UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 ENERGY POSITION LIMITS AND HEDGE EXEMPTIONS 

 Washington, D.C. 

 Tuesday, July 28, 2009 

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 1 C O N T E N T S 

 2 Call to Order and Introduction: 

 3 CHAIRMAN GARY GENSLER 

 4 Opening Statements: 

 5 COMMISSIONER MICHAEL DUNN 

 6 COMMISSIONER JILL SOMMERS 

 7 COMMISSIONER BART CHILTON 

 8 Remarks: 

 9 SENATOR BERNIE SANDERS (I-VT) 

 10 CONGRESSMAN BART STUPAK (D-MI) 

 11 Presentation - History of the Commodity Exchange 

 Act: 

 12 

 DAN BERKOVITZ 

 13 General Counsel 

 14 Questions from the Commissioners: 

 15 DAN BERKOVITZ 

 16 RICK SHILTS 

 Division of Market Oversight 

 17 

 Presentations: 

 18 

 CRAIG DONAHUE 

 19 CME Group 

 20 JEFF SPRECHER 

 Intercontinental Exchange Inc. 

 21 

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 1 Break Presentations: 

 2 LAURA CAMPBELL 

 3 SEAN COTA 

 Petroleum Marketers Association of America 

 4 

 BEN HIRST 

 5 Air Transport Association 

 6 TODD PETZEL 

 Offit Capital Advisers, LLC 

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

 2 (9:04 a.m.) 

 3 CHAIRMAN GENSLER: Good morning. I call 

 4 to order this meeting of the Commodity Futures 

 5 Trading Commission. I would like to start by 

 6 thanking my fellow Commissioners and our 

 7 distinguished witnesses here today, and in 

 8 particular thank you, Senator Sanders, and I know 

 9 Congressman Stupak will be testifying and 

 10 testifying in a few moments. 

 11 The CFTC has the duty to protect the 

 12 American public from fraud, manipulation and 

 13 excessive speculation. The work we do has 

 14 meaningful implications on the day-to- day lives 

 15 of American people. Futures markets affect the 

 16 decisions families make around the dinner table. 

 17 Gasoline prices, for example, can determine 

 18 whether a family takes a summer vacation. Natural 

 19 gas futures contracts can affect utility bills. 

 20 And lack of convergence in the wheat market can 

 21 shorten a grocery list. 

 22 Immediately upon becoming Chair of the 

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 1 CFTC I called the staff into my office and 

 2 directed them to research and outline every 

 3 authority available to the agency to protect the 

 4 markets and the public. Every option must be on 

 5 the table. The CFTC has significant statutory 

 6 authority to set strict position limits in energy 

 7 markets. The Commodities Exchange Act states that 

 8 the CFTC, "Shall impose limits on trading and 

 9 positions as necessary to eliminate, diminish or 

 10 prevent the undue burdens that may come as a 

 11 result of excessive speculation." While we 

 12 currently set and enforce position limits on 

 13 certain agricultural products, we do not do so for 

 14 energy markets. The exchanges currently use 

 15 accountability levels to monitor the size of 

 16 positions in energy markets. These should not be 

 17 confused however with position limits. Whereas 

 18 position limits are strict restrictions on the 

 19 size of a position a speculator can take, 

 20 accountability levels are merely a way to provide 

 21 the exchanges with additional oversight totals 

 22 when a speculator's position exceeds a certain 

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 1 size. If a position limit is a stop sign, 

 2 accountability levels shouldn't be confused with a 

 3 yield sign. They are a way to alert the exchanges 

 4 of growing positions. In fact, in the last 12 

 5 months nearly 70 times different energy traders 

 6 exceeded accountability levels. 

 7 Let me be clear. The CFTC recognizes 

 8 the importance of speculators to the effective 

 9 options of the futures markets, markets that 

 10 benefit the American public. We are concerned 

 11 with the undue burden that may be created by 

 12 excessive speculation. Speculators allow farmers, 

 13 grain elevator owners, oil producers and oil users 

 14 to hedge their risks and have a marketplace where 

 15 prices are determined in a fair and orderly way. 

 16 The Congress long ago gave the CFTC an important 

 17 tool to prevent markets from becoming too 

 18 concentrated -- position limits and they directed 

 19 us to use them. In 1980 the CFTC reiterated its 

 20 goal to prevent market concentration and in a rule 

 21 making by this Commission we stated that, "A 

 22 trader's net position has a continued effect on 

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 1 price and if sufficiently large can become a 

 2 perceptible market factor." By limiting the 

 3 ability of one part or group to obtain 

 4 extraordinarily large positions, speculative 

 5 limits diminish the possibility of accentuating 

 6 price swings of large positions must be liquidated 

 7 abruptly. To the extent that financial parties 

 8 such as money managers, hedge funds and swap 

 9 dealers participate in the futures markets, 

 10 position limits have the potential to increase 

 11 liquidity I believe by reducing the positions of 

 12 the largest trader. Position limits can enhance 

 13 liquidity by promoting more market participants 

 14 rather than having one party that has such 

 15 concentration as to decrease liquidity in fact. 

 16 I believe we must seriously consider 

 17 setting position limits in these markets. This 

 18 series of hearings will help inform the Commission 

 19 on the merits of possible new rules to set limits 

 20 to protect the American public. I was pleased in 

 21 this regard to read in the written testimony of 

 22 the Chicago Mercantile Exchange that it supports 

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 1 adaptation of a hard limit regime. This is a 

 2 significant development by a major exchange 

 3 expressing support for hard position limits. This 

 4 announcement represents tangible progress and I 

 5 welcome it. Nevertheless, several very important 

 6 questions remain. What formula should be used to 

 7 determine where position limits are set? Who 

 8 should set them, the CFTC or the individual 

 9 exchanges. Should noncommercial exemptions be 

 10 provided for financial risk management? 

 11 On the first question I look forward in 

 12 this hearing to our panelists and what they 

 13 believe is the appropriation position levels and 

 14 what quantity measures should be used in setting 

 15 such limits. On the question of who should set 

 16 position limits, this is one that's been debated 

 17 for nearly seven decades. Senator Capper, one of 

 18 the co-authors of our original legislation to 

 19 regulate commodities, pressed then vice president 

 20 of the Chicago Board of Trade, Seibel Harris, on 

 21 this very question in the 1936 hearings. Harris 

 22 was arguing that the exchanges should the limits. 

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 1 Then Senator Capper asked, "I take it that your 

 2 position all hangs on this point, that you want 

 3 the board of trade to make all the rules and 

 4 regulations governing the grain trade rather than 

 5 an impartial agency of the government that will 

 6 function in the interests of all parties 

 7 interested." I believe it should be the CFTC that 

 8 sets the rules and regulations for the futures 

 9 markets. We need consistent across-the-board 

 10 regulations for all competing exchanges. The CFTC 

 11 is the most able to strike a balance between 

 12 competing interests and the responsibility to 

 13 protect the American public. 

 14 The third question is whether and how to 

 15 grant noncommercial hedgers exemptions from 

 16 position limits. Congress has made it clear that 

 17 position limits should apply to bona fide hedgers. 

 18 There are three different types of categories 

 19 currently that are set with regard to exemptions 

 20 for agriculture commodities, commercial parties 

 21 with physical inventory, commercial parties with 

 22 physical anticipatory needs, and then lastly those 

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 1 who fall under Section 147 of our rules. These 

 2 parties neither have inventory nor commercial 

 3 parties with anticipatory needs. Thank you for 

 4 joining us as well. 

 5 It is this third category of hedge 

 6 exemptions, the exemptions for noncommercial 

 7 entities such as swap dealers, that currently risk 

 8 swallowing up the rule. To prevent market 

 9 participants from moving to the over-the- counter 

 10 market or onto foreign exchanges, the Commission I 

 11 believe also must urgently work with Congress to 

 12 secure additional authorities including aggregate 

 13 position limits. The CFTC should be empowered to 

 14 establish these limits across markets to ensure 

 15 that traders cannot avoid position limits by 

 16 moving to a related exchange or market including 

 17 international markets. 

 18 I look forward to hearing from everyone 

 19 who is participating today. I believe that we 

 20 have a diversity of points of view that will 

 21 provide a thoughtful discussion on this very 

 22 important subject. I will also note that the 

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 1 written comments on the topic of this hearing will 

 2 be accepted from the public until August 12, 2009, 

 3 and included in the record. Based upon what we 

 4 learn in these hearings, we will further review 

 5 CFTC rules to determine what the best course of 

 6 action is most appropriate. 

 7 I will now turn to Commissioner Dunn for 

 8 his opening statement, and after each of the 

 9 Commissioners have an opening I will turn to our 

 10 esteemed panelists. 

 11 COMMISSIONER DUNN: Thank you, Mister 

 12 Chairman. It's unusual for us to be on this side 

 13 of the dais with the Senator and the 

 14 Representative. It feels kind of good. 

 15 I commend you, Mister Chairman, for 

 16 calling these hearings and providing the setting 

 17 for an open and meaningful dialogue on excessive 

 18 speculation and the impact that that may have on 

 19 the futures markets. Since the Commission issued 

 20 the concept release on whether to eliminate bona 

 21 fide hedge exception during my tenure as acting 

 22 chair, I've been keenly aware of the need to study 

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 1 this issue and look forward to listening to the 

 2 witnesses who will testify over the course of the 

 3 three scheduled hearings. 

 4 The term excessive speculation is as old 

 5 as the futures markets. Despite its age, a hard 

 6 and fast definition of excessive speculation has 

 7 alluded both Congress and the Commission. Instead 

 8 of defining excessive speculation and preemptively 

 9 addressing any impact it may have on the futures 

 10 markets, Congress and the Commission have chosen 

 11 to react to market events that may or may not be 

 12 caused by excessive speculation. This is akin to 

 13 treating a symptom of an illness without 

 14 diagnosing the disease and finding a cure. 

 15 An historical review of the acceptable 

 16 role of speculators in futures markets could lead 

 17 to the justified conclusion that the legislators 

 18 and regulators have been schizophrenic in their 

 19 approach to this subject. In reality, Congress 

 20 and the Commission are both membership bodies in a 

 21 constant state of flux whose prevailing beliefs 

 22 can only reflect the composition of the current 

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 1 body. Additionally, the futures industry is 

 2 composed of a dynamic group of entrepreneurs whose 

 3 business and marketing strategies are continually 

 4 changing to reflect and anticipate market needs. 

 5 The hearings we begin today will allow 

 6 us to ask important questions needed to diagnose 

 7 the situation we face. Are the futures markets 

 8 working effectively and with the integrity that 

 9 the public has a right to expect? Are our current 

 10 regulations and rules out of synch with the 

 11 underlying proposed mandates by Congress for the 

 12 futures markets? If so, what role has excessive 

 13 speculation played in preventing the futures 

 14 markets from operating correctly? What tools does 

 15 the Commission have at its disposal and how is it 

 16 utilizing them to address this alleged problem? 

 17 Are new tools needed? If they are, what are they 

 18 and how will any changes impact the futures 

 19 industry? 

 20 Thankfully the Chairman has gathered a 

 21 diverse group to testify on this subject and I 

 22 look forward to a lively, robust and educational 

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 1 discussion. I appreciate the efforts that the 

 2 Commission's staff has put into this hearing and 

 3 also the efforts of those testifying. Your 

 4 commitment of time and effort will be instrumental 

 5 in helping this Commission decide what steps are 

 6 necessary. My commitment to you is to listen with 

 7 an open mind to your thoughts on this subject and 

 8 to work with my fellow Commissioners to ensure 

 9 that we have a functioning futures industry. 

 10 Thank you in advance for all of your 

 11 participation. 

 12 CHAIRMAN GENSLER: Thank you, 

 13 Commissioner Dunn. Commissioner Sommers? 

 14 COMMISSIONER SOMMERS: Thank you, Mister 

 15 Chairman, and thank you Senator Sanders and 

 16 Congressman Stupak for being with us today. 

 17 The U.S. futures markets have been 

 18 continually examined over the past 18 months as 

 19 prices for crude oil and many agricultural 

 20 products reached record highs. The question on 

 21 everyone's mind is whether speculative trading is 

 22 responsible especially through the influx of new 

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 1 traders into the market such as pension and 

 2 endowment funds seeking exposure to commodities 

 3 through passive long-term investment in commodity 

 4 indexes and swap dealers who seek to hedge price 

 5 risks resulting from their over-the-counter 

 6 activity. 

 7 Those participating in the debate have 

 8 acknowledged that speculation is a necessary 

 9 component of healthy markets. It is speculators 

 10 who take on the risk that hedgers seek to shed and 

 11 provide the liquidity that is the lifeblood of 

 12 futures trading. There is a sense by some though 

 13 that excessive speculation has pushed prices 

 14 beyond levels warranted by supply and demand and 

 15 that something must be done to rein it in. One of 

 16 the primary tasks of market regulators is to 

 17 foster the high level of market integrity 

 18 necessary to preserve the important risk 

 19 management and price discovery functions the 

 20 futures markets perform. So we must ask ourselves 

 21 how do we ensure that the markets are working as 

 22 they should? 

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 1 Congress recognized in the Commodity 

 2 Exchange Act that market functions can be 

 3 compromised when excessive speculation causes 

 4 sudden or unreasonable fluctuations or unwarranted 

 5 changes in the prices of commodities and therefore 

 6 authorized the Commission to set limits on the 

 7 amount of trading that can be done by market 

 8 participants. Congress also recognized the need 

 9 for certain market participants to exceed such 

 10 limits for the purpose of bona fide hedging. 

 11 Determining what constitutes excessive speculation 

 12 however is how straightforward and there are 

 13 differing views on the types of risks that should 

 14 be eligible for hedging. 

 15 The issues surrounding position limits 

 16 and hedge exceptions are enormously complex. 

 17 Every market has its own characteristics. So what 

 18 works for the soybean markets for example may not 

 19 be appropriate for natural gas markets. Trading 

 20 linked to commodity indexes, exchange traded funds 

 21 and exchange traded notes presents a whole 

 22 different set of questions. Should positions 

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 1 related to such trading be governed by their own 

 2 set of rules given the passive nature of the 

 3 activity? How do we determine the appropriate 

 4 level of passive investment in the markets? 

 5 Should it be based on percentages, numerical 

 6 limits or some other methodology? Should hard 

 7 position limits be imposed in all physical 

 8 commodities? And if so, should they be imposed on 

 9 exchange trading without similar limits in place 

 10 for the OTC markets? I'm especially concerned 

 11 that doing so will have the perverse effect of 

 12 driving large positions of the market away from 

 13 centralized trading and clearing at the very same 

 14 time we are urging all standardized OTC activity 

 15 to be traded on exchange or cleared. Likewise, I 

 16 can concerned that without global standards 

 17 trading will move to other financial centers 

 18 around the world. 

 19 The Commission has undertaken various 

 20 initiatives to inform this debate including 

 21 collecting detailed information from swap dealers 

 22 and index traders which we plan to publish on an 

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 1 ongoing basis, and I believe these hearings are 

 2 another important step in developing the record. 

 3 It is critical for us to have input from all sides 

 4 of the marketplace to inform the debate as the 

 5 Commission struggles to answer many of these 

 6 complicated questions. This is a very challenging 

 7 time, but we just do everything we can to fulfill 

 8 our mission and preserve the critical price 

 9 discovery and hedging functions of the U.S. 

 10 futures markets. Thank you, Mister Chairman, for 

 11 holding these hearings and to all the panelists 

 12 for their contributions over the next week. 

 13 CHAIRMAN GENSLER: Thank you, 

 14 Commissioner Sommers. Commissioner Chilton? 

 15 COMMISSIONER CHILTON: Thanks, Mister 

 16 Chairman. I really want to thank both the Senator 

 17 and Congressman for not only being here but for 

 18 your tireless efforts on these issues. Some 

 19 people must think you're crazy. They are so 

 20 difficult, and I know it takes a lot of our staff 

 21 resources. Warren does a great job for you, 

 22 Senator, Justin does a great for you, Congressman. 

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 1 I see Dawn Stumps here from Senator Chambliss's 

 2 office from our Committee or Jurisdiction and we 

 3 appreciate her being here and her tireless work. 

 4 You've been great leaders on these issues and we 

 5 very much appreciate it. 

 6 I just want to make two points. One, 

 7 these are new markets in that we have new 

 8 participants. So they're older markets but they 

 9 have new participants in them. The impact of new 

 10 speculators, the pension funds, the endowments, et 

 11 cetera, I don't think anybody is saying that 

 12 they're evil or that they don't provide the needed 

 13 liquidity, but it's a new way for us to look at 

 14 them. Are they having an impact in the aggregate? 

 15 Some people will say absolutely yes, some people 

 16 will say no. I tend to think personally that the 

 17 billions of dollars in these markets is having 

 18 some upward impact on prices and its our job to be 

 19 inquisitive and try to figure out the right 

 20 balance here. 

 21 Secondly, with regard to individual 

 22 traders, these accountability levels, you have the 

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 1 position limits as everybody knows in the final 

 2 few trading days, but these accountability levels 

 3 that my colleagues were discussing, they're not 

 4 very effectual. They're sort of like suggested 

 5 speed limits on a dark desert highway. They're 

 6 not really adhered to. So at some level, an 

 7 individual trader's position in the markets, it 

 8 seems to me that there should be a limit. I don't 

 9 know what that limit is. I don't know if it's a 

 10 percentage of open interest, if it's the number of 

 11 contracts as the Chairman was talking about, but 

 12 you got to say at some point it's too much. In 

 13 addition to the energy commodities, I also think 

 14 we should be looking at the metals complex here. 

 15 I commend the Chairman for saying we should look 

 16 at commodities of finite supply. Metals is a 

 17 finite supply. People invest their hard-earned 

 18 investments there and I think we need to be 

 19 looking at that and doing the same types of things 

 20 that we end up doing if we end up doing and I 

 21 don't want to prejudge what we're doing on metals 

 22 as we do on energy. 

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 1 There's a second part to this and this 

 2 is my final point. That is that what we're doing 

 3 is using all of the available tools that we have 

 4 right now, but quite frankly, and I look to the 

 5 Senator and the Congressman, we need more. So if 

 6 we do this alone, you could actually have the 

 7 perverse impact of shifting some of this to the 

 8 OTC market and we don't want to do that. I don't 

 9 think we're going to do that. We're going to be 

 10 thoughtful. We're getting the best and brightest 

 11 minds here to figure this out and not be draconian 

 12 in how we go forward. But we need regulatory 

 13 reform also. We need to ensure that what we do 

 14 here doesn't make things less transparent. Make 

 15 no mistake about it, there are tens of billions, 

 16 hundreds of billions of dollars that are traded 

 17 OTC all the time and those trades can have an 

 18 impact on price discovery on what people pay at 

 19 the pump because they're impacted the regulated 

 20 markets that we do see. So that's an important 

 21 second component of this. If we just do the types 

 22 of things that we're talking about potentially 

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 1 doing today, that's only half of the story. 

 2 So let me thank you again and I couldn't 

 3 be more pleased to have everybody here and I very 

 4 much thank the Chairman for his leadership on 

 5 these issues and I look forward to the hearing. 

 6 CHAIRMAN GENSLER: Commissioner Chilton, 

 7 I thank you and I agree if I might say that as 

 8 these hearings that we're looking at, the energy 

 9 markets we do as the Commission I believe it to 

 10 the markets and the American public to look at 

 11 other commodities of finite supply including the 

 12 metals and silver, and I know you've been very 

 13 thoughtful on that regard. 

 14 It's our great honor today to have two 

 15 esteemed members of Congress, and if I can just 

 16 briefly introduce both Senator Sanders and 

 17 Congressman Stupak. I wanted to personally thank 

 18 you and thank you on behalf of the Commission not 

 19 only for coming but your leadership on behalf of 

 20 the American public on these very challenging but 

 21 real issues in our marketplace, how we make the 

 22 marketplace fair and orderly but at the same time 

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 1 protected against any burdens that might come to 

 2 the marketplace by large or excessive speculation. 

 3 Senator Sanders and I first met many 

 4 years ago. I think you were still in the House at 

 5 the time. We had lively debates at the time. We 

 6 had lively debates even through my confirmation 

 7 process. But I view us as allies trying to 

 8 protect these markets and the American public. 

 9 You have in front of the Senate now a bill that 

 10 talks about the CFTC and tries to give us even 

 11 additional authorities, and I applaud that because 

 12 I know that we do need additional authorities. 

 13 Congressman Stupak, it's amazing that you're even 

 14 here with all that you're doing in terms of the 

 15 energy markets and the recently passed cap and 

 16 trade bill, but in that bill and many bills 

 17 earlier last year worked with Chairman Peterson of 

 18 the House Agriculture Committee on how we can 

 19 enhance our oversight and regulatory regime of the 

 20 energy markets and we thank you for that and look 

 21 forward to working even more closely with you 

 22 moving forward. With that I turn the mike over to 

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 1 Senator Sanders and we look forward to your 

 2 thoughts. 

 3 SENATOR SANDERS: Mister Chairman, thank 

 4 you very much for inviting me and allowing me to 

 5 be here, and Commissioners, thank you very much as 

 6 well. It's a pleasure to be here with Congressman 

 7 Stupak who I've worked with for many, many years. 

 8 As you indicated in your opening 

 9 remarks, Mister Chairman, while the terminology 

 10 that we use today may be complicated and may be 

 11 esoteric, they have real life impacts. I come 

 12 from a very rural state and in my state when the 

 13 price of gasoline gets to $4 a gallon and you have 

 14 people who make $10 an hour traveling 100 miles to 

 15 their jobs and back, trust me, it impacts their 

 16 lives very severely. In my state, the weather 

 17 gets 20 below zero in the wintertime. A lot of 

 18 our people including many older people on fixed 

 19 incomes hear with heating oil and when that price 

 20 soars, these people make the choice of whether 

 21 they stay warm in the winter or they buy the 

 22 prescription drugs they need or the food they 

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 1 need. So the work you are doing is enormously 

 2 important and I applaud you very much for having 

 3 this hearing today. 

 4 Mister Chairman, as you know, when 

 5 President Obama first nominated you as Chairman, I 

 6 had reservations about whether you were the right 

 7 person at the right time for this job. That's not 

 8 a secret. But since you have taken over the reins 

 9 of the CFTC, I have been impressed by some of the 

 10 statements you have made and the initial steps you 

 11 have taken to begin to tackle excessive oil 

 12 speculation in particular and the reform of our 

 13 financial markets in general. First, your 

 14 legislative proposal to regulate over-the-counter 

 15 derivatives will go a long way to putting a lid on 

 16 excessive speculation, but I believe more must be 

 17 done to regulate what Warren Buffett correctly 

 18 called "financial weapons of mass destruction." 

 19 Clearly the plan you have presented to Congress is 

 20 a significant step in the right direction. 

 21 I'm also pleased that instead of waiting 

 22 around for Congress to act, you are currently 

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 1 considering all of the options that the CFTC 

 2 currently has at its disposal to ensure that the 

 3 price of oil and other commodities are based on 

 4 the fundamentals of supply and demand, not by 

 5 those on Wall Street out to make a quick buck. 

 6 And I applaud your decision to make the futures 

 7 market more transparent so that for the very first 

 8 time the American people will know how much big 

 9 banks and hedge funds are trading in oil and other 

 10 commodities. So thank you for the start that you 

 11 have begun. 

 12 But I am here today to tell you that as 

 13 important as these steps are, they will all be for 

 14 naught unless they are followed up by aggressive 

 15 action on the part of the CFTC to prohibit 

 16 excessive speculation in oil and gas trading. The 

 17 bottom line is that we have got to make sure that 

 18 Americans are no longer ripped off at the gas pump 

 19 by some of the same Wall Street gamblers 

 20 responsible for the worst economic crisis since 

 21 the Great Depression, and that's the charge that 

 22 you have and that is an enormous charge. Frankly, 

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 1 the American people are tired and they are 

 2 disgusted and they have felt the ramifications of 

 3 excessive speculation and bubble economics caused 

 4 by Wall Street greed. They are tired of 

 5 record-breaking Wall Street profits and excessive 

 6 compensation packages while millions of Americans 

 7 continue to lose their jobs, their savings, their 

 8 homes and their hope for the future. They are 

 9 tired of hedge fund managers and firms like 

 10 Goldman Sachs making a fortune betting that the 

 11 subprime mortgage market will continue to get 

 12 worse or that more companies will go bankrupt. 

 13 The American people are tired of financial 

 14 policies that benefit the very few at the expense 

 15 of the many. And they are sick of a Wall Street 

 16 that is allowed to make a fortune betting that the 

 17 price of oil will go up while millions of 

 18 Americans pay that price at the gas pump. 

 19 Mister Chairman, we all learned in 

 20 Economics 101 that when supply is low and demand 

 21 is high, prices are supposed to go up, and when 

 22 supply is high and demand is low, prices are 

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 1 supposed to go down. That is a concept that most 

 2 Americans can understand and do understand. But 

 3 when it comes to the recent run-up in oil and gas 

 4 prices this summer and the astronomical prices we 

 5 saw last summer, those economic textbooks can be 

 6 thrown out the window. Right now the supply of 

 7 oil in the United States is at an all-time high 

 8 and demand for oil in this country is lower today 

 9 than it was a decade ago, yet instead of seeing 

 10 prices go down, crude oil prices have more than 

 11 doubled since Christmas Eve. From April to June 

 12 24 of this year, gasoline prices increased 54 days 

 13 in a row, the longest streak on record dating back 

 14 to 1996. While gas prices have gone down some 

 15 since that time, they are now headed back up. 

 16 This summer's high gas prices could not come at a 

 17 more inopportune time. I don't have to tell you 

 18 what Americans are experiencing today as the 

 19 result of the severe recession we are currently 

 20 experiencing. Clearly we have all of us, Congress 

 21 and you, a responsibility to do everything we can 

 22 to prevent the manipulation of oil and gas prices 

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 1 so that they reflect the basic economic supply- 

 2 and-demand curve, not excessive speculation. This 

 3 would not only help Americans struggling to fill 

 4 up their gas tanks this summer, but it would also 

 5 help my constituents in Vermont and Bart Stupak's 

 6 constituents in Michigan who need to purchase 

 7 heating oil to stay warm in the winter. 

 8 To begin to address these problems I've 

 9 introduced S. 1225, the Energy Markets 

 10 Manipulation Prevention Act, to require the CFTC 

 11 to use its emergency powers to prevent the 

 12 manipulation of oil prices and empower the CFTC 

 13 with new authority to prohibit excessive 

 14 speculation in the oil market. As you know, last 

 15 July the House of Representatives passed similar 

 16 legislation by a vote of 402 to 19. That is 

 17 bipartisan to say the least. But that legislation 

 18 unfortunately did not become law. In addition, my 

 19 legislation would also require the CFTC to do the 

 20 following. Number one. Immediately classify all 

 21 bank holding companies and hedge funds engaged in 

 22 energy futures trading as noncommercial 

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 1 participants and subject them to strict position 

 2 limits. I think the American people would have a 

 3 hard time understanding why large financial firms 

 4 are being treated by the CFTC in the same manner 

 5 as truckers, airlines and fuel dealers, people who 

 6 actually deal with oil on a day-to-day basis, but 

 7 that is exactly what is going on today. I'm not 

 8 sure many people know that. Over the past several 

 9 years, the CFTC has granted "bona fide hedging 

 10 exemptions" to Wall Street firms like Goldman 

 11 Sachs and Morgan Stanley, allowing them to trade 

 12 as much oil and gas as they want in the futures 

 13 market. As a result, we now have a situation in 

 14 which the overwhelming majority of oil trades on 

 15 the futures market are being conducted not by oil 

 16 companies, not by airlines who consume huge 

 17 amounts of oil, not by truckers, not by fuel 

 18 dealers, but by speculators. This has got to 

 19 change. Classifying hedge funds and financial 

 20 firms as speculators and subjecting them to strict 

 21 position limits could go a long way toward 

 22 stabilizing the price of gas and oil. 

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 1 Number two. Eliminate the conflicts of 

 2 interest that arise when a large Wall Street 

 3 financial institution has employees under one 

 4 umbrella responsible for predicting the future 

 5 price of oil while the same company owns and 

 6 controls physical oil assets and trades in energy 

 7 derivatives. We have seen this time and time 

 8 again. Goldman Sachs and other companies predict 

 9 the price of oil is going to go up, lo and behold, 

 10 the price of oil goes up and the same companies 

 11 make a fortune. That's wrong and we've got to 

 12 deal with that. 

 13 Number three. This legislation that we 

 14 have introduced would also immediately revoke all 

 15 staff no action letters for foreign boards of 

 16 trade that have established trading terminals in 

 17 the United States for the purpose of trading U.S. 

 18 commodities to U.S. investors. Mister Chairman, 

 19 the Intercontinental Exchange, ICE, operates a 

 20 trading terminal in Atlanta, Georgia, that allows 

 21 U.S. investors to buy and sell west Texas 

 22 intermediate crude oil, but because ICE claims 

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 1 that its headquarters in London, the CFTC has 

 2 allowed it to be regulated by the British 

 3 Financial Services Authority. While steps have 

 4 been taken to address this matter, in my view ICE 

 5 and other foreign boards of trade that have set up 

 6 trading terminals in the United States should fall 

 7 completely within the jurisdiction of the CFTC. 

 8 Mister Chairman, I understand that there 

 9 are still some who may not believe that excessive 

 10 speculation is responsible for driving up oil and 

 11 gas prices, but let me just mention some past 

 12 recent history to maybe delude you of that 

 13 supposition. We know that in 2000 and 2001 energy 

 14 traders at ENRON for thrown in jail for 

 15 manipulating electric prices on the West Coast. 

 16 Everybody knows that. We know that in February 

 17 2004 the CFTC fined BP $303 million for driving up 

 18 the price of propane by purchasing "enormous 

 19 quantities of propane and withholding the fuel to 

 20 drive prices higher." We all know that. And we 

 21 know that in 2006 the Amaranth hedge fund went 

 22 bankrupt after federal regulators found that it 

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 1 had artificially increased natural gas prices by 

 2 controlling 75 percent of all the natural gas 

 3 futures contracts in a single month. In other 

 4 words, the idea of speculators acting illegally to 

 5 drive prices up is not a new concept. That is 

 6 exactly what has been happening in recent years. 

 7 Given that, why would anyone believe that 

 8 speculators at this very moment are not now 

 9 manipulating the price of oil when supply is high 

 10 and demand is low? I think the American people 

 11 believe that. 

 12 Mister Chairman, in conclusion I think 

 13 the American people were stunned that companies 

 14 like Goldman Sachs made huge profits in the second 

 15 quarter of this year and will be rewarding their 

 16 executives with huge bonuses just as if the 

 17 financial crisis never happened. We are back to 

 18 where we were again where speculation and bubble 

 19 economics is the rule of the game. So what I'm 

 20 here to tell you today, to ask you, is don't let 

 21 that happen again. Your job is not to protect oil 

 22 speculators, people who make a quick buck 

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 1 speculating in oil and gas, your job is to protect 

 2 the American people and I look forward to working 

 3 with you to make sure that that happens. Thank 

 4 you very much, Mister Chairman, and thank you 

 5 members of the Commission. 

 6 CHAIRMAN GENSLER: Thank you very much 

 7 Senator Sanders. Congressman Stupak? 

 8 CONGRESSMAN STUPAK: Thank you, Mister 

 9 Chairman, and thank you members of the Commission 

 10 for having me here today. I agree with many of 

 11 the things that my friend Senator Sanders said. I 

 12 recognize that some individuals remain skeptical 

 13 of the claim that anything other than 

 14 supply-and-demand fundamentals dictate the price 

 15 of the market. So I'd like to review if I may a 

 16 number of recent studies and events that prove 

 17 otherwise, that really that excessive speculation 

 18 is dictating prices. 

 19 According to CFTC data, from January 

 20 2008 through the end of June 2008, index 

 21 speculators poured $55 billion into major 

 22 commodity indexes, pushing up the price of crude 

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 1 oil from $99 per barrel to $140. Gasoline prices 

 2 spiked at around $4 a gallon and reaching $5 per 

 3 gallon in my rural district. That same market 

 4 collapsed over the course of the next 6 months 

 5 with prices plummeting to $30 a barrel by December 

 6 2008 as investors withdrew $73 billion from the 

 7 market. This was not a coincidence. The dramatic 

 8 drop in oil prices was occurring at the same time 

 9 index investors fled the market. 

 10 Now take from January of this, January 

 11 2009 through May 2009, and you can see prices rise 

 12 from $35 a barrel to $70 a barrel as index 

 13 investors came back into the market and put $35 

 14 billion into major commodity indexes. I have 

 15 three charts up here illustrating the fact that 

 16 supply-and-demand fundamentals are not driving 

 17 this oil market. This year, domestic oil supplies 

 18 are at a 20- year high, oil demand is at a 10-year 

 19 low, yet in June oil was trading at more than $70 

 20 per barrel, up from the $35 per barrel in January 

 21 representing a price increase of more than 100 

 22 percent in the first 6 months of this year. All 

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 1 of this comes in the midst of the worst global 

 2 economic decline since the Great Depression, but 

 3 oil prices keep going up even though demand is 

 4 down. The driving factor contributing to an 

 5 increase in the price of oil this year was the 

 6 surge of funding from index investors back into 

 7 the oil markets. According to an independent 

 8 analysis of CFTC data on oil future positions, 

 9 index investors increased their crude oil holdings 

 10 to the equivalent of 600 million barrels in June 

 11 that is up more than 30 percent from the end of 

 12 December 2008. 

 13 There have been a number of reports and 

 14 studies over the past few years implicating 

 15 excessive speculation as the cause of volatility 

 16 and price increases in the commodities futures 

 17 market. In October 2007, the Government 

 18 Accountability Office, GAO, released its report on 

 19 the ability of the CFTC to properly monitor these 

 20 markets to prevent manipulation. The GAO found 

 21 that the volume of trading in energy commodities 

 22 have skyrocketed specifically after the ENRON 

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 1 loophole was created in 2000. The GAO also found 

 2 that while trading has doubled since 2002, the 

 3 number of CFTC staff monitoring these markets has 

 4 actually declined. On June 23 at one of my 

 5 Oversight Investigation Subcommittee hearings on 

 6 the effect that speculators have on energy prices, 

 7 Fidel Gate, managing director and senior oil 

 8 analyst at Oppenheimer said in his testimony, "I 

 9 firmly believe that record oil prices in excess of 

 10 $135 per barrel is inflated. I believe based on 

 11 supply-and-demand fundamentals that crude oil 

 12 should not be above $60 a barrel." In 2000, 

 13 physical hedgers, businesses such as airlines, 

 14 trucking companies in the need to hedge to ensure 

 15 a stable price for fuel in the future months 

 16 accounted for 63 percent of the oil futures 

 17 market, speculators were 37 percent. By April 

 18 2008, physical hedgers' share of the same market 

 19 dropped to 29 percent and speculators were not 

 20 controlling an astonishing 71 percent of the 

 21 market. The market was taken over by swap dealers 

 22 and speculators, a considerable majority of whom 

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 1 had no physical stake in the market. Excessive 

 2 speculation is a significant factor in the price 

 3 Americans are paying for gasoline, diesel and home 

 4 heating oil. Even the executives of U.S. oil 

 5 companies recognize this. On April 1 in testimony 

 6 before the House Select Committee on Global 

 7 Warming, John Lowe, executive vice president of 

 8 ConocoPhillips said, "It is likely that the large 

 9 inflow of capital into the commodities funds is 

 10 temporarily exaggerating upward oil price 

 11 movements." At a May 21, 2008 hearing in the 

 12 Senate Judiciary Committee, Shell president John 

 13 Hoffmeister agreed that the price of crude oil has 

 14 been inflated, saying that the proper range of oil 

 15 prices should be, "Somewhere between $35 and $65 a 

 16 barrel." The federal Energy Regulatory Commission 

 17 released its "State of the Market" report on April 

 18 16, 2009. The report indicated that excessive 

 19 speculation within the natural gas market was a 

 20 principal reason for the price increase in natural 

 21 gas. And while I know we are focusing on energy 

 22 in this hearing, the Senate Homeland Security and 

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 1 Government Affairs Subcommittee on Investigations 

 2 released a report on June 23, 2009, indicating 

 3 that excessive speculation was the blame for the 

 4 distortion of wheat futures prices in relation to 

 5 the settling cash market price. 

 6 On October 24, 2008, the Energy and 

 7 Commerce Committee requested company-by-company 

 8 data underpinning the CFTC staff report on swap 

 9 dealers and index traders with specific 

 10 information on individual companies' swap 

 11 positions and related futures positions for crude 

 12 oil, heating oil, natural gas and gasoline. This 

 13 data was requested and was followed-up by 

 14 questions raised by Commissioner Bart Chilton and 

 15 others regarding the accuracy and conclusions of 

 16 the September 2008 staff report. I understand 

 17 that the CFTC will issue a new report possibly 

 18 contradicting previous assumptions on the role 

 19 speculator played in the energy markets. I look 

 20 forward to seeing the CFTC's revised analysis. 

 21 Although the data provided by the CFTC 

 22 on swaps did not distinguish between commercial 

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 1 and noncommercial positions, it was possible to 

 2 draw insights not presented in the CFTC staff 

 3 report. By identifying the core business activity 

 4 of each company, airlines, investment banks, oil 

 5 producers and utilities, one can estimate the role 

 6 each entity played in the combined swaps in 

 7 futures markets. This chart shows that the 

 8 speculators such as the banks and hedge funds held 

 9 60 percent of the open interest in natural gas 

 10 markets on June 30, 2008, and 75 percent of the 

 11 west Texas intermediate crude oil market. 

 12 Physical hedgers and middlemen took a much smaller 

 13 share of both natural gas and oil markets. I 

 14 encourage the CFTC to look closer at this data, 

 15 update it with more recent positions and see if 

 16 the conclusion is the same. 

 17 If the dollars and swaps and related 

 18 futures positions equals power in the marketplace, 

 19 the banks and hedge funders are determining prices 

 20 and physical hedgers have become small players in 

 21 the process. This data points to excessive 

 22 speculation dictating the pricing of commodities 

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 1 in June 2008. The prices paid by physical hedgers 

 2 whose bid and ask price are linked to supply and 

 3 demand are being swapped by speculators who have 

 4 overtaken this combined market. In a number of 

 5 reports, market experts and regulators agree that 

 6 reform of the derivatives market is necessary. 

 7 Physical hedging, long used to provide liquidity, 

 8 transparency and set market prices is no longer 

 9 possible due to manipulation of financial traders. 

 10 The recent statement by Treasury Secretary 

 11 Geithner advocating derivatives reform, and Mister 

 12 Chairman, your support for aggregate position 

 13 limits on all commodities and these hearings by 

 14 the CFTC are a welcome step toward reining in 

 15 excessive speculation in the marketplace. I 

 16 caution the CFTC against regulating only so-called 

 17 standard contracts as loopholes for customization 

 18 will circumvent any regulations in place to 

 19 prevent manipulation in the market. The 

 20 Commodities Exchange Act recognized the dangers of 

 21 excessive speculation. Section 4 of the Act 

 22 states excessive speculation in any commodity 

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 1 under contract for sale of such commodity for 

 2 future delivery made on or subject to the rules of 

 3 contract markets or derivative transactions, 

 4 execution facilitates causing sudden or 

 5 unreasonable fluctuations or unwarranted changes 

 6 in the price of such commodity is an undue and 

 7 unnecessary burden on interstate commerce. As a 

 8 result, Section 4(a) requires the CFTC to use the 

 9 authority to aggregate position limits or take 

 10 other actions necessary to curb excessive 

 11 speculation. However, there are significant 

 12 loopholes that exempt energy trading from these 

 13 protections against excessive speculation. The 

 14 swaps exemption in 2(g) and 2(h)(1) of the 

 15 Commodities Exchange Act, the Foreign Boards of 

 16 Trade no action letters swap loophole which allows 

 17 a swap dealer to circumvent position limits 

 18 designed to prevent excessive speculation. 

 19 Finally, state attorneys general are handcuffed by 

 20 applying -- gaming laws to swap dealers through a 

 21 preemption of state law contained in the 

 22 Commodities Futures Modernization Act. 

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 1 Legislation I have introduced and 

 2 included in the American Clean Energy and Security 

 3 Act, otherwise known as ACES, which recently 

 4 passed in the House of Representatives and is now 

 5 pending before the Senate contains strong 

 6 provisions to comprehensively address excessive 

 7 speculation in the energy markets. I encourage 

 8 the Commission to look thoroughly at each of these 

 9 issues and take action within its existing 

 10 authority to begin address the problems -- swap 

 11 transactions for energy commodities. The Farm 

 12 Bill only closed the ENRON loophole for future 

 13 trades on electronic exchanges. Most bilateral 

 14 swap trades remain in the dark. These bilateral 

 15 trades must be subject to CFTC oversight. Foreign 

 16 boards of trade, petroleum contracts offered 

 17 through Intercontinental Exchange, ICE or on ICE 

 18 futures are cleared on a foreign board of trade in 

 19 London. Data provided by the CFTC indicates that 

 20 more than 60 percent of the trades of west Texas 

 21 crude originate in the United States. These 

 22 contracts for west Texas crude have a delivery 

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 1 point in the United States. ICE is a foreign 

 2 board of trade in name only. ICE futures agreed 

 3 to provide CFTC with information and set position 

 4 limits on their trades. However, this step is not 

 5 enough. The CFTC does not have the authority to 

 6 regulate foreign markets that act as price-setting 

 7 markets dominated by U.S. energy trading. The 

 8 CFTC just enforce standards on all markets to 

 9 eliminate loopholes. Similar to ICE, the Dubai 

 10 exchange raises the same issues, and because of 

 11 the CFTC's inability to enforce regulations on 

 12 trades bound for the U.S., this loophole remains 

 13 open for excessive speculation to impact energy 

 14 prices. The CFTC should exert jurisdiction over 

 15 these exchanges when they are using computer 

 16 terminals in the United States and when they are 

 17 trading energy commodities that provide for a 

 18 delivery point in the United States. 

 19 Swaps loophole bona fide hedging 

 20 exemption. The Commodity Exchange Act allows 

 21 exemptions from position limits for businesses to 

 22 hedge their legitimate anticipated business needs. 

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 1 However, in 1991 the CFTC authorized the first 

 2 bona fide hedging exemption to a swap dealer, J. 

 3 Aron Company, which is owned by Goldman Sachs with 

 4 no physical commodity exposure and therefore no 

 5 legitimate anticipated business need. Since 1991, 

 6 15 different investment banks have taken advantage 

 7 of this exemption even though they do not have a 

 8 legitimate anticipated business need. Since 2006, 

 9 NYMEX has granted 117 hedging exemptions for west 

 10 Texas intermediate crude contracts many of which 

 11 are for swap dealers without physical hedging 

 12 positions. Swaps are currently excluded from 

 13 requirements for position limits designed to 

 14 prevent excessive speculation. An estimated 85 

 15 percent of futures purchases tied to commodity 

 16 index speculation come through swap dealers. 

 17 Because there are no requirements for position 

 18 limits, these swaps have grown considerably, 

 19 driving crude prices higher. By eliminating this 

 20 exemption, swaps would be subject to position 

 21 limits to prevent excessive speculation. The CFTC 

 22 created this exemption and can undo it. The CFTC 

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 1 must clarify that legitimate anticipated business 

 2 needs does not mean economic speculators. 

 3 Strong aggregate position limits. CFTC 

 4 should set aggregate trader position limits on 

 5 energy contracts over all markets. With the 

 6 growing number of markets, speculators can 

 7 currently comply with exchange specific position 

 8 limits on several exchanges while still holding an 

 9 excessive number of total contacts taken together. 

 10 By setting strong aggregate position limits over 

 11 all markets, the CFTC would be able to curb 

 12 excessive speculation by making sure traders are 

 13 not amassing huge positions in a commodity in an 

 14 attempt to play one exchange off the other. 

 15 Carbon market regulation. 

 16 Carbon market regulation. The ACES or 

 17 the climate change bill that we passed in the 

 18 House of Representatives and sent to the Senate 

 19 creates an economy wide cap and trade program for 

 20 carbon dioxide and other greenhouse gas emissions. 

 21 Companies will hedge their risks and lock in 

 22 prices for these carbon credits in a new carbon 

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 1 futures market. The CFTC should have the 

 2 authority to regulate any carbon futures market 

 3 with strong regulations from the start to prevent 

 4 price volatility from excessive speculation. I 

 5 introduced these protections in the ACES 

 6 legislation and I believe the CFTC should apply 

 7 strong rules on aggregate position and bona fide 

 8 hedging exemptions to any carbon futures market. 

 9 Last week one of my dealers up north has already 

 10 given to me what they anticipate the carbon market 

 11 is going to look like. They are already starting 

 12 to hedge what it's going to be. Is it going to be 

 13 $15, $25, $50 or $100. Depending on where it is, 

 14 that's how much more my constituents will pay for 

 15 their residential electricity. So I urge you 

 16 before this market gets going to put in strong 

 17 regulations. 

 18 By closing all these loopholes and 

 19 setting strong aggregate position limits, the CFTC 

 20 would be better able to monitor trades in real 

 21 time to present market manipulation. Eliminating 

 22 unreasonable inflation of energy prices caused by 

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 1 excessive speculation protects American consumers. 

 2 We cannot continue the status quo that allows 

 3 excessive energy speculation. I look forward to 

 4 your work. Thank you for holding these hearings 

 5 and thank you for having me here. 

 6 CHAIRMAN GENSLER: Senator, Congressman, 

 7 I can't thank you enough on behalf of the 

 8 Commission. Personally if I might say, Senator 

 9 Sanders, I very much appreciate your kind words 

 10 because I know we've had a great dialogue. I look 

 11 forward to meeting each of you probably on the 

 12 Hill in your offices because you've raised so many 

 13 things in your bills, but I just want to say for 

 14 the record and the public I think that there's 

 15 much we agree on in each of the statutes -- 

 16 legislative initiatives about trying to close 

 17 loopholes, making sure that we put in place 

 18 position limits that are consistently applied 

 19 across the markets, that we even look at the 

 20 conflicts of interest that Senator Sanders has 

 21 embedded in his bill in terms of energy traders on 

 22 Wall Street and the conflicts just as we do in the 

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 1 securities markets, whether the commodities 

 2 markets should have some of those similar concepts 

 3 to avoid conflicts. As Congressman Stupak has 

 4 laid out with very thoughtful analysis as well, 

 5 you mentioned at one point that we need more 

 6 resources down here at the Commission and I look 

 7 forward to working with Congress on that, but also 

 8 many of your attributes that you said about how we 

 9 close these various loopholes of 2(g) and 2(h) and 

 10 swaps loopholes and so forth. I thank both of you 

 11 for being part of this process. I wanted to say 

 12 that these slides here hopefully if I could just 

 13 make sure we'll have a chance to also put them on 

 14 our website so that the public can see them, so 

 15 that will all be available at some point a 

 16 www.cftc.gov. 

 17 The next stage of what we're going here 

 18 is we're going to go through a little bit of 

 19 background on the legislative history of the 

 20 position limits and hedge exemptions. Our general 

 21 counsel Dan Berkovitz has a report which he is 

 22 going to summarize, but that too will be in our 

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 1 record. Just before that I was going to go 

 2 through a few bits of data that was referred to in 

 3 some of our openings. It's a PowerPoint. Is 

 4 there a physical copy for the Commissioners? I 

 5 was going to do a quick run through of a few 

 6 pages. This document and I believe with a few 

 7 text notes will be on our website as well and is 

 8 available on some back table there. 

 9 The Commodity Futures Trading Commission 

 10 sets speculative position limits on corn, oats, 

 11 soybeans, soybean oil, meal and cotton, and then 

 12 limits -- on energy and metal products just in the 

 13 spot month. This is in the last 3 days of the 

 14 month to avoid manipulation and congestion, and 

 15 there is an accountability regime that will be 

 16 discussed I'm sure by the exchanges and by Mr. 

 17 Berkovitz that are set for single month and all 

 18 months combined. 

 19 With regard to accountability levels, we 

 20 just took a look as the Commission in the last 12 

 21 months through June 30 how often were these 

 22 accountability levels -- individual traders who 

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 1 had passed that. Overall, there were 69 

 2 instances, 69 unique traders, that went over the 

 3 single month limit and 46 times all months 

 4 combined. To give you a sense of who they were, 

 5 we can't disclose individual names in a public 

 6 hearing like this, the commercial or physical 

 7 hedgers are about 20 of the 70 total or 13 of the 

 8 46, a little over a quarter of the total, but the 

 9 risk management or swap money managed which is 

 10 largely hedge funds and other noncommercials make 

 11 up roughly three- quarters or 70 to 75 percent of 

 12 the times that people are above accountability 

 13 levels either in a single month or all months 

 14 combined. 

 15 These are looking at the four large 

 16 energy contacts. We did not have for this hearing 

 17 the time to look at every energy contract, but it 

 18 gives you an indication of the four major 

 19 contracts on NYMEX. We have on ICE Futures Europe 

 20 just in the last 3 months -- had the full 

 21 authorities and been getting the daily data on the 

 22 linked contracts. I think it would show a similar 

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 1 story, but this is for NYMEX contracts here of 

 2 crude oil, natural gas, heating and RBOB or 

 3 gasoline. The number of traders just to use an 

 4 example on crude oil that went past the 10,000 

 5 single month limit was 43, but 23 on all months 

 6 combined. You can see that on average it's 

 7 roughly 80 to 85 days that they're over. Of the 

 8 69 individual traders that were over, there are 

 9 some that are over just occasionally, 5 to 10 

 10 days, there are some in fact that are over every 

 11 day of the year. So it's a wide diversity between 

 12 them. The average position you can see on the 

 13 right-hand schedule is 20,000 in a single month, 

 14 about 33,000 in the all months combined on crude 

 15 oil, and then the other statistics going forward. 

 16 We took a look at in terms of this how 

 17 often did traders in these four major contracts go 

 18 over 10 percent of the total open interest, how 

 19 many times did traders go over the 20 percent? 

 20 This is just in the 12-month period. We weren't 

 21 looking at an earlier period. We're not 

 22 suggesting this is necessarily what's going to 

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 1 happen in the next 12 months. It's just one 

 2 period of time to see what are these 

 3 accountability levels. You can see that twice in 

 4 the crude oil markets, 13 times in natural gas, 4 

 5 in heating oil, and in gasoline. A trader in 

 6 these 12 months was greater than 10 percent of the 

 7 open interest, but in natural gas you can see that 

 8 they actually grew, four times it was over 20 

 9 percent, and there were three instances where 

 10 traders were over 30 percent of the open interest 

 11 with the maximum being 33 percent and 14 percent 

 12 crude oil to give you a sense of just this 

 13 12-month period of time of the largest 

 14 concentration in these marketplaces. 

 15 This is same analysis for the first 

 16 deferred futures. So rather than the nearby 

 17 contractors going out one more contract, generally 

 18 the most liquidity is in the first two contracts. 

 19 I believe that in the set of data that might be on 

 20 the web, we might include one more contract if I 

 21 recall. 

 22 In terms of the speculative position 

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 1 limits, the position limits that are set by the 

 2 exchanges are in the last 3 days of the spot 

 3 month. We also took a look at how many exemptions 

 4 are there from that. There are no exemptions from 

 5 accountability limits because accountability 

 6 levels are not really a limit, but in terms of 

 7 position limits themselves, this gives you a 

 8 flavor for the limits. So on crude oil where the 

 9 limit is 3,000 contracts, there are 37 exemptions 

 10 and they average roughly 5,700 contracts. So on 

 11 order of magnitude, the exemptions of 1,000 in the 

 12 other contracts and 3,000 in crude oil the main 

 13 market participants are generally two and a half 

 14 times that limit in the three contracts and about 

 15 twice that in crude oil. I should note that of 

 16 this 35 to 40 exemptions, that's the whole 

 17 category so that includes commercial anticipatory 

 18 hedges as well as risk management hedges, but 

 19 roughly half in each category are risk management 

 20 meaning the swap dealers and financial 

 21 participants, about half are inventory hedgers or 

 22 commercial anticipatory hedges. These numbers 

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 1 might slightly differ from what the exchange has, 

 2 but I think they're approximately the same. 

 3 We also took a look at the position 

 4 exemptions that we as the Commission grant, and 

 5 you can see in the individual categories there are 

 6 three different types of exemptions that are 

 7 granted. Some are automatically, and these are 

 8 the original ones from the 1936 act that are 

 9 physical inventories that occur, and depending on 

 10 the contract, between eight and 13 of these. 

 11 There are also exemptions that we have to grant 

 12 that we have to write a letter on under our rules. 

 13 I think it's 1.48 is the rule, and these are 

 14 physical anticipatory commercial and it's between 

 15 three and six, except for cotton is zero. Then 

 16 risk management exemptions are swap dealers while 

 17 soybean meal is smaller generally between 11 and 

 18 14. I believe this was the subject of Chairman 

 19 Levin's Permanent Subcommittee investigation as 

 20 well. We talked about these in the wheat markets. 

 21 So that's just a little background. I'm going to 

 22 turn it over to our General Counsel Dan Berkovitz 

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 1 who has done I think a really commendable job 

 2 looking at the legislative history. This is meant 

 3 for the public as well as the Commission to look 

 4 at how did we come about in 1936 to have position 

 5 limits in our statute, what was the debate at the 

 6 time and the history and amendments since then. 

 7 He's going to try to summarize. We're going to 

 8 give him 10 minutes because there's a lot to 

 9 summarize, but to summarize that. Then the 

 10 Commissioners will ask questions and we'll try to 

 11 see if there's need for a second round of 

 12 questions, we'll go twice. We'll turn it over to 

 13 you, Dan. 

 14 MR. BERKOVITZ: Thank you, Mister 

 15 Chairman and Commissioners. As you noted, since 

 16 its enactment in 1936, the Commodity Exchange Act 

 17 has stated that excessive speculation in any 

 18 commodity traded on a futures exchange causing 

 19 sudden or unreasonable fluctuations or unwarranted 

 20 changes in the price of such commodity is an undue 

 21 and unnecessary burden on interstate commerce. 

 22 Since 1936, the Act has directed the Commission to 

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 1 establish such limits on trading as it finds " -- 

 2 are necessary to diminish, eliminate or prevent 

 3 such burden." Also since 1936, the Commodity 

 4 Exchange Act has exempted bona fide hedging 

 5 transactions from position limits. Initially the 

 6 Act defined the term bona fide hedging as 

 7 transactions that were offsetting price risks in 

 8 the cash market for the commodity. In 1974, 

 9 Congress provided the Commission with discretion 

 10 to define the term bona fide hedge transaction 

 11 providing that the definition enables producers 

 12 and users of a commodity to hedge their 

 13 anticipated business needs. 

 14 The inclusion of position limits in the 

 15 Commodity Exchange Act of 1936 was the culmination 

 16 of a debate that had raged since the depression in 

 17 farm prices set in after the end of the First 

 18 World War. The initial legislation passed after 

 19 the War to regulate grain futures did not contain 

 20 any trading limits. Throughout the 1920s and 

 21 1930s the argument and the debate continued as to 

 22 whether regulation could better be accomplished by 

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 1 the exchanges rather than by a federal agency, 

 2 whether speculators were to blame for depressed 

 3 farm prices and whether limits on speculation 

 4 would impair hedging in the grain business. By 

 5 the mid 1930s during the Great Depression the tide 

 6 of opinion had turned and Congress passed 

 7 legislation to regulate the securities markets and 

 8 strengthen the regulation of the commodity markets 

 9 to prevent excessive speculation. 

 10 In Section 4(a) of the Commodity 

 11 Exchange Act, the Commission found that excessive 

 12 speculation in futures contracts constituted an 

 13 unnecessary burden on interstate commerce. It 

 14 directed the Commission to establish such limits 

 15 on trading as it found necessary to diminish, 

 16 eliminate or prevent such burdens. After the 

 17 passage of the 1936 Act, the Commission held 

 18 hearings and set position limits for single months 

 19 and all months combined and daily trading limits 

 20 of 2 million bushels for wheat and other grains. 

 21 Later the Commission established position limits 

 22 for cotton and several other agricultural 

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 1 commodities. Because prior to 1974 the Commission 

 2 did not have legal authority over all of the 

 3 futures contracts that were being traded on the 

 4 exchanges, for a number of commodities such as the 

 5 livestock commodities, the exchanges set position 

 6 limits themselves. These exchange set limits set 

 7 the precedent for the Commission to rely on the 

 8 exchanges to set limits after the CFTC's 

 9 jurisdiction was expanded in 1974 to cover all 

 10 futures contract in all commodities. After the 

 11 passage of the 1974 Act, the Commission studied 

 12 both whether and how it should establish position 

 13 limits for these additional commodities that were 

 14 just brought into its jurisdiction. In 1981, in 

 15 the aftermath of the manipulation of the silver 

 16 market by the Hunt Brothers, the CFTC found and 

 17 determined that large positions in fact had the 

 18 potential to distort prices. It adopted Rule 

 19 1.61, now Rule 150.5, requiring exchanges to 

 20 impose position limit for all commodities that did 

 21 not have Commission set limits. 

 22 In January 1992, the CFTC approved the 

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 1 Chicago Mercantile Exchange's request for an 

 2 exemption from the position limit requirement and 

 3 permitted the CME to establish position 

 4 accountability for certain financial contracts 

 5 traded on the CME. Position accountability levels 

 6 were not fixed limits but, rather, position sizes 

 7 that would trigger review by the exchange of 

 8 traders' positions. Initially the CFTC stated 

 9 that position accountability could apply to 

 10 financial instruments that had a high degree of 

 11 liquidity. Six months later, in June 1992, the 

 12 Commission determined it also would allow position 

 13 accountability to be used for highly liquid 

 14 contracts in the energy markets. In 1999, the 

 15 Commission issued a rule that formally recognized 

 16 the practice of position accountability so that it 

 17 would no longer have to issue exemptions from its 

 18 regulations to allow the exchanges to implement 

 19 it. The rule provided however that the exchanges 

 20 were still required to set spot month position 

 21 limits at a level no greater than one quarter of 

 22 the estimated spot month deliverable supply. 

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 1 In the Commodity Futures Modernization 

 2 Act of 2000, the Congress statutorily authorized 

 3 the use of position accountability by the 

 4 exchanges. Designated Core Principle 5 states, 

 5 "To reduce the potential threat of market 

 6 manipulation or congestion especially during 

 7 trading in the delivery month, the Board of Trade 

 8 shall adopt position limitations or position 

 9 accountability for speculators where necessary and 

 10 appropriate." The CFMA did not alter however the 

 11 Commission's mandate in Section 4(a) to establish 

 12 position limits as it finds are necessary as to 

 13 prevent undue burdens on interstate commerce that 

 14 may arise from excessive speculation. 

 15 Since 1936 again the Congress has stated 

 16 that position limits should not apply to the users 

 17 of the futures markets by commodity producers or 

 18 users to discover prices and manage their price 

 19 risks. Section 4(a) originally defined a bona 

 20 fide hedge transaction to mean sales or purchases 

 21 of futures contracts that were offset by purchases 

 22 or sales of the same cash commodity. By the mid 

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 1 1950s, concern had arisen that the statutory hedge 

 2 exchange criteria was too restrictive in light of 

 3 the commercial practices of the time. In 1956, 

 4 Congress responded by permitting anticipatory 

 5 hedging. In 1974, when Congress expanded the 

 6 jurisdiction of the CFTC to include financial 

 7 futures contracts, the Congress repealed the 

 8 statutory definition of a bona fide hedge 

 9 transaction and gave the CFTC discretion to define 

 10 what constituted bona hedging provided that its 

 11 definition permits commercial producers, 

 12 purchasers or users of the commodity " -- to hedge 

 13 their legitimate anticipated business needs." In 

 14 1977, the Commission defined what constituted a 

 15 bona fide hedging transaction in Rule 1.3(z). 

 16 This definition remains in place today. 

 17 In 1987, the Commission clarified its 

 18 interpretation of its bona fide hedging rule. The 

 19 CFTC stated there was concern that the link to 

 20 transactions in the physical commodity markets 

 21 required under Rule 1.3(z) precluded numbers 

 22 hedging strategies that reduced risks. The CFTC 

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 1 clarified that the bona fide hedge exemption 

 2 should not be construed to apply only to firms 

 3 using futures contracts to reduce their exposure 

 4 to risks in the cash market. The CFTC concluded 

 5 that to qualify as a bona fide hedge, the 

 6 transaction in the futures market could also 

 7 include various trading strategies that are risk 

 8 reducing and otherwise consistent with this 

 9 interpretation. 

 10 The CFTC subsequently granted a number 

 11 of hedge exemptions to swap dealers using the 

 12 futures markets to offset price risks arising in 

 13 the over-the-counter market. Since 1991, the 

 14 Commission has granted a number of hedge 

 15 exemptions to swap dealers hedging their financial 

 16 exposures from swaps tied to the value of a 

 17 commodity index, so-called commodity index 

 18 traders. In September 2008, the CFTC's report on 

 19 commodity swap dealers and index traders 

 20 recommended that the CFTC staff develop an 

 21 advanced notice of proposed rule making for 

 22 whether to eliminate the bona fide hedge exemption 

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 1 for swap dealers and replace it with a limited 

 2 risk management exemption. In March 2009, the 

 3 Commission published a concept release on whether 

 4 to eliminate the bona fide hedge exemption for 

 5 certain swap dealers and create a new limited risk 

 6 management exemption from speculative position 

 7 limits. The longer legislative history is 

 8 submitted for the record and I'd like to 

 9 acknowledge everyone in my office who worked on 

 10 that and the other divisions who contributed to 

 11 that review over the past 70 years and more. 

 12 CHAIRMAN GENSLER: General Counsel 

 13 Berkovitz, I thank you for particularly putting 

 14 that together in the midst of all that we're doing 

 15 in working with friends and colleagues in the 

 16 administration also on over-the-counter 

 17 derivatives legislation, so that I know a lot is 

 18 going on. 

 19 I feel every time I'm with you it's like 

 20 I'm with an historian, so if I can ask a couple 

 21 history questions and then legal questions and 

 22 then turn it over to my fellow Commissioners. On 

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 1 the history, the various exemptions, I understand 

 2 that what we now call an inventory exemption 

 3 that's automatic, that came up first in 1936. 

 4 MR. BERKOVITZ: That's correct. 

 5 CHAIRMAN GENSLER: Secondly, what we 

 6 call a commercial exemption for anticipatory 

 7 needs, that first came up in 1956? 

 8 MR. BERKOVITZ: That's correct. 

 9 CHAIRMAN GENSLER: But the risk 

 10 management exemption I'm a little confused. This 

 11 is for the swap dealers. Did you say that in 1977 

 12 we adopted a rule, I think you called it 1.3(z), 

 13 but it was not until many years later that we 

 14 actually had the risk management exemption? 

 15 MR. BERKOVITZ: It was in 1987 that the 

 16 Commission that the issue arose whether indeed 

 17 1.3(z) was limited to instances where there was a 

 18 transaction in the cash market for the commodity. 

 19 This issue had been debated in the Congress and 

 20 the Congress directed the CFTC to study the issue. 

 21 It didn't make a change in the statute. It just 

 22 said please study the issue, and the Commission 

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 1 issued a clarification. It did not change the 

 2 actual wording of the regulation but it clarified 

 3 that we believe that the purpose of the regulation 

 4 is to enable users of the futures markets to 

 5 reduce risks and therefore that it would be 

 6 consistent with the purpose of the regulation to 

 7 permit these risk management techniques even 

 8 without use of a cash market. 

 9 CHAIRMAN GENSLER: So one last history 

 10 question and then I have a couple legal questions 

 11 because you are a lawyer. So it was in 1991 that 

 12 the first exemption for risk management was 

 13 granted by the Commission, so to speak, a swap 

 14 exemption was granted? 

 15 MR. BERKOVITZ: Correct. 

 16 CHAIRMAN GENSLER: So the 10 to 14 that 

 17 are in the agricultural products that have been 

 18 granted by this Commission were granted starting 

 19 in that period of time and then following along 

 20 the years? 

 21 MR. BERKOVITZ: That's correct. 

 22 CHAIRMAN GENSLER: And then the 

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 1 exchanges separately granted exemptions, total 

 2 exemptions, about half of that, so maybe it's call 

 3 it 20, but roughly the earlier slide showed 35 to 

 4 40 total exemptions and about half of those are 

 5 risk management exemptions were granted by the 

 6 exemptions starting in 1991 or did they start 

 7 granting exemptions later? 

 8 MR. BERKOVITZ: I would have to check on 

 9 the data when the exchanges first granted those. 

 10 CHAIRMAN GENSLER: Maybe if we have 

 11 people from the exchange they could answer. Let 

 12 me ask some questions about the law and then I'll 

 13 turn to Commissioner Dunn. Do I take it from your 

 14 testimony that the Commission has the authority to 

 15 set position limits for all commodity futures 

 16 contracts? 

 17 MR. BERKOVITZ: Yes, that's correct. 

 18 CHAIRMAN GENSLER: Does the Commission 

 19 have the authority to set position limits even if 

 20 an exchange has already established a limit? 

 21 MR. BERKOVITZ: Yes. 

 22 CHAIRMAN GENSLER: Does the Commission 

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 1 have to make an affirmative finding that there has 

 2 actually been excessive speculation? 

 3 MR. BERKOVITZ: No. The Commission has 

 4 been able to set position limits without such a 

 5 finding. 

 6 CHAIRMAN GENSLER: So if the Commission 

 7 doesn't have to make that finding, do we have to 

 8 make an affirmative finding that there has been 

 9 undue burden on interstate commerce that has 

 10 resulted from excessive speculation? 

 11 MR. BERKOVITZ: No, the Commission has 

 12 interpreted the statute and position limits have 

 13 been applied in a manner, and the direct wording 

 14 of the statute is to prevent such undue burden, so 

 15 as the Commission has described it's a 

 16 prophylactic measure. So you don't have to wait 

 17 for some damage to the market or some undue burden 

 18 on commerce where the Commission is directed to 

 19 actually prevent it. 

 20 CHAIRMAN GENSLER: So I take it that 

 21 historically at least in the agricultural products 

 22 that the Commission found that the concentration 

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 1 of individual traders, meaning the large size of 

 2 those traders in itself should be limited and was 

 3 necessary to eliminate, diminish or prevent the 

 4 burdens that may come to interstate commerce from 

 5 excessive speculation. 

 6 MR. BERKOVITZ: That's correct. 

 7 CHAIRMAN GENSLER: Thank you. For 

 8 energy products, energy contracts right now, do 

 9 the exchanges have a statutory responsibility to 

 10 set position limits and accountability levels to 

 11 prevent excessive speculation as contrasted with 

 12 manipulation and congestion? 

 13 MR. BERKOVITZ: Core Principle 5 does 

 14 not refer to excessive speculation as one of the 

 15 purposes of position limits or accountability. 

 16 CHAIRMAN GENSLER: I just want to 

 17 understand this a little bit better. Core 

 18 Principle 5, what is that? That's the principle 

 19 that the exchanges have to follow? 

 20 MR. BERKOVITZ: Correct. 

 21 CHAIRMAN GENSLER: In Core Principle 5 

 22 what is it that they're setting position limits to 

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 1 address? 

 2 MR. BERKOVITZ: I'll quote Core 

 3 Principle 5, "To reduce the potential threat of 

 4 market manipulation or congestion especially 

 5 during trading in the delivery month, the Board of 

 6 Trade shall adopt position limitations or position 

 7 accountability for speculators where necessary and 

 8 appropriate." 

 9 CHAIRMAN GENSLER: I gather that the 

 10 statute as amended in 2000 and as stands today, 

 11 there is not a statutory responsibility of the 

 12 exchanges to set position limits to address 

 13 excessive speculation. 

 14 MR. BERKOVITZ: That's correct. 

 15 CHAIRMAN GENSLER: Is there a statutory 

 16 responsibility for this Commission to set position 

 17 limits to address the burdens that may come from 

 18 excessive speculation? 

 19 MR. BERKOVITZ: That is the language of 

 20 Section 4(a) of the statute of the direction to 

 21 the Commission. 

 22 CHAIRMAN GENSLER: What does the word 

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 1 "shall" mean in 4(a)? There's a word that the 

 2 Commission shall set. 

 3 MR. BERKOVITZ: If the Commission finds 

 4 that position limits are necessary to prevent, 

 5 diminish or eliminate such burdens, then there is 

 6 a directive that it shall establish position 

 7 limits. 

 8 CHAIRMAN GENSLER: Thank you, General 

 9 Counsel Berkovitz. Commissioner Dunn? 

 10 COMMISSIONER DUNN: Thank you, Mister 

 11 Chairman. This morning -- I usually get up around 

 12 3:30 and the first thing I do is go to the 

 13 computer and see what's on the blobs, and lo and 

 14 behold I got a message from our Chief Counsel at 

 15 3:35, and if you were just getting to bed when I 

 16 was just getting up, I give you a great amount of 

 17 support for being here this morning. You may not 

 18 be able to answer some of the questions I have, 

 19 but if other staff are in the room, we might call 

 20 on them to get some of these answers. What I want 

 21 to take to take a look at is how does the 

 22 Commission come up on federal spec limits. What 

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 1 criteria do they use in establishing those? 

 2 MR. BERKOVITZ: The Commission uses I 

 3 believe, and I would also welcome Division of 

 4 Market Oversight to assist, but the criteria are 

 5 set forth in the Commission's regulations in 150.2 

 6 as to what the specific criteria are. 

 7 CHAIRMAN GENSLER: I'm inviting up as 

 8 Chair, I think I have the prerogative to invite up 

 9 our head of Division and Market Oversight Rick 

 10 Shilts who can assist where appropriate. 

 11 MR. SHILTS: The formula or the 

 12 procedures that the Commission has adopted in its 

 13 policies for setting limits in the agricultural 

 14 commodities federal limits, for the spot month 

 15 it's geared to deliverable supplies and it's 

 16 generally about one-fourth of the estimated 

 17 deliverable supplies for the commodity, and then 

 18 for individual months outside of the spot month 

 19 and in all months combined it's generally geared 

 20 toward open interest for the previous year. The 

 21 limits aren't adjusted on an annual basis, but 

 22 when they are it goes back looking at average open 

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 1 interest for the prior year looking at 10 percent 

 2 up to the first 25,000 and then a marginal rate of 

 3 2-1/2 percent after that. So it's to address 

 4 concentration in the particular contracts, but 

 5 it's deliverable supplies for the spot month and 

 6 open interest for the other months. 

 7 COMMISSIONER DUNN: We recently had 

 8 where there has been a drought on the agricultural 

 9 of course because that's the ones we set, and 

 10 there is less deliverable supply available, do we 

 11 ever step in and change those mid- contract or 

 12 midyear? 

 13 MR. SHILTS: No. Federal limits are 

 14 established via rule making and generally not to 

 15 apply to existing positions. I think that's a 

 16 provision in the law that we can't modify limits 

 17 and effect position positions, but it's all done 

 18 through an open process through a proposed rule 

 19 making and then an adoption of final rules. 

 20 COMMISSIONER DUNN: When someone exceeds 

 21 a position limit or even an accountability limit, 

 22 could you describe what the action is between the 

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 1 CFTC and the exchange that is responsible for that 

 2 contract? 

 3 MR. SHILTS: Yes. Our surveillance 

 4 staff is in regular contact with the surveillance 

 5 staff of all the exchanges and they have large 

 6 trader to do oversight of positions as do we. So 

 7 if a trader is over a position, we will know that 

 8 there is a potential violation as well as the 

 9 exchange. There will an immediate dialogue with 

 10 the exchange to make sure that the facts are 

 11 correct. Then if it's a federal limit, then 

 12 obviously we will immediately take action to get 

 13 the trader down, what caused the violation, and if 

 14 it's egregious then we can refer that to 

 15 Enforcement because any violation of either the 

 16 federal limits or exchange set limits is something 

 17 that our Division of Enforcement take action on 

 18 which happens. 

 19 COMMISSIONER DUNN: Is the same true for 

 20 accountability levels? 

 21 MR. SHILTS: No. Accountability levels 

 22 are not limits. They are alert levels where the 

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 1 exchange can take additional action, additional 

 2 oversight and get more information from the 

 3 exchanges or they can take action to tell a trader 

 4 to either not increase their position or reduce 

 5 the position. But exceeding an accountability 

 6 level in and of itself is not a violation. 

 7 COMMISSIONER DUNN: Is there a 

 8 requirement for an exchange to notify the CFTC 

 9 when someone has exceeded the accountability level 

 10 or to tell us what actions they intend to take? 

 11 MR. SHILTS: No, there is no specific 

 12 rule or requirement for that, but as part of our 

 13 ongoing surveillance we get reports of traders 

 14 from the exchanges that are over the levels and 

 15 there's a continuing dialogue, but there is not a 

 16 formal requirement for that. 

 17 COMMISSIONER DUNN: To follow up on Core 

 18 Principal Number 5, when you're looking at an 

 19 exchange, how do you determine whether or not 

 20 whether they're in compliance with that core 

 21 principle? 

 22 MR. SHILTS: For looking at the spot 

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 1 month limits which is what's essentially required, 

 2 again it's an evaluation of the estimated 

 3 deliverable supplies for that particular 

 4 commodity. When we look at a rule enforcement 

 5 review we'll be looking at the exchange's 

 6 procedures for monitoring the positions, ensuring 

 7 that traders are taking action if they do exceed 

 8 the limits, as well as their oversight in 

 9 implementing their accountability provisions. But 

 10 again, exceeding the level is not a violation. 

 11 COMMISSIONER DUNN: On the rule 

 12 enforcement review, these are normally scheduled. 

 13 How long is the period between those reviews? 

 14 MR. SHILTS: Generally we have striven 

 15 to have the reviews done every 2 years, but 

 16 because of staffing issues, it's been extended 

 17 generally about 3 years on average, and they are 

 18 all posted on our website too. 

 19 COMMISSIONER DUNN: Thank you, Mr. 

 20 Shilts. I appreciate your coming up ad hoc here. 

 21 I've got another question for Mr. Berkovitz. 

 22 CHAIRMAN GENSLER: Rick, don't go too 

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 1 far. 

 2 COMMISSIONER DUNN: Thought he'd get 

 3 away easy. Senator Sanders brought up the fact 

 4 that Goldman Sachs predicted that crude would hit 

 5 $200 per barrel and that is also in the testimony 

 6 that Mr. Cota has submitted to us. How do we 

 7 delineate between someone who is an active trader 

 8 and someone who is giving investment advice when 

 9 we look at those particular entities? 

 10 MR. BERKOVITZ: We don't have any what 

 11 would be consider insider trading requirement or 

 12 prohibitions like they would have in the 

 13 securities context. 

 14 COMMISSIONER DUNN: We don't have a 

 15 prohibition from the trading desk getting 

 16 information? 

 17 MR. BERKOVITZ: No. 

 18 COMMISSIONER DUNN: Thank you. 

 19 CHAIRMAN GENSLER: Commissioner Sommers? 

 20 Again, if we need another round we'll go another 

 21 round. 

 22 COMMISSIONER SOMMERS: Thank you, Mister 

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 1 Chairman. I think that probably my questions will 

 2 be directed more at Rick as well. 

 3 CHAIRMAN GENSLER: Glad you didn't go 

 4 far. 

 5 COMMISSIONER SOMMERS: You mentioned 

 6 that when we look at the formula for position 

 7 limits that we do not adjust those limits 

 8 annually. When is the last time we adjusted the 

 9 limits for the federally set? 

 10 MR. SHILTS: I believe the last time was 

 11 in 2005. It generally has been at the request of 

 12 the exchanges. The last time we adjusted the 

 13 limits the Commission had said we would try to do 

 14 this on a more regular basis. There was a 

 15 proposal in 2007 but there was various concern in 

 16 the industry and that was withdrawn. 

 17 COMMISSIONER SOMMERS: If we consider 

 18 these changes to position limits right now, would 

 19 it be more appropriate to consider and put in a 

 20 rule that we would have annual adjustments 

 21 relating to the formula? 

 22 MR. SHILTS: Yes, I think that probably 

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 1 would make sense. 

 2 COMMISSIONER SOMMERS: Also with regard 

 3 to the formula, is the formula across the board 

 4 appropriate for every commodity or are there 

 5 differences in commodities that would make it 

 6 difficult to apply the same formula across the 

 7 board for all the commodities? 

 8 MR. SHILTS: I think that's a good 

 9 question and something we'd have to evaluate, if 

 10 the Commission decides to go forward what would be 

 11 the appropriate formula to use for different types 

 12 of commodities. 

 13 COMMISSIONER SOMMERS: But it's possible 

 14 that each commodity might be different? 

 15 MR. SHILTS: Yes. 

 16 COMMISSIONER SOMMERS: I'm not sure 

 17 which of you this question is more appropriately 

 18 directed at, but when we were talking about the 

 19 legislative history, has there ever been a 

 20 discussion or a recognition in the long history of 

 21 the debates about excessive speculation and 

 22 position limits as to the difference between cash 

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 1 settled contracts and physically settled 

 2 contracts? Has that ever been a factor in the 

 3 debate? 

 4 MR. SHILTS: In terms of the spot month 

 5 limits it has been a consideration because, to use 

 6 the shorthand I said for the spot month limit we 

 7 look at the estimate of deliverable supplies. For 

 8 a cash settled contract there is no delivery so 

 9 there aren't deliverable supplies. But there the 

 10 spot month limit has been geared toward the size 

 11 of the underlying market from which the cash 

 12 settlement price is determined. So of you're 

 13 looking at a feed or cattle contract we'd be 

 14 looking at the volume of sales and all that to 

 15 into determination of the cash settlement price if 

 16 it's something like on euro dollars where you're 

 17 looking at a LIBOR rate or something then there 

 18 may not be a need for a limit or whatever because 

 19 of the issues about how it's calculated. So, yes, 

 20 there are different considerations. 

 21 COMMISSIONER SOMMERS: Would we consider 

 22 that it would be appropriate to have different 

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 1 levels for cash settled versus physically settled? 

 2 That's not how we do it now is it? 

 3 MR. SHILTS: For the ag commodities 

 4 essentially they're all physically delivered, so 

 5 this would be something that we'd have to 

 6 consider. 

 7 COMMISSIONER SOMMERS: For energy. 

 8 MR. SHILTS: Yes. 

 9 MR. BERKOVITZ: One of the distinctions 

 10 that is found throughout the legislative history 

 11 in more recent years since the financial futures 

 12 began to be traded in the 1970s and the 1980s and 

 13 there was a lot of discussion back then and it 

 14 continues now is the discussion focuses a lot on 

 15 the inexhaustible supply issue, that in the 

 16 financial commodities you're not dealing with 

 17 something in a finite supply and so then the 

 18 question becomes what do you do with a commodity 

 19 that might have a larger type of supply. The 

 20 energy commodities, should they be like a 

 21 financial commodity where there's nearly an 

 22 inexhaustible supply and apply the same concepts 

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 1 to the commodities of finite supply that are very 

 2 large as you do to financials or to the 

 3 agriculture commodities where you do have that 

 4 finite supply and those concepts I think came 

 5 together in the position accountability rule where 

 6 you have a spot month limit for an energy 

 7 commodity for example or a metal but you don't 

 8 have your other month limits. 

 9 COMMISSIONER SOMMERS: Thank you. I 

 10 don't have any other questions. 

 11 CHAIRMAN GENSLER: Thank you, 

 12 Commissioner Sommers. Commissioner Chilton? 

 13 COMMISSIONER CHILTON: Mr. Berkovitz, 

 14 you talked about how we could deal with position 

 15 limits on exchange, but people talk about 

 16 loopholes. Senator Sanders talked about 

 17 loopholes, people talk about the swaps loopholes 

 18 and about the London loophole. Can you address 

 19 our ability to address either of those different 

 20 areas of trading, both OTC trading and then 

 21 look-alike contracts? 

 22 MR. BERKOVITZ: Legally the Commission's 

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 1 authority to establish position limits only goes 

 2 to designated contracts, designated derivative 

 3 transactions, execution facilities or where there 

 4 is a finding that there's a significant price 

 5 discovery contract on an exempt commercial market. 

 6 So we do not have statutory authority to impose 

 7 position limits in the over-the-counter market or 

 8 other markets. 

 9 COMMISSIONER CHILTON: Hence, you'd 

 10 probably need some legislative authority to deal 

 11 in particular with the OTC market, but we'd need 

 12 something from Congress to change that. Then 

 13 there are other things though with regard to look 

 14 alive contracts that we could do regulatorily even 

 15 though we may not have a clear statutory 

 16 responsibility? Is that correct? 

 17 MR. BERKOVITZ: If a look alike contract 

 18 is traded on an exempt commercial market for 

 19 example, to use the example of the 

 20 Intercontinental Exchange and the Henry Hub 

 21 natural gas contract which was traded on the 

 22 Intercontinental Exchange which is either Friday 

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 1 or yesterday the Commission actually found was a 

 2 significant price discovery contract, so with that 

 3 determination under the provisions that were 

 4 enacted into law in the Farm Bill last year, the 

 5 Commission upon the finding that it's a 

 6 significant price discovery contract, the exchange 

 7 now has an obligation to follow the core principle 

 8 with that and the Commission has statutory 

 9 authority under Section 4(a) to actually establish 

 10 its own position limit should it make the finding 

 11 and determine to do so. 

 12 COMMISSIONER CHILTON: For Mr. Shilts, 

 13 what about look alike contracts like the WTI in 

 14 London? What sort of regulatory oversight do we 

 15 do? ICE has been cooperating in giving us data 

 16 and we've been working with FSA, but what sort of 

 17 legal constructs are there that we are using to 

 18 ensure that we're monitoring the markets to the 

 19 extent that we can? 

 20 MR. SHILTS: I'll let Dan talk about 

 21 some of the legal issues, but we do get data from 

 22 ICE Futures Europe. 

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 1 COMMISSIONER CHILTON: On a daily basis? 

 2 MR. SHILTS: On a daily basis. 

 3 COMMISSIONER CHILTON: We get it 

 4 directly from ICE? 

 5 MR. SHILTS: We get it through the FSA. 

 6 COMMISSIONER CHILTON: Do we sort of 

 7 C.C. it? It goes to FSA and we're C.C.'d, so 

 8 we're getting it in real time unfiltered from ICE 

 9 in London? 

 10 MR. SHILTS: Right. The same timeframe 

 11 we would get large trader data. 

 12 COMMISSIONER CHILTON: And the same type 

 13 of information that we would get from NYMEX? 

 14 MR. SHILTS: Correct. 

 15 COMMISSIONER CHILTON: And it's in the 

 16 same form and we can understand it? 

 17 MR. SHILTS: Yes. 

 18 COMMISSIONER CHILTON: So this is easy 

 19 for us to digest as part of your general 

 20 surveillance mechanics that you do every single 

 21 day? 

 22 MR. SHILTS: Yes. So we get that data 

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 1 and we can integrate it into the data we get from 

 2 NYMEX to do oversight of the NYMEX market. But as 

 3 to whether our authority to, I think the other 

 4 part of your question, oversee the foreign boards 

 5 of trade market, I'll let Dan respond to that 

 6 because I don't believe we do have that authority. 

 7 MR. BERKOVITZ: I think it's problematic 

 8 from several points legal as well as policy to 

 9 directly regulate the foreign board of trade. The 

 10 path that's been chosen by the Commission has not 

 11 confronted that issue directly, but instead the 

 12 Commission has chosen to put conditions on the 

 13 process by which ICE Futures Europe or any other 

 14 foreign exchange is permitted to install its 

 15 terminals in the United States. It's called the 

 16 no action process where we have said we will not 

 17 bring an action for a violation of any of our 

 18 regulations if you install terminals subject to 

 19 the following conditions. Last year the 

 20 Commission added several conditions to that and 

 21 worked with ICE and the FSAs and one of those 

 22 conditions was that you have comparable position 

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 1 limits. So while we don't have the direct 

 2 authority to establish on a foreign board of trade 

 3 or may not, these position limits we can condition 

 4 their access into our markets by the imposition of 

 5 these, and that's the way we've chosen to do it. 

 6 COMMISSIONER CHILTON: So we do have 

 7 some regulatory hook there to ensure that that ICE 

 8 Europe is abiding by positions, not that they 

 9 haven't suggested that they would do so anyway 

 10 voluntarily both through accountability levels or 

 11 position limits which I commend them for, but 

 12 there is some sort of legal hook that we have to 

 13 ensure that would be the case should they decide 

 14 they didn't want to. 

 15 MR. BERKOVITZ: That's correct. We have 

 16 tools at our disposal in that event. 

 17 COMMISSIONER CHILTON: Thank you. 

 18 CHAIRMAN GENSLER: I just have two quick 

 19 follow- ups. One is, General Counsel Berkovitz, I 

 20 take it that from what you said earlier that 

 21 somewhere along the line that the Commission 

 22 decided that financial futures as you used the 

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 1 term had sort of an inexhaustible supply and thus 

 2 position limits would not apply to them and 

 3 accountability levels would be appropriate, is 

 4 that right, somewhere in the 1991 or 1992 period? 

 5 MR. BERKOVITZ: Yes, that's correct. 

 6 CHAIRMAN GENSLER: In a close reading of 

 7 your long but well-written testimony, I take it 

 8 that some number of months later but in a separate 

 9 action the Commission said that the exchanges 

 10 could set accountability levels as well on energy 

 11 and I believe metals at the time, but at least 

 12 energy. 

 13 MR. BERKOVITZ: At least energy. That's 

 14 correct. 

 15 CHAIRMAN GENSLER: So you said that at 

 16 the center of that discussion then back in 1991 

 17 was whether the energy futures was more akin to 

 18 financials which had an inexhaustible supply or 

 19 was more akin to agricultural products which of 

 20 course have a finite supply. 

 21 MR. BERKOVITZ: The Commission's 

 22 determination at that point to apply to energy 

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 1 said that like financials, they have a nearly 

 2 inexhaustible supply. That was the rationale that 

 3 the Commission used to extend it to the energy 

 4 market. 

 5 CHAIRMAN GENSLER: But if this 

 6 Commission now, given 18 years of history and 

 7 development of markets came to a judgment that I 

 8 have but I can't speak on behalf of the Commission 

 9 that energy products are a product of finite 

 10 supply and that though they are larger than 

 11 agricultural products and they may be larger by 

 12 multiples but they still have more similarities to 

 13 products in agricultural supply, could this 

 14 Commission now take action to set position limits 

 15 based on our current judgment on this? 

 16 MR. BERKOVITZ: Certainly, if the 

 17 Commission were to make that finding. Certainly, 

 18 the initial finding in 1991 was a statement and a 

 19 decision to allow an exemption. It was not 

 20 adopted through a formal rule making. 

 21 CHAIRMAN GENSLER: So it was just 

 22 through an exemption. It wasn't even a rule 

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 1 making. 

 2 MR. BERKOVITZ: Correct. 

 3 CHAIRMAN GENSLER: That's very helpful. 

 4 So you believe the statute is clear and even the 

 5 history our rule making is clear if this 

 6 Commission came to the view that energy products 

 7 are a finite supply and have more similarity to 

 8 the agricultural products where we do set federal 

 9 position limits, that we have clear authority to 

 10 do that if that's our determination? 

 11 MR. BERKOVITZ: Yes. 

 12 CHAIRMAN GENSLER: Thank you. 

 13 Following-up on Commissioner Chilton's I thought 

 14 very helpful questions about both the significant 

 15 price discovery determination on ICE exempt 

 16 commercial market or the natural gas contract and 

 17 on ICE Futures U.K., I took it that you felt while 

 18 it was a little indirect but it's clear we have 

 19 currently the tools to set position limits and 

 20 make sure that those position limits are complied 

 21 with on both the natural gas contract and on the 

 22 linked contacts on ICE Futures U.K. 

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 1 MR. BERKOVITZ: We clearly have the 

 2 tools to apply position limits to the linked 

 3 contract in the United States. We also have tools 

 4 to clearly condition the access of the foreign 

 5 terminals to put those in the United States on 

 6 compliance with conditions. 

 7 CHAIRMAN GENSLER: I hear that we have a 

 8 very clear tool on one exchange, the natural gas 

 9 contract, and through ICE -- I apologize, is it 

 10 ICE U.K. or ICE Europe? ICE Europe. You believe 

 11 that we do, but it's through this conditional way 

 12 and through the no action process? 

 13 MR. BERKOVITZ: That's correct. 

 14 CHAIRMAN GENSLER: But we will have a 

 15 member of the senior management of ICE on the next 

 16 panel, so we can ask directly where I'm headed 

 17 because if we were to set as the Commission 

 18 position limits I want to make sure that we would 

 19 have clear authority that these would apply on 

 20 both of these ICE linked contracts. I don't have 

 21 any further questions. 

 22 COMMISSIONER DUNN: Thank you, Mister 

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 1 Chairman. Rick, since we've got you on the hot 

 2 seat, a couple others. We talked a little bit 

 3 about the rule enforcement reviews that you do, 

 4 and for ICE Futures U.S. you have authorities to 

 5 do those reviews? 

 6 MR. SHILTS: Definitely for ICE Futures 

 7 U.S. 

 8 COMMISSIONER DUNN: ICE Futures Europe? 

 9 MR. SHILTS: No. 

 10 COMMISSIONER DUNN: ICE Futures Canada? 

 11 MR. SHILTS: No. 

 12 COMMISSIONER DUNN: ICE over the 

 13 counter? 

 14 MR. SHILTS: For contracts just declared 

 15 to be a significant price discovery contract, yes, 

 16 we will. 

 17 COMMISSIONER DUNN: For the new SPDC? 

 18 MR. SHILTS: Yes. 

 19 COMMISSIONER DUNN: I had sent some 

 20 questions to the ICE and CME asking what they do 

 21 and how they do things. I was told by ICE that on 

 22 setting their accountability limits for both ICE 

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 1 Futures Europe and ICE over the counter under the 

 2 new SPDC they are going to utilize those that are 

 3 in NYMEX. Mr. Shilts, does that give them or give 

 4 somebody who wants to have a lot of speculation 

 5 position two bites at the apple? Are they allowed 

 6 to then since they're not aggregated to be able to 

 7 have similar positions in both exchanges? 

 8 MR. SHILTS: Yes. The way the limits 

 9 are set up, again these exchange limits, so each 

 10 exchange would set their own limit. So presumably 

 11 one could have limit sized positions at both 

 12 exchanges because they're not aggregated. 

 13 COMMISSIONER DUNN: Is there a size 

 14 issue here? If NYMEX says we have say 25 

 15 contracts on 100 outstanding contracts, that's the 

 16 limit that we have on there, and then another 

 17 exchange comes on and says we'll se the same 25 

 18 contracts but they only have 50 outstanding, does 

 19 that skew the situation in that other exchange? 

 20 MR. SHILTS: Presumably not because as I 

 21 said, since the limits are set separately for each 

 22 exchange, then there is parity there in that 

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 1 sense. I think the issue is if the overall limit 

 2 should be really set at that level then 

 3 potentially you could have a position by a trader 

 4 that exceeds that level by doing it on multiple 

 5 exchanges which would suggest an aggregation 

 6 provision. 

 7 COMMISSIONER DUNN: When you have 

 8 observed folks who have positions exceeding those 

 9 and have asked them to reduce those positions or 

 10 the exchanges have asked them to reduce those, 

 11 have you observed them migrating to other 

 12 exchanges and over-the-counter and other OPEC swap 

 13 deals that we do not have oversight over? 

 14 MR. SHILTS: For the federal limits that 

 15 really aren't alternative markets so we haven't 

 16 observed that. As far as migration from other 

 17 markets, maybe that might be a good question for 

 18 the NYMEX people who would be watching that when 

 19 they take provisions under their accountability 

 20 procedures to tell traders to reduce. 

 21 COMMISSIONER DUNN: Would they know if 

 22 that customer of theirs went to another exchange? 

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 1 MR. SHILTS: Presumably I think they 

 2 would. 

 3 COMMISSIONER DUNN: Does this argue for 

 4 us to look at the aggregate of positions that an 

 5 investor might have? 

 6 MR. SHILTS: Just from my own personal 

 7 opinion, I think if the Commission decides that a 

 8 certain level is appropriate in terms of a 

 9 speculative limit, then I think it makes sense 

 10 that that be applied to all positions that are 

 11 equivalent to that whether they be on multiple 

 12 markets or not. 

 13 COMMISSIONER DUNN: Thank you. 

 14 CHAIRMAN GENSLER: Thank you, 

 15 Commissioner Dunn. Commissioner Sommers I believe 

 16 said she didn't have any more questions. 

 17 Commissioner Chilton? 

 18 COMMISSIONER CHILTON: Just real quick. 

 19 Senator Sanders raised and the Chairman referred 

 20 to this issue of the trading arms at firms as 

 21 opposed to their forecasting arms. I've talked 

 22 about this before and I think it's an issue, but I 

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 1 want to clarify legally. As the Commission we 

 2 don't have the ability to distinguish and do 

 3 anything about that if we thought it was a bad 

 4 idea. Am I correct that that would take a 

 5 statutory change to the Act? 

 6 MR. BERKOVITZ: I think our legal 

 7 authority is somewhat tenuous in that area. 

 8 CHAIRMAN GENSLER: But I take it, Mr. 

 9 Berkovitz, if we wanted to explore this, we could 

 10 explore this more with you as to our ability 

 11 through our regulation through futures commission 

 12 merchants and the application of futures 

 13 commission merchants to do things in this area. 

 14 MR. BERKOVITZ: Yes, certainly. There 

 15 are segments of the market that we have clear 

 16 authority over and I was referring to Commissioner 

 17 Chilton as the whole market and the entire market 

 18 in general. 

 19 CHAIRMAN GENSLER: I want to thank both 

 20 Mr. Berkovitz and then at the last minute Mr. 

 21 Shilts. I also want to thank the public because 

 22 this is the way that this Commission can actually 

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 1 meet as a Commission under the Sunshine Act and 

 2 meet with staff, so there was a little back and 

 3 forth that was very helpful, but the public gets 

 4 to participate in that too. So if we excuse these 

 5 witnesses, I thank our other experts for their 

 6 patience, but I think I see some or maybe one of 

 7 them actually left the room. 

 8 I want to express the Commission's deep 

 9 appreciation for our next two witnesses. We have 

 10 with us today the Chief Executive Officers each of 

 11 the two major trading companies that trade energy 

 12 futures not here in this country by globally who 

 13 really make the significant share again both here 

 14 in the U.S. and globally of the energy futures 

 15 markets. I also wanted to express the 

 16 Commission's appreciation that in the written 

 17 testimony both Craig Donahue and Jeff Sprecher 

 18 have indicated tangible, real steps toward trying 

 19 to address the very real concerns that we here are 

 20 grappling with with the possibility of setting 

 21 position limits as I believe the CME has said in 

 22 their written testimony though there still remain 

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 1 many questions and many questions that we'll 

 2 discuss and may have lively debate over, we 

 3 appreciate the tangible indications in your 

 4 testimony about the support for possibly setting 

 5 position limits not only in the spot month but in 

 6 single month and all months combined and the 

 7 tangible steps that Mr. Sprecher has put in his 

 8 testimony about if we were to do it, how to do 

 9 that. I think this public dialogue is very 

 10 beneficial to the process as we move forward. 

 11 With that, I don't know if we flip a coin between 

 12 the two of you or I'm supposed to go 

 13 alphabetically, but Mr. Donahue? I promise if we 

 14 have you back another time we'll go in the other 

 15 order. 

 16 MR. DONAHUE: Thank you very much, 

 17 Mister Chairman and Commissioners. We appreciate 

 18 the opportunity to be here today and to provide 

 19 our input to the Commission's review of the 

 20 approach to speculative position limits in 

 21 contract energy and hedge exemptions as well. 

 22 CHAIRMAN GENSLER: Your prepared remarks 

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 1 will be entered into the record. I just wanted to 

 2 make sure of that. 

 3 MR. DONAHUE: Thank you. I have 

 4 prepared remarks, but I'd like to just maybe 

 5 depart from that for a moment to clarify something 

 6 that I think General Counsel Berkovitz might have 

 7 neglected in his very good summary and I think 

 8 mostly accurate review of the history of position 

 9 limits. With respect to the question of the 

 10 exchanges' obligations and roles, I wanted to 

 11 point out Appendix B to Part 38 to Core Principle 

 12 Number 5 which I will quote, "In order to diminish 

 13 potential problems arising from excessively large 

 14 speculative positions and to facilitate orderly 

 15 liquidation of expiring futures contracts, markets 

 16 may need to set limits on trader positions for 

 17 certain commodities." I agree with many of the 

 18 conclusions of Mr. Berkovitz, but I wanted to 

 19 point out that I think that the Commission's own 

 20 interpretation of acceptable practices clearly 

 21 places that obligation on the exchanges. 

 22 I'd like to begin by saying that the 

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 1 theory that speculators in futures markets cause 

 2 unwarranted price volatility and excessively high 

 3 and low prices is certainly not new. Congress has 

 4 been repeating that notion since the late 1800s. 

 5 Farmers and their legislative representatives have 

 6 called for the elimination of speculators on 

 7 futures exchanges and the Commodity Exchange Act, 

 8 however, does not limit speculator but only 

 9 excessive speculation. This is of course an 

 10 implicit recognition that futures markets cannot 

 11 operate without the participation of noncommercial 

 12 participants. The so-called speculator such as 

 13 index funds and swap dealers who are the focus of 

 14 recent intense criticism are in fact not engaged 

 15 in traditional speculative activity trying to beat 

 16 the market. Rather, swap dealers use futures 

 17 markets to facilitate the hedging of more complex 

 18 and specific risks accepted in connection with 

 19 swap transactions with commercial customers and 

 20 others. Denying or limiting their access to the 

 21 futures markets will simply impede hedging 

 22 activity by commercial market participants. Index 

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 1 fund aggregate the buying and selling decisions of 

 2 many thousands of investors most of whom who are 

 3 doing exactly what they've been taught for decades 

 4 to do, diversity in their investment portfolios 

 5 and hedging inflation risks in order to enhance 

 6 their investment returns and to maximize their 

 7 retirement savings and their individual wealth. 

 8 The debate regarding controlling 

 9 excessive speculation in the energy markets by 

 10 means of position limits or otherwise must be 

 11 informed by two facts. First, it is rare for 

 12 speculators, index traders and other swap dealers 

 13 individually to have control of a large share of 

 14 the open interest in any futures contract. And 

 15 second, efforts to control price or volatility by 

 16 position limits is generally a failed strategy. 

 17 Position limits are not across this palliative to 

 18 appease angry farmers or gasoline or heating oil 

 19 buyers. Position limits when improperly 

 20 calibrated and administered can easily distort 

 21 markets, increase the cost to hedgers and 

 22 effectively increase the cost to consumers. 

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 1 Unfortunately, many demands for speculative 

 2 limitations assume that severe limits on 

 3 speculation will bring prices to some favored 

 4 level. On the contrary, position limits on 

 5 futures contracts will not and do not control cash 

 6 market prices. There is a complete disconnect 

 7 between the implied promise to drive prices down 

 8 or up, whichever a constituency desires, and the 

 9 ability of position limits to deliver on that 

 10 promise. 

 11 We have taken a very strong position in 

 12 the past, and in the answers to your questions 

 13 today respecting the value of additional hard 

 14 position limits in energy markets. We employed 

 15 position limits during the last 3 days of trading 

 16 before the delivery period and position 

 17 accountability levels at other times in order to 

 18 avoid congestion and other market disrupting 

 19 events that may flow from excessive concentrations 

 20 of positions. Nothing we have heard or read 

 21 discredits the principles upon which those 

 22 policies were built. Although our administration 

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 1 of accountability levels in the energy markets may 

 2 not be broadly understood by the public, it is 

 3 certainly understood by the Commission's own 

 4 Division of Market Oversight, as it is routinely 

 5 subject to rule enforcement review by DMO. 

 6 Notwithstanding the success of our 

 7 accountability regime, we do recognize, Mister 

 8 Chairman, that others have concerns respecting the 

 9 role of index funds and swap dealers in the future 

 10 market, and in particular the impact that their 

 11 participation in the markets might have on energy 

 12 prices. CME Group is prepared to respond to those 

 13 concerns by adopting a hard limit regime for those 

 14 products including single month and all months 

 15 combined limits, in addition to the current limits 

 16 that apply during the final 3 days of trading. 

 17 This modified regime will include the 

 18 administration of tailored hedge exemptions for 

 19 swap dealers and index funds, and as a whole we 

 20 believe should alleviate the external concerns 

 21 that positions held by these investors and hedgers 

 22 will increase price volatility or artificially 

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 1 inflate or deflate prices. 

 2 CHAIRMAN GENSLER: I didn't know just 

 3 how you were going to summarize, but everything 

 4 will be in the written record. 

 5 MR. DONAHUE: Thank you. 

 6 CHAIRMAN GENSLER: I don't mean to cut 

 7 you off. I didn't know how you were going to 

 8 summarize. I'm watching the clock too. 

 9 MR. DONAHUE: It is important I think to 

 10 include a brief word on the value of indexing. 

 11 Index investing in commodity futures is an 

 12 efficient means for thousands of small traders to 

 13 gain the benefit of asset diversification or to 

 14 hedge inflation risks. For example, contrary to 

 15 the picture painted by a few witnesses at a recent 

 16 congressional hearing, index funds are not 

 17 monolithic entities where a single speculator 

 18 controls a large block of capital. Also, a review 

 19 of U.S. oil funds open positions shows that it was 

 20 liquidating positions when oil prices were rising. 

 21 Indeed, the net reduction of futures equivalent 

 22 swap positions constituted an 11 percent decline 

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 1 over the first 6 months of 2008. I heard the 

 2 testimony of the two members of Congress this 

 3 morning and I think it's important to note that 

 4 there have been numerous studies, the CFTC's own 

 5 study, other governmental studies and private 

 6 economists who have studied these issues. None of 

 7 them has established causation between the role of 

 8 index funds, swap dealers and noncommercial 

 9 participants in the futures markets and the price 

 10 behavior that we saw last summer. In fact, in the 

 11 year since those studies were largely completed, 

 12 we have yet to see a single study based on 

 13 empirical evidence and reliable economic analysis 

 14 that concludes to the contrary. Thank you very 

 15 much. I look forward to answering your questions. 

 16 CHAIRMAN GENSLER: Thank you very much. 

 17 MR. DONAHUE: I hope that was brief 

 18 enough for you. 

 19 CHAIRMAN GENSLER: We'll do a couple of 

 20 rounds of you both together. Mr. Sprecher? 

 21 MR. SPRECHER: Thank you, Chairman 

 22 Gensler and Commissioners, and I very much 

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 1 appreciate the opportunity to appear in front of 

 2 you. 

 3 Before I start I'd also like to echo 

 4 what Mr. Donahue said and just put a note of 

 5 caution out there that we as well have not seen a 

 6 quantitative study that's shown that speculation 

 7 in the futures market was the cause of the 

 8 increased energy commodity prices that we've seen 

 9 over the last year. In fact, we see that markets 

 10 where there are no active futures contracts traded 

 11 have had similar price effect. So I'm sure you 

 12 and the exchanges as well want to make sure that 

 13 when we finish this process, American consumers 

 14 will be left in a better position than they were 

 15 when we started. 

 16 Against that backdrop, we've made five 

 17 recommendations to you in our written testimony 

 18 and I'd like to summarize them. First, we think 

 19 that any aggregate system of position limits, 

 20 accountability levels and hedge exemptions should 

 21 be set and administered by you the CFTC and not by 

 22 the exchanges. Second, we think that position 

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 1 limits and accountability levels should be 

 2 determined by you using a market neutral and 

 3 transparent methodology in a manner that will 

 4 preserve competition for trading venues. Third, 

 5 we think that financially settled contracts and 

 6 physically delivered contracts should be treated 

 7 differently in a revised regime, somewhat going to 

 8 the questioning of Commissioner Sommers. Fourth, 

 9 we think that the CFTC should maintain the 

 10 distinction between the expiring month position 

 11 limits and future month accountability levels. 

 12 Lastly, we think that there are changes that can 

 13 be made to exchange traded commodity funds or ETFs 

 14 that may be required to help administer any of 

 15 these accountability levels, position limits and 

 16 exemptions that we end up with. 

 17 I think rather than go through my 

 18 testimony in any great detail I'd like to stop 

 19 there and let you ask questions and I can 

 20 elaborate on those. Thank you. 

 21 CHAIRMAN GENSLER: I thank our 

 22 panelists. What I want to try to do is maintain a 

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 1 5-minute clock even for us too and we'll go two 

 2 panels and we'll decide whether we need a third, 

 3 but maybe we can all get it done in two. 

 4 Mr. Donahue, your opening comment about 

 5 Mr. Berkovitz's testimony, I appreciate that and 

 6 I just want to draw your attention to though he 

 7 was also trying to summarize in a short time, he's 

 8 got a 27-page legislative history, but on pages 19 

 9 and 20 it goes through exactly what you're talking 

 10 about and does specifically go through that the 

 11 statutory regime in Core Principle 5 does not set 

 12 in statute specific provisions or requirements for 

 13 the exchanges to set position limits to prevent or 

 14 diminish or eliminate excessive speculation. 

 15 You're accurate that in part 38, and he refers to 

 16 this in the document, is guidance by the 

 17 Commission but not in statue say that you may. I 

 18 don't think it says shall, but you may. The one 

 19 distinction is that the statute says we shall. 

 20 I'm glad you brought our attention to that because 

 21 I think you're accurate that in the summary it 

 22 didn't have a chance to -- so I guess my question 

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 1 is, are we on the same wavelength with regard to 

 2 that or maybe you want to follow-up later and have 

 3 your folks read his fuller testimony to see if you 

 4 concur with what he has there. 

 5 MR. DONAHUE: No, I think I've clarified 

 6 that the Commission's own interpretation is that 

 7 we have an obligation and presumably in reviewing 

 8 our compliance with the core principles under the 

 9 acceptable practices the CFTC would similarly 

 10 conclude that we have an obligation to prevent 

 11 excessive speculation -- wouldn't understand what 

 12 the acceptable practices language meant. 

 13 CHAIRMAN GENSLER: We might need to 

 14 bring Mr. Berkovitz back up, but what I'm trying 

 15 to say is he did address it, and so if you'd take 

 16 a look at the full testimony. 

 17 MR. DONAHUE: I only play a lawyer on 

 18 TV. 

 19 CHAIRMAN GENSLER: What's that? 

 20 MR. DONAHUE: I said I only play a 

 21 lawyer on TV these days so that's about as far as 

 22 I can go. 

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 1 CHAIRMAN GENSLER: I have a question for 

 2 Mr. Sprecher and then maybe a couple back for Mr. 

 3 Donahue. You had said that you thought that there 

 4 is a need for competition in the marketplace and I 

 5 understand that you thought to the extent position 

 6 limits were set, these should be set by the 

 7 Commission and not the exchanges. Could you 

 8 elaborate on that a bit? 

 9 MR. SPRECHER: Sure. I think a couple 

 10 of points actually flow from that. One is that we 

 11 are asking for you to set aggregate position 

 12 limits. I think what would be fair for users in 

 13 the market is that if they were given a certain 

 14 bucket of positions that they were allowed to hold 

 15 that they should be able to shop for the exchange 

 16 that will give them the best service. I think 

 17 that keeps Mr. Donahue and my colleagues honest 

 18 and drives innovation. Also a point that I don't 

 19 think has really been made here and with great 

 20 respect to the elected officials who were here, 

 21 they were very focused on the U.S. markets, but 

 22 today energy is really a global market and we 

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 1 unfortunately in the United States import the bulk 

 2 of our oil and so we are beholden to global 

 3 competition. I think it's important that in 

 4 setting this regime we respect the fact that these 

 5 positions can move around and will move around, so 

 6 it make sense that things be done in the 

 7 aggregate. 

 8 We have worked very closely with CFTC 

 9 staff and many of you now to try to bring both the 

 10 over-the-counter markets into a more transparent 

 11 and to put regulation over them as well as bring 

 12 foreign markets into the United States and put 

 13 regulation over them. In doing that what we've 

 14 basically agreed to do is try to adopt as best we 

 15 can and as best you can the regime that's in place 

 16 right now for the incumbent exchange, the CME. In 

 17 doing that, we've run into some problems as 

 18 somebody willing and trying to become regulated. 

 19 One is we have no transparency into how these 

 20 position limits were established or how the 

 21 exemptions are given. We have customers come to 

 22 us all the time and say I have a hedge exemption 

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 1 from your competitor. You should respect it. 

 2 Should we respect it? We don't know what's behind 

 3 it. So we're in a very, very difficult position. 

 4 We also have had what we believe are some odd 

 5 practices that in the guise of risk management I 

 6 think are anticompetitive where our customers are 

 7 being told that they can't carry a position on ICE 

 8 if they want to get a hedge exemption somewhere 

 9 else. That seems anticompetitive to me. I 

 10 understand from a risk standpoint it would be 

 11 better for the incumbent exchange to see the 

 12 entire position, but I would like for you to help 

 13 drive competition there. 

 14 Lastly, we've seen changes to limits 

 15 that we can't explain and we've actually FOIA'd 

 16 your staff to try to get documentation and 

 17 understand how these things evolved and we find 

 18 that there's very little documentation that you 

 19 have in your files, so we don't understand it. 

 20 All that suggests to me that it would be much 

 21 better to have you as a neutral counterparty who 

 22 has also an obligation under Congress to make sure 

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 1 that there are orderly markets that are 

 2 competitive administer that regime. 

 3 CHAIRMAN GENSLER: I thank you. To make 

 4 sure that standards and limits are applied 

 5 consistently across all Commissioners, I now turn 

 6 to Commissioner Dunn. 

 7 COMMISSIONER DUNN: Thank you for that 

 8 equality. Mr. Donahue, you said in your written 

 9 piece to the extent that the Commission seems to 

 10 impose position limits on over-the-counter 

 11 markets, we do not believe that it currently has 

 12 the authority to do so. I think we are finding 

 13 that out. What happens when someone reaches that 

 14 position limit on one of the exchanges? 

 15 MR. DONAHUE: Thank you for that 

 16 question, Commissioner Dunn. We obviously 

 17 recognize that the CFTC as you do lacks authority 

 18 currently to regulate transactions in the 

 19 over-the-counter derivatives markets and also that 

 20 the CFTC has in fact limited authority in this 

 21 regard with respect to exemption commercial 

 22 markets and foreign boards of trade, and 

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 1 potentially no authority whatsoever with respect 

 2 to foreign exchanges that don't seek to provide 

 3 direct access to customers through terminals in 

 4 the United States. Despite Mr. Sprecher's 

 5 complaints about the way in which the current 

 6 market works, the sad reality is and we've seen 

 7 numerous instances of this including Amaranth that 

 8 when people run up against limits and levels in 

 9 our regulated market NYMEX, they sometimes devolve 

 10 to the less regulated markets or the markets where 

 11 historically there have been neither position 

 12 reporting nor position limits nor position 

 13 accountability which apparently is very difficult 

 14 to put in place for ICE, firstly. Secondly, we've 

 15 also seen numerous instances including very 

 16 recently where market participants have said in 

 17 response to requests to reduce positions at NYMEX 

 18 that they will instead gain the same exposure by 

 19 going to the swap market and replicating the same 

 20 exposures that they could otherwise achieve in the 

 21 regulated market with reporting with limits and 

 22 with accountability. 

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 1 COMMISSIONER DUNN: In the supplemental 

 2 questions that I had sent to you, I asked you what 

 3 happens when position limits or accountabilities 

 4 are exceeded and is the Commission notified, and 

 5 you indicate that there is no formal requirement 

 6 that that takes place. Is that true? 

 7 MR. DONAHUE: We continue to work with 

 8 the DMO in giving them information with respect to 

 9 participants in our markets. As I mentioned or 

 10 might have mentioned and certainly is included in 

 11 my written testimony, we do obviously provide that 

 12 information. The CFTC conducts rule enforcement 

 13 reviews. They look at position accountability 

 14 level determination that we make and so they do 

 15 have access to that information and there is an 

 16 going dialogue between the Commission's staff and 

 17 our market regulation staff. 

 18 COMMISSIONER DUNN: And those RERs that 

 19 we do are on the exchanges that we have oversight? 

 20 MR. DONAHUE: That's correct, and they 

 21 generally include a very detailed review of these 

 22 very issues. 

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 1 COMMISSIONER DUNN: I want to thank both 

 2 of you for your staffs putting together 

 3 supplemental questions that I asked and some of it 

 4 that you supplied me is proprietary information so 

 5 I won't release it. 

 6 CHAIRMAN GENSLER: Actually I'd like to 

 7 ask because I read it just this morning to the 

 8 extent that there is any proprietary information 

 9 which I didn't see, but if there is if you could 

 10 resubmit them so we could put them in the record. 

 11 That would be helpful. 

 12 COMMISSIONER DUNN: Thank you, Mister 

 13 Chairman. I would like to ask both of you to give 

 14 us a brief overview of how your surveillance and 

 15 compliance divisions operate. 

 16 MR. SPRECHER: As you probably are 

 17 aware, we have three regulated futures exchanges, 

 18 one in the United States, one in Canada, one in 

 19 London all of which we acquired so they were 

 20 preexisting exchanges. We have worked to try to 

 21 harmonize the tools that they use really to try to 

 22 get best of breed because one of the interesting 

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 1 things we found in making these acquisitions is 

 2 that both regulatory oversight and risk management 

 3 differed from exchange to exchange so we've 

 4 harmonized that. As General Counsel Berkovitz I 

 5 think testified, as of Friday we now are putting 

 6 oversight into the over-the-counter markets. 

 7 We're drawing from that collective team as well as 

 8 hiring a dedicated OTC staff. We allow those 

 9 people to coordinate. We use similar tools. We 

 10 use futures techniques now in the over-the-counter 

 11 markets for surveillance. And all total that's a 

 12 staff north of 50 people not including the 

 13 oversight that we have for risk management and 

 14 clearing. 

 15 CHAIRMAN GENSLER: Mr. Donahue? I know 

 16 we're over. 

 17 MR. DONAHUE: Very briefly, we have 130 

 18 full-time professionals that work in our market 

 19 regulation department, approximately 40 of those 

 20 in market regulation. The annual cost of that is 

 21 roughly $30- to $35 million a year and many of 

 22 those market surveillance professionals are very 

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 1 heavily engaged in not only reviewing position 

 2 limit position accountability levels, market 

 3 participants' behavior, but also reviewing 

 4 exemption requests and granting exemptions where 

 5 appropriate. 

 6 CHAIRMAN GENSLER: Commissioner Sommers? 

 7 COMMISSIONER SOMMERS: Thank you, Mister 

 8 Chairman. I actually have the same question for 

 9 both of you. You both in your testimony discussed 

 10 the complexities involved in getting these 

 11 position levels right and the unintended 

 12 consequences of getting them wrong that it can 

 13 damage or distort the markets. It's clear to me 

 14 that the unintended consequences can be 

 15 significant. Taking into consideration your 

 16 answers to some of the previous questions about us 

 17 not having authority over the OTC markets, how do 

 18 we know not taking that sizable chunk of the 

 19 markets into account when we're looking at what 

 20 aggregate position limits should be, how do we 

 21 know we're going to get it right? Or what do we 

 22 need to look at to make sure we get it right? 

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 1 MR. SPRECHER: Thank you for that 

 2 question. We have in our written testimony and I 

 3 strongly believe that we need to look at the 

 4 entire market in setting the size of the limits. 

 5 While the Commission may not have statutory 

 6 authority to necessarily put position limits on 

 7 the over- the-counter markets, I think we could 

 8 all respect the fact that those markets exist and 

 9 we should make the size limits in the futures 

 10 market appropriate so that we don't inadvertently 

 11 push people into the over-the-counter markets. 

 12 Just one aside. A lot of the index 

 13 funds and institutional money that comes into 

 14 ICE's markets are not actually traded on our 

 15 markets. They're traded in the over-the-counter 

 16 swaps market and then they're coming in to us 

 17 solely for clearing. So limits that we would be 

 18 putting on ICE would be really clearing limits, 

 19 not trading limits, and what I think at least 

 20 Secretary Geithner's proposal is which is 

 21 resonating I believe in the Hill is to try to get 

 22 much more of the over-the-counter market to come 

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 1 into a clearinghouse so we don't want to 

 2 inadvertently create clearing limits when we're 

 3 really trying to talk about speculation limits and 

 4 that means we have to look at the entire market in 

 5 setting the exchange limits. 

 6 MR. DONAHUE: Commissioner Sommers, I 

 7 would just add a couple of things. I think first 

 8 of all this morning to Mr. Sprecher's point we 

 9 heard the two members of Congress speak of swap 

 10 dealers and Goldman Sachs and others as 

 11 effectively just pure speculators in the market 

 12 seeking to make profits on the price movements in 

 13 the energy and commodity markets. I think in an 

 14 area that we can clearly agree, obviously much of 

 15 what's happening with swap dealers is they in fact 

 16 are facilitating the hedging of more complex risks 

 17 for commercial customers with underlying exposures 

 18 in these markets and then hedging the net residual 

 19 risks of their unmatched swap books in the futures 

 20 markets. So I think first and foremost we 

 21 together as a community of interested parties have 

 22 to recognize that before we throw the baby out 

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 1 with the bath water and limit or deny access to 

 2 futures markets for legitimate and bona fide 

 3 investment and hedging and risk transfer 

 4 strategies. 

 5 Secondly, I think that this isn't an 

 6 either/or equation and we certainly support the 

 7 affirmative role of the CFTC in determining how to 

 8 administer limits in these markets and 

 9 particularly across different segments of the 

 10 market and we have no argument with that, but we 

 11 do strongly believe that we have our own 

 12 responsibility and also do believe we have our own 

 13 competency and infrastructure and capabilities to 

 14 do that very effectively, and I think this 

 15 industry will be best served if we work together 

 16 to accomplish that. So one way in which you could 

 17 get it wrong is if you were not to take advantage 

 18 of the expertise and capabilities and 

 19 infrastructure of at least the regulated exchanges 

 20 in terms of how we do this. We interface very 

 21 extensively with market participants on a real 

 22 time basis and this isn't a science, it's a 

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 1 science and an art and there are judgments that 

 2 have to be made as we look at market conditions 

 3 and trading strategies and market participants' 

 4 behaviors, our knowledge of their related position 

 5 as well as their financial condition. 

 6 Just thirdly I would say that I think 

 7 that it's very important that we not act 

 8 precipitously in a way that does just serve the 

 9 antithetical purpose of driving more participants 

 10 into unregulated or nontransparent markets. We 

 11 talked about the fact that the CFTC does lack 

 12 authority. We support the CFTC's greater 

 13 authority to appropriately regulate where he can, 

 14 although we recognize that there will be many 

 15 instances where the CFTC cannot, but again we 

 16 support that. But in the meantime and prior to 

 17 the establishment of that authority, it would be 

 18 indeed unfortunate if we saw more market 

 19 participants gravitating away from regulated 

 20 markets with reportability, with limits, with 

 21 accountability levels into the ether where there 

 22 is none of that. So I think the timing of how we 

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 1 do this and how we get to where we want to be as 

 2 an industry is very, very critical. 

 3 CHAIRMAN GENSLER: As we'll have another 

 4 round, I turn to Commissioner Chilton. 

 5 COMMISSIONER CHILTON: Thanks, Mister 

 6 Chairman. I wanted to make a little comment and 

 7 then I'm interested in both your feedback. It 

 8 seems to me sometimes that people talk past each 

 9 other on a lot of these issues. They're 

 10 complicated. You're trying to get sound bites at 

 11 times. But for example, Mr. Donahue was saying 

 12 there lacks this conclusive study that shows 

 13 speculators having an impact. There are studies 

 14 that say they're having an impact. There are 

 15 studies that say they're not having an impact. I 

 16 think you have to listen carefully to how people 

 17 talk about this and to some extent I'm guilty of 

 18 it too, that for example, last year we said that 

 19 speculators weren't driving the price, driving. I 

 20 think a lot of people would agree they're not 

 21 driving the price, that it's based on 

 22 fundamentals, but were they having an impact? And 

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 1 is that impact potentially, and it's our job to 

 2 think about potentially, having some uneconomic 

 3 influence on prices, prices that are devoid from 

 4 supply and demand which is why you've seen these 

 5 crazy supply-and-demand charts and prices. So 

 6 sometimes I think we have to listen to the exact 

 7 words that people use and it's not just 

 8 speculators are evil and they're causing these big 

 9 problems, I don't believe that, but I do think 

 10 that they some impact either up or down and that's 

 11 why it's important that we get this right. So I'm 

 12 interested if you think I'm on the mark or what 

 13 your thoughts are on that. In particular, Mr. 

 14 Donahue talked about if we didn't calibrate this 

 15 right, and this goes a little bit to what 

 16 Commissioner Sommers said. By the same token, 

 17 speculative activity unchecked at least 

 18 theoretically from your perspective, could it have 

 19 the same dangerous consequences? Both of you, Mr. 

 20 Donahue first. 

 21 MR. DONAHUE: I'll just begin by saying 

 22 that I think that most of the economic analysis 

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 1 that I've reviewed indicates that speculators 

 2 generally are responding to price activity in the 

 3 market versus driving in your terms price activity 

 4 in the market, and I think that's fairly 

 5 uncontrovertible and there are many studies that 

 6 have been done over the decades that have come to 

 7 that conclusion having nothing to do with the more 

 8 recent price movement activity in energy and 

 9 commodity markets over the course of the last year 

 10 and a half. Secondly, and I guess the point that 

 11 I would make is that to a certain extent, many of 

 12 the people who are in favor of imposing hard 

 13 limits or denying access to the market for swap 

 14 dealers or index funds many of whom once again are 

 15 engaged in legitimate hedging risk transfer and 

 16 investing in inflation hedging activities, but we 

 17 heard the members of Congress this morning 

 18 expressing concern which I think we all share 

 19 about price increases in gas markets and oil 

 20 markets and food markets as well. But to make the 

 21 point, as of July 7 in the energy markets, swap 

 22 dealers are actually more net short than they are 

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 1 net long and so you can make the value judgment 

 2 that you think they're speculators and you should 

 3 deny them access to the market, but you're denying 

 4 access to sellers, and at least the last time I 

 5 studied economics that's likely to have a 

 6 depressing price on the market and not an 

 7 inflationary price on the market. So these are 

 8 the kinds of issues that I think need to be very 

 9 carefully discussed before we just jump to the 

 10 conclusion that we should either limit exemptions, 

 11 prevent exemptions altogether, and claim to 

 12 understand what people are doing in the market. 

 13 MR. SPRECHER: Let me make a similar 

 14 point, and I think it goes to some of your public 

 15 comments, which is I don't want to be left with 

 16 anybody thinking that ICE is saying that we don't 

 17 believe they have any impact because they do have 

 18 impact, and the person that we've seen that's done 

 19 the most research on this has been Professor 

 20 Verleger who I believe may testify later. We 

 21 believe strongly that they are not the cause of 

 22 $147 oil, but they do have an impact and their 

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 1 movements tend to dampen actually price swings and 

 2 that's a double-edged sword. It may mean that 

 3 prices don't go as low as they could go without 

 4 them, but it also means that they may not go as 

 5 high as they will go without them. So right now 

 6 we're in an historically low period for natural 

 7 gas prices and people may argue that they could go 

 8 lower, but you would hope that the index funds 

 9 would actually prevent the price from going 

 10 higher. So that's the research of Dr. Verleger 

 11 and it's the best that I've seen and so I would 

 12 really point you to that. 

 13 CHAIRMAN GENSLER: Thank you, 

 14 Commissioner Chilton. I think we're going to 

 15 probably with the patience of the witnesses need a 

 16 few more rounds. I'll try to do it quicker if I 

 17 can get at least three questions in. Mr. 

 18 Donahue, I take it from your prepared testimony 

 19 and from your oral testimony that the Chicago 

 20 Mercantile Exchange through NYMEX is prepared to 

 21 adopt a hard limit regime for those products, the 

 22 energy products, including single month and all 

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 1 months combined limits in addition to those that 

 2 are currently in place for the spot month. Is 

 3 that correct? 

 4 MR. DONAHUE: Yes, sir. 

 5 CHAIRMAN GENSLER: Thank you. I thank 

 6 you for that. Secondly, I wanted to ask on the 

 7 data I know that there were some charts, but is 

 8 that data roughly consistent? I know the numbers 

 9 we might have to get into, but they're roughly 

 10 consistent about accountability levels and so 

 11 forth that I've presented earlier? 

 12 MR. DONAHUE: Are you referring to the 

 13 number of exemptions that have been granted or the 

 14 number of times in which people -- 

 15 CHAIRMAN GENSLER: That's right, 

 16 approximately nearly 70 parties in these four 

 17 energy contracts have been over the accountability 

 18 levels in the last 12 months, the rough 

 19 presentation or the thrust of that presentation. 

 20 MR. DONAHUE: Right. Our data shows 

 21 from June 2008 through July 7, roughly 46 

 22 instances I believe in energy and metals markets 

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 1 where that has occurred, and although your data 

 2 didn't show it, I believe in those cases the 

 3 position limits were typically exceeded by 

 4 somewhere between two contracts and 569 contracts 

 5 or an average of roughly 122 contracts which of 

 6 course would be incredibly small in relationship 

 7 to average daily volume and open interest -- 

 8 CHAIRMAN GENSLER: Mr. Donahue, I did 

 9 read that in your testimony. I think that we 

 10 might be speaking -- 

 11 MR. DONAHUE: I don't think that was in 

 12 my testimony. 

 13 CHAIRMAN GENSLER: Or in a document that 

 14 you prepared for Mr. Dunn, confusing, because you 

 15 were very kind and I would like to make sure if 

 16 you both would commit to look at that data that 

 17 you provided Commissioner Dunn and see if we could 

 18 submit it for the record. I think I was asking 

 19 about accountability levels and we might have been 

 20 speaking past each other. You might have been 

 21 referring to the position limits. But on the 

 22 accountability levels, if you don't know now, if 

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 1 you could get back for the record to see. I'm not 

 2 terribly interested whether we're at 69 and it's 

 3 really 66, but just whether the main thrust of 

 4 what we presented in the numbers on accountability 

 5 levels that would be helpful. 

 6 Lastly, one other question I saw and 

 7 this was in what you provided to Commissioner 

 8 Dunn. He was good. He has good questions. He 

 9 asked a question, How often are position limits 

 10 and accountability levels exceeded? Then went on 

 11 in your answer you said that the exchange employs 

 12 certain tolerance levels for market participants 

 13 who breach accountability levels. These levels 

 14 are generally at 20 to 25 percent of market 

 15 concentration in the front month, 30 percent in 

 16 months two to six, and approximately 40 percent in 

 17 back months. So these are as it was written 

 18 market concentrations that you employ as tolerance 

 19 levels. Do I take that to mean that if a trader 

 20 is below those tolerance levels, they're above the 

 21 accountability levels but below what you wrote to 

 22 Commissioner Dunn, below those tolerance levels, 

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 1 then it's just a notice, but when they hit those 

 2 tolerance levels is when you start to talk to them 

 3 and take actions? 

 4 MR. DONAHUE: No. Actually, the 

 5 accountability level itself is intended to act as 

 6 an early warning system within our large trader 

 7 reporting system. That would generally trigger an 

 8 immediate review of the positions. 

 9 CHAIRMAN GENSLER: A review as you said 

 10 in your testimony, I think this was in the 

 11 testimony, 22 times that you took some action, but 

 12 if we're correct, at least 70 unique traders were 

 13 over and sometimes they were over multiple times 

 14 in a year. So a majority of cases you did not 

 15 talk a position down? Our understanding is 

 16 probably at least three-quarters of the time it 

 17 was just a notice. So it wasn't a stop sign or a 

 18 yield sign, it was sort of honk if you go past 

 19 this sign? 

 20 MR. DONAHUE: Correct, and that's as it 

 21 is intended and designed to be. If it were 

 22 otherwise it would function like a hard limit and 

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 1 it's not intended to. 

 2 CHAIRMAN GENSLER: Thank you. Mr. 

 3 Sprecher, if I could ask you a question, the last 

 4 question in this round. You said that you thought 

 5 there should be a difference between cash settled. 

 6 In fairness, I'm going to hand it to Commissioner 

 7 Sommers because it's probably going to be a long 

 8 answer, or I'm sorry, Commissioner Dunn. 

 9 COMMISSIONER DUNN: Thank you, and thank 

 10 you so I don't have to talk about the tolerability 

 11 levels which was a new term that I had heard in 

 12 this paper. Senator Sanders talked very 

 13 eloquently about the men and women who are his 

 14 constituents who are genuinely suffering because 

 15 of high prices. But I'd like to know who are 

 16 these folks who are speculators. Are there 

 17 differences between ETF and who might they be, 

 18 managed monies and hedge funds. Could you both 

 19 respond to that? 

 20 MR. SPRECHER: The interesting thing 

 21 about energy is when people think of energy they 

 22 think of crude oil, and if you think about who 

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 1 buys crude oil it is refiners, and anyone who is 

 2 not a refiner is using it as some correlated 

 3 asset. So the airlines that have been quite vocal 

 4 on this actually don't buy crude oil, they buy jet 

 5 fuel, and obviously crude oil can be converted 

 6 into jet fuel. But we also have people come on 

 7 who are portfolio managers who say they have 

 8 exposure to energy prices in their portfolio 

 9 either via inflation or dollar escalation or the 

 10 unique nature of their portfolio. So there's this 

 11 area of all grays that we're grappling with and I 

 12 think as part of this hearing process of what is 

 13 proper hedging and speculation and what is 

 14 improper and that is a very difficult question to 

 15 answer because we really don't know the root cause 

 16 of an investor's needs. 

 17 MR. DONAHUE: I'll just add that with 

 18 respect to the index funds and the ETF managers, 

 19 the ETF manager is not some monolith who's making 

 20 these speculative decisions. They're issuing 

 21 literally as I think various of you are aware 

 22 billions of shares of ETF units that themselves 

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 1 reflect the buying and selling interests of the 

 2 individual investors who are seeking exposure to 

 3 these markets or perhaps they're sophisticated 

 4 enough to be hedging inflation risks or doing what 

 5 most of us were taught in terms of portfolio 

 6 management to diversify their returns in a 

 7 noncorrelated way to the equity market. So 

 8 literally they're making investment decisions in 

 9 the aggregate that reflect the underlying 

 10 investment decisions of many, many thousands of 

 11 investors. Swap dealers as you know from your own 

 12 data gathering and report last September 2008 tend 

 13 to be an amalgamation of activity representing not 

 14 only commercial participants who are going to swap 

 15 dealers to hedge more customized and tailored 

 16 risks, but also noncommercial participants as 

 17 well. But I believe the data that you produced at 

 18 least at that time indicated that the vast 

 19 majority of activity underlying those swap 

 20 agreements was commercial hedging activity of more 

 21 particularized risks. 

 22 COMMISSIONER DUNN: Mr. Sprecher, you 

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 1 had a very good appendix and I notice some of the 

 2 charts you used were very similar to the ones that 

 3 Senator Sanders had used. I guess it gets back to 

 4 that quantitative analysis or anecdotal analysis 

 5 of how you look at these particular charts, and I 

 6 appreciate you putting them in there. But you 

 7 also mentioned that when you took over ICE Europe 

 8 that it rapidly became all electronic as have 

 9 almost all of the exchanges today, and a tip of my 

 10 hat to those bloggers who usually my wife puts me 

 11 onto early in the morning looking at, there is a 

 12 great deal of chatter with the econo- bloggers 

 13 about high frequency trading or flash trading as 

 14 it's been called. It occurs to me as I've gone 

 15 through the exchanges and I see people paying very 

 16 high rent to have their computers right next door, 

 17 is that a concern for us and a concern for us for 

 18 the possibility of front running? I have asked 

 19 our staff to begin looking at that, but I'd like 

 20 to get your opinion. I know it's off the subject, 

 21 but it is something that is relevant today. 

 22 MR. DONAHUE: With respect to the 

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 1 so-called practice of flashing, we do not engage 

 2 in that practice, so that is not permitted on the 

 3 GLOBEX platform. I think the other part of your 

 4 question relates to collocation services which is 

 5 a common convention used in almost all segments of 

 6 the market, the equity markets and options 

 7 markets, certainly the exchange traded derivative 

 8 markets, and would generally fall into I think a 

 9 no harm category and represents just the nature of 

 10 competition and innovation in the market where we 

 11 used to have people who would wear platform so 

 12 they could see a little bit higher in the pit and 

 13 get more trades than the guy next to him, so that 

 14 people do those things all the time. But I don't 

 15 believe there's anything harmful about collocation 

 16 services. Flashing practices we would never 

 17 allow. 

 18 MR. SPRECHER: Similarly we don't have 

 19 any so- called dark pools or anything that shows 

 20 orders to any unique participant ahead of any 

 21 other participant. But the collocation actually 

 22 started when we found that there were traders who 

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 1 had determined where our servers were located and 

 2 had themselves gone and tried to put their 

 3 computers next to ours. In fact, the anecdotes 

 4 are when EUREX first came over and listed 

 5 electronic bonds in Germany, many Chicago traders 

 6 actually flew over and put computers in Germany. 

 7 So we actually as exchanges have tried to organize 

 8 up what is already going on and that is to create 

 9 a level playing field for people who want to be 

 10 close to be there on the same terms and we felt 

 11 that was the fairest thing to do. 

 12 COMMISSIONER DUNN: For both of you, 

 13 those who aren't there who have a 3 millisecond 

 14 delay, that does put them at a disadvantage. 

 15 MR. DONAHUE: I'll just say on that that 

 16 we provide a totally level playing field, open 

 17 access and nondiscriminatory practices with 

 18 respect to eligibility for collocation services 

 19 and all of our customers are eligible to do that. 

 20 I think to Mr. Sprecher's point, it helps level 

 21 the playing field because people are smart and 

 22 they figure out where your data centers are and 

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 1 they start to locate around that and this affords 

 2 everybody essentially a more equal opportunity to 

 3 obtain the same speed advantages. Unfortunately 

 4 it's a law of physics in an electronic world where 

 5 the closer you are to where the match is made the 

 6 faster you're likely to be. It's just the speed 

 7 of light phenomena unfortunately. 

 8 COMMISSIONER DUNN: I would remind you 

 9 there are other laws in the area of regulation as 

 10 well. 

 11 CHAIRMAN GENSLER: Just to have the 

 12 opportunity as Chair to associate myself with the 

 13 comments of Commissioner Dunn, I think that there 

 14 are other laws and that as this becomes aware to 

 15 the public and to this Commission, I think that 

 16 we're going to take a look with our staff and 

 17 hopefully with each of the exchanges about 

 18 practices in collocation so that we could actually 

 19 achieve what each of the chief executive officers 

 20 say here is a level playing field even in the 

 21 collocation practices because many people in the 

 22 room and maybe the press aren't aware, but the 

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 1 closer you put a computer to the servers of the 

 2 CME or ICE or EUREX or the New York Stock 

 3 Exchange, the trade can happen even if it's a few 

 4 milliseconds faster. So I certainly want to 

 5 associate myself with the Commissioner to say that 

 6 we're going to ask staff to work with you all to 

 7 really understand the practices and see whether 

 8 there's any rules that are appropriate in this 

 9 area to better protect the public and make a level 

 10 playing field. With that, Commissioner Sommers? 

 11 COMMISSIONER SOMMERS: Thank you, Mister 

 12 Chairman. I have a question for Mr. Sprecher 

 13 regarding ICE U.K. or ICE Europe. I just want to 

 14 make sure that I understand with regard to the way 

 15 the industry has evolved and the way that people 

 16 now have access to U.S. customers with the no 

 17 action letters. Terminals are no longer actually 

 18 involved in this process. Is that right? 

 19 MR. SPRECHER: That's correct. It sort 

 20 of lends itself to the last conversation. 

 21 COMMISSIONER SOMMERS: I want to 

 22 clarify. If we were to contemplate revoking a no 

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 1 action letter, ICE Europe has a successful WTI 

 2 contract that I assume would not stop trading. 

 3 MR. SPRECHER: That's our assumption, 

 4 yes. 

 5 COMMISSIONER SOMMERS: A couple of 

 6 different numbers have been thrown around with 

 7 regard to the percentage of volume that comes from 

 8 the U.S. Do you have an idea of what that might 

 9 be? 

 10 MR. SPRECHER: I do, and the number that 

 11 sticks in my head is maybe 60 percent, and I can 

 12 correct that for the record, but I think the 

 13 important thing that we see is the people that are 

 14 the large traders are actually the global 

 15 companies who also find us out of other offices 

 16 around the world and have the ability under law to 

 17 act as brokers for foreign exchanges and move 

 18 business overseas. I think that number would 

 19 change overnight if for some reason we pulled out 

 20 of the United States. 

 21 COMMISSIONER SOMMERS: I've just briefly 

 22 glanced at your membership list and I think the 

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 1 numbers of members of ICE Europe that are located 

 2 in the U.S. is maybe a third of your membership. 

 3 MR. SPRECHER: That sounds about right, 

 4 but I would point out that the largest traders of 

 5 oil which is what that contract really is tend to 

 6 be located in London. I think our top five 

 7 customers are London based and that's simply 

 8 because it's time zone oriented, they can get to 

 9 the United States and they can get to Asia. So 

 10 over time we've seen them really put their 

 11 domicile in London. 

 12 COMMISSIONER SOMMERS: Thank you very 

 13 much. 

 14 CHAIRMAN GENSLER: Commissioner Chilton? 

 15 COMMISSIONER CHILTON: I just want to 

 16 follow-up. I talked about this earlier and it's 

 17 in your testimony, but just for the record people 

 18 here hear you say it, Mr. Sprecher, if we 

 19 implemented aggregate position limits on WTI for 

 20 example, you'd be willing to comply with those 

 21 even though there's only this tangential legal 

 22 certitude that we have that Mr. Berkovitz talked 

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 1 about? 

 2 MR. SPRECHER: Absolutely, and we 

 3 continue to work with staff here to try to see if 

 4 there are any other things we can add particularly 

 5 go give you enforcement capabilities if somebody 

 6 were to go over those limits. 

 7 COMMISSIONER CHILTON: Thank you. If 

 8 you can give me a quick one on this both of you, I 

 9 think I know the answer but again for the record I 

 10 wanted to get it. I talked at the beginning about 

 11 whatever we do here whether or not you agree 

 12 conceptually with it or not, there's another part 

 13 to this that if we don't get it right, and I think 

 14 we're going to get it right and that's why you're 

 15 here, but there is a danger of some of this moving 

 16 to OTC. Do both of you support giving us the 

 17 generic ability, and I'm not asking for a specific 

 18 legislative bill if you'll support that, providing 

 19 the Commission with additional oversight and 

 20 regulatory authority over the OTC market? 

 21 MR. DONAHUE: We definitely support the 

 22 CFTC's overall interest in having a higher degree 

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 1 of regulation over the over-the-counter 

 2 derivatives markets if done intelligently. In 

 3 this particular area we certainly do support your 

 4 ability to understand OTC swap market activity and 

 5 swap dealer activity for purposes of having an 

 6 intelligent regime for position limits and 

 7 position accountability and ensuring what we all 

 8 have an interest in which is avoid disruption in 

 9 the market. 

 10 MR. SPRECHER: I would echo Mr. 

 11 Donahue's statement on that. 

 12 COMMISSIONER CHILTON: One of the things 

 13 that goes back to my comments earlier about 

 14 talking past each other, a lot of this data 

 15 doesn't exist and we'll hear a little bit of 

 16 testimony later, but we can only see the regulated 

 17 market and vicariously through our 1805 authority, 

 18 our special call, we can ask the swap dealers what 

 19 they're doing OTC. But it hasn't to date, and 

 20 I've talked about this in the media today, been I 

 21 think something you want to hang your hat on. 

 22 It's been good, it's been helpful, it's been a 

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 1 good benchmark for us to go forward, but we're 

 2 getting better at that in the future and I commend 

 3 the Chairman for pushing in that regard. Should 

 4 there be some sort of distinction between position 

 5 limits should we decide to put mandatory position 

 6 limits in the back months between commercials and 

 7 noncommercials in both your opinions? 

 8 MR. DONAHUE: Are you speaking 

 9 specifically of back months? 

 10 COMMISSIONER CHILTON: Yes. 

 11 MR. DONAHUE: I think my view would be 

 12 that I think that's unnecessary. Obviously the 

 13 entire marketplace benefits in commercial hedgers 

 14 with longer term exposures benefiting from having 

 15 liquidity farther out. As you know, our contracts 

 16 go out approximately 9 years in the energy arena 

 17 and I think to circumscribe more deferred contract 

 18 month liquidity in that way would be 

 19 counterproductive and ultimately would raise costs 

 20 for users, decrease liquidity and make it more 

 21 difficult to hedge longer term exposures. 

 22 COMMISSIONER CHILTON: Thanks. 

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 1 MR. SPRECHER: I agree exactly with 

 2 those points. 

 3 COMMISSIONER CHILTON: Thank you both. 

 4 Last time before I get the alarm, Mr. Donahue you 

 5 talked about what you were going to do with 

 6 position limits, et cetera, in energy. Is there 

 7 some reason why metals shouldn't be treated the 

 8 same? We've talked about contracts of finite 

 9 supply. Is there some reason why we should be 

 10 more careful about including metals in anything 

 11 that we do or the metals complex in general? 

 12 MR. DONAHUE: I think that again we're 

 13 happy to look at ourselves and to work with the 

 14 Commission in addressing those kinds of issues. 

 15 We have to look at each of these markets very, 

 16 very differently. As you know, the energy market 

 17 for example is 25 times larger than most of the 

 18 agricultural commodity markets and so one of the 

 19 concerns in going back to Commissioner Sommers's 

 20 question about how do we get this right and how do 

 21 we avoid getting it wrong is we need to be very 

 22 careful about understanding these major 

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 1 differences between these different markets and 

 2 that has implications for not only the regime 

 3 that's adopted but the percentages and levels and 

 4 the way in which we would go about putting in 

 5 place an effective regime, and we can talk about 

 6 that. 

 7 COMMISSIONER CHILTON: But I mean the 

 8 same sort of fundamental principles would apply to 

 9 the metals market. If somebody were concerned 

 10 about a trader or a group of traders holding a 

 11 large percentage that could potentially, I'm not 

 12 saying intentionally, but could potentially 

 13 manipulate the market, those same types of generic 

 14 concerns, there is no difference between energy 

 15 and metals is there? If you had those concerns, 

 16 I'm not suggesting you do, but if one had those 

 17 concerns, wouldn't you say they'd be the same 

 18 across both complexes? 

 19 MR. DONAHUE: If you believe that 

 20 accountability levels are just not effective in 

 21 preventing excessive speculation or undue burdens 

 22 on commerce, then you probably wouldn't draw much 

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 1 of a distinction, but you might set the regime and 

 2 the levels differently depending on the dynamics 

 3 of the metals market from the energy market and 

 4 the energy market from the commodities market. 

 5 COMMISSIONER CHILTON: Thank you. 

 6 CHAIRMAN GENSLER: I checked with the 

 7 other Commissioners and I don't think we're going 

 8 to need a full round, but I did have one follow-up 

 9 question for Mr. Sprecher that came from our 

 10 dialogue earlier with General Counsel Berkovitz. 

 11 If I could separate the two questions about ICE, 

 12 as it relates to the Henry Hub natural gas 

 13 contract that was just cleared, a significant 

 14 price discovery contract, do you believe that you 

 15 now have all the authority to ask any individual 

 16 participant in that market or trader in that 

 17 market to comply with the position limit or to get 

 18 their positions down if they're over some level 

 19 even if it's set by somebody else? 

 20 MR. SPRECHER: Yes. In fact, I think 

 21 it's identical to futures regulation with the one 

 22 difference in that we don't have any brokers in 

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 1 that market. By rule it's a principals only 

 2 market so there are some rules about how you 

 3 interface with brokers and we don't have those 

 4 simply because we don't have brokers. But 

 5 otherwise it's identical to what's in the futures 

 6 -- 

 7 CHAIRMAN GENSLER: And as I understand 

 8 it, you gained in essence additional authority as 

 9 of Monday or Friday when we signed that. 

 10 MR. SPRECHER: Correct. 

 11 MR. DONAHUE: If I might, because that 

 12 comment has come up twice now with respect to his 

 13 limits being set somebody else, presumably us, but 

 14 I'm not aware of anything that would limit ICE 

 15 from voluntarily adopting their own limits 

 16 regardless of what our limits are, whether they 

 17 were the same, higher or lower. 

 18 MR. SPRECHER: The issue is not so much 

 19 the limit as it is how do you give an exemption 

 20 and if you're not giving an exemption and I am or 

 21 if you are and I'm not, we haven't really solved 

 22 the problem which is what is the actual limit. 

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 1 MR. DONAHUE: We won't make it a debate, 

 2 but you can make your own exemptions too obviously 

 3 using your own criteria, but to say that you're 

 4 dependent on our limits is ridiculous. Adopt your 

 5 own limits. You've chosen not to which is why you 

 6 default to ours, but adopt your own limits. I 

 7 don't think anybody is going to stop up there. 

 8 CHAIRMAN GENSLER: To my core question, 

 9 you feel that the significant price discovery 

 10 contract and the Henry Hub natural contract gives 

 11 you full authority to work within your current 

 12 regime to get people down. 

 13 MR. SPRECHER: Absolutely. 

 14 CHAIRMAN GENSLER: The second one is 

 15 just on the ICE linked contracts or ICE Europe. I 

 16 thought I heard you say and I greatly appreciate 

 17 it that it's something tangible, your willingness 

 18 to work to see whether there are additional 

 19 provisions that we would add and additional 

 20 conditions to that regulatory regime of the CFTC's 

 21 oversight of ICE and obviously ICE's oversight of 

 22 its markets. Is that correct? 

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 1 MR. SPRECHER: Yes, absolutely. 

 2 CHAIRMAN GENSLER: I thank you. I don't 

 3 know if there were any further questions. 

 4 COMMISSIONER CHILTON: I thought we were 

 5 going to do one more round. If I could just be 

 6 real quick. I'm out of turn. I don't know if my 

 7 colleagues have any. 

 8 CHAIRMAN GENSLER: Commissioner Dunn is 

 9 none. Commissioner Chilton? 

 10 COMMISSIONER CHILTON: Just very 

 11 quickly. I think your last little exchange about 

 12 the exemption is a good reason for us to consider 

 13 doing it. You guys are some of the best 

 14 businessmen in the world and that's your primary 

 15 motive. You want transparent markets, you want to 

 16 ensure that they're operating efficiently and 

 17 effectively and everything, but that's not our 

 18 job. Our job is to protect consumers, and as long 

 19 as we don't mess up what you're doing as long as 

 20 we're ensuring that these are markets that are 

 21 operating efficiently and effectively, they're 

 22 avoiding fraud, abuse and manipulation, it seems 

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 1 to me that we should figure out a way on the 

 2 exemptions, we should be the independent arbiter 

 3 or at least have a greater role and understand 

 4 them. So the little discussion made me think, 

 5 yes, obviously it should be us at least looking at 

 6 these to a greater degree. 

 7 The second thing, and I just want to 

 8 make sure this wasn't lost, because the Chairman 

 9 was I think very good in explaining on his 

 10 PowerPoints earlier these accountability levels, 

 11 that they're important and Mr. Donahue says sort 

 12 of an early warning system, but they're abrogated 

 13 all the time. Maybe abrogated is too strong a 

 14 word because they're not mandatory. But the 

 15 Chairman talked about how many times they go over 

 16 and he talked about the average, about how they go 

 17 over by an order of magnitude in the average, but 

 18 that's the average. There are some that are very 

 19 high. And I'm not saying that they have 

 20 manipulated the market, but they at least hold the 

 21 theoretical possibility and I think the exchanges 

 22 have done a good job at being cognizant of those. 

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 1 But like what I said on the exemptions, it seems 

 2 to me that's our job to look at this stuff and if 

 3 we can find the right level whether or not it's a 

 4 percentage of open interest or hard number 

 5 contract limits or maybe a combination of them 

 6 both, it seems to me that's where our focus should 

 7 be. So anyway, thank you very much. 

 8 CHAIRMAN GENSLER: I thank each of our 

 9 witnesses today. I don't know if you had anything 

 10 else you wanted to share with us before we let you 

 11 go and take a 10-minute break, and I mean just 10 

 12 minutes because we'll be back because we have 

 13 another panel. But I thank both of the chief 

 14 executive officers of the major energy exchanges 

 15 not only for their testimony today but for their 

 16 real tangible evidence of willingness to support 

 17 setting position limits. 

 18 (Recess) 

 19 CHAIRMAN GENSLER: I thank you. I think 

 20 I'm officially reconvening the Commission and I 

 21 want to thank our next panel. I had an 

 22 opportunity to read all of your testimony and I 

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 1 hope my fellow Commissioners have as well and each 

 2 of the full testimony will be entered into the 

 3 record. Apologies in advance if you're able to 

 4 summarize your testimony, we'll try not to beep 

 5 you too much with that little light and then we'll 

 6 see to the extent the Commissioners want multiple 

 7 rounds, we'll go through that. But it's a 

 8 pleasure you have Todd Petzel, Ben Hirst, Laura 

 9 Campbell and Sean Cota. Some of you I've met 

 10 before and know and I look forward even beyond 

 11 today to getting to know all of you and having an 

 12 open dialogue with this Commission. With that, as 

 13 my grandmother always taught me, if I can, Ms. 

 14 Campbell first, and then after that we'll go left 

 15 to right. 

 16 MS. CAMPBELL: Thank you, Chairman 

 17 Gensler and Commissioners. I appreciate this 

 18 opportunity to testify before you today. My name 

 19 is Laura Campbell and I'm the Assistant Manager of 

 20 Energy Resources for Memphis Light, Gas & Water. 

 21 MLGW is the nation's largest three service 

 22 municipal utility. I testify today on behalf of 

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 1 the American Public Gas Association. APGA is the 

 2 national association for publicly owned natural 

 3 gas distribution systems. There are approximately 

 4 one thousand public systems in 36 states, and over 

 5 740 of these systems are APGA members. Publicly 

 6 owned gas systems are not for profit retail 

 7 distribution entities owned by and accountable to 

 8 the citizens they serve. APGA's members are 

 9 active participants in the various segments of the 

 10 market for natural gas including the forward 

 11 markets, regulated futures markets and 

 12 over-the-counter OTC markets. Together these 

 13 markets play a critical role in the utilities 

 14 securing natural gas supplies at stable prices for 

 15 their communities. 

 16 The topic of today's hearing, whether 

 17 the Commission should apply position limits 

 18 consistently across all markets and participants 

 19 is perhaps the single most important issue for the 

 20 energy markets. The various market segments for 

 21 energy contracts are economically linked and 

 22 actions in one market segment can affect prices in 

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 1 the other segments. Accordingly, APGA believes 

 2 that a unified position limit administered by the 

 3 Commission across all markets in addition to the 

 4 limits adopted and administered by each separate 

 5 market would provide the only effective limitation 

 6 on the total size of positions that a speculator 

 7 could amass and offer meaningful means of 

 8 preventing evasion of the limits by traders moving 

 9 positions from one market to another. 

 10 In this regard, APGA strongly supports 

 11 the use of spot month speculative position limits 

 12 as a proven and effective tool for addressing 

 13 markets with constrained deliverable supplies 

 14 which is typical for the market of natural gas. 

 15 The Commission recently promulgated rules 

 16 implementing the provisions of the CFTC 

 17 Reauthorization Act relating to its new oversight 

 18 authority with respect to significant price 

 19 discovery contracts. APGA believes that the final 

 20 rules are a very good foundation for addressing 

 21 the issue but recommends that the Commission 

 22 consider additional steps. In that regard, APGA 

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 1 notes that the Commission deferred action to make 

 2 spot month speculative position limits or back 

 3 month position accountability rules apply to 

 4 noncleared transactions on an exempt commercial 

 5 market on which SPDCs are traded despite 

 6 recognition of the important role that the 

 7 noncleared transactions may play in price 

 8 formation. This weakens the preventative 

 9 protection that speculative position limits are 

 10 intended to provide. Accordingly, APGA suggests 

 11 that the Commission take this opportunity to 

 12 include linked noncleared SPDCs within the current 

 13 position requirements. As noted above, APGA also 

 14 recommends that the Commission consider adopting 

 15 its own unified speculative position limits for 

 16 economically linked contracts in order to prevent 

 17 speculators from amassing very large positions by 

 18 spreading their positions among multiple markets. 

 19 In this regard, APGA considers that it is vitally 

 20 important that bilateral noncleared OTC contracts 

 21 also be included within such unified market 

 22 Commission set speculative position limits. 

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 1 Bilateral noncleared OTC contracts that are 

 2 economically linked to contracts traded on 

 3 regulated exchanges or exemption commercial 

 4 markets may have an important influence on pricing 

 5 and on the performance of other market segments. 

 6 Speculative position limits can only fulfill their 

 7 regulatory purpose if they apply to all 

 8 economically linked or fungible contracts. 

 9 Otherwise they will only push trading into a less 

 10 regulated market segment. 

 11 Moreover, a dual system of Commission 

 12 and market speculative position limits would be a 

 13 far more effective regulatory tool than reliance 

 14 upon only separate market imposed speculative 

 15 position limits. A dual system of position limits 

 16 is not new. It's existed as part of the 

 17 regulatory landscape since the enactment of the 

 18 Commodity Exchange Act in 1936 with respect to 

 19 domestic agricultural commodities. APGA has for 

 20 many years supported greater transparency and 

 21 oversight with respect to market segments for the 

 22 markets of natural gas including financially 

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 1 settled OTC derivatives. However, APGA's members 

 2 also believe that the continued availability of 

 3 bilateral noncleared OTC derivative transactions 

 4 is vital to their being able to provide natural 

 5 gas to their customers at stable prices and at the 

 6 lowest possible cost. 

 7 We believe that more transparency is not 

 8 inconsistent with continued availability of 

 9 noncleared bilateral transactions. Although APGA 

 10 has been a strong supporter of increased 

 11 transparency and market oversight, proposals that 

 12 would require public systems to clear their OTC 

 13 derivative transactions would have a significant 

 14 impact on the financial operations of these 

 15 systems, ultimately increasing costs to consumers. 

 16 Proposals within the administration and Congress 

 17 that would mandate clearing of all OTC 

 18 transactions would require public gas systems to 

 19 post initial margin and meet potential margin 

 20 calls whenever required on little notice. 

 21 APGA commends the Commission on holding 

 22 these hearings and we look forward to working with 

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 1 the Commission and I look forward to your 

 2 questions. 

 3 CHAIRMAN GENSLER: Thank you, Ms. 

 4 Campbell. Mr. Cota? 

 5 MR. COTA: Thank you, Honorable Chairman 

 6 Gensler and distinguished members of the 

 7 Commission. Thank you for the invitation to 

 8 testify before you today. I appreciate the 

 9 opportunity to address the application of position 

 10 limits and exemptions from position limits in 

 11 energy markets. I'm here today on behalf of the 

 12 Petroleum Marketers Association of America, the 

 13 New England Fuel Institute, and as President of 

 14 Cota & Cota of Bellows Falls, Vermont, a home 

 15 heating fuel provider where I actually see the end 

 16 consumer. 

 17 Mister Chairman, this summer's run-up in 

 18 oil prices occurred despite a sluggish world 

 19 economy, increasing high unemployment, dismal 

 20 consumer confidence, demand for oil at a 10-year 

 21 low and U.S. inventories at a quarter century high 

 22 and the dollar value essentially flat over the 

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 1 past 3 months. Prices did not and do not reflect 

 2 supply and demand. 

 3 With regard to the Commission's question 

 4 on application of position limits and exemptions 

 5 from position limits in energy markets, I would 

 6 take this opportunity to present PMA and NEFI's 

 7 recommendations. Question on, on apply position 

 8 limits across markets and participants, yes. 

 9 Failure to include index fund, swaps and other 

 10 financial energy products has helped ruin these 

 11 commercial markets. It is vital to bring 

 12 integrity to energy futures markets and to help 

 13 purely financial traders from overwhelming these 

 14 finite energy commodity markets. 

 15 On your question two, position limit 

 16 effects on market function, integrity and 

 17 efficiency, we propose that the Commission 

 18 facilitate the risk management of clearinghouses 

 19 by requiring all OTC derivatives to at least clear 

 20 through regulated exchanges in order to 

 21 effectively enforce aggregate position limits. 

 22 This will expose the person or entities attempting 

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 1 to corner the market and would help to mitigate 

 2 oil price volatility. Therefore risk management 

 3 is enhanced because participants will see what's 

 4 happening in all aspects of the trade. 

 5 As to question three, CFTC's additional 

 6 authority, PMA and NEFI and their allies in the 

 7 commodity market oversight coalition continue to 

 8 urge Congress to amend the Commodities Exchange 

 9 Act by reversing exemptions provided in the 

 10 Commodities Futures Modernization Act of 2000 for 

 11 over-the-counter derivatives products and swap 

 12 traders. NEFI and PMA specifically also 

 13 recommends that derivative trading be exchange 

 14 traded or at a minimum exchange cleared in order 

 15 to mitigate energy price volatility and to better 

 16 manage risk. Clearinghouses are only useful to 

 17 the extent that they have the same guarantees are 

 18 regulated exchanges. If Congress requires the 

 19 clearing of OTC derivatives, the CFTC should 

 20 successfully implement aggregative speculative 

 21 position limits at the control level entity 

 22 without new legislation even Congress fails to do 

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 1 so. Still we believe that Congress specifically 

 2 direct the CFTC to impose these limits and we'll 

 3 support that. 

 4 Exemptions from position limits for 

 5 anyone other than a bona fide hedger for the 

 6 conduct and management of commercial enterprises 

 7 should not be allowed. Bona fide exemptions need 

 8 direct proportionality to the physical product 

 9 handled. In other words, speculative amounts in 

 10 excess of direct proportionality for swap dealers 

 11 should not a bona fide and therefore would require 

 12 position limits, disclosure and reporting 

 13 requirements. 

 14 As to question four, methodology of 

 15 position limit levels. Passive investors like 

 16 index funds need to have much smaller limits to 

 17 prohibit them from banding together and driving up 

 18 prices. Secondly, PMA and NEFI recommend the 

 19 establishment of an advisory panel of physical 

 20 hedgers to advise the Commission as to how to set 

 21 appropriate aggregate position limits across all 

 22 exchanges for energy. As to the quantitative 

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 1 measures for setting these limits, the Commission 

 2 might consider setting limits by percentage of 

 3 allowed contracts for these finite markets. We've 

 4 had a lot of discussion which I wish I'd heard 

 5 before my testimony on that subject. Should 

 6 limits apply to all months? Our view is, yes, the 

 7 limits should apply to the delivery month, single 

 8 months and all months combined similar to 

 9 agricultural commodities. In 2008, speculators 

 10 controlled over 70 percent of the open interest on 

 11 NYMEX oil futures. PMA and NEFI urge the 

 12 Commission to take necessary steps to limit the 

 13 speculation in these markets. Thus, 

 14 noncommercials should never make up more than 30 

 15 to 40 percent of the total open interest. This 

 16 will allow sufficient liquidity in the marketplace 

 17 without overwhelming physical hedgers, and 

 18 Amaranth did a lot of trading in the outer months, 

 19 so if you're going to capture that, that's part of 

 20 that. 

 21 Should trade spreads be incorporated in 

 22 this calculation? Spread trades should have their 

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 1 own separate limits, but limits should apply 

 2 across all months and all terminals. Should the 

 3 Commission limit aggregate position limits held by 

 4 one person across different markets? Yes. Also 

 5 every individual noncommercial trader needs to be 

 6 distinguished within each hedge fund. For 

 7 example, if a sovereign wealth fund utilizes 30 

 8 different hedge funds for all its similar 

 9 positions in crude oil, the Commission must 

 10 require the hedge fund to identify the sovereign 

 11 wealth fund or the other large -- and its 

 12 subsidiaries to identify this aggregate limit. 

 13 This is a national security issue from our 

 14 perspective. PMA, NEFI and our customers need 

 15 public officials to stand against the abuse of 

 16 trading practices that artificially inflate prices 

 17 and severely damage our economy particularly at 

 18 this weak point. We strongly support free 

 19 exchanges of commodity futures including 

 20 speculators on an open, well regulated transparent 

 21 exchanges that are subject to the rule of law, 

 22 oversight and accountability. Again thank you for 

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 1 this opportunity. 

 2 CHAIRMAN GENSLER: Thank you, Mr. Cota. 

 3 Mr. Hirst? 

 4 MR. HIRST: Thank you, Mister Chairman. 

 5 I appear today on behalf of the Air Transport 

 6 Association which represents the major passenger 

 7 and cargo airlines in the United States, an 

 8 industry that has been devastated in the past 2 

 9 years by the high price of fuel oil and volatility 

 10 in oil markets. We appreciate your determination 

 11 to address the causes of these conditions which 

 12 have destroyed some airlines and deeply damaged 

 13 the rest. We strongly support strengthened 

 14 regulation of the oil futures market. 

 15 U.S. airlines are suffering through a 

 16 very difficult economic climate and have been 

 17 forced to cut employees and air service. 

 18 Unfortunately, the impact of the recession on the 

 19 airline has been exacerbated by the recent 

 20 volatility in the fuel markets. In 2008 alone, 

 21 U.S. Airlines spent $16 billion more on fuel than 

 22 they did before despite the fact that we decreased 

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 1 our fuel consumption by more than 5 percent. 

 2 Because fuel is our largest single expense, around 

 3 40 percent of our revenues, we are particularly 

 4 susceptible to the recent wild swings in fuel 

 5 prices. At Delta Airlines we consumer 

 6 approximately 4 billion gallons of jet fuel 

 7 annually which makes us the second large consumer 

 8 of jet fuel in the world after the U.S. 

 9 government. A one dollar increase in the price of 

 10 oil annualized increases our fuel costs by $100 

 11 million. The speculative oil price bubble that 

 12 began in mid 2007 cost Delta $8.4 billion in fuel 

 13 and hedge losses compared to what we would have 

 14 spent if the price of oil had remained at $60 a 

 15 barrel. In addition, it forced us to reduce 

 16 capacity by 10 percent and eliminate 10,000 jobs. 

 17 In the last 3 years we have seen a 

 18 significant increase in the volatility of oil 

 19 prices. This increased volatility has been 

 20 associated with a massive increase in speculative 

 21 investment in the oil futures market. The total 

 22 value of investment in commodity indices which are 

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 1 heavily weighted to oil has increased from an 

 2 estimated $15 billion in 2003 to around $200 

 3 billion, and I've even see higher estimates, in 

 4 mid 2008. Over the same period while volatility 

 5 has increased, global demand for physical barrels 

 6 of oil has remained virtually unchanged. 

 7 For airlines, a volatile oil market 

 8 driven by excessive speculation creates three 

 9 serious problems. First, it increases the costs 

 10 and risks of hedging. As a result of last year's 

 11 oil bubble for example, Delta incurred about $1.7 

 12 billion in hedge losses. Second, speculative 

 13 activity last year pushed fuel prices so high that 

 14 capital within the industry has been depleted. 

 15 Finally, with each spike in oil prices, airlines 

 16 ground aircraft, reduce air service, eliminate 

 17 jobs and defer capital expenditures. 

 18 It is worth remembering that the 

 19 ultimate purpose of commodities markets is to 

 20 provide hedging opportunities for producers and 

 21 end users of commodities. Speculators play a 

 22 valuable role in providing the liquidity needed 

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 1 for hedging to occur. However, to the extent that 

 2 there is excess speculation above this level, it 

 3 destabilizes commodity markets. The Commission 

 4 should use its authority in our view to ensure 

 5 that there is enough speculation in the market to 

 6 provide liquidity but no more. 

 7 We strongly recommend that the 

 8 Commission impose position limits on individual 

 9 oil traders as it has in other markets. In 

 10 setting these limits, the Commission should ensure 

 11 that in the aggregate they represent a percentage 

 12 of the market that provides adequate liquidity 

 13 without causing excessive volatility or market 

 14 behavior divorced from fundamentals. Historically 

 15 the Commission can look to the period before the 

 16 explosion of index fund investment as a guide to 

 17 appropriate speculative levels in relation to 

 18 acceptable levels of volatility. 

 19 The Commission has adequate existing 

 20 authority to impose federal position limits on 

 21 designated contract markets, exempt commercial 

 22 markets and foreign boards of trade that trade 

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 1 energy futures, options or swaps in the United 

 2 States. In addition, we think the Commission 

 3 should seek to impose position limits in the OTC 

 4 market, and to the extent it needs additional 

 5 authority to do so, it should ask Congress for 

 6 this authority. 

 7 As a general rule, exemptions from 

 8 speculative position limits should only be 

 9 available in our view to persons who produce, 

 10 process, manufacture or consume a commodity. The 

 11 management of financial risk alone should not 

 12 qualify traders for hedge exemptions. The 

 13 commodity markets were never intended to serve as 

 14 investment vehicles for enormous capital flows 

 15 from hedge funds and institutional investors as 

 16 they do today. 

 17 Mister Chairman, we recognize the 

 18 challenges the Commission faces in crafting policy 

 19 that will adequately limit excessive speculation. 

 20 However, the current state of the oil futures 

 21 market is totally unacceptable to the airline and 

 22 to our employees. Recent developments in the 

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 1 commodities markets have undermined their 

 2 fundamental purposes and strong action from the 

 3 Commission is needed to restore the proper balance 

 4 between commercial hedging and speculation. I 

 5 look forward to answering any questions you may 

 6 have of us. 

 7 CHAIRMAN GENSLER: Thank you, Mr. Hirst. 

 8 Mr. Petzel? 

 9 MR. PETZEL: Thank you, Mister Chairman 

 10 and Commissioners. My name is Todd Petzel, and 

 11 I'm the Chief Investment Officer of Offit Capital 

 12 Advisers, a New York based registered investment 

 13 adviser. 

 14 I have long been a student of and a 

 15 practitioner in the futures markets. My academic 

 16 research dates back over 30 years. From 1982 to 

 17 1995, I was First Chief Economist of the Coffee, 

 18 Sugar and Cocoa Exchange where my duties included 

 19 market surveillance, and then the Chicago 

 20 Mercantile Exchange. During that time I worked 

 21 very closely with the CFTC and its staff on market 

 22 surveillance and position limit issues. In 1996 I 

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 1 became a money manager. Also since 1996 I have 

 2 been elected as a public director to both the 

 3 National Futures Association and the Futures 

 4 Industry Association. I want to emphasize that my 

 5 testimony here today represents my own views and 

 6 not that of either organization or their members. 

 7 The three broad topics I addressed in my 

 8 written commentary concern market information, 

 9 position limits and the impact of traditional 

 10 investors not active in commodity futures markets. 

 11 Information is clearly the lifeblood of both well 

 12 functioning markets and effective market 

 13 regulation. I support the Commission's recent 

 14 efforts to collect background detail on positions 

 15 and provide regular summaries of that data to the 

 16 public. Most commercial participants already have 

 17 a very good understanding of current market 

 18 dynamics, but the boarder public should benefit 

 19 from a clearer understanding of who is 

 20 participating in the markets and why. 

 21 We've had federal mandated position 

 22 limits for select agricultural commodities since 

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 1 1936, and for just as long there have been 

 2 exchanges allowed to those limits for hedging 

 3 purposes. Over time, exchanges were charged with 

 4 establishing position limits for other futures. 

 5 The goal was simple. Avoid outsized positions 

 6 that can disrupt prices in general or the 

 7 convergence of spot and futures prices at 

 8 expiration. The exchanges have a very strong 

 9 reason to get this right. Commercial participants 

 10 act voluntarily. As I used to say, manipulation 

 11 was not only a federal crime under law, it was 

 12 also very bad for business. If a market is 

 13 perceived to be either inaccurate or easy to 

 14 disrupt, those commercial participants simply will 

 15 not trade. But a balance has to be maintained. 

 16 Limits that are too large may allow for market 

 17 disruptions, but if the limits are too small there 

 18 will not be enough capital in the market to 

 19 provide regular liquidity or adequately transfer 

 20 risk. 

 21 The growth of these markets over decades 

 22 suggest that the exchanges have generally gotten 

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 1 this balance correct. In the early part of the 

 2 1990s the traditional concept of hedge exemptions 

 3 evolved to include risk management exemptions 

 4 covering unleveraged synthetic financial 

 5 positions. We also came to embrace hedge 

 6 exchanges for dealers who were creating 

 7 off-exchange financial and commodity index 

 8 products for their clients and who then needed to 

 9 manage the risks of those products created. It is 

 10 sometimes suggested that such off-exchange 

 11 activity can be used to circumvent existing 

 12 position limits. The expanded position 

 13 information mentioned above will shed light on 

 14 this conjecture. I simply don't know that we have 

 15 enough information today to answer that question. 

 16 If a problem exists, there are suggestions in my 

 17 testimony how this might be addressed. 

 18 While the proper size and effectiveness 

 19 of position limits can be debated at great length, 

 20 what cannot be disputed is the necessity of dealer 

 21 hedge exemptions associated with any activity that 

 22 is consistent with and allowed by the established 

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 1 position limits. The negative impact of 

 2 disallowing such exemptions on the effectiveness 

 3 of our futures markets cannot be overstated. 

 4 Turning to traditional investors who are 

 5 now participating in futures markets, over the 

 6 past two decades institutional and individual 

 7 investors alike have increasingly embraced the use 

 8 of unleveraged commodity futures contracts as part 

 9 of their long term asset allocation. In my 

 10 written testimony I go into some detail concerning 

 11 how these investments work and their impact on the 

 12 markets. In these remarks I will simply say that 

 13 I believe the investors in aggregate have had a 

 14 material impact on price levels, price spreads and 

 15 the level of inventories currently being held. 

 16 That does not mean however that these investors 

 17 are manipulators or that they should be banned 

 18 from the markets. There is much concern today in 

 19 the investor community about federal deficits, the 

 20 size of the Fed's balance sheet and the prospect 

 21 of wealth destruction through inflation. These 

 22 investors are looking to real assets including 

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 1 commodities as their own hedge. If they are 

 2 precluded from using unleveraged futures positions 

 3 they will not go away. Instead, they will shift 

 4 their focus to foreign and physical markets where 

 5 it may prove less efficient for them and it will 

 6 definitely be less transparent to both regulators 

 7 and other market participants. 

 8 In summary, the importance of well 

 9 functioning futures markets is beyond dispute. 

 10 The exchanges have strong incentives to provide 

 11 reliable, open and nonmanipulated markets to all 

 12 users. Recent improvements in transparency should 

 13 be maintained and applauded. If changes are made 

 14 to position limits in any market, great care 

 15 should be exercised to not set them too low, 

 16 discouraging a wide range of participants who 

 17 bring valid market information and liquidity to 

 18 all market users. It would be a major step and in 

 19 my opinion a most unfortunate one for a free 

 20 society to move from a stated policy of preventing 

 21 market manipulation to using laws and regulation 

 22 in an attempt to change temporarily unpopular 

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 1 market outcomes. Thank you. 

 2 CHAIRMAN GENSLER: Mr. Petzel, thank 

 3 you. All of our witnesses, thank you. If I could 

 4 ask a few questions and then to my fellow 

 5 Commissioners. 

 6 Mr. Petzel, I take it from your oral, 

 7 and I was able to read your full written late last 

 8 night, that you do believe that financial 

 9 investors, these index investors and other 

 10 financial investors, have had as you say a 

 11 material effect on markets. Is that correct? 

 12 MR. PETZEL: That is correct. 

 13 CHAIRMAN GENSLER: While it's a rather 

 14 narrow piece, but it does relate to the topic that 

 15 we were looking at as well, in the wheat markets 

 16 as well if I could just ask, I noticed in your 

 17 testimony that you said also that you thought that 

 18 investors and index investors particularly in how 

 19 they enter the market can lead to having the 

 20 deferred contracts trading more at a premium and 

 21 the near contracts more limited and thus have more 

 22 positive carry. Is that correct as well? 

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 1 MR. PETZEL: I think the effect is a 

 2 cumulative one over time because as these holders 

 3 of index positions roll their positions to 

 4 deferred contracts, they're selling the near by 

 5 and they're buying the distant one which naturally 

 6 widens the spread. 

 7 CHAIRMAN GENSLER: One of the things 

 8 that I said at least in testimony and believe that 

 9 in the wheat markets some of the problems in wheat 

 10 convergence relate to when the markets are in full 

 11 carry that the design of the contract is less 

 12 appropriate and it doesn't work as well in full 

 13 carry, and what I think I'm hearing is that full 

 14 carry may be a cumulative effect of those index 

 15 investors. 

 16 MR. PETZEL: It also has an impact on 

 17 the people who are holding inventory which is 

 18 reflective of the full carry markets and that 

 19 often times is a sign of dislocations of large 

 20 pools of the inventory. 

 21 CHAIRMAN GENSLER: I see. Let me ask 

 22 the other witnesses a question. Mr. Hirst, I take 

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 1 it from your testimony that you believe that it is 

 2 necessary for the Commission to set or the 

 3 exchanges, but it's necessary to help eliminate, 

 4 diminish or prevent the burdens of excessive 

 5 speculation that position limits be set. 

 6 MR. HIRST: We've come to that 

 7 conclusion, Mister Chairman, that's correct. 

 8 CHAIRMAN GENSLER: Ms. Campbell, I take 

 9 it from your testimony that you believe it's 

 10 necessary for position limits to be set. 

 11 MS. CAMPBELL: We do. 

 12 CHAIRMAN GENSLER: Mr. Cota? 

 13 MR. COTA: We do, and you need to 

 14 identify what they are first. There are still 

 15 huge chunks of the market that are not seen, 

 16 particularly the over the counter and a lot of the 

 17 hedge fund activity which I know you've been 

 18 inquiring into recently. 

 19 CHAIRMAN GENSLER: Could you help the 

 20 Commission out? I'll start with Mr. Hirst first 

 21 from Air Transport and Delta. I don't mean to 

 22 leave you off. You can add in too. How does 

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 1 Delta specifically now or if you want to speak 

 2 more generically use the markets to hedge your 

 3 fuel risks? Do you use the futures market 

 4 primarily, the over- the-counter market? Give us 

 5 a sense of how you address your risks. 

 6 MR. HIRST: I'd be happy to, Mister 

 7 Chairman. We use primarily the over-the-counter 

 8 market. The instruments that we use are largely 

 9 customized to our purposes. The over-the-counter 

 10 market has that advantage as well as the fact that 

 11 it's unnecessary for us to post an initial margin 

 12 and so the costs of hedging are more manageable in 

 13 that market. Obviously it's very important to us 

 14 though that volatility within the market be 

 15 managed. Our ultimate concern is the effect of 

 16 the futures market on spot prices, and to the 

 17 extent that the futures market is a volatile 

 18 market and volatility increases beyond historical 

 19 norms, it makes it very difficult for us to do the 

 20 kinds of planning we need to do and to do the 

 21 kinds of risk management that we need to do as 

 22 well. 

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 1 CHAIRMAN GENSLER: And though you use 

 2 the over- the-counter markets and therefore your 

 3 counterparties are largely swap dealers, I hear 

 4 you're saying to this Commission that those swap 

 5 dealers should be subject to appropriately set 

 6 position limits within this marketplace. 

 7 MR. HIRST: Yes, for the same reason 

 8 that we believe the exchanges or exchange 

 9 participants should as well, and that is to limit 

 10 the volatility in the market as a whole and avoid 

 11 the kinds of extreme impacts that have occurred in 

 12 the spot market. 

 13 CHAIRMAN GENSLER: Ms. Campbell, could 

 14 you give us a sense of whether it's Memphis Light 

 15 & Gas or the APGA whether it's in the futures 

 16 markets or over the counter and how that 

 17 influences your thought? 

 18 MS. CAMPBELL: Most of the APGA members 

 19 use the OTC market to hedge their risk. They have 

 20 also customized products where they're able to 

 21 make sure that the income coming in from the 

 22 customers matches the out-go for their swaps 

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 1 contracts, so they're limiting that risk. For 

 2 Memphis Light, Gas & Water we typically are 

 3 accessing the NYMEX to hedge our risks. However, 

 4 we go to the OTC to manage our basis risk, so we 

 5 use a combination of both. 

 6 CHAIRMAN GENSLER: Given that you're 

 7 still recommending that the swaps dealers 

 8 themselves would be subject to these position 

 9 limits that you think are necessary. 

 10 MS. CAMPBELL: I think with the swaps 

 11 dealers, perhaps there's a refinement there and 

 12 looking and who their counterparty is should there 

 13 be some consideration as to who their counterparty 

 14 is in determining whether an exemption is granted. 

 15 Perhaps the exemption is not granted to the 

 16 dealer, but perhaps the exemption is granted to 

 17 the transaction. 

 18 CHAIRMAN GENSLER: Mr. Cota, I have to 

 19 cut myself off, but when we come back to my next 

 20 round, if you can help me out on that. 

 21 Commissioner Dunn? 

 22 COMMISSIONER DUNN: Thank you very much. 

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 1 Dr. Petzel, reading your background here I've 

 2 been looking or persons who have been so involved 

 3 that we could blame them, and this is a very 

 4 impressive background and long history of 

 5 interactions with both the Commission and the 

 6 marketplace. Could you tell me have speculators 

 7 in the energy markets made money or lost money? 

 8 MR. PETZEL: I can't comment in general. 

 9 I would say on average a lot of studies over time 

 10 have shown that speculators tend to do worse than 

 11 the commercial participants in the marketplace. 

 12 COMMISSIONER DUNN: What's gained by 

 13 being a passive long? 

 14 MR. PETZEL: The passive long like an 

 15 index investor? 

 16 COMMISSIONER DUNN: Yes. 

 17 MR. PETZEL: You have a broad hedge 

 18 against general price movements or against the 

 19 depreciation of the U.S. dollar where a lot of 

 20 these commodities are traded internationally in 

 21 dollar terms, so as the dollar goes down, the 

 22 value of those portfolio go up. And most of the 

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 1 people I know or the institutions I know that are 

 2 trading in this way see this way see this as a 

 3 core part of their hedge inflation strategy versus 

 4 their equities versus their regular government 

 5 bonds which tend to do very, very poorly in an 

 6 inflationary environment. 

 7 COMMISSIONER DUNN: Some of the other 

 8 charts that we've seen, the one that ICE had, the 

 9 cost of fuel versus the strength of the dollar and 

 10 it looked like a mirror image of each other. Do 

 11 you think that as there became more volatility 

 12 then in the securities and the capital markets, 

 13 people were looking for a safe place to park their 

 14 funds, and is that a reason why we saw a buildup 

 15 of speculators in commodities? 

 16 MR. PETZEL: With all due respect, 

 17 Commissioner, I tend not to use the word 

 18 speculator for these types of investors any more 

 19 than I would call their activity in their stock 

 20 portfolios speculative. So what I would argue is 

 21 that over the last 10 years in particular there 

 22 has been an increasing awareness of the role that 

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 1 these kinds of commodity investments can play in a 

 2 portfolio. These are not active traders. These 

 3 are not people who are trying to manipulate the 

 4 market. Quite the contrary. They are simplify 

 5 sitting there passively trying to gain exposure to 

 6 any motion that would move in that direction. The 

 7 theory here is that this will be a benefit in very 

 8 tough times. 

 9 COMMISSIONER DUNN: This ultimately is a 

 10 hedge against inflation is what you're saying. 

 11 MR. PETZEL: That's the primary reason. 

 12 Yes, sir. 

 13 COMMISSIONER DUNN: Mr. Cota, you're 

 14 getting to be an old hand here in this room. You 

 15 recommend the establishment of an energy market 

 16 advisory board made up of physical traders and 

 17 stakeholders to advise the Commission on setting 

 18 appropriate aggregate position limits across the 

 19 exchanges. You are a member of our Energy 

 20 Advisory Board aren't you? 

 21 MR. COTA: Yes, I am. 

 22 COMMISSIONER DUNN: You don't feel that 

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 1 that's going to be able to perform that function? 

 2 MR. COTA: I think it does need to 

 3 relate to the finite. I think it could. After 

 4 listening to the discussion earlier today, I do 

 5 feel that with a lot of the position limits that 

 6 we were talking about that it's appropriate that 

 7 the CFTC particularly when it looks at things in 

 8 an aggregate position really is the best entity to 

 9 do that so you don't have one exchange working 

 10 against another exchange working against 

 11 over-the-counter types of transactions. So I 

 12 think that having physical players in the market 

 13 where you do take an analysis to what's actually 

 14 deliverable is something you need to do. Amaranth 

 15 when it decided to try to corner the natural gas 

 16 market whether it did willfully or through just 

 17 inertia of money, they had 70 to 80 percent of the 

 18 February natural gas contract for the entire 

 19 United States. Obviously that's a limit that's 

 20 too high. And you can only make sense of it when 

 21 you do it in an aggregate manner, so that's the 

 22 general thrust. 

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 1 With regard to index funds, because I'd 

 2 like to comment on that briefly, the index funds 

 3 are the new chumps in the market from my 

 4 perspective. They're invesculators. They're not 

 5 really speculators, they're just putting huge 

 6 amounts of money which has money momentum in it. 

 7 If you take a look at a lot of the index funds and 

 8 you chart it against the underlying commodities, 

 9 it doesn't match up and it doesn't match up from 

 10 my perspective because the contango in the market 

 11 is being charged to the index funds so people may 

 12 be profiting separately on spreads that are 

 13 outside of the index funds but the contango in the 

 14 storage fees like the very large crude carriers 

 15 that are now for the first time ever storing 

 16 refined product offshore, those fees are being 

 17 charged to the index funds and that's something 

 18 new. So it's a bad investment for whoever it is, 

 19 whether it be Harvard University or whoever it is. 

 20 They think that they're diversifying their 

 21 portfolio. In my opinion they're being taken 

 22 advantage of and they're driving up contango in 

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 1 the markets which all consumers are paying for. 

 2 CHAIRMAN GENSLER: Commissioner Sommers? 

 3 COMMISSIONER SOMMERS: Thank you, Mister 

 4 Chairman. I actually want to go down a little bit 

 5 of the same line of questioning as the Chairman 

 6 did in this first round with regard to the 

 7 specific ways that you each use the markets in 

 8 talking about the fact that you each have 

 9 customized needs and use the OTC markets and how 

 10 we look to set appropriate position limits when 

 11 we're not seeing those transactions right now and 

 12 whether or not you think we need to have the 

 13 authority before we can assess what appropriate 

 14 levels would be, if you each could answer that. 

 15 MR. HIRST: Commissioner Sommers if I 

 16 may, we believe that there needs to be more 

 17 transparency in these markets broadly speaking and 

 18 in particular in the over-the- counter market. 

 19 And to the extent that the Commission needs 

 20 additional information to understand those markets 

 21 and understand the effects of any regulations that 

 22 it might adopt, it needs to obtain that 

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 1 information. So that's clearly a first priority 

 2 in our judgment. Having said that, to the extent 

 3 that the Commission needs additional regulatory 

 4 authority to deal with the over-the-counter 

 5 market, we very strongly support that. 

 6 MS. CAMPBELL: I'll agree with Mr. 

 7 Hirst. We have long thought that the Commission 

 8 needed greater transparency within the natural gas 

 9 markets in particular and so we welcome that, and 

 10 if it does require further authority from 

 11 Congress, we would be supportive of that. 

 12 MR. COTA: I think there is somewhat of 

 13 a timing issue. When NYMEX was the only game in 

 14 town it was easier for them to have both position 

 15 limits and margin requirements that in a volatile 

 16 market would fluctuate pretty dramatically from 

 17 what you see today, but now everyone is worried 

 18 about competition. We really have no idea, at 

 19 least we as the retail gasoline and heating 

 20 industry, about what the total over-the-counter 

 21 derivative part of that market is. Part of my 

 22 trading is in the market, but in order to really 

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 1 aggregate what that is you need to see what the 

 2 total is, but in the list of priorities, Rome is 

 3 burning. So if in the markets that you can see 

 4 what's going on and in those markets you can apply 

 5 things like the traditional agriculture 

 6 methodology for aggregate limits in that aspect, 

 7 that might be the best first step while you fix 

 8 the legislation. I do think you need to deal with 

 9 the legislation in capturing as much of the other 

 10 markets as you possibly can, but meanwhile we're 

 11 in a very weak economy and we need to do something 

 12 right now. 

 13 MR. HIRST: Mister Chairman and 

 14 Commissioner Sommers, if I could add, I echo on 

 15 behalf of the airline industry Mr. Cota's comment 

 16 that Rome is burning. We encourage you to take 

 17 action, and while we believe that you will get it 

 18 right or generally right, if you don't, you are a 

 19 Commission, you are not Congress, you have the 

 20 ability to make midcourse corrections and 

 21 adjustments, and so we encourage you to act before 

 22 we see a repeat of last year's oil bubble. 

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 1 Because if that happens, at least as to our 

 2 industry, it will change into something that 

 3 hasn't been seen before. There will be fewer 

 4 airlines, more consolidated airlines, and serious 

 5 impacts on the nation's air transportation system 

 6 and on the economy. 

 7 CHAIRMAN GENSLER: Commissioner Chilton? 

 8 COMMISSIONER CHILTON: Todd, I'm 

 9 curious. You talked about speculators not doing 

 10 all that well last year. Is that correct? 

 11 MR. PETZEL: I know there have been 

 12 academic studies that have tried to figure out 

 13 whether speculators on average make money or not, 

 14 and on average the commercial participants have 

 15 more information, they probably have better skills 

 16 and on average they take money away from 

 17 speculators. 

 18 COMMISSIONER CHILTON: You're not 

 19 suggesting that passive long speculators who were 

 20 in for example the WTI contract last year when it 

 21 got up to $147.27 didn't make a boatload of money? 

 22 MR. PETZEL: I'm suggesting that those 

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 1 people who either went into that contract or the 

 2 index in the second quarter of 2008 lost a ton of 

 3 money as the prices went down. 

 4 COMMISSIONER CHILTON: How about at the 

 5 end of the second quarter? 

 6 MR. PETZEL: At the end of the second 

 7 quarter, if you went into the market in the second 

 8 quarter of 2008, you were buying at the highs. 

 9 COMMISSIONER CHILTON: Mr. Cota, what do 

 10 you think the actual impact has been? You talk 

 11 with people all the time every day. You monitor 

 12 these markets from your perspective. What do you 

 13 think the impact of not having these position 

 14 limits has been? 

 15 MR. COTA: The trend is always your 

 16 friend, so if you've got large money come in, the 

 17 market has no choice but to react to that. 

 18 Certain commercial players, yes, could if they 

 19 plan things and they pay attention to it they can 

 20 plan around that, but that's all at much higher 

 21 costs. Volatility is measured generally in option 

 22 costs pricing dynamics which the consumer pays for 

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 1 and those numbers have just kept increasing and as 

 2 a percentage of the total it's a just higher all 

 3 of the time. So I think that because of the large 

 4 inertia and the direction that some of these 

 5 trades can really drive up pretty dramatically, 

 6 there is no knowledge to when that trend is going 

 7 to end and because these things are expensive on a 

 8 hedge perspective or you don't hedge in the spot 

 9 market perspective because the futures market 

 10 determines the spot price directly, the consumer 

 11 ends up paying a much higher price than they would 

 12 otherwise and that's what I'm seeing. Demand is 

 13 down. Fifteen percent of my business is gone and 

 14 will not come back and that's because of 

 15 conservation and we're seeing that trend across 

 16 all markets. So price does relate to demand, but 

 17 there is no reason why it's going up now. 

 18 COMMISSIONER CHILTON: Ms. Campbell, 

 19 this might be helpful for my colleagues. You guys 

 20 are in this market all the time, you specifically 

 21 in Memphis, but some of your colleagues, members 

 22 of your association, really don't get into the 

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 1 market even though they may have a desire to. Is 

 2 part of that because of their concern about the 

 3 markets, about the concern of the excessive 

 4 volatility in energy markets? 

 5 MS. CAMPBELL: So much of what happens 

 6 to municipals is what happens on the front page 

 7 and when we see a catastrophic failure like with 

 8 Amaranth these things resonate with a mayor and a 

 9 city council and it makes everyone concerned about 

 10 whether they should be in those markets or not. 

 11 So I think most gas managers would say that we 

 12 need to be in that market to protect customers, 

 13 but no doubt we have members who do not 

 14 participate in these markets because there is so 

 15 much uncertainty and fear that there may be some 

 16 type of manipulation that affects consumers. 

 17 COMMISSIONER CHILTON: I don't want to 

 18 make a direct correlation and I'm not, but some 

 19 say that if you put position limits on you're 

 20 going to lose liquidity and some traders would 

 21 exit the market. By the same token, aren't there 

 22 some potential new traders who might get into 

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 1 these markets if they had more confidence that 

 2 there wasn't the volatility that has existed for 

 3 the last several years? 

 4 MS. CAMPBELL: I think traders are drawn 

 5 to volatility, but then hopefully to dampen that 

 6 out. What I think is if there is greater 

 7 confidence in the markets and certainly that they 

 8 are free from manipulation, then certainly I do 

 9 think that there would be new entrants. Also to 

 10 Mr. Petzel's point that so many people are getting 

 11 into this marketplace as a hedge against 

 12 inflation, then perhaps it's not that it would be 

 13 very large entities that are out there, but again 

 14 the demand for that contract is still there and 

 15 there will be other entities who come about to 

 16 fill that space. 

 17 COMMISSIONER CHILTON: Thank you. Thank 

 18 you, Commissioner Chilton. If I could return 

 19 myself to Mr. Cota on the question of how the 

 20 industry you represent or even you individually 

 21 use the markets to hedge risks whether it's in the 

 22 futures, over the counter, how you do that and 

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 1 then how that influences your thinking on position 

 2 limits. 

 3 MR. COTA: It's evolved dramatically. 

 4 We've been hedging since probably 1988. The 

 5 industry particularly in Northern New England 

 6 where I'm located we've seen the percentage of 

 7 consumers who want to buy a hedged program go as 

 8 high as 75 percent of your total market. Heating 

 9 oil is a seasonal demand. 

 10 CHAIRMAN GENSLER: This is the 

 11 homeowner? 

 12 MR. COTA: Homeowner, right. So what we 

 13 try to do is match up with the homeowner on 

 14 individual contracts and aggregate those together 

 15 in order to buy hedged positions. Traditionally 

 16 we did it with just futures contracts, NYMEX based 

 17 futures contract with our wholesalers with a fixed 

 18 differential for different months depending upon 

 19 what the contango in the market was and our 

 20 minimum number on that was generally about 10 to 

 21 12 contracts, so about a half million gallons at a 

 22 time where the average consumer uses 800. Over 

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 1 time what we've seen is that as things became 

 2 slightly more volatile, people wanted to buy 

 3 options for capping these programs. So at that 

 4 point about 7 years ago we could buy a put and 

 5 call into an oil contract for about 6 cents a 

 6 gallon and that's both directions together. Last 

 7 summer that number was over a dollar and now it's 

 8 somewhere around probably about 60 to 70 cents. 

 9 So as time has evolved depending on where the 

 10 market is, sometimes we'll do a put derivative 

 11 offset by a futures contracts, again a NYMEX 

 12 futures contract for physical delivery with my 

 13 wholesaler where I pay a small margin for that 

 14 portion because we're part of the physical trade 

 15 and the derivative is done separately. Currently 

 16 we're doing over-the-counter derivatives and we 

 17 make our consumers buy that. So whatever that 

 18 cost is, we pass that on. 

 19 CHAIRMAN GENSLER: I'm at the risk of 

 20 running out of my own time. Just as a yes or no, 

 21 being aware of all that though you still think 

 22 it's necessary to set position limits and those 

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 1 position limits should apply as well to the swap 

 2 dealer community? 

 3 MR. COTA: Absolutely, and after Lehman 

 4 went bankrupt I went into a panic mode and said 

 5 you're exchange clearing these. Right? And I 

 6 should have asked that question -- 

 7 CHAIRMAN GENSLER: Let me just see if I 

 8 can slip this in before the buzzer. Mr. Hirst, I 

 9 take it from your testimony specifically, I may 

 10 have misread this, but that you also think that we 

 11 should have a position limit on the aggregate 

 12 amount a speculator, so it's not just on 

 13 individual speculators, but also the aggregate of 

 14 the class itself or did I misread that? 

 15 MR. HIRST: Mister Chairman, what we 

 16 were getting at is that it seems to us that there 

 17 needs to be a proper balance between physical 

 18 hedging and speculation which provides the 

 19 liquidity to allow that to occur. So the question 

 20 really is how do you get to that balance. We're 

 21 certainly not experts in regulating these markets 

 22 and we're confident you'll find the right way to 

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 1 do it. It appears to use that one conceptual way 

 2 to think about this is to ask what was the level 

 3 of speculative interest in the market say 10 years 

 4 ago when volatility was operating within a 

 5 reasonable range and then use that as an overall 

 6 objective to build your limits toward. So you 

 7 could say individual speculators can only have so 

 8 much individually, but then you sort of set that 

 9 number with an eye to creating an overall limit, 

 10 and it can't it seems to us be precise, but it can 

 11 be sort of directionally -- 

 12 CHAIRMAN GENSLER: What you're 

 13 suggesting is that the aggregate pool of 

 14 speculators somehow helps us in our analysis as to 

 15 setting individual trader -- 

 16 MR. HIRST: Exactly. 

 17 CHAIRMAN GENSLER: Then there's a 

 18 question I think it was in Mr. Cota's testimony 

 19 which was I thought you had a phase in there of a 

 20 bona fide speculator. Of course as the public 

 21 knows and the witnesses know, we have a roll 

 22 around bona fide hedging, but you had a concept of 

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 1 bona fide speculator. Did you want to just tell 

 2 us a little bit more about that? 

 3 MR. COTA: It's not a fully formed idea. 

 4 CHAIRMAN GENSLER: But it is in your 

 5 public testimony. 

 6 MR. COTA: It is. We debated it last 

 7 night as to whether we should put it in there. In 

 8 general terms, a speculator will take a long 

 9 position or a short position over a time of time 

 10 and the index funds and a lot of these large 

 11 invesculator groups only go long and they'll short 

 12 the near month and go to the long month and 

 13 they'll do that forever. A speculator actually 

 14 will help to take out those tops and bottoms. So 

 15 if I had a real speculator in there, the guys who 

 16 used to be in the pits at the NYMEX, maybe they're 

 17 okay compared to a lot of big dumb money. That 

 18 was the idea behind that. 

 19 CHAIRMAN GENSLER: Commissioner Dunn? 

 20 COMMISSIONER DUNN: I think I saw the 

 21 term in somebody's testimony of speculavestos as 

 22 well, so we're learning all kinds of new things 

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 1 here. First I'd like to commend the Chairman for 

 2 trying to put additional transparency in our 

 3 commitment of trader's report in establishing new 

 4 categories, and I'd like to ask all four of you to 

 5 reflect on that and tell us how this is helping or 

 6 hurting, hopefully not hurting, but how it's 

 7 going. Ms. Campbell, I'll start with you and 

 8 then Mr. Hirst and then go around. 

 9 MS. CAMPBELL: Thank you. And thank 

 10 you, Chairman. We have been very pleased and we'd 

 11 like to continue to see more information provided 

 12 in the commitment of trader's report because it is 

 13 very helpful for us to understand who the players 

 14 are in the marketplace as we look forward in what 

 15 we're going to do in our hedging strategy. I 

 16 would also say that to the extent that we can have 

 17 more information as I alluded to earlier into the 

 18 OTC markets provided to the Commission, we would 

 19 certainly like to see that as well in the 

 20 commitment of trader's report and further 

 21 refinements in there can only help in 

 22 understanding what's going on in the marketplaces. 

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 1 MR. HIRST: It clearly makes good sense 

 2 to find ways through the existing reports to bring 

 3 some greater precision to understanding who is a 

 4 physical hedger and who is a financial player in 

 5 the market and disaggregating those categories. 

 6 But beyond that, it seems clear to us that these 

 7 markets generally have suffered from a lack of 

 8 transparency and we applaud the efforts that 

 9 you're initiating to bring more transparency to 

 10 all aspects of it. I think it's critical that you 

 11 do that. 

 12 MR. PETZEL: I think I touched on this 

 13 in my testimony that I was very supportive of the 

 14 efforts. The one thing I would say which probably 

 15 isn't going to win me many friends at the exchange 

 16 or maybe even at the Commission is that 

 17 periodically you want to drop the reporting limits 

 18 to a very, very low level to take a little survey 

 19 of those who currently fall under the active 

 20 reporting levels to see if they're reflective of 

 21 what you're capturing currently or whether they're 

 22 actually behaving in a different way, and I think 

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 1 that would probably reinforce the whole reporting 

 2 program and add to the transparency. 

 3 MR. COTA: Commissioner, I agree with 

 4 Mr. Petzel as well. I look at the trader reports. 

 5 I get a newsletter from Cameron Hannover every day 

 6 and I take a look at what the positions are long 

 7 and short of the different segments, and even I 

 8 know that on a fundamental basis what I'm seeing 

 9 is completely nuts, if I see that the prevailing 

 10 volume of the market is going in the other 

 11 direction, I just got to go with the market 

 12 regardless of what's right or wrong. So those are 

 13 critical for me in seeing the volume of money and 

 14 the direction of the money as critical for my 

 15 consumers to do an appropriate hedge. 

 16 COMMISSIONER DUNN: Ms. Campbell, on 

 17 page 8 of your testimony, and you touched on it a 

 18 little bit with the Chairman, that first full 

 19 paragraph with regard to classification of traders 

 20 as hedgers are speculators and believe that the 

 21 ultimate characterization of the position should 

 22 reflect the nature of the counterparty, i.e., 

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 1 commercial market end users, hedgers and 

 2 speculative end users and speculators, could you 

 3 drill down and amplify a little bit on that? 

 4 MS. CAMPBELL: Again it goes to what we 

 5 were just talking about, a better refinement in 

 6 understanding who the participants are and the 

 7 nature of their activity. If we're looking at a 

 8 swaps dealer who is on the other side of a 

 9 transaction where a utility is on the other side, 

 10 clearly that transaction is one that is in the 

 11 benefit of the hedging community to help them 

 12 provide liquidity. But I think there becomes a 

 13 gray area as was alluded to earlier and so better 

 14 understanding who all those counterparties are I 

 15 think is critical to us getting our arms around 

 16 the market and understanding not only, one, what's 

 17 going on in the market, but, two, as we look to 

 18 setting position limits and potentially even 

 19 position limits in the OTC markets, having an 

 20 understanding of who those market players are is 

 21 critical. 

 22 CHAIRMAN GENSLER: Chairman Sommers? 

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 1 Commissioner. I keep doing that. 

 2 COMMISSIONER SOMMERS: That's kind of 

 3 weird. 

 4 CHAIRMAN GENSLER: It's a long day. 

 5 COMMISSIONER SOMMERS: Thank you, Mister 

 6 Chairman. Actually I'm going to get off the topic 

 7 of this hearing for a minute and on to something 

 8 that a couple of you addressed in your written 

 9 statements, and that is something that we are also 

 10 dealing with now, the concept of mandatory 

 11 clearing for your customized contracts. I just 

 12 wanted to know if you'd be willing to talk a bit 

 13 about the unintended consequences for you if 

 14 mandatory clearing were imposed. 

 15 MS. CAMPBELL: I'll start with there are 

 16 a couple of issues really at stake here. One is 

 17 the customized as I alluded to earlier how some of 

 18 the OTC contracts are customized to match the cash 

 19 flow of some of our members. But then also if you 

 20 think about if we went to mandatory clearing, and 

 21 really as I see it when I first heard about this, 

 22 it seemed to be to address systemic risk. It was 

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 1 addressing credit quality in the marketplace. So 

 2 as you look at a distributor such as us, then most 

 3 of our cash flow comes during the winter, yet most 

 4 of the positions we have are in the later summer 

 5 in anticipation of the winter. So if we were put 

 6 in the position where we were required to do that 

 7 margining then there could be some short term 

 8 loans that we would have to take out during the 

 9 summer to get us to hold those positions into the 

 10 winter and therefore increase costs to our 

 11 customers. So that's really the two issues, the 

 12 customizable effect of using the OTC derivatives, 

 13 but then also if any margining were required there 

 14 would be additional costs for our consumers. 

 15 MR. HIRST: Commissioner Sommers, we're 

 16 of two minds in the airline industry about 

 17 mandatory cleaning because on one hand mandatory 

 18 clearing would give you more tools to control the 

 19 impacts of the market that we're concerned about, 

 20 volatility and other effects, it would give you 

 21 greater information to do that with. On the other 

 22 hand, today as I mentioned earlier, we use the 

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 1 over-the- counter market almost exclusively for 

 2 hedging, A, because of customization and, B, 

 3 because of cost. Between the two just speaking 

 4 for Delta, if mandatory clearing led to a 

 5 restoration of volatility to historical levels, we 

 6 would be fine with that because hedging would be 

 7 much less important to us at that point. Between 

 8 the two, we would prefer to see normalization in 

 9 the market in terms of price and volatility. 

 10 MR. COTA: Commissioner Sommers, the 

 11 credit risk for me is real from a delivery 

 12 perspective. My commodity cost fluctuates by many 

 13 multiples of my margin, so if the end 

 14 over-the-counter player isn't able to perform for 

 15 whatever reason, I'm out of business. So if 

 16 there's an additional cost to that, I'm happy to 

 17 pay that cost. The consumer ends up paying for 

 18 that in the long run. And currently a lot of 

 19 these over-the-counter derivative things in my 

 20 opinion are already pricing in a lot of that 

 21 credit cost into it. They may be doing it with 

 22 credit default swaps which I think is another 

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 1 problematic issue with the over-the-counter 

 2 products that do this, but I think an unexpected 

 3 benefit as opposed to an unexpected consequence 

 4 may be that a lot of these over-the-counter 

 5 products will evolve into separate credit types of 

 6 packaging deals which will do credit packaging in 

 7 a different sort of way than they've currently 

 8 doing it with credit default swaps. Will that 

 9 cost more money? Perhaps. Maybe it's at a less 

 10 leveraged level which I would encourage. Leverage 

 11 is a great tool if you play it well, but it can 

 12 wipe you out very rapidly and I need to be in 

 13 business for my consumers because if my 

 14 counterparty goes bad, I go bad and thousands of 

 15 customers go bad and I got to head for the hills 

 16 because they're going to hunt me down. 

 17 MR. PETZEL: I do have a philosophical 

 18 point here. Just to remind everybody that the 

 19 clearing members who are backing the 

 20 clearinghouses are all volunteers. There is no 

 21 government guarantee for the clearinghouse. When 

 22 I hear the phrase mandatory clearing, I get 

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 1 concerned about things that get pushed onto a 

 2 clearinghouse in a margining system that may not 

 3 really be well placed there, that may pose more 

 4 risks to these clearing members than they are 

 5 willing to assume. At that point, they withdraw 

 6 capital from the clearinghouse, the whole system 

 7 becomes less strong and I don't think we're really 

 8 reached our objective. I think this is a very big 

 9 subject that needs a lot of intensive scrutiny, 

 10 but it's not an easy problem. 

 11 CHAIRMAN GENSLER: Commissioner Chilton? 

 12 COMMISSIONER CHILTON: I just had a 

 13 final comment and not even a question. One, you 

 14 were talking about transparency a little bit ago 

 15 and I just wanted to thank the Chairman for that 

 16 effort both in the commitment of trader's report 

 17 but also in our swaps report. We're doing another 

 18 swaps report coming up here fairly soon and I 

 19 think we're going to have a lot more confidence in 

 20 that and that is important. 

 21 But it highlights the problem that we've 

 22 had in that that's going to the swaps dealers and 

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 1 asking information about what's going on in 

 2 over-the-counter markets, so it would be natural 

 3 that the confidence that you might initially have 

 4 in these sorts of reports wouldn't be very high. 

 5 But we're getting better at it and I commend the 

 6 Chairman for his emphasis which we see every day 

 7 in that regard. 

 8 The final thing I wanted to mention is 

 9 members of this panel or members of our Energy and 

 10 Environmental Markets Advisory Committee that 

 11 Commissioner Dunn talked about a little bit 

 12 earlier, Mr. Sprecher and Mr. Donahue are members 

 13 also, and who knows what we're going to do on 

 14 timing with regard to this if anything. But on 

 15 September 16 we're going to have an EMAC meeting 

 16 and if there is some proposal out there then we 

 17 have to worry about the appropriate comments, et 

 18 cetera. We may not be able to comment, but that 

 19 doesn't mean that we couldn't listen to what 

 20 members of the EMAC have to say about a proposal 

 21 if the Commission determined that it was going to 

 22 put one out. I'm not prejudging that we will or 

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 1 won't. So anyway, I want to thank the Chairman. 

 2 This was very helpful to me. And like you said 

 3 earlier, I learned a lot and I think it will be 

 4 good as we go forward. 

 5 CHAIRMAN GENSLER: Thank you. I think 

 6 the reason I kept calling my fellow Commissioners 

 7 Chairman is because there are four Commissioners 

 8 and we work well together and I think we're all 

 9 trying to grapple with this very important topic 

 10 here today. 

 11 I just wanted to comment on something 

 12 that Commissioner Chilton just raised and I know 

 13 that some of the panelists were just asked about 

 14 by my fellow Commissioners about some of the 

 15 transparency initiatives that we're moving forward 

 16 with. I think on July 7 we announced that we're 

 17 going to bring greater transparency to the 

 18 commitment of trader's report, breaking that out 

 19 into four categories instead of the two that we've 

 20 done traditionally. In addition, that in 

 21 furtherance of what was put out last September in 

 22 the swaps report, we're going to be going forward 

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 1 and putting out on a quarterly basis and hopefully 

 2 at some point on a monthly basis an index investor 

 3 report and that data we're trying to make a bit 

 4 more thorough. We're also going to be looking at 

 5 putting both gross longs and gross shorts as 

 6 contrasted to just the net positions that were 

 7 once put out. I think that it would be 

 8 inappropriate to speculate on the data that's 

 9 going to be in reports that we've yet to put out, 

 10 and frankly none of the four Commissioners have 

 11 even seen. So reports that the CFTC will release 

 12 a study reversing the positions that were taken 

 13 about energy speculation last year are premature 

 14 and inaccurate. 

 15 Just turning back to these hearings, I 

 16 think these hearings have been of tremendous 

 17 benefit, this hearing and these panels today I 

 18 can't thank the four of you enough. We're going 

 19 to have I think seven witnesses tomorrow and we 

 20 also have a full day next week, and we look 

 21 forward to keeping the record open for the public. 

 22 Thank you. 

 ANDERSON COURT REPORTING 

 706 Duke Street, Suite 100 
 Alexandria, VA 22314 

 Phone (703) 519-7180 Fax (703) 519-7190 
 212 

 1 (Whereupon, at 1:22 p.m. the 

 2 PROCEEDINGS were adjourned.) 

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 ANDERSON COURT REPORTING 

 706 Duke Street, Suite 100 
 Alexandria, VA 22314 

 Phone (703) 519-7180 Fax (703) 519-7190 
 213 

 1 CERTIFICATE OF NOTARY PUBLIC 

 2 I, Carleton J. Anderson, III do hereby 

 3 certify that the forgoing electronic file when 

 4 originally transmitted was reduced to text at my 

 5 direction; that said transcript is a true record 

 6 of the proceedings therein referenced; that I am 

 7 neither counsel for, related to, nor employed by 

 8 any of the parties to the action in which these 

 9 proceedings were taken; and, furthermore, that I 

 10 am neither a relative or employee of any attorney 

 11 or counsel employed by the parties hereto, nor 

 12 financially or otherwise interested in the outcome 

 13 of this action. 

 14 /s/Carleton J. Anderson, III 

 15 

 16 

 17 Notary Public in and for the 

 18 Commonwealth of Virginia 

 19 Commission No. 351998 

 20 Expires: November 30, 2012 

 21 

 22 

 ANDERSON COURT REPORTING 

 706 Duke Street, Suite 100 
 Alexandria, VA 22314 

 Phone (703) 519-7180 Fax (703) 519-7190