[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE COMMODITY FUTURES TRADING COMMISSION 2012 AGENDA

=======================================================================

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

FEBRUARY 29, 2012

__________

Serial No. 112-29

Printed for the use of the Committee on Agriculture
agriculture.house.gov

_____

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COMMITTEE ON AGRICULTURE

FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois TIM HOLDEN, Pennsylvania
STEVE KING, Iowa MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas JOE BACA, California
JEFF FORTENBERRY, Nebraska DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida JIM COSTA, California
MARLIN A. STUTZMAN, Indiana TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia LARRY KISSELL, North Carolina
SCOTT R. TIPTON, Colorado WILLIAM L. OWENS, New York
STEVE SOUTHERLAND II, Florida CHELLIE PINGREE, Maine
ERIC A. ``RICK'' CRAWFORD, Arkansas JOE COURTNEY, Connecticut
MARTHA ROBY, Alabama PETER WELCH, Vermont
TIM HUELSKAMP, Kansas MARCIA L. FUDGE, Ohio
SCOTT DesJARLAIS, Tennessee GREGORIO KILILI CAMACHO SABLAN,
RENEE L. ELLMERS, North Carolina Northern Mariana Islands
CHRISTOPHER P. GIBSON, New York TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois JAMES P. McGOVERN, Massachusetts
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
KRISTI L. NOEM, South Dakota

______

Professional Staff

Nicole Scott, Staff Director

Kevin J. Kramp, Chief Counsel

Tamara Hinton, Communications Director

Robert L. Larew, Minority Staff Director

(ii)

C O N T E N T S

----------
Page
Baca, Hon. Joe, a Representative in Congress from California,
prepared statement............................................. 6
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, prepared statement...................................... 5
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma,
opening statement.............................................. 1
Prepared statement........................................... 3
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 4
Prepared statement........................................... 4
Welch, Hon. Peter, a Representative in Congress from Vermont,
submitted letter............................................... 49

Witness

Gensler, Hon. Gary, Chairman, Commodity Futures Trading
Commission, Washington, D.C.; accompanied by Hon. Jill E.
Sommers, Commissioner, Commodity Futures Trading Commission.... 7
Prepared statement........................................... 9
Submitted questions.......................................... 50

THE COMMODITY FUTURES TRADING COMMISSION 2012 AGENDA

----------

WEDNESDAY, FEBRUARY 29, 2012

House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 10:02 a.m., in Room
1300 of the Longworth House Office Building, Hon. Frank D.
Lucas [Chairman of the Committee] presiding.
Members present: Representatives Lucas, King, Neugebauer,
Conaway, Fortenberry, Schmidt, Thompson, Stutzman, Tipton,
Crawford, Huelskamp, DesJarlais, Gibson, Hultgren, Schilling,
Peterson, Holden, McIntyre, Boswell, Baca, David Scott of
Georgia, Cuellar, Costa, Schrader, Kissell, Owens, Pingree,
Courtney, Welch, Fudge, Sablan, Sewell, and McGovern.
Staff present: Tamara Hinton, Kevin Kramp, Josh Mathis,
Ryan McKee, John Porter, Matt Schertz, Heather Vaughan, Suzanne
Watson, Liz Friedlander, C. Clark Ogilvie, John Konya, Jamie
Mitchell, and Caleb Crosswhite.

OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN
CONGRESS FROM OKLAHOMA

The Chairman. This hearing of the Committee on Agriculture
to review the Commodity Futures Trading Commission 2012 agenda
will come to order.
Good morning, and I would like to thank all of you for
being here. Today's hearing will focus on the Commodity Futures
Trading Commission, the CFTC agenda for the coming year. And I
would like to thank Chairman Gensler for joining us to share
his perspective.
This is a timely hearing as the CFTC is facing a number of
issues of concern to our constituents. First and foremost, the
CFTC's agenda for the coming year must be its investigation
into the collapse of MF Global and its missing customer funds.
Thousands of customers have yet to receive nearly 30 percent of
the funds that MF Global should have held in segregated
accounts.
While I commend the Trustee for working quickly to trace
the thousands of complex transactions that occurred during MF
Global's final days, the fact remains that many customers have
yet to be made whole. Farmers and ranchers across the country
continue to face hardships because of their missing funds and
have lost confidence in the futures system. This raises several
key questions about customer protections in place and the
CFTC's role in futures markets. Although the CFTC has gained
new authority over the swaps market under the Dodd-Frank Act,
the MF Global collapse demonstrates the importance of CFTC's
oversight responsibilities in futures market.
In addition to our concerns about MF Global customer funds,
we also must address the Dodd-Frank rulemaking process. As the
CFTC nears the halfway mark in completing the dozens of
regulations required by Dodd-Frank, I remain concerned about
the breadth of those proposals. Instead of focusing resources
on the entities and activities that pose the most significant
risk to our financial systems, the CFTC is casting a wide net
that could needlessly catch end-users.
For example, for months we have been assured by Chairman
Gensler that the swap dealer definition would not result in
unnecessary registration of on end-users, which Congress never
intended to fall within the swap dealer category. However, as
the Commission neared completion of the rule last week, end-
users were frantically seeking clarification that their hedging
activities would not be classified as swap dealing. Now, this
doesn't make sense because Congress never intended for hedging
to be considered swap dealing.
Additionally, the CFTC has yet to propose a rule that would
clarify the scope of its new regulations for activities that
occur outside our borders, what we refer to as
extraterritoriality. There is a long-standing precedent by both
the CFTC and the Prudential Regulators to defer to foreign
regulatory authorities in matters concerning foreign entities
and transactions. Expanding the reach of the Dodd-Frank into
activities outside our borders not only ignores the principles
of international law, but it spreads our agencies and resources
too thin. It also threatens the international cooperation
required for global financial reforms as envisioned by the G20.
Additionally, the lack of clarification on the territorial
scope of regulations has made it incredibly difficult for
market participants to prepare for compliance. The confusion
over the swap dealer definition and the foreign scope of those
regulations are just two examples of many issues which the CFTC
has failed to deliver concrete answers or policy solutions. Our
constituents need more than empty reassurances.
Most of these concerns are rooted in an issue that we have
discussed for more than a year now, the need for strong and
robust economic analysis. The Economist magazine recently
highlighted the Obama Administration's tendency to overstate
the benefits of regulation while underestimating the cost. That
has certainly been apparent in the Dodd-Frank rulemaking.
At a public meeting recently, CFTC staffers admitted they
simply had not calculated the cost and benefits of a rule
governing internal business conduct standards. They could not
provide substantial substantive analysis for the conclusions
they drew about how the rule would impact our economy and that
is unacceptable.
Even if the CFTC was attempting to conduct economic
analyses of Dodd-Frank regulations, it would be difficult given
the lack of clarity about which organizations will be affected
by each rule. Making policy without regard to the economic
consequences is a luxury we cannot afford even in the strongest
of economies, and we certainly cannot afford it right now.
I look forward to hearing Chairman Gensler's agenda for
2012. More than that, I look forward to a time when we can
guarantee our constituents that they will not be overburdened
by regulations that were not intended for them.
[The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress
from Oklahoma
Good morning, and thank you all for being here. Today's hearing
will focus on the Commodity Futures Trading Commission (CFTC) agenda
for the upcoming year.
I'd like to thank Chairman Gensler for joining us to share his
perspective.
This is a timely hearing, as the CFTC is facing a number of issues
of concern to our constituents.
First and foremost on the CFTC's agenda for the coming year must be
its investigation into the collapse of MF Global and its missing
customer funds. Thousands of customers have yet to receive nearly 30
percent of the funds that MF Global should have held in segregated
accounts.
While I commend the Trustee for working quickly to trace the
thousands of complex transactions that occurred during MF Global's
final days, the fact remains that many customers have not yet been made
whole.
Farmers and ranchers across the country continue to face hardships
because of their missing funds, and have lost confidence in the futures
system.
This raises several key questions about customer protections in
place, and the CFTC's role in futures markets.
Although the CFTC has gained new authorities over the swaps market
under the Dodd-Frank Act, the MF Global collapse demonstrates the
importance of CFTC's oversight responsibilities in futures markets.
In addition to our concerns about MF Global customer funds, we also
must address the Dodd-Frank rulemaking process. As the CFTC nears the
half-way mark in completing the dozens of regulations required by Dodd-
Frank, I remain concerned about the breadth of the proposals. Instead
of focusing resources on the entities and activities that pose the most
significant risks to our financial system, the CFTC is casting a wide
net that could needlessly catch end-users.
For example, for months we have been assured by Chairman Gensler
that the swap dealer definition would not result in unnecessary
registration of end-users, which Congress never intended to fall within
the swap dealer category.
However, as the Commission neared consideration of the rule last
week, end-users were frantically seeking clarification that their
hedging activities would not be classified as swap dealing.
This doesn't make sense, because Congress never intended for
hedging to be considered swap dealing.
Additionally, the CFTC has yet to propose a rule that will clarify
the scope of its new regulations for activities that occur outside our
borders--what we refer to as extra-territoriality.
There is a long-standing precedent by both the CFTC and the
Prudential Regulators to defer to foreign regulatory authorities in
matters concerning foreign entities and transactions.
Expanding the reach of Dodd-Frank into activities conducted outside
our borders not only ignores principles of international law, but it
spreads our agencies and resources too thin. It also threatens the
international coordination required for global financial reform as
envisioned by the G20.
Additionally, the lack of clarification on the territorial scope of
regulations has made it incredibly difficult for market participants to
prepare for compliance.
The confusion over the swap dealer definition and the foreign scope
of regulations are just two examples of the many issues on which the
CFTC has failed to deliver concrete answers or policy solutions. Our
constituents need more than empty reassurances.
Most of these concerns are rooted in an issue that we have
discussed for more than a year now--the need for strong and robust
economic analysis.
The Economist recently highlighted the Obama Administration's
tendency to overstate the benefits of regulation while underestimating
the costs. That has certainly been apparent in the Dodd-Frank
rulemaking.
At a public meeting recently, CFTC staffers admitted they simply
had not calculated the costs and benefits of a rule governing internal
business conduct standards. They could not provide substantive analysis
for the conclusions they drew about how that rule would impact our
economy. That's unacceptable.
Even if the CFTC was attempting to conduct economic analyses of
Dodd-Frank regulations, it would be difficult given the lack of clarity
about which organizations will be affected by each rule.
Making policy without regard for the economic consequences is a
luxury we cannot afford even in the strongest economy. We certainly
cannot afford it now.
I look forward to hearing Chairman Gensler's agenda for 2012, but
more than that, I look forward to a time when we can guarantee our
constituents that they will not be overburdened by regulations that
were not intended for them.

The Chairman. And with that, I would like to recognize the
Ranking Member for any opening comments he might have.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA

Mr. Peterson. Thank you, Mr. Chairman, and welcome,
Chairman Gensler, back to the Committee for today's hearing.
In addition to passing a farm bill, oversight of the CFTC
has been a top priority of this Committee. It is important for
Chairman Gensler to provide an update on the agenda of the CFTC
for the year, along with the Commission's progress on
implementing the financial reforms passed in 2010. Looking at
the Dodd-Frank rules that have already been finalized by the
CFTC, I believe it is safe to say that so far the CFTC has done
a pretty good job. And in my conversations with Chairman
Gensler, it seems to me that they are on the right track, going
forward.
For example, during a legislative hearing last year, we
heard concerns about business conduct standards and the
potential impact that they could have on pension plans' ability
to use swaps to hedge risk. In January, the Commission approved
a bipartisan final rule establishing business conduct
standards, and the general feeling I get from the pension plans
is that the CFTC got the final rule right.
As the CFTC continues finalizing more rules, I suspect that
they will continue to get it right and address the concerns
that we have heard at various hearings. I know that some of you
have expressed frustration with the CFTC's process for
implementing these reforms. While it has not been a perfect
process, we cannot lose sight of the importance of their taking
the time so that they can, in the end, get the right outcome.
But the CFTC has more on its plate than just Dodd-Frank. It
is still in the process of investigating what happened at MF
Global and monitoring our futures market as we watch energy
prices continue to climb. The Commission does these things and
much more, all while being grossly under-funded.
Today's hearing will provide Members with an opportunity to
ask about these and many other issues currently before the
CFTC, so I look forward to hearing Chairman Gensler's testimony
and I thank the chair for holding today's hearing.
[The prepared statement of Mr. Peterson follows:]

Prepared Statement of Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Thank you, Chairman Lucas, and welcome Chairman Gensler to today's
hearing.
In addition to passing a farm bill, oversight of the CFTC has been
a top priority for this Committee and I think it's important for
Chairman Gensler to provide an update on the CFTC agenda for the year
along with the Commission's progress of implementing the financial
reforms Congress passed in 2010.
Looking at the Dodd-Frank rules that have already been finalized by
the CFTC, I believe it is safe to say that, so far, the CFTC has done a
pretty good job. And, in my conversations with Chairman Gensler, it
seems to me that they are on the right track.
For example, during a legislative hearing last year, we heard
concerns about business conduct standards and the potential impact they
could have on pension plans' ability to use swaps to hedge risk. In
January, the Commission approved a bipartisan final rule establishing
business conduct standards.
The general feeling I get from the pension plans is that the CFTC
got the final rule right. As the CFTC continues finalizing more rules,
I suspect they will continue to get it right and address the concerns
we have heard at our various hearings.
I know that some have expressed frustration with the CFTC's process
for implementing these reforms. While it has not been a perfect
process, we cannot lose sight of the importance of taking the time to
do this right.
But the CFTC has more on its plate than just Dodd-Frank. It is
still in the process of investigating what happened at MF Global and
monitoring our futures markets as we watch energy prices continue to
climb. The Commission does these things and much more, all while
grossly under-funded. Today's hearing will provide Members with the
opportunity to ask about these, and many other issues, currently before
the CFTC.
I am looking forward to hearing Chairman Gensler's testimony and I
thank the chair for holding today's hearing.

The Chairman. The chair appreciates the gentleman's opening
comments. And the chair would request that other Members submit
their opening statements for the record so the witness may
begin his testimony and to ensure that there is ample time for
questions.
[The prepared statements of Mr. Conaway and Mr. Baca
follow:]

Prepared Statement of Hon. K. Michael Conaway, a Representative in
Congress from Texas
Mr. Chairman, thank you for convening this hearing today. I look
forward to the opportunity to hear from Chairman Gensler about the
course the CFTC is charting over the coming year. In particular, I am
interested in hearing more about the schedule for rolling out the final
rules we are waiting on and the Commission's plans to bolster the cost-
benefit analysis that it conducts on those rules still pending.
For the past year, I have pushed, cajoled, admonished, and begged
the CFTC to do a better job in estimating the costs and benefits of the
rules it proposes. For too long, the Commission has hidden behind the
letter of the law which says the Commission must only ``consider'' the
costs and benefits of a proposed rule. Often, it is left to the
commenters to provide the relevant data and perform an analysis of the
proposed rule. Unfortunately, this misses the point. The analysis is
supposed to inform drafters of the proposal. The regulators ought to do
their homework before they make proposed regulations, not after.
What is worse, this process is complicated by the continuing issue
with the sequence of the rules. For many potential regulated entities,
they simply do not know if a particular rule will apply to them or not,
because we have not yet defined the very basic participants and
components of the market.
I am certain the concerns I raise today are a surprise to no one.
However, I continue to bring them up and I continue to push on them,
because the work the CFTC is doing over this coming year holds the
potential to make or break the financial markets that so many of my
constituents depend on to manage their businesses and their financial
affairs.
To that end, I was would like to highlight three statements by
three of the CFTC Commissioners given at the most recent public meeting
and enter them into the record. I believe together, these three
statements ought to continue to guide the Commission as it completes
its work over the coming year. They are the reasons why I demand the
CFTC do its due diligence.
Commissioner Chilton noted correctly, that ``we must, as we go
forward, be extremely cognizant that all of these swaps rules are an
interdependent set. It is a grave error to look at each rule as free-
standing--they are not.''
Although this idea should surprise no one, the Commission's failure
to adequately consider the effects and scope of the rules proposed
under Dodd-Frank have lead to contradictory mandates, duplicative
filings, and sowed needless confusion among stakeholders in the
derivatives and futures community. Unfortunately, this confusion is
wholly self-induced. Better sequencing and a stronger commitment to
analysis could have avoided much of the uncertainty that has plagued
this process since the beginning.
Commissioner Sommers issued what I believe will be a prescient
statement when she said, ``I do not believe that these rules have a
chance of withstanding the test of time, and instead believe that this
Commission will be consumed over the next few years using our valuable
resources to rewrite rules that we knew or should have known would not
work when we issued them.''
It is my fear that when we get to the end of the rulemaking
process, we are going to find the new institutions and systems we have
erected are not very good. Should that pass, blame will certainly rest
with the drafters of the financial reform bill. But, our regulators
will not have helped the process if they did not strive to understand
every facet of every rule, before they were finalized.
Finally, Commissioner O'Malia's statement reached straight to the
heart of the matter when he said: ``Our inability to develop a
quantitative analysis, or to develop a reasonable comparative analysis
of legitimate options, hurts the credibility of this Commission and
undermines the quality of our rules.''
The Commission's failure to articulate economically defensible
reasons behind its rules damage its reputation as a regulator and
strain its relationships with the entities it oversees. Rules that are
perceived to be arbitrary or pointlessly burdensome are rules that will
be avoided or worse, actively circumvented. Bad regulation leads to
loopholes, shortcuts, and will necessitate constant regulatory
intervention to tweak and patch the rules for every new eventuality. If
this happens, the rules laid down under Dodd-Frank will bring more risk
and more uncertainty to the market.
Before I close, I want to commend Chairman Gensler on his openness
and attentiveness, both with Members of Congress and market
participants. He has engaged the Commission in an extraordinary
campaign of meetings and public hearings as they have undertaken the
staggering array of new rules required by Dodd-Frank.
However, he has consistently left idle the most important tool at
his disposal--cost-benefit analysis. I fear that all his efforts in
openness will not result in a better final product, because the
Commission has not bothered with a sustained effort to quantify its
proposals or any of their alternatives.
This analysis is not about making things easier for the bankers of
Wall Street, it is about creating a regulatory framework in which all
market actors can participate. I do not worry about the big banks or
the big financial firms; they all have armies of lawyers prepared to
help them sort through the end result of this process.
I do fear for the farmer whose local bank will not give him a loan,
because he can no longer hedge his crop. I worry about the small
manufacturer that wants to export products, but finds executing an
interest rate swap is too expensive. And, I agonize over the jobs that
will be lost because businesses are no longer able to effectively
manage their risks.
Whether they know it or not, my constituents--the farmers,
ranchers, manufactures, and small businesses spread across the 11th
District--and all Americans are counting on the CFTC. Their ability to
manage their financial lives will be impacted by the rules the
Commission finalizes. To that end, I will continue to insist the CFTC
utilizes every tool at its disposal to get them right.
______

Prepared Statement of Hon. Joe Baca, a Representative in Congress from
California
Chairman Lucas and Ranking Member Peterson:

I am pleased to be here today to discuss the ongoing implementation
of Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, and discuss the 2012 agenda for the Commodity Futures
Trading Commission.
I thank the Chairman and Ranking Member for convening this hearing.
I also want to thank our witness, and recognize the Chairman of the
Commodity Futures Trading Commission, Mr. Gary Gensler.
Chairman Gensler, thank you for your efforts--I know you have been
working very hard to properly implement the regulatory requirements of
Dodd-Frank.
Everyone in this room understands the important balance we need to
reach as we look at establishing a regulatory framework for the complex
area of derivatives and exotic futures trading.
We want to make sure our agricultural producers, business
communities, and end-users have the flexibility to effectively trade
commodities; BUT we also must protect the American public from
predatory financial risks.
We all saw what happened the last time our regulators fell asleep
at the wheel--financial institutions across the nation collapsed and
our economy fell victim to a foreclosure crisis that is still
paralyzing many segments of the country.
As the CFTC moves forward in finalizing the definitions of swaps
and swap dealers--I hope it will keep in mind the predicament that many
energy providers in my home State of California face.
Moving forward--I hope that any transaction an energy provider
makes in order to comply with state regulations--is excluded from the
process used to determine whether an entity is a swap dealer.
We all must remember the importance of the mission the Dodd-Frank
Wall Street Reform Act laid out.
The American people must have OVERSIGHT and the ACCOUNTABILITY to
ensure that all derivative trading occurs in light of day, and is above
the board.
Again, I want to thank the Chairman and Ranking Member for their
leadership on this critical issue.
I look forward to this opportunity to hear about the progress of
the implementation of Title VII provisions of the Dodd-Frank bill; and
to make sure the CFTC is properly following the legislation's
Congressional intent.
Thank you.

The Chairman. With that, I would like to welcome to our
witness to the table, Hon. Gary Gensler, Chairman of the
Commodity Futures Trading Commission, Washington, D.C. Mr.
Chairman, please begin whenever you are ready, sir.

STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.; ACCOMPANIED BY HON. JILL E. SOMMERS,
COMMISSIONER, COMMODITY FUTURES TRADING COMMISSION

Mr. Gensler. Good morning, Chairman Lucas, Ranking Member
Peterson, and Members of the Committee. I am pleased to be here
also with my fellow Commissioner Jill Sommers as well. Today, I
am told it is my 39th time testifying before Congress in this
job. Apparently, I have been in the job 109 days but I will
tell you this is the first time I have testified on February
29.
After a full year in 2011, the CFTC has significant work in
front of us for 2012. Derivatives markets are critical for
farmers, ranchers, producers, and other end-users in the real
economy. And as this Committee has noted to me, but I would
give the statistic: the non-financial side of our economy
provides 94 percent of private sector jobs. That is what the
derivatives markets helps: futures and swaps, allow these
companies to manage risk and focus on what they do best, that
is, servicing customers, producing products, farming, milling,
and investing in our economy.
My written testimony is more complete, but in short, our
agenda includes completion of the swaps markets rules; clearing
mandate determinations, which is a big piece of what Congress
gave us; implementation of swaps reforms, working with members
of the public on that; enhanced customer protections; and
adapting oversight to changing market structure.
Last summer, we turned the corner from our proposal phase
to starting finalizing rules. We have completed 28 rules to
date and we have just over 20 to go. While the statute
generally called for us to complete this within 1 year, it has
taken us longer. And we are completing rules in a thoughtful,
balanced way to get them right, not against the clock. And with
28,000 public comments and 1,300 meetings with the public to
date, there is a lot to consider. We are close to finalizing
rules with the SEC to further define the term swap dealer. I
believe we will be responsive to comments from farm credit
institutions that have been the subject of some of your
discussions here in bills, agriculture cooperatives, and yes,
the commercial end-users and the issue the Chairman raised
about hedging. The product definition rules should follow later
during the spring. But again, we are not trying to rush these.
We are trying to get them right and listen to the commenters
and this Committee.
We also are looking to soon finalize the Commercial End-
User Exemption. Our proposal took Congress' intent to heart.
Non-financial companies using swaps to hedge or mitigate
commercial risk are out of the requirement for central
clearing. The Commission's proposed rule on margin for swap
dealers likewise provides that such non-financial companies
will not be required by Commission rules to post margin for
uncleared swaps.
I also want to mention that we are taking the legislative
proposals of this Committee into consideration as we complete
our rules. I view them as pretty serious comments in our
comment file. The Commission, for example, has already provided
for certain exceptions for inter-affiliate swaps from real-time
reporting and the external business conduct rules that the
Ranking Member mentioned. We also look forward to seeking
public comment on inter-affiliate clearing for financial
companies.
As we finalize reforms, we also have reached out broadly on
how to best implement them, including last year's roundtables,
public comment periods, and many meetings. And I thank you,
Congressman Conaway, because we worked a lot with you, in
thinking this through. In response to this public input, we
have included phased implementation in many of our rules. We
are also working internally to implement the swaps reforms. The
Commission published a new strategic plan last year; we have
restructured some divisions; in particular, standing up the new
data and technology division. And given our increasing
oversights needs, we are investing in updated market
technology.
Before I close, I will mention resources. At about 700
people, we are only about ten percent greater than we were in
the 1990s, and since then of course you have asked us to also
cover the swaps market, which is nearly eight times the size of
the futures market. The CFTC is not a price-setting agency.
Nevertheless, rising prices for basic commodities--agriculture
and energy--just remind us once again of the importance of
having effective market oversight that ensures the integrity
and transparency of these markets.
I will conclude just by saying that the derivatives
reforms, once implemented, will benefit all Americans in the
real economy. They will benefit the end-users of derivatives,
which are responsible for most of the job creation in the
economy. It will do this through the transparency and
competition it brings to the marketplace. I think also it will
benefit the public by lowering risk that Wall Street poses to
the rest of us.
I thank you and I look forward to your questions.
[The prepared statement of Mr. Gensler follows:]

Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures
Trading Commission, Washington, D.C.
Good morning, Chairman Lucas, Ranking Member Peterson, and Members
of the Committee. I thank you for inviting me to today's hearing on the
Commodity Futures Trading Commission's (CFTC) 2012 agenda. I also thank
my fellow Commissioners and CFTC staff for their hard work and
commitment to protecting the public and promoting transparent and
efficient markets. I'm pleased to be here with CFTC Commissioner Jill
Sommers.
CFTC Mission
At its core, the CFTC's mission is to ensure the integrity and
transparency of derivatives markets--both the futures and swaps
markets. Each part of our economy relies on a well-functioning
derivatives marketplace. These markets are critical for farmers,
producers, ranchers and other end-users in the real economy--the non-
financial side of the economy that provides 94 percent of private
sector jobs. End-users can lock in a price or rate and manage their
risk through these markets. The futures and swaps markets allow
companies to focus on what they do best--servicing their customers,
producing products, innovating, and investing in our economy. These
markets are also critical for pension funds, mutual funds, community
banks and insurance companies, and the Americans who rely upon these
entities for their savings and financial needs.
The CFTC has historically been charged with overseeing the
commodity futures markets. In 2010, Congress expanded the CFTC's
mission to also oversee the previously unregulated swaps marketplace.
At approximately $300 trillion, the domestic swaps market is nearly
eight times the size of the futures market.
Combined these markets help their users hedge or transfer $22 of
risk for every dollar of goods and services produced in the U.S.
economy. Futures and swaps markets touch nearly every aspect of our
economy from the food we eat, to the price at the pump, to our
mortgages and credit cards, and to our retirement savings. Thus, it is
essential that these markets are transparent and efficient and work for
the benefit of the American public. And when markets are open and
transparent, they are safer and sounder, and costs are lower for
companies and their customers.
CFTC 2012 Agenda
After a very full year in 2011, the CFTC has a significant agenda
this year to further enhance the futures and swaps markets to better
protect the public. To start, I'll review what is ahead with regard to
swaps a market reforms. I then will discuss further initiatives for
enhancing customer protection and touch on some steps we are looking at
to address changing market structure. I will close by discussing the
CFTC's request for additional resources to best accomplish these goals.
Completion of Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) Rules
The CFTC has made significant progress in completing the reforms
that will bring transparency to the swaps market and lower its risk to
the rest of the economy. But there is much work yet to be done.
During the rule-writing process, we have benefitted from
significant public input. CFTC Commissioners and staff have met over
1,300 times with the public, and we have held 16 public roundtables on
important issues, including a 2 day roundtable beginning today on
further protections for customer money.
We substantially finished our proposal phase last spring, and then
largely reopened the mosaic of rules for additional public comments. We
have accepted further public comment after the formal comment periods
closed. The agency received 3,000 comment letters before we proposed
rules and 28,000 comment letters in response to proposals.
Last summer, we turned the corner and started finalizing rules. To
date, we've completed 28 rules with just over 20 more to go. Attached
to this testimony is a more complete list of rules we've finished, as
well as proposed rules. It's my anticipation that we will finish most
of the rule-writing work by this summer; however, it's possible that a
handful won't be finished until later this year. While the statute
generally called for completion of the rules in 1 year, for most of
them, it has taken us longer. We are completing rules in a thoughtful,
balanced way--not against a clock.
To promote transparent and competitive markets, we've been able to
complete seven key reforms. Among these reforms, the Commission already
has begun to receive position information for large traders in the
swaps markets for agricultural, energy and metal products. Based on
completed registration rules, three swap data repositories have already
filed with the CFTC. In December, we finalized rules for the reporting
of swaps transactions both to the public and to regulators, which will
begin to take effect as early as July of this year. For the first time,
the public and regulators will have specific information on the swaps
markets, in aggregate and transaction-by-transaction. By contrast, none
of this information was available leading up the 2008 crisis.
Looking forward, we hope to complete rules with regard to
designated contract markets (DCMs), followed later this spring by rules
for swap execution facilities (SEFs). These rules will be critical to
bringing transparency and the benefits of competition to both buyers
and sellers in the swaps market before they transact.
Last week, the Commission proposed a new block trading rule with a
revised methodology for determining block sizes that benefitted from
public input and a review of market data. As we have discussed in this
Committee during previous hearings, the Commission is mindful that
there are times when a reproposal of a rule is necessary to help ensure
the Commission gets it right.
The CFTC also has made significant progress on rules to bring swaps
into central clearing. We completed rules establishing robust risk
management requirements for derivatives clearing organizations. We
finished a rule on the process for clearinghouses to submit swaps that
may be mandated for central clearing. In addition, the Commission
adopted an important customer protection enhancement, the so-called
``LSOC rule'' (legal segregation with operational commingling) for
swaps. It prevents clearing organizations from using the cleared swap
collateral of non-defaulting, innocent customers to protect themselves
and their clearing members.
To further facilitate broad access to these markets and promote
competition, the Commission hopes in the near term to consider final
rules on client clearing documentation, risk management, and so-called
straight-through processing, or sending transactions immediately to the
clearinghouse upon execution.
We also are looking to soon finalize the end-user exception.
Consistent with Congressional intent, our proposal would ensure non-
financial companies using swaps to hedge or mitigate commercial risk
will not be required to bring swaps into central clearing. The
Commission's proposed rule on margin for swap dealers likewise provides
that such non-financial companies will not have to post margin for
uncleared swaps.
The Commission has received substantial public input on the
treatment of swaps among affiliates of the same business entity. The
CFTC's final rules on real-time reporting and external business conduct
standards include exceptions for such swaps. To address commenters'
questions about a possible clearing requirement between affiliates of
financial entities, I expect the Commission to consider a proposal and
take public comments later this year.
The CFTC has begun to finalize rules to regulate swap dealers and
lower their risk to the rest of the economy. First, we finished rules
requiring registration of swap dealers with the National Futures
Association (NFA). Second, we completed rules establishing and
enforcing robust sales practices in the swaps markets. And third, a
rule finalized this month requires swap dealers and major swap
participants to establish policies to manage risk, as well as to put in
place firewalls to prevent conflicts of interest between trading and
research and trading and clearing units.
Later this year, we will consider final rules on capital and margin
rules, which will have the benefit of close consultation with other
regulators, both domestic and international. I also anticipate the
Commission will explicitly seek public input on the extraterritorial
application of Title VII of the Dodd-Frank Act.
The Dodd-Frank Act was clear on the meaning of swap and swap
dealer, but the law called on the CFTC and the Securities and Exchange
Commission (SEC) to act jointly in further defining these terms. We
have benefitted from significant public input on the rule relating to
entity definitions, and we are looking to finish it in the near term.
We are taking into account all public comments, including those from
farm credit institutions and agricultural cooperatives. The product
definitions rule will follow in the spring.
Furthermore, the CFTC is working with participants in the
electricity markets on possible exemptive orders for rural electric
cooperatives, municipal public power providers and regional
transmission organizations.
The Commission also is working with the banking regulators and the
SEC on the Volcker rule. In adopting the Volcker rule, Congress
prohibited banking entities from proprietary trading, an activity that
may put taxpayers at risk. At the same time, Congress permitted banking
entities to engage in market making, among other activities. One of the
challenges in finalizing a rule is achieving these dual objectives. It
will be critical to hear from the public on how to best achieve
Congress' mandate. The CFTC's comment period closes April 16, and I
very much look forward to the substantial public input I anticipate we
will receive on this rule.
The global nature of the swaps markets makes it imperative that the
United States actively consults and coordinates with foreign
authorities. The Commission is working with our foreign counterparts to
promote robust and consistent standards and avoid conflicting
requirements in the global marketplace. CFTC staff is sharing many of
our comment summaries and drafts of final rules with international
regulators. We have ongoing dialogues with regulators in the European
Union (EU), Japan, Hong Kong, Singapore and Canada. Last week, I met
with EU Commissioner Michel Barnier during his visit to Washington.
Next week, I will be in Basel to meet with the Financial Stability
Board to discuss timely implementation of swaps reforms in each of the
major market jurisdictions. I then travel to Brussels to meet with key
European officials and industry leaders.
Clearing Mandate
Congress gave the CFTC an important role to play in determining
which swaps must be mandatorily cleared. The clearing of standardized
swaps will lower risk and make markets more competitive. Under the
Congressionally mandated process, the Commission will have 90 days to
review a clearinghouse's submission and determine whether the swap or
group of swaps is required to be cleared. Last year, the CFTC finalized
a rule on the process for review of swaps for mandatory clearing.
Earlier this month, we asked each registered clearinghouse to submit
for the agency's review all the swaps that it was clearing as of
February 1, 2012, including all pre-enactment swaps. Staff is now
reviewing these submissions and preparing recommendations for the
Commission regarding which swaps or groups of swaps should be required
to be cleared. During the Commission's review period, there will be a
30 day period for the public to provide comments. Though much of the
timing depends on the clearinghouses, I anticipate that this comment
period may begin this spring.
Implementation
As we move on from the rule-writing process, a critical part of our
agenda is working with market participants on phased implementation of
these reforms. We have reached out broadly on this topic to get public
input. Last spring, we published a concepts document as a guide for
commenters, held a 2 day, public roundtable with the SEC, and received
nearly 300 comments. Last year, the Commission proposed two rules on
implementation phasing relating to the swap clearing and trading
mandates and the swap trading documentation and margin requirements for
uncleared swaps. We have received very constructive public feedback and
hope to finalize the proposed compliance schedules in the next few
months.
In addition to these proposals, the Commission has included phased
compliance schedules in many of our rules. For example, both the data
and real-time reporting rules, which were finalized this past December,
include phased compliance. The first required reporting is as early as
July for interest rate and currency swaps. Other commodities have until
October. Additional time delays for reporting were permitted depending
upon asset class, contract participant and in the early phases of
implementation.
The CFTC will continue looking at appropriate timing for
compliance, which balances the desire to protect the public while
providing adequate time for industry to comply with reforms.
Furthermore, to ensure a smooth transition for market participants, we
have given them exemptive relief from the effective dates of certain
rules until July 16, 2012.
As swaps market reforms are implemented, market participants will
continue to seek guidance, and in some cases petition for exemptions.
The CFTC wants to be as responsive as possible to these inquiries, and
this is an important part of our 2012 agenda. In the case of the large
trader reporting requirements for the physical commodity swaps market,
Commission staff worked with market participants and delayed
requirements for 2 months to accommodate technical requirements. CFTC
staff also engaged with market participants to ease the process of
compliance. In addition to regular dialogue, our staff developed a
guidebook of data standards, which can be found on our website. Just as
we did with large trader reporting, staff is reaching out to market
participants regarding the data rule we completed in December, and we
will continue this type of engagement in other areas.
Another significant agenda item for this year will be the
registration of new market participants. This process has already begun
for SDRs and foreign boards of trade (FBOTs). Since the FBOT rule was
finalized in December, three have requested to be registered. We expect
other FBOTs that are currently operating under staff no-action letters
to shortly request to be registered. We also are working with two new
entities seeking to register with the CFTC as designated clearing
organizations. In January, we finalized the registration rule for swap
dealers and major swap participants, and we will be working, along with
the National Futures Association, on these entities' registration and
related questions. In addition, Commission staff estimates that 20-30
entities will seek to become SEFs, and I anticipate they would begin to
register later this year.
The agency also has a lot of work to do internally this year to
further prepare for the implementation of reforms. A year ago, the
Commission published a new strategic plan for Fiscal Years 2011-2015
that incorporates the agency's expanded responsibilities to oversee
both the futures and swaps markets. Importantly, the strategic plan
also includes a new and tougher approach to agency performance measures
to more accurately evaluate our progress. In addition, the CFTC's new
responsibilities necessitated an agency restructuring to ensure the
Commission uses its resources as efficiently as possible. The
Commission created the Division of Swap Dealer and Intermediary
Oversight and the Office of Data and Technology. The reorganization was
put in place last October.
Our new Office of Data and Technology has a number of critical
objectives to achieve in support of both swaps and futures oversight.
The office will establish connections with SDRs so that the CFTC can
collect and analyze swaps data for surveillance and enforcement
purposes. It is taking on the challenge of how we aggregate data across
SDRs, as well as how we aggregate it with futures market data. The
office also will be working with the Treasury Department and
international regulators on legal entity identifiers. Given our
increasing oversight needs and the events of May 6, 2010, we will begin
collecting daily order books from trading platforms for surveillance
and market oversight purposes. The technology office also will continue
to update and improve automated surveillance, including greater use of
alerts.
Building on newly available data to the Commission, the CFTC plans
to begin publishing aggregated swaps trader data. The public has
benefited for years from the futures market data we have published in
our Commitment of Traders reports. Our goal is to provide similar
transparency to the public for the swaps market.
In October, the Commission adopted a final rule to establish
position limits for physical commodity derivatives. The limits will
come into effect once the joint rule further defining the term ``swap''
is completed and the Commission has received a year's worth of data on
the relevant swap markets.
Customer Protection
Segregation of customer funds is a core foundation of customer
protection in both the futures and swaps markets. The CFTC already has
taken a number of steps in this area. The completed amendments to rule
1.25 regarding the investment of funds bring customers back to
protections they had prior to exemptions the Commission granted between
2000 and 2005. Importantly, this prevents use of customer funds for in-
house lending through repurchase agreements. In addition,
clearinghouses will have to collect margin on a gross basis and futures
commission merchants (FCMs) will no longer be able to offset one
customer's collateral against another and then send only the net to the
clearinghouse. And the LSOC rule for swaps ensures customer money must
be protected individually all the way to the clearinghouse.
We will continue looking at options to further protect customers.
Today and tomorrow Commission staff are hosting public roundtable
sessions to examine additional enhancements. Also participating are
other regulators, including the SEC and NFA. Panel topics include
protections for the collateral of futures customers, consistent with
the already-approved LSOC rule for cleared swaps. Additional discussion
topics are alternative custodial arrangements for segregated funds,
enhancing the controls over the disbursement of customer funds, and
increasing transparency to customers and to the CFTC regarding the
location and investment of customer funds. Also on the agenda are
revisions to the bankruptcy rules for FCMs, protection of customer
funds at FCMs to be traded on foreign futures markets, issues
associated with entities dually registered with the CFTC as FCMs and
the SEC as broker-dealers, and enhancing the self-regulatory structure.
CFTC staff is actively seeking public input on these topics, and
members of the public can submit comments through our website.
Changing Market Structure
This year, the Commission also will continue working to adapt our
oversight to changing market structure, including emerging trends
related to electronic trading. Instead of being traded in the pits,
nearly 90 percent of futures and options on futures are traded
electronically. While market participants used to be personally
involved in each of their trades, they now often rely on algorithms to
execute their trades. Humans are much more frequently depending on the
judgment programmed into machines to execute their trading strategies.
The makeup of the market also has changed. In contrast with the early
days of the CFTC, swap dealers, managed money accounts and other non-
commercial reportable traders make up a significant majority of many of
the futures markets. Most of the trading volume in key futures
markets--up to 80 percent in many markets--is day trading or trading in
calendar spreads.
I expect the Commission will consider putting out for comment a
concept release concerning the testing and supervision of automated
market participants. These concepts will be designed to address
potential market disruptions that high frequency traders and others who
have automated market access can cause. Furthermore, the Commission's
Technology Advisory Committee has established a subcommittee to
specifically examine automated and high frequency trading.
In addition, the CFTC will continue working with the markets and
the SEC on recommendations from the Joint-SEC-CFTC Advisory Committee
on Emerging Regulatory Issues with regard to cross-market circuit
breakers, pre-trade risk safeguards, effective testing of risk
management controls and supervisory requirements regarding algorithmic
trading.
The Commission staff also is developing proposed rules on the
reporting of ownership and control information for trading accounts.
These rules would enhance the Commission's surveillance abilities and
increase market transparency.
Resources
The CFTC is a good investment for the American public. But the
agency needs sufficient resources to do its job. The CFTC's budget
request strikes a balance between important investments in technology
and human capital, both of which are essential to carrying out the
agency's mandate under the Commodity Exchange Act and the Dodd-Frank
Act.
As we move into FY 2013, the CFTC will need additional resources
consistent with the agency's expanded mission and scope. At our current
size of about 700 people, we are but ten percent larger than our peak
in the 1990s. Since then, though, the futures market has grown
fivefold, and Congress added oversight of the swaps market, which is
far more complex and nearly eight times the size of the futures market
the agency currently oversees.
The budget request estimates the need for an appropriation of $308
million and 1,015 staff-years for the agency. This request is a
significant increase over the $205 million FY 2012 enacted
appropriations level, but it is much needed given the dramatic growth
of the markets we oversee.
The CFTC will continue working hard to effectively oversee the
futures market and implement reforms for the unregulated swaps market.
Without sufficient funding, however, the nation cannot be assured that
this agency can oversee the futures and swaps markets, that customers
are protected, and that the public gets the benefit of transparent
markets and lower risk.
Conclusion
The financial crisis brought our economy to a standstill. While
there are signs of recovery, Americans continue to face a challenging
economy and are seeing budgets squeezed because of increasing prices at
the pump. Thus, it is essential that the futures and swaps markets are
transparent, competitive and work for the benefit of the America
public.
The financial crisis exposed that swaps helped concentrate risk in
the financial system that spilled over into the real economy, affecting
businesses and consumers across the country. The derivatives reforms in
the Dodd-Frank Act, once implemented, will lead to significant benefits
for the real economy and all the Americans who depend on pension funds,
mutual funds, community banks and insurance companies. They will
benefit from lowering the risk of the swaps market and increasing
transparency.
Some have raised cost considerations about these reforms. But there
are far greater costs--the eight million jobs lost, millions forced out
of their homes, shuttered businesses and the uncertainty throughout the
economy that came from risk, which spilled over from Wall Street.
Thank you for inviting me today, and I'd be happy to take
questions.
Attachment
CFTC Dodd-Frank Update
Final Rules & Guidance
Agricultural Commodity Definition

Agricultural Swaps

Anti-manipulation

Business Affiliate Marketing and Disposal of Consumer
Information

Commodity Pool Operators and Commodity Trading Advisors:
Amendments to Compliance Obligations

Derivatives Clearing Organization--General Provisions and
Core Principles

External Business Conduct Standards

Foreign Boards of Trade--Registration

Internal Business Conduct Standards (Duties, Recordkeeping,
& CCOs)

Investment Advisor Reporting on Form PF (Jt. with SEC)

Investment of Customer Funds (Regulation 1.25)

Large Trader Reporting for Physical Commodity Swaps

Position Limits for Futures and Swaps

Privacy of Consumer Financial Information

Process for Review of Swaps for Mandatory Clearing

Process for Rule Certifications for Registered Entities
(Part 40)

Real Time Reporting for Swaps

Removal of References to or Reliance on Credit Ratings

Reporting Certain Post-Enactment Swap Transactions (IFR)

Reporting Pre-Enactment Swap Transactions (IFR)

Retail Commodity Transactions--Interpretive Guidance on
``Actual Delivery''

Retail Foreign Exchange Intermediaries--Regulations &
Registration

Retail Foreign Exchange Transactions--Conforming Amendments

Segregation for Cleared Swaps

Swap Data Recordkeeping and Reporting Requirements

Swap Data Repositories--Core Principles, Duties &
Registration

Swap Dealers and Major Swap Participants--Registration

Whistleblowers
Proposed Rules & Guidance
Block Rule

Capital for Swap Dealers & Major Swap Participants

Client Clearing Documentation, Straight Through Processing,
Clearing Member Risk Management

Commodity Options

Conforming Rules

Designated Contract Markets--Core Principles

Disruptive Trade Practices

End-User Exception

Entity Definitions (Jt. with SEC)

Governance and Conflict of Interest (DCM, DCO, & SEF)

Harmonization of CPO/CTA Reporting

Identify Theft (Jt. with SEC)

Implementation Phasing for Clearing & Trading Mandates

Internal Business Conduct (Documentation, Confirmation, &
Portfolio Reconciliation)

Margin for Uncleared Swaps

Process for ``Made Available to Trade'' Determinations

Product Definitions (Jt. with SEC)

Reporting of Historical Swaps

Segregation for Uncleared Swaps

Swap Execution Facilities--Core Principles & Registration

Volcker Rule
Final Orders
Delegation to National Futures Association (NFA)--Certain
exemptions for Commodity Pool Operators

Delegation to NFA--Foreign Exchange Intermediary
Registration function

Delegation to NFA--Swap Dealer & MSP Registration function

Exemptive orders--Effective Date for Swaps Regulation

Treatment of Grandfather Relief Petitions--Exempt Boards of
Trade & Exempt Commercial Markets

Treatment of Grandfather Relief Petitions--Transactions done
in Reliance on 2(h)
Studies
Feasibility of Requiring Use of Standardized Algorithmic
Descriptions for Financial Derivatives (Jt. with SEC)

International Swap Regulation (Jt. with SEC)

Study on Oversight of Carbon Markets (Jt. with various other
Agencies)

The Chairman. Thank you, Mr. Chairman.
The chair would like to remind Members that they will be
recognized for questioning in the order of seniority for
Members who were here at the start of the hearing. After that,
Members will be recognized in order of arrival. And I, as
always, do appreciate the Members' understanding of that.
And I now recognize myself for 5 minutes.
Mr. Chairman, you have recused yourself from the
investigation of MF Global, correct?
Mr. Gensler. That is correct that I am not participating in
that matter, sir.
The Chairman. And you have not been involved or privy to
information regarding new developments in the investigation and
relevant enforcement proceedings, correct?
Mr. Gensler. That is correct, sir.
The Chairman. But Chairman, do you plan on being involved
in any policy response that the Commission makes based on the
lessons learned from MF Global. For example, the Customer
Protection Roundtable scheduled for the next 2 days, you will
be involved in those?
Mr. Gensler. I have, for a long time, sir, focused along
with my fellow Commissioners and customer protection was
involved last summer and last fall when we tightened up the
investment of customer funds protections in December when we,
through the clearinghouse rules, ensured that margins should be
posted on a gross basis. And as consensus develops to the
extent consensus is developed I would anticipate being involved
in some of these matters of general rules.
The Chairman. So as I understand it, it is your intention
that the Commission moves forward on proposals potentially as
early as this spring. So I guess my question would be,
Chairman, how can you be in a position to lead the Commission
in the policy response when it should clearly be supported by
lessons learned during the investigation if you are not a part
of the investigation?
Mr. Gensler. Well, you are right, sir, that I am not part
of that investigation, but as I mentioned, there are a number
of things that the Commission laid out even before the matters
of the fall, like tightening up the investment of customer
funds. To the extent that a consensus forms through these 2
days of roundtables, through a lot of market input and market
feedback, I would be involved in that as one of the five
members of the Commission. And I do believe that there would be
significant public input on anything in reaching any changes in
the rules to really help the public and enhance what, as you
said, is the core foundation of the futures and swaps market,
that customer money is protected.
The Chairman. But you would acknowledge not being involved
in the day-to-day investigation going on now that the lessons
that hopefully will clearly come from that process will make it
more challenging for you to be part of the solution?
Mr. Gensler. Well, I think of this, if I might, somewhat as
incremental. I think what we did in December was very critical
to tighten up some of the loosening that we had frankly done in
the early years to the investment of customer funds. I think
what we have done in the clearinghouse rules are very critical
as well. But again, as the consensus forms--and I don't know
what will come out of these 2 days of public roundtables--but
we have asked the public to weigh in. The public is also not
participating in the investigation, nor am I.
The Chairman. Chairman Gensler, over the next several
months, you have reassured this Committee that the definition
of swap dealer will not result in end-users unnecessarily
having to register as swap dealers, yet last week, it was your
intention to propose the final rule related to swap dealers and
the end-user community was frantically working to have an
explicit exemption for hedging included in the rule. Chairman
Gensler, it was of course never Congress' intent for the
Commission to consider hedging activities to be swap dealing.
In fact, Congress made every effort to ensure end-users were
exempt from clearing and margin, which are only 2 of the many
regulations associated with being a swap dealer. If you
intended to make improvements to the rule as you have reassured
Members of the Committee, and for that matter myself, then why
were end-users forced to make last-minute appeals to
Commissioners for help on something as fundamental as the
classification that hedging is not swap dealing?
Mr. Gensler. I think we have done a good job throughout
these rulemakings to take into consideration public comment,
but I will say that normally speaking, in the last 2 to 3 weeks
before we vote on something, we hear from people reminding us
of their comment letters, even sometimes when we have taken
already and adjusted the base text of the rule because these
documents are not put out again under the Administrative
Procedures Act.
With regard to the actual rule itself, let me speak to the
substance. One of the key things in the rule if I might say is
market-making. There are three or four prongs that Congress
laid out. If you are ``regularly engaged in swap dealing'' is
one of them; but another one is if you are ``market-making.''
And we received a lot of comments to narrow that, to address
that, and I think that we will address that, particularly with
regard to the word hedging.
The Chairman. I guess the question, Chairman Gensler, is
based on your assurances in the past and the near panic that
was set off over this definition issue, how can the Committee
be assured that assurances given today won't lead to near panic
on other rules as the process goes along?
Mr. Gensler. Well, I think just as the Ranking Member
mentioned on the pension fund concerns about external business
conduct rule, I remember some pension funds being in our
building 2 and 3 days before the Commission vote on our rule. I
mean we are running a very open process and I welcome the
commenters coming in. I am saying that there are a number of
issues on the definition that you and I fully agree on and one
is that the end-user community banks are not swap dealers.
There are some parties that have chosen to deal, that make
markets on a routine basis. In the energy swap area they
actually list themselves as primary members of the
International Swap and Derivatives Association, which says you
can only be a primary member if you make markets, not for
hedging. And that is really the approach. I think there is not
a difference between you and I, sir, on this issue.
The Chairman. With the indulgence of my colleagues, one
last question.
Chairman Gensler, would you say that you are coordinating
with your international counterparts as required by Dodd-Frank
in Section 754?
Mr. Gensler. Yes, very much so. We share our draft
documents with them before we consider proposals and finals,
but more than that, we meet with them extensively, Commission
Sommers and myself both. She was just recently in Japan. I will
be over in Basel and Brussels next week.
The Chairman. Chairman Gensler, I understand that the
European Commissioner for the EEU on this subject matter,
Michel Barnier, just last week would have said in regards to
the U.S. and its efforts of coordination, ``it is not
acceptable that U.S. rules have such a wide effect on other
nations and foreign capital markets without any international
coordination. A unilateral approach is a path to fragmentation
and inefficiency. We need more international cooperation in all
of these areas. This is the message I would bring to all of my
U.S. counterparts. Think internationally.''
How do you respond to that?
Mr. Gensler. Michel Barnier and I had a very good meeting
last week. His letter was I think specifically about the
Volcker rule, which he and I had a lively discussion on that.
It is a very difficult rule and challenging because Congress
gave us two pieces--prohibit one thing, proprietary trading;
permit another thing, market-making. But we have had an ongoing
dialogue with Michel Barnier and his people, at one point
weekly. We looked at gaps and overlaps. And as I say, I am
going to meet with him again on Tuesday. So it has been a very
constructive coordination, a partnership with----
The Chairman. But Chairman Gensler, my understanding of
Commissioner Barnier's comments were not limited to the Volcker
rule. In fact, they were much broader than that. And if leaders
of one of our primary partners in the global regulatory reform,
the EEU is concerned that we are taking a unilateral approach
to reform, yet you are telling us you are working closely
together. There is clearly a lack of coordination here and
apparent inconsistencies with what you have told the Committee.
International cooperation and coordination is a key to making
global reform effective and to ensure that we are not
unnecessarily building inconsistencies or duplications in the
regime that will hamper competition growth. I just urge you to
more carefully consider the feedback from our global partners.
And with that, Mr. Chairman, I thank you and I yield to the
Ranking Member for 5 minutes.
Mr. Peterson. Thank you, Mr. Chairman.
You know, I think everybody should understand that hundreds
of millions of dollars have been spent over the last year or 2
by these folks trying to get around these rules. I think some
of the concerns are legitimate and some of them aren't. But,
from what I can tell kind of where you are heading with the
Commission is that if you are actually hedging, you are an
actual end-user, that is not going to trigger this swap dealer
designation. But there are firms in the electricity area and in
the energy gas and oil area that are actually dealers like you
say. For myself, as one of the sponsors of this bill, those
folks, the dealer part of their business should be regulated.
So that is what I think. I guess you guys are sorting through
that.
But, when it looks to me like some of the end-users are
trying to convince Members that we are somehow or another
trying to do something to them on their end-user status to get
out of the other part of it where they are clearly dealers. I
hope that we get more of this out into the public so people can
understand what is going on. There has been a lot of noise made
over all this stuff--and on the issue--it looks like a
combination of this extraterritorial and Volcker rule that some
of these folks are using the old saw that they are going to
move their business overseas and so forth, we have heard that.
That is part of why we didn't regulate people in the first
place.
I just hope people understand that a lot of what is going
on here is that people still don't want to be regulated. They
still want to do whatever they want, which is what got us in
trouble in the first place. I for one hope that you look
carefully at this. From what I understand, the end-users that
are actually hedging for commercial purposes are probably not
going to be swept up in this, is that----
Mr. Gensler. I agree with that and we can address that
because Congress laid out one of the prongs to be a swap dealer
is market-making. And so we can modify the final rule to
clearly address--that it is really about routinely
accommodating people knocking on your door to hedge their risk,
not your risk----
Mr. Peterson. Yes, they are----
Mr. Gensler.--somebody else coming with you.
Mr. Peterson.--actually competing in the same market as
these big--Goldman Sachs and J.P. Morgan and so forth, right? I
mean they are in the same market.
Mr. Gensler. There is a small handful. For the tens of
thousands----
Mr. Peterson. Yes, I mean----
Mr. Gensler.--of end-users are not going to be caught up in
this----
Mr. Peterson. Right.
Mr. Gensler.--but there are some who have chosen actively
to deal. The largest integrated oil companies, some of them
have a dealing desk that they do because that is a business
they choose to be in and provide liquidity to others. But it is
set up as a regular business.
Mr. Peterson. Yes.
Mr. Gensler. And that was another prong that if they set it
up as sort of a regular business to provide that liquidity and
risk management again to others.
Mr. Peterson. And it wouldn't be fair to the people that
are being regulated to have their competitors not be regulated.
I mean that just seems to be----
Mr. Gensler. Well, I----
Mr. Peterson.--they are actually in the business.
Mr. Gensler. I think it is that or we could look back to
2012 and then we would call it the BP loophole instead of the
Enron loophole. There are very real bylaws of the International
Swap and Derivatives Association that say you can only be a
primary member if you make markets and not for hedging.
Mr. Peterson. Right.
Mr. Gensler. There are six or eight companies that
voluntarily choose to do that. Now, maybe they will stop
choosing to do that. It is really to make sure, as you say,
that the tens of thousands of end-users, I agree with the
Chairman, are not swap dealers. If they are entering into a
swap--foremost to hedge, if they are not routinely, making
markets, or accommodating demands of somebody else, they are
not a swap dealer. If they are entering into swap, really the
purpose is to hedge the energy that they are producing or the
oil they have in the refinery. That is not accommodating
somebody else's business.
Mr. Peterson. One other thing, Mr. Chairman, if I could.
We have heard various reports from folks that have met with
you and other Commissioners. These rumors are circulating
constantly. One of these rumors is that there is some interest
in the Commission of exempting high-frequency traders from the
definition of swap dealer. Until 3 years ago, very few people
outside of Wall Street had even heard of high-frequency trading
and there are some indications that it may have contributed to
the flash crash of May 2010. So I would have concerns about
such a blanket exemption. So is this under serious
consideration at the Commission, and if it is, is it wise?
Mr. Gensler. It is something that some high-frequency
traders have come in to talk about. They actually sometimes
tout that they make markets. They don't yet make markets in
swaps, but if they were to develop to make markets over the
next several years, I think it is consistent with Congressional
intent that if you are making markets, actively accommodating
demand in the markets, that you would register. So I think it
would be unwise to somehow just leave them out.
Now, they wouldn't be necessarily coming under let's say
the sales practice regimes or external business conduct rules
because in January we made sure that those rules don't cover
people anonymously trading on a market. But you are correct.
Some of them have been making the rounds. One came in this week
and said they look forward to registering. They are registered
in other jurisdictions. So actually it is even amongst that
community there is a split.
The Chairman. The gentleman's time has expired.
The chair now recognizes the gentleman from Iowa for 5
minutes, Mr. King.
Mr. King. Thank you, Mr. Chairman.
Chairman Gensler, thank you for your testimony and repeated
testimony here on the Hill. I understand that you have recused
yourself from MF Global and I don't want to press anything on
that. I just want to ask just a very standard question I think
that could be reviewed from just reading the papers, but if
they had not been switching between accounts to keep themselves
liquid for the day, is it a safe conclusion that they would
have gone bankrupt earlier, and if so, how much earlier would
you guess?
Mr. Gensler. I don't know. I think this might be when I
turn to Commissioner Sommers.
Ms. Sommers. Congressman, I am not familiar with the press
reports that you are referring to, but I guess I would say that
our current investigation is doing just what you indicated. We
are tracing those transactions out of the customer segregated
accounts to find out where they would have gone.
Mr. King. If I could just----
Ms. Sommers. I don't know at this point whether they would
have gone bankrupt earlier. That----
Mr. King. May I just say that from where I sit--and I will
just make this comment then and you can decide whether you
would like to answer or not--from where I sit, if they hadn't
been using segregated accounts to meet their daily call, then
my position would be that they would have collapsed earlier and
gone into bankruptcy earlier. That is an observation from what
happens when you run into a cash flow problem. I thought that
was a simple, basic question. So that is my comment on it. If
you choose to disagree, that is fine. But I don't want to put
you on that spot.
I would like to instead move on a little bit and direct to
the Chairman, I have information in front of me that says that
of derivatives--well, first, maybe I better ask this broader
question. Do we know the value of derivatives and the value of
swaps, total notional value of each?
Mr. Gensler. We have approximations. The size futures
market runs in the U.S. between $35 and $40 trillion a year
depending upon the month and the time of year. The total
worldwide size of the swap market is reported that it is a
little over $700 trillion and it is estimated a little less
than \1/2\ is in the U.S. So I usually use an estimate of $300
trillion. But it is just that, an estimate.
Mr. King. Okay. Well, thank you. That gives us a sense of
the scope of this. And I have data in front of me that shows
that 96 percent of the value of the derivatives in this country
are in the hands of the five largest banks or in control of the
five largest banks, and then if you go to the top 25 banks, you
are at 99.86 percent of the notional value of the derivatives.
And we have a little over 1,000 small institutions that are
trading there in that .14 percent. And I would just like to
know is it your intent to regulate those small banks in the
same method as the larger banks?
Mr. Gensler. No.
Mr. King. Are you concerned--good. What would be your
intent?
Mr. Gensler. Congress gave us a flexibility to set a de
minimis in the swap dealer definition. And we put out to
comment a de minimis that many commenters came in and said was
too low. And so it is under consideration between the
Securities and Exchange Commission and us. But I think we have
taken those comments to heart.
Worldwide there is between 35 and 40 large banking
enterprises that are currently clearing at a London
clearinghouse, the big interest rate clearinghouse. Most of
those have indicated they will probably register. But then when
you get beyond that group, depending again where we end up, we
will add a couple of key definitions, the de minimis and also
something I would like to be asked about, about swap dealing in
connection with originating loans. I think that those thousands
of small banks will not be touched at all.
Mr. King. Would you have an estimate on how many banks
would be of the--I went to 25. That number, it sounds to me
like it will grow, but do you have an estimate on how many
banks would be covered?
Mr. Gensler. I don't sitting here, but the 35 to 40
international banks, some of which aren't in the U.S. that are
registered with that clearinghouse are the types of banks that
are likely to register.
Mr. King. So the small institutions have breathed a sigh
here I think. But I would like to go to----
Mr. Gensler. That is our goal, sir.
Mr. King. Yes. Then I would like to go to Dodd-Frank. And
if this Congress did the sweeping thing and perhaps not this
year, perhaps in the next Congress and repealed 100 percent of
Dodd-Frank, what would be the impact from your perspective?
Mr. Gensler. I think the public would lose the benefits of
transparency and competition in this market, this $300 trillion
or so notional market. I think end-users would--they may not
feel it immediately--but the next time Wall Street spills out
risk, they would look back and say that wasn't such a good
thing to repeal, Title XII. I am just speaking about what this
Committee came together to do. I really think the public would
be more at risk. Let's not forget eight million jobs were lost
largely because of the financial community's risk spilling out
to the economy in 2008.
Mr. King. If I could just conclude with this, Mr. Chairman,
and that is that sometime back in 2007 or perhaps in the late
fall of 2006 when we were first looking at these shifts that
were taking place financially that brought about this downward
spiral that we are reacting to now, I remember a conversation
with an investment banker who said then what you do when you
are in this business is pretty much what everyone else does.
That way if they are making money, you are making money, and if
things fall apart and there is a bailout, you will be bailed
out with the rest of them. I make that statement because I
wrote that down that day. I remember it clearly, and I think it
was a precursor to what actually happened. I think our
investors in this country, many of the large institutions were
counting on a bailout. I think they knew they were running on
the edge and taking those risks and the bailout came. That
prediction came true.
So I just incorporate that into the process. There are two
ways to do this. One is let the investors take the risk and
evaluate the collateral. The other one is to do the regulatory
and the expensive thing that has not been proven by the Obama
Administration.
I appreciate your testimony and the response of the
Commissioner as well. And I would yield back the balance of my
time.
The Chairman. The gentleman's time has expired.
The chair now recognizes the gentleman from Pennsylvania
for 5 minutes.
Mr. Holden. Thank you, Mr. Chairman.
And Chairman Gensler, thank you for being here. I agree
with the Ranking Member's opening statement that so far in the
rulemaking process, the CFTC has been really attentive to
concerns that have been raised. I just have one question about
farm credit, though. Last month, this Committee passed in a
very bipartisan manner H.R. 3336, Small Business Credit
Availability Act. Among its provisions, this bill reaffirms
Congress' original intent that farm credit institutions qualify
for the statutory exemption we provided in Section 1(a) of
Dodd-Frank, which states, ``in no event shall an insured
depository institution be considered to be a swap dealer to the
extent it offers to enter into a swap with a customer in
connection with originating a loan with that customer.'' At a
previous hearing, you raised a question as to the Commission's
ability to ensure that farm credit institutions would be able
to get this same exemption granted to insure depository
institutions. Do you still have those doubts? And do you
believe the Commission has the authority to grant farm credit
banks this same exemption?
Mr. Gensler. I do believe that we have the authority. The
hearing was helpful. I don't remember how many months ago and
there was a Member over here that asked it but I can't remember
whom.
Mr. Holden. Yes.
Mr. Gensler. And we went back and researched it. I think we
do have the authority. And though the American Bankers
Association recently sent us a letter and pointed out they
thought otherwise. So there are comments on both sides of this
but----
Mr. Holden. Okay. Thanks, Mr. Chairman. I yield back.
The Chairman. The gentleman yields back. The chair now
recognizes the gentleman from Texas, Mr. Conaway, for 5
minutes.
Mr. Conaway. Thank you, Mr. Chairman.
And Mr. Gensler, welcome to the Committee. I am going to
return to a topic that is near and dear to my heart and yours
as well I suspect. I feel a lot like Sisyphus pushing this rock
up a hill and it rolls back down, push it back up, and that is
the cost-benefit analysis that the Commission in my view needs
to do on each of its rules. As you know, we have passed a bill
here that would strengthen Section 15a of the Commodity
Exchange Act prospectively. We are going to have to go back and
redo it for these. But recently, two of your Commissioners have
been pretty critical of the cost-benefit analyses that have
been done, particularly with respect to the business conduct
rules, examples of 1 year retention on audio conversations that
need to be taped whether the technology may or may not be
available, a 15 year retention on documents with respect to
swaps, a duplicative requirement on retention of documents that
swap data repositories in accordance with your rules would be
required to maintain as well, overlapping requirements. Can you
talk to us about why that is cost-effective and/or necessary
that these duplicative costs need to be put in place under the
business conduct rules?
Mr. Gensler. Congress said that records have to be kept,
including voice recordings. That is statute. We received a lot
of comments on that and we actually moderated it. We rolled
back in the final and said the voice recordings no longer have
to be digitized or put on an electronic file. And in fact with
Commissioner O'Malia's help right there on the dais, we even
rolled back a little bit more and we assured people all you
have to do is keep it and make sure that if the enforcement
folks request something that you can search it. And there is a
lot of software to search it by keywords. And so I think we
clarified that.
To the second question about keeping books and records.
Books and records are important whether it is in the futures,
securities, or now swaps area so that a company can manage its
risk and even report to its public shareholders and to have a
check actually on the clearinghouse or somebody else. So, we
did come out that they have to keep internal books and records
and don't, so to speak, outsource that to somebody else.
Mr. Conaway. So part of your analysis will be, then, to
check records against records----
Mr. Gensler. No, not that we----
Mr. Conaway.--against the internal documents? We are going
to run into that?
Mr. Gensler. It is just that they have to keep books and
records on their transaction and trading so that they can
manage their credit risk, manage their interest rate----
Mr. Conaway. I understand.
Mr. Gensler. Okay.
Mr. Conaway. That is all done while the trade is active. I
got that. They are going to do that anyway. Fifteen years when
most other retaining requirements are 10? Why the 15 year
retention in this area?
Mr. Gensler. I would like to get back to you just on that
if I might----
Mr. Conaway. Okay.
Mr. Gensler.--because I don't remember the retention
period.
Mr. Conaway. Let me ask you something else. And this came
to our attention just within the last day or so. Single family
offices where they are doing a lot of things for really wealthy
families have enjoyed an exemption under the rule. SEC has
recently given them an exemption from certain rules. Are you
willing to work with that community to make sure that they are
treated the way they have been previously with respect to Rule
413(a)(3) to make sure that they can do their business without
unnecessary regulations and new layers of cost to these
families?
Mr. Gensler. Yes, but even further than that, I think there
are four exemptive letters that we have given over the last 10
or 15 years, and we said affirmatively that those would apply,
as a general matter. But there is always----
Mr. Conaway. Okay.
Mr. Gensler.--things that are different. So yes----
Mr. Conaway. My concern, though, is under the Commodity
Pool Operator rules that that exemption that previously was
there was not included. It may be an oversight but you are
willing to work with that community?
Mr. Gensler. Oh, absolutely. The four letters--you see,
they were actually letters; they weren't in our rule.
Mr. Conaway. Okay.
Mr. Gensler. So those letters, then, can be relied on by
other people in----
Mr. Conaway. Okay.
Mr. Gensler.--similar circumstance. It is more a question
whether it is a little bit different circumstance----
Mr. Conaway. All right.
Mr. Gensler.--and that is where we would like to work with
that community.
Mr. Conaway. All right. Well, Mr. Chairman, I continue to
be concerned that the cost-benefit analysis that is either
there or not there is not representative and there may be other
ways to get at some of these regulations and get the industry
reactions and their responses to these things, that the cost
outweighs the benefits associated with what we are doing make
sense. So with that, Mr. Chairman, I yield back.
The Chairman. The gentleman yields back.
The chair now recognizes the gentleman from Connecticut for
5 minutes.
Mr. Courtney. Thank you, Mr. Chairman. And thank you for
holding these hearings and, Chairman Gensler, for your
endurance. These are really important issues. And coming from
Connecticut where my local gas station hit $4 a gallon last
week, again, the importance of the work your Commission does is
in people's faces every single day. I mean the data that we are
seeing that is widely reported in the media, that supplies are
higher than they were 3 years ago when gas was $1.90, that
demand is down from where it was a year ago. Yet, we are seeing
this spike happening in February of all times of the year at a
moment when our recovery is finally getting some traction,
again, to me just underlines the need for the Commission to
move forward on what the Dodd-Frank bill mandated.
I have been reading the pleadings in the court challenge
that somehow suggest that you exceeded your discretion by
imposing these position limits last October. That is ludicrous.
The law is crystal clear that this is something that the
Commission was required to do. And not just to do it but to do
it expeditiously.
I mean frankly there are a lot of folks in my state who are
upset with the fact that it took so long for the Commission to
extract the rule. And again I am not pointing the finger at
you. I realized you had a juggling act in terms of trying to
line up three votes on that Commission and you did it and I
salute you for it. But obviously, we are 5 months out since
that vote occurred and yet there are still no rules in place
again with all of the negative trends that we are seeing
reemerge again, the very issue which the Dodd-Frank legislation
was intended to address. So, number one, I mean if you could
give us an update because people are anxiously looking to you
for relief here in terms of where we stand as far as the
implementation of the October rule.
Mr. Gensler. I think you refer to the position limit rule
and that rule would go into effect after two important things.
First, that we finalize jointly with the SEC the further
definition of the term swap, the product definition rule. We
have made good progress, but as you have seen on the entity
definition, we have scheduled that once and rescheduled it a
couple times so I would think the product definition rule is
this spring to give you a realistic time frame. Second, that we
collect 1 year of data. We started collecting that data last
fall and I think the year runs through this August if I am not
mistaken. It needed 1 year of data to collect and then apply
the formulas. And then, of course, as you noted, there is this
court challenge on the core question that, of course, I think
you and I agree. I think if there is ever a clearer
Congressional intent, this was--I mean people talk about intent
on end-users and intent on the Farm Credit Bureau, but if there
was ever an intent, I think the position limits this Committee
had spoken of a number of times from 2008 on.
Mr. Courtney. Well, I know Commissioner Chilton issued a
statement a couple of days ago again acknowledging the fact
that you were able to muster the votes to get that measure
through last October, but frankly, time is the enemy here in
terms of trying to get a market that is transparent, that has
some connection to supply and demand. I would urge you to--and
I wrote to you a few days ago on this specific point--to get
those position limits to follow the law, which is what the
Congress enacted. You know, this Committee tried to trip up
that law with H.R. 1573. Luckily, it has not moved forward, the
2 year stay on the Dodd-Frank legislation. But, the impact in
terms of small businesses, individuals, consumers, the payroll
tax cut extension which we just passed a few days ago, it is
just going to go up in smoke literally at the gas pump. And it
is just critical that we get these rules in place. I don't know
if you wanted to----
Mr. Gensler. I was just going to say I think some of what
we have done has been very significant. We will have brought
greater transparency to these markets by this summer when
reporting has to begin in these markets, energy swap markets
included. We have passed very strong rules unanimously, I
recall, on anti-manipulation to give us new authorities to
chase after folks that are manipulating markets. So I think we
have done some very good and constructive final rules that are
in effect, it will take some time to implement, but you are
correct; the position limit rule takes a little longer.
Mr. Courtney. And last, the impact in terms of government
spending as far as these price increases in terms of our
military dwarf whatever your budget request is that came in.
And again I hope that this Congress will recognize that you
have hard work to do and that you need the staff to do it to
protect our economy.
I yield back, Mr. Chairman.
The Chairman. The gentleman yields back. The chair now
recognizes the gentleman from Arkansas, Mr. Crawford, for 5
minutes.
Mr. Crawford. Thank you, Mr. Chairman.
And thank you, Mr. Chairman, for your appearance today. I
just want to ask you in your decision-making process, why have
you chosen not to convene an Ag Advisory Committee since the
grain, hog, and beef industries have been so severely impacted
by the MF Global meltdown?
Mr. Gensler. We consult with members of the Ag Advisory
Committee pretty regularly. Some of them are even participating
in this 2 day roundtable that was referred to. The actual
formal meeting of the Committee, the last number of years, I
think 6 years, has been once a year. We are only in February
but we are certainly going to bring that together as a formal
group and have a public meeting. We did have Commissioner Dunn,
who had so successfully chaired it for years, retire, and so we
also have to find a way to move forward but we are absolutely
committed. And we use Members of the Committee as much as we
can and seek their advice.
Mr. Crawford. Do you have a timeline on that, when you
might convene that just yet?
Mr. Gensler. I don't because, it involves a little bit of
working with the General Services Administration because
charters have 2 year clocks and things like that. But we would
be glad to work with your office and get you more details.
Mr. Crawford. Okay. Thank you. Of course you know ag co-
ops, for example, provide swaps to their members and then enter
into another swap to offset that risk. This is critical to
their ability to continue to provide hedging tools to members
of their co-ops. In that scenario, would the offsetting swap
make an entity eligible for the end-user clearing exemption?
Mr. Gensler. Well, I think that--and I hope as we finalize
this we have spent a lot of time with the agriculture
cooperatives around the dealer definition again and if it is an
agriculture cooperative that is Capper-Volstead and dealing
with another co-op or one of its members. It is almost like an
inter-affiliate transaction. I think we have worked through an
approach subject to Commissioners of two Commissions voting on
it that they are not going to get caught up in the dealer
definition. To your question, then, if they are not a dealer,
they are an end-user. I mean they are just then by definition
an end-user.
Mr. Crawford. Okay. Would the offsetting swap meet the
definition of a hedge of commercial risk?
Mr. Gensler. Well, I think they would be an end-user if
they are not a dealer so any of their swaps, they would have a
choice whether to come to a clearinghouse. And under our end-
user exception that I think is what you are referring to, the
proposal I believe would be a yes to that if that--I am trying
to follow the question but I think what you are referencing is
would they be exempt from clearing if they choose to be? And I
think the answer is yes.
Mr. Crawford. Right, okay. Let me switch gears to small
banks real quick. Out in the country it is important for me,
farmers, and ranchers that they be hedged against commodity
price risk in order to qualify for loans from their local
banks, the relationship between commodity hedging and
borrowing. It is exactly what Congress intended to preserve in
the swaps in connection with loans exemption from the swap
dealer definition. Will community and mid-sized banks that
provide commodity swaps to their loan customers be eligible for
this exemption under the final swap dealer rule?
Mr. Gensler. We have received comments; we are still
looking at it. Again I think, as I mentioned to other Members,
because of how we are addressing ourselves to the market-making
definitions and de minimis definitions, those community banks
to which you refer, I am not aware of any that will probably be
above some of these numbers. But I am not suggesting there
might not be one or two.
Mr. Crawford. Okay. And finally, in the little time that I
have left, if the commodities swaps that small and mid-sized
banks provide to loan customers are not covered under the swap
dealers definition in connection with loans exemption,
continuing to provide those swaps will make them swap dealers
and subsequently subject to Section 716 push-out provisions. So
my question is has the CFTC examined the impact within the
context of the swap dealer rule?
Mr. Gensler. We are aware of it. It is part of our
discussions. Again I think, you refer to community banks,
particularly because there is an interplay between a de
minimis, how high to make that, the definition of market-
making, in essence how tight to make that. That, as I said
earlier, I think the community banks--I mean if there is one
that you specifically know of and your staff wants to share
with us, it would be helpful to understand the issue better.
Mr. Crawford. All right, thank you. I yield back.
The Chairman. The gentleman yields back. The chair now
recognizes the gentleman from Vermont for 5 minutes, Mr. Welch.
Mr. Welch. Thank you very much, Mr. Chairman.
Thank you, Chairman Gensler, for being here. I want to talk
a little bit about gas prices in speculation premium. I have an
article from Forbes that basically goes through a Goldman Sachs
analysis that says that there is likely a $23.39 speculation
premium in the price of a barrel of oil if oil is at $108 a
barrel, which when this study was done it was at. What it talks
about is that the positions on NYMEX for future contracts is
the equivalent to 233 million barrels of oil, which is the
equivalent of 1 year's crude supply from Iran to Western
European nations like France, Belgium, Greece, Italy, and
Spain. And it goes on to do an analysis in the careful Goldman
way to state that if there is a $23 a barrel speculation
premium, that translates into about 56 cents per gallon of gas.
And obviously, that has a brutal impact on our consumers and it
has a brutal impact on many of our manufacturers that depend on
petroleum products.
Also, this is happening at a time when our production is
high, our demand is relatively low, and the United States is
actually exporting gasoline. Do you have the resources that you
need to address the speculation premium that is now injected
into the price of gasoline at the pump and that is doing so
much harm to our economy and so much damage to the pocketbook
of everyday consumers?
Mr. Gensler. I will take a broader question. Do we have the
resources we need? No, because Congress just gave us a large
task. I hope that once we have finalized these rules, which I
anticipate most will be done by this summer--there will be a
handful that will take longer--that we can move on and work
with this Committee, work with the appropriators and get the
resources to move the agency close to a 1,000 person agency
from 700 person agency. I do think that rising energy prices is
a reminder as to why this is a good investment to the American
public.
Mr. Welch. The point of our legislation I think was to
acknowledge that the futures market is absolutely essential for
end-users, but that to the extent it is manipulated by Wall
Street speculators, it is for their benefit at the expense of
consumers in the productive economy. Is that a fair statement?
Mr. Gensler. Absolutely. We are a good investment for the
real economy. The real economy is 94 percent of the jobs in
this country and I sometimes feel that people are trying to tip
the scales back to Wall Street.
Mr. Welch. Do you have any reason to dispute the analysis
by Goldman Sachs as to how much of a price is being imposed
through speculation as opposed to supply and demand?
Mr. Gensler. I know it has been quoted by many. There are
other analyses that say other things but I don't have things to
either support it or deny it.
Mr. Welch. All right.
Mr. Gensler. To support or deny Goldman Sachs' analysis I
just don't know.
Mr. Welch. All right. Now, many of us who have supported
legislation that would provide a steady and stable funding
source for you--not you so much as your agency to do the work
that needs to be done on behalf of consumers in the productive
economy, much like the SEC, a small fee on transactions. Is
this something that would be helpful to make certain that your
agency had the resources that it needed to act on behalf of
consumers and the productive economy?
Mr. Gensler. The President referenced this in his recently
sent budget to the Hill. I think prior Presidents of both
parties have raised it. I would support whatever this Committee
and Congress thought would help ensure that we have the
adequate resources, whether it is out of the general Treasury
or if these--I am supportive either way. And if this Committee
would like to work on it, I would work with you on it.
Mr. Welch. Well, I thank you, Mr. Gensler.
And Mr. Chairman, this seems like an area of common
interest because all of us represent consumers who are getting
hammered. We represent Democrats in Republican districts and we
represent Republicans in Democratic districts and every one of
us has been hearing from families where they are just wondering
why, if the demand is going down, the price is going up and how
in the world they are going to pay for this. And it is hurting
our manufacturers as well. So if there is any way, Mr.
Chairman, that we can find our way clear to help get the price
down, I think we ought to do it.
I yield back.
The Chairman. The gentleman's point is appreciated. The
gentleman yields back.
The chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
And thank you, Chairman Gensler, for being here today. I
apologize. I had another Committee so I just stepped out for a
few minutes, so if any of this is repetitive, I apologize, but
they are important questions for my constituents that I wanted
just to ask and see if we could get some answers for.
One is I am just concerned about the continued delays in
rulemaking process that are creating regulatory uncertainty and
affecting the ability of especially rural electric and farm co-
ops to plan for the future, especially with regard to the
pending definition of swap dealer. After several apparent
delayed votes on that rule, I am wondering if you could give my
constituents any idea of what to expect, when to expect it,
specifically wondering on what your prediction is for the de
minimis exception and where that will be set.
Mr. Gensler. All right. I would like to not get out ahead
of not just my Commission, but the SEC as well, so it is ten
Commissioners' deliberation. You are right; we had hoped to
vote on this and then there was more collaboration over at the
SEC to go on. But in terms of the de minimis, higher than where
we were without pinning myself down because it is ten
Commissioners weighing in. And that with regard to the
agricultural co-ops, as we have said, we have worked a lot with
the community with this Capper-Volstead community offering risk
management through swaps to their members. We are going to do
our best to try to treat that like it is an affiliate
situation.
And then on the rural electric cooperatives and municipal
power authorities, we have been working on this, I think it is
now for 6 or 8 months. We are hoping that they will come in and
file a petition. We have been working actively with them. And
then we will put it out to public comment and get what is
called a 4(c) exemption, but we have to vote on it, put it out
to public comment, and then finalize it. We are doing something
similar with the regional transmission organizations. I hope we
are close to them filing the actual petition but we are not
there yet.
Mr. Hultgren. So the delay is their filing or is the delay
from your office?
Mr. Gensler. Well, on the rural electric cooperatives I
just want to say we have been working very cooperatively, but
yes, I mean because that community is so diverse, in fairness
to them to put this petition in front of us does take some
coordination between a lot of actors in their community. But I
can't speak for other Commissioners but I am personally
supportive of it.
Mr. Hultgren. What is your best guess? You know, is it 30
days? Is it 90 days? Is it 120 days for that specifically? And
then also you had talked about dealing with the ten members,
waiting for them to respond.
Mr. Gensler. With regard to the finalizing the definitions,
the entity definitions, it is my hope that it will be through
this coming month, March. With regard to the cooperatives, the
rural electric cooperatives, if we could get back to you but I
was hopeful that we were going to have a petition in February
but I don't want to speak for them. If the petition came in,
then we would put it out to public comment. So I would say it
is probably well into the spring by the time we start to get
the public comment. And I that, I believe, takes 30 days as
well.
Mr. Hultgren. Well, okay. Again, I wasn't here for all of
the debate on Dodd-Frank, but I am wondering just a little bit.
You know, getting back to this de minimis exception, the $100
million level to start with, was that ever realistic? It just
seems like such a low number and opens it up to so many
questions out there, again, for my constituents and just
wondering again if there is a recognition of what I see as just
an unrealistic number and hopefully a realization that----
Mr. Gensler. We have gotten a lot of comments--you are
absolutely right on this--from whether it is community banks,
end-users, and we are taking them very seriously.
Mr. Hultgren. Okay. And maybe again you have already
discussed this a little bit but we have been hearing a lot of
questions about this as well. With commercial hedging, they are
wondering if that will expressly be excluded from the
activities that constitute swap dealing under the rule?
Mr. Gensler. Congress laid out a number of important
prongs. Market-making is one of them and regular business is
another one if I might say. And so a lot of commenters came in
and said, well, what is market-making? Can you be more specific
about that? And in my mind--I am just speaking off the top of
my mind. It is really about routinely making yourself available
to others who need to hedge, not about your hedging. So it is
not about some energy company that the purpose of what they are
doing is hedging the oil in the refinery.
In terms of regular business we received a lot of comments
about that. Can we be a little bit more specific and explicit
about that? And again I don't want to speak for other
Commissioners but in my mind I think there are things we can do
there to help people out and of course address through the de
minimis. Sometimes that is just an easy way to help folks.
Mr. Hultgren. Well, hopefully it can be both, because I
think both create that uncertainty and continue that. So my
hope is that it can be well defined and what I am hearing from
you is you are pretty much saying you don't have control of it.
We would probably argue you have a little bit more control----
Mr. Gensler. No, no, I----
Mr. Hultgren.--than you are letting on, but, we want to
make sure that we are getting that assurance that again there
is going to be some express exclusion of commercial hedging.
People who aren't in the business of that are in the business
of trying to serve their customers, to run a business and
knowing the uncertainties of agriculture and the commodities
markets.
Mr. Gensler. I think that we will sufficiently address the
issue of hedging in the context of a producer or merchant. That
is your point----
Mr. Hultgren. Well, I look forward to seeing that. So thank
you very much.
I yield back.
The Chairman. The gentleman's time has expired. The chair
now recognizes the gentlelady from Ohio for 5 minutes, Ms.
Fudge.
Ms. Fudge. Thank you so much, Mr. Chairman.
And thank you, Chairman Gensler, for being here. I just
have two brief questions.
You may well know that Congressman Steve Stivers and I
introduced H.R. 2779, which is a bill that would exempt certain
inter-affiliate transactions from swap dealers from meeting
margin and clearing requirements. This would ensure that
transactions are not classified as separate transactions. If
these contracts are classified as separate transactions, there
is a concern that it will increase the cost for customers of
the products and it will impede the ability of businesses to
manage their risk.
I have two questions. The first is that you talked about
it, as well as in your testimony, you state that the final
rules will include exceptions for inter-affiliate swaps. Is
that going to be in that group that is coming in the summer or
when is that?
Mr. Gensler. Well, some of them have already been
completed. For instance, in December we completed the reporting
rule and I know in your bill I think you addressed reporting as
well.
Ms. Fudge. Right.
Mr. Gensler. This is the public reporting or real-time
reporting. So we addressed affiliate swaps there that are not
really arm's length transactions and so forth. We addressed in
January in the sales practice or external business conduct
where again these affiliate transactions that aren't at arm's
length. So we shouldn't have to protect the sales practices in
that regard.
In most affiliate transactions, if one party is an end-
user, there will not be any clearing requirement. But what we
think we need to do is probably publish for notice and
comment--and we believe we have the authority to do it--but
publish for notice and comment between a financial company and
its financial affiliate where both are financial companies.
That is the one area. So for the end-user community, I truly
don't believe that this is an issue but it is just within an
insurance company between two of its affiliates, for instance.
Ms. Fudge. What do you think that time frame is, I mean, to
be----
Mr. Gensler. I need to put out a proposal on this. Given
our calendar it is going to be likely in the spring and then we
have to put it out. Maybe we will decide only to put it out to
30 days comment instead of 60 because sometimes where there is
more consensus we might go a little shorter. And in this whole
area we have about 20 or so more rules. Adding an inter-
affiliate, adding others maybe there will be 25. As I say, we
will be working through the summer and fall possibly on some of
these.
Ms. Fudge. Okay. Thank you. And the second part of my
question is I understand that the SEC has suggested that they
will treat these transactions differently than you may. Can you
discuss how you plan to address the concerns of market
participants when they may have to comply with two different
sets of rules on the same product?
Mr. Gensler. We spent a lot of time with the SEC in trying
to harmonize and sometimes advocate for our point of view. On
the trades between affiliates I have not been brought--it is
just not brought to my attention but if your office could help
me, if there is something that you think the SEC is not doing
that I should know about, I would like to help you on that.
Ms. Fudge. We will certainly be in touch. Thank you.
I yield back.
The Chairman. The gentlelady yields back. The chair now
recognizes the gentleman from Nebraska for 5 minutes.
Mr. Fortenberry. Thank you, Mr. Chairman, for holding this
important hearing.
Chairman Gensler, welcome. What is causing the rise of the
price of gasoline?
Mr. Gensler. You know, I am spending so much time thinking
about enhancing customer funds and working on these rules, but
what we are, we are not a price-setting agency. It is not what
Congress asked us to do. We are an agency that oversees the
markets to ensure that they are transparent, competitive, and
free of fraud and manipulation. And so that is what we can best
do to ensure that these energy markets work and that whatever
price, high or low, in the energy markets and the agriculture
markets reflect buyers and sellers, both hedgers and
speculators meeting in that market.
Mr. Fortenberry. Here is what is at issue: if you look at
demand for gasoline, in fact you see lower demand currently.
Supply disruptions, perhaps volatility in the Middle East are a
factor but not significant enough to probably correlate
directly to this spike that we are seeing currently. Back to
Mr. Welch's question earlier, it has been suggested by your own
Commissioner in a recent article, Bart Chilton, that there is a
speculative premium built into the price of gasoline that may
be as much as 56 cents per gallon. Do you agree with that
assessment?
Mr. Gensler. I agree that we need to make sure that our
markets have a strong oversight, that we have a strong anti-
manipulation regime, that we have transparency, and yes, that
we complete position limits. That is where Commission Chilton
and I are----
Mr. Fortenberry. Do you think these----
Mr. Gensler.--aligned.
Mr. Fortenberry.--current speculative position limits would
adequately address the problem?
Mr. Gensler. I think that the whole regime--I must say I
think that the limits are one part to ensure integrity of a
market but I think that it is critical that we complete the
other rules with regard to transparency. That we actually give
the public the benefit of this whole work that this Congress
did and that we are now about a year late on.
Mr. Fortenberry. What would you surmise the correlation to
be between the Federal Reserve's loose monetary policy is
driving down the value of our currency therefore increasing
commodity prices, particularly oil, which tends to lead the
other prices. What is the correlation there? In other words,
our debt and the way in which we are printing money to solve it
is lending itself to higher commodity prices, that is a major
factor in this uptick of retail gasoline prices.
Mr. Gensler. I have not seen a study on----
Mr. Fortenberry. I haven't either. That is why I am asking
you but we are trying to examine all of factors here that are
involved----
Mr. Gensler. Right.
Mr. Fortenberry.--I mean something is doing it.
Mr. Gensler. You are absolutely correct but if I might
return. I think our role as a Commission, as an agency is not
to set a price or even that a price is low or high. It is----
Mr. Fortenberry. No, I understand.
Mr. Gensler.--really that the markets are transparent and
work for the American public.
Mr. Fortenberry. I understand. You are just an expert in
the dynamics of these markets so it would be helpful to hear
your opinion as to all the factors that are driving up the
price in this regard.
Mr. Gensler. Though at any one time there are many factors,
I am not aware of a study--and if there is one, I would
certainly read it and so forth--but on the specific point that
you mentioned about the monetary policy and so forth----
Mr. Fortenberry. It could be a factor?
Mr. Gensler. Well, there are many factors that come into
markets. These markets, to just give you a sense of the oil
market today, the oil market today--and we publish these
figures every Friday--has producers and merchants and that
makes up between I think 13 to 15 percent of the open futures
market. And then there are swap dealers that make up a big
group. And then the managed money, that is the hedge funds, and
then other financials. So somewhere between 80 and 85 percent
of the futures market are swap dealers and what we call managed
money or hedge funds and other financials and 13 or 15 percent
of the futures markets--this is on NYMEX and so forth--are the
producers and merchants.
Mr. Fortenberry. How has that ratio shifted through the
years? It used to be inverted is my understanding.
Mr. Gensler. We have only been breaking out this into four
categories. We started doing that about 2 years ago and we have
published I think 5 prior years. So over those 7 years it has
shifted a little less than you said, but yes, it has shifted.
Mr. Fortenberry. Significantly?
Mr. Gensler. A little bit more towards financial----
Mr. Fortenberry. I am about to run out of time. I am sorry
to interrupt you. I think the broader point here is we are
deeply concerned that a system originally designed to mitigate
risk is actually creating risk now.
Mr. Gensler. Well, I think that that is just a keen
reminder as to why we have to continue to get our oversight
right and also that we need to be a fully resourced and funded
agency.
Mr. Fortenberry. Thank you.
I yield back.
The Chairman. The gentleman's time has expired. The chair
now recognizes the gentleman from Georgia, Mr. Scott, for 5
minutes.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
Welcome, Chairman Gensler. Chairman Gensler, let me ask
you. The whole core of what we are trying to do rests on
funding. We can write all kinds of laws; we can put out all
kinds of regulations. Dodd-Frank is a tremendous, tremendous
law, very complex and it puts a tremendous responsibility on
your agency as the regulator. So I need to know and I think the
Committee needs to know and the American people need to know
your real serious thoughts on the funding of it. And I
specifically want to ask you if you do not have sufficient
funding, could we see delays in reviewing, for example,
applications for new swap execution facilities, designated
clearing organizations, and swap data repositories?
Mr. Gensler. I thank you for that question. The answer is
yes, we could see delays. We are about a 700 person agency, and
with the help of this Committee and Congress, we have $205
million of funding. That is only about ten percent more staff
than we had in the 1990s. And now, I deeply respect you all
have a very hard job with the appropriators. We are asking,
along with the President, for funding to move up to $308
million, a little over 1,000 people, 300 more people because we
are taking on a market eight times the size. We do not right
now have what I would consider a plan that is adequate to
address all the registrations that will come in. We expect
between 20 and 30 swap execution facilities, a handful of data
repositories, two or three more clearinghouses. We are going to
rely on the NFA to register dealers. We are probably going to
borrow some of our enforcement staff and move some enforcement
staff for 6 months or so to try to deal with some of these
registrations. But that is a backup plan at best. It is the
plan we have but it is not a plan that I think is the best for
the American public.
Mr. David Scott of Georgia. And this would also apply to
delays in reviewing swaps to see if the clearing mandate should
apply, requests for exemptions to the law's provisions as well.
Mr. Gensler. Hopefully, the clearinghouses will start the
review of mandatory clearing this spring but you are absolutely
correct that when people knock on our doors for interpreter
letters, no-action letters, exemption petitions, this is a
human exercise and we do need more technology; but the
computers can't just take an exemptive request and put it one
end of the computer and it prints out at the other end.
Mr. David Scott of Georgia. I think that is very important.
And I think that we owe it to your agency if we are drafting
these major pieces of legislation which are needed, certain
tweaks certainly need to be made here and there. But there are
forces at work that don't like Dodd-Frank. There are forces at
work to find creative ways of trying to do away with Dodd-Frank
and there is no more clearer way of accomplishing this than
starving the very agencies and the regulatory people we assign
to do the job. It is sort of like cutting the legs out from
under somebody and then condemning them for being crippled.
Mr. Gensler. Well, I would have to say to you, Congressman,
I believe working with my fellow Commissioners and an excellent
staff, we will get the rules finished and then the industry
will want people there. But you are right; we will not have the
people even to examine the clearinghouses on an annual basis,
on a regular basis.
Mr. David Scott of Georgia. Let me ask--and I have 1 minute
to go--and our Ranking Member brought up an interesting subject
of extraterritoriality. I hope I pronounced that long word
right. And it is also an issue that you and I have discussed in
my other committee, Financial Services. It is my understanding
that the SEC Chairman Schapiro has announced that the SEC will
issue a formal rulemaking related to the extraterritorial
application of the Dodd-Frank law. Can we expect the CFTC to
also issue a formal rulemaking on the extraterritorial scope of
the Dodd-Frank as the SEC has announced?
Mr. Gensler. Though our statutory situation is a little
different, we will seek public comment on what is called 722(d)
or it might be called 2(I) of the Commodity Exchange Act. They
don't have that provision but that is basically the core to
this question. In addition, I am hoping to get public comment
through that release on swap dealer--where we defer to foreign
regulators. We have a long history of deferring to foreign
regulators. I am hoping that we can continue to do that but
that will be also--and hopefully get public comment on it.
Mr. David Scott of Georgia. All right. Thank you very much,
Mr. Chairman.
The Chairman. The gentleman's time has expired.
For the benefit of the Members, it is worth noting we will
next go with Mr. Schilling, followed by Mr. Boswell, followed
by Mr. Huelskamp, followed by Mr. Thompson, and finally Mr.
Tipton.
With that, Mr. Schilling is recognized for 5 minutes.
Mr. Schilling. Thank you, Mr. Chairman.
Good to see you again, Mr. Gensler. As you know, Congress
provided an exemption for captive finance affiliates from both
the definition of major swap participant as well as the
definition of financial entity for the purpose of end-user
clearing exception. The statutory language, however, leaves
room for interpretation by the Commission and the operational
realities of the financing provided by captive finance
companies require additional clarification from the CFTC with
regard to how they intend to interpret the calculation of the
90/90 rule. For example, take a tractor made by John Deere in
Moline, Illinois. The tractor may have an implement that is not
made by John Deere. Are they allowed to finance this
transaction?
Mr. Gensler. Though I am very familiar with the provision
and we will carry out the intent of this Committee and Congress
on the captive finance provision, I would like to sort of work
with staff and get back to you on the specific question of
the--I think if I follow the question is if John Deere sells a
tractor but there is an implement that they sell with it----
Mr. Schilling. Right. Like let's say they sell a tractor
and then they have an auger that goes with it----
Mr. Gensler. Right. Right.
Mr. Schilling.--are they going to be able to do that
basically?
Mr. Gensler. Well, I know they will be able to sell it but
your question about because the provision says that 90 percent
of what they are financing has to be what they are
manufacturing if I remember?
Mr. Schilling. Right.
Mr. Gensler. And so it is a question of whether the auger,
because it is not something they manufactured, would be counted
against the 90 percent?
Mr. Schilling. Exactly.
Mr. Gensler. I think that our proposal didn't speak
negative or positive to it, but I know this question has come
up and I don't know how we would address it other than in a
facts and circumstances. But certainly if I can talk to staff
afterwards and get back to you.
Mr. Schilling. Yes, that would be great because as I
understand many of these companies are already hearing from the
other folks that they do business with and they will demand
assurances that these captives qualify for the exemption before
they will trade with them. So it is just another piece of--
certainly I think that the John Deeres to Caterpillars and
other companies out there just really need to have some good
solid clarification to where it is not going to be second-
guessing by you guys, so, very good.
With that I yield back my time. Thank you, sir.
The Chairman. The gentleman yields back.
The chair now recognizes the gentleman from Iowa, Mr.
Boswell, for 5 minutes.
Mr. Boswell. Well, thank you, Mr. Chairman.
And thank you, Chairman Gensler, for your work. It seems to
me like if we just give you the tools and get out of your way
you will get on with it, you have lots to do and it is just
kind of holding you up.
But we keep discussing it and this is not a criticism, Mr.
Chairman. This is just a discussion. It seems like half of our
hearings have been about this subject, full Committee and
probably as much on the Subcommittee. And I am sure you will
have something to say. But I will yield to you momentarily.
I understand and I support the need for Congressional
oversight but I believe we must get to other business, too, and
I am concerned about the farm bill. Many of us have experienced
the hands-on, you and me, and we know the plan. We have to have
a little information to plan ahead. And you probably know
things I don't know about this farm bill so I just hope we get
to it. I think it is important and I know you do, too. So you
might comment on that.
Another issue, Mr. Welch touched on it, and this Forbes
report about speculation in the cost per barrel. Now, I have
spent a lot of my life in Texas and a lot of my life in
Oklahoma and I know what those arms going up and down mean. I
see them all over the place, even I believe where the State
Capitol grounds, in Oklahoma, used to be. So I understand that.
I am not quarreling about that. But I just feel like that this
gasoline price impact on our producers, economy, everything
about it, we owe it to our people that we support that they
have other options as well as they go about planning their
business and not relying on OPEC and Wall Street. So could you
comment on some of that for my ratification and my
clarification or whatever?
The Chairman. And the gentleman yields and I appreciate
that yield. To the fine gentleman from Iowa I would note as far
as the farm bill goes, this is one of those issues where as the
pieces come together we will move as aggressively together as
we possibly can. Whether it was last fall in the hurry-up
effort for the Super Committee where the chair and the Ranking
Member worked very diligently with the chair and Ranking Member
of the other body to try in a time frame that was very tight to
craft policy. Unfortunately, the rest of Congress and the Super
Committee didn't match the efforts of the House and Senate
Agriculture Committees. Whether it was that scenario or the
situation we are in this summer, we are going to do everything
within our power working with every Member of this Committee in
regular order to craft that good farm policy and move us
forward.
As far as the number of hearings that this Committee has
dealt with that relate to Dodd-Frank and the Commodity Futures
Trading Commission, I just simply observe that the very
aggressive rulemakings process that the Commission has gone on
mandated by Dodd-Frank has the potential for tremendous effect
on the economy, not just agriculture but the entire national
and international economies. And doing our responsibilities of
oversight, looking over the Chairman's shoulder on a regular
basis, asking the Chairman lots of pointed questions on a
regular basis is a part of our responsibility and I believe
that helps him and his fellow Commissioners do a better job in
their important role. And we will continue to work that.
I won't deny to you for a moment that when all of this is
done and all the rules are in place and hopefully everyone
agrees on the same interpretation, if we never have another
CFTC hearing as long as I live, it will be too soon. But that
said, until we reach that magic point, we are going to do our
job. And I would also note to my good colleague from Iowa that
very soon we will announce a series of hearings in the field
addressing farm bill issues. I suspect after that there will be
a few more hearings here in this very Committee chamber
addressing farm bill issues and we are going to load our
quiver, we are going to sharpen our blades, and we are going to
get after that farm bill, sir.
Mr. Boswell. All right.
The Chairman. Thank you for those questions.
Mr. Boswell. Well, thank you for the reassurance.
And thank you, Mr. Gensler, for your work. I know we gave
you a lot of responsibility and a whole volume of rules to come
up with and so on but I appreciate your work and the time that
you have had to spend answering questions from me and so on,
thank you for that. And I wish you continued success.
And Mr. Chairman, thanks for your remarks, but speculation
is going on. I don't know to what degree out there but I think
we probably do and I do think we do agree that we have
responsibility to do everything we can. I know we agree to do
everything we can to let our producers out there know what they
have to deal with.
Thank you for your efforts, I appreciate it. I yield back.
The Chairman. And the only comment I would add is just let
it rain in Oklahoma. With that I thank the gentleman and he
yields back.
And I now turn to the gentleman from Kansas, Mr. Huelskamp,
for 5 minutes.
Mr. Heulskamp. Thank you, Mr. Chairman.
And I appreciate the opportunity to visit with you, Mr.
Chairman, as well. And I know in one of your previous answers
you said that your main priority, a top priority was enhancing
customer funds and I wanted to follow up with a few more
questions. I know you were unable to make our hearing in
November on MF Global and I understand. And these questions
will be directed--before you recused yourself from the
investigation, I would like your comments that given that 99
percent of MF Global's accounts were commodity accounts
regulated by the Commission, do you think it was appropriate
the bankruptcy was structured as a SIPA bankruptcy, thereby
stripping customers of their priority status?
Mr. Gensler. If I might just try to answer it in a general
question about when futures commission merchants under our
jurisdiction and regulation are also broker-dealers under the
Securities and Exchange, there is the bankruptcy protection of
SIPA, the Securities Investor Protection Act, and there is the
bankruptcy protection which is in the Bankruptcy Code and so
forth and they interact. But as I understand it from my
knowledge of this from staff is that once it is a joint broker-
dealer futures commission merchant and there are securities
customers at risk the way the law interacts is that the
Securities Commission and SIPA can put it into a SIPA Trustee.
The good news though from what I understand is everything that
is in the Bankruptcy Code to protect the futures customers,
Subpart 4 I think it is called, or our code rules 190, they
have to use those same provisions.
Mr. Heulskamp. Customers with segregated funds that were
lost, they did lose their priority status, is that correct,
with this approach in bankruptcy?
Mr. Gensler. I might have to turn to Commissioner Sommers
because it is about this specific matter, but I don't know. I
mean I am able to sort of----
Mr. Heulskamp. I have a couple other questions as well. And
Ms. Sommers, if you would answer that question, I would
appreciate that.
Ms. Sommers. Of course. Thank you, Congressman. In the SIPC
proceeding for MF Global, commodity customers have an exclusive
right to the customer property that were in the segregated
accounts. They did not lose their priority status in that
particular bankruptcy case.
Mr. Heulskamp. Okay. Thank you. Second question would be,
Mr. Chairman, I guess given it was obvious on October 31--and I
know you weren't able to make our November hearing I guess on
this issue--it was obvious by then from the details that we
have seen that customer funds were missing and likely
commingled. Why didn't the Commission move immediately to
freeze the assets of MFGI and MFGH with that knowledge in hand
on October 31?
Mr. Gensler. I will try to answer just that what I know
about from that weekend. I think that is before I recused
myself. But just from what I know about that weekend, MF Global
had filed that they were in compliance each day and that
weekend, most of that Sunday the company, not us, were working
to move the customer positions to another company, Interactive
Brokers. And so there were a series of conference calls on that
Sunday to help facilitate the movement of the positions. And as
it has been widely reported, somewhere around 2:30 in the
morning that I was woken up and told, no, that is not the case.
And then a few hours later this SIPA--I mean the protections of
SIPA and the bankruptcy court were put in place.
Mr. Heulskamp. Put in place on what day?
Mr. Gensler. The same----
Mr. Heulskamp. At 2:30 in the morning? The same day?
Mr. Gensler. Well, no, they weren't put in place until
whatever--I don't know if it was 6 or 8 hours later.
Mr. Heulskamp. Okay. So you had no knowledge or no one at
the Commission had knowledge before that that there was a
commingling of funds occurring?
Mr. Gensler. I can only speak to what I know of.
Mr. Heulskamp. Well, yes. That is why I am asking you the
questions. I don't want to ask anybody else because you are the
head of the Commission. This is 10 days before you recused----
Mr. Gensler. I was woken up around 2:30 in the a.m. on the
31st of October.
Mr. Heulskamp. And did they tell you funds were commingled
at that time?
Mr. Gensler. To be more precise I was told that there was--
that the account was--I don't actually remember the words but
the word that you used was not used. It was just that the----
Mr. Heulskamp. Well, tell me what word they used, please,
if you would if you can remember. What, we are talking about
billions of dollars. I know we are talking about 2:30 in the
morning for you but these are billions of dollars for farmers
and ranchers that have just been lost----
Mr. Gensler. Absolutely. I recall being woken up and
saying--being informed with a lot of people on a phone call--
international regulators, the SEC and so forth--that the
customer funds account was not--that the deal with Interactive
was off and the customer funds account was not whole.
Mr. Heulskamp. So there were customer funds missing. That
is what you were told?
Mr. Gensler. I don't recall the exact words, sir.
Mr. Heulskamp. Okay. And, Mr. Chairman, if I might just for
30 seconds, if I can just figure out--then could you provide
for the Committee what you were told at that time at a later
moment? And again this is 10 days before your recusal or
whatever you are, a nonparticipant----
Mr. Gensler. I want to work with this Committee but also
not prejudice an ongoing investigation of the career staff and
so forth. So----
Mr. Heulskamp. So you won't tell us what you were told
then, Mr. Commissioner?
Mr. Gensler. No, I want to work with this Committee and--
but it is also what was told to any representative of the CFTC
over that----
Mr. Heulskamp. Okay.
Mr. Gensler.--weekend, and I was a representative of the
CFTC is also a matter of an investigation as well so----
Mr. Heulskamp. So are you personally being investigated?
Mr. Gensler. No.
Mr. Heulskamp. Is that why----
Mr. Gensler. No, it just is a fact----
Mr. Heulskamp. So I want to ask you as a Member of the
Committee that you will tell us in writing if necessary what
exactly you were told at that time of the night.
Mr. Gensler. And we are just working with the Committee and
the Division of Enforcement.
Mr. Heulskamp. Well, I don't care about the Division of
Enforcement. This is a request from myself as a Member of this
Committee and I am not asking about the division and I would
just like to know what you and apparently dozens of other folks
were told.
So thank you, Mr. Chairman.
The Chairman. The gentleman yields back.
The chair now recognizes the gentleman from California for
5 minutes.
Mr. Costa. Thank you very much, Mr. Chairman. Good hearing
this morning and I have several questions.
One, and California is specifically related. Last hearing
on the markup of H.R. 3527 you may or your staff may have
informed you that there was a California-specific issue that
Congressman Baca and I raised at the time to the chair and the
Ranking Member on California's ability for our energy providers
to comply with our unique regulatory system. That under the
changes it might designate California's energy companies as
swap dealers. The utility companies have submitted comments to
the CFTC. There has been extensive discussions with your staff.
We have seen no positive--at least I have been told that there
has been no positive movement on the issue. Later today, I am
going to be sending you a letter to more thoroughly outline my
concerns and hoping you might be able to speak to whether or
not you believe actions that have been undertaken to comply
with state or local laws or regulations should be specifically
included in terms of what is determined as to whether or not an
entity is a swap dealer or not.
Mr. Gensler. I am trying to recall the hearing to which you
are referring. Is this related to the municipal power
authorities in Los Angeles and elsewhere?
Mr. Costa. It is related to the major utility companies in
California, PG&E, Southern California Edison, San Diego Gas &
Electric. We have a deregulated environment under which they
purchase and under the H.R. 3527 they may be viewed as a swap
dealer and they don't believe they are swap dealers. But
obviously this issue has not come to your attention.
Mr. Gensler. Well, there were two California issues because
the Municipal Power Authority of Los Angeles----
Mr. Costa. This is not Municipal Power Authority's----
Mr. Gensler. I just wanted to----
Mr. Costa. It is needed to ensure that these companies and
ultimately California ratepayers are not charged the additional
fee on this issue.
Mr. Gensler. So I believe that we will successfully address
through the entity definition rule that, as Congress said, if
somebody is making markets, it is only if they are
accommodating others on a routine basis and I am not familiar
enough with PG&E's----
Mr. Costa. Well, please----
Mr. Gensler.--business----
Mr. Costa.--get familiar with it and get back to us. I was
going to send you the letter this afternoon. We don't want--
because these California companies are complying with state
law--to be penalized by the Federal regulators that ultimately
could impact the ratepayers in California.
Mr. Gensler. I think they will benefit by this law because
it will bring transparency and I believe it will----
Mr. Costa. No, that is----
Mr. Gensler.--address your----
Mr. Costa.--the largest issue but there is a problem. Get
this? There is a problem with complying with state law, Federal
law and we need to work through that problem.
Mr. Gensler. I look forward to reading your letter.
Mr. Costa. Okay. Thank you very much.
On the broader set of issues and it has been talked about
before in terms of the impacts on gas prices and the volatility
and the potential speculation, while they are talking about the
potential to reach $4 a gallon, they have exceeded $4 a gallon
in California. I was at the pump on Saturday and it was in
excess of $4.18 a gallon as I saw my fill-up reach almost $70.
So we are aware of the BP fire in Washington State at the
refinery, but other places in the West are being similarly
impacted. We know from the data at the Energy Information
Administration that the supply, as has been already stated here
this morning, of oil and gas is higher today than it was 3
years ago when the national gasoline was below $2 a gallon.
We know it is a worldwide market, of course, but right now
the demand for oil in the U.S. is the lowest since 1997. I am
not satisfied with the response you have made earlier this
morning as to whether or not you agree that something else more
basic than supply and demand is driving these prices.
Mr. Gensler. These markets are made up of hedgers and
speculators and at any given time both are part of a market. As
I mentioned earlier, in fact, the futures market, over 80
percent of the market is swap dealers, hedge funds, managed
money, other financial----
Mr. Costa. So you would say essentially----
Mr. Gensler.--is less than 20 percent----
Mr. Costa.--speculation as having some impact; you just
can't quantify it?
Mr. Gensler. On any given day financial actors, as you are
referring to them as speculators, are part of the pricing of
energy and agricultural products. Our role is to make sure and
ensure that that market is free of manipulation, it is
transparent, and it reflects supply and demand.
Mr. Costa. Well, my time has expired but, Chairman Gensler,
the fact is is that for American farmers and all of the benefit
from the products that we produce, the CFTC is undertaking with
other authorities to address the extensive energy speculation
that is destroying--I don't know if you care to comment any
further as to what specific efforts you are taking under the
new Dodd-Frank rule.
Mr. Gensler. Well, just that there are broad rules, it is
new anti-manipulation authority, it is transparency
authorities, it is trying to complete once the data is in,
position limits authority, so I think it is really the
collection that this Committee asked us to address the markets
with.
Mr. Costa. Mr. Chairman, I wasn't here earlier but is it
the desire of the Committee to have the Commissioner to come
back and report when they have made their findings or to
provide it in some informative fashion?
The Chairman. I believe that is certainly possible and that
can be addressed as one of the questions submitted to him, and
a response to that would be the report.
I thank the gentleman from California. His time has
expired.
Mr. Costa. Thank you.
The Chairman. I now recognize the gentleman from
Pennsylvania for 5 minutes, Mr. Thompson.
Mr. Thompson. Chairman Lucas, thank you.
Chairman Gensler, thanks for coming once again. You had
mentioned in your testimony the time constraints for completion
of the rules and that the CFTC is ``completing rules in a
thoughtful, balanced way, not against the clock.'' Well, how
specifically is CFTC allowing for flexibility with rulemaking?
Mr. Gensler. Well, foremost, Congress gave us 1 year to
complete which was last July, and of course, here we are 8 or
10 months later. We put out exemptive order last July to say
the whole market could rest at ease until December and then
again we came back in October and November and said rest at
ease again until this coming July. In addition, in each of the
rules we have phased in implementation and in some cases it
goes out years; some cases it is just months. It depends on
what comments we have heard from the markets. I would be
hopeful that we would complete most of our rules by this
summer, but as I have said in my written testimony, some might
take longer. We want to get these things right.
Mr. Thompson. One of the things I see just burdening our
economy is on certainty from many different aspects, and so
what is your agency doing to help relieve some of the
uncertainty that many of our banks and financial institutions
are experiencing as these rulemaking processes continue?
Mr. Gensler. You raise a good point because it is balancing
lowering that regulatory uncertainty with not trying to rush
things. And I think this Committee wants us to do both but I
have taken the Chairman to heart not to rush things. But as we
complete each rule, I think we do help lower that uncertainty.
Beyond that what we have tried to do is really reach out and
have a lot of work with market participants before and after a
rule is done through roundtables and then, as we have done in
some of these data rules, to actually have weekly calls with
market participants to sort through some of their questions. In
one case, we put out an over 100 page topic area on large
trader reporting to help describe how to get the data in.
Mr. Thompson. You mentioned in your testimony that a motive
for the current expansion of regulations that you believe
failure to regulate swaps and future markets led to the 2008
financial crisis. Could you please describe a specific
regulation that you have added since the 2008 financial crisis
that significantly reduces the risk of future financial crises?
Mr. Gensler. I think in a number of places. I do think
swaps were not the only cause of the crisis but it was part of
it. I think the overall regime of clearing and central clearing
lowers the interconnectedness and I think we will get this
right. This Committee and Congress want end-users out but the
other part of the markets to be in clearing. I think
transparency, even what we completed in December. Starting this
summer in July of this year, regulators and market participants
for the first time will actually see the pricing of these
transactions. It will be delayed to protect the anonymity, to
protect the market, but people for the first time will start to
see what the pricing of these transactions are.
Mr. Thompson. One of the critical pieces of the mosaic of
regulations that you describe in your testimony is the
definition of a swap. Could you please share with us your
preliminary definition and indicate areas in which you think
changes are likely?
Mr. Gensler. In the definition, did you say swap or----
Mr. Thompson. Swap, please.
Mr. Gensler. We have gotten a lot of questions and
comments, which I think were very helpful just drilling in on
where forwards would not be considered to be swaps. And I think
it was the intent of this Committee--I know there was an
important colloquy with then-Chairman Peterson on this matter
that forwards aren't treated as futures and they are not
treated as swaps. My hope would be we give greater clarity on
that whole topic. There are similar topics that people have
raised, concerns about when insurance is not a swap, when
regular commercial transactions are not a swap. So I think the
final rule will benefit from those comments and clarity.
Mr. Thompson. Okay, thank you.
Mr. Chairman, I yield back.
The Chairman. The gentleman yields back.
The chair now turns to the gentleman from Colorado, Mr.
Tipton, for 5 minutes.
Mr. Tipton. Thank you, Chairman Lucas. And thank you,
Chairman Gensler for being here.
Chairman, we are very aware of the importance for
agricultural producers to be able to gain access to credit, and
quite often an important component of their ability to gain
that access to credit is to ensure that they are hedged against
the risks they face, commodity prices, be it interest rates or
currency rates. In recognition of this, Dodd-Frank provided an
exemption for banks to provide swaps in connection with loans
from designation of swap dealers to ensure the important
relationship between risk management and flow of credit that it
can continue between small- and mid-sized banks and businesses.
This link I believe is well described in a letter by one of the
banking regulators from the OCC that they sent to you last year
expressing their concerns. With a narrow approach to the swaps
in connection with loans, the exemption is proposed by the CFTC
and the impact that this may actually have on our banks.
The OCC--and I will read this--stated specifically in their
letter, ``the statutory language does not limit the loan
exclusion with swaps that are connected to the financial terms
of a loan, nor does it require that the swap be entered into
contemporaneously with a loan origination. CFTC's proposed
implementation of the loan exclusion effectively prevents
community and mid-sized banks from offering commodity-based
swaps to loan customers. We are concerned that this interferes
with the bank's risk management and believe that it was
precisely this type of risk management that Congress intended
to preserve through the loan exclusion. Loan underwriting
criteria for the community and mid-sized banks that offer loans
to commercial customers engaged in commodity-driven business
may require as a condition of the loan that the borrower be
hedged against commodity price risk incidental to its business.
This hedging activity reduces the bank's credit risk on the
loan since the borrower is situated to withstand potentially
volatile commodity price fluctuations.''
It did continue on in regards to the restrictions on the
timing of the swaps relative to the origination of the loan. In
their letter they stated, ``the loan exclusion should also be
implemented in a manner that recognizes practical reality of
bank and end-user risk management practices.'' To that end, the
loan exclusion should be tailored to allow for ongoing hedging
throughout the life of a loan, providing such hedging is
connected to the origination of a loan, as discussed above.
Eliminating the exclusion to swaps that are contemporaneous to
loan origination or close thereto, as is contemplated in the
proposed rule, would preclude ongoing risk management connected
to bank lending and increased credit risk for bonds.''
So I am familiar with that. And Mr. Gensler, in light of
the fact that one of our primary banking regulators expressed
concern that precluding commodity swaps from the exemption or
by placing arbitrary timing restrictions on swaps in connection
with loans will actually raise credit risk at our banks. Can we
expect these restrictions to be omitted from the final rule?
Mr. Gensler. I am familiar with the comment letter and
other comment letters about lending in connection with
originating a loan. We are taking them all into consideration.
We actually asked questions of the public on a number of these
issues. Let me just focus on one. The second that you raised is
to what does it mean, in connection? Is it contemporaneous? Is
it a week before? Is it a month before? Et cetera. Is it
throughout the life of the loan? We received a lot of
different--there was a range of feedback on that and we will be
addressing all of the issues I think in that Comptroller's
letter. Some of them would add clarity but again subject to
other Commissioners and to Commissions.
I would say the other piece of this is----
Mr. Tipton. I am not sure--not to interrupt but I am going
to run out of time. I am not sure I am hearing an answer to the
question. Can we expect that to be omitted from the final rule
because the primary purpose of Dodd-Frank was to be able to
lower that risk.
Mr. Gensler. I am answering as best I can that in a pack of
rulemaking that we will take into consideration and I am very
familiar with the Comptroller's letter and his other letters on
other topics. John and I sometimes talk about these letters as
well, and I believe the community banks also will ultimately
understand that as we address ourselves to the de minimis
standard as well. But I am not able at this stage to say that
we are accepting the Comptroller's letter completely.
Mr. Tipton. Okay. You aren't willing to accept that but you
said you were reaching out to the market participants and they
are directly saying with the backup of the OCC that this is
going to raise that risk?
Mr. Gensler. Again, sir, it is the banks who offer swaps in
connection with originating loans have raised questions about
when can they give that. We are going to address that as best
we can, those comments and the comments of the Comptroller and
address the comments separate from that letter about the de
minimis.
Mr. Tipton. Mr. Chairman, if I can just have about 30 more
seconds here?
The Chairman. Thirty more seconds.
Mr. Tipton. I appreciate that. I would really applaud and
stand behind Mr. Costa in terms of his regard to be able to
bring these back to Committee because I think the legislative
intent is incredibly important. As you are developing these
rules and I would join myself and associate myself with Mr.
Huelskamp's remarks as well in regards to actually having a
response back to his request. So thank you.
The Chairman. The gentleman's time has expired.
The chair will now turn to the gentleman for final
questions from the Republic of Texas for 5 minutes, Mr.
Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Gensler, good to have you here today.
Mr. Gensler. Good to be with you, sir.
Mr. Neugebauer. You had mentioned that Commissioner O'Malia
last week strongly criticized the final swap dealer business
conduct rule saying that he felt like the Commission had failed
to really do a comprehensive cost-benefit analysis of that
rule. I think in fact in some of the discussions with some of
the CFTC lawyers, they really couldn't produce any substantial
numbers to indicate that really any kind of cost-benefit
analysis had been done. And I believe Mr. O'Malia asked the OMB
for independent review of that process and to see whether those
rules comply with the Obama Administration's Executive Order.
In fact I think he used the word that you all had committed
regulatory malpractice. That is a pretty strong statement from
one of your Commission members.
And I think one of the things that many of us are concerned
about is we have been tracking the compliance side of Dodd-
Frank. So it has about 400 different rulemaking requirements. I
think we reached a milestone the other day--I think we are at
140. I think you said you had done about 25 or 26; you had 20
more. So that means we are \1/3\ of the way through this
process and the current number is that it takes about 21
million man hours to comply with the first 140 rules. Now, I
want to put that in perspective for you. It means that it only
took 20 million man hours to do the Panama Canal. And so
basically what somebody said earlier this week is for 21
million man hours what we have done rather than connecting two
oceans and creating a huge economic engine, the only thing we
have united here is lawyers and billable hours.
And so I think the importance of these cost-benefit
analyses can't be overemphasized. And you must comply with the
law because we are giving the American people a lot of
regulations and we are not, one, sure it is going to fix all of
the issues that many thought that were a part of the crisis in
2008. But the other issue is the huge burden that it is going
to put on the economy and the financial systems in total.
And so what is your response to ``that you committed
regulatory malpractice?''
Mr. Gensler. I am very proud of the agency's work, the
Commission's work and I think that we have fully complied with
the Commodities and Exchange Act and the Administrative
Procedures Act on cost-benefit considerations. We take them
into consideration on each of our rules. The Chief Economist's
Office has to sign off on any rule that comes before us, and in
many of our internal deliberations it is really very helpful
what commenters have come in and said to us about this.
Mr. Neugebauer. What is your response though that your own
lawyers admitted they had not crunched the numbers when
analyzing the impact or any of the alternatives to that----
Mr. Gensler. I was at the same hearing and that, with all
respect, what they said was to a very specific question about,
as I recall, specific numbers on the ability to search voice
records, one question. Congress mandated that voice records be
kept and in our proposal we said that it had to be put in
electronic form. A lot of people didn't like that so we then
said, okay, you do not have to put it in electronic form. We
rolled back. We dialed back because of the cost of that but we
said you still just need to be able to search it to find a key
term. You know, if there is an enforcement case later, then
somebody has got to be able to search it. And there are readily
available search tools to just to be able to search and find a
key term.
Mr. Neugebauer. So you have a definitive document that says
cost-benefit analysis for this rule and it has quantitative
data in it?
Mr. Gensler. Well, it is actually called cost-benefit
considerations because that is what the statute----
Mr. Neugebauer. So there is----
Mr. Gensler. Yes. Oh, yes. That is in each of our rules,
absolutely.
Mr. Neugebauer. Can you furnish me with a copy of that?
Mr. Gensler. We will do that.
Mr. Neugebauer. Do you understand the importance of why
this cost-benefit analysis is important? Because it is not just
what you are doing at this Commission but it is what is going
on across the whole spectrum. And what we are already hearing
is in many cases there is duplication, there are conflicts of
what rules that are being put out by you and other regulators.
And so it doesn't appear we are moving in a direction that is
necessarily positive.
Mr. Gensler. I not only understand it; I have found it
very, very helpful, not just commenters' views on costs and
benefits but our own deliberations when somebody in our Chief
Economist's Office says, well, how do you justify this? Now, it
is only within the discretion we have, but like this example of
voice recordings that we said, no, do not put them in
electronic form----
Mr. Neugebauer. And is the cost-benefit analysis that you
do, is that done prior to releasing the rule or before the rule
is final?
Mr. Gensler. There is a cost-benefit consideration section
that is in a proposal. We ask commenters to comment. We
particularly ask them if they can send us quantifications. A
lot of times we don't get quantities and numbers. And so it may
not be as much quantification as any of us would think about in
keeping our own bank account or something. But, yes, we get
comments through our roundtables, through our meetings, and
then we include that in the final rule as well.
Mr. Neugebauer. The feedback I get is that basically the
quantification comes from the people commenting that your
documents, the rules themselves don't really have very much of
a concrete quantification or justification of the cost-benefit
analysis and that you ask for additional information on that
aspect. The problem with that is then that you take that into
consideration; then you go out and put out the rule. I would
submit to you that if you don't have the data, you are asking
for the data, that when you get that information back, that you
should resubmit the rule with an updated version of the cost-
benefit analysis so that then there could be comment on that.
But if you are mining a lot of data from the people on comment,
not everybody has the eyes to get to see that prior to when you
finally--or if you don't resubmit the rule, then it comes in
after the fact.
Mr. Gensler. The good piece of the process of every agency,
and ours as well, is everybody gets to see everybody else's
comments. So we actually get comments on comments, and we have
used our discretion to allow people to put in late comments.
And often it is on cost and benefits and they have been very
helpful.
The Chairman. The gentleman's time has expired. All time
has expired. Any closing comments from the Ranking Member?
Seeing none, the chair simply notes once again we
appreciate the opportunity to look over Chairman Gensler's
shoulder. We will continue to do that as we work together to
make sure the good policy is corrected in this process.
Mr. Gensler. Could I say, Mr. Chairman, I would hope that
even when we do finish the rules that we would keep coming in
front of this Committee, but if you were trying to give us the
motivation to slow it down more so that it can always have a
reason to come in front of you----
The Chairman. Chairman Gensler, you are almost like a
member of my family we have spent so much time together. And
like all family members, you will always be welcome----
Mr. Gensler. Thank you. Thank you.
The Chairman.--to finish this process.
Mr. Gensler. All right.
The Chairman. With that, under the rules of the Committee,
the record for today's hearing will remain open for 10 calendar
days to receive additional material and supplemental written
responses from the witnesses to any question posed by a Member.
This hearing of the Committee on Agriculture is adjourned.
[Whereupon, at 12:00 p.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]

Submitted Letter by Hon. Peter Welch, a Representative in Congress from
Vermont
Commodity Markets Oversight Coalition--An Alliance of Commodity
Derivatives End-Users and Consumers
February 29, 2012

Hon. Harold Rogers, Hon. Norman D. Dicks,
Chairman, Ranking Minority Member,
House Committee on Appropriations, House Committee on Appropriations,
Washington, D.C.; Washington, D.C.;Hon. Daniel K. Inouye, Hon. Thad Cochran,
Chairman, Ranking Minority Member,
Senate Committee on Appropriations, Senate Committee on Appropriations,
Washington, D.C.; Washington, D.C.

Dear Chairmen Rogers and Inouye, and Ranking Members Dicks and
Cochran:

The undersigned members of the Commodity Markets Oversight
Coalition write to endorse the Administration's Fiscal Year 2013 budget
request of $308 million for the Commodity Futures Trading Commission.
We believe this funding level is necessary to ensure the oversight,
transparency and stability necessary for the proper functioning of our
nation's commodity markets and to ensure adequate protections for
commodity hedgers and commercial end-users.
The CMOC is an independent, non-partisan and nonprofit alliance of
organizations that represents commodity-dependent industries,
businesses and end-users that rely on functional, transparent and
competitive commodity derivatives markets as a hedging and price
discovery tool. The coalition advocates in favor of government policies
that promote stability and confidence in the commodities markets, that
seek to prevent fraud, manipulation and excessive speculation, and that
preserve the interests of bona fide hedgers and consumers.
While we acknowledge the deficit crisis our country faces and
commend Congressional leaders for their calls to rein in Federal
spending, the Commission must be funded sufficiently to exercise its
statutory responsibilities. For more than a decade, the CFTC has been
under-funded, understaffed, and under-resourced. All the while it has
faced complex new market trends and technologies, a vast expansion of
authority over unregulated over-the-counter swaps markets, and
challenges to market stability and security, including the recent
bankruptcy of commodity brokerage firm MF Global. The collapse of MF
Global illustrates the importance of rigorous market surveillance,
accountability and consumer protections.
By CFTC Chairman Gary Gensler's own admission, the current funding
level of $205 million is wholly insufficient to meet these challenges.
Furthermore, failing to provide this important financial regulator with
needed funds could further jeopardize security, stability and
confidence in the commodity markets and adequate consumer protections.
As businesses that depend on competitive, transparent and
functional commodity derivatives markets, we urge Congressional
appropriators to provide the Commission with the amount of $308 million
as requested by the Administration for Fiscal Year 2013.
Thank you in advance for your thoughtful consideration.
Sincerely,

Airlines for America;
American Feed Industry Association;
American Public Gas Association;
American Trucking Associations;
Colorado Petroleum Marketers Association;
Consumer Federation of America;
Florida Petroleum Marketers Association;
Fuel Merchants Association of New Jersey;
Gasoline & Automotive Service Dealers of America;
Independent Connecticut Petroleum Association;
Institute for Agriculture and Trade Policy;
Louisiana Oil Marketers & Convenience Store Association;
Maine Energy Marketers Association;
Massachusetts Oilheat Council;
Montana Petroleum Marketers & Convenience Store Association;
National Association of Oil & Energy Service Professionals;
National Association of Truck Stop Operators;
National Family Farm Coalition;
National Farmers Union;
New England Fuel Institute;
New Jersey Citizen Action Oil Group;
New Mexico Petroleum Marketers Association;
New York Oil Heating Association;
Oil Heat Council of New Hampshire;
Oil Heat Institute of Long Island;
Oil Heat Institute of Rhode Island;
Organization for Competitive Markets;
Petroleum Marketers & Convenience Store Association of Kansas;
Petroleum Marketers & Convenience Stores of Iowa;
Petroleum Marketers Association of America;
Public Citizen;
Ranchers-Cattlemen Action Legal Fund (R-CALF) USA;
Society of Independent Gasoline Marketers of America;
Vermont Fuel Dealers Association;
West Virginia Oil Marketers and Grocers Association;
Wyoming Petroleum Marketers Association.

CC:

Chairman Gary Gensler, Commodity Futures Trading Commission;
Commissioner Jill Sommers, Commodity Futures Trading Commission;
Commissioner Bart Chilton, Commodity Futures Trading Commission;
Commissioner Scott O'Malia, Commodity Futures Trading Commission;
Commissioner Bart Chilton, Commodity Futures Trading Commission;
Rep. Jack Kingston, Chairman, House Appropriations Subcommittee on
Agriculture;
Rep. Sam Farr, Ranking Member, House Appropriations Subcommittee on
Agriculture;
Rep. Frank D. Lucas, Chairman, House Committee on Agriculture;
Rep. Collin C. Peterson, Ranking Member, House Committee on
Agriculture;
Rep. Fred Upton, Chairman, House Committee on Energy & Commerce;
Rep. Henry A. Waxman, Ranking Member, Committee on Energy & Commerce;
Sen. Richard Durbin, Chairman, Senate Appropriations Subcommittee on
Financial Services and General Government;
Sen. Jerry Moran, Ranking Member, Senate Appropriations Subcommittee on
Financial Services and General Government;
Sen. Debbie Stabenow, Chairwoman, Senate Committee on Agriculture,
Nutrition & Forestry;
Sen. Pat Roberts, Ranking Member, Senate Committee on Agriculture,
Nutrition & Forestry;
Sen. Jeff Bingaman, Chairman, Senate Committee on Energy & Natural
Resources;
Sen. Lisa Murkowski, Ranking Member, Senate Committee on Energy &
Natural Resources.
______

Submitted Questions
Response from Commodity Futures Trading Commission
Questions Submitted by Hon. Frank D. Lucas, a Representative in
Congress from Oklahoma
MF Global
Question 1. Please tell us why and what led to your decision as
Chairman of the CFTC to recuse yourself from the largest failure of a
CFTC registrant and arguably the largest investigation the Commission
has ever had. What are the parameters of your recusal? Do you
participate in any Commission deliberations or review any reports of
the investigation?

Question 2. Why does your ``Statement of Non-Participation''
regarding matters involving MF Global extend to J.C. Flowers & Co.?

Question 3. Please describe the nature of your relationship with
J.C. Flowers and any and all communications you have had with him while
serving as Chairman of the CFTC.
Answer 1-3. For the convenience of the Committee, I include two
documents which address Questions 1, 2, and 3. The first is the text of
my statement of non-participation. The second is a Memorandum which
includes information detailing my activities prior to my withdrawal
from participation in the matter. (See attachments 1-2).

Question 4. You directed the agency's Division of Swap Dealer and
intermediary Oversight to find ways to bolster agency regulations for
how it oversees and what it requires from self-regulatory organizations
and futures commission merchants in direct response to MF Global. What
recommendations did you receive?
Answer. Commission staff members are reviewing the customer funds
protection provisions of the Commodity Exchange Act and Commission
regulations to identify enhancements to the protection of customer
funds. As part of this process, Commission staff held a 2 day public
Roundtable on February 29 and March 1, 2012 to solicit input and to
identify enhancements to FCM internal controls surrounding the handling
of customer funds. Panelist at the Roundtable represented a cross-
section of the futures industry including academics, consumer groups,
agricultural and energy interests, managed funds and pension plans,
FCMs, derivatives clearing organizations, self-regulatory
organizations, securities regulators and securities self-regulatory
organizations, and industry trade associations.
The Roundtable provided a forum for Commission staff to obtain
information and views on a range of customer protection issues. Day one
of the Roundtable focused on customer funds segregation models; FCM
controls over the disbursement of customer funds deposited for trading
on U.S. futures markets; increasing transparency surrounding an FCM's
holding and investment of customer funds; and lessons learned from
commodity brokerage bankruptcy proceedings. Day two of the Roundtable
focused primarily on the protection of customer funds deposited with
FCMs for trading on foreign futures markets; particular issues
associated with entities dually registered with the CFTC as FCMs and
the U.S. Securities and Exchange Commission as broker-dealers; and
enhancing the self-regulatory structure.
Commission staff also has held discussions with representatives of
the Futures Industry Association (``FIA'') and the two primary futures
markets self-regulatory organizations, the National Futures Association
(``NFA'') and the Chicago Mercantile Exchange (``CME''), regarding
enhancing customer protections. Staff is taking into consideration the
recommendations that FIA issued in its document titled, Initial
Recommendations for Customer Funds Protection, and in its publication
of frequently asked questions regarding the protection of customer
funds.
The Commission recently approved an NFA proposal that stemmed from
a coordinated effort by the CFTC, the SROs, and market participants
The three key areas of reform included in the NFA rules are:

First, FCMs must hold sufficient funds in Part 30 secured
accounts (funds held for foreign futures and options customers
trading on foreign contract markets) to meet their total
obligations to customers trading on foreign markets computed
under the net liquidating equity method. FCMs will no longer be
allowed to use the alternative method, which had allowed them
to hold a lower amount of funds representing the margin on
their foreign futures;

Second, FCMs must maintain written policies and procedures
governing the maintenance of excess funds in customer
segregated and Part 30 secured accounts. Withdrawals of 25
percent or more of excess funds in these accounts (that are not
for the benefit of customers) must be pre-approved in writing
by senior management and reported to the NFA; and

Third, FCMs must make additional reports available to the
NFA, including daily computations of segregated and Part 30
secured amounts, as well as twice monthly detailed information
regarding the cash deposits and investments of customer funds.

Additional staff recommendations include:

Incorporating the NFA rules approved recently into the
Commission's regulations;

Ensuring that SROs and the CFTC have direct electronic
access to FCMs' bank and custodial accounts for customer funds,
without asking the FCMs' permission. Further, require that
acknowledgement letters (letters acknowledging that accounts
contain segregated customer funds) and confirmation letters
come directly to regulators from banks and custodians;

Providing that futures customers, if they so elect, to have
access to information about how their assets are held and with
whom, similar to that which is available to mutual fund and
securities customers.

Question 5. The CFTC recently concluded an industry-wide spot check
of major futures brokerages and did not find any material breaches of
customer fund protections. The CFTC's spot check concluded there were
no material breaches of customer fund protections. Isn't that what CME
found both in the annual audit of MF Global that ended August 4th of
last year and again in October, just days before the bankruptcy? Did
the CFTC use any knowledge it has gained from the MF Global bankruptcy
to sharpen its spot check?
Answer. The CME did not report MF Global being in violation of
Commission segregation requirements as a result of its 2011 examination
of MF Global, or during its review in late October 2011.
Commission staff, in coordination with the CME and NFA, conducted
limited reviews of all FCMs that carry customer funds to assess their
compliance with requirements to segregate such funds pursuant to
Section 4d of the Act, and to set aside in secured accounts funds
deposited for trading on foreign boards of trade under Section 4(b) of
the Act and Part 30 of the Commission's regulations. The principal goal
of the limited reviews was to obtain an appropriate level of assurance
that FCMs holding customer funds were not in violation of the
segregation and Part 30 secured amount requirements as of the review
date.
DSIO staff conducted the reviews by obtaining from each FCM a
detailed listing of assets held in segregated and Part 30 secured
accounts as reflected in the firm's books and records. The listing of
assets was compared to independent third-party source documents and
reconciliations maintained at the FCM's offices supporting the asset
balances. Staff also reviewed the third-party account documentation to
determine that the funds were maintained in properly titled segregated
or secured accounts, as appropriate. In addition, staff reviewed each
FCM's reported segregation and Part 30 secured amount liabilities and
reviewed underlying firm records to ensure that the records reflected
such liabilities. The staffs of the CME and NFA performed comparable
review procedures. Each FCM was determined to be in compliance with the
segregation and secured amount requirements as of the respective review
date.
Commission staff is using its experience with the MF Global
bankruptcy to develop proposed enhancements to the customer protection
regime, including strengthening FCMs' internal controls surrounding the
handling of customer funds.

Question 6. Has there been a drop in trading volume since the MF
Global bankruptcy? If so, how much of the drop can be attributed to the
collapse of the firm? What more could have CFTC done to prevent this
disaster?
Answer. During the first quarter of 2012, aggregate trading volume
across all contract markets decreased 5.9 percent relative to 2011.
While aggregate trading volume decreased over this period, aggregate
open interest in futures and options combined increased 5.4 percent.
Commission staff is reviewing the facts and circumstances that led
to the shortfall of customer funds at MF Global and conducting an
enforcement investigation. Staff will use this information in assisting
with the development of proposed enhancements to the protection of
customer funds.
Dodd-Frank Implementation
Process
Question 7. For nearly 18 months, the CFTC has been in the process
of writing rules to govern the swaps market--and you've finalized
nearly 30 rules. But, the very cornerstone of the entire new regime--
the definition of a swap--is still not final. Why is the definition of
swap coming late in the game, when it should have been the first rule
finalized?
Answer. The Commission recently finalized the swap definition rule,
acting jointly with the Securities and Exchange Commission. The
Commissions benefitted from substantial public comment, deliberate
consideration of those comments, and frequent and substantial contact
between staff of the two agencies.

Question 8. You mentioned in your testimony that there may be times
when a re-proposal is necessary. Are there particular rules that you
believe may require a re-proposal? Should we expect a re-proposal on
the swap dealer definition in light of your assurances that significant
changes have been made to improve the rule?
Answer. On April 27, 2012 the CFTC and the Securities and Exchange
Commission adopted joint rules and interpretive guidance on the further
definition of ``swap dealer,'' ``security based swap dealer,'' ``major
swap participant,'' and ``major security based swap participant.''

Question 9. What steps has the CFTC taken to minimize differences
with the SEC's proposals on similar provisions related to security-
based swaps?
Answer. The CFTC and SEC consult and coordinate extensively to
harmonize Dodd-Frank rules. This close coordination will continue and
always benefits the rulemaking process. The two agencies recently
adopted joint final rules further defining the terms ``swap'' and
``security-based swap.''

Question 10. Recently, the CFTC finalized a rule requiring market
participants to register as swap dealers with the Commission. However,
many of the rules governing swap dealers have not been finalized. How
can entities know whether they will register if they cannot evaluate
the costs associated with the registration because of the various
unknown regulatory requirements?
Answer. The Dodd-Frank Act provides the Commission with ample
flexibility to phase in implementation of requirements. The Commission
has utilized this flexibility where appropriate to allow for phased
compliance with specific regulatory requirements.

Question 11. We have stressed to you in numerous hearings the
importance of logical sequencing of proposed and final rules. Both to
support useful public comment, and to minimize disruptions in the
markets. In the FY 2012 Agriculture Appropriations bill, you were
directed to develop and publish, with a 60 day comment period, a
schedule of implementation and sequencing of Dodd-Frank rules. Can you
update us on your compliance with this, and when we can expect the
implementation plan?
Answer. The Commission has taken a number of actions to facilitate
implementation of Dodd-Frank regulations in keeping with the
instructions with the report language in the FY 2012 House Agriculture
Appropriations bill. These include:

March 16, 2011--Implementing the Dodd-Frank Act, FIA's Annual
International Futures Industry Conference, Boca Raton, Florida.
Remarks of Chairman Gary Gensler (as posted on CFTC website and
including listing of order in which rules might be considered).

April 12, 2011-June 10, 2011--Comment period open (292 written
comments filed); Concepts document published as a guide for
commenters.

May 2, 2011 and May 3, 2011--CFTC-SEC Staff-led Roundtable
Discussion on Dodd-Frank Implementation.

May 4, 2011--Notice published in Federal Register re-opening and
extending comment periods (through June 30) in order to ``provide
interested parties with an additional opportunity to participate
in'' Dodd-Frank Rulemakings. Also requesting comment on the order
in which the Commission should consider final rulemakings.

June 17, 2011--Commission seeks public comment on proposed order to
grant exemptive relief from the application of Dodd-Frank Act
effective dates.

July 14, 2011--Commission publishes final order providing exemptive
relief from effective dates of Dodd-Frank Act provisions in order
to facilitate a smooth transition for market participants (expiring
on December 30, 2011; extended on Dec. 23, 2011).

September 8, 2011--Outline published of Dodd-Frank Title VII Rules
the CFTC May Consider in 2011 and the First Quarter of 2012

September 8, 2011--The Commission sought public comment on proposed
rules specifically to establish schedules to phase in compliance
with the swap clearing and trade execution requirement provisions
of the Dodd-Frank Act. At that meeting, the Commission also
approved a proposed rule to phase in compliance with previously
proposed requirements, including the swap trading relationship
documentation requirement and the margin requirements for uncleared
swaps.

December 23, 2011--Commission publishes amendment to July 14 order
extending effectivedate relief through July 16, 2012.

January 11, 2012--Update of order of consideration of final rules
posted on Commission website.

July 3, 2012--Commission approves amendment to July 14 order
extending effective daterelief through December 31, 2012.
Individual proposed rules specifically request public comment
regarding implementation and sequencing. Examples of such rules
include: Reporting, record-keeping and Trading Records requirements
; Real-Time Public Reporting of Swap Transaction Data; Registration
of Swap Dealers and Major Swap Participants; and Protection of
Collateral of Counterparties to Uncleared Swaps

Commission staff--along with staff from the SEC and other
implementing agencies--have conducted a number of roundtables
(transcripts available on CFTC.gov):

August 20, 2010--Conflicts of interest in the clearing and listing
of swaps.

September 14, 2010--Swap Data and Swap Data Repositories

September 15, 2010--Swap Execution Facilities

October 22, 2010--Credit Default Swaps

October 22, 2010--Customer Collateral Protection

December 2, 2010--Disruptive Trading Practices

December 12, 2010--Capital and Margin

June 3, 2011--Protection of Cleared Swaps Customer Collateral

June 8, 2011--Swap Data record-keeping and Reporting

June 16, 2011--Definition of Swap Dealer and Major Swap Participant

July 6, 2011--Changes related to Commodity Pool Operators and
Commodity Trading Advisors

August 1, 2011--International issues

January 30, 2012--``Available to Trade'' Provision for SEFs and
DCMs

Feb 29 and March 1, 2012--Roundtables to discuss additional
customer collateral protection

May 31, 2012--The Volcker Rule

June 5, 2012--Core Principle 9 for Designated Contract Markets
Cost-Benefit Analysis
Question 12. How has the CFTC been able to conduct cost-benefit
analysis on any of its final rules pertaining to swap dealers or major
swap participants if the rule defining these terms has not been
finalized? How would they know the number, type or size of the entities
affected by the regulations and how certain costs may impact them?
Answer. The Commission relies on information provided by industry
participants, the general public, and currently available data to
conduct cost-benefit considerations for all its rulemakings. For entity
definitions, the Commission used a conservative estimate reported by
the National Futures Association that the number of swap dealers and
major swap participants is anticipated to be 125. Given the lack of
transparency in the swap markets, it is difficult to accurately predict
this number.
The entity definition rules have been finalized with an interim de
minimis threshold of $8 billion notional swaps exposure (as opposed to
$100 million in the proposed rules). Once the rules have been
implemented, the CFTC and SEC will collate information from the swap
markets and conduct additional studies regarding the threshold for swap
dealers and major swap participants.

Question 13. Has the CFTC undertaken any analysis regarding the
cumulative impact its rules will have--on particular sectors of the
economy or the economy as a whole?
Answer. Two principles are guiding the agency throughout the rule-
writing process. First is the statute itself. We intend to comply fully
with the statute's provisions and Congressional intent to lower risk
and bring transparency to these markets.
Second, we are consulting heavily with both other regulators and
the broader public. We are working very closely with the SEC, the
Federal Reserve, the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency and other prudential regulators,
which includes sharing many of our memos, term sheets and draft work
products. We also are working closely with the Treasury Department and
the new Office of Financial Research. CFTC staff have held 600 meetings
with other regulators on implementation of the Act.
The Commission is bound by the requirements of the Administrative
Procedure Act, carefully reviews and addresses the thousands of
comments received, and strives to arrive at a balanced result.

Question 14. How does the Commission ensure its cost-benefit
analysis meets the standards set forth in Executive Order 13563--
President Obama's Order ``Improving Regulation and Regulatory Review''?
Answer. The Commission's guidance on costs and benefit
considerations incorporates principles from OMB circular A-4 and
Executive Orders 12688 and 13563.

Question 15. You mentioned in testimony that derivative markets
help their participant's hedge or transfer $22 of risk for every dollar
of goods and services produced in the U.S. economy. You also mentioned
that these markets touch nearly every aspect of our economy from the
food we eat, to the price at the pump, to our mortgages and credit
cards, even our retirement savings.
If market participants--those who use these tools to mitigate
risk--are subject to unnecessarily higher costs associated with new
rules, would your analysis then also support the fact that the costs
will be borne by the customers who use end-users products, such as
electricity, fuel at the pump, or food at the grocery store?
Answer. I believe implementation of the Dodd-Frank Act will lower
the risk of the swaps marketplace by directly regulating dealers for
their swaps activities and by moving standardized swaps into central
clearing. The Act also brings transparency to the swaps marketplace.
The more transparent a marketplace is the more liquid it is, the more
competitive it is and the lower costs will be for hedgers, borrowers
and their customers.
In addition, the Commission finalized the end-user exception to the
clearing requirement for swaps. Congress provided that non-financial
entities, such as farmers, ranchers, manufacturers and other end-users,
should be able to choose whether or not to clear those swaps that hedge
or mitigate commercial risks. The Commission's final rule implements
this exception for non-financial entities, establishing criteria for
hedging or mitigating commercial risk and imposing minimal reporting
requirements for those swaps that come under the end-user exception.
Entity Definitions/Registration Requirements
Question 16. We have heard from many end-users that the breadth of
the swap dealer definition may miscategorize the swaps they enter into
for hedging purposes as swap dealing. Will the definition of ``swap
dealer'' resolve this issue by providing an explicit exemption for
hedging?

Question 16a. How will you define ``hedging''? Will it be
consistent with the definition proposed in the Major Swap Participant
definition and end-user exemption?
Answer 16-16a. The statutory definition of ``swap dealer'' does not
specifically address hedging activity. However, the CFTC believes it is
appropriate to provide, in an interim final rule, that swaps a person
enters into for the purpose of hedging price risks related to physical
positions are excluded from the swap dealer determination. The interim
final rule draws upon principles in the Commission's long standing
interpretation of bona fide hedging. It excludes swap activity for the
purpose of portfolio hedging and anticipatory hedging. If a swap is not
entered into for the specific hedging purposes identified in the rule,
then all relevant facts and circumstances about the swap would be
considered in determining if the person is a swap dealer. The CFTC is
looking forward to receiving comment on whether the interim final rule
appropriately excludes swaps for hedging.

Question 17. If the Commission adopts a definition of ``hedging''
that is specific to the swap dealer definition, the Commission will, in
three separate rulemakings, have three definitions of hedging: one in
the MSP rule; another in the position limits rule; and finally another
in the swap dealer definition rule. Hedging is a generally understood
and accepted term. Why would the Commission have three different
definitions for the same activity across regulations that affect the
same companies and firms?
Answer. CFTC rules define how instruments used for hedging are
treated for various purposes. For example, where one definition is
tailored to give full meaning to the end-user exception from clearing,
another is crafted in the context of the Volcker Rule with its
limitation on proprietary trading. (See attachment 3).

Question 18. Why is the end-user exemption provided for on a
transactional basis as contemplated by the Commission's proposal?
Wouldn't this be unduly burdensome and costly for end-users? Instead,
why not allow end-users to make an annual declaration to the CFTC that
they will transact as an end-user, with an obligation to report to the
CFTC should their situation change?
Answer. Under the Commission's final rule, when reporting a swap in
compliance with the statutory requirements, the end-user must provide,
or cause the swap dealer to provide, notice that the exception is being
elected. The end-user has the option of providing additional required
information in an annual filing or on a swap-by-swap basis.

Question 19. Will the CFTC distinguish between trading and dealing
activities in the swap dealer definition? How? Will such a distinction
appear in the Rule itself, or in the preamble?
Answer. The dealer-trader distinction is discussed in the preamble
to the CFTC and the SEC joint final rules and interpretive guidance on
the further definitions of ``swap dealer,'' ``security based swap
dealer,'' ``major swap participant,'' and ``major security based swap
participant.'' The CFTC anticipates that the dealer-trader distinction
will be useful as one consideration, particularly in light of the
degree to which it overlaps with many of the other characteristics
identified in the release that are indicative of dealing activity.

Question 20. As you know, agricultural co-ops, for example, provide
swaps to their members, and then enter into another swap to offset the
risk. This is critical to their ability to continue to provide hedging
tools to members of the co-op. In that scenario, would the offsetting
swap make an entity ineligible for the end-user clearing exception?
Would the offsetting swap meet the definition of a hedge of commercial
risk?
Answer. Under the final rule, the exception is available with
respect to a swap involving a non-financial entity, where the swap is
hedging or mitigating the person's business risks.

Question 21. The Commission recently voted to propose the ``Volcker
rule,'' and it included a definition of what constitutes ``market
making.'' Will the final rule defining swap dealer also define what
constitutes ``market making'' since it is one of the key criteria
established under Dodd-Frank?
Answer. True to Congressional intent, end-users other than those
genuinely making markets in swaps won't be required to register as swap
dealers. The swap dealer definition benefited from the many comments
from end-users who use swaps to hedge their risk. The final rule
defining ``swap dealer'' includes the provision from the proposed rule
which incorporates the statutory requirement that this term include a
person that ``makes a market in swaps.'' The preamble to the final rule
includes an extensive discussion of what constitutes market making.

Question 22. Before Dodd-Frank, non-financial forward commodity
contracts and commercial options were excluded from CFTC regulation.
This allowed commercial commodity transactions to proceed without
financial markets regulation. As you know, Dodd-Frank repealed these
exclusions. Further, in a proposed rule, the CFTC deleted the
regulatory exemption for commercial options, and has proposed other
rules that imply physical forward commodity contracts will now be
regulated as ``swaps.'' In one of our previous hearings, you have
stated that the Rural Electric Cooperatives are not dealing in swaps,
but ``forwards'' or ``forwards with embedded options.'' Should there be
express exclusions from the definition of ``swap'' for commercial
commodity contracts that utilities use every day--such as forward
contracts for physical power, natural gas, coal and other fuels, and
for commercial options, such as capacity contracts, reserve sharing
agreements, and all-requirements contracts?
Answer. The Commission recently adopted a final rule to repeal and
replace previously existing regulations concerning commodity options.
The Commission also issued an interim final rule (with a request for
additional comment) that incorporates a trade option exemption into the
final rules for commodity options. The interim final rule provides a
trade option exemption from the general swaps rules, subject to certain
conditions, for certain physical delivery commodity options. The
interim final rule was adopted in response to commenters that requested
relief from Dodd-Frank swaps regulations for commodity options used by
commercial entities to deliver and/or receive physical commodities in
connection with their business. The trade option exemption conditions
include position limits, large trader reporting, appropriate record-
keeping and reporting requirements, anti-fraud and anti-manipulation
rules, and the retention of certain swap requirements for swap dealers
and major swap participants that engage in trade options. The
Commission seeks public comment on the interim final rule.
Small Banks
Question 23. Out in the countryside, it is important for many
farmers and ranchers that they be hedged against commodity price risk
in order to qualify for loans from their local banks. This relationship
between commodity hedging and borrowing is exactly what Congress
intended to preserve in the ``swaps in connection with loans''
exemption from the swap dealer definition. Will community and mid-size
banks that provide commodity swaps to their loan customers be eligible
for this exemption under the final swap dealer rule?
Answer. The final ``swap dealer'' definition rule fulfills
Congress's mandate that a swap entered into by an insured depository
institution in connection with originating a loan is not to be
considered dealing activity.

Question 24. According to recent data, 96% of the notional value of
all derivatives within the U.S. banking system is held by only five of
the largest banks. Among the largest 25 banks, that percentage
increases to 99.86% of the total notional value. That means that the
remaining .14% of the total notional value is spread among 1,046 small
and community banks. Is it your view that the .14% of notional value
spread among 1,046 small financial institutions is a threat to the
stability of the financial system?

Question 24a. Can we expect that in the final rule ``End-User
Exception to Mandatory Clearing'', the CFTC will use its authority to
exempt smaller financial institutions, farm credit banks and credit
unions from the definition of financial entity so that they are not
subject to unnecessary costs--in recognition that they pose no systemic
risk?
Answer 24-24a. The final rule exempts banks, savings associations,
farm credit system institutions, and credit unions with total assets of
$10 billion or less from the definition of ``financial entity,'' making
such institutions eligible for the end-user exception.
Extraterritoriality/International Coordination
Question 25. Will the CFTC issue a proposed rule related to the
extraterritorial application of Dodd-Frank, as Chairwoman Schapiro has
indicated the SEC will do, or is it your intent for the Commission to
simply issue guidance? How can you ensure two different processes will
produce consistent results? Will market participants be afforded the
same opportunity to comment on the CFTC's guidance as they will on the
SEC's rule proposal?

Question 26. When should market participants expect the CFTC to
provide clarification on extraterritorial application?

Question 26a. If you intend to issue guidance, as opposed to a
formal rule, will the Commission be obligated to perform cost benefit
analysis?
Answer 25-26a. Section 722(d) of the Dodd-Frank Act states that
swaps reforms shall not apply to activities outside the United States
unless those activities have ``a direct and significant connection with
activities in, or effect on, commerce of the United States.'' Congress
included this provision (722(d)) for swaps, but included a different
provision with regard to the SEC's oversight of the security-based
swaps market. In response to many requests, the Commission issued
proposed guidance interpreting section 722(d) of the Dodd-Frank Act.
The Commission is seeking public comment on the guidance and looks
forward to the public's input.

Question 27. Chairman Gensler, you have reassured us that you are
well coordinated with international regulators. I'm growing concerned
that the international community does not agree.
In a recent article in the Economic Times, the U.S. role in
international financial reform was described as this--

The United States is coming to be seen as a global threat,
acting unilaterally with aggressive new market rules that
critics say will hurt U.S. firms, foreign banks, and
international markets in one swoop.
Despite its talk of a global level playing field, the United
States is being portrayed as a rogue country . . .

Please respond to this.

Question 28. What regulatory coordination initiatives are you
undertaking with your international counterparts with regard to Dodd-
Frank and G20 regulatory goals? What initiatives are you undertaking
with regard to mutual recognition or mutual accommodation schemes?

Question 29. In your testimony, you discuss your ongoing dialogues
with Japan. In April of last year, the Financial Services Agency of
Japan sent you a letter expressing concerns with the reach of Dodd-
Frank. In fact, the letter states that ``if (Japanese financial
institutions) were also to be regulated under U.S. DFA framework, this
will create an undesirable and redundant effect on these Japanese
institutions.''
Based on your ongoing discussions with Japanese regulators, will
you take action to respond to the concern they've raised about the
redundancy extraterritorial application of Dodd-Frank creates?
Answer 27-29. As we do with domestic regulators, the CFTC shares
many of our Dodd-Frank Act rulemaking memos, term sheets and draft work
product with international regulators. We have been consulting directly
and sharing documentation with the European Commission, the European
Central Bank, the UK Financial Services Authority, the European
Securities and Markets Authority, the Japanese Financial Services
Agency, and regulators in Canada, France, Germany, Singapore, and
Switzerland.
Both the CFTC and European Union are moving forward to address the
four key objectives set forth by the G20 in September 2009, namely
clearing through central counterparties; trading on exchanges or
electronic trading platforms; record-keeping, reporting; and higher
capital requirements for noncleared swaps.
Section 722(d) of the Dodd-Frank Act states that the provisions of
the Act relating to swaps shall not apply to activities outside the
United States unless those activities have ``a direct and significant
connection with activities in, or effect on, commerce'' of the United
States.
Volcker Rule
Question 30. As you know, the markets for Treasury securities and
Treasury futures and options are intertwined. Yet, the proposed Volcker
rule excludes treasuries, but not futures and options on Treasuries. Is
this purposeful? Will you commit to clarifying in the final rule that
market making-related activities in exchange-traded futures and options
are among the permitted activities in which a covered banking entity
may engage, or in the alternative, use your exemptive authority to add
Treasury futures and options on Treasury futures to the list of
permissible proprietary trading activities for covered banking
entities?
Answer. The Commission has solicited public comment with respect to
the proposed Volcker rule and looks forward to reviewing submitted
comments. The Commission will review, analyze and consider all public
comments submitted in connection with this rulemaking before proceeding
to issue a final rule.
CFTC FY 2013 Budget Request
Question 31. The FY 2013 Budget and Performance Plan details the
redeployment of resources to process the surge of Dodd-Frank
registrations and reviews during FY 2012. It states that staff will be
reassigned from examinations and enforcement as necessary to support
registration and reviews. The plan also states that the Commission
acknowledges that this realignment creates risks in its critical
oversight roles. Please describe which critical oversight roles will be
at risk. How has Dodd-Frank impacted your ability to effectively
oversee the futures markets?
Answer. The CFTC has been directed by Congress to oversee the swaps
market as well as the futures market that it has traditionally
regulated. The CFTC needs additional resources in order to oversee the
swaps market, which is eight times larger than the futures market we
have traditionally overseen. The National Football League would not
significantly expand the number of games in a weekend without, at the
same time, expanding the number of referees to protect the players,
ensure fair competition, enforce the rules and protect the integrity of
the game.

Question 31a. Chairman Gensler, since the bankruptcy of MF Global,
has your agency refocused its oversight goals? Should it?
Answer. The Commission has been actively working to improve
protections for customer funds. This includes:

The completed amendments to rule 1.25 regarding the
investment of funds bring customers back to protections they
had prior to exemptions the Commission granted between 2000 and
2005. Importantly, this prevents use of customer funds for in-
house lending through repurchase agreements;

Clearinghouses will have to collect margin on a gross basis
and futures commission merchants (FCMs) will no longer be able
to offset one customer's collateral against another and then
send only the net to the clearinghouse;

The so-called ``LSOC rule'' (legal segregation with
operational commingling) for swaps ensures customer money is
protected individually all the way to the clearinghouse; and

The Commission included customer protection enhancements in
final rules for DCMs. These provisions codify into rules staff
guidance on minimum requirements for self-regulatory
organization (SROs) regarding their financial surveillance of
FCMs.

In addition, the Commission approved an NFA proposal that stemmed
from a coordinated effort by the CFTC, the SROs, and market
participants, including from the CFTC's 2 day roundtable earlier this
year on customer protection.

Question 31b. Please describe the priorities you have set for the
CFTC. Has the writing of new rules taken higher priority over
examinations and enforcement of the futures and commodities markets?
Answer. The Commission has been directed to promulgate and
implement regulations to implement the derivatives reforms of Title VII
of the Dodd-Frank Act. That direction is in addition to the
Commission's traditional mandate: oversight of the futures market. The
Commission is dedicated to carrying out its entire mission.

Question 32a. If yes--has this priority shift affected the
Commission's core mission?

Question 33. Your testimony states that the Commission is
completing rules in a thoughtful, balanced way--not against a clock.
Have you mirrored this approach when instituting resources and manpower
under the new authority and rule writing responsibilities in the Dodd-
Frank Act?
Answer. The Commission has carefully developed a strategic plan
which has led to the development and execution of a reorganization of
the agency's staff.

Question 33a. What steps have you taken to become more efficient
and effective with the resources your agency has in developing rules
mandated by the Dodd-Frank Act?
Answer. The CFTC is dedicated to using taxpayer dollars
efficiently--nearly a fourth of our overall budget request is for the
development of Information Technology.
But it still takes human beings to watch for market manipulation
and abuses that affect hedgers--farmers, ranchers, producers,
commercial companies and the public buying gas at the pump.
For example, the Dodd-Frank swaps market transparency rules mean a
major increase in the amount of incoming data for the CFTC to aggregate
and analyze. The agency is taking on the challenge of establishing
connections with SDRs and aggregating the newly available swaps data
with futures market data. This requires high performance hardware and
software and the development of analytical alerts. But it also requires
the corresponding personnel to manage this technology effectively for
surveillance and enforcement.
Position Limits
Question 34. When was the last time the CFTC calculation of
deliverable supply was done to help set position limits?
Answer. The CFTC does not routinely calculate deliverable supplies
for physical commodities. CFTC staff, as part of its due diligence
reviews, evaluates related exchange filings. Staff conducts interviews
with participants in the cash markets for the commodity underlying the
contract to understand the production, consumption, and distribution of
the underlying commodity and underlying deliverable supply. The cash
market analysis and deliverable supply estimate are used together to
assess the contracts' susceptibility to manipulation and to verify that
the position limit is consistent with the Commodity Exchange Act and
CFTC regulations and policy. CFTC staff last estimated a commodity's
deliverable supply in 2009 when staff estimated deliverable supplies
for crude oil, natural gas, RBOB gasoline, and heating oil. Staff
concluded that deliverable supplies were adequate. Under the new rules
recently adopted by the CFTC establishing position limits in 28
physical commodity markets, the exchanges and the CFTC would reevaluate
deliverable supplies on a regular 2 year basis.
Other Issues
Question 35. This question is related to the efficient use of CFTC
resources and judicial review of agency actions. When the SEC adopts a
rule, a person affected by that rule may file a petition for review
directly in a U.S. Court of Appeals challenging the SEC's rule under
the Administrative Procedures Act. That has been true for decades.
Direct appeals allow for expeditious and efficient review by the courts
of agency action. The Commodity Exchange Act does not have a similar
provision. When the CFTC adopts a rule, I understand the CFTC's
position to be that a person affected by that rule must file a
complaint in federal district court, not in the court of appeals. That
means the CFTC and the plaintiff must go through two proceedings to
challenge a CFTC rule--one in district court and one in appellate
court--while a challenge to the SEC involves only a one step process
with the court of appeals. In this instance, the SEC process is more
direct and less costly for the agency. Do you support an amendment to
the CEA that would allow direct appeals from CFTC rules to the courts
of appeals?

Question 35a. If yes, would you favor enactment of such an
amendment expeditiously so that it could take effect this year? Would
that help to preserve CFTC resources? If no, why not?
Answer 35-35a. The Commission has not taken a position with regard
to this matter.
Questions Submitted by Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Question 1. Earlier this year, the CFTC published its final rule
for real-time public reporting of swap transaction data included the
term ``publicly reportable swap transaction'' as defining the types of
swaps that would be subject to public dissemination. The rule excluded
``internal swaps'' or some swaps between affiliates, because such swaps
were not arms-length transactions and disclosure would not enhance
price discovery. In a footnote, the Commission does say that ``covered
transactions between affiliates as described in Sections 23A and 23B of
the Federal Reserve Act'' would be publicly reportable swaps
transactions. Can you explain more about the nature of these specific
covered transactions mentioned in the Federal Reserve Act and why the
Commission unanimously voted to require their public dissemination
despite being between affiliates? Did the Federal Reserve have any
input regarding this subject?
Answer. Sections 23A and 23B of the Federal Reserve Act refer to
transactions between a bank and its affiliate. Section 23A relates to
all derivatives transactions of the bank that create credit exposure to
the affiliate. Section 23B sets the ``arm's-length requirement'' for
that section. The Commission determined that it would be appropriate to
include certain covered transactions as publicly reportable and
reflective of the market. The Commission did have the benefit of
consultation with the Federal Reserve Board regarding this provision.

Question 2. Last month this Committee marked-up H.R. 1840,
legislation which would amend the CFTC's legal standard for cost-
benefit analysis. You and your staff may already be familiar with its
contents, but generally the bill matches the directives included in
President Obama's Executive Order ``Improving Regulation and Regulatory
Review.'' Do you believe there is a significant difference between the
cost-benefit analysis conducted currently at the CFTC and the level of
analysis that would be required by H.R. 1840/the President's Executive
Order?
Answer. Section 15(a) of the Commodity Exchange Act (CEA) currently
requires the CFTC, before it promulgates a regulation, to ``consider
the costs and benefits of the action.'' H.R. 1840 would amend section
15(a) to require that such determinations be done through the
Commission's Office of the Chief Economist. It would require that the
Commission consider qualitative and quantitative costs and benefits,
and specify that the Commission could propose or adopt a regulation on
a reasoned determination that the benefits of the intended regulation
justify the costs of the intended regulation.

Question 2a. How difficult is it for the Commission to conduct
quantitative and qualitative analysis on its proposed regulations?
Answer. The Commission takes very seriously the consideration of
costs and benefits of the rules it considers under the Dodd-Frank Act
as required under section 15(a) of the Commodity Exchange Act. The
economic costs and benefits associated with regulations, especially as
they pertain to commenters' concerns, are of utmost importance in the
Commission's deliberation and determination of final rules.
As noted in the guidance for cost-benefit considerations for final
rules memorandum to rulemaking teams from the Chief Economist and
General Counsel dated May 13, 2011, rulemakings involve consideration
of quantified costs and benefits to the extent it is reasonably
feasible and appropriate. For rules that do not have quantifiable
costs, the Commission seeks to explain why such costs are not
quantifiable and to explain the reasoning and supportive explanation of
its predictive judgments using qualitative measures.

Question 2b. How dependent is the Commission on factual data
submitted from market participants on the costs associated with their
market activity in conducting quantitative and qualitative analysis;
can the Commission require market participants to submit information so
you can have better data to guide your analysis?
Answer. The Commission recognizes the significance of meaningful
issues raised by commenters regarding costs or benefits and takes those
comments seriously as it is working on final rules. The Commission does
not require that commenters provide data with regard to their
operational costs. For those comments which persuade the Commission to
modify its proposed rule, the Commission seeks to explain why the
proposed alternative more effectively furthers the goals of the statute
in light of the section 15(a) factors, not only in the cost-benefit
section but throughout the rule's preamble. In contrast, for those
comments which do not persuade the Commission to modify its proposed
rule, the Commission seeks to explain its adoption of the proposed rule
as the most effective means to further the goals of the statute in
light of section 15(a). The Commission seriously considers commenters'
concerns regarding costs or benefits and evaluates the alternatives
presented.

Question 2c. Would enactment of H.R. 1840 significantly slow down
the Commission's efforts to implement Dodd-Frank?
Answer. The bill does include provisions that generally would
require additional steps in the Commission's regulatory process.

Question 3. One of your fellow Commissioners recently sent a letter
to OMB asking them to review some of the CFTC's cost-benefit analysis
to see if it complied with various Executive Orders and OMB guidance.
But it is my understanding that these Orders and guidance do not apply
to the CFTC and that the Commodity Exchange Act's statutory cost-
benefit requirements set the cost-benefit standard that the Commission
is required to meet. Is my understanding correct? Can the OMB direct
how the Commission conducts its cost-benefit analysis?
Answer. The Commission is bound by section 15(a) of the Commodity
Exchange Act in its rulemaking. The statute includes particularized
factors to inform cost-benefit analyses that are specific to the
markets regulated by the CFTC. The Commission's practices are largely
consistent with the executive order principles.

Question 4. Last month this Committee passed by a bipartisan vote
H.R. 2682, legislation to ensure that end-users are not subject to
margin requirements for their swap transactions. The need for this
legislation arose from the Prudential Regulators proposing rules that
would require end-users to post margin. During many of our hearings,
much attention has been focused on regulatory harmonization between
agencies. This is an area which could benefit from some harmonization,
particularly if was in the direction of the CFTC's position of not
subjecting end-users to margin requirements. Have you been in contact
with the Prudential Regulators to make the case for the CFTC's
position? Do you detect any flexibility in their position on this
issue?
Answer. The CFTC has been working with the Federal Reserve, the
other U.S. banking regulators, the SEC, and international regulators
and policymakers to align margin requirements for uncleared swaps. It
is essential that we align these requirements globally, particularly
between the major market jurisdictions. The international approach to
margin requirements in the consultative paper (sponsored by the Basel
Committee on Banking Supervision and the International Organization of
Securities Commissions) released this month is consistent with the
approach the CFTC laid out in its margin proposal last year. It would
lower the risk of financial entities, promote clearing and help avoid
regulatory arbitrage. Consistent with the CFTC's proposal, it also
excludes non-financial end-users from margin requirements for uncleared
swaps.
The CFTC reopened the comment period on our margin proposal so that
we can hear further from market participants and the public in light of
the work being done to internationally harmonize margin rules. As we
work with international regulators on this coordinated approach, I
would anticipate that the Commission would only take up the final
margin rules toward the end of this year.

Question 5. Last month this Committee passed by a bipartisan vote
H.R. 3527, legislation to clarify the definition of ``swap dealer.''
During debate on that bill in the Committee, Members raised questions
about language in the amended bill which would directed the Commission
to adopt standards distinguishing the ``dealing'' activities versus
``entering into swaps for a person's own account for the purpose of
achieving one's own trading objectives.'' This was an attempt to
establish some dealer/trader distinction similar to what the SEC has in
place. I know you are not a lawyer, but to you what does ``achieving
one's own trading objectives'' mean?

Question 5a. While the goal of this language was to create a
dealer/trader distinction, do you believe the language could be read in
other ways inconsistent with that intent?

Question 5b. Can you again describe the differences between the
CFTC and SEC proposed rules regarding the dealer/trader distinction in
your respective definitions of swap dealer and security-based swap
dealer? Do you believe such differences are reconcilable?
Answer 5-5b. The dealer-trader distinction is discussed in the
preamble to the CFTC and the Securities and Exchange Commission joint
final rules and interpretive guidance on the further definitions of
``swap dealer,'' ``security based swap dealer,'' ``major swap
participant,'' and ``major security based swap participant''. The
dealer-trader distinction will be useful as one consideration,
particularly in light of the degree to which it overlaps with many of
the other characteristics identified in the release that are indicative
of dealing activity.

Question 6. There have been several press reports for several
months now about the CFTC and other federal and foreign financial
regulators investigating a group of banks for using swaps to manipulate
the price of the London interbank offered rate (LIBOR). While we know
you cannot answer questions about the investigation specifically, we
would like you to answer these more general questions. For the record,
can you explain the LIBOR, how it affects Americans and the serious
implications of this potential manipulation?

Question 6a. Do you have sufficient staff and other resources to
conduct this investigation?

Question 6b. A recent Financial Times article (Feb 17, 2012)
highlighted the role of voice brokers in the LIBOR ``interdealer''
market in this investigation. Do you believe there are market
structures or barriers in place that make it easier for such
manipulation to occur or harder for regulators to spot it?
Answer 6-6b. LIBOR and Euribor are indices at the center of the
capital markets for both borrowings and derivatives contracts. LIBOR is
the reference index for the largest open interest contracts in both the
U.S. futures markets and swaps markets. As of the end of June, the 3
month Eurodollar futures contracts that settle to U.S. Dollar LIBOR
make up about 70 percent of the notional value of all futures contracts
traded on the CME Group exchanges. U.S. Dollar LIBOR's traded volume in
2011 on the CME had a notional value exceeding $564 trillion. According
to the British Bankers Association, swaps with a total notional value
of approximately $350 trillion and loans amounting to $10 trillion are
indexed to LIBOR.
The CFTC initiated in April of 2008 a review of LIBOR after media
reports raised questions about the integrity of the index. Thereafter,
we began coordinating with the United Kingdom's Financial Services
Authority (FSA), which helped us facilitate information requests. The
FSA and the U.S. Department of Justice subsequently joined the CFTC
with regard to the Barclays matter, and it has been a collaborative
effort throughout.
To conduct such a complicated case, the CFTC enforcement staff had
to sift through a voluminous number of documents and audio recordings
that spanned many years.
The CFTC's Order found that Barclays traders and employees
responsible for determining the bank's LIBOR and Euribor submissions
attempted to manipulate and made false reports concerning both
benchmark interest rates to benefit the bank's derivatives trading
positions. The conduct occurred regularly and was pervasive. Barclays'
traders located at least in New York, London and Tokyo asked Barclays'
submitters to submit particular rates to benefit their derivatives
trading positions. In addition, certain Barclays Euro swap traders
coordinated with and aided and abetted traders at other banks in each
other's attempts to manipulate Euribor.
The Order also found that throughout the financial crisis, as a
result of instructions from Barclays' senior management, the bank
routinely made artificially low LIBOR submissions. Submitters were told
not to submit at levels where Barclays was ``sticking its head above
the parapet.'' The senior management directive was intended to fend off
negative public perception about Barclays' financial condition.
The CFTC's Order required Barclays to pay a $200 million civil
monetary penalty for attempted manipulation of and false reporting
concerning LIBOR and Euribor. In addition, Barclays is required to
implement measures to ensure its future submissions are honest.
Among other things, these requirements include:

Making submissions based on a transaction-focused
methodology;

Implementing firewalls to prevent improper communications,
including between traders and submitters;

Preparing and retaining documents concerning submissions and
certain relevant communications; and

Implementing auditing, monitoring and training measures
concerning submissions and related processes, including making
regular reports to the CFTC.

The CFTC has and will continue vigorously to use our enforcement
and regulatory authorities to protect the public, promote market
integrity, and ensure that these benchmarks and other indices are free
of manipulative conduct and false information. The Commodity Exchange
Act (CEA) is clear in its prohibitions against attempted and actual
manipulation of futures, swaps and commodity prices. Further, the CEA's
Section 9(a)(2) prohibits knowingly making false reports of market
information that affects or tends to affect the price of a commodity.
Questions Submitted by Hon. Tim Huelskamp, a Representative in Congress
from Kansas
Question 1. During the hearing, you stated that you could not
exactly recall what you were told during the phone call that occurred
at 2:30 a.m. the morning of October 31. Were you given any information
at all about the possibility of misused, misappropriated, commingled,
or missing funds from segregated customer accounts? What information
were you given during this phone call?

Question 1a. If it was not during the 2:30 a.m. phone call, when
did you learn that money was missing from customers' segregated
accounts?

Question 1b. Who else was a part of that conference call in the
middle of the night? Were there any MF creditors on that call?
Answer 1-1b. During the phone call, staff of MF Global informed
regulators that there was a significant shortfall in segregated funds.
The other participants on the call were staff of the SEC [and possibly
UK FSA--I have no current recollection]. Other participants on the call
were the consultants MF Global had retained to support sale of the
assets of the company. I am not aware of any knowledge that creditors
of MF Global were on the call.

Question 2. Once you learned that segregated funds were missing,
why did you not immediately freeze all MF accounts (including those of
MF Holdings), to ensure that those funds could be returned to the
customers?
Answer. As an initial matter, CFTC has no authority to immediately
freeze accounts without a court order. While the CFTC did have the
authority to seek a court order freezing accounts of, or otherwise seek
a receivership for MF Global, Inc., the FCM/BD, the Securities Investor
Protection Act provides that after a SIPA filing the court is to stay
any pending related action. Given that a SIPA proceeding for MF Global,
Inc. was to be brought, it did not seem in the public interest to bring
a competing equity receivership proceeding. Moreover, any freeze of MF
Global, Inc.'s accounts could not, of itself, recover funds that had
already been transferred out of MF Global, Inc.

Question 3. In your oral testimony, you said that when the SEC has
any regulatory authority over a company, then that company can undergo
a SIPA bankruptcy. Is it mandatory that the bankruptcy be processed
according to SIPA standards? Why was it decided that the bankruptcy of
MF Global undergo a SIPA bankruptcy, rather than a Commodities Exchange
Act bankruptcy?

Question 4. Who at the CFTC was involved in making the decision
regarding the type of bankruptcy that should be used in this particular
situation? Who outside the CFTC was a part of that decision-making
process? Did anyone at CFTC discuss the structuring of the bankruptcy
with individuals at MF Global, the SEC, SIPC and/or the DOJ, and/or
MF's creditors such as JP Morgan or Goldman Sachs? If so, who, when and
with whom?
Answer 3-4. Futures Commission Merchants (``FCMs'') are the
financial intermediaries for futures market transactions. An FCM or
``commodity broker'' bankruptcy must proceed as a liquidation under
Chapter 7 of the Bankruptcy Code, rather than a reorganization under
Chapter 11, and the trustee has specified duties. Chief among those
duties is to endeavor to transfer the positions of customers of the FCM
to a solvent FCM. The financial intermediaries for securities are known
as broker dealers (``BDs''), and the insolvency of a BD proceeds under
SIPA. The insolvency of an entity that is both a commodity broker and a
BD (a ``BD/FCM'') will, so long as there is at least one securities
customer, proceed under SIPA.

Question 5. FCM's are required to file a monthly report with the
CFTC detailing the status of segregated customer assets. Did MF Global
submit their data for September 2011 within the required timeframe?

Question 5a. When did the CFTC publish this information and/or post
it to the CFTC website?

Question 5b. Who is responsible for reviewing this information to
ensure that segregated funds remain intact?
Answer 5-5b. Commission regulations require an FCM to file an
unaudited monthly financial statement with the Commission and with the
firm's DSRO within 17 business days of the end of the month. MF Global
submitted its September 30, 2011 financial statements to the Commission
within the 17 business days required by the regulations.
FCMs file monthly financial statements with the Commission in an
electronic format. The CFTC uses an automated program to promptly
review each FCM financial statement received. The review program
immediately alerts an assigned Commission staff member if the financial
statements indicate certain regulatory violations, including a
violation of segregation or capital requirements.
MF Global's September 30, 2011 financial statements showed the firm
to be in compliance with the customer funds segregation and capital
requirements. Regional examination staff conducts further analysis of
FCM financial statements after the documents are filed with the
Commission.
The CFTC publishes monthly FCM financial data on its website
shortly after it receives all filings. October 26, 2011 was the 17th
business day during the month of October 2011. Commission staff was in
the process of compiling the September 30, 2011 financial data when MF
Global filed for bankruptcy on Monday, October 31, 2011. Staff did not
publish MF Global's September 30 financial data as the firm had
declared bankruptcy prior to the publication of the information, and
questions existed regarding the accuracy of the firm's books and
records.

Question 6. Did you speak with or have any other communication with
Jon Corzine or any other MF Global executives during the period October
24-November 5?
Answer. During some calls with regulators on October 29-30 and into
the morning of October 31, 2011, MFG representatives and
representatives of a firm considering facilitating the transfer of MFG
customer positions also participated. My involvement was in furtherance
of the CFTC's effort to ensure to the maximum extent possible the
protection of customer property that had been entrusted to MFG. Though
it was not always apparent which representatives from MFG were present
on these calls, to the best of my knowledge and recollection, Mr.
Corzine was on the line for at least part of one of these calls, and
discussed matters regarding MFG's European bond positions.

Question 7. After the CFTC was given an investigative role in the
bankruptcy of MF Global, it took you a week before you made an
announcement that you were to be a ``non-participant'' in the
investigation. What is a ``non-participant'' and how does that differ
from actually recusing yourself from the investigation? What
investigatory activities did you participate in or lead before you
removed yourself from the investigation?

Question 8. Prior to your becoming a ``non-participant'', what sort
of responsibilities did you personally have in the oversight of MF
Global? Were you required to sign off on any reports? Did you write
reports or conduct any audits or investigations regarding anything at
MF Global?
Answer 7-8. For the convenience of the Committee, I include two
documents which address Questions 7 and 8. The first is the text of my
statement of non-participation. The second is a Memorandum which
includes information detailing my activities prior to my withdrawal
from participation in the matter. (See attachments 1-2).

Question 9. The Commission recently finalized a rule setting forth
requirements for margin segregation for cleared swaps, correct?

Question 9a. And wasn't failure to properly segregate funds for
futures customers the problem with MF Global?

Question 9b. Why did you move forward with a segregation rule for
swaps, without fully understanding what went wrong with the segregation
regime for futures customers at MF Global? Couldn't the rule have
benefited from more time to take account of what we're beginning to
learn about MF Global? Won't you just have to revisit this rule if new
facts come to light so that you can properly protect swaps customers--
in addition to futures customers?
Answer 9-9b. The Commission's adoption of final rules for the
segregation of customer funds for cleared swaps carries out the Dodd-
Frank Act mandate that futures commission merchants (FCMs) and
derivatives clearing organizations (DCOs) segregate customer collateral
supporting cleared swaps. FCMs and DCOs must hold customer collateral
in a separate account from that belonging to the FCM or DCO. It
prohibits clearing organizations from using the collateral of non-
defaulting, innocent customers to protect themselves and their clearing
members. For the first time, customer money must be protected
individually all the way to the clearinghouse.
We received a tremendous amount of public input on this rule,
including through two roundtables, as well as through comments on an
advanced notice of proposed rulemaking and a proposal. This rule builds
on customer protections included in the clearinghouse core principles
rule finalized in October requiring DCOs to collect initial margin on a
gross basis for their clearing members' customer accounts.
In addition, in February, the Commission held a public roundtable
on customer protection. Among the topics discussed were protections for
the collateral of futures customers, consistent with the already-
approved LSOC rule for cleared swaps.

Question 10. In light of what has happened with MF Global, does the
Commission intend to recommend changes to the Bankruptcy Code?
Answer. The Commission has not recommended changes to the
bankruptcy code. It has adopted important customer protection
enhancements and continues to review further improvements. The
completed amendments to rule 1.25 regarding the investment of funds
bring customers back to protections they had prior to exemptions the
Commission granted between 2000 and 2005. Importantly, this prevents
use of customer funds for in-house lending through repurchase
agreements. Clearinghouses also will have to collect margin on a gross
basis and futures commission merchants will no longer be able to offset
one customer's collateral against another and then send only the net to
the clearinghouse. And the so-called ``LSOC rule'' (legal segregation
with operational commingling) for swaps ensures customer money is
protected individually all the way to the clearinghouse.

Question 11. Segregated funds have been the hallmark of customer
fund protection. How do you believe customer funds should be treated in
a bankruptcy scenario and how do you perceive the SIPC trustee is
handling the funds of futures customers? If this was a CFTC led
process, would the funds of futures customers be treated differently?
Answer. Commodity customers in a SIPA proceeding do not suffer any
disadvantage relative to commodity customers in a subchapter IV,
Chapter 7 bankruptcy proceeding.
Questions Submitted by Hon. Randy Hultgren, a Representative in
Congress from Illinois
Question 1. The CFTC recently approved the final rule regarding
registration requirements for market participants. However, since the
joint rule on entity definitions and a determination of what a ``swap''
contract will be, many market participants are still unclear if they
will have to register with the CFTC. Will additional time be provided
by the CFTC for participants to comply with new registration
requirements? Will the CFTC wait to apply these registration
requirements until the final entity definitions have been completed?
When does the CFTC expect market participants to be fully capable of
compliance?
Answer. A swap dealer or a major swap participant is not required
to apply for registration until 60 days after the joint final rule
further defining the term ``swap'' is published in the Federal
Register. Staff for the CFTC's Division of Market Oversight has already
provided relief for some firms in the form of a ``no-action'' letter.
That relief is intended to provide sufficient time for nonclearing
member swap dealers to transition. The Commission is working with
market participants and will continue to do so.

Question 2. Please describe the challenges experienced by the CFTC
and SEC when engaging in joint rulemaking and other coordinated
efforts. Specifically, please explain how agency coordination, or lack
thereof, has complicated the process of defining ``swap''.
Answer. The CFTC and SEC consult and coordinate extensively to
harmonize to the greatest extent possible on Dodd-Frank rules. This
close coordination will continue and always benefits the rulemaking
process. The two agencies recently adopted joint final rules further
defining the terms ``swap'' and ``security-based swap.''

Question 3. In the CFTC's efforts to understand high frequency
trading, what stakeholder groups do you think should be consulted and
how involved with market participants be in this process?

Question 4. Is proprietary algorithmic trading data necessary to
understanding the development of high frequency trading practices and
what protections will be extended to this sensitive information when it
is share with the CFTC?

Question 5. When considering high frequency traders, will the
aggregate value of trades and total volume of trades be considered?
Answer. 3-5 In analyzing HFT activity, the Commission has consulted
stakeholder groups with substantial knowledge of these trading
practices. The Technology Advisory Subcommittee on High-Frequency
Trading of the Commission was established in March of 2012, and
includes experts from exchanges, clearing firms, sell-side firms, buy-
side (hedging) institutions, data and technology service providers,
academia, SROs and high-frequency firms themselves. A sequence of
public meetings have been held to present, discuss and debate the
findings and deliberations of the highly qualified members of the
Subcommittee and in the process, help the Commission develop a detailed
picture of high-frequency and other automated trading styles and their
potential impact on the market.

Question 6. Has the CFTC considered how the indemnification
provision of Dodd-Frank could undermine the mitigation of systematic
risk and hamper transparency in the over-the-counter (OTC) derivatives
market? How does the CFTC think these negative consequences could be
avoided?
Answer. On May 1, of this year, the Commission issued a Proposed
Interpretative Statement regarding the confidentiality and
indemnification provisions in the Dodd-Frank Act. The proposal
generally exempts foreign regulators from the indemnification and
confidentiality provision in the Dodd-Frank Act, and ensures that
foreign regulators have access to data in Swap Data Repositories (SDR).
This exemption only applies to data that is required to be reported and
if the SDR is recognized by the country's law and regulation.

Question 7. The House Agriculture Committee recently passed H.R.
1810 that would require a comprehensive cost-benefit analysis by CFTC
of its rules and orders. How would this legislation, if passed, change
the cost-benefit analysis currently preformed by CFTC related to the
Dodd-Frank Act?
Answer. Section 15(a) of the Commodity Exchange Act (CEA) currently
requires the CFTC, before it promulgates a regulation, to ``consider
the costs and benefits of the action.'' H.R. 1840 would amend section
15(a) to require that such determinations be done through the
Commission's Office of the Chief Economist. It would require that the
Commission consider qualitative and quantitative costs and benefits,
and specify that the Commission could propose or adopt a regulation on
a reasoned determination that the benefits of the intended regulation
justify the costs of the intended regulation.

Question 8. Of the estimated 286 rulemakings requirements with
specified deadlines in Dodd-Frank, well over half are still
outstanding. While the CFTC has been better than some of its sister
regulators, statutory rulemaking deadlines have been missed or delayed.
Is it fair to say that, as passed, Dodd-Frank set an overly ambitious
timetable for the development and finalization of the many new rules
included?
Answer. The Commission has made significant progress in
implementing Congress' direction to ensure that common-sense standards
are established for the swaps market. To date, we've completed 36 rules
and now have fewer than 20 to go. We are working to complete these
rules in a thoughtful, balanced way--not against a clock.

Question 9. Recently former CFTC Commissioner Sharon Brown-Hruska
from NERA authored a report that estimated the cost for a non-financial
energy firm to comply with the obligations of a Swap dealer. The report
estimates that non-financial energy firms designated as swap dealers
will incur more the $70 million of annual (year-one) costs to comply
with the CFTC's proposed rules. The CFTC estimated the annual cost of
compliance with its Swap dealer rules at roughly $2 million. Will the
CFTC reexamine its cost-benefit analysis of the Swap Dealer definition
to address the omissions cited in the NERA report? How will the CFTC
ensure that the Swap Dealer definition will not impose an undue burden
without a detailed reexamination of its cost-benefit studies?
Answer. The CFTC strives to include well-developed considerations
of costs and benefits in each of its proposed rulemakings. Relevant
considerations are presented not only in the cost-benefit analysis
section of the CFTC's rulemaking releases, but additionally are
discussed throughout the release in compliance with the Administrative
Procedure Act (APA). The APA requires the CFTC to set forth the legal,
factual and policy bases for its rulemakings.
In addition, Commissioners and staff have met extensively with
market participants and other interested members of the public to hear,
consider and address their concerns in each rulemaking. CFTC staff
hosted a number of public roundtables so that rules could be proposed
in line with industry practices and address compliance costs consistent
with the obligations of the CFTC to promote market integrity, reduce
risk and increase transparency as directed in Title VII of the Dodd-
Frank Act. Information from each of these meetings--including full
transcripts of the roundtables--is available on the CFTC's website and
has been factored into each applicable rulemaking.
With each proposed rule, the Commission has sought public comment
regarding costs and benefits. The Commission welcomes each comment and
incorporates those comments--including those relating to costs--in
development of its final rule.
Questions Submitted by Hon. William L. Owens, a Representative in
Congress from New York
Question 1. In your testimony, you note that the CFTC intends to
follow Congressional intent by ensuring that non-financial companies
using swaps to hedge or mitigate commercial risk will not be required
to bring swaps into central clearing. However, you also claim the
Commission's proposed rule adheres to this structure, despite many end-
users claiming to the contrary. How do you account for this
discrepancy?
Answer. Congress provided that non-financial entities, such as
farmers, ranchers, manufacturers and other end-users, should be able to
choose whether or not to clear those swaps that hedge or mitigate
commercial risks. The Commission's final rule implements this exception
for non-financial entities, establishing criteria for hedging or
mitigating commercial risk and imposing minimal reporting requirements
for those swaps that come under the end-user exception.

Question 2. The CFTC has approved the final rule requiring market
participants to register with the CFTC but delayed a vote on finalizing
definitions. Will the Commission be providing additional time for
market participants to comply with this registration requirement so
that this requirement is not effective until the final entity
definitions has been completed?
Answer. A swap dealer or a major swap participant is not required
to apply for registration until 60 days after the joint final rule
further defining the term ``swap'' is published in the Federal
Register. Staff for the CFTC's Division of Market Oversight has already
provided relief for some firms in the form of a ``no-action'' letter.
That relief is intended to provide sufficient time for nonclearing
member swap dealers to transition. The Commission is working with
market participants and will continue to do so.

Question 3. In your testimony, you note that you anticipate the
Commission will seek public input on the extraterritorial application
of Title VII. Can you shed some light on when the CFTC intends to
propose a formal rulemaking process on the extraterritorial application
of Dodd-Frank and if you believe these requirements should extend to
transactions which are conducted outside of the United States through
either foreign affiliates of domestic firms or by foreign entities with
non-U.S. persons?
Answer. On June 29, 2012, the CFTC approved proposed interpretive
guidance on the cross-border application of the Swaps Provisions of the
Dodd-Frank Act and the Commission's regulations. The proposed guidance
interprets Section 722(d) of the Dodd-Frank Act, which states that the
swaps provisions of the CEA shall not apply to activities outside the
United States unless those activities have a direct and significant
connection with activities in, or effect on, commerce of the United
States. The guidance will be open for public comment for 45 days. While
the Commission is not required to solicit public comment on
interpretive guidance, I am particularly interested in the public's
input and look forward to comments on the proposed guidance.

Question 4. The House Agriculture Committee recently approved (H.R.
2779) legislation that would exempt certain inter-affiliate
transactions of swap dealers from meeting margin and clearing
requirements. You note in your testimony that you expect the Commission
to consider a proposal on this issue later this year. Do you expect the
Commission's rules to mirror the SEC's?
Answer. The Commission has benefitted from substantial public input
on the treatment of swaps among affiliates of the same business entity.
To address commenters' questions about a possible clearing requirement
between affiliates of financial entities, I expect the Commission to
consider a proposal and take public comments in the near future. The
staff recommendation, which would exempt certain affiliate swaps from
the clearing requirement, is under review by commissioners. The
Commission will continue to consult closely with the SEC.

Question 5. With respect to the swap dealer definition, will the
CFTC clearly define Market Making in a manner that provides clarity to
market participants as to what distinguishes Market Making from other
market activity that end-users engage in, such as hedging risk? Will
you support a specific exemption from swap dealing for commercial
hedging in the rule?
Answer. On April 18, 2012 the Commission adopted a joint final
rule, required by Section 712(d)(1) of the Dodd-Frank Act with the SEC
further defining the terms ``swaps dealer,'' and ``major swaps
participant.'' The rulemaking incorporates an interim final rule, such
that swaps a person enters into for the purpose of hedging price risks
related to physical positions are inconsistent with swap dealing, and
are excluded from the swap dealer determination. The interim final rule
draws upon principles in the Commission's long standing interpretation
of bona fide hedging. It excludes swap activity for the purpose of
portfolio hedging and anticipatory hedging. However, the CFTC is not
adopting a per se exclusion of all swaps that hedge or mitigate risk.
If a swap is not entered into for the specific hedging purposes
identified in the rule, then all relevant facts and circumstances about
the swap would be considered in determining if the person is a swap
dealer. The CFTC is looking forward to receiving comment on the interim
final rule.

Question 6. Will you support a clear distinction between dealing
activity and trading activity within the finalized definitions?
Answer. The dealer-trader distinction is discussed in the preamble
to the CFTC and the Securities and Exchange Commission joint new final
rules and interpretive guidance on the further definitions of ``swap
dealer,'' ``security based swap dealer,'' ``major swap participant,''
and ``major security based swap participant''. The CFTC anticipates
that the dealer-trader distinction will be useful as one consideration,
particularly in light of the degree to which it overlaps with many of
the other characteristics identified in the release that are indicative
of dealing activity.
attachment 1
November 8, 2011
Statement of Non-Participation
With respect to the recent matters involving MF Global, the staff
at the CFTC is working hard to recover customers' funds and to find out
what happened to the missing customer money and how it happened. The
CFTC has a tremendously capable staff and I do not want my
participation to be in any way a distraction in this important matter.
Accordingly, I have determined that I will not participate
personally and substantially in any enforcement matter involving
specific parties MF Global, MF Global Holdings Ltd., MF Global Inc.,
and J.C. Flowers & Co. (the ``specific parties''), and any matter
directly related thereto. I will advise my principal subordinates of my
decision not to participate in these matters. I also will instruct my
principal subordinates that all inquiries and comments involving any of
the matters described above should be directed to Dan Berkovitz, the
General Counsel of the CFTC who will act on my behalf, without my
knowledge or involvement.
In order to help ensure that I do not inadvertently participate
personally and substantially in any particular matter that could have a
direct or predictable effect on the specific parties with respect to
such matters described above, I am directing Mr. Berkovitz to seek
assistance from the alternate designated agency ethics official if he
is ever uncertain whether or not I may participate in a matter.
I have instructed David Stawick, the Secretary of the Commission,
to screen all CFTC matters directed to my attention that involve
outside entities or that require my participation, to determine if they
involve any of the specific parties and matters listed above. If Mr.
Stawick determines that a matter involves any of the specific parties
and matters, he will refer it to the appropriate official to take
action without my knowledge or involvement.

Hon. Gary Gensler, Date
Chairman.
attachment 2
Confidential Memorandum
To: Chairman Gensler

From: Dan M. Berkovitz,
General Counsel and Designated Agency Ethics Official

John P. Dolan,
Counsel and Alternate Designated Agency Ethics Official
Date: December 13, 2011
Subject: Participation in Matters Concerning MF Global, Inc.
I. Introduction and Summary
Pursuant to 5 CFR 2635.502, the Commodity Futures Trading
Commission (CFTC or Commission) designated agency ethics official
(DAEO) has undertaken this review of the participation of CFTC Chairman
Gary Gensler in certain CFTC matters regarding MF Global, Inc. (MFGI),
a futures commission merchant (FCM) registered with the CFTC. During
the 1980s and 1990s Chairman Gensler and the former President and Chief
Executive Officer (CEO) of MFGI, Jon Corzine, worked together and were
partners at Goldman Sachs (GS), an investment bank.\1\
---------------------------------------------------------------------------
\1\ Mr. Corzine resigned as President and CEO of MFGI on Friday,
November 4, 2011.
---------------------------------------------------------------------------
On November 3, 2011, the General Counsel and DAEO provided Chairman
Gensler with an oral opinion that the Chairman was not required to
withdraw from participation in MFGI matters as a result of his prior
relationship with Mr. Corzine. On that same date Chairman Gensler
nonetheless elected to not participate in enforcement matters related
to MFGI.\2\ Following this decision, the General Counsel and DAEO and
ADAEO decided to undertake this review to determine whether Chairman
Gensler's participation in matters involving MFGI was appropriate.
---------------------------------------------------------------------------
\2\ On November 8, 2011, Chairman Gensler executed a ``Statement of
Non-Participation.'' This statement explained the Chairman's decision:
``With respect to the recent matters involving MF Global, the staff at
the CFTC is working hard to recover customers' funds and to find out
what happened to the missing customer money and how it happened. The
CFTC has a tremendously capable staff and I do not want my
participation to be in any way a distraction in this important
matter.''
---------------------------------------------------------------------------
Based on the facts and circumstances detailed in this memorandum,
and based upon the standards set forth in 5 CFR 2635.502, this review
concludes that Chairman Gensler was not required to withdraw from
matters involving MFGI. From a legal and ethical perspective, Chairman
Gensler's participation in Commission matters involving MFGI was not
improper.
II. Factual Background
A. MF Global, Inc.
Subsidiary of MF Global

MG Global is a financial business comprising a holding company, MF
Global Holdings Ltd., a Delaware corporation headquartered in New York
City, and a variety of subsidiaries located in the United States and
other countries.\3\ One of the subsidiaries is MFGI, which is an FCM
registered with the CFTC as well as a securities broker-dealer
registered with the SEC.\4\ According to the Annual Report (SEC Form
10-K) filed by MF Global Holdings Ltd. in May 2011, MF Global is a
broker in markets for commodities and listed derivatives and a broker-
dealer in markets for commodities, fixed income securities, equities,
and foreign exchange.\5\
---------------------------------------------------------------------------
\3\ MF Global Holdings Ltd. Form 10-K for fiscal year ended March
31, 2011 at 1, http://www.sec.gov/Archives/edgar/data/1401106/
000119312511145663/d10k.htm (accessed November 6, 2011); see
Disclaimer, MF Global Website, http://www.mfglobal.com/disclaimer
(accessed November 6, 2011).
\4\ Disclaimer, MF Global Website, http://www.mfglobal.com/
disclaimer (accessed November 6, 2011).
\5\ MF Global Holdings Ltd. Form 10-K for fiscal year ended March
31, 2011 at 5, http://www.sec.gov/Archives/edgar/data/1401106/
000119312511145663/d10k.htm (accessed November 6, 2011).

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MFGI Bankruptcy

On October 31, 2011, the Securities Investor Protection Corporation
(SIPC) filed an application for the entry of a protective order in the
U.S. Bankruptcy Court placing MFGI in liquidation under the Securities
Investor Protection Act (SIPA). On that same date, ``the Commission's
Division of Enforcement opened an investigation into whether the
Commodity Exchange Act (CEA) or Commission regulations were violated in
connection with MFGI, and the Commission [] authorized the Division to
issue subpoenas.'' \6\
---------------------------------------------------------------------------
\6\ CFTC Press Release, PR6140-11, November 10, 2011.
---------------------------------------------------------------------------
In a filing on November 2, the Commission informed the Bankruptcy
Court that it ``intends to take all appropriate action, within the
purview of the Bankruptcy Code and the [CEA], to ensure that customers
maximize their recovery of funds and to discover the reason for the
shortfall in segregation.'' \7\
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\7\ Statement of Commodity Futures Trading Commission in Support of
the Trustee's Emergency Motion for an Order Approving the Transfer of
Certain Segregated Customer Commodity Accounts of MF Global Inc. and
Related Margin and Motion for Expedited Hearing, MFGI Bankruptcy Case,
November 2, 2011.

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Key officials

Jon S. Corzine was the Chairman and Chief Executive Officer of MF
Global Holdings Ltd. until his recent resignation.\8\ According to the
MF Global website, Mr. Corzine also is an operating partner at J.C.
Flowers & Co. LLC.\9\ According to the MF Global website, Mr. Corzine
joined GS as a fixed income trader in 1975 and subsequently served as
chief financial officer and as chairman and senior partner from 1994
through 1999.\10\
---------------------------------------------------------------------------
\8\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed
November 6, 2011).
\9\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=198970 (accessed
November 6, 2011).
\10\ Id.
---------------------------------------------------------------------------
Bradley I. Abelow is the President and Chief Operating Officer of
MF Global Holdings Ltd.\11\ According to the MF Global website, Mr.
Abelow previously was a partner and managing director of GS, where he
managed the operations group.\12\ Earlier he was responsible for GS's
operations, technology, risk, and finance functions in Asia.\13\ He
joined GS in 1989.\14\
---------------------------------------------------------------------------
\11\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed
November 6, 2011).
\12\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=204097 (accessed
November 6, 2011).
\13\ Id.
\14\ Id.
---------------------------------------------------------------------------
Laurie R. Ferber is the General Counsel of MF Global Holdings
Ltd.\15\ According to the MF Global website, Ms. Ferber worked for GS
for over 20 years beginning in 1987.\16\ She held a number of different
positions including serving as co-general counsel of the Fixed Income,
Currency and Commodities Division and launching and running the
economic derivatives business.\17\
---------------------------------------------------------------------------
\15\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed
November 6, 2011).
\16\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=186545 (accessed
November 6, 2011).
\17\ Id.
---------------------------------------------------------------------------
J. Christopher Flowers is the founder and executive chairman of
J.C. Flowers & Co. LLC, a private equity firm.\18\ According to press
reports, J.C. Flowers & Co. owns preferred stock in MF Global that, if
converted to common stock, would amount to 6% of the total.\19\ Also
according to press reports, Mr. Flowers worked with Mr. Corzine at GS
and later recommended that Mr. Corzine take over as MF Global's
chairman and chief executive officer in March 2010.\20\
---------------------------------------------------------------------------
\18\ J.C. Flowers & Co. LLC: Private Company Information--
Businessweek, (accessed November 6, 2011) http://
investing.businessweek.com/research/stocks/private/snapshot.asp?privcap
Id=1089967.
\19\ J.C. Flowers Fund Said to See $47.8 Million Loss on MF
Global--Businessweek (November 2, 2011), http://www.businessweek.com/
news/2011-11-02/jc-flowers-fund-said-to-see-47-8-million-loss-on-mf-
global.html (accessed November 6, 2011).
\20\ Id.
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B. Relationship Between Chairman Gensler and Mr. Corzine \21\
---------------------------------------------------------------------------
\21\ The facts in this section are based primarily upon an
interview with Chairman Gensler conducted on November 4, 2011.
---------------------------------------------------------------------------
Chairman Gensler's Employment at GS

Chairman Gensler worked at GS from September 1979 until September
1997, when he left to serve as Assistant Secretary of Treasury for
Financial Markets.\22\ In late 1988, when Chairman Gensler became a
partner in the firm, there were approximately 128 partners at GS,
including Chairman Gensler and Mr. Corzine.\23\
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\22\ Chairman Gensler served as Assistant Secretary for Financial
Markets from September 1997 until April 1999, and as Under Secretary of
Treasury for Domestic Finance from April 1999 to January 2001.
\23\ By 1997, when Chairman Gensler left GS, there were
approximately 190-200 partners at GS.
---------------------------------------------------------------------------
From his arrival at GS in 1979 until late 1991 or early 1992,
Chairman Gensler worked in the Mergers and Acquisitions (M&A)
Department.\24\ In late 1991 or early 1992, Chairman Gensler and a few
other junior partners at the firm were asked to transfer to other
departments as part of their career development. The transfers were
suggested by Mr. Robert Rubin (the co-Chairman and Co-Senior Partner of
GS at the time) and Mr. Corzine (the co-head of the fixed income
department (FI) at the time). Mr. Gensler was asked to transfer to FI
and agreed.
---------------------------------------------------------------------------
\24\ Chairman Gensler spent approximately 6-12 months during the
1983-1984 time period on the equity trading floor as part of a
``mobility program.''
---------------------------------------------------------------------------
Chairman Gensler's initial assignment in FI was in the mortgage
trading department. In this capacity, he reported to Michael Mortara,
who reported to Mr. Corzine and the other co-head of FI, Mr. Mark
Winkelman. Chairman Gensler, Mr. Mortara, and Mr. Corzine all worked on
the fixed income trading floor.
In January 1993, Mr. Corzine requested, and Chairman Gensler
agreed, that Chairman Gensler serve as co-head of fixed income trading
in the GS office in Tokyo, Japan. Chairman Gensler served in this
position until late 1994. During this two-year period, Mr. Corzine and
Mr. Winkelman were Chairman Gensler's direct supervisors.
In the fall of 1994, Chairman Gensler was asked by Mr. Steve
Friedman, who was then co-head of GS with Mr. Rubin, to transfer out of
FI to be the head of the Operations, Technology, and Finance Division
(OTF) in Asia. Chairman Gensler reported to Mr. John Thain, head of
worldwide OTF. Shortly thereafter, Mr. Corzine became the Senior
Partner of GS and Chairman of the Management Committee.\25\
---------------------------------------------------------------------------
\25\ Executive functions were shared between Mr. Corzine and Mr.
Henry Paulson, who served as Chief Operating Partner and Vice Chairman
of the Management Committee. Mr. Thain reported to Mr. Corzine and Mr.
Paulson.
---------------------------------------------------------------------------
Chairman Gensler returned to New York in November 1995 to become
co-head of Finance. In this position, Chairman Gensler continued to
report to Mr. Thain, who continued to report to Mr. Corzine and Mr.
Paulson. As co-head of Finance, Chairman Gensler served on various
committees of the firm, including the Risk Committee. Mr. Corzine also
was a member of the Risk Committee (which had approximately 10-15
members), and sometimes he participated on other committees, too.
Chairman Gensler served as co-head of Finance until he left GS in 1997
for the Treasury Department. Prior to leaving GS, Chairman Gensler
visited with Mr. Corzine at the latter's apartment to provide departing
observations.\26\
---------------------------------------------------------------------------
\26\ Mr. Corzine subsequently left GS in early 1999.

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After Chairman Gensler Left GS

To the best of his recollection, Chairman Gensler believes he did
not see Mr. Corzine for 3 years after Chairman Gensler left GS.\27\
While Chairman Gensler served at Treasury, the only time that he saw
Mr. Corzine was in late 2000 or early 2001. Then-Senator-elect Corzine
had come to the Treasury Department to visit with Secretary of Treasury
Lawrence Summers, and following the meeting with Secretary Summers, Mr.
Corzine stopped by to say hello to then-Under Secretary Gensler.
---------------------------------------------------------------------------
\27\ Chairman Gensler believes that he may have spoken with Mr.
Corzine once or twice by telephone while serving at Treasury, but
cannot specifically recall any such conversations.
---------------------------------------------------------------------------
In early 2002, Chairman Gensler volunteered to serve as an advisor
to Senator Paul Sarbanes on legislation that eventually was enacted as
the Sarbanes-Oxley Act. Senator Sarbanes was Chairman of the Senate
Committee on Banking, Housing and Urban Affairs and Senator Corzine was
a Member of the same Committee. In his role as advisor to Senator
Sarbanes, Chairman Gensler occasionally spoke with Senator Corzine
about the pending legislation. Chairman Gensler also spoke with Senator
Corzine while Chairman Gensler, Senator Sarbanes, and Senator Corzine
were on the Senate floor during the consideration of the legislation
for final Senate passage.
In 2003-2004, Chairman Gensler served as Treasurer of the Maryland
State Democratic Party. During the same time, Senator Corzine became
head of the Democratic Senatorial Campaign Committee. As a result of
their fundraising responsibilities, Chairman Gensler saw Senator
Corzine at several political events attended by large numbers of
people. This included an event to support the campaign of Senator Kerry
for President in 2004, which was attended by approximately 400 others,
including other Members of Congress.
In 2005, Chairman Gensler was invited to a fundraiser in
Washington, D.C., for the New Jersey State Democratic Party.
Approximately 100 people attended, including both Senator Corzine and
the other Senator from New Jersey, Senator Frank R. Lautenberg. At the
time, Senator Corzine was campaigning to be elected Governor of New
Jersey. As a participant in the fundraiser, Chairman Gensler
contributed $10,000 to the New Jersey State Democratic Party (as he
similarly contributed to the State Democratic Party of several other
States), which earned him the title of being a ``host'' of the
fundraiser.\28\ Chairman Gensler did not see Governor Corzine for
another 3 years.
---------------------------------------------------------------------------
\28\ Chairman Gensler's contribution was to the New Jersey State
Democratic Party, not directly to Senator Corzine's campaign for
Governor.
---------------------------------------------------------------------------
During the primary season for the 2008 Presidential campaign,
Chairman Gensler first served as an unpaid senior advisor to the
campaign of then-Senator Hilary Clinton. Chairman Gensler recalls
speaking with Governor Corzine on a couple of occasions to answer
Governor Corzine's questions about Senator Clinton's positions on
various policy issues. Chairman Gensler recalls seeing Governor Corzine
at a fundraising event in New Jersey in either August or September of
2008 for then-Senator Obama.

Chairman Gensler's Tenure at the CFTC

Chairman Gensler began serving as Chairman of the CFTC in May 2009.
At the time he joined the CFTC, Chairman Gensler determined not to
participate in any CFTC matters involving GS.
Shortly after joining MFGI in March 2010, Mr. Corzine met with
Chairman Gensler and the Chairman's staff at CFTC headquarters. Mr.
Corzine requested the meeting, which Chairman Gensler recalls as a
``meet and greet'' and that Mr. Corzine did not make any specific
requests to Chairman Gensler.
In November 2010, Mr. Corzine asked Chairman Gensler to speak at a
seminar at Princeton University that Mr. Corzine was conducting on
financial institutions and regulation.\29\ Mr. Andrew Ross Sorkin also
spoke at this seminar, and Mr. Corzine introduced both of them.
Following the seminar, Chairman Gensler joined Mr. Corzine and
approximately 15-20 students for dinner.\30\ Chairman Gensler and Mr.
Corzine did not discuss any issues relating to MFGI while Chairman
Gensler was at Princeton.
---------------------------------------------------------------------------
\29\ A copy of Chairman's Gensler's speech can be found at: http://
www.cftc.gov/PressRoom/SpeechesTestimony/2010/index.htm. (last visited
Nov. 6, 2011).
\30\ Mr. Sorkin was unable to stay for the dinner.
---------------------------------------------------------------------------
In December 2010, Mr. Corzine and Ms. Ferber met with Chairman
Gensler and other CFTC staff. Chairman Gensler does not recall the
subject of the meeting or the matters discussed.
In June 2011, Chairman Gensler was the keynote speaker at lunch at
a conference sponsored by Sandler O'Neill and Partners, an investment
banking and broker/dealer firm.\31\ Mr. Corzine was seated at the same
table as Chairman Gensler during the lunch. The invitation did not come
from Mr. Corzine, and Chairman Gensler and Mr. Corzine did not discuss
any issues relating to MFGI while Chairman Gensler was at the
conference.
---------------------------------------------------------------------------
\31\ The firm regularly sponsors such conferences. See, e.g.,
https://register.sandleroneill.com/conferences/ (last visited Nov. 6,
2011).
---------------------------------------------------------------------------
In September 2011, Chairman Gensler and Mr. Corzine were both
wedding guests of mutual acquaintances. Chairman Gensler and Mr.
Corzine did not discuss any issues relating to MFGI while attending the
wedding.
Chairman Gensler has been on two conference calls with Mr. Corzine
during his term as Chairman of the CFTC. The first, on July 20, 2011,
was a conference call to discuss topics relating to a rulemaking
regarding CFTC Rules 1.25 and 30.7.\32\ Second, Chairman Gensler
participated in a series of conference calls with other regulatory
authorities and MFGI during the days leading up to the filing of the
MFGI bankruptcy proceedings. Chairman Gensler is aware that Mr. Corzine
was on the line for at least part of one of these calls, regarding the
European bond portfolio.\33\ Since becoming Chairman of the CFTC,
Chairman Gensler has not had any private telephone conversations with
Mr. Corzine.\34\
---------------------------------------------------------------------------
\32\ A record of this call can be found at http://www.cftc.gov/
LawRegulation/DoddFrankAct/ExternalMeetings/dfmeeting_072011_928 (last
visited Nov. 7, 2011). In response to media questions as to whether a
delay in consideration of this rulemaking showed favoritism to MFGI,
Chairman Gensler has stated that he has ``been consistent on this rule,
and I allowed more time for others to continue to look at it.'' See
Silla Brush, Bloomberg, ``MF Global Didn't Get Preferential Treatment,
CFTC's Gensler,'' Nov. 7. 2011.
\33\ It is possible that Mr. Corzine was on the line during other
portions of these conference calls.
\34\ On November 8, 2011, BNA reported that Chairman Gensler and
Mr. Corzine spoke shortly after Mr. Corzine resigned from his positions
at MF Global. See Steven Joyce, BNA, ``Gensler Says Recusal Decision
Made Days Before Corzine Resignation, Grassley Letter,'' Nov. 8, 2011.
This report is not accurate; the reported conversation between Chairman
Gensler and Mr. Corzine did not occur.

---------------------------------------------------------------------------
Summary

Chairman Gensler worked with Mr. Corzine during the last 6 years of
Chairman Gensler's tenure at GS. During two of those years (1993-1994),
Chairman Gensler reported directly to co-heads Messrs. Corzine and
Winkelman; during the other 4 years, Mr. Corzine was his second-level
supervisor. Their relationship during this period was solely
professional. Chairman Gensler and Mr. Corzine did not socialize or
spend time together apart from their mutual professional
activities.\35\
---------------------------------------------------------------------------
\35\ Chairman Gensler recalls one non-professional interaction that
indirectly involved Mr. Corzine during his tenure at GS. In 1991,
Chairman Gensler learned that Mr. Corzine had registered to run in the
New York City Marathon that year. Chairman Gensler recalls that he
asked Mr. Corzine's secretary whether Mr. Corzine actually was going to
run the marathon. A few weeks later Mr. Corzine's secretary told
Chairman Gensler that Mr. Corzine would not run in the race and would
not use the number he had been provided. Mr. Corzine's secretary gave
Mr. Corzine's number to Mr. Gensler, who then used Mr. Corzine's bib
number in the race.
---------------------------------------------------------------------------
Since the time they worked together at GS over 14 years ago,
Chairman Gensler's contacts with Mr. Corzine have been infrequent.
Generally, they have met when they both were present at a function
organized by others. Similarly, Chairman Gensler has not socialized
with Mr. Corzine after his departure from GS, nor have their families
socialized with each other. Chairman Gensler and Mr. Corzine do not
correspond with each other; Chairman Gensler does not recall any e-
mails or other electronic communications between himself and Mr.
Corzine for at least as far back as 10 years. Chairman Gensler does not
carry Mr. Corzine's personal phone number in his cell phone directory.
Chairman Gensler and Mr. Corzine have never attended any of each
other's major non-professional life-events during the entire time they
have known each other. Mr. Corzine did not attend Chairman Gensler's
wedding (which occurred while Chairman Gensler was at GS), the bat-
mitzvahs of Chairman Gensler's daughters, or the funeral of Chairman
Gensler's wife. Similarly, Chairman Gensler did not attend Governor
Corzine's inaugural in 2005 or his wedding in 2010.
Chairman Gensler did not ask Mr. Corzine for support of his
nomination as CFTC Chairman. He has never contributed directly to any
of Mr. Corzine's electoral campaigns. He has raised money for several
national Democratic figures, but has never solicited a campaign
contribution for Mr. Corzine. Nor does he recall ever soliciting a
campaign contribution from Mr. Corzine.
C. Relationship Between Chairman Gensler and Other Former GS Officials
Working for or on Behalf of MFGI \36\
---------------------------------------------------------------------------
\36\ The facts in this section are based primarily upon an
interview with Chairman Gensler conducted on November 4, 2011.
---------------------------------------------------------------------------
Certain other current MFGI employees and officials previously
worked at GS at the same time as Chairman Gensler. Chairman Gensler's
relationship with these individuals is as follows:

Brad Abelow

Mr. Abelow became a partner at GS at around the time that Chairman
Gensler was leaving GS. At some point, Mr. Abelow became head of OTF in
Asia, the position Chairman Gensler had previously occupied. Chairman
Gensler recalls that when he was in OTF he and Mr. Abelow had a
``weekly to bi-weekly working relationship.''
After leaving GS, Chairman Gensler did not see Mr. Abelow until
August or September 2008, at a fundraiser for the Presidential campaign
of then-Senator Obama. As previously noted, Governor Corzine also
attended this event. At the time, Mr. Abelow was Governor Corzine's
Chief of Staff. Chairman Gensler recalls speaking to Mr. Abelow for
approximately 5 to 10 minutes at this event.
Chairman Gensler believes it is possible that he may have spoken to
Mr. Abelow on one or more occasions in his capacity as Governor
Corzine's Chief of Staff to facilitate the discussions with Governor
Corzine previously noted during the Presidential primary season prior
to the 2008 election. After that, Chairman Gensler did not speak with
Mr. Abelow again until one of the multi-party conference calls between
regulators and MFGI during the weekend prior to the bankruptcy filing
of MFGI.
Chairman Gensler and Mr. Abelow did not have a social relationship
apart from their professional relationship at GS.

Christopher Flowers

Chairman Gensler began working with Mr. Flowers in the M&A
department at GS upon his arrival at GS in 1979. They worked together
in M&A for approximately 12 years--until Chairman Gensler was
transferred from M&A to FI. While Chairman Gensler was in the M&A
department, he and Mr. Flowers frequently discussed M&A issues and
strategies, but Chairman Gensler and Mr. Flowers specialized in
different industries and, to the best of his recollection, did not work
together on any specific deals.
After Chairman Gensler left GS, Mr. Flowers visited him once at the
Treasury Department. Chairman Gensler recalls that as part of this
visit they may have had lunch together.
Chairman Gensler does not recall seeing Mr. Flowers in person since
that meeting at the Treasury Department. Mr. Flowers called Chairman
Gensler twice at the CFTC. With respect to the first call, Chairman
Gensler recalls that Mr. Flowers expressed condolences that his wife
had passed away, and he provided Chairman Gensler with the name of an
individual who was knowledgeable about financial market regulation.\37\
Mr. Flowers did not ask for any action by Chairman Gensler or the CFTC.
---------------------------------------------------------------------------
\37\ Chairman Gensler did not contact that individual and does not
recall his or her name.
---------------------------------------------------------------------------
In connection with the MFGI matter, Mr. Flowers called Chairman
Gensler on October 31, 2011, before Chairman Gensler arrived at the
office. Chairman Gensler returned Mr. Flowers' call after he arrived at
the office. Several other CFTC employees were present in Chairman
Gensler's office for the call and several individuals were present with
Mr. Flowers, including Mr. Goldfield, Henri Steenkamp (Chief Financial
Officer) and another MFGI official. The MFGI officials on the call
provided the call participants with information regarding MFGI's
financial status.
Chairman Gensler and Mr. Flowers did not have a social relationship
apart from their professional relationship at GS.

Laurie Ferber

At the time that Chairman Gensler was in FI at GS, Ms. Ferber was a
senior compliance officer/attorney at the firm. Chairman Gensler
believes that he may have spoken with Ms. Ferber on one or more
compliance matters when he was in FI, but he does not recall anything
specific.
After leaving GS, Chairman Gensler did not have any contact with
Ms. Ferber until he met with the Board of Directors of the Futures
Industry Association (FIA) in September 2010. At the time, Ms. Ferber
represented MFGI on the FIA Board of Directors. Ms. Ferber also
attended the meeting between Mr. Corzine and CFTC officials, including
Chairman Gensler, in December 2010. Ms. Ferber also was on the July 20,
2011, conference call between MFGI officials (including Mr. Corzine)
and CFTC officials, including Chairman Gensler, concerning topics
relating to a CFTC rulemaking regarding Rules 1.25 and 30.7. Chairman
Gensler does not believe that he met or spoke with Ms. Ferber after
that, until she participated in one or more multi-party conference
calls between MFGI and regulators prior to the bankruptcy filing.
Chairman Gensler and Ms. Ferber did not have a social relationship
apart from their professional relationship at GS.

Jacob Goldfield

Chairman Gensler first met Mr. Goldfield in late 1991 or early
1992, after Chairman Gensler began working in FI. Mr. Goldfield also
worked in FI, trading options on the government bond desk.
At the time that Chairman Gensler was co-head of fixed income
trading in Tokyo, he also had co-supervisory responsibility for the
trading of Yen currency swaps conducted in Asia. At the same time, Mr.
Goldfield, who was located in New York, had supervisory responsibility
for the worldwide GS swap book. Accordingly, Chairman Gensler and Mr.
Goldfield had overlapping responsibilities with respect to the GS Yen
swap book. Chairman Gensler recalls that he and Mr. Goldfield also
later may have served together on the Risk Committee.
Mr. Goldfield visited Chairman Gensler on one occasion at the CFTC.
During the consideration of the Dodd-Frank legislation, Mr. Goldfield
met with Chairman Gensler and at least one other member of the
Chairman's staff. Mr. Goldfield told the Chairman that he was doing
good work and if he ever needed anything, to give him a call. Chairman
Gensler does not recall any other meetings with Mr. Goldfield since
Chairman Gensler left GS.
On October 30, 2011, Mr. Goldfield e-mailed Chairman Gensler to
inform him that he was at MF Global ``in case there are questions.''
Mr. Goldfield also informed Mr. Gensler that he had ``no financial
interest in the company and [was] not looking at it for investment.''
Mr. Gensler asked Mr. Goldfield whether there were ``any observations
you wish to pass along?'' Mr. Goldfield replied, ``Not as of now, I
want only to send along novel insights that are useful.'' Chairman
Gensler responded, ``Novel and useful. Now those are limiting
conditions, though I would say that most everything you have shared
over our long knowing each other has been useful.'' Mr. Goldfield then
stated, ``Also want to make sure that I am right before I comment.''
Chairman Gensler does not recall any further comments or information
from Mr. Goldfield.
Mr. Goldfield was present at MFGI during one of the conference
calls between MFGI and regulators on October 30, 2011. To the best of
his recollection, Mr. Goldfield did not speak on the call. A
participant from another regulatory agency who was present at MFGI
headquarters in New York and who was on the call relayed to Chairman
Gensler during the call that Mr. Goldfield walked by and requested that
he say ``hello to Gensler.''
Mr. Goldfield also was present at MFGI during a conference call
between MFGI and regulators on the morning of October 31, 2011.
Chairman Gensler and Mr. Goldfield did not have a social
relationship apart from their professional relationship at GS.
III. Legal Standard
The standard for determining whether an employee may participate in
a matter affecting the employee's financial interests, or involving
persons with whom the employee has or has had a professional, business,
economic, or personal relationship, is set forth in 5 CFR 2635.502.
Specifically, 2635.502(a) provides:

(a) Consideration of appearances by the employee. Where an
employee knows that a particular matter involving specific
parties is likely to have a direct and predictable effect on
the financial interest of a member of his household, or knows
that a person with whom he has a covered relationship is or
represents a party to such matter, and where the employee
determines that the circumstances would cause a reasonable
person with knowledge of the relevant facts to question his
impartiality in the matter, the employee should not participate
in the matter unless he has informed the agency designee of the
appearance problem and received authorization from the agency
designee in accordance with paragraph (d) of this section.

(1) In considering whether a relationship would cause
a reasonable person to question his impartiality, an
employee may seek the assistance of his supervisor, an
agency ethics official or the agency designee.
(2) An employee who is concerned that circumstances
other than those specifically described in this section
would raise a question regarding his impartiality
should use the process described in this section to
determine whether he should or should not participate
in a particular matter.

With respect to a ``covered relationship,'' 2635.502(b)(iv)
provides that an employee has a ``covered relationship'' with any
person ``for whom the employee has, within the last year, served as
officer, director, trustee, general partner, agent, attorney,
consultant, contractor or employee.'' (Emphasis added.) \38\
---------------------------------------------------------------------------
\38\ Section 2635.502(b) provides in full that an employee has a
``covered relationship'' with:

(i) A person, other than a prospective employer described in
2635.603(c), with whom the
employee has or seeks a business, contractual or other financial
relationship that involves
other than a routine consumer transaction;
(ii) A person who is a member of the employee's household, or
who is a relative with
whom the employee has a close personal relationship;
(iii) A person for whom the employee's spouse, parent or
dependent child is, to the em-
ployee's knowledge, serving or seeking to serve as an officer,
director, trustee, general part-
ner, agent, attorney, consultant, contractor or employee;
(iv) Any person for whom the employee has, within the last
year, served as officer, direc-
tor, trustee, general partner, agent, attorney, consultant,
contractor or employee; or
(v) An organization, other than a political party described in
26 U.S.C. 527(e), in which
the employee is an active participant. Participation is active if,
for example, it involves serv-
ice as an official of the organization or in a capacity similar to
that of a committee or sub-
committee chairperson or spokesperson, or participation in
directing the activities of the or-
ganization. In other cases, significant time devoted to promoting
specific programs of the
organization, including coordination of fundraising efforts, is an
indication of active partici-
pation. Payment of dues or the donation or solicitation of
financial support does not, in
itself, constitute active participation.

---------------------------------------------------------------------------
When the circumstances identified in 2635.502(a) are not
present--i.e., there is no direct and predictable effect on the
financial interest of a member of his household, and there is no
covered relationship-- 2635.502(a)(2) provides that the procedures
specified in 2635.502 should still be followed if a question
concerning the employee's impartiality may nevertheless remain.\39\
---------------------------------------------------------------------------
\39\ Under these circumstances--where no financial interest is
affected and no covered relationship exists--the Office of Government
Ethics (OGE) does not consider the failure to follow these procedures
to be ``an ethical lapse'':

OGE has consistently maintained that, although employees are
encouraged to use the
process provided by section 2635.502(a)(2), `[t]he election not to
use that process cannot ap-
propriately be considered to be an ethical lapse.' OGE Informal
Advisory Letter, 94 x 10(2);
see also OGE 97 x 8 (`obligation' to follow process where covered
relationships involved, but
employees `encouraged' to use process in other circumstances); OGE
95 x 5 (`not required
by 5 CFR 2635.502 to use the process described in that section'
where there is no covered
relationship with person who is a party or represents a party); OGE
94 x 10(1) (employee
may `elect' to use process in section 2635.502(a)(2), but `election
not to use that process
should not be characterized, however, as an `ethical lapse').

OGE 01 x 8, Impartiality and Romantic Relationships, August 23,
2001. OGE has further indicated that in such circumstances, ``even if
it were now determined, in hindsight, that a reasonable person with
knowledge of the circumstances would question the [person's]
impartiality, we cannot say that she violated the impartiality rule.''
Id.
---------------------------------------------------------------------------
``For example,'' the Office of Government Ethics (OGE) explains,
``if an employee believes that a personal friendship, or a
professional, social, political or other association not specifically
treated as a covered relationship, may raise an appearance question,
then the employee should use the section 2635.502 process to resolve
the question.'' \40\
---------------------------------------------------------------------------
\40\ OGE, Memorandum dated April 26, 1999, from Stephen D. Potts,
Director, to Designated Agency Ethics Officials, Regarding Recusal
Obligations and Screening Arrangements, 99 x 8. Under section
2635.502(a)(2), an employee may determine not to participate in a
matter due to appearance concerns even if that employee's withdrawal is
not required. Id.
---------------------------------------------------------------------------
In this event, under the 2635.502 process, the threshold
determination is to ``consider whether the employee's impartiality
would reasonably be questioned if the employee were to participate in a
particular matter involving specific parties where persons, with
certain personal or business relationships with the employee are
involved.'' \41\ If it is determined that the employee's participation
would ``raise a question in the mind of a reasonable person about his
impartiality,'' the agency's designated ethics official may nonetheless
authorize the employee to participate in the matter ``based on a
determination, made in light of all relevant circumstances, that the
interest of the Government in the employee's participation outweighs
the concern that a reasonable person may question the integrity of the
agency's programs and operations.'' \42\
---------------------------------------------------------------------------
\41\ Id; 5 CFR 2635.502(c).
\42\ 5 CFR 2635.502(d). This section provides the following
factors that may be considered in making this determination:

(1) The nature of the relationship involved;
(2) The effect that resolution of the matter would have upon
the financial interests of the
person involved in the relationship;
(3) The nature and importance of the employee's role in the
matter, including the extent
to which the employee is called upon to exercise discretion in the
matter;
(4) The sensitivity of the matter;
(5) The difficulty of reassigning the matter to another
employee; and
(6) Adjustments that may be made in the employee's duties that
would reduce or elimi-
nate the likelihood that a reasonable person would question the
employee's impartiality.

---------------------------------------------------------------------------
IV. Analysis
Is there a financial interest or ``covered relationship''?

Neither Chairman Gensler nor any member of his household has a
financial interest in MFGI, or in any commodity or security interest
held by MFGI. More broadly, neither Chairman Gensler nor any member of
his household has any other financial interest that would be
predictably or directly affected by a CFTC investigation involving MFGI
or associated CFTC actions, including participation in the MFGI
bankruptcy proceedings, and the recovery of customer funds.
Accordingly, the resolution of the MFGI matter would not have a
``direct and predictable'' effect upon the financial interests of
Chairman Gensler or any member of his household. Chairman Gensler does
not have a ``covered relationship'' with MFGI or any of its employees,
officers, directors, or shareholders. Chairman Gensler's partnership
with GS, Mr. Corzine, and other partners at GS terminated in 1997, more
than 14 years ago. This is far beyond the 1 year ``cooling off period''
provided in 2635.502(b)(iv) for a person who was a general partner
with another person to be considered to have a ``covered relationship''
with such other person.\43\

\43\ 5 CFR 2635.502(b)(iv). As previously noted, OGE has stated
that if no financial interest is involved and a covered relationship is
not present, a determination not to follow the procedures in
2635.502--and hence to participate in the matter--cannot be considered
to be an ``ethical lapse.'' Nonetheless, in accordance with OGE
recommendations, Chairman Gensler has determined to follow the
2635.502 process.
---------------------------------------------------------------------------
Is there a reasonable basis to question the employee 's
impartiality?

The sole fact that Chairman Gensler at one time was a business
partner with Mr. Corzine, without more, does not constitute a
reasonable basis, within the meaning of 2635.502, to question
Chairman Gensler's impartiality with respect to matters relating to
MFGI.
Once the 1 year cooling-off period has passed, the fact that an
employee previously was within a covered relationship with respect to
another individual, without more, cannot by itself be the basis to
reasonably question an employee's impartiality. To hold otherwise
would, in effect, transform the 1 year cooling off period into a
lifetime prohibition, for in every such instance the covered
relationship within the 1 year period could be cited as the basis for
disqualification beyond the 1 year period.\44\
---------------------------------------------------------------------------
\44\ This conclusion is consistent with the OGE position that in
circumstances in which no financial interest is involved and a covered
relationship is not present, a determination not to follow the
procedures in 2635.502 cannot be considered to be an ``ethical
lapse.''
---------------------------------------------------------------------------
The ethics regulations do not require such a result. To the
contrary, the procedures in 2635.502 clearly contemplate that
employees who at one time may have had a covered relationship with
respect to another person or entity, but that no longer have such a
covered relationship, may participate in a matter involving the person
or entity that previously was within the covered relationship.
To constitute a reasonable basis to question Chairman Gensler's
impartiality, therefore, there must be some additional indicia of a
relationship between Chairman Gensler and Mr. Corzine, GS, or its
partners, beyond the factors that would establish a covered
relationship--i.e., facts in addition to Chairman Gensler's partnership
at GS some 14 years ago. However, the facts regarding Chairman
Gensler's relationship with Mr. Corzine and others at GS who are now
associated with MFGI--both during the time that Chairman Gensler worked
at GS and afterwards--are insufficient to provide such indicia.
The record set forth above indicates that at all times, both during
their partnership and afterwards, the relationship between Chairman
Gensler and Mr. Corzine was exclusively a professional relationship.
Chairman Gensler and Mr. Corzine did not socialize or meet apart from
their professional obligations and interests. The record indicates that
since Chairman Gensler and Mr. Corzine left GS in the late 1990s, they
have met only infrequently and solely on matters of mutual professional
interest. Indeed, most of their encounters have occurred when they both
have been invited to attend an event by others. Although both Chairman
Gensler and Mr. Corzine have been involved in political fundraising and
electoral campaigning, neither has done so on the other's behalf or at
the other's request. They have not socialized, and they have not been
involved in each other's personal lives. Their infrequent professional
contacts, over a 14 year period following their departure from their
partnership at GS, do not constitute a covered relationship or a
similar type of relationship that would form a reasonable basis under
section 2635.502 to question Chairman Gensler's impartiality with
respect to MFGI.\45\
---------------------------------------------------------------------------
\45\ Chairman Gensler's contribution to the New Jersey State
Democratic Party at the time Mr. Corzine was campaigning for Governor
of New Jersey is not sufficient to warrant a different conclusion.
During this time period, Chairman Gensler was an active fundraiser for
and contributor to Democratic candidates for elected office in many
states. Chairman Gensler's contribution to the New Jersey State
Democratic Party therefore is not sufficient to establish a special
relationship between Chairman Gensler and Mr. Corzine that would
warrant a different conclusion.
---------------------------------------------------------------------------
Following his departure from GS, Chairman Gensler's contacts with
Mr. Abelow, Mr. Flowers, Ms. Ferber, and Mr. Goldfield have been more
attenuated than his contacts with Mr. Corzine. Based on the highly
infrequent nature of Chairman Gensler's contacts with these individuals
since he left the GS partnership in 1997, Chairman Gensler's
relationships with these individuals, both individually and
collectively, are insufficient to constitute a reasonable basis under
section 2635.502 to question Chairman Gensler's impartiality with
respect to MFGI.
In sum, this review determines, based on the facts and
circumstances stated herein, that there is not a reasonable basis under
5 CFR 2635.502 to question Chairman Gensler's impartiality with
respect to the Commission's investigation of MFGI and involvement in
related matters, such as the MFGI bankruptcy proceedings. Accordingly,
5 CFR 2635.502 does not preclude Chairman Gensler's participation in
these matters, and Chairman Gensler is not required to withdraw from
participation. From a legal and ethical perspective, Chairman Gensler's
participation in Commission matters involving MFGI would not be
improper.\46\
---------------------------------------------------------------------------
\46\ This review solely addresses matters before the Commission
prior to and at the time of the Chairman's election not to participate
and is based on the facts contained herein.
---------------------------------------------------------------------------
attachment 3
Rule 151.5(a), adopted under CEA section 4a(c)(2):

(1) Any person that complies with the requirements of this
section may exceed the position limits set forth in 151.4 to
the extent that a transaction or position in a Referenced
Contract:

(i) Represents a substitute for transactions made or
to be made or positions taken or to be taken at a later
time in a physical marketing channel;
(ii) Is economically appropriate to the reduction of
risks in the conduct and management of a commercial
enterprise; and
(iii) Arises from the potential change in the value
of one or several--

(A) Assets that a person owns, produces,
manufactures, processes, or merchandises or
anticipates owning, producing, manufacturing,
processing, or merchandising;
(B) Liabilities that a person owns or
anticipates incurring; or
(C) Services that a person provides,
purchases, or anticipates providing or
purchasing; or

(iv) Reduces risks attendant to a position resulting
from a swap that--

(A) Was executed opposite a counterparty for
which the transaction would qualify as a bona
fide hedging transaction pursuant to paragraph
(a)(1)(i) through (iii) of this section; or
(B) Meets the requirements of paragraphs
(a)(1)(i) through (iii) of this section.

(v) Notwithstanding the foregoing, no transactions or
positions shall be classified as bona fide hedging for
purposes of 151.4 unless such transactions or
positions are established and liquidated in an orderly
manner in accordance with sound commercial practices
and the provisions of paragraph (a)(2) of this section
regarding enumerated hedging transactions and positions
or paragraphs (a)(3) or (4) of this section regarding
pass-through swaps of this section have been satisfied.

(2) Enumerated hedging transactions and positions. Bona fide
hedging transactions and positions for the purposes of this
paragraph mean any of the following specific transactions and
positions:

(i) Sales of Referenced Contracts that do not exceed
in quantity:

(A) Ownership or fixed-price purchase of the
contract's underlying cash commodity by the
same person; and
(B) Unsold anticipated production of the same
commodity, which may not exceed 1 year of
production for an agricultural commodity, by
the same person provided that no such position
is maintained in any physical-delivery
Referenced Contract during the last 5 days of
trading of the Core Referenced Futures Contract
in an agricultural or metal commodity or during
the spot month for other physical-delivery
contracts.

(ii) Purchases of Referenced Contracts that do not
exceed in quantity:

(A) The fixed-price sale of the contract's
underlying cash commodity by the same person;
(B) The quantity equivalent of fixed-price
sales of the cash products and by-products of
such commodity by the same person; and
(C) Unfilled anticipated requirements of the
same cash commodity, which may not exceed 1
year for agricultural Referenced Contracts, for
processing, manufacturing, or use by the same
person, provided that no such position is
maintained in any physical-delivery Referenced
Contract during the last 5 days of trading of
the Core Referenced Futures Contract in an
agricultural or metal commodity or during the
spot month for other physical-delivery
contracts.

(iii) Offsetting sales and purchases in Referenced
Contracts that do not exceed in quantity that amount of
the same cash commodity that has been bought and sold
by the same person at unfixed prices basis different
delivery months, provided that no such position is
maintained in any physical-delivery Referenced Contract
during the last 5 days of trading of the Core
Referenced Futures Contract in an agricultural or metal
commodity or during the spot month for other physical-
delivery contracts.
(iv) Purchases or sales by an agent who does not own
or has not contracted to sell or purchase the
offsetting cash commodity at a fixed price, provided
that the agent is responsible for the merchandising of
the cash positions that is being offset in Referenced
Contracts and the agent has a contractual arrangement
with the person who owns the commodity or holds the
cash market commitment being offset.
(v) Anticipated merchandising hedges. Offsetting
sales and purchases in Referenced Contracts that do not
exceed in quantity the amount of the same cash
commodity that is anticipated to be merchandised,
provided that:

(A) The quantity of offsetting sales and
purchases is not larger than the current or
anticipated unfilled storage capacity owned or
leased by the same person during the period of
anticipated merchandising activity, which may
not exceed 1 year;

(B) The offsetting sales and purchases in
Referenced Contracts are in different contract
months, which settle in not more than 1 year;
and
(C) No such position is maintained in any
physical-delivery Referenced Contract during
the last 5 days of trading of the Core
Referenced Futures Contract in an agricultural
or metal commodity or during the spot month for
other physical-delivery contracts.

(vi) Anticipated royalty hedges. Sales or purchases
in Referenced Contracts offset by the anticipated
change in value of royalty rights that are owned by the
same person provided that:

(A) The royalty rights arise out of the
production, manufacturing, processing, use, or
transportation of the commodity underlying the
Referenced Contract, which may not exceed 1
year for agricultural Referenced Contracts; and
(B) No such position is maintained in any
physical-delivery Referenced Contract during
the last 5 days of trading of the Core
Referenced Futures Contract in an agricultural
or metal commodity or during the spot month for
other physical-delivery contracts.

(vii) Service hedges. Sales or purchases in
Referenced Contracts offset by the anticipated change
in value of receipts or payments due or expected to be
due under an executed contract for services held by the
same person provided that:

(A) The contract for services arises out of
the production, manufacturing, processing, use,
or transportation of the commodity underlying
the Referenced Contract, which may not exceed 1
year for agricultural Referenced Contracts;
(B) The fluctuations in the value of the
position in Referenced Contracts are
substantially related to the fluctuations in
value of receipts or payments due or expected
to be due under a contract for services; and
(C) No such position is maintained in any
physical-delivery Referenced Contract during
the last 5 days of trading of the Core
Referenced Futures Contract in an agricultural
or metal commodity or during the spot month for
other physical-delivery contracts.

(viii) Cross-commodity hedges. Sales or purchases in
Referenced Contracts described in paragraphs (a)(2)(i)
through (vii) of this section may also be offset other
than by the same quantity of the same cash commodity,
provided that:

(A) The fluctuations in value of the position
in Referenced Contracts are substantially
related to the fluctuations in value of the
actual or anticipated cash position; and
(B) No such position is maintained in any
physical-delivery Referenced Contract during
the last 5 days of trading of the Core
Referenced Futures Contract in an agricultural
or metal commodity or during the spot month for
other physical-delivery contracts.

(3) Pass-through swaps. Bona fide hedging transactions and
positions for the purposes of this paragraph include the
purchase or sales of Referenced Contracts that reduce the risks
attendant to a position resulting from a swap that was executed
opposite a counterparty for whom the swap transaction would
qualify as a bona fide hedging transaction pursuant to
paragraph (a)(2) of this section (``pass-through swaps''),
provided that no such position is maintained in any physical-
delivery Referenced Contract during the last 5 days of trading
of the Core Referenced Futures Contract in an agricultural or
metal commodity or during the spot month for other physical-
delivery contracts unless such pass-through swap position
continues to offset the cash market commodity price risk of the
bona fide hedging counterparty.
(4) Pass-through swap offsets. For swaps executed opposite a
counterparty for whom the swap transaction would qualify as a
bona fide hedging transaction pursuant to paragraph (a)(2) of
this section (pass-through swaps), such pass-through swaps
shall also be classified as a bona fide hedging transaction for
the counterparty for whom the swap would not otherwise qualify
as a bona fide hedging transaction pursuant to paragraph (a)(2)
of this section (``non-hedging counterparty''), provided that
the non-hedging counterparty purchases or sells Referenced
Contracts that reduce the risks attendant to such pass-through
swaps. Provided further, that the pass-through swap shall
constitute a bona fide hedging transaction only to the extent
the non-hedging counterparty purchases or sells Referenced
Contracts that reduce the risks attendant to the pass-through
swap.
(5) Any person engaging in other risk-reducing practices
commonly used in the market which they believe may not be
specifically enumerated in 151.5(a)(2) may request relief
from Commission staff under 140.99 of this chapter or the
Commission under section 4a(a)(7) of the Act concerning the
applicability of the bona fide hedging transaction exemption.

Rule 1.3(z), revised under CEA section 4a(c) to apply only to
excluded commodities as defined in CEA section 1a(19):

(1) General definition. Bona fide hedging transactions and
positions shall mean any agreement, contract or transaction in
an excluded commodity on a designated contract market or swap
execution facility that is a trading facility, where such
transactions or positions normally represent a substitute for
transactions to be made or positions to be taken at a later
time in a physical marketing channel, and where they are
economically appropriate to the reduction of risks in the
conduct and management of a commercial enterprise, and where
they arise from:

(i) The potential change in the value of assets which
a person owns, produces, manufactures, processes, or
merchandises or anticipates owning, producing,
manufacturing, processing, or merchandising,
(ii) The potential change in the value of liabilities
which a person owns or anticipates incurring, or
(iii) The potential change in the value of services
which a person provides, purchases, or anticipates
providing or purchasing.
(iv) Notwithstanding the foregoing, no transactions
or positions shall be classified as bona fide hedging
unless their purpose is to offset price risks
incidental to commercial cash or spot operations and
such positions are established and liquidated in an
orderly manner in accordance with sound commercial
practices and, for transactions or positions on
contract markets subject to trading and position limits
in effect pursuant to section 4a of the Act, unless the
provisions of paragraphs (z)(2) and (3) of this section
have been satisfied.

(2) Enumerated hedging transactions. The definitions of bona
fide hedging transactions and positions in paragraph (z)(1) of
this section includes, but is not limited to, the following
specific transactions and positions:

(i) Sales of any agreement, contract, or transaction
in an excluded commodity on a designated contract
market or swap execution facility that is a trading
facility which do not exceed in quantity:

(A) Ownership or fixed-price purchase of the
same cash commodity by the same person; and
(B) Twelve months' unsold anticipated
production of the same commodity by the same
person provided that no such position is
maintained in any agreement, contract or
transaction during the 5 last trading days.

(ii) Purchases of any agreement, contract or
transaction in an excluded commodity on a designated
contract market or swap execution facility that is a
trading facility which do not exceed in quantity:

(A) The fixed-price sale of the same cash
commodity by the same person;
(B) The quantity equivalent of fixed-price
sales of the cash products and by-products of
such commodity by the same person; and
(C) Twelve months' unfilled anticipated
requirements of the same cash commodity for
processing, manufacturing, or feeding by the
same person, provided that such transactions
and positions in the 5 last trading days of any
agreement, contract or transaction do not
exceed the person's unfilled anticipated
requirements of the same cash commodity for
that month and for the next succeeding month.

(iii) Offsetting sales and purchases in any
agreement, contract or transaction in an excluded
commodity on a designated contract market or swap
execution facility that is a trading facility which do
not exceed in quantity that amount of the same cash
commodity which has been bought and sold by the same
person at unfixed prices basis different delivery
months of the contract market, provided that no such
position is maintained in any agreement, contract or
transaction during the 5 last trading days.
(iv) Purchases or sales by an agent who does not own
or has not contracted to sell or purchase the
offsetting cash commodity at a fixed price, provided
that the agent is responsible for the merchandising of
the cash position that is being offset, and the agent
has a contractual arrangement with the person who owns
the commodity or has the cash market commitment being
offset.
(v) Sales and purchases described in paragraphs
(z)(2)(i) through (iv) of this section may also be
offset other than by the same quantity of the same cash
commodity, provided that the fluctuations in value of
the position for in any agreement, contract or
transaction are substantially related to the
fluctuations in value of the actual or anticipated cash
position, and provided that the positions in any
agreement, contract or transaction shall not be
maintained during the 5 last trading days.

(3) Non-enumerated cases. A designated contract market or
swap execution facility that is a trading facility may
recognize, consistent with the purposes of this section,
transactions and positions other than those enumerated in
paragraph (2) of this section as bona fide hedging. Prior to
recognizing such non-enumerated transactions and positions, the
designated contract market or swap execution facility that is a
trading facility shall submit such rules for Commission review
under section 5c of the Act and part 40 of this chapter.

Rule 1.3(kkk), adopted under the definition of the term ``major
swap participant'' in CEA section 1a(33):

For purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33)
and 1.3(hhh), a swap position is held for the purpose of
hedging or mitigating commercial risk when:

(1) Such position:

(i) Is economically appropriate to the
reduction of risks in the conduct and
management of a commercial enterprise (or of a
majority-owned affiliate of the enterprise),
where the risks arise from:

(A) The potential change in the value
of assets that a person owns, produces,
manufactures, processes, or
merchandises or reasonably anticipates
owning, producing, manufacturing,
processing, or merchandising in the
ordinary course of business of the
enterprise;
(B) The potential change in the value
of liabilities that a person has
incurred or reasonably anticipates
incurring in the ordinary course of
business of the enterprise; or
(C) The potential change in the value
of services that a person provides,
purchases, or reasonably anticipates
providing or purchasing in the ordinary
course of business of the enterprise;
(D) The potential change in the value
of assets, services, inputs, products,
or commodities that a person owns,
produces, manufactures, processes,
merchandises, leases, or sells, or
reasonably anticipates owning,
producing, manufacturing, processing,
merchandising, leasing, or selling in
the ordinary course of business of the
enterprise;
(E) Any potential change in value
related to any of the foregoing arising
from interest, currency, or foreign
exchange rate movements associated with
such assets, liabilities, services,
inputs, products, or commodities; or
(F) Any fluctuation in interest,
currency, or foreign exchange rate
exposures arising from a person's
current or anticipated assets or
liabilities; or

(ii) Qualifies as bona fide hedging for
purposes of an exemption from position limits
under the Act; or
(iii) Qualifies for hedging treatment under
(A) Financial Accounting Standards Board
Accounting Standards Codification Topic 815,
Derivatives and Hedging (formerly known as
Statement No. 133) or (B) Governmental
Accounting Standards Board Statement 53,
Accounting and Financial Reporting for
Derivative Instruments; and

(2) Such position is:

(i) Not held for a purpose that is in the
nature of speculation, investing or trading;
and
(ii) Not held to hedge or mitigate the risk
of another swap or security-based swap
position, unless that other position itself is
held for the purpose of hedging or mitigating
commercial risk as defined by this rule or
240.3a67-4 of this title.

Proposed rule 39.6(c), adopted under the end-user exception from
the clearing requirement in CEA section 2(h)(7):

For purposes of section 2(a)(7)(A)(ii) of the CEA and Sec.
39.6(b)(4), a swap shall be deemed to be used to hedge or
mitigate commercial risk when:

(1) Such swap:

(i) Is economically appropriate to the
reduction of risks in the conduct and
management of a commercial enterprise, where
the risks arise from:

(A) The potential change in the value
of assets that a person owns, produces,
manufactures, processes, or
merchandises or reasonably anticipates
owning, producing, manufacturing,
processing, or merchandising in the
ordinary course of business of the
enterprise;
(B) The potential change in the value
of liabilities that a person has
incurred or reasonably anticipates
incurring in the ordinary course of
business of the enterprise; or
(C) The potential change in the value
of services that a person provides,
purchases, or reasonably anticipates
providing or purchasing in the ordinary
course of business of the enterprise;
(D) The potential change in the value
of assets, services, inputs, products,
or commodities that a person owns,
produces, manufactures, processes,
merchandises, leases, or sells, or
reasonably anticipates owning,
producing, manufacturing, processing,
merchandising, leasing, or selling in
the ordinary course of business of the
enterprise;
(E) Any potential change in value
related to any of the foregoing arising
from foreign exchange rate movements
associated with such assets,
liabilities, services, inputs,
products, or commodities; or
(F) Any fluctuation in interest,
currency, or foreign exchange rate
exposures arising from a person's
current or anticipated assets or
liabilities; or

(ii) Qualifies as bona fide hedging for
purposes of an exemption from position limits
under the Act; or
(iii) Qualifies for hedging treatment under
Financial Accounting Standards Board Accounting
Standards Codification Topic 815, Derivatives
and Hedging (formerly known as Statement No.
133); and

(2) Such swap is:

(i) Not used for a purpose that is in the
nature of speculation, investing, or trading;
or
(ii) Not used to hedge or mitigate the risk
of another swap or securities-based swap,
unless that other swap itself is used to hedge
or mitigate commercial risk as defined by this
rule or the equivalent definitional rule
governing security-based swaps promulgated by
the Securities and Exchange Commission under
the Securities Exchange Act of 1934.

Interim final rule 1.3(ppp)(6)(iii), adopted under the definition
of the term ``swap dealer'' in CEA section 1a(49):

In determining whether a person is a swap dealer, a swap that
the person enters into shall not be considered, if:

(A) The person enters into the swap for the purpose
of offsetting or mitigating the person's price risks
that arise from the potential change in the value of
one or several (1) assets that the person owns,
produces, manufactures, processes, or merchandises or
anticipates owning, producing, manufacturing,
processing, or merchandising; (2) liabilities that the
person owns or anticipates incurring; or (3) services
that the person provides, purchases, or anticipates
providing or purchasing;
(B) The swap represents a substitute for transactions
made or to be made or positions taken or to be taken by
the person at a later time in a physical marketing
channel;
(C) The swap is economically appropriate to the
reduction of the person's risks in the conduct and
management of a commercial enterprise;
(D) The swap is entered into in accordance with sound
commercial practices; and
(E) The person does not enter into the swap in
connection with activity structured to evade
designation as a swap dealer.

The Commission addressed these definitions in its recent release
adopting the rules further defining the terms swap dealer, eligible
contract participant and major swap participant.

Regarding interim final rule 1.3(ppp)(6)(iii), the
Commission stated: ``[A]lthough the CFTC is not incorporating
the bona fide hedging provisions of the CFTC's position limits
rule here, the exclusion from the swap dealer analysis draws
upon language in the CFTC's definition of bona fide hedging.
For example, the exclusion expressly includes swaps hedging
price risks arising from the potential change in value of
existing or anticipated assets, liabilities, or services, if
the hedger has an exposure to physical price risk. And, as in
the bona fide hedging rule, the exclusion utilizes the word
`several' to reflect that there is no requirement that swaps
hedge risk on a one-to-one transactional basis in order to be
excluded, but rather they may hedge on a portfolio basis. For
these reasons, swaps that qualify as enumerated hedging
transactions and positions are examples of the types of
physical commodity swaps that are excluded from the swap dealer
analysis if the rule's requirements are met.''

The Commission explained that ``The definition of bona fide
hedging in [rule] 1.3(z), which applies for excluded
commodities, is not relevant here, because it does not contain
the requirement that the swap represents a substitute for a
transaction made or to be made or a position taken or to be
taken in a physical marketing channel, as required by [rule]
1.3(ggg)(6)(iii)(B). We believe that this requirement is an
important aspect of how principles from the bona fide hedging
definition are useful in identifying swaps that are entered
into for the purpose of hedging as opposed to other purposes.''

The Commission addressed how the interim final rule compares to the
definition of hedging or mitigating commercial risk in rule 1.3(kkk),
explaining that ``the usefulness of an exclusion of all swaps that
hedge or mitigate commercial risk for certain aspects of the major swap
participant definition is not a reason to use the same exclusion in the
swap dealer definition, since the swap dealer definition serves a
different function. The definition of the term `major swap
participant,' which applies only to persons who are not swap dealers,
is premised on the prior identification, by the swap dealer definition,
of persons who accommodate demand for swaps, make a market in swaps, or
otherwise engage in swap dealing activity. The major swap participant
definition performs the subsequent function of identifying persons that
are not swap dealers, but hold swap positions that create an especially
high level of risk that could significantly impact the U.S. financial
system. Only for this subsequent function is it appropriate to apply
the broader exclusion of swaps held for the purpose of hedging or
mitigating commercial risk.''