[Senate Hearing 114-645]
[From the U.S. Government Publishing Office]
S. Hrg. 114-645
NOMINATIONS OF
CHRISTOPHER JAMES BRUMMER AND
BRIAN D. QUINTENZ TO BE
COMMISSIONERS OF THE
COMMODITY FUTURES TRADING COMMISSION
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 15, 2016
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.fdsys.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
23-593 PDF WASHINGTON : 2018
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
PAT ROBERTS, Kansas, Chairman
THAD COCHRAN, Mississippi DEBBIE STABENOW, Michigan
MITCH McCONNELL, Kentucky PATRICK J. LEAHY, Vermont
JOHN BOOZMAN, Arkansas SHERROD BROWN, Ohio
JOHN HOEVEN, North Dakota AMY KLOBUCHAR, Minnesota
DAVID PERDUE, Georgia MICHAEL BENNET, Colorado
JONI ERNST, Iowa KIRSTEN GILLIBRAND, New York
THOM TILLIS, North Carolina JOE DONNELLY, Indiana
BEN SASSE, Nebraska HEIDI HEITKAMP, North Dakota
CHARLES GRASSLEY, Iowa ROBERT P. CASEY, Jr., Pennsylvania
JOHN THUNE, South Dakota
Joel T. Leftwich, Majority Staff Director
Anne C. Hazlett, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Joseph A. Shultz, Minority Staff Director
(ii)
C O N T E N T S
----------
Page
Hearing(s):
Nominations of Christopher James Brummer and Brian D. Quintenz to
be Commissioners of the Commodity Futures Trading Commission... 1
----------
Thursday, September 15, 2016
STATEMENTS PRESENTED BY SENATORS
Roberts, Hon. Pat, U.S. Senator from the State of Kansas,
Chairman, Committee on Agriculture, Nutrition, and Forestry.... 1
Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan... 2
Witnesses
Brummer, Christopher James, of Washington, DC, to be a
Commissioner of the Commodity Futures Trading Commission....... 4
Quintenz, Brian D., of Washington, DC, to be a Commissioner of
the Commodity Futures Trading Commission....................... 6
----------
APPENDIX
Prepared Statements:
Brummer, Christopher James................................... 26
Quintenz, Brian D............................................ 28
Document(s) Submitted for the Record:
5-day letter, Committee questionnaire and Office of
Government Ethics Executive Branch Personnel Public
Financial Disclosure Report filed by Christopher James
Brummer.................................................... 32
5-day letter, Committee questionnaire and Office of
Government Ethics Executive Branch Personnel Public
Financial Disclosure Report filed by Brian D. Quintenz..... 54
Questions and Answers:
Brummer, Christopher James:
Written response to questions from Hon. Pat Roberts.......... 76
Written response to questions from Hon. Debbie Stabenow...... 77
Written response to questions from Hon. Sherrod Brown........ 88
Written response to questions from Hon. Charles Grassley..... 85
Written response to questions from Hon. Heidi Heitkamp....... 89
Written response to questions from Hon. Patrick J. Leahy..... 87
Written response to questions from Hon. David Perdue......... 81
Written response to questions from Hon. Ben Sasse............ 82
Written response to questions from Hon. John Thune........... 86
Quintenz, Brian D.:
Written response to questions from Hon. Pat Roberts.......... 90
Written response to questions from Hon. Debbie Stabenow...... 92
Written response to questions from Hon. Sherrod Brown........ 105
Written response to questions from Hon. Charles Grassley..... 101
Written response to questions from Hon. Heidi Heitkamp....... 106
Written response to questions from Hon. Patrick J. Leahy..... 103
Written response to questions from Hon. David Perdue......... 97
Written response to questions from Hon. Ben Sasse............ 98
Written response to questions from Hon. John Thune........... 102
NOMINATIONS OF
CHRISTOPHER JAMES BRUMMER AND
BRIAN D. QUINTENZ TO BE
COMMISSIONERS OF THE
COMMODITY FUTURES TRADING COMMISSION
----------
Thursday, September 15, 2016
United States Senate,
Committee on Agricultural, Nutrition, and Forestry,
Washington, DC
The Committee met, pursuant to notice, at 10:00 a.m., in
room 328A, Russell Senate Office Building, Hon. Pat Roberts,
Chairman of the Committee, presiding.
Present: Senators Roberts, Boozman, Perdue, Tillis,
Stabenow, Brown, Klobuchar, Bennet, Gillibrand, Donnelly and
Casey.
STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Chairman Roberts. I call this hearing of the Senate
Agriculture, Nutrition, and Forestry Committee to order. I
welcome my colleagues, and colleagues soon to come, as we
consider the nominations of Dr. Christopher Brummer, and Mr.
Brian Quintenz to serve as Commissioners of the Commodity
Future Trading Commission.
The CFTC is charged with fostering open, transparent and
competitive financially sound markets and to avoid systemic
risk. Further, the Commission is tasked with protecting market
users and their funds, consumers and the public, from fraud,
manipulation and abusive practices related to derivatives and
other products that are subject to the Commodity Exchange Act.
In order to fulfill its mission, the Commission is
comprised of five Commissioners nominated by the president with
the advice and consent of the Senate. Unfortunately, there are
two commissioner vacancies at the CFTC, or perhaps fortunately,
and that is what brings us here today.
As noted by the CFTC's own mission statement, farmers,
ranchers, producers, and commercial companies are end users--
that includes municipalities and pension funds and others who
use markets to lock in a price or rate and focus on what they
do best, that is, innovating and producing goods and services
for the economy, most importantly, creating jobs.
It is essential that the CFTC have individuals in charge
that truly take that mission statement to heart, as the
innovation and hard work of our farmers and ranchers seems to
have been forgotten in recent years. As I have said before, it
was not the farmer, the rancher, the producer or the commercial
end user that caused the great financial crisis of 2008, yet
they are paying the price. Many of us here raised concerns when
Dodd-Frank was being considered and insisted that the
legislation should not negatively impact those who had nothing
to do with the causes of the 2008 crisis. It is important to
note that this was a bipartisan concern.
Yet when Dodd-Frank became law, and the CFTC began writing
new regulations, it was in fact our farmers, our ranchers, and
our country grain elevator managers who felt the heavy hand of
overregulation. We hear of the concerns from constituents who
describe in detail, the regulatory overreach stemming from the
Dodd-Frank Act and its implementation.
In order to address these concerns, this Committee passed a
bill in April titled ``The Commodity End User Relief Act.'' The
bill champions compromise and a responsible solution to
providing regulatory certainty to end users while increasing
customer protections. As the futures and derivative markets
have grown to include a producer's input costs like fuel and
fertilizer, so too has the producer risk management toolbox,
and more options for managing risks are a good thing.
It is clear that Congress should not withhold needed
regulatory relief from our farmers and ranchers and risk
management service providers any longer, nor should the CFTC.
The CFTC must look through the lens of regulatory practicality,
not the lens of irrationality. I am pleased that Chairman
Massad is recommending the automatic drop of swap dealer de
minimis levels be pushed back one year. It is important that
the Commission have more time to analyze the issue to better
serve our farmers, ranchers and end users.
It is also important the CFTC discontinue its expansion of
its jurisdiction where systemic risk is not present. It is
imperative that all Commissioners understand the historic
nature of the markets the CFTC regulates and truly understand
risk mitigation as well as associated costs of regulations.
I thank both the nominees for being here today. I look
forward to your testimonies, and I now turn to my colleague,
Ranking Member Stabenow, for her opening remarks.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN
Senator Stabenow. Well, thank you very much, Mr. Chairman.
I too want to welcome and congratulate our two CFTC nominees,
Chris Brummer and Brian Quintenz, and welcome their families
and friends who are here today.
It is remarkable to think that more than eight years have
passed since the start of the worst financial crisis to hit our
country since the Great Depression. That is why your positions
are so important, this responsibility is so important. Whenever
I think about the work of the CFTC, I never forget that eight
million hardworking Americans lost their jobs because of
financial markets that got out of control. Small businesses
closed, people were evicted from their homes, retirements were
wiped out. Despite many signs of strength and continued growth
in our nation's resilient economy, we also know that millions
of Americans across the country are still trying to get fully
back on their feet from what happened at that time.
Although the Commodity Futures Trading Commission is rarely
associated with helping to create or secure American jobs, the
price of food in the marketplace, the supermarket, or the cost
of gas at the pump, this Committee knows all too well the
direct relationship between the CFTC's responsibilities and
these fundamental elements of our economy that American
families worry about every single day.
The CFTC is the front line regulator of derivatives, which
as we know, includes futures, options, and since 2010, swaps.
As we all know, derivatives, specifically the over-the-counter
swaps market, played a significant role in the financial
crisis. The swaps market was once in the shadows and a virtual
financial playground. But today, this Committee and the CFTC
can confidently say that as a result of Wall Street reform, a
light is shining on the swaps market.
From strong capital and margin requirements to mandatory
clearing, trade reporting, swap execution facilities, the
derivative market is much more transparent and well-regulated
in the public interest than it has ever been. There is,
however, more to do. The CFTC must continue to build on the
momentum of the past six years to ensure that the derivatives
market remains strong, transparent, free from manipulation and
fraud, and accessible to end users, and certainly the Chairman
and I agree and have both joined together in supporting the
accessibility and effectiveness for end users in this process.
Today the CFTC has much more responsibility than it has
ever had. Unfortunately, though, it carries out those
responsibilities with limited resources, which continues to be
a concern of mine in terms of the ability to fully respond to
markets and be effective through the CFTC. While I will
continue to lead the fight for additional Commission resources,
it is critical that the Commission use existing resources in
the most effective manner possible.
The CFTC must also keep a sharp eye on all market
participants, including clearing houses, exchanges, swap
dealers, which now have significant new roles and
responsibilities under Dodd-Frank, and new risks associated
with automated trading and threats from cyberattacks are
threats that could domino across the globe and knock families
and small business down along the way.
Finally, the CFTC must continue to work to harmonize key
financial reform rules across borders, carefully balancing the
need for smart financial reform with the sensitive appreciation
of how countries may approach regulations differently. The
CFTC's most important responsibility is to fight for every
American who has lost their job, their home, their pension
after the financial crisis, also for every farmer, every
manufacturer, rancher, business person who uses the markets and
needs it to be effective.
I have enjoyed meeting with each of you and appreciate the
responses, the conversations that we have had, and I look
forward to your responses today. If confirmed, I fully expect
both of you to work with this Committee in an open and
responsive manner. Thank you, Mr. Chairman.
Chairman Roberts. I thank my distinguished colleague for
her remarks. It is now time to hear from the nominees.
Dr. Chris Brummer is a professor of law and faculty
director of the Institute of International Economic Law at the
Georgetown University Law Center where he has taught since
2009. Chris received his bachelor's from Washington University
in St. Louis, a juris doctorate from Columbia University Law
School, and a Ph.D. from the University of Chicago. From 2004
to 2006, he was an associate of the law firm of Cravath Swaine
& Moore, LLP. From 2006 to 2009, Chris was an assistant
professor at Vanderbilt University Law School, and he served as
an academic fellow in the Securities and Exchange Commission
Office of International Affairs in 2008. In 2015, he completed
a three-year term on the National Adjudicatory Council of
Financial Industry Regulatory Authority. The acronym for that
is FINRA.
Welcome, Chris.
Our next nominee, Mr. Brian Quintenz, is a founder and
managing principal and chief investment officer of Saeculum
Capital Management, LLC, in Washington, DC Prior to forming
Saeculum Capital Management in late 2013, Brian worked within
the Global Institutional Consulting Group at Merrill Lynch as
an outside consultant. From 2009 to 2012, he was the senior
associate for Hill-Townsend Capital, a firm established during
the 2000 crisis to focus solely on U.S. financial company
equity opportunities.
Prior to working in the financial markets, from 2001 to
2007, Brian was a senior policy aide for Congresswoman Deborah
Pryce, an outstanding member of the House from Ohio and a good
friend. Brian graduated Magna Cum Laude from Duke University--
it is not clear whether he is one of these Duke University's
jumping up and down fans on the basketball court, so that will
remain classified--who has a major in public policy studies and
received an MBA from Georgetown.
I welcome you. I look forward to your testimonies. But
before that, there are two questions I will ask you under oath.
Please stand and raise your right hand.
Do you swear that the testimony you are about to present is
the truth, the whole truth and nothing but the truth so help
you God?
Mr. Brummer. I do.
Mr. Quintenz. I do.
Chairman Roberts. Secondly, do you agree that if confirmed,
you will appear before any duly constituted committee of
Congress if asked to appear?
Mr. Quintenz. I will.
Mr. Brummer. Yes.
Chairman Roberts. I thank you both. We recognize Dr.
Brummer first.
TESTIMONY OF CHRISTOPHER JAMES BRUMMER, TO BE COMMISSIONER OF
THE COMMODITY FUTURES TRADING COMMISSION
Mr. Brummer. Thank you so much, Chairman Roberts, Ranking
Member Stabenow, and the members of the Committee. I am honored
to be here before you today as a nominee to serve as a
commissioner on the Commodity Futures Trading Commission. I
would also like to thank President Obama for nominating me and
my amazing family, especially my wife, for supporting me.
The CFTC has an important, significant impact on the daily
lives of Americans and it is critical that CFTC regulated
markets work well, and I hope to contribute to this work. I
come from a family of teachers and farmers. My grandparents had
a small farm in the Shenandoah Valley of Western Virginia, and
some of my earliest memories include spending summers on that
farm, riding on the back of my grandfather's pickup truck as we
took produce to the local market.
My mother, who grew up there, would become an elementary
school teacher and move with my father to beautiful Northwest
Arkansas, where I was raised. I grew up in a rural area just
outside of Fayetteville, where my neighbors raised cattle and
horses, and poultry producers were just a 10-minute walk down
the road from my house. My upbringing taught me to respect
different points of view and stressed basic values that have
longed sustained the country: work hard, help your neighbor,
think before you act, and do good.
These values have paid dividends throughout my life. I
worked hard in school, learned a couple of foreign languages,
and eventually ended up a lawyer, which opened doors for me to
educational and professional experiences around the world. I
invested a significant amount of time studying markets and
financial regulation as a professor, and I opted, where I
could, to do good, from advising regulators in the United
States, Europe and Asia on how to ensure safe and efficient
cross-border market supervision, to working on critical
enforcement efforts intended to keep America's financial
markets safe and secure.
The 2008 financial crisis had devastating consequences for
the economy and like many Americans, it impacted those I cared
about in many ways. It would also underscore for me important
lessons about interdependence and the global economy. For much
of 2008, I was a fellow at the Securities and Exchange
Commission's Office of International Affairs, on loan from
Vanderbilt Law School in Nashville where I was teaching. There
I helped push forward America's regulatory interests and
priorities in the world and saw firsthand the need for skilled
communication and coordination with global actors.
My work since then has focused on cross-border oversight of
derivatives and securities markets. I am a strong believer in
promoting safe and economically vibrant financial markets
through sensible and strong regulation at home and close
coordination abroad. Smart international coordination helps
level the playing field for U.S. firms competing abroad and to
prevent arbitrage that can undermine our domestic policy
priorities and market practices.
I have seen in my experience assisting law enforcement
that, unfortunately, threats to market integrity are very real
and must be addressed swiftly. Farmers, ranchers, and
commercial end users must be able to trust that markets both
function properly and allow market participants to hedge their
commercial risks effectively. They also have to trust that the
markets in which they participate are healthy, liquid and free
of fraud and manipulation.
To accomplish this, government oversight should be prudent
and efficient and rules should be carefully and faithfully
enforced. The CFTC should not be afraid to embrace new
technologies that promote efficient markets, but where
innovations pose risks, whether to market integrity,
cybersecurity or financial stability generally, end users and
U.S. taxpayers must be protected.
Finally, I believe the CFTC's mission going forward is as
much about faithfully concluding the agency's Dodd-Frank
rulemaking as it is about looking forward to new threats and
opportunities facing the derivatives markets and those who
depend on them. I recognize that to do this job well requires
listening and keeping an open door to people who rely on those
markets, and I promise to do just that.
Again, I am honored to be here today, and I look forward to
your questions.
[The prepared statement of Mr. Brummer can be found on page
26 in the appendix.]
Chairman Roberts. Thank you very much, Dr. Brummer, for an
excellent statement, and for being on time. I make a note of
that. Ranking Member will have to give him a star for that. Mr.
Quintenz.
Mr. Quintenz. I will make a note of that too, Mr. Chairman.
TESTIMONY OF BRIAN D. QUINTENZ, NOMINEE TO BE COMMISSIONER OF
THE COMMODITY FUTURES TRADING COMMISSION
Mr. Quintenz. Thank you, Chairman Roberts, Ranking Member
Stabenow, and members of the Senate Agriculture Committee. It
is an honor to be with you this morning. I would also like to
thank Majority Leader McConnell for recommending me for this
position and President Obama for my nomination. If confirmed, I
would fill the seat vacated by Scott O'Malia, who set a high
standard in his service as commissioner.
I am deeply grateful for the love and support of my
parents, Kenneth and Susan Quintenz; my brother, Darren
Quintenz; and my two children, Connor and Vivienne, all of whom
are in attendance today. I am proud to have them here.
Mr. Chairman, I am a Midwesterner, a first generation
Ohioan whose mother and father grew up in Wisconsin, the home
of my extended family. While I am a resident of Washington, DC,
I still consider myself a Midwesterner, and I believe firmly in
the Midwest values of hard work, honesty, and community.
I come from a family of entrepreneurs and small business
owners. My grandfather on my mother's side, after serving in
World War II, returned home to Northwestern Wisconsin and
bought a Ford car dealership. His wife, my maternal
grandmother, was raised on a family dairy farm in Chetak,
Wisconsin. My paternal grandmother owned and operated a
restaurant on the east side of Milwaukee, putting her three
sons through college. My father started his own business, my
brother started his own business, and I am the founder of my
own business, Saeculum Capital Management.
Saeculum is an investment firm currently registered with
the CFTC as a commodity pool operator. As the sole proprietor
of this firm, it is my responsibility to effectively and
meticulously manage risk as well as compliance. I am,
therefore, very familiar with the CFTC's investor protection
rules, disclosure requirements, and recordkeeping obligations.
Additionally, as a registered Associated Person of this firm, I
hold a Series 3 National Commodity Futures Exam license, a
credential valuable in interpreting the impact of regulations
on futures markets.
I began my career in finance in 2008, during the financial
crisis, working directly under the CEO at an investment firm
focused on the banking sector. I performed detailed valuations
on financial institutions of all sizes and complexities. I
became an expert at reading banks' balance sheets and income
statements, understanding their accounting rules and financial
disclosures, and forecasting their capital levels and quarterly
earnings.
In this position, I depended on the accuracy and
accessibility of publicly available information and became a
firm believer in data and transparency. Transparency increases
market efficiency and can provide an important check on risky
behavior. The Commission's focus on data and transparency is
encouraging, but more progress is needed. If confirmed, I will
draw from my professional experience to advance that important
work.
But my professional career did not begin in finance; it
began in public policy. After graduating from Duke with a
degree in public policy studies, I joined the office of
Congresswoman Deborah Pryce, who represented Ohio's 15th
District, an area that included my hometown of Columbus.
Ultimately, I became her Senior Policy Advisor with an issue
portfolio that included agriculture. In meeting agricultural
constituents and personally visiting some of the over 1,000
family farmers in our Ohio district, I developed a strong
appreciation for the work ethic and sophistication of America's
farmers and ranchers, as well as for the pressures, costs, and
risks that they face in their business. Should I be confirmed,
I pledge to ensure the market concerns of the agricultural
sector are recognized and continue developing a firsthand
knowledge of the agricultural community.
The financial crisis scarred every sector of our economy,
hurt individuals, families and communities, and exposed deep
flaws in our markets. It deserved a legislative and a
regulatory response. As that response is calibrated,
regulations meant to address those flaws should not spill over
to harm the normal activity of ordinary businesses. When costs
are added without targeting risk, poor outcomes ensue. I will
work to ensure that regulations and their burdens are tied to
the risks being mitigated.
I would be honored to bring my public policy background, my
expertise in finance, my knowledge of derivatives and their
uses, my familiarity with risk management, as well as my
respect for the agricultural community and end users of these
markets, to the CFTC. This is a crucial time for our financial
markets and for the people that depend on them. It would be a
privilege to be of service in safeguarding and improving the
country's marketplaces.
I will be very pleased to answer your questions.
[The prepared statement of Mr. Quintenz can be found on
page 28 in the appendix.]
Chairman Roberts. Thank you, sir. We now turn to
questioning of the witnesses, and I am going to ask this
question, and we will ask Brian to start off.
Looking at the CFTC through the lens of an agricultural end
user, do you think the CFTC has done an adequate job of
balancing risk versus costs in rules they have issued as
required by Dodd-Frank?
Mr. Quintenz. Thank you for the question, Mr. Chairman. I
think it is crucial that the agency, in all aspects of their
rulemakings, do a thorough job in understanding, estimating,
and disclosing the costs associated with their rule writings
and to ensure that, as they seek to apply those costs through
the definitions they create that target entities and
activities, that those definitions correspond to the risks
being mitigated. Otherwise, I fear costs are applied broadly,
burdens are borne inappropriately, and the Commission gets into
the dangerous area of potentially regulating generic activity.
I guess I would point to, as an example, something we saw a
number of years ago with the agency revising the Part 135
requirements that would require farmers and ranchers to keep
very detailed records that were searchable and sortable,
including text messages and instant messages, of any
communication that could possibly lead to a transaction. I know
this was a great burden on the farming and ranching community.
I am pleased that the CFTC recognized the burden of that and
worked to fix it, although, unfortunately, I think it took a
number of years to happen. But I would point to that, as well
as maybe some other things coming down the pike, where they
need to focus on this.
Chairman Roberts. Dr. Brummer.
Mr. Brummer. It is absolutely critical that the CFTC both
remember its roots and the importance of agricultural end users
to the U.S. economy. If these derivatives markets do not
function well, it jeopardizes the ability of end users to not
only hedge their risk, but also to contribute productively to
the U.S. economy.
You have my commitment that I will work to ensure that the
rules that are in place work effectively for these end users,
for the folks back home in my community and similar
communities. It is important work, and frankly it has to be
something to keep in mind in the ongoing rulemaking.
Chairman Roberts. So you have your cost benefit yard stick
right in your pocket?
Mr. Brummer. Well, the CFTC statutorily is required to
consider costs. It is critical that the work being done is data
driven, that the Commission grounds its rule writing in facts.
Part of the costs to be considered involve avoiding dead weight
costs to society, while at the same time making sure that we
keep in mind the greater costs at times, and certainly in the
financial crisis, that we saw that can peril the U.S. economy.
So the data-driven analysis has to be one where you kick the
tires and you lift the hood, and also you keep in mind the
stakes of getting it right and the stakes involved in getting
it wrong.
Chairman Roberts. You both have touched on this, but I want
to really emphasize that I have stated many times before that
we need more options and lower costs for our on-the-ground
folks who are trying to hedge their agriculture or their
commercial risks so they can get down to the business of what
they do the best for America. As the CFTC is currently
considering rules and regulations that could negatively affect
our farmers, ranchers, and end users, can you please speak to
how you would address those rules and regs as a commissioner,
specifically the de minimis level and position limits.
We will start with you, Mr. Quintenz.
Mr. Quintenz. Thank you, Mr. Chairman. Yes, these are very
important rulemakings that could affect a lot of activity that
falls outside, I think, the risks that are being targeted. I
think it is important in position limits to make sure that the
end users maintain their ability to bona fide hedge their
risks. The proposal, I think, contains a number of limitations
of very tried and true hedging practices that would be subject
to Commission approval and create an approval regime. In terms
of the de minimis threshold, I fear that if we get that wrong,
we end up driving providers of these swaps out of the market
and consolidating risk.
Chairman Roberts. Dr. Brummer.
Mr. Brummer. Given the data that I have seen from the CFTC,
I would have some concerns about the risk of transactions in
the non-financial commodity swaps markets flying under the
radar. I hear today, like you, that the Chairman has announced
a year-long delay in order to get more data in order to not
only do that, but also get their capital rules right. I
certainly cannot disagree with the proposition that you want to
get these rules in particular right.
But I think that any delay really should be a purposeful
one. It is essential for regulators to understand cost. But if
you have significant players in the market, the law mandates
that there needs to be in place standards like business
conduct, reporting, record keeping, and risk mitigation, in
order to help assure a high quality transactional environment.
So if confirmed, I would certainly work to ensure that the
time is used wisely.
Chairman Roberts. Dr. Brummer, let me ask you a question.
In a 2000 ``Georgetown Law Journal'' article you wrote the
following, quote, ``Policymakers in agencies such as the SEC
and Federal Reserve are not generally elected by the public and
once appointed, are not often easily removed by even
democratically-elected officials. Policymaking is to some
degree unaccountable to the public, and therefore, some
believe, illegitimate.''
Now, considering this, why do you want to become such a
policymaker, and how will you ensure the legitimacy of your
work at the CFTC? Pardon us for going into your background.
Mr. Brummer. Oh, no, no. It is an honor to have my
scholarship certainly discussed by such an esteemed body. In
that article and in other articles I also add that in order to
get rulemaking right, you have to have on the one hand,
technical expertise, people who are willing to get into the
details and to make sure that very fact-specific and often
complex market ecosystems work well. But it is essential that
when doing this, that there is sound, strong congressional
oversight.
I think that if I have the honor of being a commissioner, a
certain modesty has to be involved in everything that you do,
to know that I am not or would not be an elected
representative, and that ultimately I have to understand that
although I have a responsibility to safeguard the public
interest, that at the same time that work has to be done in a
collaborative spirit with elected rule makers. It is the only
way to get it right, to get all the information that you need
about your constituents and others, and I think it ultimately
enhances the quality of agency rulemaking.
Chairman Roberts. I appreciate that. I have two other
questions, one involving the cost benefit balance and the
consideration when voting on proposed final rules and regs, the
other on CFTC in regards to the Dodd-Frank rule writing
process. You have both touched on those in your answers.
I turn now to Senator Stabenow.
Senator Stabenow. Well, thank you, Mr. Chairman, and thank
you again to both of you. I wanted to specifically ask you a
little bit about cybersecurity, which obviously, when we look
at every realm of our lives now, there is the whole question
that is very serious. Last week the CFTC adopted amendments to
its system safeguard rules in an effort to enhance and clarify
existing cybersecurity requirements.
I am pleased that the Commission did that in a timely way,
because it goes without saying that this threat of cyberattack
is one of the biggest challenges we face both in the public and
the private sector. However, looking closely at last week's
amendments, I am curious whether each of you believes that a
best practices approach is enough or whether we need to be
looking at more specific cybersecurity regimes which closely
integrate the public sector's work with the private sector.
What is the best that we should be doing here as it relates to
addressing cyber threats to our financial markets?
I will first, Mr. Quintenz, ask you and then Dr. Brummer.
Mr. Quintenz. Thank you, Senator. That is a very important
and a very difficult question. There is no more important
issue, I believe, to regulators and to the marketplaces than
cybersecurity. I view cyberspace as the battlefield of the 21st
Century for those that wish not only to commit fraud and theft,
but for those that wish to do our country harm and potentially
create a panic that could lead to a breakdown in social
services. This is something that I believe the Commission has
taken very seriously. I was encouraged by the bipartisan and
unanimous adoption of that rule.
Specifically, to your question, I think we need to allow
for innovation in this space. We need to allow for the
flexibility of firms that have very large budgets that can
target cybersecurity, to spend those funds and spend that
thought in a flexible way, while ensuring that they are meeting
best practices, a high standard of best practices, to save our
markets.
Senator Stabenow. Thank you. Dr. Brummer.
Mr. Brummer. Cybersecurity is critically important. It is
critically important to our markets. It is critically important
to the health and security of the U.S. economy. It is not only
complex, but it is fast moving. Cyber threats can quite
literally move in milliseconds, and it is critical that the
agency, that the CFTC, remains ahead of the technological
curve.
Certainly best practices are a start. You want to, I would
imagine, make sure--and certainly I would want to make sure, if
I had the honor of being confirmed, that best practices and
benchmarks are indeed being met and that there is a high
quality to those best practices. It is important, frankly, for
CFTC Commissioners and staff to get out into the field and make
sure that they have both the resources and the wherewithal in
order to predict trends to cybersecurity. But is it of critical
importance, and you would have my commitment that I would be
paying this very, very close attention.
Senator Stabenow. Thank you. Let us talk about cross-border
harmonization. I know, Dr. Brummer, you have done a lot of
important work in that area, but recent decisions by some
international regulators to delay the September 1
implementation of margin requirements for un-cleared swaps has
raised many important policy questions regarding global
harmonization of financial markets and relates to the risks of
rewarding bad behavior by broadly delaying deadlines. This is a
dilemma because we have moved ahead, others have not.
So given the global nature of the swaps market, what is
your view of the U.S. role among international regulators, and
how would each of you balance the need to move forward on
financial reform while recognizing real challenges that
individual regulators may face and the communities being
regulated face in all of this? Dr. Brummer.
Mr. Brummer. International coordination is deceptively
hard. It is difficult. You have countries with different
traditions, different economies, different political and
economic cycles, and getting everybody on the same page takes
commitment and it takes work. Overall, I think it is hard,
however, to lead if you do not lead by example. I think if you
want to have an environment, a cross-border regulatory
environment that is of high quality, then the United States
should commit to the highest standards and find those who are
like-minded.
There have been some delays. My sense is that by standing
firm, the United States, and particularly the CFTC, has been
able to encourage other countries to accelerate some of their
own reforms in order to provide a more stable cross-border
regulatory environment, but it certainly takes a lot of
dedication, work and listening to other regulators and a firm
understanding of what exactly they are doing in other parts of
the world.
Senator Stabenow. Thank you. Mr. Quintenz.
Mr. Quintenz. Thank you, Senator. I would agree with my
fellow nominee. I think this comes down ultimately to
relationships and trust and keeping an open line of
communication across our borders to make sure that these
efforts are coordinated. I think someone does have to go first,
but I do not believe that is the full analysis. I believe that
the full analysis is: after you go first, how long will it be
until all the jurisdictions move, what is the size of the
regulatory arbitrage you are creating, and once other
jurisdictions move, will there be regulatory arbitrage going
forward?
I believe that requires a great level of coordination on
which I would be thrilled to work should I have the honor of
being confirmed.
Senator Stabenow. Thank you very much. One other question
that I would like to ask each of you in that regards to the
clearing house risk. The risk and leverage associated with
unregulated swaps markets played, as we know, a significant
role in a financial crisis. Recognizing this, Congress required
essential clearing of certain standardized swaps. Since the
transition, many concerns and questions have been raised
regarding the new risk profile of clearing houses.
What actions do each of you believe the CFTC should take to
ensure registered clearing houses manage risk appropriately so
that the requirement for clearing does not become a vehicle for
unmanageable systemic risk? Dr. Brummer.
Mr. Brummer. The reforms, the clearing reforms, are very
important and constitute a core aspect of recent reforms, but
there are risks certainly whenever you concentrate transactions
within one entity, and as a result, the CFTC has to play a
vigilant role in making sure that clearing houses operate well,
that they function properly, and that the members are
fulfilling their own obligations to the clearing house.
This involves close supervision of clearing houses. It
involves an analysis of what contributions the members are
making to the clearing house in order for it to function
properly, what risk protocols are not only being implemented
now, but on an ongoing basis, and making sure that there are
inspections of those clearing houses to make sure that they are
adequately capitalized and to make sure again, that U.S.
taxpayers are never again on the hook for shortcomings in our
own financial market infrastructure.
Senator Stabenow. Thank you. Mr. Quintenz.
Mr. Quintenz. Yes, thank you for the question. I think it
is crucial to make sure that the clearing houses are keeping
their obligations. I do not believe that, before rule writing
in this area, there was any method to potentially resolve a
clearing house failure. So I believe that is crucially
important, that it be on the record and in the books, and that
process be known to the markets so it does not create a panic.
However, I am also aware clearing houses need to protect
themselves against their largest two customers and members
failing, in which case there would probably be some significant
other problems that we would be having to deal with. But I
think it is crucial that we verify that they are keeping those
obligations to prevent anything outside of that from happening.
Senator Stabenow. Thank you, Mr. Chairman.
Chairman Roberts. I thank my colleague. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman, and Dr. Brummer,
we are glad that your family saw the light and moved you from
Virginia to Northwest Arkansas.
Mr. Brummer. Yes, sir.
Senator Boozman. Certainly we are very, very proud of you.
I would like to follow up on the Chairman's question about the
relationship of the importance of the CFTC understanding the
American farmer and understanding agriculture. If confirmed--
and this is a question for both of you. If confirmed, how do
you plan to engage with agricultural groups as well as with
other end users? What would be your method of getting out and
ensuring that you have a good understanding?
Mr. Quintenz. Thank you, Senator. When I spent time on the
Hill, one of my favorite things to do was to go back to our
district and actually visit with people. I do not think you get
a better sense of their businesses and their pressures and
their costs than you do by actually going there and being on
the ground with them.
I would, should I have the honor of being confirmed, commit
to, on a very regular basis, meeting with the agricultural
community and farmers and ranchers around the country to make
sure that I am hearing their concerns. I would also very much
like to keep an open line of communication to you and your
colleagues to make sure I am hearing the concerns of your
constituents.
Senator Boozman. Dr. Brummer.
Mr. Brummer. Absolutely. It is an honor, a privilege to
talk to our great farmers. I too can commit to getting out,
talking to farmers and ranchers and other end users about their
needs. I enjoy getting back home and talking to folks in my
community and other similarly-situated communities and will
continue to do so.
Senator Boozman. Very good. In your testimonies, I think
both of you noted the importance of ensuring that U.S. firms
are operating on a level playing field as compared to our
international competitors, and certainly, I completely agree
with that point. But one area that has been a challenge is in
harmonizing the rules, and again, our Ranking Member brought
this up with the regulations with the rest of the world.
How would you approach the decisions like the CFTC's recent
comparability determination regarding Japan? How would you
ensure that U.S. firms are able to compete with their
international counterparts without competitive advantage?
Mr. Quintenz. Thank you for the question, Senator. I think
that this does come down to relationships. It does come down to
keeping open lines of communication. I believe that in the
example of Japan, ``comparability'' is an important word. The
word is not ``equality''; it is ``comparability''. I think that
we need to be open to understanding other jurisdictions have
their own authority and, if their goals are similar to ours and
we feel that we are comfortable with the ring fencing they can
do around that risk, I think that those determinations should
be pretty easy.
But I think that it is crucial that we understand how our
rules are either advantaging our markets or potentially
disadvantaging our markets in a situation where there is
disharmony in the regulatory process.
Mr. Brummer. I think that harmonization is important. Rules
will never be 100 percent the same across jurisdictions, and it
is important to make sure that regulators are on the same page,
both from the standpoint of financial risk, but also to make
sure that there is a level playing field for our companies
operating abroad, and I think you have to leverage existing
international organizations and forums, having sound
relationships, and leading by example.
As I said, I think it is hard to lead if you do not lead by
example, but also understand that there are different
regulatory ecosystems and countries have different ways of
getting things done.
Senator Boozman. I really do not have a question about
cybersecurity except just to comment in the sense I am on a
Subcommittee that has jurisdiction over OPM and the IRS and
Appropriations, and this is just a huge problem for our
country, and we are seeing this with all the stuff that is
coming out. But that is certainly something that I would really
encourage both of you to really just make that a priority. It
is just something that we have to attack as a nation. The
Federal Government just does not do a very good job. So if you
want to comment on that.
Mr. Quintenz. I just agree with you. It requires an immense
amount of coordination and effort.
Senator Boozman. Yeah.
Mr. Brummer. Absolutely, sir.
Senator Boozman. Thank you. Thank you, Mr. Chairman. As
noted, I have also stayed within my time line.
Chairman Roberts. Much appreciated. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Mr. Quintenz,
welcome fellow Ohioan. I see your family is there with you. I
know it is a big day for you and for them, and congratulations.
I had the honor of serving with your very distinguished former
employer in the House, with Congresswoman Pryce. So thanks for
joining us.
Let me start with you, and then I want to follow up with
Dr. Brummer from what Mr. Boozman asked about and what Ranking
Member Stabenow talked about too. The Advisory Committee, the
CFTC Advisory Committee, as you know, these committees serve an
important function, but earlier this year, the Energy and
Environmental Markets Advisory Committee presented a one-sided
report that was withdrawn.
How do you support balancing the membership of the
Committee to make sure a variety of viewpoints are considered
and represented? Because in that report we had some
conversations and the Commission did not really seem all that
interested in more balance. How do we get there on those kinds
of advisory committee reports?
Mr. Quintenz. I think it is crucial that advisory
committees are open and transparent. I think transparency is
the bedrock of trust in governments and in markets. I believe
in hearing all sides of an issue. As a former staffer and as an
analyst in the markets, I know there are always two sides of a
story. So I would encourage a robust conversation on any
advisory committee would I have the honor of leading. I believe
that the two advisory committees open are Global Markets and
Technology. I am not sure exactly how robust those viewpoints
would be, but I would agree with you that an open process is a
good process.
Senator Brown. Thank you. That is important. You want to
comment on that, Dr. Brummer?
Mr. Brummer. I certainly know that--frankly, I do not have
a monopoly on all good ideas in the world, and it is so
important that you have folks from different vantage points who
are directly informing our regulatory decision-making. It is
the only way in which you can get the information. People talk
about data-driven analysis. It is the only way in which you can
get the information to make sure that you get decisions right.
So you would have my commitment, to the extent that I am
both confirmed and have the power over any particular advisory
committee to do so, to make sure that there is a broad set of
personalities and interests that are involved in forming the
decision-making.
Senator Brown. Thank you. Let me follow up on the
conversation again that Senator Boozman and Senator Stabenow
had with you on the whole issue of international regulators. I
stepped out of the Committee because I was speaking with
Governor Dan Tarullo of the Federal Reserve, who does not have
the title, but really is the supervisory--does the supervisory
work for the Fed. What we were--the subject of the conversation
in large part was what is happening with international
regulators on capital standards, and partly the different speed
at which--whether it is Basel III, whether it is the EU,
whether it is individual countries--is they move on capital
standards and on regulation, both the speed and the pressure
they are under from their banking communities and their
legislators.
There are always efforts of one country playing off against
another, one set of companies playing off one country against
another to try to weaken rules. That being said, understanding
you need to coordinate with international regulators, we have
seen, like I said, rulemaking not always moving at the same
speed. Are there risks or unintended consequences of CFTC
repeatedly delaying its implementation based in part either at
the weaker rules or the delaying--the slower moving rules of
another country?
Mr. Brummer. Again, where I am from, leadership is often--
leadership by example--and it is important if you want to push
certain high quality standards--that an agency shows that it is
willing to abide by those standards. You have to, obviously,
try to understand that other countries work differently.
Literally how they make rules can be different.
But at the same time, the strategy should be to find other
like-minded countries who have the same commitment, not only in
the rules but in the supervision with same commitment to our
rules that we have, and then to work collaboratively to create
a large enough of a market and regulatory ecosystem that other
countries are either inspired or required to opt into our
standards and market and regulatory preferences. It is a
critical aspect of our diplomacy, and getting it right means
strong rules at home and leadership abroad.
Senator Brown. One more point. I apologize for going over a
bit, and thank you for that. For both of you, if you would, I
know earlier you both discussed the importance of protecting
markets from the threats of cyberattacks. In your opinion, is
CFTC's funding keeping pace with this threat? Is it adequate?
Do you want to start, and then Mr. Quintenz?
Mr. Brummer. You know, I come from a part of the country
where people want to know that their tax dollars are being
invested wisely, and I think that the CFTC----
Senator Brown. That may, actually, be all parts of the
country, but fair enough.
Mr. Brummer. I know. well, certainly----
Senator Brown. Even in Bexley we think that.
Mr. Brummer. I think the CFTC's case is an exceptionally
strong one, and cybersecurity is one aspect of that case. The
responsibilities of the agency have expanded dramatically and
the threats from cyber have expanded dramatically as well. So
you need to have both the human capital, the technological
capability, the surveillance mechanisms, and other tools in
place to help, again, promote sound decision-making, regulatory
certainty from market participants and end users, also
protecting the U.S. economy from folks who may want to
undermine that stability.
Senator Brown. So is the funding adequate? Do you know
this? Can you figure this out yet?
Mr. Brummer. Certainly I will have a better--the funding
has certainly not kept up with the dramatic increase in the
agency's responsibilities, and I have concerns, serious
concerns about whether or not they are sufficient.
Senator Brown. Mr. Quintenz.
Mr. Quintenz. Thank you, Senator. I think I would have to
get there to be able to answer that question concretely. From
the rule writings that have been issued, they have been focused
on enforcing very high standards of best practices for the
industry. There are companies that spend hundreds of millions
of dollars on this for themselves. It would be hard to answer
that question in terms of the resources until I get there,
should I have the honor of being confirmed.
Senator Brown. As long as you are obviously aware of the
acute need and that we do not always keep up with things like
that as well as we should. Also, thank you for the meetings you
have each had with my staff so far and I look forward to
sitting with each of you. Thank you.
Mr. Quintenz. Thank you.
Chairman Roberts. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. I thank you both
for being here today, and thank you for being generous with
your time meeting with me in the office. I enjoyed that
discussion. I just have a couple of questions.
In the office, I appreciate some of the forward-looking
discussions we had. I have a couple of questions here. One I
may just submit for the record because it has to do with
modernizing and becoming more focused on digital alternatives
to the analog world that we live in today.
But I want to get to two specific policy questions. One of
them is about the regulation of automated trading. Are you
familiar with the rule the Commission is trying to implement to
remove the subpoena requirement? In my opinion, I cannot find
any evidence of where the subpoena requirement is broken, so I
do not know why they are trying to fix it. But I would be kind
of curious about your position on this issue and the position
you would take if confirmed.
Mr. Quintenz, we will start with you.
Mr. Quintenz. Sure Senator, thank you. I believe that the
source code, trading mechanisms and algorithms that firms
develop do not just represent historical trading files. I
believe that they are a result of an immense amount of time and
energy and thought and research, and represent future as well
as current business strategy.
Senator Tillis. It is critical intellectual property.
Mr. Quintenz. I would agree with that, and I believe it
deserves those protections. I do not see anything that is wrong
or risky or inconvenient about maintaining the subpoena process
as the appropriate legal and judicial standard to compel a firm
to disclose its intellectual property. There are plenty of
steps that the agency can take before it gets to that level to
work with the firm.
Senator Tillis. Thank you. Mr. Brummer.
Mr. Brummer. As a law professor----
Senator Tillis. Dr. Brummer.
Mr. Brummer. No, no. I certainly understand the importance
of due process. It is an essential part of the rule of law
since, frankly, Roman times. The CFTC has rules, or must have
rules in place to make sure that information is protected and
that market participants can trust regulators.
Now, I am not entirely sure about how enforcement is
practiced in the building, and I have heard that there are some
surveillance concerns and as a result, you would want to talk
to the folks charged with financial stability and the
enforcement folks to make sure that they have the tools that
they need in order to do their job well. But I give you my word
that I will do my very best to make sure that whatever the CFTC
comes out with, due process and the confidentiality of
information will be assured. I think this does require close
attention.
Senator Tillis. In my opinion, again, if we could point to
a litany of examples where something bad could have been
averted as a result of bypassing the subpoena process, I would
see the argument. In my personal opinion, it looks like a power
grab that I am not particularly supportive of.
The other one that I had has to do with the implementation
for the margin for un-cleared swaps. You know, we had several
nations and economies that were going to be involved in that.
Most, except for the United States and Japan, have delayed
their implementation. The result is putting the U.S.--I will
not speak for Japan--at a disadvantage in the period of time
where some financial markets are not subject to the new rules
that we are subject to.
So I am kind of curious about why you would think it is
either wise or unwise for the United States to move forward
when some of our top global competitors have decided to delay
it. Quite honestly, if they start measuring the benefit of
having this market advantage for some period of time, I cannot
imagine why they would not think, well, maybe we need a little
bit more time than the initial delay to get a market advantage.
So I would be curious, and this time, we will start with
you, Dr. Brummer.
Mr. Brummer. I too believe that it is important that
countries work in concert with one another to the extent
possible on regulatory positions and you do not want to do
anything to burden our market participants in a global
environment----
Senator Tillis. So would you----
Mr. Brummer. --needlessly.
Senator Tillis. --in the interest of time then----
Mr. Brummer. Sure.
Senator Tillis. --would you suggest that it would make
sense then for us to key our implementation dates with our
major global competitors?
Mr. Brummer. Here it is tough, because I would not want to,
frankly, reward bad behavior. I think that if the United States
wants to promote its rules, it has to do so by leading by
example, and I think that it appears that the CFTC's----
Senator Tillis. Yeah.
Mr. Brummer. --pace has accelerated parts----
Senator Tillis. Although I would say--and I am only
interrupting you because of the time.
Mr. Brummer. Sure. I am sorry.
Senator Tillis. I would like to have your opinion. But it
is almost like we are being penalized for good behavior. We are
on time; some of the other key players are not. Our banking
industry is suffering as we move forward with regulations that
make us globally uncompetitive.
So to me it is something that we should take a look at. We
should never move forward with regulations that knowingly will
put us at a disadvantage, and we have to make these things get
in synch, otherwise, it provides our competitors with a
disincentive to move quickly even after the delay.
Mr. Quintenz, I will have you summarize.
Mr. Quintenz. Yes. Thank you, Senator. I could not agree
with you more. I think regulatory arbitrage always hurts
someone. To the extent that it is created by us moving first or
someone else delaying their rules, we need to be aware of how
that affects our markets, how that imposes costs, how that
disadvantages our economy. So I would urge a teamwork approach
to this, being on time but moving forward with it together.
Senator Tillis. Thank you both. I look forward to
supporting your confirmation.
Chairman Roberts. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman, and thank you,
Dr. Brummer, Mr. Quintenz. I come from a farm state, Indiana,
and I think it is really important for the CFTC commissioner,
as my colleague Senator Boozman was saying, to make your
decisions based on more than just being in Washington, and to
not just occasionally fly out, have an airport meeting and fly
back, but to actually be out and see what happens in our
chairman's farms in Kansas and mine in Indiana.
I think it is really important for you to spend the day
there, to see what is going on, to see the effect of your
decisions on how the balance sheet turns out for them, how that
determines whether or not they are going to be able to cover
their bills that year. I just want to follow up with Senator
Boozman's comments that we would like a commitment that you
will hit the road, that you will spend time out there, that you
will talk to our farmers, not just at the airport lounge, but
actually at their actual farms with a lot of the ag leaders in
the community. Dr. Brummer.
Mr. Brummer. I could not agree with you more. You have my
commitment. Some of the smartest things I ever heard came from
my own grandfolks who were farmers. You learn not only about
markets, you learn not only about what they do, but you learn a
little bit of common sense too, and it is important for folks
to get out of Washington generally.
But you have my commitment that I will do my very best to
keep in touch and to make sure that the rules work as well as
possible for our farmers, ranchers.
Senator Donnelly. Mr. Quintenz, the Indiana line is only
about 90 miles away from Columbus.
Mr. Quintenz. I cannot wait. I cannot wait to come and
visit my--my grandmother grew up on a dairy farm in Northern
Wisconsin. She still lives very close to it. I remember her
ridiculing me one time for bringing margarine home from the
grocery story instead of butter, and that will never happen
again.
Senator Donnelly. She is a wise woman.
Mr. Quintenz. I would very much like to take you up on your
invitation.
Senator Donnelly. Following up on that, one of the things
that affects our farmers and their livelihood are how the
commodities are obviously treated once they are on the market,
and I have consistently argued that position limits should be a
tool in the CFTC's toolbox. That helps the Commission fulfill
its mission to promote transparent, open markets and to protect
the public from fraud and manipulation. If confirmed, I want to
know if you are going to work to help finalize the strong
positions limit rule in a timely manner. Dr. Brummer.
Mr. Brummer. Absolutely. You put it best. It is one of a
number of tools that the Commission has historically relied on
and will rely on to police market abuse and large systemic
concerns of large positions, any one position. To get it right,
you have to make sure that you do not end up excluding the
folks who depend on them, a smart bona fide hedging rule.
At the same time, you cannot create loopholes for the sake
of creating loopholes. You have to focus on making sure it is
as cost efficient and value enhancing for the market and for
the global and U.S. economics as possible.
Senator Donnelly. Mr. Quintenz.
Mr. Quintenz. Yes, thank you, Senator. This issue has been
out there for a long time. We have had four proposed rules. The
one final rule was vacated by a federal court. We have had
thousands of comment letters. It seems to me that the problems
in finalizing something may not be a result of effort as
opposed to perspective. I believe that the perspective needs to
require the concerns of end users being met here, making sure
that they can hedge in a bona fide way. Yes, I give a
commitment to working on that.
Senator Donnelly. Because it is important, obviously, that
they be able to lay off risk and know that they are secure, but
at the same time, we do not want to see these markets abused as
well.
Mr. Brummer. Absolutely.
Senator Donnelly. I would also like to talk to you a little
bit about the funding for the CFTC. You know, we have great
hopes. We have great challenges. It is critically important to
our rural communities and actually to the entire economy of the
United States. But it is like a car, if there is no gas, you
cannot start the car and it will not go down the highway.
So one of the things we want to do is make sure that there
is enough funding. I am interested in learning more about the
possibility of creating some self-funding mechanisms for the
Commission that provides you with the sufficient resources you
need without restricting access for market participants.
I am not asking you for an answer today, but would each of
you commit to getting back to me about that concept of some
methods of self-funding so you are not reliant on us having our
budget act together and other things that make it very
difficult. Mr. Quintenz, I will have you answer first.
Mr. Quintenz. Yes, I would be thrilled to engage with you
on that issue and respond to that issue.
Senator Donnelly. Dr. Brummer.
Mr. Brummer. Absolutely. I would be delighted to.
Senator Donnelly. Great. Well, look, I will tell you that
we had some folks from the EPA out to Indiana in February in an
unheated barn. It was about 10 degrees. Everybody had a good
time, I think, except maybe some of the folks who were not from
Indiana. So we will try to make it either a heated barn or
during the summer, if that works better for you. Thank you very
much.
Mr. Quintenz. Thank you.
Chairman Roberts. Thank you, Senator Donnelly. We have
never had any EPA folks out to Dodge City. I am not sure they'd
get back. That memo that you are going to get from the two
nominees with regards to the possibility of user fees, my word,
not yours. Send me the same information.
We have now Senator Gillibrand.
Senator Gillibrand. Thank you, Mr. Chairman. I would like
the memo too. I wanted to know specifically what budgetary
challenges you think you are going to encounter. Because you
have such a limited appropriations considering that the
derivatives market is worth $300 trillion and $34 trillion
worth of futures and options and $270 trillion worth of swaps.
I mean, that is a huge responsibility. You have 750 people, but
your budget is $250 million. So that is really much farther
below other prudential regulators with the same regulatory
responsibilities.
So I would really like you to be as far reaching in your
analysis of budgetary concerns and funding streams and what you
think your ideal budget would be, and specifically, if you
think capital infusions are needed for live time reporting or
retaining qualified staff, also whether any mandatory funding
stream should or would be necessary, whether you suggest fees
or other mechanisms. Because I do think you need a more
reliable and standard funding source for the CFTC.
So I am very interested in your thoughts. If there is any
you want to share now, you can, but otherwise, we can wait for
your memo. Dr. Brummer.
Mr. Brummer. Certainly fulfilling this mandate is not easy.
The responsibilities have expanded dramatically and I look
forward to providing it.
Senator Gillibrand. Mr. Quintenz.
Mr. Quintenz. Thank you. That was a very detailed question,
and I think it would be very difficult to answer that question
without being at the agency and understanding exactly how they
are spending their money and their resources. I do know that
the Technology Advisory Committee is currently un-sponsored,
and should I have the honor of being confirmed and have the
honor of sponsoring that advisory committee, it would give me a
deep dive look into the technology needs of the agency to be
able to assess resources.
Senator Gillibrand. I think it is really important, and it
obviously is relevant to the questions that we have already had
on cybersecurity. I just think there is enormous vulnerability
there, and while our markets are resilient, the systemic risks
and bad actors throughout the world create more risks for us. I
think part of those concerns directly relate to your budgeting
and your vast area of responsibility.
Recently the CFTC agreed that Japan's uncleaned swaps
collateral would--excuse me--un-cleared swaps collateral was
strong enough to suffice the CFTC margin requirements. A member
of the Commission voiced concern that Japan's rule would quote,
``introduce greater risk into the derivatives markets,''
specifically highlighting their concern that what would happen
in the event of bankruptcy.
As the Commission continues to move toward regulatory
consistency in the market, what do you see as additional risks
with the non-U.S. counterparties, and specifically with risks
arriving from un-cleared swaps?
Mr. Brummer. So clearing is an essential aspect of the
CFTC's rulemaking because it allows a better opportunity to
both standardize risk and to assess those risks. It is
important when one looks and thinks about cross-border risk and
the mandate of the agency and the agency resources and where
risk may be coming in the future.
There are parts of the world that are not only behind, but
may not necessarily have any incentives to opt into the global
reforms that were articulated by large international bodies
like the G-20, and I think this is a key question. It is an
important question. The margin rules are, as well, critical
components of financial security and safety, and it is
important that we get the rest of the world--and they are
coming along. I think that there has been an enormous amount of
progress made, but there is still some way to go to make sure
that this is done right.
Senator Gillibrand. Mr. Quintenz.
Mr. Quintenz. Thank you, Senator. I think this is a very
important area. Un-cleared swaps can provide very essential
risk-mitigating features for companies in terms of hedge
accounting and their exposures. But I think it is crucial that
we also make sure that large exposures do not come back to our
markets and harm us from a jurisdiction that may not have as
similar rules to ours as we would like.
So I think that is an important thing to consider, and I
believe Chairman Massad had some responses to the concerns
raised by the other commissioner.
Senator Gillibrand. Do you see any other regulatory
inconsistencies in non-U.S. jurisdictions that CFTC should seek
to address through partial or full substitute compliance?
Mr. Quintenz. I think that the swap execution facility
rules, we need to keep working on those. There is potential
evidence that it is fracturing a very important market and that
it is shrinking liquidity to our participants, and if that is
the case, I think we need to be open to revisiting that.
Senator Gillibrand. Okay. Since I have no more time, I am
going to submit my specific cyber question for the record, so
you guys can just answer it once you get in place. You will
have more information to be able to answer it more fully given
the answers already. Thank you.
Mr. Brummer. Thank you.
Senator Gillibrand. Thank you.
Chairman Roberts. I thank the distinguished Senator from
New York for setting a wonderful example with regards to her
time.
Senator Klobuchar. Did you do that because I am up next?
Chairman Roberts. Precisely. Senator Klobuchar.
Senator Klobuchar. All right. Thank you very much, Mr.
Chairman. I would like to start by thanking you for holding
this hearing on the important nominations of Dr. Brummer and
Mr. Quintenz, to be Commissioners. Thank you so much for that.
I would like to focus some of my questions, given how
people in my state have been harmed by speculation and by
issues that have come before the Commodity Futures Trading
Commission, and we also have a lot of businesses who hedge
their risk legitimately. I always see a difference between some
of the people that do it as part of their businesses and the
effect that other types of speculation has had on our farming
community.
Each of you has a strong background with the financial
markets. Dr. Brummer, you have a strong academic background.
Mr. Quintenz, you are a participant in the financial markets as
a part of your business. Could you talk to me about how you
would evaluate the differences and the similarities between
regulations for the financial markets and then for agricultural
end users.
Mr. Brummer. Frankly, one of the first observations is that
farmers and ranchers did not cause the crisis, and I think that
has to be acknowledged. At the same time, derivatives markets
exist for a reason. It is for people to be able to hedge the
risk in a way that is responsible and allows them to ultimately
contribute to the U.S. economy. Certainly the origins and the
roots are in the agricultural sector, but there are hardworking
Americans, and commercial end users, who need the derivatives
markets for similar things.
It is key at the same time just to make sure that when
examining the different risks, the different kinds of
positions, the size of the positions, the liquidity of the
different kinds of markets in which they are operating, to take
into account the public interest across the board and to make
sure that U.S. taxpayers are safe. But this has to be done in a
responsible, efficient way.
But again, understanding that is not just a question of the
differences of the market participants, but also of the
different contracts.
Senator Klobuchar. So are you willing then to work with
those who trade physical commodities to ensure that the
exemptions to the position limit rule allow for normal
practices of the businesses?
Mr. Brummer. Absolutely.
Senator Klobuchar. Thank you. Mr. Quintenz.
Mr. Quintenz. Yes. Thank you, Senator. I think commodity
markets need to work for the people that are exposed to
commodity risk. Ultimately, markets need to work for the people
that use them, and these markets are different than other
markets in that regard. But with regard to your second
question, yes, I am very concerned about making sure that any
position limits rule allows for long-standing and tried and
true hedging practices in the energy markets to make sure that
people can, and firms can, hedge that risk the same way that
they have been.
Senator Klobuchar. Well, I know the CFTC has studied
speculation extensively. Can you talk a little bit about how
the trades that commercial end users enter into are different
than the types that financial institutions have entered into
and just your views on speculation? Mr. Brummer.
Mr. Brummer. Well, certainly speculators have a role in
derivatives markets and they are supposed to be there to make
sure that trades are completed where perhaps end users are not
there and to be ready. They help to make the markets work. The
CFTC's regulation, and particularly its statutory authority,
involves excessive speculation, and to make sure that excessive
speculation does not distort the price discovery operations of
these markets.
Senator Klobuchar. Do you think the rules that we have in
place now are adequate to do that, to go after abusive or
excessive speculation?
Mr. Brummer. I think we have made a strong start. I think
it is important for the agency to continually reevaluate where
it stands as it gets more information and data, particularly
pertaining to your question on market abuse and market
manipulation, because the markets themselves are always
changing. You would have my commitment to do just that and to
keep an eye open and talk to you and others about where the
market stands on this.
Senator Klobuchar. Mr. Quintenz, what steps do you believe
the CFTC should take to reduce the risk of market manipulation
from large market participants using one market to influence a
price for similar contracts in another market?
Mr. Quintenz. Thank you, Senator. That is a very good and
interesting question. I think they need to be focused on all
aspects that could affect artificially the price in any market.
I think that position size has long been recognized, in the
investment community, as something that can impact prices and
create large price moves. As such, there has been a very robust
regulatory architecture that has developed over the last 70
years to identify, closely monitor, and in some cases, disallow
large positions.
Position limits have been a part of the CFTC's enforcement
for 80 years now, I believe, and large trader reporting
requirements for almost 90 years. So that is well established.
Senator Klobuchar. Thank you very much. I appreciate it.
Forty-four seconds over, Mr. Chairman.
Chairman Roberts. That goes into your bank. That is
certainly within the boundaries of the distinguished Senator.
This is going to conclude our hearing this morning. I want to
thank each of our witnesses very much for sharing your
background and testimony. As the Committee considers your
nomination, it has been most valuable to hear your perspectives
first hand.
I have a little admonition here to both of you, and for
that matter, anybody else who is listening. There has been a
lot of discussion about funding here today. I remember well
when former Chairman Gensler came into my office to talk about
funding. He was a little disturbed, alarmed, upset with regards
to what the House of Representatives had done to his budget. We
will not get into numbers, but it was significantly lower than
what he requested. I informed him that some might be a little
bit more understanding of his request, but what would he need
all of that money for. He indicated it would be for several
hundred more lawyers to implement Dodd-Frank.
I asked if there would be parking places available for the
attorneys and informed him we lived in a brave new world, where
I think at that particular time the debt was about what, $17
trillion, $16 trillion. It is now 20.
I would say that the best perspective is that of our
farmers who are going through a very difficult time. They are
facing terribly tough times right now and, quite frankly, they
just have to do more with less. There is a lot of talk about
that, a lot of press about that. It is hard. It really is hard,
and it requires that you really prioritize. But they know they
have to do it.
I remember sitting at the Pentagon with the commandant of
the Marine Corps going over their mission in the Pacific, which
is considerable, if anybody would ever use them. But having
said that, I asked the commandant, how is he going to do this?
He said, we are going to do what we always do, we are going to
have to do more with less.
I think that is the situation that we face, unfortunately.
We should all do the same, and so we are going to talk about
things like user fees and additional funding. It is good that
we do that, but now is not the time. It is not going to happen.
So with that wonderful news, to my fellow members, I would
ask that any additional questions that they may have for the
record, they be submitted to the Committee clerk by 5 p.m.
Friday. I thank you both.
Mr. Quintenz, that young man that looks remarkably like you
can now go to whatever experience he wants to go that will be a
lot more interesting than it has been so far for him today.
The Committee stands adjourned.
[Whereupon, at 11:18 a.m., the Committee was adjourned.]
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QUESTIONS AND ANSWERS
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