The Commission has in the past also made its preeminence in U.S. futures market
surveillance known to its sister regulatory agencies overseas. If a DCM and a foreign board of
trade list for trading essentially the same contract, the Commission understandably coordinates
its surveillance activities with foreign regulators. The Commission’s experience with the
Financial Services Authority and ICE Futures Europe illustrates how well this kind of
cooperative information sharing approach can work in practice. The Commission is to be
commended for establishing the necessary arrangements without overburdening market
participants or sacrificing its legitimate surveillance needs.

While some may talk of loopholes and regulatory gaps, FIA believes the record
shows that the Commodity Exchange Act’s anti-manipulation foundation in the energy area is
very strong. FIA does not believe any changes to the CEA are vital to the Commission’s ability
on a day to day basis to achieve its anti-manipulation mission. The CEA works well and the
CFTC works well with it.

At the same time, we recognize that Congress is not clairvoyant and that market
conditions change, especially in a world driven by changes in technology that come at us faster
every day. We know the Commission will take whatever steps it determines to be appropriate to
update its regulatory approaches consistent with its statutory authority. FIA understands it is
possible that the Commission may determine that it lacks some needed authority in some areas
and may therefore want to consider recommending that Congress make some modest, targeted
changes in those areas. Perhaps, as one major ECM has observed in a congressional hearing,
limited changes might be called for in the ECM area for some commodities in some

circumstances where multiple markets exist. But the tests for any of these changes should be:


In contrast, Congress did not extend manipulation protections to other off-trading
facility transactions in excluded or exempt commodities. FIA agrees with that congressional
judgment, embodied in sections 2(d) and 2(g) of the CEA. Price manipulation is of little concern
in one-off, non-standardized transactions between two eligible contract participants where price
applies to the individual transaction, not to a wider market. But where the pricing of trades
would affect the interests of other market participants, or even others that base commercial
transactions on market prices, the CFTC has an interest in preventing manipulation. In those
circumstances, the CFTC must be the cop on the beat.

The Commission’s traditional role as the exclusive regulator of futures
transactions and markets actually compels this kind of comprehensive and vigilant multi-market
surveillance approach. Multiple markets combined with multiple regulators would be a recipe
for disaster. For that reason, in 1974, Congress granted the CFTC the extraordinary power of
exclusive jurisdiction to make sure that only an agency expert in futures pricing would cast its
surveillance eyes on futures trading activities. At the same time, Congress wanted futures
market participants to be answerable only to that expert agency’s judgment. Other federal
agencies may have legitimate concerns and interests in protecting other markets or transactions
that fall within their statutory spheres, and perform important work in their respective areas. But
Congress was clear who was responsible for policing futures markets: the CFTC and only the
CFTC. The Commission has in the past correctly made clear to its sister agencies, the states, the
courts and Congress that monitoring futures pricing is its exclusive statutory duty. You should
continue to do so, not as a matter of turf but as a means of continuing to vindicate the public
policy goals exclusive jurisdiction serves, including the avoidance of duplicative or conflicting

regulation.


are they essential for the performance of the CFTC’s market surveillance function and are they
the least intrusive means for achieving the required outcome?

FIA does not believe that any statutory change should be a basis for leveling the
so-called competitive playing field. Congress has appropriately allocated regulatory oversight in
the CEA based on differences in market participants, commodities traded, means of trading,
intermediation and even impact on cash markets. FIA would not support any fundamental
change to that regulatory alignment.

In particular, FIA would oppose any efforts to interfere with start up ECMs or to
undermine the entrepreneurial spirit and emphasis of the ECM category. The ECM category
under the CEA has been the most successful incubator for innovative markets and product
offerings. It should be maintained as a basis for encouraging innovation and competition.

Our final point is a familiar one and a critical one. Price manipulation is public
enemy #1 because it affects both market participants and the public at large. Price manipulation
can have a serious ripple effect in our economy and can hurt many innocent bystanders. That is
why Commission vigilance is so important.

It is also why Commission regulation benefits not just market participants, but
just as profoundly non-market participants. For that reason, FIA continues to be vehemently
opposed to funding the CFTC through a transaction tax. In our view, all taxpayers benefit from
CFTC market oversight. Therefore all taxpayers should pay for it. If the CFTC needs additional
resources, the Administration should request and Congress should appropriate the necessary
funds. But imposing an arbitrary and egregious tax that would be borne most by those that
provide the liquidity that allows futures markets to serve so many public interests is a bad idea

whose time should never come.


PREPARED STATEMENT OF FUTURES INDUSTRY ASSOCIATION
BEFORE THE COMMODITY FUTURES TRADING COMMISSION
ON OVERSIGHT OF ENERGY MARKETS

SEPTEMBER 18, 2007

The Futures Industry Association is pleased to submit this statement of its views
on the oversight of trading markets in energy futures and other related derivative contracts.
FIA’s member firms play many different roles in the trading and clearing of energy transactions,
both as intermediaries and principals. We have a substantial interest in energy markets and
commend Acting Chairman Lukken and the Commission for holding this public forum to allow a
full spectrum of views to be heard.

Everyone agrees that the price of energy is a critical element of our national
economy. For decades, energy futures have served our national interest by providing a means
for efficiently managing and reliably discovering energy prices. The Commission should take
pride in its effective oversight and stewardship of these markets.

In recent years, energy markets have experienced considerable innovation and
increasing competition. Congress addressed, and even stimulated, these forces when it enacted
the Commodity Futures Modernization Act of 2000. The CFMA updated the Commodity
Exchange Act by recalibrating Commission regulation of different forms of derivative
transactions to different levels. This scaled-regulatory approach was designed to serve equally
well the public interest and various commercial interests. In FIA’s view, the CFMA has worked
admirably for markets generally and energy markets in particular.

In energy, the CFMA has made it possible for new markets to compete with

established exchanges. That competition has caused those exchanges to modernize through


Thank you for holding this hearing and for considering our views. I would be

happy to answer any questions you might have.


electronic trading or at least increase their pace of modernization. The CFMA has also
encouraged innovative thinking by established exchanges and new trading platforms. The result
is that those trying to manage energy price risks and those willing to assume those risks now
have more choices than ever before. Indeed, one of the most popular recent innovations in
energy -- the ability to submit certain private bi-lateral energy transactions to regulated clearing
entities -- flowed directly from the CFMA’s provisions. The importance of this innovation can
not be overstated. Those bi-lateral but cleared transactions on the New York Mercantile
Exchange’s ClearPort facility now comprise approximately [%] of that exchange’s monthly
volume.

In our view, the CFMA has sparked these positive developments without
compromising the public interest, including the vital interest in preventing price manipulation.
The Commission continues to deploy a wealth of market surveillance techniques and an arsenal
of enforcement weapons in its pursuit of what Chairman Lukken has labeled the agency’s zero
tolerance of price manipulation. These Commission tools include large trader reports, special
calls, position limits, price manipulation enforcement actions and even sweeping, perhaps
unprecedented market emergency powers. Clearly, the Commodity Exchange Act and the
Commission’s regulatory apparatus continue to target price manipulation as public enemy #1.

FIA agrees with this emphasis. Price manipulation should be prevented whenever
possible and never tolerated. The best defense against price manipulation is effective CFTC
market surveillance based on all relevant large trader information. The Commission’s recent
proposal to confirm under its special call authority that large traders must maintain books and
records for related non-reportable transactions is fully consistent with this philosophy. The

Commission’s proposal would even include trades on foreign boards of trade within this special

we


call authority so that the Commission could obtain access to transaction detail from a large
futures trader on both a U.S. exchange and a foreign exchange in the same commodity. The
Commission’s proposal illustrates that the agency’s existing authority is substantial and
adaptable to current market needs and conditions.

Some have questioned how well the existing anti-manipulation defenses work
when more than one energy derivative market exists. In FIA’s view, multiple trading facilities,
like NYMEX and the Intercontinental Exchange today in energy, only enhance the need for
vigorous CFTC oversight. When more than one market is trading and neither has self-regulatory
authority over the other, it is even more important that CFTC market surveillance have ready
access to all relevant large trader information. This principle applies whether the two (or more)
related markets are DCMS, DTEFs, EXBOTs or ECMS. None of those markets would be able
to survey, or should be expected to survey, all relevant positions on its competitor trading
platform. Nor would we want one trading platform operator to take action against traders on its
competitor’s platform for claimed trading improprieties. That kind of dueling private police
actions could lead to market pricing instability.

If we are to have same commodity competition among trading facilities, as the
CFMA contemplated and FIA has espoused, then the Commission must conduct this kind of
multiple market surveillance. This is perfectly consistent with the statute. In the CFMA itself,
Congress signaled that promoting multiple trading platforms in energy derivatives did not mean
that price manipulation prevention should be short-changed. Instead, Congress made clear in the
statute that for any energy or other “exempt commodity” transactions conducted on a “many to
many” trading facility -- whether that facility was a DCM, DTEF, or ECM -- the Commission

was empowered to enforce the statute’s prohibition against price manipulation.