[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                        REAUTHORIZING THE CFTC: STAKEHOLDER 
                                       PERSPECTIVES

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

                                HEARING

                               BEFORE THE

                SUBCOMMITTEE ON COMMODITY MARKETS, DIGITAL 
                      ASSETS, AND RURAL DEVELOPMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2024

                               __________

                           Serial No. 118-24
                           
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          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
57-150 PDF                  WASHINGTON : 2024                    
          
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                        COMMITTEE ON AGRICULTURE

                 GLENN THOMPSON, Pennsylvania, Chairman

FRANK D. LUCAS, Oklahoma             DAVID SCOTT, Georgia, Ranking 
AUSTIN SCOTT, Georgia, Vice          Minority Member
Chairman                             JIM COSTA, California
ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
SCOTT DesJARLAIS, Tennessee          ALMA S. ADAMS, North Carolina
DOUG LaMALFA, California             ABIGAIL DAVIS SPANBERGER, Virginia
DAVID ROUZER, North Carolina         JAHANA HAYES, Connecticut
TRENT KELLY, Mississippi             SHONTEL M. BROWN, Ohio
DON BACON, Nebraska                  SHARICE DAVIDS, Kansas
MIKE BOST, Illinois                  ELISSA SLOTKIN, Michigan
DUSTY JOHNSON, South Dakota          YADIRA CARAVEO, Colorado
JAMES R. BAIRD, Indiana              ANDREA SALINAS, Oregon
TRACEY MANN, Kansas                  MARIE GLUESENKAMP PEREZ, 
RANDY FEENSTRA, Iowa                 Washington
MARY E. MILLER, Illinois             DONALD G. DAVIS, North Carolina, 
BARRY MOORE, Alabama                 Vice Ranking Minority Member
KAT CAMMACK, Florida                 JILL N. TOKUDA, Hawaii
BRAD FINSTAD, Minnesota              NIKKI BUDZINSKI, Illinois
JOHN W. ROSE, Tennessee              ERIC SORENSEN, Illinois
RONNY JACKSON, Texas                 GABE VASQUEZ, New Mexico
MARCUS J. MOLINARO, New York         JASMINE CROCKETT, Texas
MONICA De La CRUZ, Texas             JONATHAN L. JACKSON, Illinois
NICHOLAS A. LANGWORTHY, New York     GREG CASAR, Texas
JOHN S. DUARTE, California           CHELLIE PINGREE, Maine
ZACHARY NUNN, Iowa                   SALUD O. CARBAJAL, California
MARK ALFORD, Missouri                ANGIE CRAIG, Minnesota
DERRICK VAN ORDEN, Wisconsin         DARREN SOTO, Florida
LORI CHAVEZ-DeREMER, Oregon          SANFORD D. BISHOP, Jr., Georgia
MAX L. MILLER, Ohio

                                 ______

                     Parish Braden, Staff Director

                 Anne Simmons, Minority Staff Director

                                 ______

     Subcommittee on Commodity Markets, Digital Assets, and Rural 
                              Development

                 DUSTY JOHNSON, South Dakota, Chairman

FRANK D. LUCAS, Oklahoma             YADIRA CARAVEO, Colorado, Ranking 
AUSTIN SCOTT, Georgia                Minority Member
DAVID ROUZER, North Carolina         DONALD G. DAVIS, North Carolina
DON BACON, Nebraska                  JIM COSTA, California
TRACEY MANN, Kansas                  ANDREA SALINAS, Oregon
JOHN W. ROSE, Tennessee              MARIE GLUESENKAMP PEREZ, 
MARCUS J. MOLINARO, New York         Washington
NICHOLAS A. LANGWORTHY, New York     NIKKI BUDZINSKI, Illinois
ZACHARY NUNN, Iowa                   JONATHAN L. JACKSON, Illinois
LORI CHAVEZ-DeREMER, Oregon          GREG CASAR, Texas
MAX L. MILLER, Ohio                  ANGIE CRAIG, Minnesota
                                     JASMINE CROCKETT, Texas
                                     ------

                                  (ii)
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Caraveo, Hon. Yadira, a Representative in Congress from Colorado, 
  opening statement..............................................     3
Johnson, Hon. Dusty, a Representative in Congress from South 
  Dakota, opening statement......................................     1
    Prepared statement...........................................     2
Thompson, Hon. Glenn, a Representative in Congress from 
  Pennsylvania, opening statement................................     4

                               Witnesses

Lukken, J.D., Hon. Walter L., President and Chief Executive 
  Officer, Futures Industry Association, Washington, D.C.........     5
    Prepared statement...........................................     7
    Supplementary material.......................................    43
    Submitted questions..........................................    45
Sexton III, J.D., Thomas W., President and Chief Executive 
  Officer, National Futures Association, Chicago, IL.............    13
    Prepared statement...........................................    14
    Supplementary material.......................................    44
    Submitted questions..........................................    47
Antonsen, Travis, Senior Vice President, Grain Marketing, and 
  Rail Logistics, Agtegra Cooperative, Aberdeen, SD; on behalf of 
  National Council of Farmer Cooperatives........................    17
    Prepared statement...........................................    18
Thornton, J.D., Alexandra, Senior Director, Financial Regulation, 
  Center for American Progress, Washington, D.C..................    21
    Prepared statement...........................................    22

 
            REAUTHORIZING THE CFTC: STAKEHOLDER PERSPECTIVES

                              ----------                              


                        THURSDAY, JULY 25, 2024

                  House of Representatives,
    Subcommittee on Commodity Markets, Digital Assets, and 
                                         Rural Development,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 8:29 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Dusty 
Johnson [Chairman of the Subcommittee] presiding.
    Members present: Representatives Johnson, Lucas, Austin 
Scott of Georgia, Bacon, Mann, Nunn, Miller of Ohio, Thompson 
(ex officio), Caraveo, Davis of North Carolina, Costa, 
Budzinski, and Craig.
    Staff present: Paul Balzano, Wick Dudley, Tim Fitzgerald, 
Nick Rockwell, Kevin Webb, Kyle Upton, Kate Fink, Josh Lobert, 
Clark Ogilvie, John Konya, and Dana Sandman.

 OPENING STATEMENT OF HON. DUSTY JOHNSON, A REPRESENTATIVE IN 
                   CONGRESS FROM SOUTH DAKOTA

    The Chairman. All right. Since everybody is ready to go, we 
will go ahead and get started. I call this hearing to order.
    Welcome, and thanks for coming. I always delight when this 
Committee does something that is important, but not necessarily 
sexy. The sexy stuff gets all the headlines, but it is indeed 
our job to govern a country, and sometimes that means doing 
things that are really important, even if they don't grab the 
headlines.
    I want to welcome everybody to this Subcommittee hearing. 
The hearing today, of course, is called, Reauthorizing the 
CFTC: Stakeholder Perspectives.
    Everybody here knows that derivatives markets are the 
backbone of our global financial system, providing essential 
tools for risk management, for price discovery, and for 
efficient capital allocation. Those markets allow businesses 
and investors to use those tools to hedge against price 
volatility, to promote stability and predictability across 
various sectors. We have a tendency to think about ag, but of 
course, it is not just ag. It is also energy. It is finance.
    In agriculture, farmers use derivatives to lock in prices 
for their crops, protecting themselves against unpredictable 
weather and market fluctuations. In the energy sector, 
companies use derivatives to stabilize prices for oil, gas, and 
electricity. That enables steady planning and operation. In 
finance, derivatives help manage interest rate risk, currency 
fluctuations, and credit exposure, and that contributes to the 
overall stability of global markets.
    The U.S. futures and swaps markets are the largest, most 
liquid markets in the world, and that is not an accident. That 
is in no small part because of the responsible regulation of 
the Commodity Futures Trading Commission.
    Each day, the Commission works to ensure the integrity, the 
vibrancy, and the resiliency of the derivatives markets, and in 
doing so, it protects those people we have been talking about, 
the farmers, the ranchers, the manufacturers, and other end-
users who rely on these markets for robust risk management 
tools.
    Today, we are going to hear from stakeholders who will 
provide diverse perspectives on the importance of reauthorizing 
the Commission, and hopefully, they will give us a little 
insight into the issues and priorities that we should consider 
during this process.
    This past March, CFTC Chair Behnam testified before the 
Committee, and the Ranking Member asked him about the 
importance of reauthorization. Chair Behnam put it well, as he 
often does, when he said this. ``We have to reauthorize the 
agency to ensure the public and our international partners 
understand that Congress and this Committee take derivatives 
markets and America's supremacy in derivatives markets very 
seriously. We have the biggest markets in the world, and I 
think we all want to keep it that way, and reauthorization is 
one step to ensure that that condition remains the same.''
    I couldn't agree more. It is our role as authorizers to 
continue to examine the work of the Commission and the needs of 
market users. Reauthorization is how we fill the role. That is 
how we ripen these conversations. Just as this Committee passed 
digital asset market structure legislation in a bipartisan 
manner, both in the Committee and on the House floor, it is my 
goal to achieve the same bipartisan success with the 
reauthorization of the CFTC.
    I want to thank our witnesses for joining us today. We look 
forward to hearing from you.
    [The prepared statement of Mr. Johnson follows:]

Prepared Statement of Hon. Dusty Johnson, a Representative in Congress 
                           from South Dakota
    Good morning. I want to welcome you all to the Commodity Markets, 
Digital Assets, and Rural Development Subcommittee hearing titled, 
Reauthorizing the CFTC: Stakeholder Perspectives.
    Derivatives markets are the backbone of our global financial 
system, providing essential tools for risk management, price discovery, 
and efficient capital allocation.
    These markets allow businesses and investors to hedge against price 
volatility, promoting stability and predictability across various 
sectors, from agriculture to energy to finance.
    In agriculture, farmers use derivatives to lock in prices for their 
crops, protecting themselves against unpredictable weather and market 
fluctuations.
    In the energy sector, companies use derivatives to stabilize prices 
for oil, gas, and electricity, ensuring steady operations and planning.
    In finance, derivatives help manage interest rate risks, currency 
fluctuations, and credit exposure, contributing to the overall 
stability of the economy.
    The U.S. futures and swaps markets are the largest, most liquid 
markets in the world, due in no small part to the work of the Commodity 
Futures Trading Commission.
    Each day, the Commission works to ensure the integrity, vibrancy, 
and resiliency of the derivatives markets. In doing so, it protects 
farmers, ranchers, manufacturers, and other end-users who rely on these 
markets for robust risk-management tools and accurate pricing.
    Today, we will hear from stakeholders who will provide diverse 
perspectives on the importance of reauthorizing the Commission, and the 
issues and priorities we should consider during this process.
    This past March, CFTC Chairman Behnam testified before the 
Committee. Our Ranking Member asked him about the importance of 
reauthorizing the Commission. Chairman Behnam put it well when he said:

          ``. . . we have to reauthorize the agency to ensure the 
        public and our international partners understand that Congress 
        and this Committee takes derivatives markets and America's 
        supremacy in derivatives markets very serious-
        ly . . . we have the biggest markets in the world, and I think 
        we all want to keep it that way. And reauthorization is one 
        step to ensure that condition remains the same.''

    I could not agree more. It is our role as authorizers to continue 
to examine the work of the Commission and the needs of derivatives 
market users. Reauthorization is how we fulfill this role.
    Just as this Committee successfully passed digital asset market 
structure legislation in a bipartisan manner, both in the Committee and 
on the House floor, it is my goal to achieve the same bipartisan 
success with the reauthorization of the CFTC.
    I would like to thank our witnesses for joining us today. We look 
forward to hearing your testimony and the opportunity to discuss this 
important topic.

    The Chairman. We look forward to the conversation that will 
flow after that, and without any further ado, I would like to 
recognize the Ranking Member for her opening remarks.

 OPENING STATEMENT OF HON. YADIRA CARAVEO, A REPRESENTATIVE IN 
                     CONGRESS FROM COLORADO

    Ms. Caraveo. Well thank you, Chairman Johnson, for working 
together to convene this timely and important hearing.
    After examining the challenging question of oversight of 
digital assets, I am pleased that the Subcommittee is turning 
to the matter of reauthorizing the agency we have chosen to 
empower with such oversight, the Commodity Futures Trading 
Commission.
    For almost 50 years, the CFTC has been the cop on the beat 
in protecting the integrity of our futures markets, and the 
important price discovery and risk management functions they 
serve. In 2010, in the wake of the financial crisis, Congress 
empowered the agency to oversee the multi-trillion-dollar swaps 
market, and ease the market's transition from an unregulated 
environment into a more transparent and financially secure 
market.
    Through the years, our markets have shown themselves to be 
remarkably resilient amongst global volatility from 
international conflicts to extreme weather events, to the 
COVID-19 pandemic. However, this agency with such important 
responsibilities has not been reauthorized for more than 2 
decades. For today's hearing, we will hear from a distinguished 
panel of stakeholders about the importance of the CFTC and the 
markets it oversees, and what Congress should consider when 
reauthorizing the agency.
    Thank you, witnesses, for being here this early morning to 
share your testimony. I look forward to hearing from all of 
you. As Ranking Member of the Subcommittee, I am particularly 
interested in how we maintain strong customer protections in 
our financial markets while we pursue reauthorization, 
especially for the retail investor. While our nation's 
financial markets are vibrant, innovative, and amongst the 
strongest in the world, they will only remain that way if the 
users of these markets have confidence in the customer 
protections in place and these agencies, like the CFTC, that 
enforce those protections.
    Additionally, as we consider these discussions regarding an 
agency whose oversight authority we are looking to expand to 
the digital assets marketplace, we must make sure we are not 
shortchanging the CFTC in our appropriations process. The 
current agricultural appropriations proposal includes a cut of 
$20 million to the agency's budget. Today, we will hear about 
the importance of this agency, and I hope it will resonate that 
such a cut will negatively impact the agency's ability to 
police its derivative markets.
    Again, I welcome our witnesses who are here today, and look 
forward to listening to your testimony. And with that, Mr. 
Chairman, I yield back.
    The Chairman. Now we turn to the legend of Howard, 
Pennsylvania, the Chairman of the full Committee, GT Thompson.

 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    Mr. Thompson. Okay. Well, maybe I should just yield back at 
this point. That is the nicest thing anybody has said about me 
in a long time.
    Good morning, everybody, and thank you to Chairman Johnson 
and Ranking Member Caraveo for convening this Subcommittee 
hearing. I would like to echo Chairman Johnson's sentiments and 
extend my thanks to everyone for joining us today.
    The U.S. derivatives markets are essential to our economy. 
They allow businesses, both large and small, to manage the 
risks associated with price fluctuations for their inputs and 
outputs. Derivatives enable businesses to focus on their core 
activities without being unduly concerned with ever-changing 
commodity prices.
    The CFTC--which, by the way, is celebrating its 50th 
anniversary this year as an independent agency--serves a 
critical function in regulating derivatives markets both 
domestically and internationally. The Commission safeguards 
market participants from fraud, manipulation, and abusive 
practices while also promoting financial innovation and fair 
competition.
    Earlier this week, a bipartisan group of House Agriculture 
Committee Members visited the CFTC's D.C. headquarters. We had 
a terrific visit with the CFTC Chairman, the Commissioners, and 
agency staff to gain a deeper understanding of how the 
Commission operates, and the pressing issues that it faces.
    The agency's authorization expired more than a decade ago, 
making it crucial that we address reauthorization now. This 
process is not merely a bureaucratic formality; it is a 
reaffirmation of our commitment to robust regulatory oversight. 
It ensures that CFTC has the necessary tools and resources to 
adapt to the evolving financial landscape.
    With technological advancements, like artificial 
intelligence, and the rise of new financial products, like 
digital assets, the CFTC's role is more critical than ever. 
Further, reauthorization of the CFTC reinforces the global 
leadership of the United States in financial regulation. It 
sends a strong message that we are committed to maintaining 
high standards in our markets, protecting investors, and 
fostering innovation. That is why Ranking Member Scott and I 
have both publicly called for the CFTC to be reauthorized this 
Congress.
    I look forward to hearing our witnesses's testimony, and 
remain committed to working towards a successful, bipartisan 
CFTC reauthorization. Together, we can ensure the CFTC remains 
a cornerstone of integrity and stability in our financial 
system.
    With that, I thank you and I yield back.
    The Chairman. The chair would request that other Members 
submit their opening statements for the record so the witnesses 
may begin their testimony and to ensure there is ample time for 
questions. Ms. Caraveo and I will be running this hearing 
together, and with that in mind, she will introduce our 
witnesses.
    Ms. Caraveo. Thank you, Mr. Chairman.
    Our first witness today is Mr. Walter Lukken, who is the 
President and Chief Executive Officer of the Futures Industry 
Association.
    Our next witness is Thomas Sexton, the President and Chief 
Executive Officer of the National Futures Association.
    Our third witness will be Mr. Travis Antonsen, who is 
Senior Vice President for Grain Marketing and Logistics for the 
Agtegra Cooperative, and our fourth and final witness today is 
Ms. Alexandra Thornton, who is the Senior Director for 
Financial Regulation at the Center for American Progress.
    Thank you all so much for joining us.
    The Chairman. Impressive witnesses. You all get situated. 
You got 5 minutes. The timer in front of you will count down, 
and when you get to red, you will get gaveled down by either 
Ms. Caraveo or myself.
    With that, Mr. Lukken, please begin when you are ready.

 STATEMENT OF HON. WALTER L. LUKKEN, J.D., PRESIDENT AND CHIEF 
              EXECUTIVE OFFICER, FUTURES INDUSTRY 
                 ASSOCIATION, WASHINGTON, D.C.

    Mr. Lukken. Chairman Johnson, Ranking Member Caraveo, and 
Members of the Committee, thank you for allowing me to come 
today and testify on reauthorization.
    Mr. Chairman, I disagree. I believe derivatives regulation 
is sexy. At least, I have been trying to convince my family of 
that for many years. So, hopefully by the end of my testimony, 
I will have you on my side.
    I am the President and CEO of FIA, which represents 
futures, options, and centrally cleared derivatives markets 
globally.
    FIA strongly supports the reauthorization of this important 
agency. As former acting Chairman of the CFTC, I believe 
reauthorization serves as an exercise in good government and 
provides a Congressional stamp of approval of the CFTC's 
important mission. Today, I want to highlight some of the 
trends that are happening in our markets that will benefit from 
your deliberations on reauthorization.
    First, our markets have grown significantly. Total trading 
volume on CFTC-regulated exchanges in the U.S. has doubled 
since 2008, the last time that this Committee reauthorized the 
CFTC.
    Second, post-crisis reforms have brought more derivatives 
products under the CFTC's regulation, while at the same time, 
making the derivatives markets safer and our financial system 
safer.
    Third, our markets have demonstrated tremendous resilience 
and strength in the face of recent volatility. Our markets have 
remained stable and working throughout recent stress events, 
including COVID-19, the war in Ukraine, the Silicon Valley bank 
failure, and even high inflation.
    One reason for this resilience is the CFTC's principles-
based regulatory regime enacted by this very Committee. This 
regulatory framework has enabled flexible oversight tools for 
the CFTC to keep pace with evolving trends and technological 
advancements. Now, this adaptability has reduced the need for 
wholesale changes of the CFTC's statutory authority over time. 
That said, while the CFTC has this flexibility that has proven 
effective, the need for this Committee's oversight remains as 
important as ever.
    There are certain trends for this Committee's oversight 
that are worth noting today. For example, as the American 
public becomes more accepting of new products, like 
cryptocurrencies, digital asset platforms bring novel market 
structures into the traditional futures industry. Increasingly, 
we are seeing more exchanges, clearinghouses, clearing brokers, 
and trading firms under one legal entity. FIA has serious 
concerns that collapsing the existing, multi-tiered ecosystem 
with its independent checks and balances could undo valuable 
customer protections of the listed derivatives markets. FIA 
welcomes Chairman Behnam's comments that the agency plans to 
propose a new rule to address these potential conflicts.
    A second topic worth noting is the pending U.S. bank 
capital proposals that would dramatically increase the amount 
of capital held by U.S. banks for client clearing, those folks 
that access customers in our markets. Without changes to the 
proposals, the costs of hedging in our markets will likely 
increase for all end-users, including production agriculture. 
Our industry appreciates this Committee's leadership in voicing 
concerns about the impact of these rules.
    The last item is the SEC's treasury clearing mandate taking 
effect over the next 2 years. The cleared derivatives markets 
are heavy users of treasury securities and the repo markets in 
the funding, margining, and collateralization of futures 
trades. This Committee will play a critical role in ensuring 
that there are no impediments to customers accessing these 
markets or overlapping jurisdictional issues between the CFTC 
and SEC with these mandates.
    Now, turning to reauthorization, FIA believes the existing 
CFTC regulatory framework has served as a source of strength 
for our markets. I believe an appropriate approach would be a 
simple and straightforward reauthorization bill, one that 
provides the Congressional stamp of approval of this agency's 
important mission, and legal authority.
    That said, there are three minor adjustments to the Act I 
would raise for your consideration.
    First, FIA joins the NFA in supporting a non-controversial 
legislative fix to resolve legal uncertainty around FCM 
bankruptcies and the definition of customer property.
    Second, FIA supports expanding the way the CFTC might 
leverage funding for educating farmers about our markets, 
including the risks and opportunities of derivatives.
    And finally, FIA supports legislative efforts to provide 
flexibility for research and development capabilities of the 
CFTC in partnering with private-sector, such as those led by 
Representative Austin Scott. Thank you, Congressman.
    Thank you all for allowing me to testify on CFTC 
reauthorization, and I look forward to your questions.
    [The prepared statement of Mr. Lukken follows:]

Prepared Statement of Hon. Walter L. Lukken, J.D., President and Chief 
   Executive Officer, Futures Industry Association, Washington, D.C.
    Chairman Dusty Johnson, Ranking Member Yadira Caraveo, and Members 
of the Committee, thank you for the opportunity to testify about the 
reauthorization of the Commodity Futures Trading Commission (CFTC), and 
the state of derivative markets.
    I am the President and Chief Executive Officer of FIA. FIA is the 
leading global trade organization for the futures, options and 
centrally cleared derivatives markets. FIA's membership includes 
clearing firms, known in the U.S. as futures commission merchants 
(FCMs), exchanges, clearinghouses, trading firms and commodities 
specialists from more than 48 countries. FIA's mission is to support 
open, transparent and competitive markets, protect and enhance the 
integrity of the financial system, and promote high standards of 
professional conduct.
    Prior to FIA, I served as a CFTC Commissioner for 7 years and as 
the agency's Acting Chair for 18 months during the financial crisis and 
the last reauthorization of the CFTC during the 2008 Farm Bill.
    I commend the Committee for continuing your important oversight 
function over the CFTC and applaud you for holding this hearing to 
consider the reauthorization of the CFTC. FIA strongly supports the 
reauthorization of this important agency. Reauthorization is an 
exercise in good government and provides a Congressional stamp of 
approval on the CFTC's important mission and legal authority. It also 
provides the agency, and market participants, with greater certainty 
about the agency's direction and priorities.
    Today, I am honored to provide my counsel to this Committee once 
again as you deliberate CFTC reauthorization and changes to the 
Commodity Exchange Act (CEA).
The State of Our Markets
Our Markets Are Growing
    In the decade and a half since the last reauthorization in 2008, 
the futures and options markets have grown significantly. Total trading 
volume on CFTC-regulated exchanges in the U.S. has nearly doubled from 
3.4 billion futures and options contracts in 2008 to 6.6 billion in 
2023. In fact, more contracts were traded on CFTC-registered exchanges 
in the first 6 months of this year than in all of 2008.
Trading volume on CFTC-regulated exchanges in the U.S. has doubled 
        since 2008
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Open interest is another important metric for these markets because 
it is a general proxy for commercial hedging among participants. At the 
end of the second quarter of this year, open interest stands at more 
than 162 million futures and options contracts at the clearinghouses 
regulated by the CFTC, compared to 97 million at the same point of time 
in 2008. Strong open interest is a sign of a healthy market, so these 
trends are worth noting.
Open interest, which measures the risk transfer function of futures and 
        options markets, is up over 67% since 2008
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

Our Markets Are Safer
    After the 2008 financial crisis, regulators around the world 
recognized the need to move more over-the-counter derivatives into 
central clearing. They understood that central clearing is one of the 
most effective ways to make the financial system more stable and 
resilient. After Congress passed the Dodd-Frank Act in 2010, the CFTC 
implemented a new set of clearing requirements for standardized over-
the-counter (OTC) interest rate and credit default swap instruments. 
Today, roughly 85% of the dollar denominated interest rate swap (IRS) 
market and roughly 60% of the credit default swap (CDS) market are 
cleared by central counterparties subject to CFTC oversight. That means 
all of those swaps are now risk-managed by FCMs and central 
counterparties, similar to the way futures markets have operated for 
decades.
Illustration of the Role Played by Counterparties
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

As required by Dodd-Frank, a majority of the U.S. OTC swaps has 
    migrated to central clearing. Asset managers and other customers 
    holding OTC swaps have deposited more than $150 billion in 
    collateral to cover the risks of these positions.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

Our Markets Are Resilient
    Several factors have introduced incredible volatility to global 
commodity markets in recent years, including the onset of COVID-19, the 
war in Ukraine, macroeconomic pressures including supply disruptions 
and inflation, and the global transition to a low-carbon economy. 
Effective operation through these powerful, real-world stress tests has 
demonstrated the resilience of our industry. Market participants have 
sought access to our markets to manage risk in a safe and regulated 
environment because of these pressures.
    This Committee deserves a lot of credit for the strength of our 
markets. As noted above, the clearing mandates that were written into 
law by this Committee following the 2008 financial crisis have expanded 
the important role of FCMs and CCPs in reducing systemic risk in our 
markets. By working in partnership with the National Futures 
Association (NFA), the CFTC, and the broader industry over the last 
several decades, the cleared derivatives markets have remained robust 
and resilient despite the extreme market volatility and record trading 
volumes. And, importantly, end-users in the real economy never lost 
their ability to access these markets to manage risk and discover 
prices.
Our Markets Are Global
    Just as producers need access to global markets to sell their 
physical commodities, they too need access to global derivatives 
markets to hedge risk in times of uncertainty. Knowing they can rely on 
well-regulated futures and options markets provides American farmers 
the protection from price volatility they need to compete in the global 
markets for corn, wheat and soybeans. The reverse is also true: 
companies all over the world use the agricultural and energy contracts 
listed on U.S. futures markets as the benchmarks for global trade in 
these commodities. That brings additional liquidity to these markets, 
and that is a win-win for both agricultural producers and consumers 
here in the U.S.\1\
---------------------------------------------------------------------------
    \1\ In 2021 FIA took an in-depth look at cross-border flows and we 
determined that roughly 25% of the trading in CME's equity index 
futures and options came from outside the U.S. The ratio was 26% in 
energy, 30% in agriculture, and 45% in metals. The same held true for 
ICE Futures U.S. Approximately 34% of the volume in its agricultural 
contracts originated from outside the U.S.
---------------------------------------------------------------------------
    Dating back to my time as a CFTC Commissioner and Acting Chair, and 
even prior, the derivatives markets have been global. Execution, 
clearing and settlement often take place in different countries and 
across different time zones and continents. And, since the last 
reauthorization, our markets have become even more global in nature. 
Market participants benefit from the global nature of our markets. The 
more participants, the stronger the market for those seeking to hedge 
risks.
    FIA appreciates that Members of this Committee, including Ranking 
Member David Scott and Representative Austin Scott, among others, have 
worked over the years to engage policymakers in other jurisdictions to 
ensure a level playing field, reduce market fragmentation and improve 
collaboration between the CFTC and its international counterparts.
Our Markets Are Innovative
    One of the most noteworthy provisions in the Commodity Exchange Act 
mandates the CFTC to promote fair competition and responsible 
innovation. There are very few other parts of the Federal Government 
with such an explicit mandate. I think this has benefited the CFTC 
throughout its history and something to keep in mind as you consider 
reauthorization.
    The U.S. derivatives markets are nimble, allowing growth and 
innovation. This is evidenced by the pace of new and novel contracts 
being listed on our markets today. There are futures contracts based on 
battery metals such as lithium and cobalt--crucial components for the 
electric vehicle industry. There are futures on Bitcoin and ether, the 
two most heavily traded crypto currencies. There are the so-called 
``ultra'' Treasury bond and note futures, which have given asset 
managers and other institutional investors more ways to hedge their 
interest rate risks.
    Another example is the expanded range of crude oil futures. In 
2008, the U.S. was a net importer of crude oil. Today we are a net 
exporter, thanks to gains in the productivity of the U.S. oil industry. 
The futures industry has responded by developing new futures contracts 
based on prices at the export terminals along the Gulf Coast. Those 
contracts are expressly designed to help companies hedge price risks on 
international flows of oil.
    The biofuels market offers another example. According to the U.S. 
Department of Agriculture (USDA), approximately 20% to 25% of all 
soybean oil produced in the U.S. is sold to refineries and converted 
into renewable diesel. Companies throughout the supply chain use the 
well-established futures based on soybean oil and heating oil to hedge 
the risks in this new and rapidly growing alternative to fossil fuels.
    These are just a few examples of the agility, market responsiveness 
and innovative spirit that has long characterized the U.S. futures 
industry and will continue to characterize the industry for years to 
come.
Priorities for Committee Oversight of CFTC
    This Committee plays a crucial role in the oversight of the CFTC as 
novel and emerging trends present themselves. As the agency's 
authorizing body, this Committee can provide guidance and Congressional 
intent to the agency's rulemaking authority as it considers these 
evolving trends. I want to highlight some of the topics worthy of your 
attention.
Evolving Market Structures
    Historically, the regulation of the futures markets, as directed by 
the Commodity Exchange Act, has been by functional registration 
category. The statute, and its implementing regulations, require market 
participants who take on certain responsibilities to register in 
various categories.
    Exchanges that bring together buyers and sellers and self-regulate 
their markets are required to register as designated contract markets 
(DCMs). Clearinghouses, with their obligations to protect the financial 
integrity of the system, are required to register as designated 
clearing organizations (DCOs). Clearing members, those firms that 
guarantee and safeguard customer funds and serve as their agents, are 
required to register as futures commission merchants (FCMs).
    Given these targeted responsibilities, these registrants have 
historically been housed in independent legal entities. Increasingly, 
however, we are seeing more exchanges and clearinghouses that are 
embedding an FCM within their legal structure.
    CFTC Chairman Rostin Behnam has recognized this trend and has 
indicated his desire to address this issue by rulemaking this fall. He 
testified before this Committee in March,\2\ highlighting that ``we are 
seeing a shift to structures, driven by technology, that combine or 
compress what have historically been unique and separate activities 
into a single or fewer entities. This compression raises many important 
questions including those regarding conflicts of interest within 
vertically integrated structures.''
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    \2\ https://agriculture.house.gov/calendar/
eventsingle.aspx?EventID=7732.
---------------------------------------------------------------------------
    FIA has a long history of supporting innovation in the derivatives 
industry. FIA also strongly believes in the fundamental regulatory 
principle: same business, same risks, same rules.
    In our May 2022 comment letter \3\ about the FTX U.S. Derivatives 
application before the CFTC, which sought to combine several market 
functions into a single entity, we identified fundamental principles of 
the derivatives regulatory oversight structure that they could not 
adequately address. These include principles of segregation of customer 
funds, conflicts of interest of those entrusted with market operations 
and customer funds, financial resourcing and capitalization of market 
operators, appropriately planned and sized default resources, and 
safeguards of key market operations.
---------------------------------------------------------------------------
    \3\ https://www.fia.org/sites/default/files/2022-05/
FIA%20FTX%20Request%20for%20A-
mended%20DCO%20Registration%20Order%205.11.22.pdf
---------------------------------------------------------------------------
    FIA has strong concerns that collapsing the existing multi-tiered 
ecosystem--with its inherent checks and balances and customer 
protections--could undo the strong foundation of the listed derivatives 
markets and, ultimately, put customers at risk. We want to make sure 
end-users, including those in the agricultural and energy sectors, will 
continue to have the same protections as customers are guaranteed 
today.
    FIA welcomes Chair Behnam's desire to establish a strong regulatory 
regime to cover conflicts originating from affiliated entities serving 
multiple functions within these vertically integrated structures.
Emerging Technology and Artificial Intelligence (AI)
    The Commission's principles-based regulatory framework and flexible 
approach to regulation has a proven track record when it comes to 
protecting customers, promoting innovation and preserving market 
integrity. Regulators and policymakers are rightfully exploring 
potential uses and risks of emerging technology, such as AI in the 
derivatives markets that the CFTC regulates and beyond.
    In January 2024, the CFTC Divisions of Market Oversight, Clearing 
and Risk, Market Participants, and Data and the Office of Technology 
Innovation issued a request for comment (RFC) to better inform them 
about AI.
    FIA believes \4\ the existing statute and CFTC rules and guidance 
provide the controls and oversight needed for the Commission to promote 
and protect the integrity and resilience of our markets. FIA urges the 
CFTC to take a ``technology-neutral'' approach and focus on achieving 
regulatory outcomes, rather than attempting to regulate the technology 
itself, moving forward.
---------------------------------------------------------------------------
    \4\ https://www.fia.org/sites/default/files/2024-04/FIA-FIA%20PTG-
CME-ICE%20Response
%20to%20CFTC%20AI%20RFC%204.24.pdf.
---------------------------------------------------------------------------
U.S. Bank Capital Proposals
    On July 27, 2023, the Board of Governors of the Federal Reserve 
System (Federal Reserve), the Office of the Comptroller of the 
Currency, and the Federal Deposit Insurance Corporation--together, the 
U.S. bank regulators--proposed the Basel III endgame capital framework 
and, separately, the Federal Reserve requested comment on a proposal 
that would make significant adjustments to the calculation of the 
global systemically important bank holding companies surcharge. These 
proposed rules \5\ represent a comprehensive rewrite of the regulatory 
capital standards for the biggest U.S. banks.
---------------------------------------------------------------------------
    \5\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20230727a.htm.
---------------------------------------------------------------------------
    While outside the jurisdiction of the CFTC, these rules will harm 
the CFTC-regulated derivatives markets and the end-users that rely on 
them. FIA contributed to a report and a set of recommendations \6\ 
adopted by the CFTC Global Markets Advisory Committee (GMAC) at a 
recent June 2024 meeting.
---------------------------------------------------------------------------
    \6\ https://www.cftc.gov/PressRoom/PressReleases/8918-24.
---------------------------------------------------------------------------
    The report highlights excerpts from the formal comment letters 
filed by the users of derivatives markets noting concerns about the 
proposals, including agriculture, energy, insurance, pension funds and 
others.
    We also commend CFTC Chairman Rostin Behnam for his comments in 
public testimony before this Committee in March 2024, emphasizing the 
need to ``create incentives'' for clearing and committing to working 
with his prudential regulators to ensure new bank capital rules are not 
``creating unnecessary barriers to clearing and clearing services for 
end-users.''
Treasury Clearing
    In December 2023, the Securities Exchange Commission (SEC) adopted 
final rules that will require most market participants to clear U.S. 
Treasury (UST) repo and cash security transactions in the secondary 
market. While these transactions are not futures contracts, our 
industry and its participants utilize treasury securities and repo 
contracts every day in the collateralization, settlement and cash 
management of futures positions. Our industry is also exploring whether 
it can take a more direct role in the clearing of these products given 
the similarities to the futures and swaps markets.
    The SEC's clearing mandate may seem familiar to Committee Members 
who were involved in the Dodd-Frank Act that mandated the clearing of 
OTC derivatives after the financial crisis. Both efforts aimed to move 
these bilateral, trillion-dollar markets to a client, all-to-all 
cleared market. In other words, the futures market model. That our 
markets act as the model for reform demonstrates the importance of our 
efficient, transparent business practices as an industry.
    The incumbent, DTCC's FICC, has made the most progress to date, 
having filed several rules with the SEC to build the framework for its 
clearing model with more rules to come in the fall. CME and ICE also 
have publicly announced an interest in providing cash treasury 
clearing.
    FIA finds this competition healthy because it will sharpen the 
discussions with the end-users in mind. We believe we have the 
expertise and experience to offer in how ``done away'' client clearing 
models will work, given their similarity to the agency give-up clearing 
model of the futures markets.
    There are challenges ahead that may require this Committee's 
attention. The CFTC and SEC will need to work together to ensure that 
the Treasury clearing mandate does not conflict with CFTC regulations. 
Both agencies are working collaboratively to address these concerns.
    The second issue is the timeline. Several workstreams need to be 
addressed before the first deadlines come into place, including 
capital, accounting, cross-margining, risk and credit controls and 
netting. Implementing this mandate before June 2026 will be a heavy 
lift, especially considering the importance of the Treasury and repo 
markets to the funding of the government and financial markets. 
Regulators will need to be flexible and aligned with industry to ensure 
realistic timetables.
    Our industry will keep this Committee abreast as this critical 
rulemaking is implemented.
FIA Views on CFTC Reauthorization
Overall
    As noted earlier in my testimony, our markets have demonstrated 
incredible resilience given the onset of COVID-19, the war in Ukraine, 
weather and energy disruptions in the U.S. and abroad, and the 
commodity market volatility associated with these events. Throughout 
all these events, the U.S. regulatory framework has proved itself as a 
source of strength for our markets, and the global clearing system has 
worked as intended, minimizing the counterparty risk that we witnessed 
during the crisis of 2008.
    As a result, FIA does not believe a broad CFTC reauthorization bill 
is needed now. Rather, a bill that provides a Congressional stamp of 
approval on this agency's important mission and legal authority, and 
that acknowledges the CFTC's proven track record through a period where 
we have seen record market volatility, is the best approach.
Customer Protection
    FIA joins the NFA in supporting legislative clarification to 
resolve legal uncertainty in FCM bankruptcies as to the definition of 
``customer property'' created by a bankruptcy court decision in the 
Griffin Trading case. The sanctity of segregated customer funds remains 
an important tenet of the CFTC's customer protection regime and FIA 
stands ready to assist the Committee on this clarification.
Expanding Access to Educational Resources for Small- and Mid-Size 
        Farmers
    Today's farmers and ranchers are incredibly savvy businesspeople. 
They want to offset their risk where possible. But they have a lot on 
their plates. And that's before the food reaches our plates.
    FIA supports efforts to expand educational resources about the 
opportunities and risks of risk management tools like futures and other 
cleared derivatives. It would go a long way to helping the 2% that feed 
the 98%--particularly for the small- and mid-size farmers, producers 
and end-users.
    During a March 2023 full Committee hearing titled ``Rising Risks: 
Managing Volatility in Global Commodity Derivatives Markets,'' FIA's 
board chair, Alicia Crighton, received a question from Representative 
Jasmine Crockett about a USDA report from October 2020 that raised 
concerns about a low percentage of farmers using futures or options to 
hedge price risk.
    FIA took interest in this report and encourages this Committee to 
consider whether opportunities exist--perhaps through CFTC 
reauthorization or another vehicle--to expand the manner in which the 
CFTC might leverage funding through the CFTC Office of Customer 
Education and Outreach (OCEO) to partner with not-for-profits, private 
sector educational initiatives or other government entities, like the 
USDA. Educational resources should be used to highlight both the 
opportunities and the risks of risk management tools like futures and 
options.
    We believe this may address the concerns raised by Representative 
Crockett and provide additional resources to farmers during a time when 
they have experienced, and continue to experience, considerable 
volatility in their markets.
Modernizing the CFTC
    The last CFTC reauthorization was enacted the same year Apple 
launched its App Store. The technological advancements by market 
participants have been incredible since that time.
    According to former Chairman of the CFTC Christopher Giancarlo, 
``The CFTC lacks the legal authority to partner and collaborate with 
outside entities engaging directly with fintech within a research and 
testing environment, including when the CFTC receives something of 
value absent a formal procurement.'' \7\
---------------------------------------------------------------------------
    \7\ https://www.cftc.gov/PressRoom/SpeechesTestimony/
opagiancarlo70.
---------------------------------------------------------------------------
    FIA supports efforts to improve the research and development 
capabilities of the CFTC. This includes legislative efforts, such as 
those led by Representative Austin Scott, that would provide the CFTC 
transaction authority to engage in public-private partnerships with 
financial technology developers. NASA, the Department of Defense, and 
other Federal agencies already have this type of authority. This 
authority would assist the CFTC so it can fully vet and test potential 
rules and regulations on the technology being utilized by industry.
Conclusion
    I am fortunate to represent a wide array of stakeholders in the 
listed, cleared and regulated derivatives industry--all of whom want to 
see this industry continue to support the price discovery and risk 
management needs of their customers in a productive way. It is an honor 
to be with you today and to work with this Committee as you craft a 
reauthorization of the CFTC and explore reforms to the CEA that 
strengthen our markets.

    The Chairman. Very good, thank you.
    Mr. Sexton, you are up.

 STATEMENT OF THOMAS W. SEXTON III, J.D., PRESIDENT AND CHIEF 
              EXECUTIVE OFFICER, NATIONAL FUTURES 
                    ASSOCIATION, CHICAGO, IL

    Mr. Sexton. Good morning, Chairman Johnson, Ranking Member 
Caraveo, and Members of the Subcommittee. Thank you for the 
opportunity for National Futures Association to appear at this 
hearing on the important topic of the CFTC's reauthorization. I 
am the President and CEO of NFA.
    NFA is a registered futures association under the Commodity 
Exchange Act and the industry-wide independent self-regulatory 
organization for the derivatives industry. Our overriding 
objective is to partner with and help the CFTC regulate the 
derivatives markets. Our main areas of responsibility are 
described in my written testimony. The CFTC oversees each and 
every aspect of NFA's regulatory authority.
    Our coordination efforts with the CFTC over the years, in 
part, have built a strong track record of protecting retail 
customers and prosecuting retail trading abuses and fraud. At 
this time, I want to thank Chair Behnam for his leadership at 
the CFTC and thank him and the CFTC's other Commissioners for 
their support of NFA and for their willingness to work with us 
to resolve the industry's regulatory issues.
    Reauthorization is always an important process for the 
industry as a whole, and for NFA in particular. NFA firmly 
believes that customer protection issues should be front and 
center as Congress works to reauthorize the CFTC. Today, I 
would like to cover one significant reauthorization topic, 
strengthening FCM customer protections in bankruptcy.
    The 2019 reauthorization bill voted out of the House 
Agriculture Committee included a key customer protection 
provision relating to FCM bankruptcies, which we continue to 
strongly support and believe any future reauthorization bill 
should address. Over 40 years ago, the CFTC adopted rules 
regarding FCM bankruptcies. Among other things, those rules 
provided that if there is a shortfall in customer segregated 
funds, the term customer funds would include all assets of the 
FCM until customers had been made whole.
    Several years ago, a district court decision cast out the 
validity of the CFTC's authority to adopt this rule. Although 
that decision was subsequently vacated, a cloud of uncertainty 
continues to remain over this rule's efficacy. Congress should 
remove that doubt and ensure that customers have priority if 
there is a shortfall in segregated funds. Congress can do so by 
amending Section 20 of the Commodity Exchange Act, which gives 
the CFTC authority to adopt regulations regarding commodity 
brokers that are debtors under Chapter 7 of the United States 
Bankruptcy Code to make clear that the CFTC has the authority 
to adopt the rule that it did. We believe that there is broad 
industry support for this approach.
    Let me turn to digital asset commodities for just a few 
minutes. In 1982, Congress and the CFTC gave NFA the authority 
or responsibility to regulate firms engaging in exchange-traded 
derivatives. We are appreciative that over the years, Congress 
and the CFTC have entrusted us with additional regulatory 
responsibilities over retail forex and swaps.
    The Commission's responsibilities are enormous and we will 
continue to help it in any way we can. The CFTC has led efforts 
among financial regulators to protect customers by tackling 
fraudulent schemes associated with retail digital asset 
commodities activities. We applaud this Subcommittee and under 
Chairman Thompson's leadership, the House Committee on 
Agriculture's collaborative work with the House Financial 
Services Committee to pass legislation governing spot digital 
assets, including those that are commodities. As this 
Subcommittee is aware, the FIT Act includes a significant role 
for an RFA in regulating the digital asset commodity market.
    I would like to take this opportunity to reaffirm NFA's 
willingness to assist the CFTC to the extent requested in 
developing an appropriate regulatory framework for the digital 
asset commodity market, if Congress moves forward with 
legislation in this area.
    Our member firms have engaged in spot digital asset 
commodity activities for over 5 years, and we have taken steps 
to regulate these members' activities to ensure that 
appropriate customer protections are in place. We are fully 
capable of working with the CFTC to perform the 
responsibilities of an RFA as outlined in the FIT Act (H.R. 
4763, Financial Innovation and Technology for the 21st Century 
Act), and will continue to take a pragmatic regulatory approach 
with regard to this area.
    Thank you again for the opportunity to appear before you 
today to discuss CFTC reauthorization. I would be happy to 
answer any questions at the appropriate time.
    [The prepared statement of Mr. Sexton follows:]

 Prepared Statement of Thomas W. Sexton III, J.D., President and Chief 
      Executive Officer, National Futures Association, Chicago, IL
    Chairman Johnson, Ranking Member Caraveo, and Members of the 
Subcommittee, thank you for the opportunity to testify at this hearing 
on the important topic of the Commodity Futures Trading Commission's 
(CFTC or Commission) reauthorization. My name is Thomas Sexton, and I 
am the President and Chief Executive Officer of National Futures 
Association (NFA), the industry-wide independent self-regulatory 
organization (SRO) for the derivatives industry.
    Before turning to my substantive remarks, please let me provide 
some background information about NFA. NFA is a registered futures 
association (RFA) pursuant to Section 17 of the Commodity Exchange Act 
(CEA). Our global membership includes CFTC registered futures 
commission merchants (FCMs), swap dealers (SDs), commodity pool 
operators (CPOs), commodity trading advisors (CTAs), introducing 
brokers (IBs), retail foreign exchange dealers (RFEDs) and associated 
persons of these entities. The CFTC requires these registered firms to 
be NFA Members. We currently have approximately 2,900 NFA Member firms 
and 38,000 individual Associate Members.
    NFA is solely a regulatory body. We do not operate a market, and we 
are not an industry trade association. Our overriding objective is to 
partner with and help the CFTC regulate the derivatives markets and, in 
doing so, we are a resolute customer protection organization. NFA's 
responsibilities include registering all firms and industry 
professionals on behalf of the CFTC, passing rules to ensure fair 
dealing with customers and counterparties, monitoring Members for 
compliance with those rules and taking enforcement actions against 
those Members that violate our rules. Every aspect of our regulatory 
authority is closely overseen by the CFTC.
    As Congress expanded the CFTC's jurisdiction over the years beyond 
exchange-traded derivatives to include the retail forex rolling spot 
and swaps markets, Congress and the CFTC also entrusted NFA with 
additional regulatory oversight responsibilities for these markets.\1\ 
NFA coordinates with the CFTC on a regular basis and worked very 
closely with the CFTC to develop rules and regulatory programs to 
effectively oversee these additional areas of regulatory jurisdiction. 
In addition, the CFTC has delegated numerous responsibilities to NFA 
including the industry's registration process and the review of CPO and 
CTA disclosure documents, CPO annual financial filings and SD swap 
valuation disputes. Our coordination efforts over the years have built 
a strong track record of protecting retail customers and prosecuting 
retail trading abuses and fraud. Today, customer complaints and single-
event customer arbitrations filed at NFA, as well as CFTC's reparations 
cases, remain near all-time lows.
---------------------------------------------------------------------------
    \1\ Congress originally gave the CFTC anti-fraud jurisdiction over 
the retail forex markets and expanded its jurisdiction to include 
regulatory oversight in 2008. Congress gave the CFTC jurisdiction over 
the swaps markets (except for security-based swaps) after the enactment 
of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act 
in 2010.
---------------------------------------------------------------------------
    The Commission's responsibilities are enormous, and we will 
continue to help it in any way we can. At this time, I certainly want 
to recognize Chair Behnam for his leadership at the CFTC and thank him 
and the CFTC's other Commissioners for their support of NFA and self-
regulation and for their willingness to work with us to resolve the 
industry's regulatory issues. Under Chair Behnam, the CFTC has led 
efforts among financial regulators to protect customers by tackling 
fraudulent schemes associated with retail digital asset commodities' 
(DACs) activities. The CFTC's last formal reauthorization expired over 
10 years ago. Since then, NFA, the CFTC and the derivatives industry 
have established a comprehensive swap dealer regulatory oversight 
program \2\ and navigated a worldwide pandemic. In doing so, we worked 
collectively to protect customers and counterparties, market integrity 
and confidence in the derivatives markets.
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    \2\ Swap Dealers became registered with the CFTC in early 2013.
---------------------------------------------------------------------------
CFTC Reauthorization
    NFA has always recognized the importance of Congress reauthorizing 
the CFTC and ensuring that the CFTC continues to have the tools it 
needs to properly regulate the derivatives industry. As this 
Subcommittee is aware, on May 22, 2024, the House of Representatives 
passed the bipartisan Financial Innovation and Technology for the 21st 
Century Act (FIT Act). This legislation calls upon the Commission to 
regulate a new area once again--the DAC market. In the past, Congress 
has used momentous changes to the CFTC's responsibilities to also 
reauthorize it.\3\ In light of the CFTC's potential new 
responsibilities in the DAC area, NFA strongly believes that now is an 
appropriate time for Congress to reauthorize the CFTC.
---------------------------------------------------------------------------
    \3\ For example, the Commodity Futures Modernization Act of 2000 
and Food, Conservation, and Energy Act of 2008 each made momentous 
changes to the CFTC's regulatory oversight and/or jurisdiction and 
reauthorized the CFTC.
---------------------------------------------------------------------------
    Reauthorization is always an important process for the industry as 
a whole and for NFA in particular. Today, I would like to cover one 
significant reauthorization topic--strengthening FCM bankruptcy 
customer protections. I would also like to take this time to reaffirm 
NFA's willingness to assist the CFTC to the extent requested in 
regulating the spot DAC market if Congress moves forward with 
legislation in this area.
Strengthening Customer Protections in FCM Bankruptcy Proceedings
    NFA firmly believes that customer protection issues should be front 
and center as Congress works to reauthorize the CFTC. The 2019 
reauthorization bill voted out of the House Agriculture Committee 
included a key customer protection provision that clarifies the 
Commission's authority to adopt rules that provide customers with 
priority in the event of an FCM bankruptcy. NFA fully supports this 
provision, and we believe there is broad-based industry support for 
this approach. We urge this Subcommittee to include this key statutory 
change in any future reauthorization bill.
    Over 40 years ago, the CFTC adopted rules regarding FCM 
bankruptcies. Importantly, those rules provide that in the event of a 
shortfall in customer segregated funds, the term ``customer funds'' 
would include all assets of the FCM until customers are made whole. 
Over 20 years ago, a United States district court bankruptcy decision 
cast doubt on the validity of the CFTC's rule. Although that decision 
was subsequently vacated after the parties in the matter settled, a 
cloud of doubt continues to linger over the validity of the CFTC's 
rule.
    NFA strongly encourages Congress to remove that doubt and ensure 
that customers have a priority in an FCM's bankruptcy if there is a 
shortfall in segregated funds. In our view, this important customer 
protection can be provided by amending Section 20 of the CEA, which 
gives the CFTC authority to adopt regulations regarding commodity 
brokers that are debtors under Chapter 7 of Title 11 of the United 
States Code. We recommend that Congress amend Section 20 to clarify 
that the CFTC has the authority to adopt the rule that it did.
NFA's Willingness to Assist the Commission in Regulating Digital Asset 
        Commodities
    At the outset, we applaud this Subcommittee's and under Chairman 
Thompson's leadership, the House Committee on Agriculture's 
collaborative work with the House Financial Services Committee to pass 
legislation governing spot digital assets, including those that are 
commodities. As this Subcommittee is aware, the FIT Act includes a 
significant role for an RFA in regulating the DAC market. Among other 
provisions, the bill requires digital commodity brokers and digital 
commodity dealers, as well as digital commodity exchanges that accept 
customer funds, to be Members of an RFA. The bill also provides that 
any person that files notice with the Commission of its intent to 
register as a digital commodity broker, digital commodity dealer or 
digital commodity exchange to be a member of an RFA and comply with the 
RFA's rules. As a result, the RFA will be solely responsible for 
oversight of these entities during the period between filing the notice 
of intent to register and actually becoming CFTC registered.
    NFA fully supports providing a role for an RFA to partner with the 
Commission in developing an appropriate regulatory regime for the DAC 
market. A cornerstone of effective self-regulation is mandatory 
membership, and the provisions in the FIT Act that mandate membership 
in an RFA are essential for ensuring that an RFA can act effectively, 
and discipline and when appropriate bar Members that do not abide by 
the RFA's rules. Without mandatory membership, registrants would be 
able to relinquish their RFA membership if they did not want to follow 
a rule or were being investigated or disciplined for failing to follow 
a rule.\4\
---------------------------------------------------------------------------
    \4\ Effective government oversight is also essential to self-
regulation. As set forth in Section 17 of the CEA, this oversight 
should cover all aspects of the SRO's regulatory activity. Today, while 
we may partner with the CFTC to regulate our Members, the CFTC closely 
reviews and monitors our activities to ensure that we fulfill our 
regulatory responsibilities.
---------------------------------------------------------------------------
    NFA looks forward to assisting the CFTC in regulating the DAC 
market and is fully capable of performing the responsibilities of an 
RFA as outlined in the FIT Act. The fact is our Member firms have been 
engaging in spot DAC activities for over 5 years, and we have already 
taken steps to regulate these Members' activities to ensure that 
appropriate customer protections are in place. For example, in 2018, we 
adopted DAC disclosure requirements for our Members because we wanted 
to make sure that investors fully understood the nature of DACs and DAC 
derivatives.
    Last year, we extended our jurisdiction over Members' spot DAC 
activities to ensure that NFA could take action if a Member firm 
committed fraud or similar misconduct with respect to these activities. 
Detecting and combating fraud is central to our mission. Therefore, our 
current compliance rules impose anti-fraud, just and equitable 
principles of trade and supervision requirements on NFA Members and 
Associates engaged in spot DAC activities. Although we have not 
observed any significant issues with our Members engaging in spot DAC 
activities, we will continue to take a proactive regulatory approach 
with regard to our Members' spot DAC activities.
    In conclusion, thank you again for the opportunity to appear before 
you today and highlight one important provision that NFA believes 
should be included in any future CFTC reauthorization bill. We also 
appreciate the opportunity to highlight NFA's willingness to assist the 
Commission in regulating DACs. We firmly believe our successful 
regulatory partnership with the CFTC is an effective structure for 
regulating the derivatives markets and the rolling spot retail forex 
and spot DAC markets. We look forward to working closely with this 
Subcommittee to reauthorize the CFTC. I would be happy to answer any 
questions.

    Ms. Caraveo [presiding.] Thank you, and we will go to Mr. 
Antonsen next.

  STATEMENT OF TRAVIS ANTONSEN, SENIOR VICE PRESIDENT, GRAIN 
            MARKETING, AND RAIL LOGISTICS, AGTEGRA 
  COOPERATIVE, ABERDEEN, SD; ON BEHALF OF NATIONAL COUNCIL OF 
                      FARMER COOPERATIVES

    Mr. Antonsen. Good morning, Chairman Johnson, Ranking 
Member Caraveo, and Members of the Subcommittee. Thank you for 
holding this hearing as you work on reauthorization of the 
Commodity Futures Trading Commission. I appreciate the 
opportunity to discuss the role of derivatives markets that 
CFTC oversees in helping farmers and agribusiness manage 
commodity price risks.
    I currently work for Agtegra, a cooperative owned by 6,700 
farmers in the Dakotas. I am also actively engaged in my family 
farming operation.
    Currently, some of our agricultural markets are seeing 
lower price levels driven by increased international crop 
production. Mostly favorable weather this year is aiding in 
crop development and futures contracts are currently pricing in 
expectations for another large harvest. For example, the 
futures price in the December 2024 corn contract topped out at 
$6.02 a bushel in April of 2022. Yesterday, that price closed 
at $4.18, so significant volatility in cash prices.
    Thus far, it appears producers who previously forwarded 
price contracts will likely receive higher prices. Our 
cooperative is active in offering those pricing tools that 
allow our members to manage their price risk well in advance of 
harvesting, or even planting that crop.
    To manage such large commodity price risks and movements, 
we rely on highly functioning derivative markets. For example, 
Agtegra uses exchange rated futures and options, OTC 
derivatives, over-the-counter contracts to hedge our price risk 
for us to protect our grain and storage, manage our future 
sales, and offset energy and fertilizer risk. We also do this 
for forward contracting options to our member owners. In the 
process of buying grain from the farm to selling it to the end-
user exporter, that bushel of grain may have had to trade 
futures four or five times by the time the grain reaches its 
final destination. The CFTC ensures integrity of those markets.
    As the Agriculture Committee has looked to reauthorize the 
CFTC in the past, we have supported those efforts. 
Reauthorizing CFTC is how this Committee acknowledges the 
importance of the agency's critical functions.
    While the CFTC's mission has expanded in recent years, we 
rely on the CFTC to ensure the soundness of our commodity 
markets. It is essential for the agriculture industry to have 
well-functioning, commodity derivative markets, and the CFTC 
performs the essential role of helping to safeguard those 
markets.
    While the Commission's responsibilities have expanded, 
funding has been flat. While not in the scope of this 
Committee, we encourage Congress to provide sufficient funding 
for CFTC's important functions. However, we caution against the 
imposition of any user fees on the industry to fund CFTC. 
Agriculture is a high-volume global margin industry. 
Incremental costs, whether passed on or imposed directly on the 
participants, eventually trickle down to the end-users and 
farmers. Grain represented by underlying futures contracts can 
be traded multiple times, as I noted before. If there is a user 
fee, then that selling price received by the producer would go 
down by the amount of the fee each time the underlying futures 
contract is traded. We fear a further increase in costs would 
have the unintended consequences of discouraging prudent 
hedging practices. To be clear, a user fee would increase risks 
being absorbed by agriculture.
    Additionally, we caution Congress from setting up a 
situation where the CFTC would see its budget directly impacted 
by the volume of trading in the products it is tasked with 
regulating.
    I outline several concerns we have with the Basel III 
Endgame proposals in my written testimony. We appreciate 
Congress's engagement on this issue, and are hopeful that those 
capital requirements will be re-proposed.
    Thank you again for this opportunity to testify today 
before the Committee. We appreciate your role in ensuring the 
industry will continue to be able to effectively hedge 
commercial risk in supporting the viability of our farmers. I 
look forward to answering any questions that you may have. 
Thank you.
    [The prepared statement of Mr. Antonsen follows:]

  Prepared Statement of Travis Antonsen, Senior Vice President, Grain 
 Marketing, and Rail Logistics, Agtegra Cooperative, Aberdeen, SD; on 
           Behalf of National Council of Farmer Cooperatives
    Chairman Johnson, Ranking Member Caraveo, and Members of the 
Subcommittee, thank you for the invitation to testify today with 
respect to the reauthorization of the Commodity Futures Trading 
Commission (CFTC) and, in particular, the importance of the agriculture 
industry's ability to use and offer risk management tools.
    I am Travis Antonsen, Senior Vice President of Grain Marketing and 
Rail Logistics of Agtegra Cooperative. Agtegra Cooperative is a local 
farmer-owned agricultural cooperative headquartered in Aberdeen, South 
Dakota. It is owned by over 6,700 farmers and ranchers, predominantly 
in North and South Dakota, with a network of over 70 locations and 900 
employees. With four main divisions, we buy grain from our farmer-
members and provide farmers and ranchers with grain, agronomy, energy 
and feed products and services. In addition, I was born and raised on a 
family farm in South Dakota where I continue to farm with my family. We 
grow corn and soybeans and raise livestock.
    Today, I am testifying on behalf of Agtegra Cooperative and the 
National Council of Farmer Cooperatives (NCFC). NCFC represents roughly 
1,700 farmer-owned cooperatives across the country whose members 
include a majority of our nation's more than two million farmers. 
Agtegra Cooperative is an NCFC member, and also a member of the 
National Grain and Feed Association (NGFA). I currently serve on the 
NGFA Risk Management Committee and have previously served on the NGFA 
Country Elevator Committee and Board of Directors.
    Farmer cooperatives--businesses owned, governed and controlled by 
farmers and ranchers--are an important part of the success of American 
agriculture. Through their cooperatives, producers are able to improve 
their income from the marketplace, manage risk, and strengthen their 
bargaining power, allowing them to compete globally in a way that would 
be impossible to do individually.
    Commodity price risk management tools are essential to help 
mitigate commercial risk in the production, processing and selling of a 
broad range of agricultural, energy and food products. America's 
farmers and ranchers must continue to have access to new and relevant 
risk management products that enable them to feed, clothe and provide 
fuel to consumers here at home and around the world. Mostly favorable 
weather this year appears to be aiding crop development and futures 
contracts are pricing in expectations for large crops. Thus far it 
appears producers who previously forward priced crops, which is made 
possible by derivatives, will likely receive higher prices for their 
crop. Not everyone forward prices crops, but having the pricing tools 
available as part of a multi-layered risk management strategy is 
important for agriculture.
Use of Derivative Markets
    As processors and handlers of commodities and suppliers of farm 
inputs, agriculture firms are commercial end-users of the futures 
exchanges, as well as the over-the-counter (OTC) derivatives markets. 
They use exchange-traded futures and options and OTC derivatives to 
hedge the price risk of commodities they purchase, supply, process or 
handle.
    For example, Agtegra uses exchange-traded futures and options and 
OTC derivatives to hedge the price risk for the cooperative to protect 
grain in storage, manage future sales, and to offer forward contracting 
options to our member-owners. In the process of buying grain from the 
farm to selling it to the end-user or exporter, that bushel of grain 
may have had to trade futures four or five times by the time the grain 
reaches its final destination. The cooperative is also active in 
offering pricing tools that allow its members to manage their price 
risk well in advance of harvesting or even planting a crop.
    While not used to the extent as exchange-traded contracts, the 
swaps markets also play a vital role in the ability of cooperatives to 
hedge in the various commodity markets, in both the agricultural and 
energy markets. Swaps are especially important in times of extreme 
price volatility that puts stress on the industry--and allows working 
capital to be freed up so cooperatives can continue to offer forward 
pricing options for farmers to manage their own production risk.
    In addition, swaps serve as important tools in agriculture markets 
that may not have sufficient trading volume on the futures exchanges, 
as well in being able to customize hedges to address situations that 
may not match up well to conventional futures contract specifications. 
To access the OTC market, cooperatives use a variety of commercial 
counterparties as well as registered swap dealers, including large 
banking entities.
    Currently some of our agricultural markets are in a period of lower 
price levels driven by increasing international crop production. For 
example, the futures price on the December 2024 corn futures contract 
peaked at $6.02/bushel on April 25, 2022 and as of the close on July 
19, 2024 is down to $4.05/bushel. To manage such large commodity price 
risks and movements, cooperatives rely on highly functioning 
derivatives markets.
    As a producer, the ability to customize risk management tools 
through OTC derivative contracts has been an invaluable tool for my 
operation by giving me the confidence to price grain well before it is 
planted. The ability to set a price floor and participate in future 
market rallies over a timeframe that I get to choose has been a game 
changer to our farm's risk management plan.
CFTC Reauthorization
    As the Agriculture Committee has previously looked to reauthorize 
the CFTC on a number of occasions since authorization expired in 2013, 
NCFC has supported the Committee's efforts.
    Reauthoring CFTC is the way in which this Committee acknowledges 
the importance of the agency's critical functions. Continued delay 
unnecessarily withholds that vote of confidence. While the current 
trend is to focus on new shiny objects such as cryptocurrency, we 
continue to rely on the CFTC to ensure the soundness of the bedrock of 
our commodity markets. As outlined above, it is essential for the 
agriculture industry to have sound, well-functioning commodity 
derivatives markets, and appreciate that the Agriculture Committee 
continues to provide that oversight. The CFTC performs the essential 
role of helping to safeguard U.S. futures, options and swaps markets 
that our industry relies on for critical risk management and price 
discovery functions. For the U.S. agricultural and energy contracts 
that are utilized extensively by our members to manage their market and 
business risks, this regulatory oversight is crucial.
    Throughout Dodd-Frank implementation, now a decade ago, NCFC has 
advocated that the agriculture industry does not fit in a one-size-
fits-all regulatory regime meant for Wall Street. As such, we continue 
to encourage you to help ensure that regulatory burdens don't impede 
the ability of farmers, their cooperatives and others involved in the 
agriculture industry to have access to the risk management tools they 
need. Reauthorizing CFTC would reassert this Committee's oversight of 
this role.
Costs to End-Users
    The CFTC performs the critically important role of helping 
safeguard U.S. futures and swaps markets, which benefits all Americans 
with more stable prices and a sound financial system. And while the 
Commission's responsibilities have continued to expand dramatically, 
adequate funding has remained stagnant. While outside the jurisdiction 
of this Committee, we encourage Congress to provide sufficient funding 
through appropriations for CFTC to perform its important functions. 
Without sufficient resources to staff the Commission and invest in 
these areas, the CFTC's ability to perform these important functions, 
as well as ensuring the integrity of the more traditional commodity 
markets our members rely on for risk management purposes, will be 
diminished.
    However, aggregate regulatory costs and market liquidity are an 
ongoing concern for farmers and their cooperatives. Agriculture is a 
high-volume, low-margin industry, and incremental increases in costs 
trickle down and impact farmers. Taken incrementally, the costs may not 
seem unreasonable, but those costs are evident to those who have to 
absorb or pass them on to the farmer. Even as end-users, significant 
resources must be used just to comply with the additional paperwork 
requirements called for under Dodd-Frank. In fact, a number of NCFC 
members have had to greatly increase spending on compliance staff and 
technology due to additional regulations.
    Therefore, we would like to caution the Committee against 
imposition of any type of user fee on the industry to fund the CFTC. We 
fear a further increase in cost structure due to higher transaction 
costs would discourage prudent hedging practices. While the President's 
2025 budget request calls for user fees: ``CFTC fees would be designed 
in a way that supports market access, liquidity, and the efficiency of 
the nation's derivatives markets,'' it does not indicate how that would 
be achievable. We believe the opposite to be true.
    There are many users of futures contracts in the agricultural 
supply chains. In grain alone, there are producers, agricultural 
cooperatives, country elevators, processors, exporters and poultry and 
livestock feeders who use futures contracts to reduce price risk. Grain 
represented by underlying futures contracts can be traded multiple 
times. If there was a user fee associated with a trade, the likely 
result is the net selling price received by the producer would go down 
by the amount of the fee each time the underlying futures contract is 
traded.
    In addition to lower farm gate prices farmers would receive, a user 
fee would result in an increase in risk being absorbed in the 
agriculture community in general, and would likely reduce the desire 
for participants, such as agricultural producers, to hedge their price 
risk.
Basel III End Game
    Throughout the Dodd-Frank Act implementation process, NCFC 
advocated for rules that would allow for continued access to a robust 
and diverse set of hedging options, contracts and counterparties. 
Therefore, NCFC echoes the concerns of the proposals (Federal Reserve, 
Federal Deposit Insurance Corporation, The Office of the Comptroller of 
the Currency) raised by other end-users that use derivatives to hedge 
their commercial risks. While the goal of ensuring and improving 
financial system integrity is strongly supported by our members, we are 
concerned our industry would be subject to unintended consequences of 
what has been proposed.
    We appreciate CFTC's engagement with the Prudential Regulators on 
this issue and are optimistic to hear that those agencies recently 
signaled their willingness to take another look at those proposals. If 
they were to go forward in their current form, potential impacts 
include:

  (A)  increased end-users' costs of hedging;

  (B)  fewer banking organizations acting as futures commission 
            merchants (FCMs) to the agriculture industry and as swap 
            dealers in commodity OTC derivative contracts, thereby 
            reducing end-users' risk management options; and

  (C)  less liquid and more volatile markets.

    The impact of increased capital costs for derivative contracts as a 
result of proposals may create a disincentive for banking organizations 
to continue to offer designated contract market (DCM) clearing services 
through their FCMs, or act as market-makers in OTC commodity derivative 
contracts, which would result in less liquidity in commodity derivative 
markets, and fewer options for end-users.
    Unnecessarily high capital requirements that do not match the 
associated risk also will create a barrier to entry for certain market 
participants, such as farmer-owned cooperatives and private companies. 
Farmer cooperatives are businesses owned, governed, and controlled by 
farmers and ranchers. Thus, we are particularly troubled by the 
determination of ``Investment Grade'' for Unlisted Corporate Exposures 
(the ``Public Listing Requirement''). The Basel III Endgame Proposal 
would provide a preferential 65% risk weight for investment grade 
corporate exposures based on a large banking organization's internal 
assessment of creditworthiness. However, the Proposal would require 
that the preferential 65% risk weight can only be applied if the 
counterparty has shares that are publicly traded on a national 
securities exchange or foreign equivalent.
    Due to the impact of increased capital costs, we fear bank 
affiliated FCMs would be disincentivized from doing business with 
entities that are not publicly traded, while their swap dealing 
entities reduce, or altogether eliminate, offering those hedging 
services to cooperatives. Given the arbitrary nature of the public 
listing requirement and the likely unintended consequences on otherwise 
highly creditworthy entities, we have urged that this requirement be 
eliminated.
    Thank you again for the opportunity to testify today before the 
Committee. We appreciate your role in ensuring our industry will 
continue to be able to effectively hedge commercial risk in supporting 
the viability of our farmers. I look forward to answering any questions 
you may have.
    Thank you.

    Ms. Caraveo. And finally, Ms. Thornton.

         STATEMENT OF ALEXANDRA THORNTON, J.D., SENIOR 
          DIRECTOR, FINANCIAL REGULATION, CENTER FOR 
              AMERICAN PROGRESS, WASHINGTON, D.C.

    Ms. Thornton. Thank you. Chairman Johnson, Ranking Member 
Caraveo, and esteemed Members of the Subcommittee, thank you 
for the opportunity to appear before you today.
    The CFTC plays a central role in overseeing agriculture and 
other physical commodities markets which are essential to our 
economy, as well as overseeing the complex financial products 
known as swaps, which were at the heart of the 2007-2008 
financial crisis.
    The Commission oversees dozens of entities where 
derivatives are traded, ten organizations that clear those 
trades, and five more outside the U.S. It also oversees the 
registration and compliance of thousands of derivatives markets 
participants, and oversees self-regulatory organizations such 
as the Chicago Mercantile Exchange and the National Futures 
Association.
    Yet, the CFTC is critically under-funded, and would remain 
so even if Congress were to grant all the funding that it has 
requested. The agency simply does not have adequate resources 
to fulfill its existing mission and statutory obligations. 
Because of this under-funding, many important protections and 
functions that should be performed by the Commission are not 
today, such as comprehensive review of designated contract 
market rule changes and products to ensure their compliance 
with the law and the core principles, and development and 
enforcement of detailed advertising performance and fee rules.
    And since the financial crisis, the markets overseen by the 
CFTC, of course, have become larger, faster, and more 
interconnected. The Commission's responsibilities are essential 
to maintaining the integrity, resilience, and vibrancy of our 
derivatives markets, and ensure that these markets never again 
threaten the stability of our financial system or wreak havoc 
on our economy. The Commission should be reauthorized and 
adequately funded to carry out its existing responsibilities.
    This is a major reason why the agency's authorized 
activities should not be expanded into new areas, as proposed 
recently in connection with digital assets and voluntary carbon 
credits. We already know there is rampant fraud and abuse in 
the crypto industry. Protecting retail investors, consumers 
from this fraud and abuse should be the guiding principle of 
any new special digital asset regulatory regime. Yet, the CFTC 
in its self-regulatory organization currently lack 
comprehensive marketing and sales practice rules like those of 
FINRA and the SEC because the agency has never had to protect 
retail--has seldom had to protect retail investors from the 
information asymmetries they confront in financial 
transactions.
    In addition, digital assets are promoted by market 
intermediaries that are often acting in multiple conflicting 
roles. Most rules designed to reduce such conflicts of 
interest, along with rules that combat terrorism, financing, 
and money laundering, require transparency and accountability 
that the industry does not want, but are essential to investor 
protection. These are just two parts of the extensive 
regulatory framework that the Commission would have to develop 
in order to adequately protect retail investors in crypto. This 
framework would take years to develop and absorb significant 
time and energy away from the agency's existing duties, and the 
rules developed could raise regulatory risk if challenged in 
court. Thus, a new CFTC regime for crypto could actually 
introduce more uncertainty around these assets, rather than 
less. It would also be extremely inefficient and costly to 
taxpayers and market participants to create a duplicate 
investor protection regime at the CFTC when there is a robust 
investor protection regime at the SEC that has been perfected 
continuously over 9 decades. A CFTC regime could incentivize 
players in the securities markets to restructure assets and 
deals to take advantage of a weaker CFTC regime, which could 
spread the risk to retail securities investors. Finally, a new 
CFTC regime would create a new veneer of legitimacy and safety, 
further confusing retail investors who are finally beginning to 
understand the risks of crypto.
    Any perceived gaps in the current Federal financial 
regulatory framework as it applies to digital transactions 
could lead to larger gaps and greater risk to our capital 
markets.
    The CFTC also should not be authorized to take a wider role 
on voluntary carbon credit derivatives, as the agency's recent 
proposal might inspire. The underlying assets, the voluntary 
carbon credits themselves, cannot readily be traded in a manner 
that is consistent with the core principles, primarily because 
a material percentage of the underlying projects that 
purportedly give rise to the credits simply do not generate the 
carbon savings claimed by those who market them. That is, the 
amount of carbon actually being removed and for how long is not 
sufficiently known to form a reliable market, and is far beyond 
the agency's expertise to fix. Until the problems are fixed by 
other responsible public and private parties in a global--in a 
unified global system, voluntary carbon credit derivatives 
should not be listed or traded.
    Thank you again for inviting me to testify today. I look 
forward to answering your questions.
    [The prepared statement of Ms. Thornton follows:]

   Prepared Statement of Alexandra Thornton, J.D., Senior Director, 
  Financial Regulation, Center for American Progress, Washington, D.C.
    Chairman Johnson, Ranking Member Caraveo, and esteemed Members of 
the Subcommittee, thank you for the opportunity to appear before you 
today to discuss reauthorization of the Commodity Futures Trading 
Commission (CFTC).
    I am senior director of financial regulation at the Center for 
American Progress, an independent, nonpartisan policy institute 
dedicated to improving the lives of all Americans through bold, 
progressive ideas, as well as strong leadership and concerted action.
    While reauthorization presents an opportunity to assess the funding 
of an agency and ensure that those financial resources are adequate for 
the responsibilities Congress has given it, as explained below we 
strongly caution against using the CFTC reauthorization process to 
expand the agency's authorities, into areas significantly beyond its 
current expertise and capabilities.
The CFTC should be reauthorized in order to protect our economy
    The CFTC plays a central role in oversight of physical commodities 
markets which are essential for our economy, including our 
manufacturing, transportation, and agriculture. And since the enactment 
of the Dodd-Frank Act and through subsequent rule makings, it has come 
to play an essential role in overseeing the complex financial products 
known as swaps, which were at the heart of the 2007-2008 Financial 
Crisis.
    The Commission oversees 41 registered entities, including 16 
designated contract markets (DCMs), 21 registered swap execution 
facilities (SEFs) and four provisionally registered swap data 
repositories.\1\ It currently has ten registered derivatives clearing 
organizations (DCOs), two of which have been designated by the 
Financial Stability Oversight Council as systemically important.\2\ And 
it regulates five registered DCOs located beyond U.S. borders.\3\ The 
Commission's market participants division oversees the registration and 
compliance of thousands of derivatives market participants, such as 
swap dealers, major swap participants, futures commission merchants, 
retail foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators, floor brokers, and floor 
traders.\4\ In addition, it oversees futures industry self-regulatory 
organizations, such as the Chicago Mercantile Exchange and the National 
Futures Association.\5\
---------------------------------------------------------------------------
    \1\ Commodity Futures Trading Commission, President's Budget, 
Fiscal Year 2025, March 2024, available at https://www.cftc.gov/sites/
default/files/CFTC%20FY%202025%20President's%20
Budget_Final_for%20Posting.pdf.
    \2\ Ibid.
    \3\ Ibid.
    \4\ Ibid.
    \5\ Ibid.
---------------------------------------------------------------------------
    Yet, the CFTC is critically under-funded and would remain so even 
if Congress were to grant all the funding it has requested. Frankly, 
the agency does not have adequate resources to fulfill its existing 
mission and statutory obligations.
    The challenge with the CFTC is that it has been so chronically 
under-funded that many important protections and functions that should 
be performed by the Commission are not today. For example, the 
Commission does not comprehensively review all DCM rule changes and 
products to ensure their compliance with the law and the Core 
Principles. These changes may include changes to market data access and 
costs, trading operations changes, or listing of new products. The 
rules and processes adopted by the CFTC currently do not allow for 
adequate Commission or public consideration of these changes now, 
leading to DCM practices that unnecessarily burden market participants 
with costs and complexities that are inconsistent with the law and Core 
Principles.\6\
---------------------------------------------------------------------------
    \6\ See, e.g., Letter from Chris Nagy, Healthy Markets Association, 
to Hon. Heath Tarbert, CFTC, December 11, 2020, available at https://
healthymarkets.org/wp-content/uploads/2020/12/CME-Historical-Data-12-
11-2020-4.pdf.
---------------------------------------------------------------------------
    Other functions that one might expect have also never been done, 
likely because the target users of the markets it has traditionally 
overseen have been sophisticated businesses. For example, the agency 
and the SROs it oversees have never developed or enforced detailed 
advertising, performance, and fee rules. This stands in stark contrast 
to the detailed requirements imposed upon brokers and asset managers in 
the securities markets.\7\
---------------------------------------------------------------------------
    \7\ FINRA, Rule 221:. Communications with the Public, available at 
https://www.finra.org/rule-sguidance/rulebooks/finra-rules/2210. 
Notably, in those markets, registered securities exchanges are not 
soliciting orders from the public for transactions or generally making 
claims related to asset performance.
---------------------------------------------------------------------------
    Unfortunately, the inadequate budgeting and staffing at the agency 
have led to inadequate examinations, leading to several high profile, 
years-long abuses and misconduct in some of its core markets, such as 
U.S. Treasury futures and metals futures markets.\8\
---------------------------------------------------------------------------
    \8\ See, e.g., Abhishek Manikandan and Michelle Price, ``JPMorgan 
to pay $920 million for manipulating preciousmetals, Treasury market,'' 
Reuters, September 29, 2020, available at https://www.reuters.com/
article/business/jpmorgan-to-pay-920-million-for-manipulating-precious-
metals-treasury-market-idUSKBN26K321/ (reflecting Treasury and metals 
market manipulations lasting from 2008 to 2016).
---------------------------------------------------------------------------
    The 2007-2008 Financial Crisis is more than 16 years in the 
rearview mirror. As this Committee considers reauthorization of the 
CFTC, it should remember the details of how the Financial Crisis 
happened and the devastation of the financial system and the economy 
that followed. The dangerous combination of deregulation and weakening 
of regulators' authorities that preceded the crisis led to a collapse 
of major portions of our financial system and ultimately a lengthy 
recession. Between 2008 and 2009, the U.S. lost 7.6 million jobs, and 
it took until 2014 for employment to recover to pre-crisis levels.\9\ 
And from 2008 to 2013, more than 5 years later, gross domestic product 
(GDP) per capita remained below the 2007 level.\10\ Economists at the 
Federal Reserve Bank of San Francisco have estimated that the long-term 
effects of the Financial Crisis led to a lifetime income loss per 
capita in present discounted value terms of about $70,000 (in 2017 
dollars).\11\ Wealth gaps between the middle class and wealthy 
Americans worsened significantly all because the rules that placed 
guardrails on risk-taking had been gutted and the agencies responsible 
for overseeing the financial system had been weakened.
---------------------------------------------------------------------------
    \9\ Marc Jarsulic and Lilith Fellowes-Granda, ``Project 2025 Would 
Allow Financial Disaster To Bolster Wall Street's Bottom Line,'' Center 
for American Progress, July 1, 2024, available at https://
www.americanprogress.org/article/project-2025-would-allow-financial-
disaster-to-bolster-wall-streets-bottom-line/.
    \10\ Ibid.
    \11\ Regis Barnichon, Christian Matthes, and Alexander Ziegenbein, 
``The Financial Crisis at 10: Will We Ever Recover?'', Federal Reserve 
Bank of San Francisco, August 13, 2018, available at https://
www.frbsf.org/research-and-insights/publications/economic-letter/2018/
08/financial-crisis-at-10-years-will-we-ever-recover/.
---------------------------------------------------------------------------
    This Committee should also keep in mind that, since the crisis, the 
markets overseen by the CFTC have become larger, faster, more 
interconnected, and more retail in focus. In other words, the demands 
on the CFTC are already greater than they have ever been.
    My colleagues Marc Jarsulic and Lilith Fellowes-Granda at the 
Center for American Progress recently estimated the present-day costs 
of a repeat of the Great Recession.\12\ They found that a 2007-scale 
financial shock today would result in 8.7 million people losing their 
jobs by 2026, and employment would not recover to current levels until 
2031.\13\
---------------------------------------------------------------------------
    \12\ Marc Jarsulic and Lilith Fellowes-Granda, ``Project 2025 Would 
Allow Financial Disaster To Bolster Wall Street's Bottom Line,'' Center 
for American Progress, July 1, 2024, available at https://
www.americanprogress.org/article/project-2025-would-allow-financial-
disaster-to-bolster-wall-streets-bottom-line/.
    \13\ Ibid.
---------------------------------------------------------------------------
    As we all know by now, previously unregulated over-the-counter 
derivatives played a central role in the Financial Crisis. Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act \14\ 
called for a comprehensive regulatory framework for these derivatives, 
granting the CFTC regulatory authority over swaps and the Securities 
and Exchange Commission (SEC) regulatory authority over security-based 
swaps.\15\ Through transparency, business conduct standards, clearing 
requirements and much more,\16\ the framework sought to eliminate or 
reduce risky practices that led to the crisis, including price opacity, 
the sale by large firms of credit default swaps with inadequate capital 
or liquidity to back the trades, practices that undermined the ability 
to net trades thus increasing counterparty risk, and the commingling of 
client margins with dealer assets.\17\
---------------------------------------------------------------------------
    \14\ Dodd-Frank Wall Street and Consumer Protection Act, Pub. L. 
111-203, July 21, 2010, available at https://www.congress.gov/111/
plaws/publ203/PLAW-111publ203.pdf.
    \15\ Michael S. Barr, Howell E. Jackson, and Margaret E. Tahyar, 
Financial Regulation: Law and Policy, West Academic (St. Paul: 2021) at 
pp. 1265-66.
    \16\ Legal Information Institute, ``Dodd-Frank: Title VII--Wall 
Street Transparency and Accountability,'' Cornell Law School, available 
at https://www.law.cornell.edu/wex/dodd-frank_title_vii_-
_wall_street_transparency_and_accountability (last accessed July 2024).
    \17\ Barr, 2021, at p. 1263.
---------------------------------------------------------------------------
    By 2021, the CFTC had fulfilled a large part of its initial 
responsibility to drag implementing rules required by the Dodd-Frank 
Act.\18\ But its job is still not finished. It has a responsibility to 
continue overseeing swaps and other derivative markets, as well as 
major market participants. The agency must monitor the markets and 
market participants for compliance with its existing rules, and impose 
appropriate disclosure requirements, margin and capital rules, risk 
management standards, and other safeguards on the firms and products 
under its jurisdiction. These responsibilities are essential to 
maintaining the integrity, resilience, and vibrancy of our derivatives 
markets--and ensure that these markets never again threaten the 
stability of our financial system or wreak havoc on our economy.
---------------------------------------------------------------------------
    \18\ ``Final Rules, Guidance, Exemptive Orders & Other Actions,'' 
Commodity Futures Trading Commission website, available at https://
www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-FrankFinalRules/index.htm 
(last accessed July 2024).
---------------------------------------------------------------------------
    Recognizing the additional responsibilities it had imposed, 
Congress significantly increased the budget of the CFTC after passage 
of the Dodd-Frank Act and enacted several increases beyond the rate of 
inflation over the years since then. The percentage change in the last 
5 years--from 2019 to 2024--was 36 percent or 11 percent, when adjusted 
for inflation.\19\ Still, as mentioned above, these amounts are 
insufficient for the Commission to carry out its existing 
responsibilities.
---------------------------------------------------------------------------
    \19\ Author's calculations based on actual budget figures in annual 
White House budget proposals since FY 2009, adjusted for inflation 
using the Employment Cost Index.
---------------------------------------------------------------------------
    For this reason and for other reasons explained below, we strongly 
encourage Congress to avoid expanding the authority of the CFTC at this 
time, especially for purposes of authorizing new areas of 
responsibility that are beyond its current expertise and jurisdiction, 
such as new authorities relating to digital assets or voluntary carbon 
credits (VCCs). Expansion of the agency's jurisdiction in such areas 
may lead to regulatory inefficiencies, the creation of negative market 
signals and incentives, and general market confusion. More important, 
it would divert the Commission's resources away from its existing 
responsibilities, which are so essential to our economy.
    My remaining remarks focus on the importance of avoiding 
inefficiencies, disincentives, and market confusion associated with 
such expanded authorities.

    CFTC authorization should not be expanded for purposes of setting 
up a special regime for crypto assets or regulating voluntary carbon 
credits.

    Proposals to expand the jurisdiction of the CFTC are often 
justified on grounds of promoting innovation and the claim that rules 
to protect investors stifle innovation. But this is not a binary 
choice: innovation or investor protection. It is possible to have both. 
The greater risk is not of stifling innovation. The greater risk is 
unleashing something that puts investors or worse the financial system 
and the economy at risk. That is what happened prior to the Financial 
Crisis. In the Commodity Futures Modernization Act of 2000, Congress 
exempted most over-the-counter (OTC) swaps from CFTC and SEC 
jurisdiction, allowing the exemption as long as the participants were 
sophisticated, as defined broadly in the legislation.\20\ By 2008, the 
gross amount of OTC derivatives outstanding had increased by 630 
percent, and credit default swaps had increased 100-fold.\21\ Financial 
lobbying played a major role in this state of affairs, which severely 
undermined regulators' ability to see what was going on and stem the 
fallout.\22\
---------------------------------------------------------------------------
    \20\ Barr, 2021, at p. 1259.
    \21\ Ibid.
    \22\ Ibid.
---------------------------------------------------------------------------
    This lesson from recent history must guide current debates in which 
financial market participants seek weaker regulation.
    Agricultural markets are so important, and they depend upon the 
CFTC to ensure that derivatives markets function well and are free of 
fraud and manipulation. It is important for this Committee to 
understand that expanded authorities of the types the agency has sought 
would distract it from its foundational responsibilities.
Digital asset regulation
    Whatever promise the digital asset industry may hold, we already 
know for certain that it contains rampant fraud and abuse. Digital 
assets are promoted by conflicted market intermediaries that are often 
acting as introducing broker, executing broker, transfer agent, 
custodian, and more.
    If Congress is to develop a new, specialized regime for the 
regulation of digital assets, ensuring some integrity of the claims 
made to customers should be a top priority. But, while the CFTC does 
not generally have such a regime, the Financial Industry Regulatory 
Authority (FINRA), the self-regulatory organization that oversees 
registered securities broker-dealer firms, and the SEC do.
    Because there are many registered broker dealers that engage with 
digital assets, FINRA has already begun to examine issues related to 
their crypto marketing claims. In particular, in November 2022, as part 
of a targeted exam, FINRA reviewed over 500 crypto asset-related retail 
communications by its registered broker-dealer members.\23\ It found 
that over 70 percent of those communications contained potential 
substantive violations of FINRA's rule on communications with the 
public.\24\ These included, for example, false statements or 
implications that crypto assets functioned like cash or cash equivalent 
instruments; comparisons of crypto assets to other assets, like stock 
investments, without providing a sound basis to compare the varying 
features and risks of these investments; failure to provide a sound 
basis to evaluate crypto assets by omitting clear explanations of how 
crypto assets are issued, held, transferred, or sold; and 
misrepresenting that the protections of the Federal securities laws or 
FINRA rules applied to crypto assets.
---------------------------------------------------------------------------
    \23\ FINRA, ``FINRA Provides Update on Targeted Exam: Crypto Asset 
Communications,'' January 2024, available at https://www.finra.org/
rules-guidance/guidance/targeted-examination-letters/sweep-update-
jan2024.
    \24\ FINRA, Rule 221: Communications with the Public, available at 
https://www.finra.org/rules-guidance/rulebooks/finra-rules/2210.
---------------------------------------------------------------------------
    These findings related only to the handful of crypto firms that are 
also already registered broker-dealers in the securities markets, who 
would seem to be the most likely to comply with regulatory 
requirements. It does not include the ``native'' crypto firms that have 
declined to make such registrations.
    Again, the CFTC and its self-regulatory organization lack 
comprehensive marketing and sales practices rules like those of FINRA 
and the SEC. This is just one part of the extensive regulatory 
framework that the agency would have to develop in order to adequately 
protect retail investors in crypto. Yet, developing such rules would 
take years and absorb significant time and energy of the agency, and 
the rules that would be developed could raise regulatory risk if 
challenged in court. All of this raises the distinct possibility that 
such a new CFTC regime for crypto would actually introduce more 
uncertainty around these assets, rather than creating clarity.
    In the 116th Congress, the last time CFTC reauthorization 
legislation was considered, the drag bill at that time, H.R. 6197, 
included provisions that would have provided for the regulation of 
digital commodities, though the full implications of that language are 
not clear. The industry has worked with like-minded legislators since 
then to crag a more detailed regulatory regime under the jurisdiction 
of the CFTC for digital commodities. These proposals have serious 
potential ramifications for retail investors, consumers, and the 
stability of the financial system. Any perceived gaps in the current 
Federal financial regulatory framework as it applies to digital 
transactions would pale in comparison to the potential negative impacts 
of these proposals.
    The crypto industry has long argued for a special regulatory regime 
under the CFTC. But the CFTC by design has never focused on retail 
investors. The commodity laws do not even contemplate the idea of an 
issuer who is selling to a retail investor; thus, the agency has never 
had to protect people from the information asymmetry that arises in 
such situations. The CFTC was created in 1974 to regulate derivatives, 
which are complex financial contracts that are based on the value of an 
underlying asset. They are used to hedge against the risk of changing 
prices in a wide range of industries, but very seldom by retail 
investors and consumers. Increasingly, derivatives are used for 
speculation. They are just too complicated, potentially volatile, and 
risky for retail investors.
    By contrast, the SEC--also by design--has focused on protecting 
retail investors since it was created 90 years ago. It has decades of 
experience with protecting investors and the public, and it has 
developed a robust framework of rules for doing so--rules that can and 
do apply to the vast majority of digital asset transactions. It would 
be extremely inefficient--and costly to taxpayers and market 
participants--to create a duplicate investor protection regime for 
digital assets at the CFTC.
    It is also highly likely that authorizing a special regulatory 
regime for crypto under the CFTC would create negative market signals 
and incentives, as players in other markets sought to restructure 
assets and deals to take advantage of the vacuum of rules and capacity 
to protect retail crypto investors. The industry has defied the SEC 
rules that already apply to them,\25\ and, if the CFTC's jurisdiction 
over digital assets were expanded, there is no reason to believe that 
the crypto industry would not resist rules designed to accomplish 
similar investor and consumer protection goals at the CFTC.
---------------------------------------------------------------------------
    \25\ Chair Gary Gensler, ``Statement on the Financial Innovation 
and Technology for the 21st Century Act,'' U.S. Securities and Exchange 
Commission, May 22, 2024, available at https://www.sec.gov/newsroom/
speeches-statements/gensler-21st-century-act-05222024 (last accessed 
July 2024).
---------------------------------------------------------------------------
    If the CFTC's jurisdiction is expanded to allow it to develop a 
special regulatory regime for crypto, this would likely provide a 
veneer of credibility and safety around crypto. This could result in 
even more harm to retail crypto investors, who may think they are fully 
protected.
    Finally, as alluded to above, the implementation of a comprehensive 
regulatory regime for digital assets within the CFTC's jurisdiction 
would be unprecedented in the agency's history, and both the burdens on 
the agency and the risks to the capital markets could be exceedingly 
large.
Regulation of voluntary carbon credit derivatives
    Voluntary carbon credit (VCC) derivatives pose a different problem. 
As the responses to the CFTC's proposed guidance for voluntary carbon 
credit derivatives make clear,\26\ the underlying assets--the voluntary 
carbon credits themselves--cannot readily be traded in a manner that is 
consistent with the Core Principles.\27\
---------------------------------------------------------------------------
    \26\ Letter to The Honorable Rostin Behnam, Center for American 
Progress Comments on Commission Guidance Regarding the Listing of 
Voluntary Carbon Credit Derivative Contracts, February 16, 2024, 
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?
id=73324&SearchText=progress.
    \27\ Designated Contract Markets (DCMs), Commodity Futures Trading 
Commission website, available at https://www.cftc.gov/
IndustryOversight/TradingOrganizations/DCMs/index.htm (last accessed 
July 2024).
---------------------------------------------------------------------------
    It is well established that a material percentage of the underlying 
projects that purportedly give rise to the credits simply do not 
generate the carbon savings claimed by those who market them.\28\ They 
are not certain and verifiable and thus not fungible enough to ensure 
that trading in them will be consistent with the Core Principles. It 
would be similar to an aluminum futures contract being traded despite 
the warrant for the aluminum being tied to only half of the promised 
amount, or no aluminum at all, perhaps a small hunk of granite.
---------------------------------------------------------------------------
    \28\ See, e.g., Natasha White, ``Carbon Offset Gatekeepers Are 
Failing to Stop Junk Credits,'' Bloomberg, March 21, 2023, available at 
https://news.bloomberglaw.com/esg/carbon-offset-gatekeepers-are-
failing-to-stop-junk-credits; Patrick Greenfield, ``Revealed: more than 
90% of rainforest carbon offsets by biggest certifier are worthless, 
analysis shows,'' The Guardian, January 18, 2023, available at https://
www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-
offsets-biggest-provider-worthless-verra-aoe; and Debra Kahn, 
``Offsets' promise and peril,'' Politico, January 1, 2023, available at 
https://www.politico.com/newsletters/the-long-game/2023/01/20/offsets-
promise-and-peril-00078763.
---------------------------------------------------------------------------
    Already, the commodity futures markets are occasionally rocked by 
scandals where it is later revealed that the physical metal underlying 
futures contracts has disappeared or of improper form or volume. But 
these cases should be relatively easy to identify and quickly end, 
given that the actual metal is supposed to be stored at a warehouse 
that could be quickly and easily inspected. There is no credible way 
for this verification function to exist either on an initial or ongoing 
basis for the vast majority of projects claiming some reduction of 
carbon in the air.
    Worse, unlike in the physical commodities markets, where the 
ultimate purchaser of a contract may take physical delivery and use the 
metal, for example, that simply does not happen in the VCC markets. The 
end-user in the metals markets very much wants the metal to be of the 
specified quality and quantity, so as to be potentially useful. 
However, there is no such market protection built into VCCs, as the 
carbon saved is not directly used. To the contrary, many users of VCCs 
may have incentives to accept exaggerated claims of carbon saved.
    The problem cannot be solved by delegating a standard setter, which 
the CFTC cannot do, or by allowing the accrediting of VCC derivatives 
contracts by the exchanges, which are equally lacking in the scientific 
knowledge and capacity to ensure that the underlying assets are certain 
and verifiable. Under these circumstances, allowing the designated 
contract markets to approve the listing of voluntary carbon credit 
derivatives would only result in market confusion and fraud.
    VCCs are likely to continue inviting waste and fraud. Unlike carbon 
credits traded under government cap and trade regimes, by definition 
VCCs do not involve governments, do not have corresponding government 
emissions caps, and can be created anywhere in the world, making them 
nearly impossible to verify and monitor. One recent study found that 
the vast majority of voluntary carbon credits are not valid.\29\ Before 
carbon credits can form the basis for derivative contracts, there must 
be an independent, reliable, fact-based entity that verifies carbon 
emission reductions on a global basis. To date, that does not exist, 
despite efforts under the auspices of the United Nations.\30\
---------------------------------------------------------------------------
    \29\ Patrick Greenfield, ``Revealed: more than 90% of rainforest 
carbon offsets by biggest certifier are worthless, analysis shows,'' 
The Guardian, January 18, 2023, available at https://
www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-
offsets-biggest-provider-worthless-verra-aoe.
    \30\ Eklavya Gupte and Agamoni Ghosh, ``COP28: Lack of progress on 
Article 6 likely to further limit carbon market growth,'' S&P Global, 
December 13, 2023, available at https://www.spglobal.com/
commodityinsights/en/market-insights/latest-news/oil/121323-cop28-lack-
of-progress-on-article-6-likely-to-further-limit-carbon-market-growth.
---------------------------------------------------------------------------
    VCC derivatives should not be listed or traded under the auspices 
of CFTC authority until there is a clear, consistent, and reliable 
methodology for creating voluntary carbon credits and establishing 
their permanence, as well as how to verify, register, and retire 
credits in a unified global system. Without these prerequisites, the 
most essential terms of a derivative contract based on those carbon 
credits, the amount of carbon actually being removed and for how long, 
will not be sufficiently known to form a reliable market that is 
consistent with the Core Principles.
    At the same time, the CFTC should aggressively pursue cases of 
obvious fraud and manipulation in VCC markets that have impacts on its 
derivatives markets, including for contracts that have already been 
identified as being tied to credits that were awarded for fraudulent or 
erroneous reasons. This should be a significant priority for the 
understaffed and under-funded examinations and enforcement staff. 
Again, the agency appears to not have the resources to protect its 
existing jurisdictions, even though it already has sufficient existing 
authorities.
    To conclude, we strongly support a clean reauthorization of the 
CFTC, without new authorities, so that the agency can focus on its 
existing responsibilities to ensure the integrity, resilience, and 
vibrancy of U.S. derivatives markets.
    Thank you again for inviting me to testify today. I look forward to 
answering your questions.

    The Chairman [presiding.] We will now recognize Members for 
questions. We will begin with my favorite portrait from the 
south wall, Mr. Frank Lucas.
    Mr. Lucas. Thank you, Mr. Chairman, and thank you, Ranking 
Member, for holding this hearing, and the witnesses for 
agreeing to testify.
    The CFTC regulates markets that impact nearly every part of 
the economy, and reauthorizing the Commission will give us an 
opportunity to provide meaningful oversight, and give certainty 
to market participants. The derivatives market faces a number 
of potential stresses: the Basel Endgame, the GSIB surcharge, 
the treasury market structure reform, along with substantial 
SEC rulemaking agenda that will decrease market liquidity and 
increase costs.
    In the context of CFTC reauthorization, it is worth 
considering the full regulatory environment that the markets 
are confronted with. So, there is a lot to discuss.
    Starting with the Basel proposal, an issue I have discussed 
with Chairman Behnam, Secretary Yellen, Chairman Powell, and 
all of the Prudential Regulators, is the impact this will have 
on our capital markets, including reduced access to derivatives 
products for end-users, and further concentrations of FCMs. It 
seems like the regulators would be open to a re-proposal, but 
FDIC and OCC will have to join with the Fed on that decision.
    Mr. Lukken, you are no stranger to the Agriculture 
Committee room, so thank you for joining us today and touching 
on Basel during your testimony. Could you expand on why it is 
so important that the regulators reopen the proposal for public 
comment?
    Mr. Lukken. Well, Congressman Lucas, you have been a leader 
on this topic on capital, and this Committee has been a leader. 
To point out the obvious fact from the financial crisis, which 
is that our markets in clearing and essential counterparties 
actually mitigate risks. They reduce risk in the financial 
system, and so, the capital is an important component of the 
financial reforms coming out of the financial crisis, that 
banks should hold more capital for risky activity. But they 
just have it wrong. I think the Prudential Regulators are 
overtaxing clearing activity to make it so there is going to be 
a capacity issue, that banks are going to stop offering this 
service to hedgers.
    We heard Travis talk about this, that end-users may have 
limited access to hedging vehicles, to hedge volatility and 
commodity markets as a result of Basel capital. So, our hope is 
that the Prudential Regulators are listening to the reasonable 
voices of the CFTC, Chair Behnam, and others that have said you 
have to get this right. It has to be proportional to the risks 
brought by our markets, and we are hopeful that it gets fixed 
in the coming months.
    Mr. Lucas. Mr. Sexton, you are a member of the CFTC's 
Global Markets Advisory Committee. One suggestion, among many, 
that GMAC had for the Commission last month was to hold a 
roundtable with the bank regulators focused on derivatives 
issues impacted by Basel.
    Could you explain broadly to the importance of stakeholder 
feedback on matters that will have a significant impact on the 
market?
    Mr. Sexton. Thank you for the question, Congressman Lucas. 
I certainly endorse the concept of GMAC and its recommendation 
to hold this roundtable to further determine the impacts of 
these capital rules.
    As Mr. Lukken and Travis have indicated, this is extremely 
important to the farmers, ranchers, and end-users and hedgers 
because of the consolidation that may occur among firms if 
these capital rules are put into place.
    So, stakeholder impact and comments are extremely 
important, and something that we should be looking to do.
    Mr. Lucas. The CFTC's enforcement authority has been a 
closely watched issue during the past several years. 
Reauthorizing the CFTC gives us the opportunity to closely 
examine what the Commission is doing, and identifying 
improvements that can be made.
    Mr. Lukken, back to you. Do you think the Commission's 
current cross-border authority is effective from a regulatory 
and enforcement perspective?
    Mr. Lukken. I can only speak from my experience at the 
CFTC, but we were able to work closely with our regulatory 
authorities overseas to partner with them to make sure they had 
the appropriate information. But the important thing is, does 
the CFTC have direct authority when there is a strong nexus to 
the United States? And I believe they do, that they have the 
ability to go after bad behavior overseas when it is a strong 
nexus to the United States.
    So, I think the CFTC does have appropriate authority.
    Mr. Lucas. Mr. Chairman, before I yield back, I would 
simply note that I have spent much time screaming about the 
potential impacts of the Basel capital requirements on the 
American economy. This is one of those things that if we don't 
get it right, the damage that would be inflicted will be 
extremely difficult to address later.
    With that, I yield back, Mr. Chairman.
    The Chairman. One hundred percent right.
    With that, we yield 5 minutes to the Ranking Member.
    Ms. Caraveo. Thank you, Mr. Chairman, and thank you all 
once again for being here this morning as we consider this 
important reauthorization of the CFTC. Your testimony is 
invaluable.
    Now, the last attempt by the Committee to reauthorize the 
CFTC included provisions to harmonize some of the enforcement 
authorities between the CFTC and the SEC. One provision would 
clarify the CFTC's authority to prosecute fraud and 
manipulation outside of the United States, where such 
activities impair our futures markets, and another would 
establish a reckless standard for those who aid and abet 
fraudsters and manipulators of our markets, the same standard 
that currently applies to those who actually perpetrate the 
fraud or manipulation.
    For the whole panel, what are your thoughts on whether we 
need to harmonize such enforcement activities, and whether 
these are appropriate?
    Thank you. Anyone who wants to answer, go ahead.
    Mr. Sexton. [audio malfunction].
    Mr. Lukken. I would just chime in; I agree with Tom that it 
is important for the CFTC to have clear authority to go after 
bad behavior overseas. I can't speak to the specifics of 
whether harmonizing with the SEC's enforcement authorities is 
the right approach. As I had mentioned, when I was chair we had 
plenty of authority to go after actors. We did not feel impeded 
in any way of going--
    The Chairman. Mr. Lukken, is your microphone on?
    Mr. Lukken. Pardon me. Sorry.
    We did not have any impediments during my tenure for going 
after bad behavior overseas, or if we were able to share with 
foreign authorities. So, we certainly support the premise, 
though, that it is important for the CFTC to have a robust 
authority to go after manipulative behavior overseas.
    Mr. Antonsen. I would agree with both gentlemen.
    Ms. Caraveo. Perfect, thank you.
    Ms. Thornton?
    Ms. Thornton. We don't really have a strong opinion on 
that, but I am really interested to learn more about it.
    Ms. Caraveo. Perfect, thank you.
    Now, Mr. Lukken, your testimony raises concerns about 
conflicts of interest within vertically integrated structures, 
particularly futures commission merchants owned by exchanges 
and clearinghouses, and embedded in their trading and legal 
structures. Can you speak more to these concerns and the impact 
of such structures on our financial systems, and then Mr. 
Antonsen, if you could follow up as to whether your members 
have any concerns?
    Mr. Lukken. We are seeing this more and more where through 
efficiencies of a lot of these crypto platforms that they are 
combining both being an exchange, a clearinghouse, and an FCM 
into one legal entity.
    The problem is that exchanges and clearinghouses have self-
regulatory authorities over FCMs. So, in essence, you would be 
policing yourself and those authorities. We saw some of this, 
and we raised concerns with the FTX application where they had 
registered--not registered, but a trading arm within their 
legal structure that were combining the exchange, the 
clearinghouse, and a trading arm within their legal structure. 
And that ultimately led to some of the issues we saw with their 
demise.
    So, we think it is good for the CFTC to take a close look 
at this to see if there are conflicts of interest that need to 
be addressed, if there are governance challenges we need to 
implement as part of this, are we needing to separate certain 
functions because of that dual role of self-regulatory agency 
over these authorities.
    Mr. Antonsen. Could you repeat your question for me, just 
so I am clear?
    Ms. Caraveo. Just whether your members have any similar 
concerns around what Mr. Lukken just discussed.
    Mr. Antonsen. No, I think having guardrails and double-
checks in that, I think we would agree with that. We use 
multiple FCMs. At times there are options to have FCMs that are 
not exchanges. So, I would agree with Walt on them.
    Ms. Caraveo [presiding.] Thank you all again for your 
testimony, and I will yield back the remainder of my time.
    I am pleased to turn it next to our esteemed Chairman 
Thompson for his questions.
    Mr. Thompson. I thank the gentlelady, and once again to all 
our participant panelists, thank you so much.
    Mr. Lukken, in your testimony you mentioned serving as 
acting Chairman of the CFTC during the last CFTC 
reauthorization in 2008. You also discussed the increasingly 
global nature of derivatives markets. Could you please 
elaborate on how the derivatives markets have evolved since 
that time, and addressing the importance of reauthorizing the 
CFTC as these markets evolve?
    Mr. Lukken. Well, certainly since that time it has gotten 
much more global, since I was at the agency. I think the 
addition of over-the-counter derivatives has added challenges 
to the CFTC's legal authority. I shouldn't say challenges, but 
given them--
    Ms. Caraveo. Sorry. Mr. Lukken, I don't think your 
microphone is on. Oh, it is.
    Mr. Lukken. I am having some microphone problems today, 
sorry.
    But no, I think the markets are definitely more global. 
They are larger. As I mentioned--but we are seeing that the 
framework has upheld very well, really, since the Commodity 
Futures Modernization Act of 2000 (Pub. L. 106-554, Appendix 
E--H.R. 5660), which but in those flexible approaches. The CFTC 
is allowed to evolve itself with these market trends, so even 
though we are seeing more global volume, the CFTC has been able 
to keep pace with those changes. And that is why I think many 
of us, if not all of us on this dais, are saying that there 
doesn't need to be a huge overhaul of the Act, that it has 
actually kept pace with the big global growth.
    Mr. Thompson. Yes, those core principles really have sort 
of made it resilient, and adaptable to--as things have evolved.
    Mr. Sexton, could you please share with us your 
perspectives on this question?
    Mr. Sexton. Thank you, Chairman Thompson. Certainly, I 
admire you for being involved.
    This is a turning point in the process. It is great that 
this Committee is seeking stakeholder interest in this process, 
a process that is not easy--by Congress to handle this 
reauthorization process. The Act has stood up well. I do have 
one recommendation with regard to Griffin, and I agree that--
with Chair Behnam and the others testimony today that 
reauthorization signals the importance of our regulatory 
structure here to the global derivatives markets, and it gives 
that acknowledgment of the CFTC's critical role in that market.
    So, I think it is very important to reauthorize the CFTC.
    Mr. Thompson. Well, thank you. I think reauthorization also 
reflects our responsibility to do our job, and to make sure 
that we can--we should have done it before.
    Mr. Sexton. Yes.
    Mr. Thompson. So, I look forward to accomplishing it here, 
even with just the remaining days we have in the 118th.
    Mr. Antonsen, in your testimony you mentioned your concerns 
regarding the negative potential impacts of Basel III Endgame 
rules may have on the derivatives markets and the end-users 
that rely on them. Could you please share with us some of those 
negative potential impacts?
    Mr. Antonsen. Yes, I think when the information first came 
out, speculation was that we were going to lose many FCMs due 
to the regulations. From our standpoint, we have seen FCMs get 
out of the business in the last 5 years. Many of them have. We 
have seen consolidation in the industry, and that--as a user of 
that, again, I mentioned we use multiple FCMs. To limit our 
resources and limit our options on who we can use, if one of 
those goes away, it--we look at potentially higher hedging 
costs, less people to do business with.
    Mr. Thompson. Very good. Thank you.
    Mr. Lukken, are your members concerned about the impacts of 
these proposals on end-users and other market participants?
    Mr. Lukken. This is one of our top concerns as an industry. 
I think rarely does our industry all get on the same page on a 
topic, but from end-users to FCMs to exchanges to 
clearinghouses, this is going to limit the capacity of people 
to hedge in our markets. And so, as Travis mentioned, we have 
seen shrinking number of FCMs, those people that access 
production agriculture, allow them access to our markets. And 
if we lose more of those folks, it is going to make the 
framework of our system less safe.
    And so, we think this is incredibly important to get this 
right. Give capacity to FCMs to get more access to more 
farmers, more commercial end-users in this marketplace. This is 
a no-brainer. Hopefully, the Prudential Regulators figure this 
out and fix these proposals.
    Mr. Thompson. Am I correct in saying--I mean, the root 
cause of this would be increasing costs, but it would result in 
more systemic impacts as you described on a derivatives market?
    Mr. Lukken. Yes. You are going to see less FCMs, and as a 
result, you are going to see more concentration in firms.
    So, we want as broad--it is like insurance. You want as 
broad of a system of FCMs out there so that there are healthy 
FCMs across the board, and so that Travis has lots of choices 
of where he can bring his business.
    Mr. Thompson. Very good. Thank you very much.
    Ms. Caraveo. Thank you, and we will go next to my colleague 
from California, Mr. Costa, for 5 minutes.
    Mr. Costa. Thank you very much. I think it is appropriate 
that we get together this morning and discuss the future of the 
CFTC.
    I wanted to, folks, to begin with the question that has 
been raised. I guess, Mr. Lukken, you might be the first to 
respond or Mr. Sexton, about the under-funding. There was a 
discussion earlier in the reauthorization effort that would 
allow you to charge fees to register companies to raise 
resources for the new level of oversight. The Appropriations 
Committee, I understand, as was noted in the opening comment by 
my colleague, cut it by $20 million from the current budget.
    When we consider the reauthorization of the Commission and 
discuss expansion of the authorities, what do you think we need 
to do to ensure that the CFTC is an appropriately funded 
regulator?
    Mr. Lukken. Well, FIA supports the full and appropriate 
funding of the CFTC. When I was acting Chairman of the CFTC, it 
was important for us to talk to the appropriators about why our 
markets matter. And so, I think for us we do have concerns with 
user fees in that it would cause less hedging. As I mentioned 
about capital, it is the same issue that if you are directly 
taxing hedging capabilities, that is problematic for farmers.
    Mr. Costa. So, the user fees then versus the reduction of 
the $20 million is the tradeoff, and do you think it is--
    Mr. Lukken. No, I think appropriators should find ways to 
appropriately fund the CFTC and to--as they have lots of 
tradeoffs they have to think about, because it is taxpayer 
dollars. But we think a case should be made and is made that 
the CFTC should be appropriately funded.
    Mr. Costa. Yes.
    Mr. Sexton, do you think the agency's lack of 
reauthorization since--and this is our fault, as the Chairman 
noted. Our responsibility, I guess I would say, since 2008, 
could impact your current funding challenges?
    Mr. Sexton. [inaudible] could impact NFA's funding 
challenges? Is that the question?
    Mr. Costa. Yes.
    Mr. Sexton. So, we are funded in two significant ways. I 
know there are two major regulatory programs. Our overall 
budget is about $140 million to assist the CFTC--regulate the 
markets.
    Our swaps regulatory program or swaps dealers is wholly 
funded by the swap dealer industry, by those dealers, and that 
is about $47 million or so through membership dues paid to NFA.
    Mr. Costa. Self-funded?
    Mr. Sexton. Self-funded, yes.
    Mr. Costa. Yes.
    Mr. Sexton. The other component are futures is funded in 
part by membership dues, but the large portion of that funding 
program at about $82 million is from what we call an assessment 
fee. We place a very small fee of what we call public trading 
volume. It is about 25 percent--
    The Chairman [presiding.] Mr. Sexton, your microphone isn't 
working, we are being told. It is not broadcasting. So, if you 
could share--or grab a microphone with--
    Mr. Sexton. Sure. I don't know if I want yours, though. I 
don't know. Let me see what I can do here.
    So, futures assessment fee--I am sorry--is a very small 
proportion, 25 percent, about a quarter of contract market 
value, that is public value, and that is at 4 around turn. So, 
it is a very small amount with regard to that fee.
    Mr. Costa. So, if the Financial Innovation Technology for 
the 21st Century, the FIT 21 were to become law, how much 
additional resources would the NFA need to effectively tackle 
these additional responsibilities in a new market?
    Mr. Sexton. That is a great question. We would--that is 
going to be dependent on how many new member firms we have and 
what our oversight regulatory responsibilities are.
    Each of our regulatory programs needs to self-fund, 
however, and so, we will find a way with regard to our new 
members to get a revenue source in order to pay for what we 
need.
    Mr. Costa. Ms. Thornton, you talked about crypto fraud in 
your comments. How extensive do you describe it today, and what 
do you think we need to do about it?
    Ms. Thornton. I think it is quite substantial, and I think 
it is something that really needs to be focused on is the use 
of arbitrage, because these spot markets in tokens, non-crypto 
asset--sorry, tokens are actually--they have different streams, 
different data streams. And what that means is that when you 
buy a token, if you are a consumer and a retail investor and 
you buy a token, you get offered a price but you may not know 
what prices are being offered on the other platforms.
    Mr. Costa. So, how do we protect against that fraud?
    Ms. Thornton. I am sorry?
    Mr. Costa. How do we protect against that fraud?
    Ms. Thornton. Well, basically, the SEC does that by 
requiring a national market system. It actually was started in 
1975. Congress authorized it in 1975. The idea that the 
different securities platforms would have to submit data so 
that a broker would know what the prices are that are being 
offered for that same security across the different exchanges, 
and would be able--and then also was given fiduciary duty of 
best interest--best execution, excuse me, so that they would 
have to execute the trade, picking the best price for the 
customer. But that doesn't exist at all with respect to crypto 
platforms.
    Mr. Costa. Well, Mr. Chairman and the Ranking Member, my 
time has expired but I think this is something that we need to 
look at in greater depth. When Mr. Lukken made his comment 
about prudence and overcapitalization, I am very curious about 
how he measures prudence or is that in the eye of the beholder? 
And then how do you measure the risk? \1\
---------------------------------------------------------------------------
    \1\ Editor's note: the information referred to is located on p. 43.
---------------------------------------------------------------------------
    But thank you very much. I appreciate the opportunity.
    Ms. Caraveo [presiding.] Thank you. The gentleman's time 
has expired.
    We will go next to Mr. Miller of Ohio for 5 minutes.
    Mr. Miller of Ohio. Thank you. I want to thank the Chairman 
and the Ranking Member and the witnesses for being here this 
morning.
    American agriculture utilizes a range of tools to manage 
risks. They employ vital on-farm strategies and Federal farm 
bill programs, including risk management commodity support 
programs, crop and livestock insurance, and disaster assistance 
prove critical in today's volatile marketplace. Our farm sector 
and other industries can also access vital measures such as 
futures, options, and marketing contracts to manage risk from 
product and input price fluctuations.
    In the modern world with input and production costs soaring 
and tight commodity prices, it is crucial to control the 
variables we are able to through commodity derivative markets. 
In the last years, conditions globally and other instabilities 
have led to exceptionally large price volatility and many 
commodity markets underscoring the role of the Commodity 
Futures Trading Commission.
    To any of the witnesses, commodities derivatives markets 
are essential to help manage price risk and hedge exposures as 
these vital tools assist agriculture producers in hedging 
exposure to rising input costs, severe weather incidents, and 
volatile prices in fuel, fertilizer, and other essentials. 
Could the witnesses elaborate on the importance of derivatives 
products to your operations, and to those of your end-users? 
And just really quick also, if a bad actor in the derivatives 
industry is causing significant harm or allowing for illegal 
and unregulated activity to take place, does the CFTC have the 
ability and resources to swiftly address and prevent harm from 
occurring through effective enforcement?
    Mr. Antonsen. I can address your first part of that 
question.
    Derivatives, futures, options, over-the-counter contracts 
are paramount in what we do every day at Agtegra for both 
ourselves and for our cooperative members. So, purchasing 
grain, hedging grain, storing grain, getting all the way 
through the system, it is probably the most important thing we 
do from a cooperative in managing risk.
    You mentioned volatility. Whether it is weather, global 
markets, global geopolitical events, volatility is through the 
roof and as farm margins are tightening down, it is more 
important than ever to have the right tools in place and 
available, and also to use them with everything that a producer 
has to use, like crop insurance. You multi-layer those risk 
programs in there to make that happen. So, we utilize those 
every single day, and we rely on a healthy marketplace to get 
in and out of those efficiently.
    Mr. Miller of Ohio. Thank you for that answer.
    Can anyone address the second part of that question? I can 
just say it again.
    The bad actor in the derivative industry is causing 
significant harm. Does the CFTC have the ability and resources 
to swiftly address it, prevent harm from occurring through 
effective enforcement?
    Mr. Sexton. Congressman, certainly we are all, as 
regulators, worried about bad actors and the impact it can 
have. I can tell you that NFA works very closely with the 
CFTC's Division of Enforcement to ensure that we find those bad 
actors, punish those bad actors, to the extent that we closely 
coordinate with them. We have quarterly meetings with that 
division.
    So, as far as the partnership with NFA and the CFTC, we are 
very focused on bad actors, and I can't say enough about the 
Division of Enforcement and its dedication to doing so.
    Mr. Miller of Ohio. Thank you. I really appreciate that.
    Second question. Given the importance of the United States 
agricultural production and the magnitude of U.S. exports of 
agricultural products to global consumers, America's farmers 
and global end-users are not strangers to market volatility. 
Can any of you please elaborate on means to withstand these 
global uncertainties in the commodities market, and tools for 
agricultural producers, energy users, and others to deal with 
such instability?
    Mr. Antonsen. I would say, from the worldwide standpoint, 
volatility is--can you repeat the question? I am sorry.
    Mr. Miller of Ohio. Yes, absolutely.
    So, just to get right to it. Could you elaborate on what it 
means to withstand global uncertainties in the commodity 
markets and the tools for agricultural producers, energy users, 
and others to deal with the instability that we are currently 
seeing?
    Mr. Antonsen. Yes, I am sorry.
    We see the days when a producer wants to sell is not the 
same time that an end-user wants to buy. There are huge, huge 
gaps in volatility and derivatives get us across that line. The 
volatility we have seen with weather, our export markets come 
and go. Being in South Dakota, we export most of our 
production. We are relying on getting it at least out of the 
state, and most of that goes to the world market. We get to 
that point and that is our biggest challenge.
    Mr. Miller of Ohio. Yes. I think if we can continue--I am 
out of time, Mr. Chairman, but we can continue to hold people 
accountable for agreeing to, say, the USMCA but taking 
advantage of us with GMO corn, and actually bring them to a 
dispute panel probably would help out as well for a little bit.
    Thank you for your time. I yield back.
    Ms. Caraveo. The gentleman yields back.
    We will go next to the gentleman from Kansas, Mr. Mann, for 
5 minutes.
    Mr. Mann. Thank you, and thank you very much for having 
this hearing. Thanks for the panel for being here this morning.
    This is a very important topic. We have to make sure that 
we get it right and it impacts not just folks all over the 
country but certainly my ag producers throughout Kansas as well 
that rely on markets to make sure that they are managing the 
risks that are just ever present and continue to increase in 
agriculture.
    First question for you, Mr. Lukken. I want to circle back 
to enforcement for a moment, and drill in on CFTC's existing 
authorities. Do you see any current gaps in the Commission's 
authorities to address overseas fraud that affects markets here 
in the U.S.?
    Mr. Lukken. Yes. I am not aware of any current impediments 
for the CFTC going after bad behavior overseas. They have, 
again, a nexus on American participants or citizens. I know 
when I was acting Chairman of the agency, there were times when 
we needed to use prosecutorial discretion on whether we went 
after activity overseas. But if there was a strong nexus to 
American consumers, of course we would take strong interest and 
the CFTC would go after that. We brought several cases in the 
international front on that case--on that basis. But, we 
oftentimes would work in partnership. It is one of those 
things--and we were talking about appropriate funds. The CFTC 
should not be the police force of the world for all activity. 
It really has to come back to whether there is a U.S. interest 
in that, and I don't think they have a lack of authority in 
that area.
    Mr. Mann. Great, thank you.
    Next question for you, Mr. Sexton. In your testimony, you 
described a court opinion that called into question how 
customer property is defined by the Commodity Exchange Act, 
CEA, relative to the U.S. Bankruptcy Code. Could you please 
share with us some additional background on that issue and why 
it is potentially problematic for customers?
    Mr. Sexton. I certainly can, and this is in the context of 
FCM bankruptcies, which are rare, thank God. And the importance 
of the proposal with regard to reauthorization that we are 
making is that in the Griffin Trading Co. case, the one that I 
am referencing, there was a hole in customer segregated funds 
caused by a rogue trader many years ago. And obviously, the 
firm did not have sufficient funds to make customers whole at 
that point in time, and the issue was whether or not customers 
would step in front of the firm's general creditors in the 
bankruptcy in order to get whatever funds existed from the 
company to go into segregated funds in order to make customers 
whole. Very important with regard to customer protections in 
our view, and the court in that case, the district court 
essentially said that the CFTC has a rule that would say yes, 
customers can step in front of the general creditors. They 
called into question the CFTC's legal authority with regard to 
making that rule in the context of some provisions of the 
Bankruptcy Code.
    So, what we are asking for is just that that cloud of 
uncertainty be removed and extremely important from a customer 
funds safeguard perspective we believe.
    Mr. Mann. Okay, thank you.
    Next question, back you to you, Mr. Lukken. In your 
testimony, you discuss the globalization of our derivatives 
markets. How important is it for global regulators to be able 
to coordinate and share information with one another as they 
surveil and regulate these markets?
    Mr. Lukken. It is incredibly important. Information is 
really the currency for the regulatory authorities around the 
world, and so, the CFTC, by statutory grant from this Committee 
has the ability to get a lot of information from our 
[inaudible]. This ensures [inaudible] to see trends in the 
markets. And so, it is important that they are able to share 
that information globally, as long as it is for an enforcement. 
It is not just an information grab, but it is for an 
enforcement purpose, and that happens quite frequently.
    Mr. Mann. In your mind, would detailing staff to and from 
foreign regulators, the EU or the UK, support the global 
sharing of knowledge and experience?
    Mr. Lukken. Yes, that would be helpful. I think I sent 
details from the CFTC over to the UK when I was chair. We 
benefitted from that because during the crisis, we were able to 
utilize those folks to help with what was happening in European 
markets. So, that kind of information and personnel sharing is 
incredibly important.
    Mr. Mann. Thank you. I yield back the 3 seconds of my time. 
Thanks.
    Ms. Caraveo. Thank you. The gentleman yields back.
    And with that, I will hand the steering wheel back to our 
esteemed chair.
    The Chairman [presiding.] Just in time for me to yield 
myself time. How very exciting.
    I will go with Ms. Thornton for just a little bit. Ms. 
Thornton, you talked a fair amount about how creating this new 
regulatory regime and duplicative efforts with the SEC might be 
complicated, troublesome, problematic. What agency today has 
jurisdiction over fraud and manipulation in commodity spot 
markets?
    Ms. Thornton. That is the CFTC, of course.
    The Chairman. Okay. So, that is the CFTC. What about who 
has jurisdiction over derivatives for non-securities, those 
markets?
    Ms. Thornton. CFTC.
    The Chairman. The CFTC. When we look at Bitcoin, have there 
been any reports that have held that Bitcoin is a security?
    Ms. Thornton. No, there is just one--no.
    The Chairman. Has the SEC ever asserted jurisdiction over 
Bitcoin?
    Ms. Thornton. It should have.
    The Chairman. Has the SEC ever asserted jurisdiction over 
Bitcoin?
    Ms. Thornton. I don't believe so.
    The Chairman. Do you know what volume of the digital assets 
trading Bitcoin constitutes?
    Ms. Thornton. Roughly 90 percent.
    The Chairman. Okay.
    Ms. Thornton. But there are hundreds of other tokens.
    The Chairman. There are, there are. Does the legislation--
of those hundreds of other tokens that are not generally 
considered to be commodities, would FIT 21 continue to place 
the jurisdiction over those other tokens with the SEC?
    Ms. Thornton. I think the problem with FIT 21 is it is a 
way of resolving the jurisdiction between the CFTC and the SEC 
so that it makes no difference what the SEC thinks because by 
the time it weighs in, the tokens are already being traded on 
the spot market and the CFTC has to unwind something. And there 
are hundreds of other tokens--
    The Chairman. Ma'am, I just--I don't think that is an 
accurate description, and in fact, alleging that the creation 
of this brand-new regime is problematic is just not consistent 
with the facts on the record. What we know now is by your own 
answers, the CFTC already has a robust role in this arena, and 
in fact, in the wake of Dodd-Frank when they were provided 
grand new authorities to deal with OTC swaps, there were no 
failures. There were no problems. I think the broad-based 
assessment by industry is that they did a magnificent job 
stepping up and filling that gap, because it built on their 
already existing expertise. That is--they are already doing so 
much of this. Again, 90 percent of the volume, I probably would 
have said 70 or 80, but we can take your assertion at face 
value.
    And so, I just want to provide greater context around the 
robust role the CFTC is already playing in commodity spot 
markets, and in digital assets, the overwhelming majority of 
digital assets.
    Sir, Travis, I would like to come to you. We are South 
Dakotans so we get to be buddies with one another.
    You noted that CFTC reauthorization would really be a vote 
of confidence. Tell me more of what you mean by that.
    Mr. Antonsen. Yes. I think knowing that whether it is 
farmers or agribusinesses knowing that we get to come to the 
table and talk about changes that need to be made, adjustments 
that should happen, that that is happening from the 
reauthorization process. I think from our standpoint I think we 
are happy with--we are okay with the regulatory environment 
around what is going on with--in the markets and in the 
regulations around that. So, I think just knowing, giving us 
the confidence that there is going to be integrity in the 
marketplace and it is going to be efficient.
    The Chairman. Very good.
    Mr. Sexton and Mr. Lukken, share you thoughts on this vote 
of confidence idea. Do the markets really care? Do market 
participants really care?
    Mr. Lukken. There is some uncertainty out there. I mean, I 
just think the lack of confidence for the CFTC, as Chairman 
Behnam noted, going overseas to his colleagues knowing that 
there hasn't been a Congressional blessing of the agency in 
over 15 years. I mean, that is something I think that it would 
be easy to do for this Committee, straightforward to do for 
this Committee, and long overdue.
    Mr. Sexton. I would agree that reauthorization recognizes 
the critical role of the CFTC, both domestically as well as 
internationally, and it is very important for Congress to do.
    The Chairman. We have a couple of other Members on their 
way who I know want to ask some questions, so I may exceed my 
time a little bit here, because I do--we want to fill out the 
record--oh, Mr. Nunn is here. Very good.
    I have questions about the bankruptcy thing, the issues 
that you brought up, Mr. Sexton. Mr. Lukken, I think you 
mentioned it as well. But let's go to Mr. Nunn and we can 
always double back.
    [The information referred to is located: for Mr. Lukken, p. 
43; Mr. Sexton, p. 44.]
    Mr. Nunn. Well, I want to thank the chair, and I believe 
strongly here that CFTC does have an important role here, 
particularly when it comes to those lanes in the road that our 
industry is asking for, particularly when it comes to digital 
assets. I think that CFTC has a better role to play than where 
the SEC has tried to insert itself. So, I will begin with that.
    I also want to thank everybody here from the Commodity 
Futures Trading Commission to ensure that our markets are safe 
and strong. I know you are each committed to this.
    Our derivatives markets remain the envy of the world, and 
that is something we should be very proud of. We should also 
work to maintain. I want to thank the stakeholders of this 
Committee who have helped our marketplace weather some pretty 
tough storms in recent years. Our markets are stronger, more 
resilient, but there is more to be done to make sure that we 
don't unintentionally hinder them.
    With that, I want to move to farmers in my district in 
Iowa. One of the programs that I think has really worked well 
here has been this Internal Whistleblower Program that CFTC 
oversees. The program is crucial for the accountability and 
protecting of agricultural and financial markets. It also 
benefits Iowans and all Americans.
    Just last month, they uncovered a corruption at a company 
thanks to a whistleblower that resulted in a $55 million fine, 
meaning the American taxpayers aren't paying for this. We are 
calling out bad actors and those bad actors then have to pay 
for their own policing. As I understand it, a large bulk of the 
policing comes from the Whistleblower Program. If we don't act 
before October 1, though, this Whistleblower Program could 
become defunct due to it not having enough funds to continue.
    So, I introduced, along with Representative Don Davis from 
North Carolina, a colleague on the other side of the aisle, and 
my senior senator, Senator Chuck Grassley, H.R. 4935, the CFTC 
Whistleblower Fund Improvement Act, to permanently address this 
accounting flaw.
    Very quickly, I want to ask each member of the panel, do 
you see yourselves committing to make sure the Whistleblower 
Program remains solvent? Could I get a yes, or if there is an 
equivocation, let me know that.
    Mr. Lukken. Yes.
    Mr. Sexton. Yes.
    Mr. Antonsen. Yes.
    Ms. Thornton. It is an important program, but obviously the 
details would need to be clear before we would have a strong 
opinion.
    Mr. Nunn. Let me ask then, what things would you see 
needing to be done to make sure the program remains solvent, 
Ms. Thornton?
    Ms. Thornton. Well, I just think one should consider 
whether it is sustainable as a long-term way to fund 
enforcement and find enforcement. That is more along the lines 
of what I am thinking.
    Mr. Nunn. If not for this program, how would we discover 
more of the bad actors inside? I mean, I think that is the 
fundamental part where both of us would agree, this is highly 
important. We don't want to incentivize folks to have to go out 
there and police themselves, but we do want to recognize there 
has got to be a clean pathway for folks to be able to raise 
their hand and say, the Federal Government or my agency is not 
working. I need somebody to come and investigate this.
    Ms. Thornton. Yes, that is certainly a fair question, but I 
also think that the CFTC needs more funding to carry out its 
existing duties, one of which is enforcement.
    Mr. Nunn. Well, I think that bad actors have a 
responsibility in helping shoulder that far more than the 
taxpayer, but I hear what you are saying there.
    Mr. Antonsen, I would like to now turn to capital market 
formation. I share your concerns about the potential impact 
here of rules proposed by some unelected bureaucrats in 
Washington making a lot more red tape for everyday working 
Americans and farmers.
    With the average price of one tractor in my home State of 
Iowa at nearly $\1/2\ million, this is a major investment for 
anyone, whether you are a small farmer or whether you are a 
beginning farmer, and it directly hurts our ability to grow. 
Let me ask this. How can we ensure that the CFTC operates in a 
way that supports the markets while avoiding unnecessary 
burdensome red tape coming out of Washington?
    Mr. Antonsen. That is a good question. I mean, we are 
coming today that we don't really have an ask, right, on CFTC 
reauthorization. We feel it is working correctly. I agree with 
you as a farmer in South Dakota, I know the economics of that 
as well. So, I think current status quo is okay for regulations 
on agribusinesses and those trading with farmers to make sure 
the system works well.
    I feel it is--we are getting into tougher times. I think 
the next year or two is going to be even tougher than the past 
couple years at the farm-gate, so I would agree with you.
    Mr. Nunn. As we highlighted with our Chairman, my home 
state a bushel of corn, $3.89. A break-even point is $4.85. 
Three years ago, we were over $8 a bushel. America's farmers, 
farming communities, and the entire country is going to 
experience a spike in costs if regulation is one of the reasons 
that it causes an American farmer to have to spend more time 
filling out paperwork than actually being in the field. I know 
you know that.
    Thank you very much, Mr. Chairman. I yield the remainder of 
my time.
    The Chairman. Of course, we care about Iowa corn farmers 
and the prices your folks have, Mr. Nunn, but coming from a 
state where our yields are 30 percent less than yours, would 
you just stop? We are not going to feel bad for you.
    Mr. Nunn. Mr. Chairman, you have an entire palace to corn. 
I appreciate everything you do.
    The Chairman. Well, that is true.
    Mr. Nunn. Thank you.
    The Chairman. I think we are prepared to close the hearing. 
With that, I would offer the Ranking Member to make any closing 
comments she would have.
    Ms. Caraveo. Well, thank you again to the witnesses for 
your testimony. It is really important to hear from you all as 
we consider this very important reauthorization, and I would 
like to thank the Chairman again for his collaborative 
approach, not just to the way that this Subcommittee is run, 
but in the way that he approaches legislation, and I look 
forward to continuing to collaborate as we look at this very 
important reauthorization as the CFTC--as we look at the CFTC's 
need to regulate all commodities, including digital assets.
    The Chairman. Yes, so many of our colleagues--not on this 
Committee, of course, this Committee is great. But so many of 
our other colleagues, they like fighting more than they like 
governing, and of course, people on this dais actually 
understand that it is our job to try and govern a country. And 
of course, our panelists have helped with that today. You have 
all to a person provided good, specific recommendations for how 
we can advance and we are going to take that under advisement. 
Obviously, it will be an ongoing conversation. It is not just 
like your 5 minutes under the clear lights are the only way 
that you can feed into this process.
    So, with that, I would note that under the Rules of the 
Committee the record of today's hearing will remain open for 10 
calendar days. That gives us an opportunity to receive 
additional material and written responses from the witnesses, 
to the extent that any Member wants to follow up for the 
record.
    The hearing of the Subcommittee on Commodity Markets, 
Digital Assets, and Rural Development is adjourned.
    [Whereupon, at 9:45 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
  Supplementary Information Submitted by Hon. Walter L. Lukken, J.D., 
  President and Chief Executive Officer, Futures Industry Association
Insert 1
          The Chairman. We have a couple of other Members on their way 
        who I know want to ask some questions, so I may exceed my time 
        a little bit here, because I do--we want to fill out the 
        record--oh, Mr. Nunn is here. Very good.
          I have questions about the bankruptcy thing, the issues that 
        you brought 
        up . . .

                  In your testimony, you discussed the bankruptcy 
                protections afforded to derivatives contract customers 
                and futures commission merchants beyond that provided 
                by the U.S. Bankruptcy Code. Can you please describe 
                the bankruptcy protection framework provided by the 
                Commodity Exchange Act and Commission regulations, and 
                the importance of this framework from your perspective?

    The sanctity of segregated customer funds in the event of an FCM 
bankruptcy is a critical tenet of the CFTC's customer protection 
regime.
    There are various rules enacted by the CFTC that ensure that 
customer funds are--at all times--segregated and protected in the event 
of a default. These include a prohibition of an FCM from using the 
funds of one customer to meet the obligations of another customer. FCMs 
are also required daily to ``top-up'' customer margin amounts under a 
given CFTC ``residual interest'' formula to serve as a buffer against a 
shortfall in the customers' accounts. Under CFTC rules, FCMs guarantee 
their customers' trades by stepping into the shoes of a customer during 
a default and using the FCM's funds to meet a failing customer's 
obligations to a DCO.
    If one or more customers of an FCM default on their obligations to 
the FCM and the loss is so great that, notwithstanding the application 
of the FCM's available funds, there is a shortfall in the amount of 
customer funds, the FCM will likely default and be placed into 
bankruptcy.
    In these circumstances, the Bankruptcy Code and Commission rules 
provide that, in the event of an FCM's bankruptcy, losses within each 
fund--the U.S. Customer Segregated Account, the Foreign Exchange 
Customer Account, and the Cleared Swaps Customer Account--are walled 
off and treated separately from other customer account classes.
    The Bankruptcy Code also provides that all FCM customers with funds 
in each account class with losses, including non-defaulting customers, 
shall share in any shortfall pro rata. However, customers whose funds 
are held in another account class that has not incurred a loss will not 
be required to share in such a shortfall.
    This segregation of account classes allows failing FCMs to ``port'' 
these protected customer account classes to another healthy FCM--
another important feature of clearing that prevents the fire sale of 
positions during stressed markets.
    The collective attributes of clearing, in combination with these 
noted bankruptcy protections, have been shown to protect customers and 
the clearing system from disorderly defaults and contagion during 
market turmoil.
Insert 2
          Mr. Costa. Well, Mr. Chairman and the Ranking Member, my time 
        has expired but I think this is something that we need to look 
        at in greater depth. When Mr. Lukken made his comment about 
        prudence and overcapitalization, I am very curious about how he 
        measures prudence or is that in the eye of the beholder? And 
        then how do you measure the risk?

    Post financial crisis, the G20 nations came together on certain 
pillars of reform of the financial markets to improve the safety and 
integrity of the financial system. Congress enacted these reforms as 
part of the Dodd-Frank Act, which sought to bring more products onto 
regulated clearinghouses, increase capital for certain bank activities, 
and improve the transparency of over-the-counter trades through 
centralized trade repositories. Since Dodd-Frank's enactment, we have 
seen tremendous growth in the number of OTC trades that clear in a 
safer and more predictable manner. This has been positive for the 
integrity of the markets and has led to other clearing mandates, such 
as the recent SEC requirement to clear certain U.S. treasury securities 
and repo transactions. The Basel capital reforms also aimed to increase 
the amount of bank capital post-financial crisis and align the capital 
levels with the riskiness of the activity.
    Unfortunately, recent ``End Game'' Basel Capital proposals by 
Prudential Regulators failed to recognize the risk mitigation effects 
of clearing, suggesting reforms that disincentivized clearing. This 
could lead to higher costs for hedgers and less clearing capacity in 
the system. There has been broad consensus among derivatives end-users 
and commodity producers that these capital reforms impacting hedgers' 
ability to clear need to be amended. Recent remarks by Federal Reserve 
Vice Chair Barr indicate that the Federal Reserve plans to revise the 
proposed Basel reforms on client clearing to better recognize the risk 
reducing effect of this activity. FIA strong supports these changes.
                                 ______
                                 
  Supplementary Information Submitted by Thomas W. Sexton III, J.D., 
  President and Chief Executive Officer, National Futures Association
Insert
          The Chairman. We have a couple of other Members on their way 
        who I know want to ask some questions, so I may exceed my time 
        a little bit here, because I do--we want to fill out the 
        record--oh, Mr. Nunn is here. Very good.
          I have questions about the bankruptcy thing, the issues that 
        you brought 
        up . . .

                  In your testimony, you discussed the bankruptcy 
                protections afforded to derivatives contract customers 
                and futures commission merchants beyond that provided 
                by the U.S. Bankruptcy Code. Can you please describe 
                the bankruptcy protection framework provided by the 
                Commodity Exchange Act and Commission regulations, and 
                the importance of this framework from your perspective?

    Section 20 of the CEA gives the Commission the authority to 
promulgate regulations regarding the bankruptcy of certain CFTC 
registrants. The Commission has promulgated bankruptcy regulations 
pursuant to this authority under Part 190 of the CFTC's regulations. 
The CFTC's Part 190 regulations contain key provisions that govern FCM 
bankruptcies and are designed to provide critical customer protections.
    Part 190 contains an overriding objective for a bankruptcy trustee 
to transfer customer assets including open futures contracts to a 
solvent FCM rather than liquidating the customers' assets--a key 
protection that helps ensure market stability and protects customers 
from losses related to a sudden liquidation event. However, in certain 
instances (e.g., a shortfall in customer funds), a bankruptcy trustee 
may not be able to effectuate this transfer. Therefore, in the event 
there is a shortfall in customer funds in an FCM bankruptcy, Part 190 
provides a critical customer protection that gives FCM customers 
priority over essentially all other claimants (e.g., general creditors) 
until bankruptcy estate assets are available to make customers whole.
    As noted in NFA's written testimony, NFA believes there is one 
aspect of the CEA that needs to be strengthened by Congress to better 
protect customers in the event of an FCM bankruptcy. While the Part 190 
regulations provide that customers shall have priority over essentially 
all other claimants, a bankruptcy court in the past found that the 
Commission lacked statutory authority to give this protection by 
regulation to customers. See In re Griffin Trading Company, 245 B.R. 
291 (Bankr. N.D. Ill. 2000). Although this decision was subsequently 
vacated on other grounds, 270 B.R. 882 (N.D. Ill 2001), a cloud of 
doubt continues to linger over the validity of the CFTC's rule. NFA, 
the CFTC and industry participants have consistently urged Congress to 
include a fix to this Griffin issue in any CFTC reauthorization 
legislation. We believe an effective solution is to amend Section 20 of 
the CEA, which gives the CFTC authority to adopt regulations regarding 
commodity brokers that are debtors under Chapter 7 of Title 11 of the 
United States Code, to clarify that the CFTC has the authority to adopt 
the regulation providing customers with priority over essentially all 
other claimants (e.g., general creditors) until bankruptcy estate 
assets are available to make customers whole. A proposed amendment to 
Section 20 of the CEA has been included in previous reauthorization 
bills voted out of both the Senate and House Agriculture Committees, 
and NFA believes there is a broad base of industry support for this 
approach.
                                 ______
                                 
                          Submitted Questions
Response Submitted by Hon. Walter L. Lukken, J.D., President and Chief 
        Executive Officer, Futures Industry Association
Questions Submitted by Hon. Dusty Johnson, a Representative in Congress 
        from South Dakota
    Question 1. Could you please comment on the adequacy of the 
examinations carried out by both the CFTC's and NFA, whether they have 
suffered from a lack of funding, and whether those examinations should 
or could uncover all market abuse?
    Answer. The CFTC and NFA are important `cops on the beat' in their 
oversight of our growing risk management markets. These complementary 
regulators partner with other self-regulatory organizations, such as 
exchanges and central counterparties, to provide broad oversight 
coverage of the markets and their participants. While it is difficult 
to comment on the adequacy of the examinations carried out by both the 
CFTC and NFA, I have found this self-regulatory model to be an 
incredibly cost-effective way to police these markets for fraud, 
manipulation, and abuse. I am not aware of instances where funding has 
caused a lapse in examinations or adequate oversight using this 
structure.

    Question 2. As both a member of the Commission and as the head of a 
major trade association, you've had a front row seat to the 
Commission's activities for over twenty years. Are you familiar with 
any instance where the Commission failed to fulfill its mission and 
statutory obligations because of a lack of funding?
    Answer. I fully support ensuring the CFTC is fully funded to 
accomplish its mission and oversee our growing markets. From my time as 
a Commissioner and Acting Chair of the Commission, and now as the 
President and CEO of FIA, I am not aware of an instance where the 
Commission failed to fulfill its mission and statutory obligations 
because of a lack of funding.

    Question 3. Could you please explain for us the process under the 
Commodity Exchange Act (CEA) and Commission regulations for exchanges 
seeking to list new contracts or make changes to their rulebooks?
    Answer. With the passage of the Commodity Futures Modernization Act 
of 2000, Designated Contract Markets (DCMs) were allowed to list for 
trading new contracts or make changes to their rules by self-certifying 
with the Commission that the new contracts or rules comply with the 
core principles of the Commodity Exchange Act (CEA) and the 
Commission's regulations. The Congressional enactment of self-
certification was meant to address concerns that U.S. exchanges were at 
a competitive disadvantage to foreign exchanges caused by lengthy 
delays in contract or rule approvals. To ensure compliance with the 
CFTC's core principles, Congress required DCMs to file a written self-
certification with the CFTC that shows the rule or contract filings 
comply with the core principles except for such files that are seen as 
complex or novel. This process has proven to be a cost-effective way 
for U.S.-registered exchanges to innovate and stay competitive with 
foreign competitors while also ensuring compliance with the core 
principles of the Act.

    Question 3a. Are you familiar with any instance where the CFTC 
failed to meet its requirements under the CEA and regulations with 
respect to the listing of new contracts or rule changes because it 
didn't have the funding to do so?
    Answer. I am not aware of any instance where the CFTC failed to 
meet its requirements under the CEA and regulations with respect to the 
listing of new contracts or rule changes because it didn't have the 
funding to do so. In fact, I would contend the self-certification 
process has freed up valuable staff time of the CFTC to focus on more 
substantive abuses in the markets, instead of the administrative tasks 
associated with product or rule approvals.

    Question 3b. Do you or your members find that the CEA's processes 
for listing contracts and making rule changes ``unnecessarily burden 
market participants with costs and complexities that are inconsistent 
with the law and core principles?''
    Answer. Generally, the self-certification process for exchanges to 
list new products or amend their rules has served the markets and 
industry well, allowing for greater innovation and enhanced 
competition.
    Regarding rule changes, specifically, I would like to flag a 
discrepancy in the current process for Systemically Important 
Derivatives Clearing Organizations (SI-DCOs) and Derivatives Clearing 
Organizations that are not deemed to be systemic. Under CFTC Rule 40.6, 
non-systemic DCOs that submit rules or rule amendments that raise novel 
or complex issues for approval require an opportunity for public 
comment. However, SI-DCOs are not required to seek public comment for 
novel and complex rule changes that affect their members.
    FIA believes the Commission's approval process for SI-DCO rules 
under CFTC Rule 40.10 should require an opportunity for public comment 
when a SI-DCO rule raises novel or complex issues similar to non-
systemic DCOs. This is particularly important for rule changes 
impacting the risk profile and responsibilities of a DCO's clearing 
members who are charged to collect margin from customers and contribute 
to a mutualized default fund aimed at protecting the clearing system 
from contagion risk. We believe a time-limited comment period would 
result in a more informed and deliberative rulemaking process that 
ultimately benefits both DCOs and market participants and we encourage 
the CFTC to reconcile these rules accordingly.

    Question 4. Could you please describe for us the marketing and 
other restrictions placed upon market participants in their 
solicitation and servicing of customers under the CEA, CFTC 
regulations, and NFA regulations?
    Answer. The NFA and CFTC have robust rules in place related to 
marketing and other restrictions placed upon market participants in 
their solicitation and servicing of customers. This includes NFA 
regulatory obligations around sales practices and promotional 
materials, NFA disclosure requirements for Members engaging in 
activities related to virtual currencies or virtual currency 
derivatives, and CFTC rules for introducing brokers to maintain tape 
records of all oral communication with clients.

    Question 5. Could you please explain the requirements that the CEA 
imposes on the CFTC with respect to how it manages the confidential 
information from market participants that it holds?
    Answer. Section 8(a) of the CEA prohibits the Commission from 
disclosing information that would separately disclose the business 
transactions or market positions of any person or trade secrets or 
names of customers. This section is incredibly important because of the 
sensitive market information the CFTC receives from large traders in 
our markets, which, if not protected and publicly disclosed, could 
distort prices and harm the public. For this reason, the CFTC must be 
diligent in its enforcement of Section 8 protections and periodically 
review the information it collects to ensure the information continues 
to meet a public need.

    Question 6. Could you provide your thoughts on if elevating the 
position of Chief Information Security Officer at the CFTC would ensure 
that information security issues are front of mind for the Chairman and 
Commissioners?
    Answer. For the reasons stated in the previous answer, I would 
support elevating the position of Chief Information Security Officer at 
the CFTC so that the position reports directly to the Chairman.
Questions Submitted by Hon. David Rouzer, a Representative in Congress 
        from North Carolina
    Question 1. Mr. Lukken, you mention we have seen an increase in new 
technologies under the CFTC's purview, such as digital assets and 
artificial intelligence. To me, the best approach when it comes to 
these novel technologies is for the CFTC to set clear, enforceable 
rules of the road while also knowing when to get out of the way and 
allow firms the flexibility to innovate. I fear failing to provide 
clarity will only lead to uncertainty and firms looking elsewhere to 
create--a loss for American industry and consumers.
    In a previous hearing, I asked Chairman Behnam about the 
possibility of the CFTC creating an AI sandbox to allow firms to test 
products. He mentioned that there could be legal limitations on 
creating such a sandbox.
    As we look towards reauthorization, how could Congress help give 
the CFTC the tools it needs to allow firms to responsibly experiment 
with emerging technologies?
    Answer. According to former Chairman of the CFTC Christopher 
Giancarlo, ``The CFTC lacks the legal authority to partner and 
collaborate with outside entities engaging directly with fintech within 
a research and testing environment, including when the CFTC receives 
something of value absent a formal procurement.'' \1\ *
---------------------------------------------------------------------------
    \1\ https://www.cftc.gov/PressRoom/SpeechesTestimony/
opagiancarlo70.
    * Editor's note: the link refers to Mr. Giancarlo's prepared 
statement submitted for the May 1, 2019, hearing before the 
Subcommittee on Commodity Exchanges, Energy, and Credit of the House 
Committee on Agriculture entitled, The State of the Commodity Futures 
Trading Commission, pp. 8-15. The hearing, in its entirety, is retained 
in Committee file.
---------------------------------------------------------------------------
    FIA supports efforts to improve the research and development 
capabilities of the CFTC. This includes legislative efforts, such as 
those led by Representative Austin Scott, that would provide the CFTC 
transaction authority to engage in public-private partnerships with 
financial technology developers.
    Jurisdictions outside of the U.S., like the Monetary Authority of 
Singapore, have established FinTech Regulatory Sandboxes. Singapore has 
established a framework that enables financial institutions and FinTech 
players to experiment with innovative financial products or services in 
a live environment but within a well-defined space and duration.

    Question 2. Agriculture is an industry that can carry a lot of risk 
and heavy up-front costs, especially for a new or young farmer starting 
from scratch. I wonder if more can be done to educate our next 
generation of farmers about the derivative products that may be 
available to them to manage their risk and avoid catastrophic losses, 
one of the major barriers for many looking at entering the industry. 
This is especially important today as slumping crop and livestock 
prices, record high input and labor prices, and increasingly volatile 
markets have pushed many out of production.
    You mention FIA's support of efforts to expand educational 
resources for producers. How could Congress encourage additional 
partnership between the CFTC, organizations and governmental entities 
such as Farm Credit or the Farm Service Agency to help better inform 
our farmers about these available tools?
    Answer. FIA strongly supports additional education for farmers and 
ranchers on the use of the derivatives markets for hedging market risk 
in production agriculture. This can be improved by expanding the CFTC's 
ability to partner with not-for-profits, private sector educational 
initiatives or other government entities, like the USDA, to provide 
educational resources about the opportunities and risks of these 
hedging tools like futures and other cleared derivatives. FIA believes 
the CFTC Office of Customer Education and Outreach (OCEO) would be a 
good place for Congress to target. We understand this office is, by 
statute, able to pay for ``customer education initiatives designed to 
help customers protect themselves from fraud or other violations.'' We 
have heard concerns that this narrow language limits the OCEO's ability 
to provide education to help customers beyond protecting them from 
``fraud or other violations.'' Congress could consider expanding the 
mandate of the OCEO beyond fraud or other violations to areas designed 
to educate farmers on the use of these risk management tools.
Response Submitted by Thomas W. Sexton III, J.D., President and Chief 
        Executive Officer, National Futures Association
Questions Submitted by Hon. Dusty Johnson, a Representative in Congress 
        from South Dakota
    Question 1. Could you please comment on the adequacy of the 
examinations carried out by both the CFTC and NFA, whether they have 
suffered from a lack of funding, and whether those examinations should 
or could uncover all market abuse?
    Answer. NFA's examinations, in conjunction with our day-to-day 
oversight activities, are designed to identify instances of NFA Member 
non-compliance with NFA's rules and CFTC regulations, which include 
instances of Members engaging in market abuse.\1\ In instances in which 
our examinations uncover fraud, NFA and the CFTC work together to 
promptly address any ongoing fraudulent activity and limit customer 
harm. While no oversight program can guarantee that all instances of 
market abuse and fraud will be uncovered, NFA's rigorous risk-based 
Member monitoring program is designed to detect fraud and market abuse 
as early as possible, take immediate action to stop fraudulent 
activity, and ensure that bad actors are appropriately disciplined.
---------------------------------------------------------------------------
    \1\ NFA is not responsible, nor do we have access to the 
information necessary, for overseeing trading activity on the 
derivatives exchanges. Instead, derivatives exchanges have their own 
self-regulatory responsibilities and surveil their markets. If our 
examination work uncovers any indicia of market abuse occurring on an 
exchange, we would refer that information to the relevant exchange and 
the CFTC for follow-up.
---------------------------------------------------------------------------
    NFA's ability to conduct examinations has never been impacted by a 
lack of funding. The CFTC relies primarily upon NFA to conduct 
examinations of NFA Member firms. See NFA's response to Question 4 
regarding the CFTC's oversight of NFA.
    NFA is not in a position to answer this question's funding part, 
which we opine should be directed to the CFTC.

    Question 2. You've been with the NFA for over 33 years and have 
served as President and CEO for 7 years. NFA clearly has a very close 
relationship with the CFTC and are keenly aware of its operations. Are 
you familiar with any instance over the past 33 years where the 
Commission failed its mission and statutory obligations because of a 
lack of funding?
    Answer. NFA is not in a position to answer this question, which we 
opine should be directed to the CFTC.

    Question 3. Can you elaborate on how NFA uses mandatory membership 
requirements to police the derivatives markets and impose essential 
customer protections?
    Answer. Part 170 of the CFTC's Regulations requires that, with few 
exceptions, each registered futures commission merchant (FCM), swap 
dealer (SD), introducing broker (IB), commodity pool operator (CPO) and 
commodity trading adviser (CTA) become and remain a member of a 
registered futures association (RFA). Section 2(c)(2)(B) of the CEA 
imposes a similar requirement for retail foreign exchange dealers 
(RFEDs). As a result, these industry participants are prohibited from 
conducting derivatives business unless they are NFA Members.
    A mandatory membership requirement is essential for NFA to oversee 
derivatives market participants. NFA's basic mission is to impose 
ethical and business conduct standards on its Member firms, and take 
disciplinary actions against those Members that fail to abide by those 
standards. In the absence of a mandatory membership requirement, firms 
most in need of NFA's oversight would evade it by choosing not to 
become NFA Members.

    Question 4. How does the CFTC work to ensure that NFA is 
effectively carrying out its regulatory responsibilities?
    Answer. Given the important role that NFA plays in the U.S. 
financial regulatory structure, it is essential that NFA's activities 
are closely reviewed and monitored by the CFTC to ensure NFA is 
fulfilling its regulatory responsibilities. The Commission's oversight 
of NFA includes both formal actions, required by the statute or 
regulations, and informal actions, which have evolved over time.
    Formally, NFA's most significant actions are subject to the CFTC's 
direct review and approval. For example, NFA is required to submit all 
new and amended NFA rules to the Commission prior to implementation, 
and the Commission may prevent NFA from making a rule effective. 
Additionally, the Commission has the authority, in part, on its own 
motion to review NFA disciplinary and registration/membership 
decisions.
    The CFTC also performs rule enforcement reviews (RERs) to ensure 
that NFA is effectively carrying out its regulatory responsibilities. 
In the last 2 years, the CFTC has performed several RERs covering NFA's 
registration processes; FCM, CPO, CTA and IB programs including 
examinations, processing of financial statements, FCM notice filings 
and SD disciplinary actions; and the SD oversight program including 
exams, staffing and disciplinary actions.
    Informally, NFA is in daily contact with the CFTC to discuss 
ongoing investigations, registration applications, examinations, 
rulemaking issues or any myriad of issues that can arise. Further, we 
generally meet quarterly with the CFTC's Chair and Commissioners to 
discuss NFA's activities and industry regulatory issues. We also have 
regularly scheduled coordination meetings with the Division of 
Enforcement (DOE), Market Participants Division (MPD), Division of 
Market Oversight (DMO), Office of International Affairs (OIA), Office 
of Public Affairs (OPA), Office of Legislative and Intergovernmental 
Affairs (OLIA), and the Office of Technology Innovation (OTI).

    Question 5. Could you please explain for us the process under the 
CEA and Commission regulations for NFA rule changes? Are you familiar 
with any instance where the CFTC failed to fulfill its duties under the 
CEA and regulations with respect to NFA rule changes because it didn't 
have the funding to do so?
    Answer. When NFA staff or our Member firms identify an issue or a 
problem that may require additional rulemaking, we work with NFA Member 
Advisory Committees, industry trade associations and the CFTC to draft 
proposed rules and then present those rule proposals to NFA's Board of 
Directors.
    Section 17(j) of the CEA sets forth the requirements for NFA to 
adopt a new rule or amend an existing rule (Rule Proposal). NFA is 
required to submit all Rule Proposals to the Commission. In most 
instances, NFA will submit the Rule Proposal and notify the Commission 
that we intend to make it effective as early as 10 days after 
submission unless the Commission notifies us that it has determined to 
review the Rule Proposal for approval. NFA may also submit a Rule 
Proposal and specifically ask for Commission review and approval of the 
Rule Proposal. The Commission is required to approve the Rule Proposal 
if the Commission determines that it is consistent with Section 17 and 
not otherwise in violation of the CEA or regulations. The Commission 
must approve a Rule Proposal or institute disapproval proceedings 
within 180 days after receiving the Rule Proposal or such longer period 
that the Commission and NFA agree upon.
    NFA is not in a position to answer this question's funding part, 
which we opine should be directed to the CFTC.

    Question 6. Could you please describe for us the marketing and 
other restrictions placed upon market participants in their 
solicitation and servicing of customers under the CEA, CFTC 
regulations, and NFA regulations?
    Answer. NFA and the CFTC work collaboratively to oversee market 
participants' customer-facing activities. NFA initially adopted 
requirements in 1985 regarding its Members' solicitation activities and 
promotional material usage. Further, NFA's rules require FCM and IB 
Members to provide customers with Commission Regulation 1.55's risk 
disclosure statement.
    NFA's solicitation and promotional material rules govern our 
Members' conduct with both retail and institutional (i.e., eligible 
contract participant) customers and counterparties. NFA Compliance Rule 
2-29 and its numerous related interpretive notices addressing specific 
issues are the cornerstone of NFA's solicitation and promotional 
material requirements. This rule prohibits Members from engaging in any 
communications related to commodity interests that are fraudulent, 
deceitful, employ or are part of a high-pressure approach or make any 
statement that commodity interest trading is appropriate for all 
persons. Further, the rule establishes specific requirements that are 
designed to ensure that promotional material is not deceptive, 
appropriately addresses trading risks and provides all material 
information. The rule also sets forth specific requirements regarding 
the use of hypothetical trading results, statements of opinion, and 
audio and video promotional material that makes specific 
recommendations.
    Over the last 40 years, NFA has adopted numerous interpretive 
notices related to NFA Compliance Rule 2-29, which address solicitation 
and promotional material abuses, many of which involved retail 
customers. These notices prohibit a Member from touting a strong 
likelihood of profits to customers when its actual trading experience 
does not support those claims and from using high-pressure sales 
tactics. Further, they place restrictions upon Members' use of radio 
and television advertisements and website and electronic 
communications. Additionally, we require FCMs and other intermediaries 
to disclose the full costs of trading to customers.

    Question 7. Can you please describe the retail-focused markets that 
the CFTC and NFA oversee? Please describe the customer protection 
requirements that the CFTC and NFA impose on intermediaries in these 
markets.
    Answer. Both the exchange-traded derivatives and retail foreign 
exchange (forex) markets include retail participants. Investor 
protection is a critical component of NFA's mission. Today, industry-
wide interest in discussing retail participation and related topics 
remains high. To facilitate discussion across the industry, NFA co-
hosted FIA's second annual Retail Roundtable event in February 2024, 
which was attended by representatives from NFA Member firms with 
significant retail customer bases, exchanges, law firms and clearing 
firms. Topics addressed at the event included proposed significant 
market structure changes like direct clearing DCOs, gamification, new 
products, the need for further customer education and more.
    A slight rise in retail interest and participation may be 
occurring, but protecting investors has been part of the CFTC's and 
NFA's mandate since inception. NFA and the CFTC have numerous customer 
protection requirements, which we impose on intermediaries engaging in 
exchange-traded derivatives. These requirements focus on the following: 
anti-fraud and anti-manipulation protections; associated person 
registration requirements; business conduct standards (e.g., 
solicitation and advertising); conflicts of interest prohibitions and 
management; customer asset protections (e.g., segregated funds; 
qualified third-party custodians hold customer assets/property and 
acknowledge they are holding customer assets/property; limitations on 
how customer funds may be invested; and bankruptcy protections); know-
your-customer and appropriate risk disclosure; maintenance of books and 
records; minimum FCM and IB capital requirements; risk management 
procedures; supervision requirements; trade practice surveillance 
(e.g., detect abusive and manipulative trading practices); and full fee 
disclosures.
    NFA and the CFTC also apply, as permitted by law, many of these 
customer protection requirements to RFEDs that act as a counterparty to 
retail participants. Moreover, NFA has requirements in place to monitor 
RFED trading platforms, which are designed to ensure that RFEDs execute 
customer orders fairly and at prices that reasonably accord with 
prevailing forex market prices.

    Question 8. How does NFA help the Commission meet its regulatory 
obligations? How important is NFA's cooperative role providing 
oversight in new markets? What efficiencies and cost savings does NFA's 
regulatory efforts provide to the CFTC?
    Answer. NFA partners with the CFTC to regulate our Members' 
derivatives activities. Our FY 2025 operating budget is approximately 
$145M, and we have approximately 525 employees. NFA began operations in 
1982 when Congress and the CFTC gave us the responsibility to regulate 
firms engaging in activities with customers in the exchange-traded 
derivatives markets. As Congress expanded the CFTC's jurisdiction over 
the years to include the retail rolling forex spot and swaps markets, 
Congress and the CFTC also entrusted NFA with additional regulatory 
oversight responsibilities for these markets. If future legislation 
establishes a CFTC regulatory framework for spot digital asset 
commodities (DAC) and a role for a registered futures association, then 
NFA looks forward to assisting the CFTC in regulating the DAC market 
and is fully capable of performing the responsibilities required of an 
RFA.
    NFA works very closely with the CFTC to develop rules and 
regulatory programs to effectively oversee our Members. NFA currently 
has seven primary functions--registration, rulemaking, monitoring 
Members, enforcement, market regulation, investor protection and 
education and dispute resolution. Our successful regulatory partnership 
with the CFTC is an effective structure for regulating the derivatives 
markets and the rolling spot retail forex and spot DAC markets. In the 
absence of this critical partnership, the CFTC would need to undertake 
NFA's current functions.

    Question 9. Could you provide your thoughts on if elevating the 
position of Chief Information Security Officer at the CFTC would ensure 
that information security issues are front of mind for the Chairman and 
Commissioners?
    Answer. NFA's Information Security staff meets regularly with the 
CFTC's Information Security group, and based on our interactions, NFA 
believes that the CFTC recognizes the significant security risks posed 
to the agency and has measures in place designed to mitigate these 
risks. Moreover, NFA believes that the CFTC Chair and Commissioners 
currently recognize the magnitude of security threats. We are not able 
to opine about the CFTC's Chief Information Security Officer's 
reporting lines but believe this individual should work closely with 
the CFTC's Chief Information Officer to mitigate any security threats.

                                  [all]