[Senate Hearing 113-248] [From the U.S. Government Publishing Office] S. Hrg. 113-248 REAUTHORIZATION OF THE COMMODITY FUTURES TRADING COMMISSION ======================================================================= HEARING before the COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY UNITED STATES SENATE ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ JULY 17, 2013 __________ Printed for the use of the Committee on Agriculture, Nutrition and Forestry Available via the World Wide Web: http://www.fdsys.gov/ ---------- U.S. GOVERNMENT PRINTING OFFICE 87-566 PDF WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY DEBBIE STABENOW, Michigan, Chairwoman PATRICK J. LEAHY, Vermont THAD COCHRAN, Mississippi TOM HARKIN, Iowa MITCH McCONNELL, Kentucky MAX BAUCUS, Montana PAT ROBERTS, Kansas SHERROD BROWN, Ohio SAXBY CHAMBLISS, Georgia AMY KLOBUCHAR, Minnesota JOHN BOOZMAN, Arkansas MICHAEL BENNET, Colorado JOHN HOEVEN, North Dakota KIRSTEN GILLIBRAND, New York MIKE JOHANNS, Nebraska JOE DONNELLY, Indiana CHARLES E. GRASSLEY, Iowa HEIDI HEITKAMP, North Dakota JOHN THUNE, South Dakota ROBERT P. CASEY, Jr., Pennsylvania Christopher J. Adamo, Majority Staff Director Jonathan W. Coppess, Majority Chief Counsel Jessica L. Williams, Chief Clerk Thomas Allen Hawks, Minority Staff Director Anne C. Hazlett, Minority Chief Counsel and Senior Advisor (ii) C O N T E N T S ---------- Page Hearing(s): Reauthorization of the Commodity Futures Trading Commission...... 1 ---------- Wednesday, July 17, 2013 STATEMENTS PRESENTED BY SENATORS Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, Chairwoman, Committee on Agriculture, Nutrition and Forestry... 1 Cochran, Hon. Thad, U.S. Senator from the State of Mississippi... 3 Panel I Bentsen, Hon. Kenneth E., Jr., President, Securities Industry and Financial Markets Association, Washington, DC.................. 4 Duffy, Terrence A., Executive Chairman and President, CME Group, Chicago, Illinois.............................................. 6 Cooper, Adam (on behalf of Managed Funds Association), Senior Managing Director & Chief Legal Officer, Citadel LLC, Chicago, IL............................................................. 7 Kelleher, Dennis, President & Chief Executive Officer, Better Markets, Washington, DC........................................ 9 Roth, Daniel J., President & Chief Executive Officer, National Futures Association, Chicago, IL............................... 11 Panel II Lukken, Hon. Walter L., President and Chief Executive Officer, Futures Industry Association, Washington, DC................... 31 Guilford, Gene A. (on behalf of the Commodity Markets Oversight Council), National & Regional Policy Counsel, Connecticut Energy Marketers Association, Cromwell, CT..................... 33 Heck, John M. (on behalf of the National Grain & Feed Association), Vice President, The Scoular Company, Omaha, NE... 35 Russak, Donald A. (on behalf of the American Public Power Association), Executive Vice President and Chief Financial Officer, New York Power Authority, White Plains, NY............ 36 Colby, Jim, Assistant Treasurer, Honeywell International, Morristown, NJ................................................. 38 ---------- APPENDIX Prepared Statements: Chambliss, Hon. Saxby........................................ 50 Cochran, Hon. Thad........................................... 53 Bentsen, Hon. Kenneth E., Jr................................. 54 Colby, Jim................................................... 65 Cooper, Adam................................................. 68 Duffy, Terrence A............................................ 81 Guilford, Gene A............................................. 89 Heck, John M................................................. 121 Kelleher, Dennis............................................. 126 Lukken, Hon. Walter L........................................ 150 Roth, Daniel J............................................... 157 Russak, Donald A............................................. 161 Document(s) Submitted for the Record: Stabenow, Hon. Debbie: American Bankers Association, prepared statement............. 172 American Cotton Shippers Association......................... 175 American Petroleum Institute, prepared statement............. 179 American Public Power Association............................ 185 Americans for Financial Reform, prepared statement........... 192 Better Markets, prepared statement........................... 204 CME Group, prepared statement................................ 218 Commodity Customer Coalition, prepared statement............. 223 Commodity Markets Council, prepared statement................ 234 Commodity Markets Oversight Coalition, prepared statement.... 241 Consumer Federation of America, prepared statement........... 249 Council of Institutional Investors, prepared statement....... 253 Futures Industry Association, prepared statement............. 256 Institute for Agriculture and Trade Policy, prepared statement.................................................. 260 Institute of International Bankers, prepared statement....... 267 IntercontinentalExchange (ICE), prepared statement........... 271 INTL FCStone, prepared statement............................. 273 Los Angeles Department of Water and Power (LADWP), prepared statement.................................................. 279 Managed Funds Association, ``Reauthorization of the Commodity Futures Trading Commission'', April 30, 2013............... 282 Michigan Municipal Electric Association, prepared statement.. 295 National Association of Manufactures, prepared statement..... 298 National Cattlemen's Beef Association, prepared statement.... 301 National Council of Farmer Cooperatives, prepared statement.. 302 National Farmers Union, prepared statement................... 305 National Futures Association, prepared statement............. 308 National Grain and Feed Association, prepared statement...... 312 National Introducing Broker's Association, prepared statement 316 National Rural Electric Cooperative Association, prepared statement.................................................. 319 Nextera Energy Resources, ``Top Legislative Items for CEA Reauthorization'', prepared statement...................... 321 Northeast Public Power Association, prepared statement....... 331 Premier Metal Services, LLC, prepared statement.............. 334 RJO'Brien, prepared statement................................ 353 Securities Industry and Financial Markets Association (SIFMA), prepared statement................................ 386 Southwest Airlines Co., prepared statement................... 396 Sutherland, prepared statement............................... 400 The Business Council for Sustainable Energy, prepared statement.................................................. 406 The Depository Trust & Clearing Corporation (DTCC), prepared statement.................................................. 408 The Farm Credit Council...................................... 417 U.S. Commodity Futures Trading Commission, prepared statement 428 United States Cattleman's Association, prepared statement.... 430 Washington Public Utility Districts Association, prepared statement.................................................. 435 Cooper, Adam: Managed Funds Association, ``Recommendations for FSOC Members-Regulators on the Protection of Non-public, Sensitive and Proprietary Information'', May 2013.......... 438 Duffy, Terrence A.: CME Group, ``Considerations Regarding the Equivalence Decision and Recognition as a Third Country CCP under Articles 25 EMIR''......................................... 454 Roth, Daniel J.: Customer Protection Initiatives.............................. 472 Question(s) and Answer(s): Stabenow, Hon. Debbie: Written questions to Dennis Kelleher......................... 476 Written questions to Daniel J. Roth.......................... 476 Written questions to Terrence A. Duffy....................... 477 Written questions to Hon. Walter L. Lukken................... 477 Written questions to Gene A. Guilford........................ 477 Written questions to John M. Heck............................ 477 Cochran, Hon. Thad: Written questions to Terrence A. Duffy....................... 478 Written questions to Daniel J. Roth.......................... 478 Written questions to Adam Cooper............................. 479 Written questions to Hon. Walter L. Lukken................... 479 Written questions to John M. Heck............................ 479 Gillibrand, Hon. Kirsten: Written questions to Daniel J. Roth.......................... 481 Heitkamp, Hon. Heidi: Written questions to Terrence A. Duffy....................... 482 Written questions to Daniel J. Roth.......................... 482 Written questions to John M. Heck............................ 483 Written questions to Hon. Walter L. Lukken................... 483 Duffy, Terrence A.: Written response to questions from Hon. Debbie Stabenow...... 485 Written response to questions from Hon. Thad Cochran......... 486 Written response to questions from Hon. Heidi Heitkamp....... 490 Guilford, Gene A.: Written response to questions from Hon. Debbie Stabenow...... 492 Kelleher, Dennis: Written response to questions from Hon. Debbie Stabenow...... 499 Lukken, Hon. Walter L.: Written response to questions from Hon. Debbie Stabenow...... 507 Written response to questions from Hon. Thad Cochran......... 507 Written response to questions from Hon. Heidi Heitkamp....... 509 Roth, Daniel J.: Written response to questions from Hon. Debbie Stabenow...... 510 Written response to questions from Hon. Thad Cochran......... 512 Written response to questions from Hon. Kirsten Gillibrand... 513 Written response to questions from Hon. Heidi Heitkamp....... 514 REAUTHORIZATION OF THE COMMODITY FUTURES TRADING COMMISSION ---------- Wednesday, July 17, 2013 United States Senate, Committee on Agriculture, Nutrition and Forestry, Washington, DC The Committee met, pursuant to notice, at 2:37 p.m., in room 216, Hart Senate Office Building, Hon. Debbie Stabenow, Chairwoman of the Committee, presiding. Present: Senators Stabenow, Brown, Klobuchar, Gillibrand, Heitkamp, Donnelly, Cochran, Roberts, Chambliss, Boozman, Johanns, Grassley, and Thune. STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY Chairwoman Stabenow. Well, good afternoon. The Committee on Agriculture, Nutrition, and Forestry will come to order. We appreciate all of our witnesses today. We do have two very important panels with a lot of witnesses to hear from, and we are looking forward to doing that today in a timely manner as well as follow-up discussions. I should also note for members that we may very well be interrupted on votes. We are hoping that they will hold off on that, but we may be. If we are, we will apologize in advance, but I know that most of you know how this works in terms of going down to the votes. And so we will manage it if it comes. We do have some business, a housekeeping matter that we need to attend to as we begin our hearing, and that is, Senator Casey is coming--I see that he is not here at the moment, but he is now coming back to our Committee. Senator Cowan was on the Committee during his time in the Senate. Senator Casey was gracious enough to step aside to other committees so that Senator Cowan could serve on the Agriculture Committee. He will now be assuming Senator Cowan's Subcommittee assignments, and we have the good fortune of having them be identical to the assignments that Senator Casey had when he left us. So we know that he will come back as Chairman of the Subcommittee on Nutrition, Specialty Crops, Food, and Agricultural Research. So we have no official items at this point other than to welcome him back to the Committee, and we will do that when he arrives. In the more than 150 years that we have had futures markets in this country, there have been cases that test the stability of the system. In the 1950s, a pair of traders in Chicago were able to corner the market on onions. They bought shorts on onions and flooded the market, driving the price down to pennies. Farmers in the Midwest were devastated and many had to file bankruptcy. As devastating as the onion scandal was to those farmers in Michigan and Indiana, and Illinois, it was nothing compared to the near collapse of the global financial markets in 2008. We cannot forget that 8 million hardworking men and women lost their jobs. Pensions and retirement savings went up in smoke. A record wave of home foreclosures swept across the countries, leaving devastated communities in the wake. There was no question that we needed serious market reform. As this Committee begins the process of reauthorizing the Commodity Futures Trading Commission, we need to examine the lessons from the past and consider ongoing challenges in the system. We want to make sure the agencies responsible for protecting these markets have the authority, the staff, and modern technology that they need to do the job. This Committee has been closely monitoring the MF Global case where customers' funds, money that rightly belonged for farmers and businesses and individuals all across the country, went missing. We continue to focus on three goals: getting customers their money back--and certainly there has been terrific progress there; holding anyone engaged in wrongdoing accountable; and ensuring that proper customer protections are in place so that something like this does not happen again. I appreciate the important steps the Trustees, market participants, and the Commission have already taken toward that objective, but we all know there is more work to do. As several witnesses will testify today, there are lessons to be learned not just from MF Global's failure but also that of Peregrine Financial Group. The cause of their failures may be different, but the resulting effect on customer confidence is the same. These markets have also been tested by the LIBOR scandal, data security breaches, occasionally unexplained price volatilities, and technology challenges that raise serious concerns about the ability of our markets to protect consumers. I am eager to hear from market participants testifying today about their suggestions and concerns for improving the CFTC and how these markets are supervised and protected. As we begin the reauthorization process, let me say again, as we all know in our Committee, that we will work together like we did on the farm bill. It will be collaborative, it will be bipartisan, it will be consensus driven, and it will lead to success because we work together. We intend to use that model as we look at reauthorizing the CFTC. In the coming weeks, we will announce additional hearings as well as staff briefings that more closely examine the issues presented to us today, and I look forward to working with my distinguished Ranking Member, Senator Cochran, and all of the very experienced and distinguished members of the Committee as we write and pass very important legislation to reauthorize the CFTC. I would now turn to Senator Cochran. STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM THE STATE OF MISSISSIPPI Senator Cochran. Madam Chair, it is a pleasure to join you and the other members of the Committee in reviewing the statements of the witnesses who are here to testify before our Committee today. The Commodity Futures Trading Commission reauthorization is before the Committee for review as we evaluate recommendations for modifications or improvements, and that is what I hope the witnesses can share with us today in terms of their views and their ideas for any changes in the law that need to be considered by the Committee. We have others who are here today to hear from the witnesses, and the witnesses themselves, so I am pleased to join you in welcoming all of them, and thank them for their cooperation with our Committee. Chairwoman Stabenow. Thank you very much, and welcome again. We have two excellent panels, and we appreciate your time today. Senator Chambliss. Madam Chair? Chairwoman Stabenow. Yes, Senator Chambliss. Senator Chambliss. Could I ask unanimous consent that a very brief statement I have be inserted in the record? Chairwoman Stabenow. Absolutely. Without objection, and that reminds me to also indicate that we are happy to accept opening statements from any of the members of the Committee. In the interest of time, because we have two large panels, we will move forward, but we certainly want to receive any statements from members. [The prepared statement of Hon. Saxby Chambliss can be found on page 50 in the appendix.] Chairwoman Stabenow. And, of course, as you all know, we will ask for 5 minutes in testimony, but, of course, we want whatever you would like to give us in terms of written testimony. So let me introduce the full panel, and then we will ask for 5 minutes in opening statements. First we have the Honorable Ken Bentsen, president of the Securities Industry and Financial Markets Association. From 1995 to 2003, he served as a Member of the U.S. House of Representatives from Texas. Several of us served with you. It is wonderful to see you again. He sat on the House Financial Services Committee, and was an active participant in the drafting of the Commodity Futures Modernization Act. Our second witness is also no stranger to this Committee or the markets: Mr. Terry Duffy, executive Chairman and president of the CME Group. Mr. Duffy has been a member of CME since 1981. Also, in 2003, he was appointed by President Bush as a member of the Federal Retirement Thrift Investment Board. Welcome. Next is Mr. Adam Cooper, someone who we have also appreciated coming before the Committee before, senior managing director and chief legal officer at Citadel LLC in Chicago, where he is responsible for Citadel's legal compliance and regulatory affairs functions. He is here today on behalf of the Managed Funds Association, an organization he knows well, having served two terms as chairman, and I also have to always say he is a proud graduate of the University of Michigan. So we know you know what you are talking about. Our fourth witness is Mr. Dennis Kelleher, who also knows the Senate well, as a distinguished staffer for many, many years. He is President and CEO of Better Markets. Previously Mr. Kelleher served as a litigation partner with Skadden Arps specializing in securities and financial markets, and it is great to see you. Mr. Roth, it is wonderful to have you back as well. Dan Roth is the president and CEO of the National Futures Association, where he has been since 1983. Prior to joining NFA, Mr. Roth was an attorney focused on general litigation and an assistant attorney general in Cook County, Illinois. Thank you very much for joining us, and we will start with Congressman Bentsen. STATEMENT OF THE HONORABLE KENNETH E. BENTSEN JR., PRESIDENT, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, WASHINGTON, DC Mr. Bentsen. Thank you, Chairwoman Stabenow, Ranking Member Cochran, and members of the Committee. I appreciate the opportunity to testify on behalf of the Securities Industry and Financial Markets Association on the reauthorization of the CFTC. Title VII, as you know, of the Dodd-Frank Act created a broad new regulatory regime for derivative products and seeks to reduce systemic risk by mandating central clearing, capital requirements, collection of margin for uncleared swaps; to protect customers through enhanced collateral safeguards and external business conduct requirements; and to promote transparency through reporting requirements, new business conduct rules, and required trading of swaps on exchanges or swap execution facilities. SIFMA supports many of the goals of Dodd-Frank's Title VII. However, we remain concerned that regulators, especially the CFTC, are interpreting and implementing many of these provisions--or how they are interpreting and implementing many of these provisions. I would like to highlight several issues that we would like to see addressed in the CEA reauthorization which we think will have a profound effect on the success of Title VII and the marketplace. With respect to cross-border treatment of swaps, Section 722 of Dodd-Frank limits the CFTC's jurisdiction over swap transactions outside the United States to those that ``have a direct and significant connection with activities in, or effect on, commerce of the United States'' or are meant to evade Dodd- Frank. In seeking to clarify its jurisdiction, on July 12th, the CFTC voted to approve final cross-border guidance, as well as a phase-in exemptive order. First and foremost, we believe it to be imperative that the CFTC, SEC, and global regulators coordinate their work on implementing OTC derivatives regulatory reform in furtherance of the G-20 commitments. We believe that the international nature of the swaps market makes such global coordination, in addition to domestic coordination, critical in order to achieve an appropriate level of oversight of swaps activities and further help to avoid unnecessary market disruption. While it is a little too early to get a full read of the guidance and exemptive order that were put out, because they just--actually we are in the third round of the exemptive order and still going through the guidance that was put out yesterday. We believe and we hope that it moves towards better coordination, but we believe that the Committee in the CEA should take a look at how we can streamline and enhance that coordination particularly among the CFTC and the SEC. In addition, I would like to talk about the Swap Push-Out Rule, Section 716 of Dodd-Frank. This is a provision that was added in this body but not really debated in the normal process through the other body and something that the prudential regulators in particular that the then-Chairman of the FDIC, Sheila Bair, and the current Chair of the Federal Reserve Board, Ben Bernanke, argued against, believing that it would affect their ability to prudentially regulate banks where swaps activities take place. And we would encourage the Committee to consider inclusion of bicameral legislation that has been introduced by Senators Johanns, Hagan, Toomey, and Warner, S. 474, that would amend this provision. I would note that the regulators have already forestalled its implementation, and so clearly they are struggling with this provision as well. Likewise, with respect to swap execution facilities, this is a situation where the CFTC and the SEC have gone in different directions. The CFTC, in their rule that was finalized earlier this year, came out with a rule that we think does not fit with where the marketplace is, and particularly from our asset manager members who are very concerned about the minimum mandatory Request for Quote model that is imposed by the CFTC's final rule, and our view from our asset manager standpoint is that this rule will actual be counterproductive and end up costing asset managers clients who utilize the swaps markets for the benefit of their investors, their fund holders, and the like. And this is an area where, like the House has adopted on a couple of occasions, that the Committee should look at going back and making further clarification on how SEFs are treated. Finally, I would raise with the Committee a provision in the Basel III company standards which were recently adopted by the Federal Reserve Board and interimly adopted by the FDIC. And, in particular, it has to do with the credit valuation adjustment. This is a provision that addresses capital put against by the dealer on swaps with non-financial counterparties. In Europe, under the European Union, they have taken a different approach because of problems in how CBA was developed by the Basel Committee, and this results, in our view, in a fragmentation between the U.S. and the EU, and it is something that we think that the Committee and perhaps the FSOC should take a look at. So we would encourage the Committee to take a look at that. With that, I will yield back the balance of my time. [The prepared statement of Mr. Bentsen can be found on page 54 in the appendix.] Chairwoman Stabenow. Thank you very much. I would ask other witnesses to take notice, a former Congressman made it within 2 seconds of 5 minutes. That was very good. Mr. Duffy, welcome back. STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN AND PRESIDENT, CME GROUP INC., CHICAGO, ILLINOIS Mr. Duffy. Thank you. Good afternoon, Chairwoman Stabenow, Ranking Member Cochran, and Committee members. I want to thank you for the opportunity to testify today regarding the reauthorization of the CFTC. Dodd-Frank subjected the unregulated, opaque OTC swaps market to a new regulatory regime based largely on the successful model for futures exchanges and clearinghouses. The CFTC was granted power to adopt regulations to implement this new model. While the Commission and the staff are to be commended for their efforts to fix the swaps market, the Commission rules have often gone far beyond Congress' intent. In some instances, the Commission has implemented Dodd-Frank by uncoordinated and inflexible rules that would have brought the industry to a standstill absent several last-minute no-action relief letters. The Commission used its swap mandate as a pretext to impose needless rules on the robustly regulated futures market. Congress did not intend to rewrite the rules of this well- functioning, highly regulated marketplace. As the CFTC contemplates its remaining rules to implement Dodd-Frank, we encourage the Committee to ensure that these rules remain within the congressional mandate and do not undermine the ability of business in the United States and worldwide to continue to manage risk. The agency's initial proposal to impose its rules across international borders without regard to local rules or regulations had threatened to expose the industry to conflicting duties and set the stage for retaliation from foreign regulators. We welcome last week's agreement between the CFTC and the European Commission on a ``Common Path Forward.'' We are hopeful that this positive development will lead to the U.S. and EU regulators achieving workable mutual recognition of derivatives trading and clearing regulation. Customer protection was noted in many responses the Committee received on reauthorization. Customer protection and market confidence are the cornerstones of CME's business. Since the failure of MF Global and Peregrine, CME and others have implemented numerous rules to strengthen and protect the customer protection of futures commission merchants. For example, daily access to aggregated customer balances of banks facilitates our risk-based reviews of FCMs. The CFTC has proposed rules that codify these initiatives, which we support. However, we urge the CFTC to reject other proposed requirements such as the residual interest proposal. That would likely drive out smaller FCMs that serve the agricultural community out of business in this country. It is also essential for customer protection and healthy U.S. derivatives markets that the agency which oversees us be adequately funded. But we strongly oppose the administration's proposal to fund any of the proposed $315 million of the CFTC's budget with a transaction tax. Such a tax will substantially increase the cost of market making, an essential source of market liquidity, as well as business costs for all customers, even those the administration wants to exempt. It will reduce liquidity, increase volatility, and impair efficiency-raising hedging costs for farmers, ranchers, and other commercials which will be passed on to consumers in the form of higher prices for food and other goods. Unexpected funding may be collected when volumes drop because market participants are driven out of U.S. markets. Last week, regulators in India saw derivatives volume drop by more than a third immediately following implementation of a 1- percent transaction tax. These are just a few of the many issues that have been submitted to the Committee in connection with your consideration of CFTC reauthorization. We stand ready to be a resource to the Committee on these and other critical issues to the futures and derivatives marketplace. I want to thank you for your time and attention, and I look forward to answering any questions you may have. [The prepared statement of Mr. Duffy can be found on page 81 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Cooper, welcome. STATEMENT OF ADAM COOPER, SENIOR MANAGING DIRECTOR AND CHIEF LEGAL OFFICER, CITADEL LLC, CHICAGO, ILLINOIS, ON BEHALF OF MANAGED FUNDS ASSOCIATION Mr. Cooper. Thank you very much, Chairwoman Stabenow, Ranking Member Cochran, members of the Committee. My name is Adam Cooper. I am senior managing director and chief legal officer of Citadel LLC. Citadel is a financial institution that engages in a wide range of asset management and capital markets activities on a global basis. I am here today on behalf of Managed Funds Association and its members, and I am pleased to provide testimony at today's hearing on reauthorization of the CFTC. MFA represents the majority of the world's largest hedge funds and is the primary advocate for sound business practices for the alternative investment industry. As fiduciaries to our investors and as customers ourselves, we share with members of this Committee a keen interest in ensuring that applicable rules provide a strong framework for the market and its participants. Though we have made progress since the financial crisis, there is much still to be done. I would like to highlight a few points in this regard. First, protection of customer collateral. MFA has been a vocal and consistent advocate for central clearance of derivatives transactions. Getting clearing right entails many complex, legal, and operational issues. One important element is the framework for protecting the property of customers who clear swaps through FCMs. Here the CFTC has chosen LSOC, a model which provides an additional level of customer protection over other models. We believe, however, that Congress could enhance the customer protections that LSOC and other models would provide. Specifically, amendments to Chapter 7 of the Bankruptcy Code could ensure that, upon an FCM's insolvency, customer assets posted as collateral on cleared swaps would not be subject to pro rata distribution. Moving on to CPO registration, the Dodd-Frank Act and CFTC rulemakings have broadened the regulatory framework to include many entities that were not formerly subject to CFTC regulation. MFA has been consistent in supporting elimination of gaps in regulation. However, the repeal of CFTC Regulation 4.13(a)(4) extends the regulatory umbrella more broadly than is necessary. This creates a very real risk of scarce resources being spread too thin at a time when we need our regulators to focus on the mission at hand. We urge the Committee to examine this issue in detail. Turning next to CFTC and SEC coordination, the CFTC and the SEC have stepped up their cooperation in recent years, and all market participants have been the better for it. But much work remains to be done. For example, last week, the SEC adopted rules under the JOBS Act to eliminate the ban on general solicitation for certain private placements. The CFTC's regulations were drafted a number of years ago to be consistent with the SEC's rules on private placements. We believe it is now time for the CFTC to adopt complementary rules to effect Congress' intent under the JOBS Act. The many systemic risk filing requirements required under Dodd-Frank represent further examples where greater coordination is needed. Currently an entity that is registered with both the CFTC and the SEC face up to three different filing requirements, that is, with the SEC, the CFTC, and the NFA. We recognize and support that regulators must have the information that they need, but steps must be taken to reduce unnecessary and costly burdens resulting from duplicative requirements. Moving on to confidentiality, MFA has supported congressional and regulatory efforts to increase the flow of information to regulators. We appreciate the need for regulators to be well informed. Yet it is of paramount importance that our laws require regulators to take all steps necessary to preserve the confidentiality of that information and, further, that robust protections exist with respect to the sensitive and proprietary intellectual capital of asset managers. Today a fund manager filing a document with the SEC has greater legal certainty of the confidentiality than if that manager filed the very same document with the CFTC. We believe the CEA should be amended to provide the same protections to CFTC registrants as the Advisers Act provides to investment advisers. Finally, international cooperation. MFA members engage in financial transactions in virtually every market around the globe. We are supportive of thoughtful regulations to ensure market integrity and to provide a dependable legal infrastructure in which to trade. But ensuring a well- functioning global market depends on coordination among regulators. It is simply unworkable to operate in an environment in which different jurisdictions have conflicting or overlapping rules. Market participants need to know which rules apply and under what circumstances, and those rules should make sense and reflect the economic realities of the transactions. MFA believes the recent efforts of the CFTC and the European Commission to address cross-border issues is a positive step, and we are hopeful that these efforts will lead to a workable framework. We urge this Committee to continue to exercise its leadership in oversight of these types of international agreements as they occur in the future. My written statement outlines these points as well as others in greater detail. I appreciate the opportunity for you to consider my views and am available to answer questions. Thank you. [The prepared statement of Mr. Cooper can be found on page 68 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Kelleher. STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, BETTER MARKETS, INC., WASHINGTON, DC Mr. Kelleher. Good afternoon, Chairman Stabenow, Ranking Member Cochran, and members of the Committee. Thank you for the invitation to Better Markets to testify today. Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in the domestic and global financial markets. I have detailed what Better Markets does in my written testimony. It is also available on our website, bettermarkets.com, and I will not repeat that here. I would like to say it is a privilege and honor to return to the Senate to testify after having been a staffer for three different Senators over the years and having worked with many of you during that time. I would like to make a few very quick points. First, the financial crash and its cost. Everyone likes to talk about the 3-year anniversary of the Dodd-Frank financial reform law, but too few even mention that just 5 years ago, the U.S. suffered the worst financial crash since 1929, which inflicted the worst economy on the United States since the Great Depression. Only massive taxpayer and Government bailouts prevented the total collapse of the financial system and a second Great Depression. As the Chairwoman noted at the beginning, the American people paid and are still paying a very high price for that, including slow to no growth, persistently high unemployment, tens of millions of homes underwater, massive deficits, unprecedented Fed policies like zero interest rates and trillions in bond purchases, among so much more economic wreckage across our country. Ultimately that is going to cost the United States more than $12.8 trillion, as you all know, from many of the damages inflicted on your constituents. As is well known, unregulated, non-transparent over-the- counter derivatives markets were at the heart of causing and spreading those financial and economic crises and costs, and that is why derivatives regulation is vital to effective financial reform as well as the protection of the American people, taxpayers, our Treasury, and our financial system. Second, the Committee should avoid becoming another battleground in the war over financial reform and should not relitigate Dodd-Frank. The responsibility for the CFTC was dramatically expanded from the $37 trillion notional futures market to include the $340 trillion notional U.S. swaps market. That was a monumental, transformative change for the agency and the markets where there are trillions of dollars at stake. It was inevitable and no one should be surprised that whatever the CFTC did, it was going to be highly controversial and hotly contested and, unfortunately, recontested. Yet the least funded, smallest financial regulatory agency, the CFTC, has taken the new laws and mandates seriously and done an outstanding job of translating the financial reform law into a reality. They have not done a perfect job, and we have not agreed with all that they have done. No one has. But that does not mean the new law should be changed on a piecemeal basis, especially given that they are now just finalizing most of their rules and few have even been implemented. The complaints being raised are almost entirely speculative and from special interests seeking to advance their narrow self-interest. That is their right. But it is no basis to start changing laws and public policy prematurely. Given the historic changes being put in place, the CFTC should be allowed time to implement the rules, see how they work, determine if changes should be made, and given the opportunity to make them. That would be the appropriate time for considering whether statutory changes are necessary or appropriate. Now is not the time and reauthorization is not the place. I urge you not to let this Committee become the latest battle front in the war over financial reform. Third, the CFTC is woefully underfunded and simply cannot do the job Congress asked it to do and the job that the markets and investors desperately need it to do. I have detailed in my testimony those details and will only say that an agency with $200 or even $300 million in annual budget cannot properly regulate or oversee the futures and swaps markets with almost $400 trillion in notional trading. The CFTC has to have the authority to impose fees and be self-funded in whole or in substantial part. If not, it is being set up for failure. It is being asked to do so much that is so important without the resources it needs to get the job done. That will be a gross disservice not just to investors but to market participants themselves. Fourth, and last, the industry claims for so-called innocent-sounding cost/benefit analysis is, in fact, little more than industry-cost-only analysis, and it must be seen for what they are most of the time: a back-door attempt to kill or gut financial reform. The proposals will impose onerous, costly requirements. Calls for cost/benefit analysis sound good in theory, but they are often catastrophic in reality for the public interest. The CFTC has done economic analysis for decades as required by the CEA. Tellingly, there have been few, if any, complaints about their work until it began implementing financial reform. That tells everybody what is really going on here. Thank you, and I look forward to your questions. [The prepared statement of Mr. Kelleher can be found on page 121 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Roth. STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS Mr. Roth. Thank you, Senator. As this Committee begins the reauthorization process, it is entirely appropriate that your attention and all of our attention is focused on customer protection issues. For the longest time, the futures industry had a very well deserved impeccable reputation for safeguarding the integrity of customer funds. But twice in the last 18 months, first at MF Global and then at Peregrine, that reputation took a serious hit as customers suffered very painful losses, and losses that, frankly, we as regulators are supposed to prevent. Clearly some dramatic improvements were required, and over the last 18 months we have worked very, very closely with the CFTC and with the CME and other SROs to bring about those changes, and I have detailed those in my written testimony, but I would like to highlight a couple of them in my oral remarks. First, the heart of the matter really is the protection of customer segregated funds. And for years and years, we have required FCMs to file daily statements with NFA regarding the amount of customer funds that they are holding, and we analyze those statements and look for trends. But we confirmed those balances to outside sources in the past only as part of our annual examination. When we would go out and do an examination of an FCM, we would then confirm those balances to outside sources such as the banks actually holding the customer funds. And when we did that, we did it through a paper confirmation process where we would mail a confirmation request to the bank and then the bank responded directly to NFA, again, in writing. In 2012, we switched to an electronic confirmation process, and it was that e-confirmation process that uncovered the fraud at Peregrine. But even then it was still just part of the annual examination, and we felt we needed to do a much better job, and that is what we have done. Together with the CME, we have built a system now where we have daily confirmation of all seg bank balances so that we still receive reports daily from the FCMs regarding the amount of funds they are holding, but now for over 2,000 bank accounts that are holding customer segregated funds, we also receive a confirmation from the bank. We then perform an automated comparison between what the firm is saying and what the bank is saying to identify any suspicious discrepancies. This is a huge improvement from where we were just a year ago. And although it is a big improvement, it is certainly not the only one that we have done. Again, as I have detailed in my testimony, we have increased dramatically FCM financial transparency. We have created a situation in which customers can come to the NFA website and there they can find financial data on all FCMs, key financial data both current and historical, so that they can do their due diligence, and that information includes information on how the FCM is investing customer funds. We have set stringent requirements for FCMs regarding minimum internal controls. We have adopted additional safeguards to prevent the misuse of customer segregated funds. We have had a top-to-bottom outside examination of all of our examination and audit practices, and we are adopting the improvements that were suggested. I would like to stress that on each one of those items, each one of those improvements, we worked very closely with the CFTC, and we were very gratified when the CFTC came out with its rule proposals that so much of the CFTC's proposal was really adopting the changes that we had already made. So a lot has been done, but there is always more to do, and two items in particular that I would like to mention. One, I think both the Peregrine and the MF Global situations highlighted certain issues regarding FCM insolvencies and bankruptcies. And those are very complicated issues. We are working with every facet of the industry to try to find common ground on proposals that everyone can agree to. But I can tell you, our primary focus is to ensure that an FCM insolvency, if there is a shortfall in customer segregated funds, then customers receive the top priority. That, in our view, is the right result. That is the result that is called for under CFTC rules, and that is the result we want to ensure is always achieved in a bankruptcy. With respect to customer account insurance, both MF Global and Peregrine have renewed questions about whether we should have customer account insurance. That is a very serious question. It deserves a serious debate, and there are a lot of public policy issues involved. But you cannot have any rational debate on that issue, I do not think, until you first know what kind of insurance would we be buying and what are we going to pay for it. That may not be the endpoint of the discussion, but it is an essential starting point. And you cannot answer that question, frankly, unless you have cold, hard data and a lot of it, because you have got to go to the insurance companies and provide them with detailed, granular information so they can perform an actuarial analysis and determine their risk. We are working on that study with the FIA, with CME, and with the Institute for Financial Markets. That is well in progress, and we hope to have it completed in the next few weeks, hopefully by mid-September. I am sorry I went over my limit by 15 second at this point, but we look forward to working with Congress and the industry, and I would be happy to answer any of your questions. [The prepared statement of Mr. Roth can be found on page 157 in the appendix.] Chairwoman Stabenow. Thank you very much, Mr. Roth. And that is all right. We had some time that others gave up on your behalf here. Thank you to each of you. Obviously we have a lot of questions. There are a lot of things we could cover, and in the limited time in each of us asking 5 minutes of questions, I would ask just that you be as concise as you can, because we have got a lot of ground to cover. When we look overall at so many different issues, the challenge for the CFTC really does relate them having the resources, the staff, the ability to do all that needs to be done in terms of accountability. There is a whole range of things that need to happen. But I want to start with the issue around resources because it is fundamental. It is not something that is just a side issue in terms of their being able to function. Mr. Duffy, you talked about the importance of adequate funding for the CFTC. At the same time, I know that you are opposed to user fees. And so what other options would you suggest for us as an alternative means of funding the agency. The SEC, other regulatory agencies have funding streams. CFTC does not. That is a serious impediment as we go forward and hold them accountable for decisions they make and the oversight that they have. So what would you suggest? Mr. Duffy. Well, it is difficult for me to come up with a suggestion for the Government, but I will say a couple different things. When we talk about liquidity and what the costs could be to the American consumer if a small fee or transaction tax was imposed on the market maker liquidity pools, even though the pool--some of it has been exempt, it could be extraordinary. I gave you a quick example of what happened in India when a third of their market makers went away. When the market makers go away, Senator, the bid-offer goes wider. When a bid-offer goes wider, the cost of business goes up. When the cost of business goes up, it gets passed on to the consumers. If you want to find a quick way to make $315 million with a transaction tax, it will cost you $1.5 billion to do it. So that is not a smart thing to do. Chairwoman Stabenow. So the question is, What? I mean, I appreciate--I have heard that concern that---- Mr. Duffy. It is hard to say what is the concern, but I think we have to make sure--no disrespect to Mr. Kelleher, and I am not going to, but when we talk about $400 trillion of over-the-counter derivatives that the CFTC is going to be regulating, you have to realize that those $400 trillion is about 2,000 transactions. We do not weigh the money. You know, we do not have to say, it can cost a lot more to do this. It does not matter what the notional value is. It is about the transaction volume that is associated with it. Our world today does 20 million transactions a day. Chairwoman Stabenow. No, I appreciate that. I guess what I am asking---- Mr. Duffy. So there is a big difference---- Chairwoman Stabenow. We have a seriously underfunded agency that has seen about---- Mr. Duffy. You know, it is hard for me to stand up here---- Chairwoman Stabenow. --a significant increase in their responsibilities. Mr. Duffy. --and say that, you know, it benefits the taxpayer by paying the $305 million. But the reality is, ma'am, it benefits the taxpayer by paying the $305 million to fund the CFTC, because in return the risk management that is associated with it goes from farmers to reinsurers to small bankers is a cost that is immeasurable. Chairwoman Stabenow. So you are saying basically taxpayer funded. Mr. Duffy. That is the way it has been funded for years, yes, ma'am. Chairwoman Stabenow. Mr. Roth, the National Futures Association is self-funded with members' fees, dues, assessments. Have those fees been prohibitive in terms of expense to the industry? Have they impacted the markets negatively? Mr. Roth. Let me make a couple of points on that, Senator. First of all, we have a number of different regulatory spheres. We have futures compliance, now swaps compliance. We also have a market surveillance function we perform for certain contract markets and soon SEFs. And we oversee retail foreign exchange transactions that are off exchange. We try to make sure that each regulatory sector pays its own freight, that they carry their own weight. Most of it, for most of those sectors, that is done through membership dues. With respect to the futures activity, we do have an assessment fee that is imposed on trades and collected by FCMs, but I should point out that at the very outset when they were forming NFA, they were very careful and worried about taxing liquidity out of the market. So our fee has a very particular structure to it, so that our assessment fee does not apply to any trade that is conducted by a member of the contract market where the transaction is executed. So, really, we only assess-- about, oh, 22, 23, 24 percent of the overall trading volume is subject to our assessment fee, and it was structured that way specifically to avoid taxing liquidity out of the market. Chairwoman Stabenow. Thank you very much. Mr. Cooper, you talked about the need for consequences for breach of data security, a very serious issue, and I am wondering what sort of consequences would be appropriate. There is a proposal, broadly supported an indemnification provision from the Dodd-Frank Act. Would removing the provision harm data security? Or are there other ways to protect confidential data? Mr. Cooper. I do not think removing that provision would harm or risk confidentiality. That actually would enhance the flow of information to necessary parties. The consequence is accountability. We need to make sure that there are robust requirements imposed on the various regulators for this huge volume of information that is now flowing into them. We need to make sure that there are no asymmetries between the confidential protections afforded to a market participant giving information to one regulatory agency versus another. We need to synthesize and harmonize, in other words, the protections available between the CFTC and the SEC. Chairwoman Stabenow. Thanks very much. I have many more questions, and we will be following up with all of you, but I am going to turn now to my Ranking Member, Senator Cochran. Senator Cochran. Thank you, Madam Chair, and we appreciate all of the witnesses being here today to help us understand what the options are and what the appropriate action could be in helping to protect those who use the services of the markets to hedge and to protect themselves from marketing disasters as well as weather-related disasters that can make it very difficult in our economy. I wonder, for example, though, if some of the things that you end up hearing as suggestions for change or improvements or modernization might do more harm than good. You might just glance through some of the suggestions that we have already received and tell us, ``It is okay to consider this but please do not do it because it is going to be creating a problem that is bigger than the one that we already have.'' That may be a negative way to ask a question, but, Mr. Duffy, I would just ask you, could you take a shot at that and warn us against doing something that we might be talked into doing that really has a negative effect on the situation? Mr. Duffy. You know, Senator, I am a fairly firm believer that a one-line reauthorization is exactly what the industry needs right now. We do not need any additional burdens or changes. I think the industry has come light years in the last 10 years. Mr. Roth just gave you an example what we did in the last year alone. I think the industry has benefited immensely because of the things that we have done internally, and I would hope very much that Congress would take that into consideration and just go ahead and do a one-line reauthorization and not make too many changes. I think there are some menus or exemptions that I am sure some of my colleagues would like to see on behalf of their clients, and I would not be opposed to that. But I think overall less is better. Senator Cochran. Thank you. Thank you, Madam Chair. Chairwoman Stabenow. Thank you very much. Senator Brown. Senator Brown. Thank you. Mr. Duffy, I am intrigued, actually by your assertion perhaps of a one-line bill, what that might mean for the ability of--or taking away the ability of certain interest groups to make mischief in this derivatives market. Thank you, Mr. Kelleher, for your comments and reminder of what this hearing is all about, what reauthorization is all about, what this agency is all about, and your discussion of costs and benefits. There are costs to industry in much of this throughout the regulatory apparatus, but we know what the cost to society was, the cost to society was because we did not do some things we should have done 5 years ago, 10 years ago. Congressman Bentsen, nice to see you. I appreciated your comments about Dodd-Frank's Push-Out Rule, which requires banks with access to deposit insurance and the Fed's discount window to move derivatives trades to separately capitalize affiliates. My first question is for Mr. Kelleher. Despite the lessons learned from the financial crisis, the markets experienced, as we know, several significant disturbances, most recently last year's $6 billion London Whale trading losses. Such incidents should serve as a reminder that the rules are there to make banking--supposedly to make banking safer, not riskier. Give us your thoughts on the push-out provision, whether it is making our system safer or riskier. What are your concerns about proposed legislation to roll back this provision? Mr. Kelleher. Thank you, Senator. It seems to me that at the level of the purpose of the swap push-out provision, nobody can really disagree, which is that the entities, large entities engaged in high-risk and non-hedging trading put those activities in a separately capitalized subsidiary, which will not otherwise have access to taxpayer bailouts or the Fed window. That seems to me that everybody would agree on. Then the question becomes--and it came up during the--as many of you know, not just during the consideration but during the conference, and indeed, some of the statements made about the objections to the swaps push-out provision were actually made in April and May of 2010, prior to the conference, prior to the fix to this provision, which allowed commercial banks to engage in a variety of traditional activities, including, importantly, allowing hedging. So it was changed in conference. So some of the testimony that has been provided to you in writing actually cites objections to that provision that are inapplicable since it was put into law. So the swaps push-out provision is very important so that the non-hedging, non-traditional commercial banking activities in the derivatives market are in a separate subsidiary, separately capitalized, so that it does not take down the bank itself and does not end up with more taxpayer bailouts and access to the Fed window. Senator Brown. Thank you. Let me shift, Mr. Kelleher, to a different issue. I am concerned about the risks associated with banks' expanded business operations into physical commodity, energy, commercial business operations, warehousing, transportation, leasing, distributing commodities, one notable one in Chairwoman Stabenow's State. In a Reuters story, a trader said, and I want to quote: ``The truth of it is that having access to the physical markets is about optimization and knowledge. It gives the trader the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets. It is trading with material non-public information.'' He then goes on to say, ``The difference compared with equity markets is that it is perfectly legal.'' Mr. Kelleher, talk, if you would, about the potential or existing conflicts in market risks that arise from banks engaging in commodity and energy and commercial business operations, what it means for consumers, what it means for businesses that use those commodities. Mr. Kelleher. Well, I think it is clear that consumers and end users are getting squeezed in paying the price for the biggest banks in the country, moving into, in massive amounts, physical commodity storage and trading activities while at the same time they are engaging in the futures market and in the swaps market, and they have direct or indirect, partial or significant ownership in some of the exchanges. Now, the LME in London has changed that in the last 2 years, but what we have seen lately--and there has been some reporting in the last several days about the warehousing of aluminum and how companies from Coca-Cola to Coors to beer companies to, you know, auto manufacturers are getting squeezed and paying a fortune because there are bottlenecks that appear to be created for the purpose of generating cash for the banks at the expense of the end users and other market participants. So the conflicts of interest should be looked at really closely. We do not even have the data on it, and one of the things we suggest that the Committee does in reauthorization is get the CFTC authority to get this data so they can see what is happening in the physical markets by these banks, at the same time they can see what they are doing in the futures and swap markets. And then we will have a much better picture of the conflicts of interest. Senator Brown. Thank you. Thank you, Madam Chair. Chairwoman Stabenow. Thank you very much. Senator Roberts. Senator Roberts. Thank you, Chairwoman Stabenow and Ranking Member Cochran, for organizing this hearing and beginning the important process of reauthorization. This Committee's oversight of the CFTC is not taken lightly by any member, especially in light of the failures of MF Global and Peregrine. We are limited on time, and that is always the case here. I wish we had more time with the expert panelists, especially covering a range of topics. So I would like to ask at least some of the panelists answer in a yes or no fashion. I know that is difficult--these are very difficult for yes or no answers--and that it is not fair. But life is not fair. Representative Bentsen, good to see you, sir. As the CFTC works to implement the Dodd-Frank Act, there have been more than a few bumps in the road resulting in numerous no-action letters, exemptive relief, and enforcement delays. I am worried about certainty. Before proposing rulemaking or guidance, does the CFTC routinely conduct enough quantitative analysis regarding the costs and benefits of their regulations, in your opinion? Mr. Bentsen. No, Senator. Senator Roberts. For the cross-border application of derivatives regulation, should the CFTC have used a formal rulemaking process, including a cost/benefit analysis, instead of issuing the regulations through ``an interpretive guidance and policy statement''? Which, by the way, is over 300 pages long? Mr. Bentsen. Yes. Senator Roberts. Mr. Duffy, when Chairman Gensler was in front of this Committee in February, he was surprised by the pushback against their proposed rules on margin requirements. Has the CFTC taken the correct approach for customer protection by requiring a futures commission merchant, FCM, to have their customers meet margin deficiency at all times? Mr. Duffy. Has the Commission made sure that they meet it at all times? Senator Roberts. That is correct. Mr. Duffy. The exchanges do set the margins, and---- Senator Roberts. Just do not worry about it. Just say, ``No.'' [Laughter.] Mr. Duffy. Yes, sir. No. Senator Roberts. If left unchanged, will this requirement have a significant and negative impact on the agricultural sector of the market? Mr. Duffy. It could, yes. Senator Roberts. Has the CFTC relied too often on no-action letters, exemptive relief during the implementation of Dodd- Frank, creating confusion and uncertainty in the marketplace? Mr. Duffy. Without question, yes. Senator Roberts. Mr. Cooper, internationally--and I emphasize ``internationally''--the CFTC is working to implement final guidance on cross-border swaps and released their latest action late as of last week, notwithstanding the progress--and I give every credit in that regard--with the CFTC. I do have a lot of concerns with the CFTC trying to enforce regulations worldwide let alone imposing their regulations on all of our trading partners. For the scope and framework of international derivative regulations, are you concerned that there could be a patchwork of different regulations if the CFTC does not do a better job of harmonizing, not dictating, their efforts with their foreign partners? So, put another way, is it more important to get our regulations correct or, even better, in line with our counterparts across the world? Mr. Cooper. We certainly need certainty, we need consistency and harmonization, and certainty was provided in certain important respects by the CFTC's action with respect to the definition of ``U.S. person.'' Senator Roberts. So your answer is yes. Is that correct? Mr. Cooper. Yes. Senator Roberts. Thank you. For once in my time on the Committee, House or Senate, I am yielding back a minute and 2 seconds. Chairwoman Stabenow. I think we should make a special note of this in the record. It is the first time for Senator Roberts. Senator Gillibrand is next. I do not see her at the moment, so, Senator Heitkamp. Senator Heitkamp. Thank you so much, Chairwoman and Ranking Member, for pulling together this very important panel and these experts. I want to focus, I think, on just a couple issues, but not to belabor the point, but if you think that MF Global had impact globally and across the country, I can tell you that people in North Dakota were shocked, absolutely shocked, because it moved off the agricultural pages into the front page, talking about the risk that now our farmers and our producers thought was completely impossible to have incurred the loss. And most of them have recovered about 89 percent of their money. They are still waiting for the other 11 percent. And they wonder why people do not go to jail, and they wonder why this and how this could possibly happen in America when we have, in their opinion, one of the most regulated industries and regulated environments in the world. I am not here to point fingers or to assess blame. I am looking for solutions, and I am looking for a path forward. And, Mr. Duffy, I notice in your testimony, although not covered in your comments, is a discussion about insurance. And this has been a topic of many of the people who have come to visit me recently about potential expansions of products that could, in fact, mitigate risk. You mentioned that there is pending a Futures Industry Association study. Can you tell me when that study is going to be done? And can you give me any kind of preliminary insight on whether you personally, given your experience, believe that an insurance market could be created that would be helpful to mitigate risk? Mr. Duffy. Sure. Thank you, Senator. I think Mr. Roth also is involved in that study, and we are looking to have completion on that sometime in mid-September. So, you know, we have put a lot into the study, so we are both looking forward to the outcome of that information. Secondly, on the MF Global clients, this has been a very horrific incident in our industry, and people are wondering if somebody is going to go to jail. There is no question about it has been on the front pages. You know, you could put a cop on every street, as they say, and someone is still going to try to commit a murder. With respect to the monies, there is 99 cents on the dollar returned to all the 4d clients of MF Global. 4d clients are U.S. participants trading on regulated exchanges. They have 99 cents on the dollar. And then for 30.7 clients of MF Global, they have 97 cents on the dollar. Those are U.S. participants trading on a foreign exchange. So most of the people, the good people of North Dakota, should have 99 cents on the dollar back of their money. The people that had their money in a broker- dealer is a different story. That is an unregulated business, so that is maybe the number that you are referencing, ma'am. On the insurance itself, I have not been really a big proponent of insurance, but I do believe that if the participants want it, we should offer it. And I have no problem with that. We have a fund at the CME Group, as you may or may not know, that is called the ``Family Farmer and Rancher Fund.'' It is a self-insured, $100 million fund that we use to make sure if there is fraud or something like that, we will pay up to $100 million to these participants in total. I could not insure that fund without any major insurance company around the world. We have $158 billion of segregated funds in our world today. I do not know what the cost of that would be to insure. I think if people want to pay the premium for that insurance, they should have every right to do so. That is my personal viewpoint. I do not believe it should be legislated. I think this business will be crushed overnight if you legislate that type of insurance into the marketplace. So I think the optionality should certainly be there, and the FCMs should offer it up, and the exchanges and the other SROs should help the FCMs in facilitating that procedure. Senator Heitkamp. And not to belabor the point, but I think it is going to be extraordinarily difficult to see a product like that develop that is useful in the private sector. There is a reason why we have flood insurance; there is a reason why we have crop insurance. There is a reason why there is often a backstop that the taxpayers assume some of the risk going forward. I want to just spend a little bit of time talking about bankruptcy, because one of the issues obviously is a failure, even though it seems clear to me that when you have customer accounts that they ought to be the first ones out in a bankruptcy, I am a lawyer, I do not know why a lawyer would see it any differently than what I did, but obviously we have concerns about bankruptcy. Seeing that it might be exceedingly difficult to amend the Bankruptcy Code to deal with this, I want to proposed something and get anyone's reaction to this. If the law were to require that contracts in the CFTC-regulated markets included a subordination agreement that confirmed in writing that customer accounts were to be the first ones paid, would that have any undesired consequences, and would that help us solve the problem with a bankruptcy court that does not appreciate the fiduciary obligations? Mr. Duffy. I know Dan has got this in his testimony, but I will make one comment on that. I think that it makes sense, and it is hard to say that the consumer should not come first. But when you are looking at some of the smaller FCMs or if you just come out, the emergents that are in our world today that--you got to remember, banks will not clear your constituents, ma'am. They do not do that. They only clear the big participants. So the smaller brokerage firms need to clear the other participants. If, in fact, you made them subordinate to the clients, they may not be able to get funding to keep those smaller FCMs in business. That is just an unintended consequence. I am not saying it could happen, but that is one of the things, as a consumer, it is really hard for me to say that the customer should not be paid first. Chairwoman Stabenow. Thank you. Thank you very much, Senator. Senator Chambliss. Senator Chambliss. Thanks, Madam Chair. Mr. Cooper, testimony submitted by Better Markets refers to academic evidence suggesting that the aggregate level of speculation in the market adversely influences the behavior of prices and that more speculation does not always mean more efficient prices. The Commodity Markets Oversight Coalition on the second panel today has submitted an attachment to their testimony referencing a number of articles that purport to show that speculation degrades market quality or that high-frequency trading causes harm to the market. Now, we all know that every market needs both speculators and hedgers in order to function properly. I understand from your testimony that MFA supports a data-driven approach to position limits. Now, have you reviewed the testimony of Better Markets and the Commodity Markets Oversight Coalition? Are you familiar with the academic research? And could you just in general shed some light on this issue, please? Mr. Cooper. Thank you, Senator. What I would say is that there are a numerous academic and Government studies from the CFTC, GAO, OECD, plus international agencies all consistently commenting on the role of speculators in the market. Those studies--study after study--have concluded consistently that, first, they have not found excessive speculation to be the cause of market volatility in recent years; and, secondly, they show that policies restricting investors' access to derivatives markets would impair the ability of commercial participants in the markets to manage their risk. We are in favor of a data- driven approach, a very careful assessment of what the facts are with respect to position limits or other restrictions on the ability of traders generally to access the markets. Senator Chambliss. Mr. Duffy, with respect to high- frequency trading, some of the panel have raised concerns about the role of high-frequency traders in the marketplace. Some have suggested that this trading activity is responsible for market disruptions such as the mini-flash crashes in recent years or sudden price spikes. Can you give us your perspective on the role of high-frequency traders? And is this a term that has been actually defined by regulators? Mr. Duffy. Thank you, Senator. I think that high-frequency trading is getting a very clouded name at best right now. When it comes to mini-flash crashes or not, that basically does what market structure because of the fragmentation that we have in the securities world today where you do not have the vertical silos that pulls the liquidity in one central place. I think what is critically important for the American public to understand about high-frequency traders, trading is going fast. Technology is going to continue to go fast, and you are not going to put technology back in a bottle. So it is up to exchanges like CME Group, groups like NFA and others, to come up with ways to show the public how we are policing these participants, and that is exactly what we do. We spend over $40 million a year policing our marketplace, a lot of that dedicated toward high-frequency trading. We can say it all we want, that these are good liquidity providers, but we have to show the American public that we are making certain that nobody is front-running an order or anything else that they are being accused of doing. Senator Chambliss. Mr. Duffy, I had significant conversations with Chairman Gensler leading up to the ultimate draft and passage of Dodd-Frank relative to the way we are going to treat swaps and derivatives, which all of us knew some changes needed to be made, but I felt like that the direction we were heading in and where we wound up was pretty excessive, particularly with the regulations that we knew were going to be forthcoming from CFTC, and they have not even been completed yet. We still do not know what they all are. And the issue that I kept raising with Chairman Gensler was, What is this going to do to American markets versus European markets and Asian markets? And the standard answer I got was they will follow us. Well, I see where the--and, interestingly enough, I was in Europe on a couple of occasions after those conversations, and I related that conversation to some of the folks in Europe, and they just got this wry smile on their face. Can you give us the benefit of where we are with respect to competitive advantages or disadvantages as a result of Dodd- Frank today? Mr. Duffy. Well, I hear what Chairman Gensler is saying, that they will follow us, but I am still perplexed on seeing what laws that have been passed today in Europe or anything that has even been proposed or passed throughout Asia. There are things proposed in Europe but that have not yet passed. So we have already gone with the passage of Dodd-Frank. I just returned from a European trip, meeting with clients all throughout Europe, and when you make that reference to them, they are not just sitting around being beholden to the United States of America anymore. There are very sophisticated trading operations all throughout Europe, and they are garnering more and more market share each and every day, and this is something they feel quite excited about. So I think they are looking at it as an opportunity. We are all big believers in regulation, Senator, but I think we need less regulation with more teeth into it. We cannot keep writing a bunch of rules that everybody can just circumvent. Let us have rules that have teeth in them, and I think that is what the American public would want, and I think it is hard for the European counterparts or Asian counterparts to refute that type of activity. But we are not doing that. We are writing rules on listed derivatives markets today or listed futures markets that Congress did not have anything to do with in Title VII. It was about over-the-counter swaps. So hopefully we can get back to what we are supposed to be doing here, but I will tell you that folks, especially in Europe, are smiling quite nicely right now. Chairwoman Stabenow. Thank you very much. I will indicate to members that we have begun what will be two votes. I will continue for another 10 minutes. We will try to have another two members be able to ask questions. We will recess and then come back afterwards. So please come back at us. Senator Donnelly? I want to just say we are so glad to have Senator Donnelly chairing our Subcommittee on Commodities, Markets, Trade, and Risk Management, and his Subcommittee will be engaged in these issues, and we will turn to him. Senator Donnelly. Thank you, Madam Chairwoman. Thank you all for being here. I do not have an academic study in front of me, and I do not have a Government study in front of me. But I am going to tell you what has happened in my home State of Indiana in the last couple months. Gasoline was $3.40 one week. A week and a half later, 2 weeks later, $4.25. Any demand increase? None. Any supply reduction? None. I called to the refiners. I said, ``Are you making any less gas right now?'' Our two largest suppliers to the State. ``Absolutely not,'' both of them. Some refineries were down. It is a regular thing that has happened. You know, they were changing blends, regular thing that happens. But from $3.40 to $4.25. So I talked to everybody I could. Three weeks later, $3.13. That has nothing to do with supply and demand. But I will tell you what it did do. There are people in my State who were not able to buy food that particular week or had to cut down significantly on their groceries because of it, because all of a sudden their gas bill has gone from $40 to $60, and that extra $20 was the pair of pants for their kids or the groceries for their family. There is a widespread belief that the markets are broken, that supply and demand have nothing to do with the price anymore, and that the game is rigged. I called in to refineries to find out, and when they say, you know, ``We are producing at the same amount.'' Demand is down, and the price has gone from $3.40 to $4.25. And I go home every weekend. Here in D.C. it was $3.62 when it was $3.40 at home, and it was $3.62 when it was $4.25 at home. And you look for answers, and you say this is a rigged game, is what people think. Back in 2011--and nothing affects families more, it seems, in terms of this whole global world of finance that we see, this moving, that moving, that every week people are trying to make ends meet, have to fill up their tank. And it is what I hear almost more than anything. In 2011, Goldman Sachs analysts said for every million barrels on spec, 8 to 10 cents price increase. And, Mr. Cooper, I would ask, do you agree with that assessment? Mr. Cooper. I cannot comment on the Goldman Sachs report. What I would say, though, is if we cannot rely on academic studies, if we cannot rely on real-world examples, if we cannot embrace and acknowledge that a data-driven approach is the only way to really understand what the issues are here, then I am not sure what we are left with. We cannot have policies that would disincentivize participants from actively participating in the markets so as to provide the energy manufacturer and the farmer the ability to effectively manage their risks--so that there is liquidity. Senator Donnelly. Well, let me ask you this: Do you think if, instead of 421 million barrels on a speculative oil market today, there were 100 million barrels on a speculative oil market today, do you think that if it was 421 or 100 that the price would be the same for a barrel of oil? Mr. Cooper. I cannot comment on that, Senator. I am sorry. Senator Donnelly. Mr. Kelleher, do you have an opinion on that? Mr. Kelleher. Well, we have provided the data on plenty of studies that have shown, as have CMOC, that there is excessive speculation, and speculation is causing a tremendous amount of volatility. And, by the way, a lot of it is coming from this new great innovation from Wall Street called ``commodity index funds'' that nobody wants to talk about that pour somewhere between $300 and $400 billion a month into the markets every month, in the futures market over and over and over again. One of the things we also do not have, Senator, is data. The CFTC needs access to data because--and this is another place where the physical trading of these big banks comes into play. When you look at it, they are all reporting record profits. Look at the FICC number, the fixed income, currency, and commodities. They are making billions and billions and billions, which just happened to correspond with the volatility and the increase in price. I am not an academic. I do not have a Ph.D. either. But, you know, you do not need a Ph.D. for some of these things. Senator Donnelly. And I am not criticizing academic or Government studies. I am just saying you get a pretty good study on I-94 on your way home from O'Hare Airport as well. Mr. Duffy, my neighbor from Chicago, you indicated you wanted to say something? Mr. Duffy. Just a quick comment on that, and I think what is important to note is when you look at the markets, you cannot really say they are broke, because I also have a concern that you have. When you cite a $3.40 to $4.25, then back to $3.13 after you make a call in gasoline in a week's time, I will tell you that the futures markets have been between $90 and $110 a barrel for 3 years. It has not moved. So to say that the futures market or the markets are impacting the price of that, what you just talked about, that fluctuation, you have the wrong panel up here asking that question. Senator Donnelly. Well, no, I think I have the right panel here, and I will ask the next panel, and I will ask other panels, too. Mr. Duffy. But with all due respect, the markets are not broke. If there is something going on that is nefarious in the marketplace by refiners or somebody else, that is who is making the markets go up and down. Markets in general have not moved, though. We are sitting at high prices in commodities overall, but that is due to a whole host of reasons from other countries, exporting our food products and everything else. We import the energy products, obviously. We cannot export oil in the United States. It is against the law. But the point is the futures market I oil has been in a very narrow range for a long period of time. Senator Donnelly. Right. I try to keep an eye on that, too. Oh, I am sorry. Chairwoman Stabenow. I apologize. I am going to take you back, given the time here. Senator Donnelly. Thank you. Chairwoman Stabenow. Given the time here on the votes. I want to turn to Senator Klobuchar. Senator Klobuchar. Thank you very much, Madam Chairwoman. And, Senator Donnelly, we had the same thing happen in Minnesota on the gas prices and same experience. I have long believed there are speculation issues. There also was a refinery-closing issue, and I have a bill that actually Senator Hoeven is on to require the refineries to tell the Department of Energy when they are going to close down so we can better stagger the closures. But I would agree with you on the speculation, so you should look at the bill. Mr. Roth, you are sitting there by yourself and not many people have asked you questions, and you are on my end, so I am going to start with you. I know you spoke a bit about some of these customer issues, and the failure of MF Global resulted in an unacceptable outcome for customers who had posted collateral with the firm, unacceptable because the Commodity Exchange Act specifically prohibits the use of customer funds for the firm's own needs. The CFTC has now charged the company and its top executives with unlawful misuse of customer funds, and we must ensure that the improved protocols put in place will help better police the system. So we have a problem of dealing with the company, but we also have the problem going forward. As we consider legislative changes relative to this matter, changes to customer funds segregation and potential reforms under the Bankruptcy Code, we need to make sure reforms are carried out to protect customers and also allow for a well- functioning futures markets. Do you have any thoughts on this? Mr. Roth. Senator, I agree wholeheartedly with everything that you said, and that certainly, from a regulatory point of view, from the regulators' side, we have to constantly be--not just fight the last war, but try to anticipate the next war and try to always be trying to make the smartest use of technology and all of our resources to monitor member firms for seg compliance. That is why I think this daily confirmation process that we instituted with the CME is a huge step forward. I also think the rules that we passed regarding FCM transparency and financial data is a huge step so that customers do not have to root through Footnote 42 of an eight-page financial statement to find information about the FCM they are doing business with. I also think the restrictions we put on firms' ability to draw out their own funds that are in the excess seg pool is a huge step forward. But you are never done with this. It is a constant struggle. And until we figure out how to change human nature and eliminate fraud--and that is a ways off. I am working on that, but we just constantly have to try to strive to minimize the likelihood that anybody can ever get away with this, and if you can make it clear that there are criminal sanctions for this kind of wrongdoing, hopefully deter that conduct in the future. Senator Klobuchar. Very good. Thank you. Mr. Kelleher, Dodd-Frank gave the CFTC the ability to establish position limits for swaps and futures held by ``any one party.'' However, questions have been raised by regulators and others that ``any one party'' is difficult to define, especially as the CFTC moves forward with rewriting the position limits rule. As they work to rewrite the rule, how can the CFTC help prevent market distortions so that no single entity has too large of a position in the market? Mr. Kelleher. Thank you, Senator. That is a good question because ``any one person'' also should include a class, as we have said both in the regulatory process and in our testimony here. Just because you are acting what appears to be a loan, but you are acting essentially identically to other market participants doing the same thing at the same time, for example, commodity index funds, among other actors working together, our view is that the CFTC has the authority to regular them and treat them as one under a class--the provision in the Dodd-Frank Act that allowed them treating a class as a trader. And it is very important to do that. I would say it is pretty clear on position limits that the CFTC has done a lot of work. We did not agree with everything that they did, but I want to be--when the district court actually vacated the position limit rule, it did not, as has been stated in written testimony submitted to this Committee today, it did not overrule, second-guess, or question what the SEC did on the merits, period, the end. It was not a merits decision. It was as procedural decision on whether or not they interpreted a particular word that the court found was ambiguous. That is what is on appeal. So the position limit rule itself is not substantively questioned by the Federal courts. It is before the courts now, but on a procedural matter. And it is important that they get back to the business of regulating these markets. It used to be the case that these markets had about 70 percent actual commercial users, 30 percent speculators. It is now reversed. It is about 70 percent or more speculators. Senator Klobuchar. Right. I know. Mr. Kelleher. That has got to change. Senator Klobuchar. Very good. Mr. Cooper, one last question. The CFTC is working with the Federal Reserve, the SEC, and its international counterparts to reach a final set of standards on margin requirements for uncleared swaps. You indicated that you have been advocating for an internationally uniform set of margin requirements in the uncleared derivatives market. Why is it important that there is a balanced approach that harmonizes U.S.-based rules with the margin requirements at the international level? Mr. Cooper. I think in the absence of a unified regime, it would make it incredibly difficult, costly, and burdensome for participants to manage their portfolios, manage their margin requirements, and transact freely across marketplaces. Senator Klobuchar. Okay. Very good. And I am not going to be back for the second panel, Madam Chair, but I wanted to say a special greeting to Honeywell who is going to be present, a company with a major presence in my State, and obviously you and I have discussed about the issue of the non-financial end users, something we care a lot about, and we look forward to submitting some questions on the record. Thank you very much. Chairwoman Stabenow. Thank you very much. We will recess. We do have at least one member who would like to ask questions of our first panel, so rather than dismiss you, I would ask for your patience for a few moments. We are at the end of the first vote. There will be a second vote, and I understand that at least one member would like to ask a question. So at this point, we will recess and come back momentarily. Thank you. [Recess.] Chairwoman Stabenow. Senator Grassley has returned. I am going to ask, as I leave, with the full trust and confidence of Senator Grassley, I am going to leave him in charge of the Committee to ask his questions. I do believe that we have another member that may be returning, and I think what I will do at this point is, if they come back before I am back, we will let other members ask questions as well. Other than that, Senator Grassley, I would then just ask you to put us back into recess when you are done. Thank you. Senator Grassley. [Presiding.] Thank you very much for not taking your recess. The Chairwoman started out with her first question--I have a follow-up for Mr. Duffy--in regard to fees, user fees. I guess this would be about a $315 million transaction tax. Would you have any estimate whatsoever of what that might break down to on a per transaction level? Mr. Duffy. So on a contract level, sir, we would have to charge per contract to get the $315 million. It would be roughly about 4.5 cents at a static volume in today's marketplace. So we charge on average roughly about 7.5 cents to our largest liquidity providers. So we are looking close to anywhere between a 70-to 80-percent increase in every transaction they do. Senator Grassley. Okay. I appreciate that. I have a question for any of the panelists on high-frequency trading. It has developed and become increasingly sophisticated. I believe it is fair to say that there are some who appreciate it and some who do not. The question I have pertains to the margin requirements. I am sure there are multitude of strategies regarding high-frequency trading, but, in general, how would it be affected by some of the new margin proposals such as prefunding? Mr. Duffy. I can take a shot at that, Senator. Most high- frequency traders go home flat every night are not subject to the margin requirements because they do not have positions on an overnight basis. Very few have positions on--so I do not see how that would impact them to any great extent on that part of their business. Mr. Kelleher. I agree with that. They go home flat so it is not going to impact them. What I did want to say, Senator, is to congratulate you for being, if you will allow me to say, a bulldog on these issues. In your recent letter to the Survey Research Center to get to the bottom of what is going on and find out some basic information about preferential treatment, privileged access, and potentially unfair and abusive trading that relates to it. And it gets to an issue before us here in the reauthorization, which is that basically even now we still have remarkably dark markets where the CFTC and the public has very little information about what is happening, and HFT is a poster child for that. And this Committee, as has been talked about by the Committee in the past and you have focused on in the past, this Committee should authorize and mandate the CFTC to start requiring registration and getting data and information from the market players who are engaged in HFT, now to some reports 60, 70, 80 percent of the volume. And once the new derivatives market infrastructure gets in place, you can be sure that is what is going to happen. And we saw only a taste of that recently when the Wall Street Journal reported on high- speed traders exploit loopholes on May 1, 2013, and what they are doing or not doing at the CME. Now, I do not know if what is in the article is accurate or not. I just know that it is a precursor to the future where HFT is going to move into this new market infrastructure in a big way and have the same disruptive aspects to it. And the CFTC needs the data and information from registration and authority now so that this Committee and that agency can get in front of the issues. Senator Grassley. Yes. That---- Mr. Cooper. Mr. Senator, could I just---- Senator Grassley. Yes, please do. Mr. Cooper. I do not think registration would accomplish anything. There are volumes of data available right now that can be used to assess the impact of high-frequency trading on the markets, and we think there is a positive impact, and it is not the impact you think. In fact, the U.K. Government- sponsored Foresight Commission as well as the SEC itself has conducted studies that show the beneficial impact. I think it is important to recognize registration of any individual category of trader is not going to enhance the information flow available to the regulators. Senator Grassley. Okay. If that is all you have to say on the subject, that takes care of my questions. I would suggest, like she said, I should adjourn, but just in case somebody was going to come back here, if you would be polite enough, if somebody comes back, to let them take over, because I was fortunate enough, I was running back here, and she came back and reconvened for me. I appreciate that very much. Thank you all. [Pause.] Senator Grassley. I guess there is more red tape to this than I thought. We are in recess. [Recess.] Chairwoman Stabenow. [Presiding.] The Committee will come to order. I apologize for the delay, but we are happy to be back. I know that Senator Thune has some questions. Senator Thune. Thank you, Madam Chair and Senator Cochran, for calling this important hearing, and I want to thank our panelists here for hanging around and giving us the opportunity to continue to ask questions. Just as we talk about reauthorization of the CFTC, I think it is important to remember that we have got to do this in an intelligent way, make sure that as we increase customer protection and build confidence in the financial system, that is something that is going to encourage producers and firms to better manage their risk and provide the necessary liquidity that the market needs to function freely. But we also have to remember that we are operating in an international global economy, and the decisions that we make do not happen in a vacuum, and that any additional regulatory burden we place on firms here in the United States are going to impact the competitiveness of these firms in the global marketplace. So I hope we can strike a balance between managing risk, inspiring confidence, and allowing the market to function without overly burdensome regulations. And so I appreciate those of you who are here today giving us some insights about how best to do that. I wanted to ask a question of Mr. Cooper. In the last Congress, I sponsored legislation which modified and updated securities regulations to help promote greater capital formation and improved transparency in the marketplace. I was pleased that the language was included in the bipartisan JOBS Act, which was signed into law by President Obama. In your testimony, you have suggested that some of the provisions in the JOBS Act which directed the Securities and Exchange Commission to amend securities regulations governing private placements should be extended to cover commodity pool operators as well. And I am wondering if you can explain why this is needed and what the implications are if the CFTC does not amend its rules to be consistent with the JOBS Act or the SEC regulations. Mr. Cooper. Thank you, Senator Thune. I want to thank you for your leadership as well on the JOBS Act, a tremendous piece of legislation designed to, in fact, and hopefully will, result in greater capital formation opportunities. We have talked a lot about consistency and harmonization today in the cross-border context. This is a perfect example where we need consistency and harmonization that is between the CFTC and the SEC on this particular provision. If the CFTC were not to amend its rules to make complementary changes to permit private placements essentially, it would thwart the very purposes in our industry that the provisions that were part of the JOBS Act were intended to promote, because, in fact, many of our members, the vast majority, are now dually registered. So not being able to participate in the broader general solicitation of private placements would, in fact, undermine the very purposes that the JOBS Act was intended to address. Senator Thune. Thank you. I want to take just a moment to take advantage that we have got a wide range of expertise and diversity of opinions on today's panel. Mr. Kelleher, you advocated user fee funding for expanded regulation by the CFTC on almost all fronts: high-frequency trading, physical commodity holdings, not to mention to help cover the costs of staffing and technology. Whereas, others have made the case that additional fees would increase the cost of hedging. An increase in the cost of hedging will then ultimately increase the costs of goods for consumers. And I am just kind of curious to know what your response is to that assertion or that criticism. Mr. Kelleher. Thank you, Senator. I would not say we are advocating fees across all boards for all--across all products, all markets, for all things. I think you have to find out that which fees are appropriate to be assessed on given the essential mandate and the funding needs of the CFTC. It is to the advantage of all the member participants in the markets, the investors, and the system that the CFTC have adequate funding on the technology side and the personnel side. So when we look at it, we say, well, if you look at it, you have got--and I cannot remember what the numbers are exactly. I do not think Terry and I are going to agree on this. We are not talking about 1 percent. We are talking about probably fractions of a penny per contract. But, you know, if you took 25 CBO wheat contracts and you had half a cent per contract, you are talking about a 12-cent addition. If you took a larger size lot of 25,000 contracts, which would be a big trade, about $70 million worth of corn, you are talking about $125 on $70 million worth of contracts if it was half a cent. And if you actually look at the numbers and then you apply it to the numbers--now, everybody can disagree or have different views of what gets carved out for liquidity purposes and otherwise--you are talking about probably a very small fraction of a penny per contract. It would be so de minimis actually to end users and market participants that it is unlikely to have any effect at all. But where it has the most effect is we have a CFTC with a huge vital mandate that gets funded at a level that can service the market participants who have to register. You have SDRs, you look at the information flowing in that cannot be handled now. That is in the interest of everybody, including everybody at this table. So I am not trying to get a huge fee. I am not trying to get more than a penny that is necessary. I think any fee should be as low as humanly possible and done in a targeted, sensible way so it does not impact liquidity and reduces the impact on all market participants, but generates enough revenue for the CFTC to get its vital job done, which everybody needs to have done. Senator Thune. Mr. Duffy? Mr. Duffy. Senator Thune, I think what is important when we are doing mathematics here, in order to get to the $315 million to fund the agency, you need to charge 5 cents per contract at the CME Group. That is a 100-percent increase on our liquidity providers. There is no question anybody that has a 100-percent increase in doing their business that they have to change the way they are going to do their business. And the way they are going to change it is they are going to do less activity and widen the spread, which will cause the consumers and the taxpayers and the Government more, especially when you are trying to auction off U.S. Government debt, and the only place they have to go to do the layoff is at the Chicago Board of Trade, which we own, and because our markets are so deep and liquid, the Government can auction off debt all day long to our participants, and they hedge it in the futures market. That bid-offer goes up, the cost to the taxpayer will go up right along with it. It will cost billions of dollars, sir. Billions. Mr. Kelleher. With all due respect, I think--and correct me if I am wrong, Terry, but you are only talking about the futures market. The jurisdiction of the CFTC will now include the swaps market. So if you take the total market, whatever the notional amount is, whatever you want to argue, you are looking at a market that is 6 times the size, or more, of the futures market. Mr. Duffy. But there are only 2,000 transactions a day, Senator Thune, that happen today in the over-the-counter opaque futures market--not in the futures, in the over-the-counter market. So even though it is 400 trillion notional, there are only 2,000 transactions a day. There are 20 million in the listed derivatives markets today. Senator Thune. Okay. Madam Chair, thank you. That was a good discussion. And I know you have a second panel you are waiting to get up here, so thank you very much for your indulgence, and I will yield back my time. Thanks. Chairwoman Stabenow. Thank you very much. That was a good discussion. Thank you again for your patience in waiting. I appreciate all of your input, and we are looking forward to continuing to work with you. So thank you very much. We will ask our second panel to come forward. You have been very patient as well, and we will proceed as soon as everyone is seated. [Pause.] Chairwoman Stabenow. Well, good afternoon. It is wonderful to have you with us, and we very much appreciate your perspectives and testimony this afternoon. Let me introduce our panel. First on the panel is the Honorable Walter Lukken, president and CEO of the Futures Industry Association. Good to see you. Before moving to the private sector in 2009, Mr. Lukken served as Acting Chairman of the Commodity Futures Trading Commission for 18 months after having been a CFTC Commissioner since 2002. Also, he knows this Committee well, having worked under my former colleague, our former colleague, Senator Lugar. So it is good to have you back. Second, we have Mr. Guilford. Mr. Gene Guilford is the national and regional policy counsel for the Connecticut Energy Marketers Association and is here today on behalf of the Commodity Markets Oversight Coalition. After working for a short time in the Reagan administration, Mr. Guilford returned to his home State of Maine to serve as president of the Maine Oil Dealers before moving to the Connecticut Petroleum Association. Welcome. Mr. John Heck is senior vide president of The Scoular Company, and he joins us today from Omaha, Nebraska, on behalf of the National Grain and Feed Association. Mr. Heck sits on the Board of Directors of NGFA. Mr. Heck has been with The Scoular Company since 1981 when he first joined as a grain merchandiser, so it is great to have you with us as well. Next we have Mr. Donald Russak, executive vice president and CFO for the New York Power Authority, and he is here today on behalf of the American Public Power Association. Mr. Russak has served in numerous positions with the New York Power Authority throughout his 33-year career, so we are glad to have you. Finally, Mr. Colby. We have Mr. Jim Colby, who is the assistant treasurer at Honeywell International. He has also worked at Bear Stearns, UBS, and General Motors. Thank you for joining us this afternoon as well, Mr. Colby. So we will now turn to you, Mr. Lukken, for your testimony. STATEMENT OF THE HON. WALTER L. LUKKEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FUTURE INDUSTRY ASSOCIATION, WASHINGTON, DC Mr. Lukken. Well, thank you, Chairman Stabenow and Ranking Member Cochran. As you turn your attention to CFTC reauthorization, the Futures Industry Association stands ready to assist. FIA is the leading trade organization for the cleared derivatives markets. As you know, clearing ensures that the financial integrity of the market is protected from the failure of one of its market participants. Futures commission merchants, or FCMs, play a critical role in facilitating the clearing process by guaranteeing the transactions of customers and serving as the front-line gatekeepers of market risk through the collection of customer margin. FIA's mission since its inception has been to protect the public interest through the adherence to high standards of professional conduct and financial integrity. In carrying out this mission, FIA responded to the unacceptable consequences brought about by the failures of MF Global and Peregrine Financial Group. FIA formed a Customer Protection Task Force in the aftermath of these insolvencies and recommended a number of changes that have already been adopted, which include the enhancement of FCM recordkeeping, reporting, and early warning indicators, including: the filing of daily segregation balances with regulators, the creation of an automated daily verification system for customer segregated balances directly with banks and other depository institutions, and the collection and posting of additional FCM financial information onto an online system to help customers monitor and assess the health of their FCMs. Much has been accomplished through these efforts over the last year and a half, and we continue to evaluate additional ideas such as the idea of customer protection insurance. The FIA, CME, NFA, and the Institute for Financial Markets have partnered to fund a study on the costs and benefits of this idea. We look forward to sharing these findings with the Committee in the coming weeks. In addition to these measures already implemented, the CFTC has proposed a set of comprehensive regulations to further enhance customer protection, and we support much of what has been suggested, including the codification of many of FIA's recommendations. However, with regard to how and when customer margin is determined and collected, the proposal drastically reinterprets the longstanding application of the statute, even though this provision in the Commodity Exchange Act has not been changed since 1936. It is estimated that this reinterpretation to a firm's excess margin or residual interest amount could add $100 billion in additional required contributions into customer funds accounts. This will result in either customers prefunding their margin or paying to use the capital of their FCM. Many commodity customers have expressed strong concerns with this proposal, which will increase the cost of hedging, cause consolidation among small and mid-sized FCMs, and limit execution choices for customers. The FIA supports many of the customer protection measures that the CFTC has proposed. We simply believe this one in particular has not been justified. I would be remiss if I did not mention the implementation of the clearing mandate of swaps in the Dodd-Frank Act. Congress looked to the reliability and stability of the futures clearing system when it determined to extend clearing to swaps. Unfortunately, the rules being written to facilitate the clearing of swaps are in some case reinventing an already proven clearing process for futures. For example, the global futures markets have long benefited from regulators around the world working collaboratively to properly regulate the trading and clearing of futures while relying upon each other's comparable regulatory regimes to ensure effective oversight. In contrast to this mutual recognition approach, the lead- up to last week's compromise on cross-border application of cleared swaps under the Dodd-Frank Act caused significant uncertainty and confusion among the global regulatory and financial communities. While this last-minute guidance provides some clarity, there remains significant complexity and open questions on how global firms will get into compliance. We now face an all too familiar path of having to request CFTC no-action relief to provide our members with the legal certainty to trade in the global markets. This may have been avoided through a formal APA rulemaking process instead of mere guidance. Even in the case where Congress granted specific recognition authority under the Dodd-Frank Act to exempt comparably regulated non-U.S. clearinghouses, there has been no guidance as to how this exemption, specifically allowed by statute, may be achieved. This compares to the futures markets that have functioned across borders without major incidents for many years under a recognition system. In closing, our members stand ready and willing to facilitate the clearing of swaps, just as we have for futures. But it is important as we implement these important changes in the market structure for swaps that we not harm the futures markets that have served our industry well over time. Thank you, and I welcome any questions you may have. [The prepared statement of Mr. Lukken can be found on page 150 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Guilford. STATEMENT OF GENE GUILFORD, NATIONAL AND REGIONAL POLICY COUNSEL, CONNECTICUT ENERGY MARKETERS ASSOCIATION, CROMWELL, CONNECTICUT, ON BEHALF OF THE COMMODITY MARKETS OVERSIGHT COALITION Mr. Guilford. Thank you. Honorable Chairwoman Stabenow and Ranking Member Cochran and distinguished members of the Committee, on behalf of the Commodity Market Oversight Coalition--CMOC--we wish to thank you for the opportunity to appear before you here today on the matter of the reauthorization of the Commodity Futures Trading Commission and associated issues with regard to CFTC's authorities regulating the activities in the commodity markets. Just very briefly, let me tell you that, since 2007, the Commodity Markets Oversight Coalition is a nonpartisan alliance of organizations that represent commodity-dependent American industries, businesses, end users, and consumers. We are the farmers, truckers, mom-and-pop gas station operators, airlines, and others who rely on transparent, functional, and stable commodity markets in which to hedge our operations for the mutual benefit of those who deliver tangible goods to markets and from whom we receive tangible goods from those markets, for the benefit of the millions of consumers that we serve. Our members rely on functional, transparent, and competitive commodity derivatives markets as a hedging and price discovery tool and as an essential part of our business operations. As a coalition, we favor Government policies that promote stability and confidence in the commodities markets; seek to prevent fraud, manipulation, and excessive speculation; and preserve the interests of bona fide hedgers and American consumers. When accepting the John F. Kennedy Profiles in Courage Award in 2009, former CFTC Chair Brooksley Born stated, ``Special interests in the financial services industry are beginning to advocate a return to `business as usual' and to argue against the need for any serious reform. We have to muster the political will to overcome these special interests. If we fail now to take the remedial steps to close the regulatory gap, we will be haunted by our failure for years to come.'' That was not the first time she issued a warning with regard to the necessity of appropriate transparency, accountability, and oversight of the derivatives markets. Now, there are several issues that we would recommend to the Committee that the Committee undertake, and we would look forward to working with the Committee as we go forward with this reauthorization process. The first on our list is manipulation and excessive speculation, and the Committee should examine the efficacy of the October 18, 2011, position limits rule as well as the underlying statutory authorities of the CFTC in preventing manipulation and the harmful effects of excessive speculation. The previous panel questioned whether or not you had the right panel in order to address these questions. I would like to take a moment, if I could, to suggest to you, with all due respect, you have the right panel. In the last 2 weeks, the NYMEX RBOB contract has increased 43 cents a gallon. In the last 2 weeks, crude has increased $10 a barrel. Let me put into context what 43 cents on the RBOB contract means: 43 cents is $155 million a day in higher gasoline costs on the American people; it will cost a billion dollars a week. And why would that be the case? Why would that be necessary? We have circumstances that I would like to get into in question and answer hopefully about what happened before the financial crisis and where we are as of 2012. We have had enormous demand destruction in gasoline demand in the United States for the first time since World War II, a substantial decrease in demand for gasoline. For the first time since 1960, we are net exporter of gasoline. For the first time since Harry Truman was President, in 2011 we became a net exporter of distillate fuel. We are importing less crude oil than at any time since President Clinton's first term. Last year, we had the greatest single increase in daily production of crude oil in the United States history since 1859. And yet through all of that, before the financial crisis and after, we have gone from 72 barrels on crude--$72 a barrel on crude to $94. And it was not a straight line. It is up and down constantly, daily, with enormous volatility. And we have added just another 10 this last week. On gasoline, we have gone from $2.80 to $3.68. At a period of time when the American people have used less gasoline, not more, we have a surplus of gasoline that we can sell into world markets. With all due respect, the accountability and transparency and oversight of these markets is exactly the reason why the Commodity Futures Trading Commission needs the authorities that you have given it so that we can determine what is going on in these markets, what is motivating them and what is moving them. We have a number of suggestions, and we would like to work with the Committee as we go forward in this process, especially with regard to resources. An agency that collects $2 billion in fines for the Federal Government may not necessarily need a tax, but it certainly needs more resources. Thank you very much for your time. [The prepared statement of Mr. Guilford can be found on page 89 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Heck. STATEMENT OF JOHN M. HECK, SENIOR VICE PRESIDENT, THE SCOULAR COMPANY, OMAHA, NEBRASKA, ON BEHALF OF THE NATIONAL GRAIN AND FEED ASSOCIATION Mr. Heck. Thank you, Chairwoman Stabenow, Ranking Member Cochran, and members of the Committee. I am John M. Heck, senior vice president of The Scoular Company in Omaha, Nebraska. Scoular manages commodity supply chain risk for customers in food, feed, and renewable fuel markets, and we assist farmers in tailoring their risk management solutions utilizing 61 grain-handling facilities across the country. Today I am representing the National Grain and Feed Association. Today I would like to focus primarily on a rule proposed by the CFTC last November that would radically change the way business is done in the futures industry, and we believe strongly, despite CFTC's goal of enhancing customer protection, that two provisions of the rule would actually cause a dramatic increase in customer risk. The first position would decrease the time in which customers' margin calls must arrive at their futures commission merchant, or FCM, from the current 3 days to just 1 day. Otherwise, the FCM would have to take a capital charge for that undermargined amount. Even in today's environment of money moving electronically, 1 day is not sufficient for all customers to maintain the current 3-day timeline. Otherwise, we fear some FCMs would require customers to pre-margin their hedge accounts, potentially putting more customer funds at risk in the event of another FCM insolvency. The second provision of concern, maybe more troubling than the first, would change the timing of FCMs' calculation of residual interest. Those are the funds that the FCM contributes from its own money to ``top up'' customer accounts until margin calls are received. For decades, this provision of the CEA has been interpreted by the Commission as allowing some period of time for FCMs to do this. The CFTC proposal would change that consistent historical interpretation to require that every customer be fully margined on a 24/7 basis. Now, that may sound like a good idea, but in the real world it causes major problems, especially among the smaller and mid-sized FCMs that serve production agriculture and agribusiness. This would severely stress FCMs' liquidity, leading us to fear, again, that pre-margining would be required of customers. An unintended consequence would be consolidation in the FCM world as smaller firms cannot compete with larger firms who could afford to top up customer accounts. If I could bring this down to a real-world example, think about a typical country elevator in Nebraska. This elevator handles 5 million bushels of grain per year. Before harvest, the elevator might have 40 percent of its annual grain volume purchased from farmer customers and then hedged through forward futures contracts. Assuming a typical crop mix of corn, wheat, and soybeans, for corn the elevator has to post $648,000 with its FCM to establish its up-front futures position; soybeans, another $594,000; wheat, another $129,000. That is a total of more than $1.3 million the country elevator has sent to the FCM just to establish its futures positions. Now let us look at the additional financial requirements if the CFTC proposal was put into effect. We will assume that the elevator's FCM would require pre-margining by the customer to cover a 1-day limit up move, a reasonable precaution by the FCM. The country elevator would have to send 1 million more to the FCM for the possibility of a limit up move that may never come. If MF Global had required pre-margining of this fashion, the country elevator would have had almost twice as much of its capital exposed to misuse and loss, about $2.3 million instead of $1.2 million. We continue to be mystified about why the meaning of the Commodity Exchange Act has changed after decades of consistent interpretation. We would prefer to work this out with the CFTC, but there may be a need for legislative action to clarify the interpretation the futures industry has relied on for so long. One final item of regulatory concern is the CFTC rule concerning recordkeeping by companies that are members of a commodity exchange. In the form prescribed by CFTC, we are not aware of any technology that currently exists that will capture the information required by the Commission. We are working with the Commission on clarification of this problem. In conclusion, I have detailed the NGFA's other reauthorization priorities in my written testimony. We believe that the U.S. Bankruptcy Code needs to be harmonized with the CEA and CFTC regulations to clarify and ensure that customers come first in FCM insolvencies. We also believe that the futures customers should have access to some form of insurance as securities customers do. As you have heard from many other comments today, we are also awaiting a study from the FIA before recommending any particular structure. Thank you for the opportunity to testify, and I look forward to any questions. [The prepared statement of Mr. Heck can be found on page 121 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Russak. STATEMENT OF DONALD A. RUSSAK, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, NEW YORK POWER AUTHORITY, WHITE PLAINS, NEW YORK, ON BEHALF OF THE AMERICAN PUBLIC POWER ASSOCIATION Mr. Russak. Chairwoman Stabenow, Ranking Member Cochran, and members of the Committee, I am testifying today on behalf of the New York Power Authority--or as it is known, NYPA--the State of New York, as well as the American Public Power Association. Thank you for the opportunity to testify on an issue of great importance to public power utilities in considering the reauthorization of CFTC. NYPA is the largest State-owned public power organization, serving business customers, governmental customers, municipal electric utilities, and rural cooperatives throughout New York State. The electric energy used to serve these customers is subject to the forces of the volatile markets, and yesterday was a perfect example of this volatility. With temperatures approaching 100 degrees in many parts of New York State, the spot market price for electricity ran up into the hundreds of dollars per megawatt hour, as much as $500 a megawatt hour in New York City alone, up from $60 the prior week. This exposes NYPA's financial position and its customers to price risk and uncertainty. NYPA uses certain hedging transactions to reduce its market risk, to stabilize revenue, and most importantly, to provide rate stability to our customers. Because of the transparency and certainty that will be provided in the swap markets, we continue to support the Dodd-Frank Act and the full funding sought for the CFTC in the President's fiscal year 2014 budget. However, CFTC regulations implementing swap dealer rules of the Dodd-Frank Act have damaged our ability to protect our customers and ourselves from this market volatility. Under these regulations, a counterparty can engage in just $25 million of swap dealing activities with public power utilities before having to be required to register as a swap dealer. For all but the smallest of transactions, the number might as well be zero. The threshold amount is also unfair to public power entities. The de minimis threshold for swap dealing activities with investor-owned utilities, entities against whom we compete, is $8 billion, or 300 times the amount. As a result of the $25 million threshold, a number of non-financial entities have refused to enter into financial transactions with NYPA, which naturally leads to increased costs to us and to our customers. This is imperiling jobs across the State as well as increasing taxes. The problem is not unique to the power authority but affects public power utilities throughout the country. APPA members commonly report that counterparties are refusing to enter into swap transactions with them, and the numbers have fallen off by half or more. In fact, Grant County Public Utility District in Washington State went from 28 counterparties down to 2. The October 2012 no-action letter raises the special entity de minimis threshold from $25 million to $800 million for certain power-related transactions. However, additional restrictions on these have meant that counterparties are still not participating in the market with us. Even CFTC's Scott O'Malia, in a keynote address this May, noted the irony that the CFTC, in trying to protect public power utilities from the perils of the swaps markets, has instead forced us to trade only with Wall Street banks. He and other CFTC Commissioners have recommended further action, if not through regulation then through legislation. On March 11, 2013, the Public Power Risk Management Act was introduced. This legislation provides very narrow and targeted relief for operations-related swaps for public power utilities. Specifically, the legislation would provide that the CFTC treat utility operations-related swaps with a utility special entity in the same manner such swaps are treated with other utilities, that is, made subject to the overall $8 billion threshold. This would put public power utilities on the same footing as investor-owned utilities. The Public Power Risk Management Act was approved by the House Committee on Agriculture with a unanimous voice vote on March 20 and was approved in the House by a 423-0 vote on June 12. The legislation has since been sent to the Senate and referred to this Committee. It has been endorsed by the U.S. Chamber of Commerce, the Consumer Federation of America, and the Commodity Markets Oversight Coalition. We would very much encourage this Committee to take up and approve H.R. 1038 or, as it considers CFTC reauthorization, to provide similar legislative relief. Public power utilities are well versed in the markets in which we hedge price and operational risks. Forcing us to enter into transactions with only Wall Street firms provides no substantive benefit and, moreover, reduces the number of market participants with whom public power utilities can hedge their risk. Ultimately, this increases operational risk and hurts our customers. Thank you again for the opportunity to testify, and I will be happy to answer any questions. [The prepared statement of Mr. Russak can be found on page 161 in the appendix.] Chairwoman Stabenow. Thank you very much. Mr. Colby. STATEMENT OF JIM COLBY, ASSISTANT TREASURER, HONEYWELL INTERNATIONAL INC., MORRISTOWN, NEW JERSEY Mr. Colby. Chairwoman Stabenow, Ranking Member Cochran, and other members of the Committee, thank you for inviting me to testify. I am an assistant treasurer at Honeywell International, and today I speak on behalf of Honeywell, the Coalition for Derivatives End Users, and other commercial end users who are asking Congress to take quick action on S. 888 to provide non-financial end users hedging commercial risk with an exception from margin requirements in keeping with the original intent of the Dodd-Frank Act. Honeywell is a diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes, and industry; turbochargers; and performance materials. The company's more than 132,000 employees include 20,000 scientists and engineers who are focused on developing innovative products and solutions. Honeywell is truly a global company, with more than 50 percent of our sales outside of the United States and therefore exposed to market risks from changes in interest rates, foreign exchange rates, and commodity prices. When appropriate, we hedge exposures through the use of derivative contracts to eliminate risks that we cannot control. We do not use derivatives for speculative purposes. With a compliance deadline looming, end users ask the Senate to take quick action on S. 888 Without swift action on this legislation, which passed the House with an overwhelming bipartisan vote in June, non-financial end users will be forced to divert capital away from job-creating investments, sidelining billions of dollars in margin accounts. According to a Coalition for Derivatives End Users survey, a 3-percent initial margin requirement could reduce capital spending by as much as $5.1 to $6.7 billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs. To demonstrate how non-financial end users use derivatives to manage risk, I will provide an example of how Honeywell uses derivatives. We sell satellite and launch vehicle inertial measurement units manufactured in Florida to customers in Germany. Europe is a key growth market for commercial space products and, in order to qualify for consideration on certain opportunities, we may be required to enter into contracts denominated in euros even though all costs of production are incurred in U.S. dollars. The period for this type of contract can span multiple years, during which changes in the value of the euro versus the U.S. dollar can significantly impact the economics of the project. To mitigate this risk, we may enter into a forward contract to sell an amount of euros equal to our net exposure to lock in the market rate. To shed some light on Honeywell's potential exposure to margin requirements, we had approximately $2 billion of hedging contracts outstanding at year-end that would be defined as a swap under Dodd-Frank. Applying 3-percent initial margin and 10-percent variation margin implies a potential margin requirement of $260 million. Cash deposited in a margin account cannot be more productively deployed in our businesses and as a result limits our ability to promote economic growth and protect American jobs. In approving the Dodd-Frank Act, Congress made clear that end users were not supposed to be subject to margin requirements. Nonetheless, regulations proposed by the prudential banking regulators would require end users to post margin. This stems from what they view to be a legal obligation under Title VII, not because they view it as necessary for the safety and soundness of the financial system. Dialogues between Senator Mike Crapo and Federal Reserve Chairman Ben Bernanke and between Senator Tester and Governor Daniel Tarullo during Senate testimony underscore why passage of the margin bill is necessary and why the Senate should have confidence in taking quick action. As Governor Tarullo made clear last week, passage of this bill would simply remove what they believe to be the requirement under Dodd-Frank to impose margin requirements while leaving intact the ``ability to use [the] full panoply of supervisory tools.'' He further stated that the Fed does not need any additional authority to promote safety and soundness in the financial system and good risk management practices among regulated entities. Passage of S. 888 would not remove the ability of banks to set margin requirements on end users as part of their credit risk management process. The legislation in no way begins to dismantle Dodd-Frank. It would simply ensure that the final act and rules function as Congress intended and that commercial end users do not face the same regulatory burden as those who speculate and create systemic risk. In conclusion, we need the Senate to quickly enact S. 888 so that end users like Honeywell will continue to have the ability to manage risk without having mandatory and unnecessary margin requirements imposed. Mandatory requirements would divert cash from investment and job creation. Regulators have made clear that they are not necessary for the safety and soundness of our financial system. Thank you for inviting me to testify today. I look forward to answering any questions that you might have. [The prepared statement of Mr. Colby can be found on page 65 in the appendix.] Chairwoman Stabenow. Well, thank you very much to each and every one of you. Mr. Colby, let me just indicate that, first of all, I was very involved in the effort on the language on end users in Dodd-Frank, and I think Congress has been very clear about the fact that we want to maintain the ability for market participant to use markets and to safely hedge, and so I share your concerns on this issue. This is something we have actively been involved in on this Committee and with the CFTC, and I realize the broader issues with the Fed and so on right now. But could you just take a moment to talk just a little bit more about what it would mean if you had to post margin as it relates to reducing your hedging activities? Mr. Colby. Well, what it would do is--I mentioned the $260 million figure. That is cash that we could be investing in the operations of the company, creating capital expenditures, creating jobs, and promoting economic growth. But instead, if we put it into a margin account, it is going to sit idle, and we cannot spend it. We cannot spend the same dollar twice. If it is sitting in a margin account, it means we cannot invest it in the business. Chairwoman Stabenow. Thank you very much. Mr. Heck, a priority for all of us is that the markets are safe and work well for commercial hedgers. Given all the changes in the last year as we look at rules, as we look at other changes with NFA that we heard about today, and CME and so on, those proposed by the CFTC, do your members feel safer using the futures and the swaps markets today? Mr. Heck. Senator, I think they do feel--I do think they feel safer today. I applaud the NFA for the self-regulatory changes they have made. A lot of those mirror recommendations made by the NGFA's task force shortly after the MF Global bankruptcy. I also think the CME has made significant progress in making our funds safer due to the changes they have made at the clearinghouse level. We do believe that there are other avenues to explore. We are not seeking a legislation solution. I think we would be interested in and have told the CFTC we would like to work on a pilot program with them that would involve a fully segregate customer account, and that kind of account exists in parts of the swaps industry right now. We would like to do that. And as I said, we would also like to see the results of this insurance study to see if that is a feasible alternative for our members. Chairwoman Stabenow. So from your perspective, your members would be willing to pay for full segregation at this point? Mr. Heck. I think that depending on the size of one of our members, segregation, full segregation of the cost of that would be something they would be interested in. But, again, we would really like to see that be optional between the FCM and their customer. Chairwoman Stabenow. Mr. Lukken, let us talk a little bit more about that from your perspective. If there were changes made to the bankruptcy laws that made full physical segregation feasible, would your member futures commission merchants offer that to customers? Is the Bankruptcy Code the only issue that is standing in the way? And do you see a demand at this point in the marketplace for full physical segregation? Mr. Lukken. Well, we would support an optional full segregation approach. I think we are dealing with this issue in Europe currently where EMIR requires not only omnibus accounts but also optional individually segregated accounts. The question is cost, whether people are willing to pay the cost to have that extra set of protection. If you are losing the fellow customer risk, that shared insurance level, it is going to cost because that risk is going somewhere, like squeezing a balloon. So somebody is going to have to pay for that risk, so that is the reason the costs are going to have to go up. Chairwoman Stabenow. Thank you. Mr. Guilford, I see Senator Donnelly here, so I am going to let him talk to you about gas prices. I know he wants to talk to you about gas prices, so I will let him have those questions, although I am also equally interested. But since you represent a company that would be, in effect, regulated by the CFTC, why are you supportive of increasing its funding and growing the agency? Why is that important for your members? Mr. Guilford. If I might, I would like to take you back to 2008---- Chairwoman Stabenow. We need you to push the button. Mr. Guilford. Thank you. I will take you back to 2008, but I will make it really brief and not as long as 2008. Chairwoman Stabenow. Good. Mr. Guilford. In 2008, we had crude oil at about $70 a barrel in March. I testified before House Energy and Commerce about a month before it reached its peak in July of that year of $147, and by November it had fallen back to $32. Now, during that span of time, we had major Wall Street investment banks claiming that crude was going to go to $200 a barrel that year. That resulted in the customers of our heating oil retailers rushing to their heating oil retailer saying, ``Lock us in, protect us from this Armageddon that is coming.'' So a lot of these consumers, hundreds of thousands of these consumers, with thousands of heating oil retailers, went into these markets and locked in prices of between $4.50 and $5 a gallon for their winter heating fuel supply. Unfortunately, by the time we got to November and that market price fell to $32 a barrel, we had market price heating oil, physical heating oil, at $2 a gallon. Well, imagine that you are a consumer and you laid out $4.50 a gallon for 900 gallons of heating oil for your winter supply, and the actual market price at the time had fallen to $2. So we had a lot of angry consumers, and we had a lot of very unfortunate heating oil retailers because they are decent business people and they have done business for three and four generations, wanted to make sure they took good care of their customers, who let a lot of those customers out of those contracts in order to be able to keep them as customers, but not without a tremendous cost. It was clear to us then that these markets are dysfunctional. They do not operate for the purpose in which they were intended. And what we heard all through that period of time--and appreciate, if you will, Madam Chairwoman, that we were told at the time that this was all because of supply and demand. Now, the previous panel discussed that you do not need to be a Ph.D. to understand some statistics. Tell me, if you would, please, because it has not been answered for us in 5 years, why we had a situation where there was a supply and demand dynamic that drove it from $70 to $147 in 4 months. Where was the extraordinary interruption in crude oil supply or the extraordinary increase in demand within 4 months that more than doubled the price of crude? And then, right after the 4th of July, after we celebrated Independence Day, it begins to fall in another 4 months from $147 to $32. So whatever circumstances attributable to supply and demand that occurred in the first 4 months apparently evaporated and turned 180 degrees in the second 4 months. Madam Chairwoman, in answer to your question, we need to have absolutely transparent, accountable, and adequately overseen financial markets, because we rely on these markets to be able to do one very simple thing for our customers. Our customers come to us and ask us to be protected--protected from the vicissitudes of the economy and the marketplace, and that is what we like to be able to do. And we like to be able to do it in a way that protects them, protects us. We can earn a decent living and manage to take care of consumers. We could not do that in 2008. Chairwoman Stabenow. Okay. Thank you very much. I am going to turn now to Senator Cochran. Senator Cochran. Following up on the last comments, what would we do if we wanted to introduce legislation and identify changes in current law that would lead to the result you just wished for? Mr. Guilford. Well, it is important, I think, Senator, to take this on several different levels. First of all, we started working on something as simple as closing the Enron loophole. You will recall that. We worked on that with you and others in the Senate back in 2008. Now, there was a clear example of an instance in which a lack of transparency in the markets resulted in the citizens of California going from paying $7 billion for electricity to $27 billion for electricity. There is no doubt about the fact that there was manipulation. Nineteen people went to jail. A 20th would have had Mr. Lay not passed away. An enormous amount of manipulation in one market by one company. And what we attempted to do at the time was to close the loophole by taking over-the-counter and electronic trading out of the dark markets, to shine a light on it, to make it transparent, to require things to go through mandatory clearing--all of the things that we eventually managed to be able to do to a greater extent in Title VII but did not entirely succeed in perfectly, certainly. But we certainly did not do it when we passed the farm bill in 2008. Well, transparency in these markets, knowing what is going on, to be able to see all of the market participants and knowing what they are doing is critical. We would take you in a couple of other directions. One of the things we would like to see the authority of the CFTC to have is not necessarily to be able to in the first instance regulate index funds, but to be able to have the authority to be able to look and make sure they understand what they are doing. Understand that the concern that we have, and to follow up on the comments of Mr. Kelleher on the previous panel, is to address the issue of how there is such an imbalance today of 70 percent financial market participation in these energy commodity markets and 30 percent actual market participants, people and airlines and farmers and truckers who want to hedge their products. We would like to be able to make sure that these markets are functioning for the purpose in which they were intended, and I think that we have forgotten why that was the case. For over 100 years, we had enormous stability in this country in energy prices, and it was not until the 1970s that they became unstable. That is when we created the CFTC, gave it its original set of authorities. We wanted to create a world marketplace in order to be able to wrest control of energy markets away from OPEC. And for about 25 years, it worked brilliantly, absolutely brilliantly, but in the last decade not as well. And I think that a lot of that was attributed to the fact that, unfortunately, a mistake was made both in 1999 and in 2000 in deregulating these markets and closing them off so that we did not see what they were doing. So in the first instance, let us make sure we understand exactly what is going on in these markets. Let us make sure we have an agency that is paying attention to what is going on in these markets, because when what we have seen going on in the last week, Senator, 43 cents on gasoline in 2 weeks, $1 billion a week it will cost the American people in higher gasoline costs, we better have a really good answer to be able to give people about why that is occurring. And we do not have a very good answer today, and it starts at the CFTC at least with what is going on in the commodity markets because that is where the activity is occurring that is driving these prices. Senator Cochran. And we are out of gas. That is the other part. In terms of production, what is the level of production compared with the way it was 5 years ago, 10 years ago? Is it going down or is it going---- Mr. Guilford. Great question. Thank you very much. Before the financial crisis, America was consuming about 20 million barrels a day of crude oil, before the financial crisis in 2007. In 2012, it was 18.5 million barrels. We had a million and a half barrel a day decrease in crude oil consumption, an enormous--cataclysmic in the energy business that we would have that much demand destruction. At the very same time, during the same period, America has produced an additional 1.5 million barrels a day in domestic production, another cataclysmic event. The biggest single increase in daily production of crude oil in the history of the United States since 1859 when we began commercially producing crude oil. Extraordinary. Combine those two issues, it is a 3 million barrel a day swing in just crude. And yet what happened between those two dates? We went from $72 on crude to $94. And, again, not a straight line. So a 3 million barrel a day swing in crude in the world's largest economy and largest consumer of petroleum products, and yet we had a $22 a barrel increase in crude and another $10 last week. Another $10. Now, on gasoline, gasoline during the same period of time, we went from, in 2007, 9.3 million barrels a day consumption of gasoline to 8.7 in 2012. The first time since World War II that Americans consumed that much less gasoline, almost 600,000 barrels a day. Now, for the economy, just as a statement of fact, in 2007 we had a 4.6-percent unemployment rate; in 2012, it was 7.6. And yet we hear out of Wall Street most recently, with the June jobs report, that we needed to tack on another $3 or $4 barrel on crude because we had a robust jobs report. The robust jobs report was up 360,000 on part-time, down 240,000 on full-time, and U-6 went from 13.8 to 14.3. I do not think you need to be a Republican or a Democrat to understand that does not meet the test of robust. And yet out of Wall Street, we needed to have an increase in the price of a barrel of crude. I do not find that justified. I do not. So we have had enormous changes in the energy markets in this country in the majority for a tremendously good reason, but I do not necessarily think those have always been reflected in the prices that Americans pay. Senator Cochran. Well, that is one of the reasons why we are having these hearings. Chairwoman Stabenow. It is. Senator Cochran. It's to get some answers and find out what the heck is going on. And if there is responsibility here in Washington, in the United States Senate specifically, we want to hear some suggestions about what we should consider. Thank you very much for being here and helping us in this effort. Chairwoman Stabenow. Thank you very much. Senator Donnelly. Senator Donnelly. Thank you, Madam Chairman. I would just like to note to Mr. Lukken, a graduate of Indiana University, we are very proud of you, and I know you worked on the Agriculture Committee under Senator Lugar, who was my predecessor, and it is filling awful big shoes following him, and I want to appreciate all your service that you gave not only to him but to the country. Thank you very much. To Mr. Russak, I will sponsor the Public Power Risk Management Act. I have talked to Indiana's municipal power agencies, and they are looking for help on this. And we have seen that the CFTC recently released a no-action letter temporarily raising the special entity threshold for utility- related swaps. Has that helped? And obviously we need a permanent solution to this. We are working hard on this. Has the temporary helped at all? Mr. Russak. Well, Senator, unfortunately, not very much because of the temporal nature of this. The counterparties, the non-financial counterparties, have not been willing to step up to the plate and offer up their services to us. So it really did not help the public power entities. We have the same issues in New York State as well with the New York municipal electric utilities, and the Power Authority itself having seen 20 percent of its counterparties going away. Senator Donnelly. Well, I want you to know we will work as fast as we can to get a companion bill on this side and get that put in place. We want to get some certainty for the municipal power agencies all over the country. Mr. Russak. Very much appreciate that, Senator. Senator Donnelly. Mr. Guilford, let me ask you, do you think that not having position limits in place for non-end users increases the per barrel price? Mr. Guilford. Yes. Senator Donnelly. And, you know, as I indicated earlier, Goldman Sachs analysts around 2011 estimated around 8 to 10 cents per million barrels--or per barrel. What you are looking at with 421 million barrels--what is your estimate of approximately what you think it affects per barrel cost? Any ball park. Mr. Guilford. I would like to put this in the context of what we said when we testified in the other body at Energy and Commerce and following the president of the world's largest energy company where he indicated that he thought it should be between $60 and $70 a barrel. I mean, in a classic economic sense, the cost of a barrel, it is the marginal cost of production of the next barrel, and that was his opinion. That was his opinion at that time. That remains my opinion today. And if I would, I think putting it in the context of what the position limits rule meant, if I could just for a moment? Senator Donnelly. Yes. Mr. Guilford. I would like to make sure that I quote it accurately. Spot month was 25 percent of estimated deliverable supply for one trader, 25 percent of estimate deliverable supply. I do not know about you, Senator, but that does not strike me as a huge burden, 25 percent of estimated deliverable supply. The not spot month, 10 percent of the first 25,000 contracts, 2.5 percent thereafter. Senator Donnelly. Well, I would like to see---- Mr. Guilford. Not much of a limit. Senator Donnelly. Right. I would like to see a market that for end users, as you indicated, airlines, transportation, shipping, ag, if they are using a product, we want them to be able to lock in prices that they can live with, to have some certainty, to avoid risk. But it does not seem to me that the purpose of this market has been to speculate on the future of oil, the future of what happens to our families and going from $3 to $4 to $3 to $4.25, that it causes extraordinary hardship not only for families but for your companies that you represent as well to try to have some certainty in a market where supply continues to go up, demand continues to be steady or fall down, and the price of crude through position limits I think has really been affected. Mr. Guilford. Absolutely, and just to follow up on that, if I might---- Senator Donnelly. Or lack of position limits, I should say, has been affected. Mr. Guilford. When we were there late last winter or early last spring, those of us who live in the Northeast remembered that we had the warmest winter on record in the history of recordkeeping. Outdoor sporting events were occurring all year round. I know they do in your State all year round, Senator Cochran. I assure you they do not in Connecticut. We usually close up sometime around Thanksgiving until, you know, just before Memorial Day. But golf courses were open all winter long. Our members lost 35 or 40 percent of their sales volume because it was so warm. The price of heating oil went up. The market price of heating oil went up. It did not go down. It should have collapsed, but it did not. So, again, that is why we feel as though we need to make sure we have a CFTC that is adequately funded, adequately staffed, has the technology in place with which it can do its job, and to be able to tell us what is going on, because a lot of it does not seem to make a great deal of sense. Senator Donnelly. Well, I would like to thank the panel and, again, Mr. Lukken, we are proud to have you as a graduate of the Hurryin' Hoosiers. Chairwoman Stabenow. Thank you very much. Senator Roberts. Senator Roberts. If we had only had the CFTC when Jimmy Carter put that embargo on the Russian sales. I remember at the Dodge City co-op--I cannot remember what the price was. I am guessing it was around $2.90, something like that, maybe 3 bucks. It went to hell in a hand basket, driven, of course, by speculators. That was the President of the United States. I am not sure the CFTC could have done that job, and I am just being sort of pesky with you. Mr. Heck, we have heard from quite a few panelists or some of the panelists that the role of the commodity prices or markets have changed due to speculation, i.e., the speculators. For your members, are they looking at the speculator driving price swings, or are they looking to reduce their risks from these swings? Mr. Heck. Senator, I think our members generally as the panelists commented before see a role for the speculators in our markets to bring liquidity, particularly in deferred periods where I have bought grain from a farmer for delivery in March of 2014, and I need to hedge that. If a speculator is out there wanting to take the other side of that trade, that is a good thing for us. So I think there is a role for that kind of liquidity in our markets. I think that between our industry and the CFTC and the exchanges we have worked pretty well together to establish the right kind of position limits in our industry. I think they function pretty well. Occasionally we have had some issues with, you know, perhaps long index funds being in our market and causing a divergence between the futures price and the cash price. Again, through collaboration, we have made some changes to that contract that have made that a non-issue. So I would say today in our industry our members are trying to work with each other and with farmers to minimize the risk inherent in price swings through prudent risk management tactics. Senator Roberts. In your comments--well, I would just add that I know that we all want stability, we all want transparency to the degree that is possible. But I am not sure the CFTC issuing regulations allegedly to achieve that--not allegedly. They are actually trying to achieve it. But they are issuing interpretive guidelines. That is like sub-regulatory guidance. That is like a lot of things that are happening in Washington in a lot of different agencies and a lot of regulations. Three hundred pages' worth, I am not sure that is going to--we need transparency on the 300 pages. In your comments you mentioned that the National Grain and Feed folks are concerned that the proposal for customer protection could end up significantly increasing the futures customers' risk in the event of future failures. In the real world, i.e., the countryside of Kansas, and Vermont, what are the challenges--and everywhere else, Mississippi, Michigan. In the real world, what are the challenges for shortening the amount that customers can make margin calls to 1 day instead of 3? Mr. Heck. I do not think that from an industry perspective we have been able to determine why the 1-day rule would benefit anybody, frankly. And I think we need to continue to work with the CFTC to understand that. They have perhaps intimated that their hands are tied by the regulation, but the interpretation they have made is contrary to what has happened over decades. Senator Roberts. Okay. Real quick, and my time is expiring. If the proposed rule on residual interest goes forward unchanged, will it dramatically impact farmers and ranchers using the market to hedge their costs? Mr. Heck. Yes. Senator Roberts. Thank you. Mr. Lukken, thank you to the Futures Industry Association and other groups for being very proactive and paying with your own dollars, not the taxpayer dollars, to evaluate the costs and benefits of the many proposals to provide additional insurance for customer accounts in case of another futures failure. There is not a question. I just wanted to thank you. It looks like I am out of time, and my wife tells me that I am already 20 minutes late, so, Madam Chairwoman, distinguished Ranking Member, the Hoosier from Indiana, Mr. Lukken, thank you for your service up here, adios. Chairwoman Stabenow. Thank you. Thank you, Senator. Thank you again. This has been a very important panel, very helpful, and your written testimony as well. We look forward to working with all of you. Let me just indicate that any additional questions for the record should be submitted to the Committee clerk 5 business days from today. That is 5:00 p.m. on Wednesday, July 24th. Without objection, the compilation of letters received by the Committee with respect to reauthorization will be added to the record of the hearing. [The following information can be found on pages 172-435:] Chairwoman Stabenow. Seeing nothing further, the meeting is adjourned. Thank you very much. [Whereupon, at 5:40 p.m., the Committee was adjourned.] ======================================================================= A P P E N D I X JULY 17, 2013 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ======================================================================= DOCUMENTS SUBMITTED FOR THE RECORD JULY 17, 2013 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ======================================================================= QUESTIONS AND ANSWERS JULY 17, 2013 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]