[Senate Hearing 112-313] [From the U.S. Government Publishing Office] S. Hrg. 112-313 EXCESSIVE SPECULATION AND COMPLIANCE WITH THE DODD-FRANK ACT ======================================================================= HEARING before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS FIRST SESSION ---------- NOVEMBER 3, 2011 ---------- Available via the World Wide Web: http://www.fdsys.gov Printed for the use of the Committee on Homeland Security and Governmental Affairs EXCESSIVE SPECULATION AND COMPLIANCE WITH THE DODD-FRANK ACT S. Hrg. 112-313 EXCESSIVE SPECULATION AND COMPLIANCE WITH THE DODD-FRANK ACT ======================================================================= HEARING before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ NOVEMBER 3, 2011 __________ Available via the World Wide Web: http://www.fdsys.gov Printed for the use of the Committee on Homeland Security and Governmental Affairs ---------- U.S. GOVERNMENT PRINTING OFFICE 72-487 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin CLAIRE McCASKILL, Missouri JOHN ENSIGN, Nevada JON TESTER, Montana ROB PORTMAN, Ohio MARK BEGICH, Alaska RAND PAUL, Kentucky Michael L. Alexander, Staff Director Nicholas A. Rossi, Minority Staff Director Trina Driessnack Tyrer, Chief Clerk Patricia R. Hogan, Publications Clerk ------ PERMANENT SUBCOMMITTEE ON INVESTIGATIONS CARL LEVIN, Michigan, Chairman THOMAS R. CARPER, Delaware TOM COBURN, Oklahoma MARY L. LANDRIEU, Louisiana SUSAN M. COLLINS, Maine CLAIRE McCASKILL, Missouri SCOTT P. BROWN, Massachusetts JON TESTER, Montana JOHN McCAIN, Arizona MARK BEGICH, Alaska RAND PAUL, Kentucky Elise J. Bean, Staff Director and Chief Counsel David H. Katz, Counsel Christopher Barkley, Staff Director to the Minority Anthony G. Cotto, Counsel to the Minority Mary D. Robertson, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Levin................................................ 1 Senator Coburn............................................... 6 Prepared statements: Senator Levin................................................ 51 Senator Coburn............................................... 57 WITNESSES Thursday, November 3, 2011 Paul N. Cicio, President, Industrial Energy Consumers of America. 8 Tyson T. Slocum, Director, Energy Program, Public Citizen........ 10 Wallace C. Turbeville, Derivatives Specialist, Better Markets, Inc............................................................ 12 Hon. Gary Gensler, Chairman, Commodity Futures Trading Commission 29 Alphabetical List of Witnesses Cicio, Paul N.: Testimony.................................................... 8 Prepared statement........................................... 59 Gensler, Hon. Gary: Testimony.................................................... 29 Prepared statement........................................... 98 Slocum, Tyson T.: Testimony.................................................... 10 Prepared statement........................................... 68 Turbeville, Wallace C.: Testimony.................................................... 12 Prepared statement with attachments.......................... 77 EXHIBIT LIST 1. a. GCommodity Index Participation in U.S. Commodity Futures and Swaps, 2007-2011, chart prepared by the Permanent Subcommittee on Investigations................................. 110 b. GIncrease in Commodity Related Exchange Traded Products, 2004-2011, chart prepared by the Permanent Subcommittee on Investigations................................................. 111 c. GIncrease in Commodity Related Mutual Funds, 2008-2011, chart prepared by the Permanent Subcommittee on Investigations. 112 d. GWTI Price and World Supply and Consumption, chart prepared by the U. S. Energy Information Administration........ 113 2. a. GCFTC Summary of Final Regulations on Position Limits for Futures and Swaps.............................................. 114 b. GCFTC Q&A--Position Limits for Futures and Swaps.......... 116 3. GPosition Limits and the Hedge Exemption, A Brief Legislative History, testimony of Dan M. Berkovitz, CFTC General Counsel, July 28, 2009.................................................. 119 4. GExecutive Summary and Findings and Recommendations from the June 25, 2007 Staff Report of the Senate Permanent Subcommittee on Investigations entitled, ``Excessive Speculation in the Natural Gas Market.''.......................................... 146 5. GExecutive Summary and Findings & Recommendations from the June 24, 2009 Staff Report of the Senate Permanent Subcommittee on Investigations entitled, ``Excessive Speculation in the Wheat Market.''................................................ 156 6. GCommodity Related Exchange Traded Products: a. GList of Selected Commodity Related Exchanged Traded Products....................................................... 176 b. GInformation related to: --ETFS Physical Palladium Shares--PALL.................... 179 --ProShares Ultra DJ-UBS Commodity........................ 181 --United States Oil Fund LP............................... 183 7. GCommodity Related Mutual Funds: a. GList of Selected Commodity Related Mutual Funds.......... 185 b. GInformation related to: --Direxion Commodity Trends Strategy Fund................. 186 --Highbridge Dynamic Commodities Strategy Fund............ 190 --MutualHedge Frontier Legends Fund....................... 192 --Oppenheimer Commodity Strategy Total Return Fund........ 206 --PIMCO CommodityRealReturn Strategy Fund................. 212 --PIMCO CommoditiesPLUS Strategy Fund..................... 212 --Rydex/SGI Long Short Commodities Strategy Fund.......... 217 --Rydex/SGI Managed Futures Strategy Fund................. 219 --Van Eck CM Commodity Index Fund......................... 221 c. GNational Futures Association correspondence to CFTC, dated August 18, 2010, to amend CFTC Regulation 4.5 which provides an exclusion from the definition of the term ``commodity pool operator.''................................... 223 d. G72 IRS Private Letters Authorizing Commodity Investments by Mutual Funds, 2006-2011, chart prepared by the Permanent Subcommittee on Investigations................................. 235 8. GAnalysis: High-frequency trade fires up commodities, Reuters, June 17, 2011......................................... 241 9. GLetter from 450 economists to the G20 Finance Ministers regarding impact of speculation on food prices, October 11, 2011........................................................... 244 10. GStatement for the Record of Gerry Ramm, Inland Oil Company, Ephrata, Washington, on behalf of the Petroleum Marketers Association of America and the New England Fuel Institute (NEFI)......................................................... 266 11. GLetter from the Consumer Federation of America forwarding October 2011 study, Excessive Speculation and Oil Price Shock Recessions, A Case of Wall Street ``Deja Vu All Over Again.''.. 273 12. GResponse for the record provided by Gary Gensler, Chairman, Commodity Futures Trading Commission, to question posed at the hearing by Senator Levin regarding mutual fund participation in commodity markets.............................................. 308 13. GResponses to supplemental questions for the record submitted by Senator Coburn to Gary Gensler, Chairman, Commodity Futures Trading Commission............................................. 309 14. GResponses to supplemental questions for the record submitted by Senator Tom Coburn to Paul N. Cicio, President, Industrial Energy Consumers of America.................................... 313 15. GResponses to supplemental questions for the record submitted by Senator Tom Coburn to Wallace C. Turbeville, Derivatives Specialist, Better Markets, Inc................................ 317 EXCESSIVE SPECULATION AND COMPLIANCE WITH THE DODD-FRANK ACT ---------- THURSDAY, NOVEMBER 3, 2011 U.S. Senate, Permanent Subcommittee on Investigations, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 9:07 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. Present: Senators Levin and Coburn. Staff Present: Elise J. Bean, Staff Director and Chief Counsel; Mary D. Robertson, Chief Clerk; David H. Katz, Counsel; Michael Wolf, Law Clerk; Lauren Roberts, Law Clerk; Christopher Barkley, Staff Director to the Minority; Anthony G. Cotto, Counsel to the Minority; William Wright, Kristin Boutchyard, Brian Murphy, Steven Hutchinson, and William Wright (Senator Brown). OPENING STATEMENT OF SENATOR LEVIN Senator Levin. Good morning, everybody. Over the past 9 years, this Subcommittee has held a series of hearings on the problem of excessive speculation in the commodity markets. For years now, commodity markets have taken the American people on an expensive and damaging roller coaster ride with rapidly changing prices for crude oil, gasoline, natural gas, heating oil, airline fuel, wheat, copper, and many other commodities. Commodity prices have whipsawed American families, farms, and businesses, run roughshod over supply and demand factors, and made our economic recovery that much harder and more chaotic. Unstable commodity prices are a key reason why Congress enacted, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new statutory requirements to put a lid on excessive speculation and price manipulation. Congress enacted the new law not only to protect consumers and businesses from unreasonable prices--prices disconnected from the usual supply and demand discipline of the marketplace--but also to protect the commodity markets themselves from losing investor confidence and looking more like a casino or rigged game than a marketplace where supply and demand determine prices. Commodities markets are not stock markets. Stock markets are intended to attract investors to provide new capital for U.S. businesses to invest and to grow. Commodity markets are supposed to serve a different function. Their purpose is not to attract investors, but to enable producers and users of physical commodities to arrive at market-driven prices for those goods and to hedge their price risks over time. Prices are intended to reflect supply and demand for the actual commodities being traded. Speculators, who by definition do not plan to use the commodities that they trade but profit from the changing prices, are needed only insofar as they supply the liquidity needed for producers and users to hedge their risks. Another big difference between stock and commodity markets involves trading limits. Stock markets do not have them, but U.S. commodity markets have been using trading limits to varying degrees for over 70 years to combat excessive speculation and price manipulation. Federal law has long authorized the Commodity Futures Trading Commission (CFTC), and U.S. commodity exchanges to impose so-called position limits to prevent individual traders from holding more than a specified number of futures contracts at a specified time, such as during the close of the so-called spot month when a futures contract expires, and buyers and sellers have to settle up financially or through the physical delivery of commodities. Position limits help ensure commodity traders cannot exercise undue market power, such as by cornering the market. The primary problem afflicting U.S. commodity markets today is an explosion of speculators who, instead of facilitating, have now come to dominate commodity trading, overriding normal supply and demand factors, distorting prices, and increasing price volatility. That explosion began in large part less than 10 years ago, with the rise of commodity index funds that enable participants to bet on the rise or fall in commodity prices. Commodity index funds are operated by swap dealers that enter into swap contracts with clients seeking to make speculative bets on commodity prices. Those clients typically bet that prices will go up and take the long side of the swap. The swap dealers usually take the short side of the swap and, to offset the financial risk, typically purchase long futures contracts. Within a few years, as the funds grew, commodity index swap dealers became regular purchasers of massive numbers of futures contracts for crude oil, natural gas, wheat, and other commodities. According to CFTC data, as shown in this chart which we are putting up, Chart 1a in our book,\1\ commodity index investors and swap dealers have spent about $300 billion in 2011 alone, mostly on long futures and swap contracts. --------------------------------------------------------------------------- \1\ See Exhibit No. 1a which appears in the Appendix on page 110. --------------------------------------------------------------------------- Sometimes referred to as ``massive passives,'' commodity index funds have created a massive, ongoing demand for futures contracts unconnected to normal supply and demand for the underlying commodities. Their steady purchases have created an artificial demand for futures contracts. In addition, the more index funds and their swap dealers push to buy long future contracts and outnumber the speculators seeking to buy shorts, the more their buying pressure, by the very nature of supply and demand, will drive up the price of the long contracts. The resulting higher futures prices then translate all too often into higher prices for the underlying commodities, in part because so many of commodity contracts for the underlying commodities use futures prices as the commodity's selling prices. In those cases, higher futures prices translate directly into higher costs for consumers of the commodities. That is why so many American consumers and businesses continue to condemn the speculative money that commodity index funds bring to the commodity markets. Commodity-related exchange traded products (ETPs), have added further fuel to the speculative fire. Exhibit 6 lists some of the many ETPs which offer securities that track the value of a designated commodity or basket of commodities, but trade like stocks on an exchange.\1\ ETPs are marketed to investors looking to make money off commodity price changes without actually buying any futures. The financial firms running the ETPs often support the value of the fund by purchasing commodity futures or using futures to offset risks. The result, as shown in this chart, which is Exhibit 1b,\2\ is that in 2011 alone, these ETPs have poured over $120 billion of speculative money into U.S. commodity markets. --------------------------------------------------------------------------- \1\ See Exhibit No. 6 which appears in the Appendix on page 176. \2\ See Exhibit No. 1b which appears in the Appendix on page 111. --------------------------------------------------------------------------- Now, that is not all. A third wave of commodity speculation has come from the $11 trillion mutual fund industry which, since 2006, has turned its attention to U.S. commodities in a big way. Hearing Exhibit 7a \3\ identifies more than 40 commodity-related mutual funds that, by 2011, as shown in this chart, which is Exhibit 1c,\4\ have accumulated assets of over $50 billion. That chart shows the growth of the mutual fund purchases of these commodity futures. The sales materials from some of those mutual funds, which are included in Exhibit 7b,\5\ show that they are marketing themselves to average investors as commodity funds and delving into every kind of commodity investment out there, from swaps to futures, putting additional speculative pressures on commodity prices. --------------------------------------------------------------------------- \3\ See Exhibit No. 7a which appears in the Appendix on page 185. \4\ See Exhibit No. 1c which appears in the Appendix on page 112. \5\ See Exhibit No. 7b which appears in the Appendix on page 186. --------------------------------------------------------------------------- Now, by law, mutual funds are supposed to derive 90 percent of their income from investments in securities and not more than 10 percent from alternatives like commodities. But the 40 commodity-related mutual funds that we have identified have found ways around that law by, among other steps, setting up offshore shell companies that do nothing but trade commodities. Those offshore shell companies are typically organized as Cayman Island subsidiaries with no offices or employees of their own and with their commodity portfolios run from the mutual fund's U.S. offices. This blatant end-run around the 90/ 10 restriction has nevertheless been blessed by the IRS which has issued dozens of private letter rulings, which are listed in Exhibit 7d,\6\ which deem the offshore arrangements to be investments in securities rather than commodities, since the parent mutual funds hold all of the stock in those offshore subsidiaries. The IRS has recently put a moratorium on these private letter rulings while it studies the issues. In addition, the offshore shell corporations are currently exempt from CFTC registration requirements, despite operating as commodity pools, a situation the CFTC is reviewing as a result of a petition filed by the National Futures Association, as indicated in Exhibit 7c.\1\ --------------------------------------------------------------------------- \6\ See Exhibit No. 7d which appears in the Appendix on page 235. \1\ See Exhibit No. 7c which appears in the Appendix on page 223. --------------------------------------------------------------------------- Now, I am glad the IRS and the CFTC are studying these offshore arrangements as well as the broader issue of mutual fund investment in commodities. If the mutual fund industry were to step up its commodities investments to even just 10 percent of its overall assets, it would unleash another tidal wave of speculative money into the commodities markets. There is more. Over the last few years, high-frequency traders have also invaded the commodities markets, seeking to profit from the increasing price volatility. Those high- frequency traders have revved up commodity trading with day- trading strategies that further contribute to constantly changing prices. Put together the swap dealers, hedge funds, ETPs, mutual funds, and high-frequency traders, and the result is a tsunami of speculative money pouring into commodity markets at unprecedented levels. Today, speculators make up the bulk of the outstanding contracts in most commodity markets, providing typically more than 70 percent of the market. Producers and users of commodities now hold as little as 20 or 30 percent of the outstanding contracts in some markets. So it is no surprise that commodity prices have become increasingly volatile, with exaggerated swings that have little to do with hedging, little to do with supply and demand for the underlying commodities, and everything to do with folks betting and speculating on price changes. Take the U.S. crude oil market as an example. In 2007, a barrel of crude oil started out the year costing $50, but by the end of the year had nearly doubled in price. In 2008, oil prices shot up in July to over $145 per barrel and then, by the end of the year, crashed to $35 a barrel. In the beginning of 2011, oil prices took off again, climbing to over $110 per barrel in May. Then they fell to a low of $77 per barrel in early October, a drop of more than 30 percent in 4 months. Three weeks later, they are back up to $92 per barrel, a 15- percent increase. This price volatility has taken place at the same time that world inventories were plentiful and basically matched world demand, as shown in this chart prepared for the Subcommittee by the Energy Information Agency, which is Exhibit 1d.\2\ In other words, the price changes in West Texas Intermediate, the benchmark crude oil contract for the United States, cannot be explained simply as a function of supply and demand for oil. --------------------------------------------------------------------------- \2\ See Exhibit No. 1d which appears in the Appendix on page 113. --------------------------------------------------------------------------- During the same period crude oil prices went haywire, speculators have become the dominant players in the crude oil market. CFTC data indicates that speculators--traders who do not produce oil or use oil in their business--now hold over 80 percent of the outstanding contracts in the oil futures market. While speculation is not necessarily the primary factor setting oil prices, the facts indicate that speculation is a major contributor. It is not just the numbers telling this story. Major players in the oil industry also point to the role of speculation in crude oil prices. For example, in May 2011, ExxonMobil CEO Rex Tillerson agreed that speculation was contributing to oil prices, estimating that the price of a barrel would be $60 to $70, instead of $110, if governed exclusively by supply and demand. The same complaint is heard with respect to other commodities. Recently, 450 economists from around the world stated in a joint letter to the G-20 leaders, which we include in the hearing record as Exhibit 9:\2\ ``Excessive financial speculation is contributing to increasing volatility and record high food prices exacerbating global hunger and poverty.'' And the CEO of Starbucks, Howard Schultz, who tracks coffee prices, had the following to say: --------------------------------------------------------------------------- \1\ See Exhibit No. 9 which appears in the Appendix on page 244. --------------------------------------------------------------------------- ``[W]hy are coffee prices going up? [A]nd in addition to that, why is every commodity price going up at the same time? I think what's going on is financial engineering; that financial speculators have come into the commodity markets and drove these prices up to historic levels and as a result of that the consumer is suffering.'' Excessive speculation is not new. In fact, much of the law related to commodity markets can be understood as an effort to prevent excessive speculation and market manipulation from distorting prices. Over the years, one of the most powerful weapons developed to combat the twin threats of excessive speculation and price manipulation has been the imposition of position limits on traders. But over the years, Federal position limits have lost much of their punch due to a growing raft of loopholes, gaps, and exemptions. For example, prior to the Dodd-Frank Act, position limits didn't apply to some key futures contracts; they often applied only in the spot month instead of other times; and multiple market participants were given exemptions. In addition, until recently, the entire commodity swaps market had no position limits at all. The combination of increased speculation and weakened position limits has clobbered American consumers and businesses with unpredictable and inflated commodity prices. That is why, when Congress enacted the Dodd-Frank Act last year, Section 737 directed the CFTC to establish position limits on all types of commodity-related instruments, including futures, options, and swaps. The Dodd-Frank Act also directed the CFTC to issue a rule establishing the new position limits by January 2011, one of the earliest implementation dates in the entire law. The CFTC missed that deadline but 2 weeks ago, after reviewing over 15,000 public comments, at long last issued a final rule. The good news is that the agency complied with the law's requirements to establish position limits to ``diminish, eliminate, or prevent'' excessive speculation, and rejected unfounded claims that excessive speculation had to be proven for each commodity before a limit could be established to prevent damage to consumers and the economy. That has never been the law, and it has no basis in the Dodd-Frank Act which is aimed at preventing problems, not waiting for them to occur and cleaning up afterwards. Also good news is that the CFTC rule applies position limits to 28 key agricultural, metal, and energy commodities; applies those limits to futures, options, and swaps; and covers all types of speculators. The bad news, from my perspective, is that while the limits appear designed to prevent any one trader from amassing a huge position that could lead to price manipulation in a particular month, the limits do not appear to be designed to combat the type of excessive speculation caused by large numbers of speculative investment funds. In addition, exempting multi- commodity index swaps from any position limits, failing to apply effective position limits to commodity index swap dealers, and delaying implementation of the swap position limits for another year are troubling. Roller coaster commodity prices and the growing flood of speculative dollars continue, while it will be another year before the full range of position limits in the new CFTC rule take effect. In the meantime, we are talking about ongoing gyrations in gasoline prices, heating and electricity costs, and food prices that affect every American family. We are talking about unstable prices for copper, aluminum, and other materials essential to industry. At stake are energy, metal, and food costs key to inflation, business costs, and family budgets nationwide. Until effective position limits are actually in place, the American economy will remain vulnerable to chaotic price swings that benefit speculators at the expense of American consumers and businesses. Today's hearing is intended to shine a spotlight on the ongoing role of speculation in U.S. commodity markets and how the new position limits can combat excessive speculation. We will hear today from a panel of experts representing business, consumers, and academia, as well as from CFTC Chairman Gary Gensler. Now let me invite our Ranking Member, Dr. Coburn, to share his views with us. OPENING STATEMENT OF SENATOR COBURN Senator Coburn. Thank you, Mr. Chairman. I want to thank Senator Levin for holding this hearing today. He has been a leader for years in Congress on efforts to better understand and monitor commodity markets, which should make us more capable of holding market regulators accountable in their efforts to ensure American exchanges remain the most dynamic, transparent, and desirable places to do business. Commodity markets and pricing have profound effects on the people in my home State of Oklahoma, who are invested in virtually all of the commodities covered by the rules we will discuss today. Whether it is oil, natural gas, wheat, or any of the other 28 commodities, market participants all the way from the producer to the end user will be affected by recent and upcoming regulatory changes. It is our obligation in Congress to make sure regulators act in the public interest, based on facts and data, rather than reflexively placing restrictions on unpopular market participants. While today's hearing will focus on the concept of ``excessive'' speculation, it is imperative that we remember one fundamental truth: That futures markets cannot function without speculators who make markets, provide liquidity for hedgers, aid in price discovery, and take risks. Two weeks ago, the CFTC issued its long-awaited position limits, imposing limits on the number of futures contracts individuals or institutions can hold. The most recent version of the rule was rushed through the Commission and applied across the board to 28 separate commodities. Much of this seems to have been done in response to intense pressure, and the unfortunate result is likely to be challenged in court. In addressing commodities, the Dodd-Frank Act said the CFTC ``shall by rule, regulation, or order establish limits on the amount of positions, as appropriate.'' In at least two Commissioners' views, those tests have not been met. Yet now every participant in the commodities market must comply with a final rule that is over 300 pages long. Commissioner Scott O'Malia indicated in his dissenting opinion that the Commission voted ``without the benefit of performing an objective factual analysis based on the necessary data to determine whether these particular limits and limit formulas will effectively prevent or deter excessive speculation.'' There is no question we want to limit excessive speculation, but it needs to be based on data and facts, not feelings. Commissioner Jill Sommers also worried that the CFTC ``is setting itself up for an enormous failure'' by issuing a position limits rule that ``ironically, can result in increased costs to consumers.'' Position limits can be a very effective regulatory tool, but must be used in the right way. For example, we have limits on cotton--they are in place--yet the cotton No. 2 futures contract has hit 16 record-setting prices since December 1, 2010. Why is that? Because of crop failures around the rest of the world, and because of a drought in the United States. Position limits must be set at the proper level for each individual commodity. Unfortunately, the CFTC chose to use the blunt weapon of across-the-board limits for nearly every commodity. While today's hearing will be a good opportunity to discuss the effects of that excessive speculation--and in that I agree with my Chairman--we need to be careful not to accuse investors of wrongdoing where none has occurred. Commodity index funds, exchange traded funds, and mutual funds are not diabolical schemes. They are simply financial instruments that some investors use as tools to hedge or gain exposure to commodity markets, thus protecting against inflation and other risks in their portfolios. Last, I would like to address my strong concerns with the Dodd-Frank Act in general, which itself was rushed through Congress last year. The law that was supposed to help fix our financial system has instead wreaked regulatory havoc, increasing uncertainty and compliance costs, doing nothing to address unemployment, and it did nothing to effect the initiation of the problems that we are presently faced with, basically Fannie Mae and Freddie Mac. The act required over 300 new regulations and studies and has overwhelmed our regulatory agencies while causing widespread confusion in the marketplace. As we move forward, we in Congress must improve our understanding of the markets being regulated, as well as the internal and external challenges facing our regulators. Continuous oversight and transparency through hearings like this are essential to ensure our regulators do not overreach their mandates and that U.S. markets remain the envy of the world. One of my greatest concerns is every trader in the world is one click away from trading somewhere else, and there are tremendous markets in this country that are going to be put at risk through this new rule. The last thing we want to do is suffocate those markets and chase interested participants to other exchanges and trading venues abroad, many of whom would like nothing more than to take away America's business. Despite my concerns about the Dodd-Frank Act, it must be implemented in a thoughtful, responsible manner by our regulators. I look forward to a healthy discussion during this hearing, Mr. Chairman. I thank our witnesses for attending, and I look forward to hearing your views and recommendations today. Thank you. Senator Levin. Thank you very much, Dr. Coburn. We are now going to call our first panel of witnesses for this morning's hearing: Paul Cicio is President of the Industrial Energy Consumers of America. Tyson Slocum is Public Citizen's Emergency Program Director. Wallace Turbeville is a Derivatives Specialist with the nonprofit Better Markets, Incorporated. Now, the Subcommittee invited and we had hoped to have with us Dr. Craig Pirrong, who is professor of finance at the Bauer College of Business at the University of Houston. He was able to make our originally scheduled hearing, but was unable to make this hearing, which we regret that he could not be with us today to give us his views. But what we will do is invite him to provide his views in a written statement. We do appreciate each of the witnesses who were able to join us this morning. We look forward to your testimony. Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. At this time I would ask our first panel to please stand and raise your right hand. Do you swear that the testimony you will give before this Subcommittee is the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Cicio. I do. Mr. Slocum. I do. Mr. Turbeville. I do. Senator Levin. Now, we are going to use the timing system today. About 1 minute before the red light comes on, you will see the lights change from green to yellow, which will give you an opportunity to conclude your remarks. Your written testimony will be printed in the record in its entirety. We would ask that you limit your oral testimony to no more than 7 minutes. Mr. Cicio, we are going to have you go first, followed by Mr. Slocum, followed by Mr. Turbeville. After we have heard all the testimony, we will then turn to questions. So, Mr. Cicio, please proceed. TESTIMONY OF PAUL N. CICIO,\1\ PRESIDENT, INDUSTRIAL ENERGY CONSUMERS OF AMERICA Mr. Cicio. Chairman Levin, Ranking Member Coburn, and Subcommittee Members, thank you for the opportunity to testify before you today. My name is Paul Cicio, and I am the President of the Industrial Energy Consumers of America (IECA). --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Cicio appears in the Appendix on page 59. --------------------------------------------------------------------------- IECA has been a long-time supporter of setting responsible speculative position limits. Since all of our companies use substantial quantities of natural gas, we will use natural gas illustrations to address the Subcommittee questions. Speculative trading volumes have been explosive in growth, even though natural gas consumption in the country has only increased moderately. For example, natural gas open interest increased by 590 percent since 1995, even though U.S. consumption has increased only 6.5 percent. Almost all of the open interest is from noncommercial trades. Large speculative volumes can be a problem because they can move market price and they do increase volatility. Charts 1 and 2 of our written testimony uses CFTC data to show that, in late 2008, four trades controlled about 50 percent of the open interest in natural gas. Eight traders controlled 60 percent of the open interest. That means that only a handful of trading companies can have an incredibly important impact on the price of natural gas. High volatility will increase the cost of hedging to manufacturers because there is a direct relationship between volatility and, for example, the option price premium. Higher volatility also increases the bid-ask spread in the forward market. To illustrate the point, using the closing Henry Hub Index price of natural gas, just last Friday, at $4.04 per million Btu, a call option for 100,000 MM Btus with a 6-month expiration at the money would cost a manufacturer approximately $36,500. If we increased the implied volatility of only 5 percent, the premium cost goes up 15 percent. If we increased the implied volatility 10 percent, the premium cost rises 31 percent. And if we increase the implied volatility 20 percent, it increases the option premium a whopping 61 percent. IECA supports the imposition of speculative position limits, but setting the limit at 25 percent of the estimates deliverable supply is too large and will do little to reduce excessive speculation. Let us put in perspective what setting speculative position limits at 25 percent means by looking again at natural gas. If only 100 traders trade at the spec limit, they would control 25 times the U.S. monthly demand. There are approximately 250 to 350 traders that report to the large trader report at the CFTC from time to time. If only 100 trade, they would control 25 times the entire consumption. Regarding commodity index funds and ETFs, we believe that passive speculators should be banned from the futures market. At minimum, they should be subjected to individual speculative position limits. The next best alternative is to set spec position limits on all commodity-related ETFs and index funds. Swap dealers and ETF managers should be subject to speculative position limits except for hedges associated with transactions with producers and consumers of the underlying commodity. There are several reasons that passive index funds should be banned. First, passive index funds put upward pressure on price. CFTC index investment data for natural gas between December 2007 and September 2011 show that index funds held a long position 86.2 percent of the time and only held short positions 17.4 percent of the time. And index funds continue explosive growth. CFTC data indicates that index open interest contracts increased by 294 percent just since December 2007. Second, passive index speculators also reduce liquidity by buying and then holding larger and larger quantities of futures contracts. This is inconsistent with the functioning of the futures market that serves consumable commodities that have a prompt month that expires. And last, they also buy without regard to price, supply, or demand, which, of course, impacts price discovery. Thank you. Senator Levin. Thank you, Mr. Cicio. Mr. Slocum. TESTIMONY OF TYSON T. SLOCUM,\1\ DIRECTOR, ENERGY PROGRAM, PUBLIC CITIZEN Mr. Slocum. Chairman Levin and Ranking Member Coburn, thank you very much for the opportunity to allow me to testify today. I am Tyson Slocum, and I direct Public Citizen's Energy Program. We are one of America's largest consumer advocacy groups, and we are proud to be celebrating our 40th anniversary this year. We work on a range of issues, and I head up our energy work. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Slocum appears in the Appendix on page 68. --------------------------------------------------------------------------- I am tasked at Public Citizen with promoting those policies that are going to produce affordable, reliable, and clean energy, and it is clear from my personal work on this issue over a decade that current energy markets are driven not by the supply-demand fundamentals but by speculation. There has been a lot of great work, Mr. Chairman, by this Committee over the years, as you mentioned in your opening statement, that has helped make that case. But it is not just this Committee, it is not just industrial consumers, and it is not just household consumers, but members of industry as well. You mentioned in your opening statement that the chairman and CEO of ExxonMobil noted the role that speculation plays in the current price of a barrel of oil, and even the investment bank Goldman Sachs earlier this year revealed that they believe the speculation price is around $27 a barrel for 2011. And Dr. Mark Cooper, a colleague at the Consumer Federation of America, estimated that around $30-a-barrel-oil of a speculation tax equates to about $600 in increased gasoline costs for the average family and about $200 billion across the economy. So when I am taking a look at these markets, it is clear that around a $30 speculation tax, which translates to about $600 costs to the average family over the course of a year is indeed excessive levels of speculation, and it is the duty of Congress and regulators to help protect household consumers and businesses from these excessive costs. Does the Dodd-Frank Act and the way that it has been implemented by the CFTC effectively address that? And Public Citizen's analysis is that the proposed position limit rulemaking does not go far enough. As my colleague, Mr. Cicio, pointed out, the speculation limit of 25 percent and then 10 percent and then 2.5 percent, depending on the contracts, allows for too great of holdings. There was some recently leaked data by a U.S. Senator to the media that detailed the positions of individual traders, and this clearly showed that the largest five operators in the WTI market--Goldman Sachs, Vital, Morgan Stanley, Deutsche Bank, and Barclays--had positions that were between 5.3 and 8.7 percent. And that is why Public Citizen believes that speculation limit needs to be more in line with proposed legislation that has sponsorship in both the Senate and the House, S. 1598 and H.R. 3006, that would establish a statutory position limit of 5 percent that would get at the concentrations that the leaked data clearly shows. It is not just banks that are involved in these markets and making profits. Again, a leaked document that Chevron inadvertently leaked to the public this summer showed that the company earned $360 million over the first 6 months of this year not from doing what it is supposed to do, which is providing the American public with oil that it works hard and spends a lot of money to get out of the ground in the United States and elsewhere and refine into useful products, but in speculating, that Chevron was speculating far and above their hedging needs and using the commodity markets to make money the same way that investment banks do. And when the Wall Street Journal reported this, they noted that Chevron, like other major proprietary traders that also feature control or ownership over energy infrastructure assets, utilized those energy infrastructure assets to have a sneak peek at the market and give them a massive competitive advantage. Mr. Chairman, like you said, they do not like to gamble. They want to have more certainty, and having a large control over the market in terms of their positions and having access to energy infrastructure assets provides them that advantage. We have seen Goldman Sachs through its control over Kinder Morgan now is going to have control over about 67,000 miles of petroleum product and natural gas pipelines throughout the United States. They have ownership interests now in two refineries in the United States. Morgan Stanley spends hundreds of millions of dollars a year on acquiring control over storage capacity. None of this is adequately regulated, and another issue that Public Citizen promotes is having firm rules limiting the communications between energy infrastructure affiliates and trading affiliates. In addition, Public Citizen shares the concerns of this Subcommittee and the research that was presented to us in your opening statement that the rise of index funds is highly disruptive, and like my colleague, Mr. Cicio, I believe that index funds do not have a legitimate role in these markets. And I applaud the efforts of the Subcommittee to examine problems of mutual funds getting involved in these markets as well. Thank you very much for your time, and I look forward to your questions. Senator Levin. Thank you, Mr. Slocum. Mr. Turbeville. TESTIMONY OF WALLACE C. TURBEVILLE,\1\ DERIVATIVES SPECIALIST, BETTER MARKETS, INC. Mr. Turbeville. Good morning, Chairman Levin and Ranking Member Coburn. Thank you for the opportunity to speak today. My name is Wallace Turbeville, and I am a derivatives specialist at Better Markets, Inc. Better Markets is a nonprofit, nonpartisan organization whose mission is to promote the public interest in the domestic and global capital and commodity markets. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Turbeville with attachments appears in the Appendix on page 77. --------------------------------------------------------------------------- Personally, I have worked in the securities industry for 31 years as a practicing attorney first, as an investment banker at a Wall Street firm, and managing companies as a principal. In the 10 years since deregulation, commodities markets have changed dramatically, and the public has been plagued by boom-and-bust price cycles. Prior to that time, physical hedgers consistently represented about 70 percent of the futures markets. Now the ratio of participants has reversed. Speculators now account for about 70 percent or more of the open interest in many markets, while physical hedgers have fallen to only about 30 percent. This increased speculation is in large part driven by commodity index funds, which are predominantly sponsored by large dealer banks. These are vehicles reminiscent of residential mortgage structures designed to synthetically convert barrels of oil and bushels of corn into investment asset classes. These changes have profoundly affected prices and price discovery. Now, the CFTC adopted position limits in response to the congressional mandate to address the issues in energy, agriculture, and metals just recently. This rule establishes some very important principles, but much remains to be done to improve limits on speculators, in particular commodity index traders. Since 2004, highly structured commodity index investment vehicles have become dominant forces in the futures markets with dramatic impacts in the physical markets as well. Not surprisingly, we are now in a period of boom-and-bust commodity prices as a result. These investments have been marketed to large institutional investors as a new asset class for diversifying investment portfolios, and they have responded quite well for the marketers. Index investors have injected amounts which have been estimated to be between $200 and $300 billion into the market, fundamentally changing the way the futures markets work. Analysis of commodity speculation is now in the hands of academics, self-interested market participants, and the CFTC. Each seeks the answer to a single question: Are the boom-bust price cycles in basic commodities related to the explosion of speculative and highly structured trading activities? Or is it just merely a coincidence that these happened at the same time? Now, commodity index investments were created to synthetically mimic ownership of market baskets of physical commodities and are valued using indices. It is kind of an interesting thing. I am not aware that anybody considered the possibility that if you synthetically created a huge ownership interest in barrels of oil and bushels of wheat and corn, whether that synthetic ownership interest in large size would actually affect the market because the market would interpret that as hoarding activity when these vehicles were first created. But the consequences, as it has turned out, are very serious. Unlike a business with shares that trade, the value of a barrel of oil or bushel of corn derives from its consumption, at which point that value ends. If it can never be consumed, it has no value. However, commodity index funds are, in theory, perpetual. It is a synthetic ownership interest that goes on forever. To synthesize perpetual ownership and make it look more like a share of stock, the commodity index fund bank sponsors take large futures and physical commodity positions and roll them over continuously in massive amounts at specified times. So everyone in the whole market knows that at specified times during each month this large rollover of futures contracts occurs. Like the Phoenix, the index hedges, all of them, and repeatedly, are destroyed and re-created with longer maturities at each roll in order to create synthetic perpetual ownership. These repeated events are so important to the market that many trades focus a bulk of their activities on the commodity index rolls. The concern is that the rolls affect the price curves. Price curves are very important. The price curve is how the market tells the world what prices are likely to be this month and in the month to come. When it slopes upward--that is to say, November prices are higher than October--the futures market is telling producers and consumers that prices are likely to rise. When it is flat or downward sloping, the message is that the prices will be stable or fall. This is tremendously important because businesses organize themselves along these lines. The shape of the price curve has changed. Historically, it was flat to downward sloping most of the time. Since 2004, it has been upward sloping almost all of the time. The message is that prices are rising, and it is a constant message that is repeated over and over. Better Markets recently released a study of price curve dynamics in the roll. We isolated the predominant roll periods for each trading month over the last 27 years and compared them to determine whether there was a tendency for prices to rise-- sorry, for the price curve to rise at the time of the roll. We found that starting in 2004, when index trading expanded, the correlation between the roll period and its bias was pronounced. In fact, the price bias in the crude oil futures markets was correlated at 99 percent level with the roll. For every other 5-day period in every other month over that 27 years, there was no correlation between upward or downward prices for these periods. So we concluded that the forces which were signaling increased prices were specific to the roll period and were caused by commodity index roll trading. The market as a whole reacted to the signal, and a price bubble emerged. Eventually, supply-and-demand forces must overcome the trading-driven sentiment, and the bubble bursts. Thank you for the opportunity to discuss these crucial questions. I am pleased to answer any questions you may have now or in the future. Senator Levin. Thank you very much, Mr. Turbeville, and each one of you. We will try an 8-minute first round. I expect we will have a number of rounds for each panel. Mr. Cicio, first, tell us again very directly how businesses are harmed when oil futures prices are subject to roller coaster prices like the ones that are pushed up to artificial levels and then plummet down and then climb back up. Mr. Cicio. The example that we have provided in our testimony is very clear. When there is increased volatility, it increases the cost of hedging. Manufacturers are consumers. They are only going to hedge as much as they are going to consume, or they may hedge less than they will consume. The example that we have provided is an option on natural gas and it illustrates that increased implied volatility has a substantial cost increase on the premium of that option. The 5- percent increase in implied volatility increases the premium cost of that option 15 percent. Fifteen percent all by itself is a large amount for a company to lay out. Anything they lay out above that existing on-the-money option is cash that they have to put up. That is working capital that could be used for other things. Senator Levin. Is that usually passed down to consumers? Mr. Cicio. Manufacturers compete in a very globally competitive environment. If it is possible for us to pass that through to our customers, we would. But in most cases, costs of this nature cannot be passed through because of global competition. Senator Levin. And the hedging that they want to do is to provide themselves with a stable economic environment so that they can know what the costs of oil or any other commodity is. Is that correct? Mr. Cicio. Yes, that is correct. Think of it this way: One of the first things we do is buy basic raw materials like natural gas or crude oil that is used to produce our products. The time frame from producing the product to making a widget, a manufactured product, and then getting it out to the customer, is a long time. We price our product out a long time. If we price the product out and in the interim the price of the raw materials continues to escalate, then we have a price with rising costs that reduce our margins. Senator Levin. Now, according to the Consumer Federation of America--and this I will address to you, Mr. Slocum--excessive speculation has added about $30 per barrel to the cost of crude oil in 2011, and as you pointed out, that added $600 to the average household expenditure for gasoline in 2011. The total drain on the economy in 2011 from speculation-driven excessive cost is more than $200 billion, and the report concludes, ``Transferring that much purchasing power from consumers on Main Street to speculators on Wall Street puts a severe drag on the economy'' and has ``already dampened economic growth.'' What do you think of those findings? Mr. Slocum. I agree with it. And like I said, it is also in line with what Goldman Sachs itself said in a research note to its investors. So the estimate provided by Dr. Mark Cooper that you just cited is absolutely in line with what one of the largest speculators in the country, Goldman Sachs, also estimated. And just like Mr. Cicio's members are hit hard by these increasing prices and the volatility, so are working families across the country. And people are beginning to understand the role that Wall Street plays in this. We see citizens of all walks of life participating in activities around the country directed at frustrations with Wall Street profits while families are really struggling to make ends meet. Senator Levin. Mr. Turbeville, speculators, according to your testimony, are now overwhelming the commodity markets and dwarfing the participation by commercial hedgers. They now account, I believe your testimony was, for 70 percent or more of the outstanding contracts in many commodity markets while actual hedgers have fallen to only 20 or 30 percent participation, and even lower in some markets. You have, I think, indicated that this is a historically new shift. Is that correct? Mr. Turbeville. That is correct. Senator Levin. In other words, a few years ago it was very different, perhaps the opposite, but at least very different from what it is now. Are there any barriers to speculators making up 90 percent of the commodity market, or even 99 percent? Mr. Turbeville. No. In fact, the new position limit rules go to the percentage of open interest that an individual speculator might have, so that the aggregate amount of speculation in a market, in fact, is not limited. And that is a real concern. It is not just the size of speculation. It is also the structure of speculation and how speculation has created this--has been created in sort of an ecosystem around the big bank traders that are trading these roll period contracts that I described. So it is both the size, absolute size, and the actual structure of the speculation that is very much a concern. Senator Levin. The most important question is the relationship between the amount of speculation in commodities and the prices of those commodities. We had a chart we put up there which shows that most of the speculative interest is on the long side, but there is obviously a short for every long.\1\ But, nonetheless, when the speculative interest is on the long side and is pushing prices upward, sooner or later there may be a short side to make to be on the other side of the deal, but that has an upward price pressure on futures contracts. Like any market, if there is a greater demand for the paper, it is going to push the price of the paper up, if there is a great demand for the long side of that paper. --------------------------------------------------------------------------- \1\ See Exhibit 1a which appears in the Appendix on page 110. --------------------------------------------------------------------------- Now, how does that get translated into the price of the commodity? I think that is what we really need to drive home, that these futures contracts and the demand for futures contracts and the demand for the long side on futures contracts, which will be met by somebody willing to go short, but, nonetheless, as the demand goes up for that long side--or the bet that the price is going to go up--will not just affect the price of the futures contract but that huge demand will be translated somehow into a demand for the underlying commodity. In my opening statement, I tried to describe how that is done in a very simple way, but could each of you now take a try at that issue. Let us start with you, Mr. Cicio. Mr. Cicio. One just needs to look at the index fund data that we cited earlier that shows that 86-plus percent of all of the positions are long. Senator Levin. This is for the index fund people. Mr. Cicio. For the index funds, that is correct. Senator Levin. OK. Mr. Cicio. And when that happens, there is mounting pressure month after month because they roll their volumes forward. When it comes to speculation and what impact it has on price really depends upon the specific commodity. Like in the case of natural gas today, you saw the numbers. We have a lot more speculators open interest than hedgers and producers. Because there is a lot more of physical natural gas--there is more supply today than there is demand for natural gas--the speculators are having a very difficult time creating that speculation because the physical product is so overwhelming that it is keeping the trading within a narrow range. So in that situation, having tight speculative position limits is not all that important. The reverse is what we are really worried about. If you have a market, a physical market that is basically in supply and demand, or there is more demand than there is supply, is when you need spec limits. That is when it is crucial that those be in place because speculators have a herding effect. They make money on the changes in price. They love speculation. They thrive on it. That is when their profitability increases. And they go to specific commodities when they sense that supply and demand of the physical commodity is in their favor to create speculation. So these things all tie together to impact the price, but it is on a commodity basis. Senator Levin. It depends on the supply-and-demand situation for the underlying physical commodity in your judgment. Mr. Cicio. Yes, sir. Senator Levin. Mr. Slocum, do you want to try to address my question? How does the speculation get translated into impact on price? Mr. Slocum. I would be happy to. I think what you see--and you kind of alluded to this--is this manufactured demand of these entities buying and selling these contracts and controlling such a big chunk of it, and particularly the disruptive influence that the index funds play, particularly as the contract month comes to expiration, where it is crowding out the folks that are looking to legitimately hedge. And so it is increasing prices for the market as a whole, and a lot of this has to do with the fact that we do not have adequate limits on the size of the positions that the banks can take. You also see a lot of other effects go on. Markets are based on fundamentals. They are based on opportunities. They are also psychological. Everyone knows that a Goldman Sachs is a major presence and player in the market, so when their analysts produce a report that say oil is going to hit $90 a barrel or go up to $100, it has a phenomenon of saying, well, that is where Goldman is headed and that is where we need to head because they are driving the market. And so I think that is an issue that also needs be examined. Senator Levin. OK. Mr. Turbeville. Mr. Turbeville. When the rollover occurs, you see firms like Goldman Sachs and JPMorgan and all the very sophisticated firms selling the November contract and then buying the December contract at a higher price because they are insensitive to the actual prices they get on the contracts, that all gets passed through to the investors. So they are really doing this rollover on behalf of the investors and passing the prices through. So what happens is that the message goes through to the market that sophisticated folks believe that prices are on the rise, prices will rise, and it really changes the information that the market has about supply and demand. The assumption is that those sophisticated folks must have some really good supply-and-demand information. That message is very important, and it passes through to prices. Mechanically, buying the December contract means that for many of the markets the physical delivery of product is indexed usually to the next maturing contract. So if the price curve is sloping upward, upward, upward, and pushed up, up, up, then what gets translated through is next month's future contract is higher; therefore, that gets indexed to the actual delivery contracts for physicals so---- Senator Levin. I want to end my questions, but I want you to just drive that point home. Mr. Turbeville. Yes. Senator Levin. Because this to me is where there is a link, a direct link---- Mr. Turbeville. Absolutely. Senator Levin. A direct link between a futures contract going up in price because of that last month, and that is used by the people who are actually buying and selling the commodity. Mr. Turbeville. That is right. Senator Levin. So that there is a direct link between the futures contract price going up and the commodity price going up because people buying and selling the actual commodity use that next month's futures price as the basis for their price in the actual commodity purchase and sale. Is that correct? Mr. Turbeville. That is absolutely the truth. The first thing you would look to, not only is it in the contracts, not only is it in the procedures for Platts and others that create indices like in the oil markets, it actually makes common sense. The first price that you would look to is the price that occurs--that is indicated for the next month. That will tell you whether you should hold onto your commodity or sell it now, which means that the next price is absolutely feeding into by contract, by indices, and by common sense the price for delivery of product in the current month. Senator Levin. Real product. Mr. Turbeville. Real product. Senator Levin. In the real current time. Mr. Turbeville. That is right. Senator Levin. Thank you. Dr. Coburn. Senator Coburn. Let me just follow up on that for a minute. What you are saying is this is divorced from supply and demand, real supply and real demand. Mr. Turbeville. Actually, what I am saying is that real supply and real demand, there is not a chart that producers and consumers go look up supply and demand, here is the price. Senator Coburn. No, but take the example--that is not happening on natural gas contracts right now. Mr. Turbeville. That is correct. Senator Coburn. And the reason is because there is an absolute excess supply of domestic natural gas in this country. Correct? Mr. Turbeville. I think there are two reasons. One is that prices are low because of excess supply. The other reason is that natural gas is structure--we have looked at this actually in our research, that natural gas is structurally different from products like oil and wheat. Natural gas comes through pipelines and is largely unstorable, so that the best predictor of price during a delivery month is actually the price in the nearest maturing futures contract, not the next one. And that is how people actually contract for natural gas. Senator Coburn. Except it is storable because I can show you all the wellheads that are turned off in Oklahoma because there is so much gas and there is no place to put it, so they are leaving it in the ground. Mr. Turbeville. You are absolutely right. It is relatively less storable---- Senator Coburn. Let me go to each of you. One of our problems is volatility, which the Chairman has talked about, which we are seeing, and the connection of volatility to excess speculation. So would each of you give me what your definition of ``excessive speculation'' is? Mr. Cicio. Let me give you a reference point. Prior to 2000, prior to deregulation of this market, producers and consumers of natural gas were about 70 percent of the market, and speculators were 30 percent. And I will tell you, from the energy managers that are a part of our organization, the market worked very well. The prices that we hedged reflected the underlying supply and demand of the market all the time. Now, these same people would say that the underlying price of the commodity does not always do that, and it is because of the influx of a lot of speculators who want to do a deal--but because the producer and the consumer have already taken care of their hedging, speculators will speculate with speculators. They are looking for deals to turn, and, again, the only way the speculators can turn a profit thru relative volatility. And so when you have large traders like the kind I talked about earlier, five traders or eight traders controlling 60 percent of the natural gas market in 2008, these are companies with large amounts of cash, and they can move markets. Senator Coburn. All right. But let me go back to my question. What is ``excessive speculation''? Because that is our whole problem. And as you answer this, think about this one thing. Can we change the rules here, in our country can we change the rules on our exchanges and solve this problem? Because unless they are doing it in London, unless they are doing it in the rest of the trading centers around the world, my fear is, no matter what we do or how we do it and whether we are right or we are wrong, what we are going to do is the same behavior is going to take place unless all the exchanges throughout the world--because we will just trade somewhere different. We are just one click away. So you agree we have to have some speculators in the market to make a market. Mr. Cicio. Yes, sir, absolutely. Senator Coburn. So what is your definition of ``excessive''? Mr. Cicio. The only reference point--and this is not a good one. But the only reference point would be the one I mentioned earlier. Prior to deregulation, with 30 percent speculators---- Senator Coburn. So compared to what it was then. Mr. Cicio. We had deals getting done, producers, consumers, and speculators, and so I would say--this is not an organization statement, but anything more than 30 percent. Senator Coburn. All right. And I would just say that discounts the change from 2000 to 2011 in terms of the globalization of all this trading, right? I mean, we have a lot of participants in our market that are not Americans. Mr. Cicio. But, Senator, this market is all about a commodity, a physical commodity, and the players, the number of players and the physical product in this case, natural gas, has hardly changed at all. It has only increased 6.5 percent since 1995, but the volume of trades has increased 600 percent. Senator Coburn. So it has not had any effect on price. Mr. Cicio. Today, that is correct because of the oversupply. But just go back a few years ago, and, yes, sir, we did have high volatility and erratic pricing and prices higher than what we should have had. Senator Coburn. Yes, OK. Mr. Slocum, thank you. Mr. Slocum. Yes, I would like to just build on Mr. Cicio's comment, but it is clear that the data indicate a rise in the level of speculators, and to specifically answer your question, I think it is when those that do not have physical delivery or production contacts to the underlying commodity have a dominating presence in the market. Those that have delivery commitments or want to hedge--or if they are suppliers and want to hedge their exposure, when they are vastly outnumbered, and particularly with the rise of the index funds, where there is no interest in the physical delivery or supply of the underlying commodity, I think that the markets have become skewed. And transparency and disclosure I think is essential because the more transparent the marketplace is, the better functioning it is going to be for all participants, and we still do not see enough transparency. And I really think we need to see trader- specific-level data, not instantaneous because that would violate some proprietary issues, but for too long the banks have enjoyed their relative obscurity in not being publicly identified. I remember I was at a hearing at the CFTC, and I was making comments critical of some of the large investment banks for their speculative activities. And there was a gentleman from a hedge fund who sounded a lot like me, and I had to talk to this guy and figure out why a hedge fund guy was sounding a lot like the Energy Program director at Public Citizen. And it was because he was complaining that the banks control the market, that it is too secret. This is a large hedge fund, one of the largest in the country, and he felt that he was at a massive disadvantage to Goldman Sachs. So imagine if you are one of those smaller independent gas producers in Oklahoma or a manufacturer trying to compete in a global economy. The deck is stacked against them as long as the banks are able to operate in secret and do not have adequate controls over the size of their positions. Senator Coburn. So it is your assumption that it is all the banks that are creating the excessive speculation? Mr. Slocum. I think the data indicates, and especially the leaked data that finally named some individual names, that the banks clearly are at the top of the list in terms of their positions. But it is also clear that there are major, especially vertically integrated players in the petroleum sector that are also big. Chevron inadvertently disclosed that it---- Senator Coburn. Yes, that is a repeat. Mr. Turbeville. Mr. Turbeville. I think you start with what excessive speculation is. There is actually some fairly good knowledge on what the required amount of speculation is, and that tends to be somewhere about a third of the whole market. Two-thirds hedging/one-third speculation makes the market work. Speculation in excess of that really ties into the very purpose of the market, which, interestingly, sort of reflects the language of the Commodities Exchange Act. When they originally talked about back in the old days excessive speculation, they described it as ``unwarranted and inappropriate higher prices in volatility.'' I think that ties into the purpose of the market. To the extent that speculation is not required but is in excess of what is required, it is excessive, meaning it is bad, if it damages the price discovery function so that suppliers and consumers can know what the forward price is--in other words, it damages the forward price curve that I was talking about before--or it inhibits in anyway hedgers actually hedging their positions in the market--the two real functions of the market, hedging and price discovery, which are related. So if volatility causes it to be very expensive to hedge, that is a bad thing, and if excessive speculation causes that, it should be ended. If the price discovery function is damaged, meaning I do not know where prices are going because of things that are being done in the speculative market, that is a bad thing. So speculation is excessive if it damages price discovery or the ability to hedge well. Senator Coburn. Excessive speculation leads to markedly increased volatility, what you should expect some market force on real supply and demand to have some influence on. Mr. Turbeville. You would. Senator Coburn. In up movements you should see exaggerated up movements. In down movements you should see exaggerated down movements. And from the testimony I hear, I am not hearing that there is an excessive down movement. Explain that to me on speculation, when there is a marked excess supply, why we do not see an excessive down movement. Mr. Turbeville. That is really an interesting point, and it goes to the issue--you would expect to see it. We have all grown up in the Chicago School of Economics that markets work perfectly and are very efficient, which I think sometimes makes it hard for some of the academics to understand what is going on in the commodities markets right now. I am not an academic, so maybe that is easier for me somehow. Senator Coburn. So maybe you can understand it. Mr. Turbeville. Exactly. [Laughter.] I think the reason is the market is actually imperfect. If you have a huge sector of the market that is long only and is insensitive to price and trades on specific days that everybody knows about, what you have is this force, this bias, if you will, towards upward prices. So I think what you see in sort of the boom-bust cycle, what is suggestive, as our research suggested, is that, in fact, what is happening, this constant trading without regard to what the price is, I do not care what price---- Senator Coburn. I know if that is the case, that means the investors in those instruments are price insensitive as well. Mr. Turbeville. That is correct. Senator Coburn. And why are they? Mr. Turbeville. Because they actually are investing to create a portfolio effect in a larger---- Senator Coburn. Then why is not everybody doing that? Why isn't all the money moved there? If it is a sure deal, if it is a sure bet and that price is on the come and it is going to rise, why isn't everybody doing it? You cannot have it both ways. Mr. Turbeville. Right. Senator Coburn. If they are price insensitive, if they do not care what the price is because they are sure they are going to make money on the next month as they roll it over, why isn't everybody doing that? Mr. Turbeville. Well, OK. There are two questions. If you would, indulge me here. The investors are not in it to make money like you would make money on a stock. They are in it because they want to have part of their portfolio that moves just like commodities move. The other side of the coin, which is a really interesting one, which is our premise is that because of the trading activity, the curve moves up, right? Why don't the arbitragers squeeze that out instantaneously? That is a really good question, and efficient markets theorists would say that would happen. Our data suggests that it actually does not happen, so you sort of ask yourself the question why. I personally believe that the reason why is that the market as a whole--remember, the trading is done by Goldman Sachs and JPMorgan, those folks. As they see those traders pricing those contracts, their interpretation is, well, they must know something that we do not. And it is not random trading activity. But it is not trading activity based on the rationale of profit and loss. Senator Coburn. Of a transparent market. Mr. Turbeville. Right. So it confuses the world about what the supply and demand is. I actually think that is what is going on, is that the prices are distorted. So going back to excessive speculation, if the price discovery function is being injured, that is a problem, and I would consider that excessive speculation and speculation that should be corrected. Senator Coburn. Thank you very much. Mr. Slocum. Dr. Coburn, may I quickly add something? Senator Coburn. Sure. Mr. Slocum. As part of my written testimony, I took a look at the Goldman Sachs Commodity Index (GSCI), and so your question is, if these index funds are such a good deal, why isn't everyone moving into them? According to SEC filings by GSCI, in January 2009 there were 135 shareholders or entities that were investors in GSCI. Two years later, in January 2011, there were 49,120. Now, they do not provide any explanation of whether or not there was some sort of plausible explanation of this or whether or not Goldman's sales reps are doing a heck of a job selling to institutional investors and high-net-worth individuals. But those numbers are staggering, and it is clear that Goldman is promoting this as an investment vehicle for certain key audiences. Senator Levin. All right. Let us try another round. I want to move to high-frequency trading. Are you aware, each of you, of an increased presence of high-frequency traders in the commodity markets? And if so, are those high-frequency traders exacerbating volatility and price distortion? Let us start with you, Mr. Cicio. Mr. Cicio. Well, yes, high-frequency trading is putting a lot of pressure on volatility. As stated earlier, traders make their profits on price movements. It does not matter whether it is up or down. And so the high-frequency trades is having a direct impact on moving the market, and that is not good for price discovery when we are looking at a consumer for a price that reflects the supply and demand rather than reflecting high-frequency, computer-driven, technical trading, speculator- driven type of decisionmaking. Senator Levin. Mr. Slocum, do you agree with that? Mr. Slocum. Absolutely. Mr. Chairman, I testified before a panel that the CFTC put together a year or so ago, and after our research at Public Citizen, we deemed that high-frequency traders do not serve a legitimate function in these markets. With all due respect to the hard-working career staff at the CFTC, which are doing a heck of a lot with relatively little resources---- Senator Levin. And they are looking right at you as you testify. Mr. Slocum. Right. They cannot compete with the types of strategies, computers, and resources. It is overwhelming for enforcement staff to keep up with the activities and the volume and the constantly evolving strategies of these high-frequency traders. And as long as our hard-working regulators are unable to get a handle on how these high-frequency traders are operating, it is clear that they are not serving a legitimate market function. It is clearly disadvantaging those that are seeking to enter the market for legitimate hedging purposes. Senator Levin. OK. Mr. Turbeville. Mr. Turbeville. I agree with the other panelists in what they have said. The high-frequency trading is to gain advantage based on a different level of knowledge that others in the market have. That is the whole point of it. And in the commodities markets, that is a very dangerous thing. It is different from the stock markets and bond markets which are really--there is no such thing, for instance, as excessive speculation in the stock market. So that kind of activity in the commodities market can be more damaging to the market itself because of the functions that we described, hedging and price discovery being the main ones. I am also concerned about this: I am concerned that as the markets evolve into markets with swap execution facilities so that everything is electronic but that there are multiple venues in which transactions can be matched, that the ability of high-frequency trading to actually move around from venue to venue to venue to take advantage of things like payment for volume--in other words, a swap execution facility could well pay for volume because they get value from the other side of the trade--that you might see the kind of activity from high- frequency traders that is actually gaming the system that is actually created to maximize full disclosure of what is going on. So the full disclosure is really good, but without some kind of a control to make sure that HFT types do not move transactions around, that could actually allow those folks to game the system to the detriment of others and make it an unfair system. Senator Levin. Let me ask you about Exhibit 1b,\1\ which is a chart which shows total assets invested in commodity-related exchange traded products. These totaled over $100 billion last year, these commodity-related ETPs, as they are called. And we have listed a lot of those in Exhibit 6 \2\ in our book. ETPs offer securities now that track the value of a commodity--or a basket of commodities, but they trade like stocks on an exchange. --------------------------------------------------------------------------- \1\ See Exhibit No. 1b which appears in the Appendix on page 111. \2\ See Exhibit No. 6 which appears in the Appendix on page 176. --------------------------------------------------------------------------- Are ETPs adding to speculative pressures on the commodity markets? Let us start with you, Mr. Turbeville. Mr. Turbeville. There is no question. If you look at it from a more cosmic level, the 30,000-foot level, one of the things happening is you are creating a huge amount of synthetic ownership of commodities as if they were hoarded, and the market is actually interpreting that at some level the commodities are being hoarded, therefore, the prices move up until something happens and the bubble bursts and everybody say, oh, yes, I remember now, those were just synthetically hoarded. So it is absolutely a similar kind of thing. To be honest with you, there is one question that the world should ask itself. This desire to own commodities, if you own a basket of commodities for 125 years, should we all live that long? You will have made something like the inflation rate on that market basket. That is all. The world should ask itself: Why is this such a popular thing to do? Is it because it is a good thing to sell by the sales folks? Or are people actually making sensible investment decisions by actually putting their money into commodities if, in fact, what I said is true, is after 100 years you have just got inflation after all? Senator Levin. Just very quickly, because I have some other questions, Mr. Slocum, would you agree with that, that ETPs are adding to speculative pressures on the commodity market? Mr. Slocum. I would, absolutely, and I really applaud the efforts of this Subcommittee to address some of the issues of this, particularly what you outlined in your opening statement about mutual funds using their investments in this to kind of get around some existing regulations. That is clearly problematic. Senator Levin. OK. Mr. Cicio. Mr. Cicio. Most certainly. Senator Levin. And now let us go to the mutual funds question. As I mentioned, we have an exhibit, Exhibit 7a,\1\ that identifies 40 mutual funds that primarily trade in commodities. The commodity-related mutual funds over the last several years have gotten into the game big time. We have come across one mutual fund that has over $25 billion in assets with one of its primary purposes to trade in commodities. --------------------------------------------------------------------------- \1\ See Exhibit No. 7a which appears in the Appendix on page 185. --------------------------------------------------------------------------- Are mutual funds that trade in commodities also contributing to commodity price speculation? And do you believe that we ought to keep the 90-percent rule that investment revenues accrued by mutual funds must be realized from investments in securities and no more than 10 percent should be realizable from alternative investments, including commodities? Can you give me a yes, no, or maybe? Mr. Cicio. Mr. Cicio. We think that mutual funds should not be participating in commodities period because, again, it has nothing to do with supply and demand and price discovery. Senator Levin. We currently have a 10-percent rule, so you at least would want us to hold to that. Mr. Cicio. Yes, sir. Senator Levin. Mr. Slocum. Mr. Slocum. I agree, absolutely, yes. Senator Levin. OK. Mr. Turbeville. Mr. Turbeville. The numbers are just staggering. Any percentage of mutual funds added compared to an open interest in commodities, in physical commodities of around $900 billion would just swamp it, yes. Senator Levin. And there is no stopping it now if they are allowed to continue to have these offshore deals that they wholly own and if they are allowed to in other ways circumvent the 10-percent rule? Mr. Turbeville. There is no stopping it, and the sales forces must be very effective, as I pointed out before. Senator Levin. By the way, we did actually stop it in the Senate. We had a House bill which would have eliminated that limit of 90 percent and said you can have as many speculative investments as you want in commodities. It came over from the House with the abolition of the 10 percent. We were able to strike it here. And the Senate sent it back to the House without that. There were some other things, mutual funds requested, but it did not get that one. And I think there has been very little attention paid to this issue, and I would hope that one of the things this hearing will do is to focus on this question really for the first time as to whether we ought to have this circumvention, through the offshore--these corporations which are shell corporations, and who is going to regulate them, and that is a big issue which we will also get into with Mr. Gensler. I think I am over my time on the second round. Dr. Coburn. Senator Coburn. Thank you. Let us go back to what we have kind of created. It is very interesting. I am trying to get a balance on where this bubble, if we do not do something about what is going on, is going to end, because it is not going to go up forever. In other words, there is going to be a point in time where somebody says, well, these guys are trading this next month. They are saying, ``How do I make money off that?'' And then there is going to be the opposite of that. So, we are always going to have to have speculators to make a market. We really cannot make a market without some speculation in it. If we could, we would not be where we are today. If we go too far or if we do not go far enough, we are going to have price exaggerations, either below or above, and I think everybody would agree with that. And we are always going to have some price exaggeration based on world events, whether it be Libya causing oil to cost $15 to $17--maybe that was exaggerated based on what we are seeing today, but the fact is there was a world event that put world oil supplies at risk and that should have some effect on commodity prices. The same thing on cotton, as I mentioned before. You had crop failures. You had $4 cotton in this country, which nobody had ever seen. Was that an exaggeration because of this? Was it made worse? So I would like your comment on how you tie in true supply-demand effects and what we are seeing. How are those true supply-demand effects that enter the market, that are fundamental differences in available supply or excess supply or marked increase in demand for some reason or another, how do those interact with what we are seeing going on in the market? Mr. Slocum. I think that there is no question that the supply-demand fundamentals play a role in these markets. It is why you have seen this big disconnect with natural gas and crude oil. It is because natural gas is not globally priced, and we do have enormous supply. That will definitely change if we start switching more and more of our coal plants to gas or if T. Boone gets his way and we have got more trucks on the road using natural gas. And as Mr. Cicio noted, it was in the very recent past that we saw significant price increases and volatility. Natural gas has a long history of that kind of volatility. But it shows that with massive amounts of supply-demand evidence that is dominating the market, supply-demand can play a role, but in a globally priced commodity like crude oil, where you have speculators playing a significant role, I think that what we see is the volume being driven by these speculators and by the index. Senator Coburn. With the marked excess in supply of natural gas, why isn't it significantly lower than it is today if these guys are playing? Why isn't it $2 instead of $3.60 or $3.90? Mr. Slocum. Right. Senator Coburn. Why isn't it $2? Mr. Cicio. That is what manufacturers are asking. Senator Coburn. But I am asking it on the basis if we have excess speculation based on market forces or intended market forces, why aren't we seeing an exaggeration on decreased price? That is my whole problem with what we are being presented with here today. Everything seems to be rigged for an upward bias, but when there is fundamental market indices that say there is absolute two to three times as much natural gas as this country can consume available right now, why aren't you seeing the other side of this? Where is the market failure in that? Mr. Cicio. Well, actually, Senator, as consumers, given the increased supply of physical natural gas, we think that prices probably should be lower than they are. But because of the ETFs and the ongoing long positions that I talked about, remember, 86 percent of all of the index positions historically have been long. There is this growing amount in volume of long positions that keeps encouraging the upward pricing pressures versus a reflection of the oversupply of the marketplace. But interesting about natural gas is that if you look at the Chicago Mercantile Exchange, which I did last week, and look out 5 years to see what the price of natural gas is, given our vast supply of natural gas, one would think that there would be a downward price curve, much like what was talked about earlier, which is historically what commodities had. They had a downward pricing curve. Natural gas prices 5 years out show a 52-percent increase. Senator Coburn. Yes, but that is readily explainable. We are building LNG terminals. We are going to ship it to the Chinese and Europe. The other factor is we are going to see massive inflation in this country in 2 or 3 years, and people are anticipating that. So maybe that is the reason that there is not the downward side to it. But I still have problems. Mr. Turbeville. Mr. Turbeville. One of the things that occurs to me about natural gas is something you mentioned, which is that natural gas gets stored in the ground as opposed to next to its use. So there is a limit on how low natural gas can go because no matter how much the supply is, the constraint is actually the transmission associated with it. But the fact is that one way to approach all of this is to try to decide how much--or what really is the effect of trading as opposed to supply and demand, is to look at elements that are unrelated to supply and demand--I am sort of promoting what we did, but that is specifically why we did it. We looked at the 5-day roll periods--over 27 years, which has nothing to do with supply and demand, and looked at the bias associated with that. The law of supply and demand has not been repealed. Nobody should think that is true. However, it is fairly certain that this inefficiency does occur on the margin, and how much is it? It is hard to say. The St. Louis Fed has said it is something like 17 percent of the price. It probably changes over time. But it also is biased towards upward levels, and it is because of this huge price-insensitive long that is in the market. I believe that is true, too. Senator Coburn. All right. Thank you. Senator Levin. The rule that came from the CFTC makes a distinction between commodity swaps that reference a single commodity, like oil, and those that reference a basket of different kinds of commodities, like oil, gold, and wheat. The rule applies position limits to single commodity swaps but no limits at all to multiple commodity swaps. Can you give us your opinion as to the basis for that distinction? And how does it affect the effort to combat excessive speculation? Let us start with you, Mr. Slocum. Mr. Slocum. Well, in terms of why the CFTC has taken this approach, I think Mr. Gensler is following us, and I think he is a lot more qualified to---- Senator Levin. We will ask him, too, but do you---- Mr. Slocum. Yes, I do not know why they have done that. I am concerned that differing treatment is problematic and will encourage levels of speculation because of that loophole that are going to be problematic for consumers. Senator Levin. OK. Mr. Turbeville. Mr. Turbeville. I guess we are mostly interested in the result, right? Do commodity index funds get effectively regulated and limited? They have taken this approach of saying a multiple index swap is not disaggregated into its component parts. It is just a swap that exists out there and is not subject to---- Senator Levin. Does that trouble you? Are you OK with it? Mr. Turbeville. I am OK with it as long as the actual limits themselves--because what happens is, of course, the bankers then have to go do swaps and futures on the other side of that. If those swaps and futures really got effectively regulated, it would not be a problem. My concern is that there are too many ways to use the single entity limits in such a way and to manipulate them so that the bankers never will get regulated. So the better result would have been to say a multiple swap is regulated and limited. Senator Levin. What happens if a basket is 99 percent oil and 1 percent something else? Doesn't that kind of make the position limits ineffective? Mr. Turbeville. Yes. Senator Levin. I know you are worried about that. We are just warming up for Mr. Gensler. [Laughter.] Mr. Turbeville. I understand. Yes, I would have been personally, and as an organization, more comfortable to go ahead and address the issue straight on and say let us talk about the swaps themselves rather than indirectly trying to get--you are right. What happens is it becomes a metaphysical concept. There is by analogy in other rules, agricultural rules, that more than 50 percent will constitute that swap, an oil swap, but it does not actually apply to oil. Senator Levin. OK. Mr. Cicio, do you have a thought on that? Mr. Cicio. Well, just briefly. We were troubled by the differing treatment as well, and we would rather have the spec position limits apply to all, so undifferentiated. Senator Levin. OK. Just one last question about a netting rule in the final rule of the CFTC which allows a swap dealer who sponsors a single commodity index fund to net any short position created by the sale of a commodity swap to a client with a long future involving the same type of commodity. So the netting rule means that to the extent the swap dealer is hedging its financial risk by buying long futures to offset its client's speculative bet, the swap dealer can claim his position is flat and not subject to any position limits. So the swap dealer then could sell $1 billion in swaps to a lot of clients and then offset that risk by buying $1 billion in futures, affect the price of those futures it is buying, but still not be subject to any position limit. Does that netting rule open up a loophole for swap dealers who will be able to sell and offset as many single commodity swaps as they want even if that activity floods the commodity markets with speculative money? Is there a loophole created by that rule, Mr. Turbeville? Mr. Turbeville. That was a change to the proposed rule that was in the final rule. The concern there is that what the rule suggests is that the swaps market and the futures markets are all one market and should be viewed as such. We think that is not appropriate. We think that the futures market is a very specific market that creates a very important--it has a very important role in price formation and price discovery. And so the netting across those two clearly should not be allowed, although it is. Senator Levin. OK. Mr. Slocum, do you want to comment on that? Mr. Slocum. I definitely share your concern. I think you articulated a potential abuse, and I think it underlies the fallacy of creating this potential for loopholes. Senator Levin. OK. Mr. Cicio. Mr. Cicio. And we agree with you, sir. Senator Levin. I said that was my last question, but I do have one other comment I want to make, and that has to do with a comment of the CEO of the Intercontinental Exchange (ICE). It is headquartered in Atlanta, and Jeffrey Sprecher was quoted in a September investment bank research report as saying that the energy markets may work better with position limits in place. It is a very important comment because it is coming from the CEO of ICE, but it has not been, I think, widely quoted yet, and I hope this may help a little bit if I quote it: ``It is not necessarily a bad thing for exchanges to prevent one large player from having concentration. ICE imposed its own version of position limits in its markets. The volume had actually increased. There was a healthier market with more and smaller players as a result.'' And here is what he then said: ``A lot of people do not like the thought of being limited in any way, but the reality is, and the evidence so far at ICE is, that we have grown very well during a position limit regime.'' I am just wondering whether each of you would welcome that kind of a comment from a person in that position. Mr. Cicio. Mr. Cicio. Clearly, yes, sir. Senator Levin. OK. Mr. Slocum. Mr. Slocum. Yes, I think it underlies how much of the debate on this issue, and sometimes others, where you have some powerful interests where their status quo is threatened and they will claim that the sky is falling is very basic regulatory oversight is applied to their sprawling complex operations. And every once in a while you get a moment of truth in that, like apparently the CEO of ICE. So I am glad that you are quoting him on that. Senator Levin. Mr. Turbeville. Mr. Turbeville. I not only welcome it, I agree with everything he said. Senator Levin. Thank you all. We are going to make all the statements part of the record, and there is an additional request for a statement to be made part of the record by the Petroleum Marketers Association of America and the New England Fuel Institute, and we will make that testimony part of the record. We will leave the record open for other organizations that might wish to file statements.\1\ --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Ramm, Petroleum Marketers Association of America and the New England Fuel Institute which appears in the Appendix as Exhibit No. 10 on page 266. --------------------------------------------------------------------------- We will thank this panel. It has been very useful and helpful testimony. Thank you all. [Pause.] Mr. Gensler, we welcome you. We appreciate your not just coming here to testify but taking some extra time to listen to our other witnesses. We very much appreciate that. We look forward to your testimony. I think as you know, all the witnesses who testify before our Subcommittee are required by our rules to be sworn, so I would ask you to please stand and raise your right hand. Do you swear that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. Gensler. I do. Senator Levin. The light will go on from green to yellow about a minute before the 10-minute period is up, so we would ask you to try to limit your oral testimony to no more than 10 minutes. There will be whatever time we need, obviously, to get your entire testimony in one way or another. So we again thank you for being here and please proceed. TESTIMONY OF THE HON. GARY GENSLER,\2\ CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION Mr. Gensler. Good morning, Chairman Levin and Ranking Member Coburn. --------------------------------------------------------------------------- \2\ The prepared statement of Mr. Gensler appears in the Appendix on page 98. --------------------------------------------------------------------------- Senator Levin. We expect he will be able to return. He had another important mission here this morning. Mr. Gensler. Well, if Ranking Member Coburn is listening somewhere, I thank him as well. I thank you for inviting me here today to talk about the changing nature of the derivatives markets and on position limit rules. The derivatives markets have changed significantly since the CFTC opened its doors back in 1975, and you have noted in some of your excellent charts these changes. But, first, there is the swaps market as well. This emerged in the 1980s, and it is now seven times the size of the futures market. Second, instead of being traded just in the trading pits in Chicago and New York and elsewhere around the globe, much of the market, over 80 percent, is traded electronically, a click of a button. Third, while the futures market has always been where hedgers and speculators meet in a marketplace, a significant majority of the market is made up of now swap dealers, hedge funds, and other financial traders. Fourth, the vast majority of trading is now day trading or trading in what is called calendar spreads, between 1 month and a later month, but not necessarily to go outright long or outright short. And I would add, as your charts suggest also, a fifth point is that a significant portion of the market is now in these index investments, more on the long side than on the short side. Now, the CFTC is focused on ensuring our regulations are responsive to today's markets. We are an agency that is not set up to be a price-setting agency, but it is an agency to promote transparency in markets, to police against fraud, manipulation, and other abuses, and to ensure that there is integrity in markets and the price discovery in the market has integrity for all the hedgers in this market. This summer, of course, with the Dodd-Frank Act's passage, we turned a corner and began finalizing many rules with regard to the swaps market but also updating some of the market rules on the futures market, and to date, we have completed 18 final rules and have a busy schedule throughout the rest of the year and into next year. We have completed rules giving the CFTC enhanced anti- manipulation and anti-fraud authority, and it extended the Commission's reach to include reckless use of fraud-based manipulative schemes. And I know we have chatted about this in the past as a very important extension of our authority to fill a gap in our enforcement tools. The CFTC also approved a final rule on large trader reporting for physical commodity swaps. For the first time, the clearinghouses and the dealers, the swap dealers themselves, must report to the Commission information about swaps activity on the large trades, and that rule actually went effective last month--well, now 2 months ago, September. The CFTC also completed the rules that are the center of this hearing, the aggregate position limits rules for physical commodities. A position limit regime is a critical component of comprehensive regulatory reform of the derivatives markets. Position limits have served since the Commodities Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce, and the emphasis might be on prevent, as the Chairman mentioned earlier, and it has been used since, I think, we first put in place our predecessor's position limits in 1938 using that initial authority. I think it was then in bushels. It might have been 2 million bushels of a certain grain. And though, as I mentioned, the CFTC is not a price-setting agency, at the core of our obligations is to promote market integrity, which the agency has historically interpreted to include ensuring markets do not become too concentrated. You mentioned that quote of an exchange leader--but I think that was really at the core of what Mr. Sprecher's quote was--about concentration of markets and making sure that there is no one who has an outsize position. In the Dodd-Frank Act, Congress mandated the CFTC to set aggregate positions for physical commodity derivatives, and this would include for the first time and historically position limits on swaps as well as futures, which I mentioned are seven times the size of the market, and even certain linked contracts on foreign boards of trade that might be trading overseas but linked to these contracts. And the final rule achieved that. The Dodd-Frank Act also tightened the definition of bona fide hedging. Since the 1930s, the concept was this was a limit on speculators not hedgers, but over time there had been some creeping and widening of that by the CFTC, various rules and interpretations and sometimes no-action letters. Congress addressed that and said it should be narrowed such that the exemption only be for transactions and positions that served to mitigate risk in the cash market for a physical commodity, and I believe the final rule achieved that as well. The Dodd-Frank Act also mandated that we set position limits for energy, metals, and agriculture for the spot month and something called individual month and all months combined, and I believe the final rule achieved this on the 28 physical commodities. I would mention that the rule re-establishes position limits for all months combined and individual months for energy and metals, which had existed actually, but had been taken off in 2001 in energy and in the late 1990s in the metals markets. Before I close, I would like to briefly mention the events this week of MF Global, if I might. Earlier this week the CFTC and SEC determined that the Securities Investor Protection Corporation-led bankruptcy proceeding would be the safest and most prudent course of action to protect customers of this failing financial institution. The most troubling aspect about MF Global's situation is the shortfall of customer money in the firm. Segregation of customer funds is at the core, and it is really a foundation of customer protection in the commodity futures and swaps markets. Segregation must be maintained at all times. Simply put, that is at every moment of every day down to the nanosecond. The Commission intends to take all appropriate action within the purview of the Commodities Exchange Act and the Bankruptcy Code to ensure that customers maximize the recovery of funds and, I say, to discover the reason for the shortfall in the segregated customer money. The CFTC and SEC and other regulators will continue to closely coordination actions, and I thank you. I would be happy to take any questions. Senator Levin. Well, thank you very much, Mr. Gensler. Since you made reference to the MF Global, let me just start with that. Is there any risk of a taxpayer bailout in this case? Mr. Gensler. No, I think this was an example, actually, of a financial institution having the freedom to fail. Senator Levin. So there is no risk of a taxpayer bailout. Mr. Gensler. I think that is right. I think when the Chairman of the SEC and I were on these middle-of-the-night conference calls from 2:30 a.m. to about 7 a.m. on Monday and we not only informed that there was not somebody to take the customer positions over but that there was the shortfall in the customer accounts, we really saw no alternative but to protect the customers, put it into bankruptcy, and it is in liquidation. But, Chairman, I do not think that there is any taxpayer money behind this. Senator Levin. Or at risk. Mr. Gensler. Or at risk. Senator Levin. Now, you made reference to what the CFTC is going to do or continue to do, I think was your word. Can you tell us just briefly what you have done and what actions you can take or will take to protect their clients? Mr. Gensler. Well, throughout this week we have worked very closely with the court-appointed trustee who is now in place over this company, and we have worked very closely with the various clearing organizations and other clearing firms to try to move the positions. We were successful yesterday that the bankruptcy court did an order to allow customer positions to move. But the monies themselves may have to wait a bit because the trustee and the bankruptcy court have to really do a full accounting. We are in there as well. We have had people at MF Global since last Thursday really trying to assess this, but, of course, events changed dramatically on Monday with the shortfall. Senator Levin. OK. Now, getting back to the subject of the hearing today, let me start by asking you about the Dodd-Frank Act requirement that you have attempted to implement in your rule and trying to curb excessive speculation and manipulation in the commodity markets by imposing position limits on commodity traders. I am just wondering whether you feel, as the Dodd-Frank Act believes and reflects, that it is critical to put this rule in place for jobs, for economic recovery, to help ensure that prices for vital commodities like crude oil will reflect supply and demand rather than speculative pressures. Mr. Gensler. I do think it was critical to put this in place and to fully implement it. I think it is critical that these markets have only--that they not have outsize concentration by one party or another, and particularly as Congress intended for us to do to place these limits on speculators. I think that markets work best when they have a diversity of points of view and a diversity of speculative interest. They are really primarily, as I think you and others have said, for hedgers to hedge. It was originally somebody growing corn or wheat to lock in the price at harvest time, and then, yes, there was a speculator on the other side who locked in that price and in a sense was taking a bet on where corn or wheat would trade. Senator Levin. But the speculation has now gone way beyond providing the needed liquidity for that kind of hedging, so now speculation is a greater part of the market than the actual trading that is needed if you are going to hedge. Would you agree with that? Mr. Gensler. Yes. I remember discussing this with you about 3 years ago when we were in your office, when I was just a nominee for this job. But I think I share that view. Senator Levin. And do you believe that the price swings in oil futures in 2008 and 2001 were caused in part by speculation and that became disconnected to the fundamentals of supply and demand, that these broad price swings in oil obviously have an actual market connection to the real fundamentals of supply and demand, but that there is a significant part of these price swings in oil futures that are the result of speculation. Mr. Gensler. We are not a price-setting agency, but when the markets are made up of--I will use oil--approximately 12 or 13 percent of the long positions of producers and merchants, and if I recall, maybe 18 percent of the shorts. And we publish these figures every Friday. They are public. So that means 80 to 87 percent of the market are financial participants, swap dealers, hedge funds, and other financials. Senator Levin. Those are the speculators we are talking about. Mr. Gensler. People generally use that word. Senator Levin. Right. Mr. Gensler. But I think it is both hedgers and speculators, and financials have an influence on price, so on any given day it is hard to determine whether it is up or down, but I think it is uncontroversial that speculators, when they are 80-plus percent of the oil market, and some of the agricultural markets at 60 percent, have a role to play, as has been known since the 1930s, and then we police for fraud and manipulation. We promote transparency, and then we use position limit regimes to ensure against any concentrated position and also to police against manipulation. Senator Levin. So there is a legitimate role that is played by people who obviously have to fund people who want to hedge. That is a legitimate role. Mr. Gensler. That is correct. Senator Levin. In terms of the excessive amount of speculation, you do not consider that to be legitimate? If it is excessive, it is not legitimate. Do you agree that excessive speculation, however it is defined, is not legitimate? By definition do you agree? Mr. Gensler. Well, I think Congress made a finding, and what we were asked to do is then to set position limits, which we have done not only just 2 weeks ago but since the 1930s, to ensure against the burdens that may come. The burdens can be just that a large position wants to sell at an inappropriate time for everybody else. It is their right to sell, but it could distort prices in the midst of a crisis or even in clear times. Or the burden could come from either direction because it is an outsize position that pushes the price down or up. So we have used it to sort of ensure against the concentration of positions in the marketplace. Senator Levin. And are price distortions and large price swings a problem? Mr. Gensler. Well, these markets--and again, we are not a pricing agency--will have volatility, just like securities markets will have volatility. But what producers and merchants want to do is lock in a price so that they can do what they are really good at. What they are really good at is either tilling the field or merchandising product to consumers. And so it is important that they have confidence in the markets and can ensure that the markets have supply and demand at their core of the price discovery. Senator Levin. And is it important that supply and demand be at the core of price discovery? Mr. Gensler. Yes. Senator Levin. And is that frustrated when there is a large amount of speculators, as we have defined it here, in the market where that dominates? Mr. Gensler. It is an excellent question, is there, in essence, a percent, as was asked earlier. Senator Levin. I am not asking you what the percent is. Is that legitimate function for hedging frustrated when there are large amounts of speculation as we have defined it? Mr. Gensler. I think at our core is to ensure that the markets are free of manipulation and fraud--I am thankful that you and others helped us get better manipulation authority--and then to use these position limits to ensure that no one is greater than a certain percent. For instance, at the core of our rule is that no one is greater than approximately 2.5 percent of these markets for the all-months combined. I mean, if they are a smaller market, there is another percent. And so that means there in essence would have to be a diverse number of speculators, not one that necessarily has an outsize position. Senator Levin. Do you believe that the purpose of our congressional enactment is to prevent excessive speculation? The word ``prevent,'' which is in the law, do you believe that is the congressional intent? Mr. Gensler. I am well advised by counsel that once worked with you who tells me it is to prevent the burdens that may come from excessive speculation. So it is preventative and forward-looking, and that is how we have used it in the past, and I think Congress understood that, and it is the clear intent of the statute, Dodd-Frank Act, that we set these aggregate positions. Senator Levin. Let me read Section 737 of the Dodd-Frank Act to you: The CFTC ``shall set limits . . . to the maximum extent practicable . . . to diminish, eliminate, or prevent excessive speculation . . . '' So is that one of the purposes of the Dodd-Frank Act, to prevent excessive speculation? Mr. Gensler. I do not have the actual words. I always thought it was ``the burdens that come from,'' but I trust---- Senator Levin. Is the word ``burdens'' in there? Mr. Gensler. I thought, but if not--but I trust whatever the Chairman's reading. Oh, I see. I am thinking of 4(a)(1), and there is---- Senator Levin. I am reading Section 737. In that section, would you agree I read it correctly? Mr. Gensler. Yes. Senator Levin. That is good. Did you hear me when I quoted the head of ICE, Mr. Sprecher? Mr. Gensler. Yes. Senator Levin. Were you familiar with that comment before that? Mr. Gensler. I was familiar with his thinking, though maybe not the exact quote, but he had shared that thinking with us, yes. Senator Levin. And do you agree with him about the potential benefits of position limits creating healthier commodity markets? Mr. Gensler. I do. I voted for the rule. I did because I think Congress mandated that we do it, but I also believe that it helps promote the integrity of markets. Senator Levin. Much of the new speculation comes from the commodity index fund investors and swap dealers who sponsor those funds, hedge their risk on their client's speculative bets by purchasing long futures contracts. Do you know approximately what percentage of the demand for long futures contracts across the futures markets is attributable to commodity index funds, approximately? Mr. Gensler. The figures that we put out monthly show--and I think they were summarized in the charts--approximately this $250 or $260 billion equivalent in futures because some of that is swaps investment. The marketplace in the commodities, the most recent figures, is about $1 trillion in notional amount of futures. So it is a little bit of apples-to-oranges, but you can think of it roughly as about 25 percent of the longs and, because the shorts are about $70 billion, about 7 or 8 percent of the shorts, though I would note there is a little apples and oranges there. Senator Levin. OK. When you testified before the Subcommittee before regarding excessive speculation in the wheat market in 2009, I asked if the CFTC as part of its work would look at the question of whether or not commodity index trading constitutes excessive speculation in the wheat market, and you told us that the CFTC would be looking at it not only for index investors but also for the broader class of speculators in financial markets. I am wondering if you have conducted that review. Mr. Gensler. Well, I think since then--and I apologize, I do not remember the exact date of that hearing--we had three public hearings in the oil markets and one in the metals markets, and then we have had two public meetings on this rule itself and conducted a great deal of inquiry, including 8,000 comments on the initial rule and 15,000 on the latter and hundreds of meetings. So collectively, yes, we have also looked at over 50 studies that were referenced in the comment file on position limits and reviews those and had our Office of the Chief Economist review those studies. Senator Levin. We have talked this morning about the commodity-related exchange rate traded products (ETPs), which are set up as securities but are designed to enable speculators to bet on changes in commodity prices without buying the underlying commodities. These are hybrids that combined securities and commodities. They can directly affect commodities futures prices. They are currently responsible for about $120 billion in commodity investments. Do you believe that exchange traded products that offer investors the chance to invest in baskets of commodities have added to the speculative money in the commodity markets and that they have contributed to speculative pressures on commodity prices? Mr. Gensler. Well, they are a group of financial investors that are speculating. Again, as hedgers and speculators meet in markets, this is a new vehicle for the retail public for the person to invest rather than maybe buying a bar of gold or-- when I was growing up, my dad used to have a couple of gold coins, I remember he would show them to me every once in a while. He thought it was good always to have a little gold. This is a new vehicle to have that. Senator Levin. My dentist, by the way, is telling me the same thing. It is good to have a little gold. Mr. Gensler. I see. Senator Levin. Anyway, I interrupted you. Mr. Gensler. No. Senator Levin. The Dodd-Frank Act acknowledged the existence of these mixed swaps as hybrid instruments that warrant oversight from the SEC and the CFTC, and I am wondering if ETPs are not the same, essentially, set up as securities but intended to function as commodity investments. Would you agree? Mr. Gensler. Yes. One of our staff calls it a ``securitized warehouse receipt.'' In a warehouse somewhere there is gold or silver, but it is traded in the securities market. Not all of these are that, but the majority of them are. Senator Levin. And, therefore, does it require oversight from either or both the SEC and the CFTC? Mr. Gensler. Well, the SEC does have oversight. We have coordinated with them for the last 6 or 7 years when this market started on that. But most directly it is the SEC's oversight, though they have done it in a cooperative way with us. Senator Levin. Are the commodity-related issues looked at by the SEC? Their function is not to look at the issues involved in commodities trades, so I want to know who is looking at the commodity-related issues in these instruments. Mr. Gensler. On these instruments, if they were used with regard to a manipulative scheme in the commodity futures markets or shortly in the commodity swaps markets, we would. But if it were just the trading of these and they did not come into a manipulative scheme, then it would be separate. But it would also, if I might say, be somewhat like if somebody was just trading gold but it was not part of a manipulative scheme, we would not necessarily be looking at that either. Senator Levin. And are you taking steps to prevent them from being used as manipulative schemes, or are you waiting for something to happen? In other words, are you doing the oversight of these securities and the way they are used as commodity trades? Is that something you are trying to prevent manipulative schemes from being used, or you are just saying, well, the SEC is looking at the trades and we are going to wait until there is some evidence that accumulates somewhere? Mr. Gensler. I think, frankly, this would have to be a little bit more evidence-based, if we saw something in our futures markets we oversee or a whistleblower or somebody comes to us. Frankly, with the 700 people that we have, the resources are not such--nor do we necessarily just go to see if somebody is doing something with gold. But if it comes into our markets, comes into the futures markets that we oversee or shortly the swaps market and becomes part of a manipulative scheme or device, we have in the past and will in the future do so. Senator Levin. So the oversight of these particular types of products is different from the futures. Mr. Gensler. That is correct, sir. Senator Levin. And isn't that a problem? Mr. Gensler. It may be. I do believe that if it came to our attention it was being used as part of a manipulative scheme, we would certainly use everything that we have in our resources, but I think you have the accurate picture. Senator Levin. Thank you. Senator Coburn. Senator Coburn. Welcome. Sorry I was not here to hear your oral testimony. How does the CFTC define ``excessive speculation''? Mr. Gensler. Congress actually had a finding in the 1930s, and we first put position limits in in 1938 based on that finding. And though some of the language has changed over the years, it is really that we were to use position limits to help curb or prevent some of the burdens that may come from excessive speculation. And so what we did then and have over the decades is really looked to ensure two things: In the spot month, when somebody is actually delivering the natural gas down in a certain spot in Louisiana or delivering the oil in Cushing, Michigan, which you know well, that there is not a corner or a squeeze or a manipulation in that delivery period; and then, second, that over all of the contracts, which we call all-months combined, that there is not a concentration or an outsize position. It used to be labeled in numbers of bushels of grain, the first position limits were that way, and then subsequently, by the 1970s and 1980s, we turned to a percentage of the market. This most recent rule really used a formula that we put in place through notice and public hearings in the late 1980s and early 1990s, so it is about 20 years ago, and it is roughly 2.5 percent of the speculators. The speculators could not each have more than 2.5 percent. Senator Coburn. So is excessive speculation happening now? We did not really get to a definition. So whatever it is, is it happening now? Mr. Gensler. The markets are made up of hedgers and speculators coming together, and one of the increasing features of the market is more and more financial parties. In the oil or natural gas markets, about 13 to 18 percent of the market are producers and merchants, and the other 80-plus percent are hedge funds and swap dealers and other financial actors. What we do is we use our authorities to police against fraud and manipulation and ensure transparency, that people see that price function, and then also to have positions to help prevent against manipulation, corners and squeezes, as I mentioned, help ensure the integrity of the market with regard to the all- months combined, that no one speculator has an outsize position. Senator Coburn. So I will go back to my question. Is excessive speculation happening now? Mr. Gensler. Well, we know that the speculative group in the market can be anywhere from 50 or 60 percent in the grain markets to 80 to 88 percent or so in the energy market. Congress made the finding not only in the 1930s but also in the Dodd-Frank Act, once again came back to it, added more words that the Chairman and I just were--he was good enough to remind me of the additional words--and asked us, really mandated for us to put in place these regimes to help as a preventative matter moving forward. Senator Coburn. So you do not know whether excessive speculation is happening now? Or you do know and do not want to define it? Or you are just responding to Congress and the assumption that there is? Mr. Gensler. Well, I think that we have been responding to Congress for 70-plus years on this, and it has been reaffirmed by Congress just last year that to ensure for the integrity of markets that we have a per se limit, that it is a specific limit that we set in place. So we use these well-worn formulas that have worked. We had limits in the energy and metals markets before. Senator Coburn. I am not debating that. Is the assumption by the CFTC there is excess speculation now so, therefore, you wrote new position limits? Mr. Gensler. No, I think that what we took was Congress' clear mandate to do this, and with the regime that we have used in the past---- Senator Coburn. The language says ``as necessary,'' so how do you decide whether it is necessary unless you assume there is excess speculation? Mr. Gensler. Well, we took this up and had many comments, some on both sides of this very issue that you just raised, Senator. It is the Commission's belief in finalizing this rule that Congress mandated that we move forward and that it is not necessary to find that there had been a burden, that these are also preventative, these are forward-looking, so ensure that there is not manipulative schemes, corners, and squeezes. Senator Coburn. So the new regulation is not based on the fact that there is an assumption that there was excessive speculation. It is to prevent any future excessive speculation. Is that what you are telling me? Mr. Gensler. That is what the statute actually says, and the Commission's finding on this is that. But in addition, we had over 50 studies referenced in the file, and about half of them are on one side and about half of them are on the other. I do not want to say a percentage, but they are mixed, the economic studies. Senator Coburn. So for clarity for the American people, either there is or there is not excessive speculation, and we have put forward regulations to prevent the potential for that in the future. Mr. Gensler. To prevent the burdens that may come from excessive speculation. Senator Coburn. Well, position limits are designed to stop excessive speculation, correct? Mr. Gensler. I believe that the statute has in 4(a)(1) the words to curb or prevent the burdens that may come to interstate commerce from excessive speculation, and then in 4(a)(2), as the Chairman pointed out, there were added four factors, and so it was also about manipulation, it was about promoting liquidity in the markets, and promoting the price discovery---- Senator Coburn. So you could have written a rule that would have allowed for excessive speculation but would not have had a burden. Mr. Gensler. I am not sure I am following that. Senator Coburn. Well, you just said the statute is to prevent the burden in terms of the price to the markets and to the country. So you could have had a rule that allowed for excessive speculation as long as the excessive speculation did not affect the price. I will not go any further on it. The point is the factual basis of determining excessive speculation needs to be based on something that is concrete, not an aftereffect but something that is concrete. And my worry is you are going to get tied up in a lawsuit that is going to--the well-intentioned thought of eliminating excessive speculation and decreasing volatility so that people are not paying too high of a price for something that the market truly is not saying--that speculation caused it to be higher, more speculation than necessary to then create the market. What my worry is is two things: One is that you are going to get tied up and spend a lot of your budget defending it; and two is what we have written here is a click away from not having any effect at all because they are going to go to some other market. What do you think will happen in the rest of the commodity exchanges around the world on the basis of the new rule that you all have put out? Mr. Gensler. I think we have made very good progress. In September, working along with international regulators in something called--I do not know that you are familiar with it, but it is the International Organization of Securities (IOSCO) regulators--put forward a joint report, and then that was moved up actually to the G-20, the 20 countries that form the Financial Stability Board, to put in place regimes that have anti-manipulation rules similar to what we have that could go after attempted manipulation, have more transparency. We actually have some of the best transparency here. And, also, it included--they called it ``position management regimes,'' a little bit different word. We would be glad to brief your staff on that. So I think we have made good progress, but you are absolutely right, capital and risk knows no geographic boundary. So Congress also included that if there was a foreign exchange that linked their contract to contracts here, for instance, if somebody in London linked the contract to something in your State, Oklahoma--it is called West Texas, the WTI contract. If it were linked, that has to come under the position limits, and we finalized a rule that said if anywhere around the globe a foreign board of trade links it to one of the contracts here, then it has to be in that same regime. Senator Coburn. Yes, but none of that is implemented anywhere yet, correct? Those are proposals to be implemented. Mr. Gensler. That is right. Senator Coburn. We have a rule that is going to be in effect, questions about it, lots of learning curve on it. What is going to happen in the meantime? Let me just assume for a minute, since Europe is functioning so well--they are functioning just about as poorly as we are as a legislative body. What happens if those do not get put in effect given ours goes into effect? What do you foresee--what is the downside for American jobs, American price discovery, American valuation for products and commodities that are made here, what is the downside for our country if that does not happen in the rest of the trading centers around the world? What is the downside? Mr. Gensler. I think we saw some of the downside of weak regulation in 2008. I think our financial system failed in part because our regulatory system failed in 2008, and 8 million Americans are out of work today because of that, not because of position limits but because of our weak regulatory system. Senator Coburn. Well, let us talk about what I asked you. What is the downside if they do not do it and we have? Mr. Gensler. But I think that Congress mandated us to do this and a lot of other pieces of---- Senator Coburn. I understand. What is the downside? Mr. Gensler. I think the downside is if we do not protect our markets, the price discovery and the integrity of these markets are weakened. So I think what Congress recognized and what the Commission recognized is that we have to promote the integrity of the markets and the price discovery function here. Congress also did ask--and we will do this--1 year after these rules go into effect, we have to report back to Congress, and one of the specific things Congress asked us to report on is exactly that which you raise, about the overseas effect, where are we at that point in time and report back, whether it is--I do not remember the exact words, but any effects of where we are overseas versus here. And I think that was very appropriate. Senator Coburn. So I take it from your answer you are not extremely concerned that disconnecting from WTI, disconnecting from the Chicago Board, disconnecting from all these others, that people decide that they will speculate somewhere else, and given that we are in a global economy, we cannot regulate the global economy by only regulating us, and the very things that we are trying to limit, excessive speculation, whatever that is--since nobody will define that for me except Mr. Turbeville--excessive speculation is going to occur somewhere else outside, and we are still going to have the same price swings in our market. Is that not the downside? Mr. Gensler. I think that we are working very closely with international regulators, and I share your view that we should harmonize as much as we can. But we do have, as you mentioned, different political systems, different cultures, and it is possible, it is even likely that we will end up with some differences in not only position limits but anti-manipulation, the oversight of swap dealers, and the like. Senator Coburn. How many people are employed in commodity trading in this country? Mr. Gensler. I know the figures for the whole financial industry is into the hundreds of thousands. I do not know the specific number to your question, but we could try to get back to you on that. Senator Coburn. Well, we have got it. The point I am saying is we have a problem, the Chairman has identified a problem. We know we want real price discovery. We know we want real transparency in our markets. We know we have to have speculators to create a market. We know we do not want excessive speculation. We know we want the CFTC when they are cornering markets or abnormal. Is the regulatory framework that you put up, without that being put up around the rest of the world, going to be effective in accomplishing what--even if Congress told you to do it or whether it was apparent as necessary you should do it, is it going to accomplish its goal? Mr. Gensler. I think that it is important that we promote the price discovery and the integrity of the markets that we can oversee here. You are absolutely right. We do not oversee all the markets around the globe. If it is linked back to these markets, we do. We have that hook. But you are right---- Senator Coburn. Yes, but all they will do is delink it. I mean, think oil. Where is the vast majority of the oil produced? Not here. So if, in fact, we have trading limits here and the rest of the world does not put them in, the oil is not going to be traded here. It is going to be traded in London, or it is going to be traded in Singapore. It is going to be traded somewhere else besides here, and we will not have accomplished the purpose. And what needs to happen is the effective implementation of transparency and price stability in all the markets, not here. Because what my worry is is we are one click away--my computer, one additional click, I can go to London and trade. Mr. Gensler. No, that is my worry about the European crisis right now. We are one click away the other direction. So we are working pretty hard to finish our rules to make sure our financial institutions are less at risk, less interconnected through the swaps market, and that the more transparency in the markets that we can oversee actually have greater transparency and greater integrity. Senator Coburn. Let me go to one other area if I might for a moment. Senator Levin. Sure. Senator Coburn. Have you all created a true definition of what a swap is? Mr. Gensler. I think that Congress had a very good definition. We were asked by Congress to further define the word ``swap,'' working along with the Securities and Exchange Commission. We had a lot of public input through what is called an Advanced Notice of Proposal, and we are working to finalize that in the next several months. Senator Coburn. So you cannot regulate it until we define it, correct? You are going to have trouble applying a position limit on a swap until you have a definition of what a swap is. Mr. Gensler. We have actually envisioned exactly that these rules go into effect for certain futures products in the spot month, but to the extent that they relate to swaps, because Congress asked us to ``further define'' it with the SEC, we need to finalize that role. As I say, we are envisioning---- Senator Coburn. When does that have to be done by? Mr. Gensler. Well, Congress asked us to finish it by this past July, but we are not working against a clock. We are working to get this in a balanced way. Senator Coburn. And when do the regulations on swap position limits take effect? Mr. Gensler. The spot month limits that are on certain futures will take effect, but the ones that relate to swaps we need to finalize that further definition, as the Senator says, and that is probably several months away. Senator Coburn. Yes, it is not going to take effect--there are no limits on a swap until you have defined a ``swap.'' Is that what you are telling me? Mr. Gensler. That is generally correct. There are some exceptions because in a law passed in 2008 around significant price discovery contracts, there are some in natural gas, but-- we do have some. Senator Coburn. So there is not going to be any position limits enforced by the CFTC until the definition of what a swap is is out, with the exception of what you described in---- Mr. Gensler. That is generally correct. Senator Coburn. All right. You already have position limits for legacy contracts, correct? Mr. Gensler. That is correct. Senator Coburn. And is cotton No. 2 one of those? Mr. Gensler. Yes, sir. Senator Coburn. And yet cotton hit 16 record-setting prices in the last 12 months, did it not? Mr. Gensler. If that is the number you have, sir, I trust the number. Senator Coburn. Did the position limits in place prevent wheat, corn, and soybean volatility in 2007 and 2008? Mr. Gensler. We are not a price-setting agency. I think that position limits are to help ensure the integrity of markets, that no one party has an outsized or concentrated position in the markets. Senator Coburn. I know, but the reason I ask the question is the panel before you, based on these new methods of trading, outside of true commodity users and people who are hedging, the implication was that the price is on the way up regardless of supply-demand, essentially, unless extreme supply-demand differences. And yet in wheat, corn, and soybeans, from 2007 to 2008, we saw tremendous price increases, yet we had position limits on them. We saw a tremendous increase in volatility. And I agree with you, you are not in the position to control price. You are in the position to create transparent and stable markets. Mr. Gensler. We agree on that. Senator Coburn. So the point I am making is we had position limits on those commodities, yet we saw tremendous swings, tremendous increased speculation, and tremendous increased volatility. So my point is we are not necessarily going to change pricing, which was our testimony of the first panel, that the bias is for an increased price, that there are no real market forces in the long term to drive price the other way on the other side of the trading with position limits. The whole goal for position limits is to make sure not anybody is manipulating the market, correct? Mr. Gensler. I think that it is--in my own words, we are not a price-setting agency. It is to ensure that the price discovery function has integrity, and that is integrity against manipulation, but also, as the agency has for decades, that there is not concentrated parties that can distort on the way down or distort on the way up, just that there is a diversity of actors. There are more actors on a stage, there is more competition in the market, less likely that one party distorts the market. Senator Coburn. But you would agree that the prices on corn, soybeans, and wheat had good price integrity during this period of increased volatility, increased speculation? I mean, corn is still at $6.40 a bushel. Three years ago it was at $3. There is nothing wrong with that pricing mechanism, is there? It worked. Mr. Gensler. Well, in some of these there are issues about the pricing mechanism with regard to convergence, which was an earlier hearing, in the wheat markets. Senator Coburn. Right. Mr. Gensler. And there is still very much focus---- Senator Coburn. You mean in terms of the close-out month. Mr. Gensler. The close-out month, and there are very serious issues still in a couple of contracts that we watch on a very regular basis. We also look in closed-door sessions at surveillance and look at issues of enforcement matters. I do not want to ever say that there are not things that we look at on a very regular, intensive way. Senator Coburn. I appreciate that. Mr. Gensler. But I think I share your view that position limits are about--I believe our whole regime, position limits, anti-manipulation, transparency, and the other rules we have, is to ensure for the integrity of markets and the price discovery. It is not about whether prices should be higher or lower. Senator Coburn. Right. Mr. Gensler. It is to allow the markets to come together and these hedgers and speculators to meet in this market. Senator Coburn. Yes. I want to thank you for your testimony, also for your service. I will have some additional questions for the record, if you would not mind responding to those. Mr. Gensler. I would look forward to it and meeting with you at any time. Senator Coburn. And I would just re-emphasize my worry, Mr. Chairman. If this is not a global regulatory scheme on commodity pricing, what you have done will have no significant effect. This is a global market. We live in a global world in terms of commerce, and what we will do in our attempt to do something good, we will actually hurt our country, hurt a lot of jobs that are employed in the commodities exchanges and trading in this country, and what we are going to do is shift it, like we have the medical device industry, to Europe or to Singapore. Senator Levin. Would you agree, Mr. Gensler, that the goal of making our markets more transparent and greater integrity is an attraction to investors? Mr. Gensler. I do. Senator Levin. And so even if other markets do not have integrity that we do, do not have transparency that we do, do not follow rules that help a market have integrity, that those markets are not necessarily going to be attracting investors; they may be, as a matter of fact, putting investors off that want markets that have integrity. Would you agree with that? Mr. Gensler. I do. Market participants want to come to deep pools of liquidity where a lot of other actors are, where no one party can control the market--and in that regard I think position limits help--and where there is market integrity and when there is a cop on the beat. Senator Levin. And removing a cop on the beat is what we tried before, and we saw the result of it with the 2008 problem that we had. Would you agree with that? Mr. Gensler. I think that was certainly part of it. There are a lot of other reasons as well, of course. Senator Levin. There are good reasons to have a global regime. I happen to agree with that. But we want to have markets that have integrity, investor confidence, even if markets in other places do not, and rather than money flowing out, we are going to have money flowing into a market that has integrity if it is competing with markets that do not have integrity, do not have the kind of transparency, do not have the kind of anti-manipulation regulators in place. Mr. Gensler. I agree with that, but if I might add, I also think that market integrity helps protect the taxpayers against some of the bailouts that so unfortunately our public had to face in 2008 and unfortunately then Europe is struggling with now. Senator Levin. I think we all would agree with that. There are a lot of reasons for assuring market integrity. Would you agree with me, without having to go back and read the Dodd-Frank Act, that the CFTC is allowed to prohibit foreign countries from installing trading terminals here in the United States unless they have similar position limits? Mr. Gensler. Yes. Senator Levin. So you can use that authority to level the playing field. Is that correct? Mr. Gensler. Yes. Senator Levin. On the question of mutual funds, we have an existing law which says that for certain tax benefits, mutual funds can invest no more than 10 percent in alternative investments, including in commodities. Alternative investments meaning alternatives to investments in securities. Mutual funds are getting around this 10-percent limit in one of two ways, both of which have been so far approved by the IRS but which the IRS is now reviewing. One, they are investing in commodity- related ETPs which qualify as securities; and, two, some mutual funds have established offshore entities that they use to invest in commodities, doing indirectly what they cannot do directly by creating shell corporations offshore which they control. Now, we have identified in Exhibit 7,\1\ 40 mutual funds whose primary focus is to invest in commodities, adding tens of billions of dollars of additional speculative pressures on commodity prices. What is your understanding of the extent to which mutual funds are active in commodity markets now, either directly through ETPs or indirectly through offshore shell entities? --------------------------------------------------------------------------- \1\ See Exhibit No. 7 which appears in the Appendix on page 185. --------------------------------------------------------------------------- Mr. Gensler. Well, I think this is an excellent exhibit for the public and for us as well. But this is part of that other number, the $250 billion or so that is in our monthly reports on commodity index investment. So this is a piece of that larger pie. Senator Levin. My staff is saying that they are not a subset; they are an overlap here. Mr. Gensler. It is not a perfect subset; that is correct. There is some overlap because the way that we collect that data is not this entire universe. We collect that data through swap dealers and some large index investors. So there is an overlap, which I think it would take a bit of research to see what the extent of the overlap is. When I meant ``part of this,'' it might make it 280 or 290, but it is part of the same overall investment piece. We did propose something earlier this year--it could have been late in December of last year--which we have yet to finalize, which is with regard to certain exemptions that were granted, I think in 2003, for commodity pool operators and whether they file with us as a commodity pool operator that also relates to some of these exemptions that you are referring to in the mutual fund area. And we actually proposed revising and in some cases repealing them--this is Section 4.5--that would, if we were to finalize it, I think give us greater transparency as an agency. It just means they are filing their financials. But it still is a helpful piece to have them file as a commodity pool operator, some that had been getting exemptions for their offshore pieces. Senator Levin. All right. So you are looking at eliminating that exemption. Mr. Gensler. We have actually proposed that exemption from 2003 with regard to certain Section 4.5, so to speak, entities. Senator Levin. All right. So as I understand it, these offshore affiliates of mutual funds that do not now have to register as commodity pool operators with you, even if they market themselves to investors as commodity funds and actually operate a commodity pool. This is allowed because of Rule 4.5, which is a regulation exempting them from the registration requirement on the ground that they are subsidiaries of mutual funds which are regulated by the SEC. And so the question that you are addressing, as I understand your testimony, is given their exclusive or primary activity in the commodity markets, they are going to have to register? Is that correct? Mr. Gensler. Well, we have not yet finalized the rule, and we have a lot of comments. We have had mutual funds come in and remind us, ``Well, we do not have to file right now.'' I would say they did not remind me. I did not quite know that we had somehow missed this in 2003. But they were exempted in 2003. We proposed revising and repealing in certain parts that, and we are looking at how to finalize it. The mutual fund companies have a point of view, and they have expressed it in their comment letters. Senator Levin. Is there a proposed rule change then that you have published? Mr. Gensler. Yes. I am sorry, in the Federal Register, I think, last December or January. Senator Levin. So when is that due to be finalized? Mr. Gensler. I would think in the first quarter. Senator Levin. All right. Getting back to Dr. Coburn's important question about a definition of ``swap,'' his point is you are going to have to define ``swap'' before the new rule affecting swaps comes into place. And I could not agree with him more. My understanding is that your definition is due to be published fairly soon. Is that not true? Mr. Gensler. That is true. It is a joint rule with the SEC, and we are sorting through a lot of things. We also had the events of MF Global this week, as the news reports, that we were doing some other things, Chairman Mary Schapiro and I. Senator Levin. But is it fair to say that we could expect that definition this month or no later than the end of this year? Is that fair? Mr. Gensler. It would be every bit my hope, but I would say this to be transparent: The next joint role with the SEC that is in our docket is the joint swap dealer definition, and these are the two definitional things. So we are looking at trying to finalize the ``swap dealer'' definition first, and we are very close on that, and then the ``swap'' and ``security-based swap'' thereafter. So I would say in the next several months, but I would not say in the next month. Senator Levin. But it is clear that it has to be defined before the rule takes effect using the word which needs to be defined. Mr. Gensler. Yes, though it was---- Senator Levin. I think that is what Dr. Coburn---- Mr. Gensler. No, I am agreeing with both of you. Senator Levin. I think that is what his point was. It is obvious, isn't it? Mr. Gensler. It is interesting. Congress actually defined the word ``swap'' and then said we were supposed to ``further define'' it. So it is all in this, what does it mean, ``further define.'' Senator Levin. Well, that is what regulators do. We adopt laws and you guys implement it, and in your discretion you further define things. Isn't that your function to do that? We have a law, in the Dodd-Frank Act, which says you are supposed to ``set limits to the maximum extent practicable'' in your discretion--the limits would be in your discretion--to ``prevent excessive speculation.'' That is what we say, ``prevent excessive speculation.'' But what is the maximum extent practicable? You have got discretion to determine that; isn't that just your ordinary function? Mr. Gensler. Right. So we will finalize--one of the reasons I say that, I think most people know what 2-year interest rate swap is. Senator Levin. All right. My time is up. Dr. Coburn. Senator Coburn. I am going to send you some questions on MF Global just simply because here we now have a regulatory scheme. If, in fact, it is true investor money was used inappropriately, that is a regulatory concern for me. I am very interested in how in the world did that get past you all, how it got past the SEC. Here we now have a new regulatory scheme. We have done a lot of changing since what happened in 2007 and 2008, and it is concerning that we have another company that has just potentially blatantly violated the rules. So I will send you some letters on that.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 13 which appears in the Appendix on page 309. --------------------------------------------------------------------------- Again, I thank you for your service. You do not have an easy job. You have a tough budget. I understand that. It is not going to get any better, the budget. The job is probably not going to get any better either, but I appreciate the work of you and your staff, and I am concerned about the challenge to this rule. I hope you do not end up spending a lot of time in court defending it because of some of the lack of definition. Mr. Gensler. I appreciate your advice, your questions, and it is an honor to be in this job. It truly is. And I think it is about protecting the taxpayers and promoting these markets, and as relates to MF Global, and all companies, protecting customers. I said--and I will repeat it because you were not in the room at the time--that I think at the core of our regime is customer money, the sanctity of it. It is supposed to be segregated. It is sort of like you do not put your hand in the cash register. You just do not. It is the customer's money, and it is supposed to be there every nanosecond of the day, segregated. Senator Coburn. Thank you. Thank you, Mr. Chairman. Senator Levin. I think we all agree on that, by the way. Thank you, Dr. Coburn. There may be some disagreements on some subjects, but when it comes to protecting the taxpayer, we are going to take steps to do that, and that is going to require regulators being put back on the beat. We are going to protect the taxpayers from companies that are too big to fail. We are going to try to make sure we take steps that we do not see the taxpayers bailing out companies again. The issue, as I understand it, with the fund that went bankrupt is that the customers may have gotten injured by improper activity, or they may have gotten injured by taking risks. But to me, it is your function to help protect customers of that hedge fund, but it is doubly important that we understand that there is no taxpayer liability here that you know of. Mr. Gensler. This is an example of freedom to fail, and I was part of that decision set of putting it into bankruptcy, and no taxpayer money is behind this at all. Senator Levin. If there was improper activity here that impacted their customers and their clients, that needs to be taken up as well. Mr. Gensler. We are going to fully pursue this. Senator Levin. We are, but it is a very different issue from the battles which we have been waging here to try to protect taxpayers and the Treasury from companies that are too big to fail, either getting bailed out or going under and there being some kind of a governmental obligation. That is not the case here, thank God, but what may be the case here is something which should not be allowed to happen either because we do not want customers to be either defrauded or to be improperly dealt with. We do not know that is the case here, but we have cops on the beat to help prevent that as well, and you folks are into it. On the high-frequency trader, we have CFTC data showing that up to 80 percent of trading in key futures markets is day trades or trading around the expiration of contracts. The day trading is conducted in part by high-frequency traders that use computers to engage in rapid-fire trades, usually profiting from slight price increases over a brief period of time. Do you believe that this day-trading activity is adding to the volatility in the commodity markets? Mr. Gensler. I think that there are a number of things that have changed in our marketplace, and you have addressed one important one. What was once day trading in a sense on the floor of the futures market or even the floor of the securities markets is now in a computer group, and it is called high- frequency trading. I think that while in calm markets they can--and there are studies that have shown they can--even narrow the difference between the bids and the offers and, so to speak--narrow the big-offer spread, that in times that are not so calm, like a year and a half ago on May 6, 2010, they can sometimes step away from a marketplace, and the liquidity-- sometimes people confuse volume in a market for liquidity. And they have added greatly to the volume in the market. It is not clear that at all times they are adding to liquidity in the market. So we have come forward with proposals. These are not final rules, but we have proposed that exchanges and clearinghouses have to have new pre-trade risk filters and pre-trade risk controls with regard to protecting the markets and the integrity of the markets better in these circumstances. Senator Levin. There has been some discussion here this morning about position limits not applying to the multicommodity swaps. You have made that distinction. These are extremely common in the commodities markets. Some of our earlier witnesses did not know why you made that distinction. Why did you? Mr. Gensler. I would say a number of reasons. One, if I might say because you mentioned it, the Goldman Sachs Commodity Index, there is actually a futures commodity, that index, on CME, and they do have a position limit, a hard 10,000-contract limit. So we addressed ourselves to that is not the only reason, but that is one reason. But what we addressed ourselves to is these 28 individual commodities and trying to reimpose or bring back in the energy and metals markets where there had not been for all months combined, and trying to sort through a really significant docket with regard to what Congress mandated to do. The commodity index is not really about the corner and squeeze issue in the same way because it is an index across many products and you cannot deliver oil or wheat or corn into the commodity index. It is an index. It is not--has the same delivery function. So I think given the full docket of trying to take on the 28, given that the exchange actually right now does have this limit on this one contract, and that it is less about the spot month and the delivery period, these are some of the factors that influenced us. It is also something we can still take up. I mean, it is not that we cannot take it up. Senator Levin. Do you expect you will take that up? Mr. Gensler. I do not know, sir, just given the full docket of what we are doing, and also we are supposed to report back to Congress in a year as to how the current regime is working. Senator Levin. Would it be useful for you to take that up? Mr. Gensler. Well, I think there are a number of questions, that plus there are these questions that were raised on the earlier panel and that you have raised about limits across a certain sector and so forth that I think are additional issues that--whether it be in the study that we report back to Congress or otherwise, are things that many people will continue to review. Senator Levin. You made reference to the mutual fund industry's effort to eliminate the 10-percent restriction on alternative investments, in particular because they want to increase the percentage of their portfolio investments in commodities. They did not succeed in that bill. I am glad for that and had something to do with that, but in any event, they are trying to apparently continue their efforts to remove that restriction. What would be the impact in your estimation as to the amount of speculation in commodity markets if that 10-percent restriction on mutual funds' alternative investments was removed? Mr. Gensler. I do not have a developed view. Senator Levin. Do you have a hunch as to whether it would increase speculation? Mr. Gensler. I frankly---- Senator Levin. That is why they want to get it removed, so would you think that if that is their motive in getting it removed that it would have the effect they seek, which is that they would be able to speculate more than 10 percent of their funds in the commodities markets? Mr. Gensler. Well, it would open up a broader class of investors in the marketplace or broader class of speculators, but I just will pause there and say I am just not familiar enough with the provision that they were seeking to pull---- Senator Levin. Are you familiar with the 10-percent limit on alternative investments that mutual funds have? Mr. Gensler. I mean, just generally, but I am not familiar with what they are trying to change. Senator Levin. They are trying to get rid of it. Mr. Gensler. They are trying to get rid of it, so it would broaden the class of potential speculators. Senator Levin. A hundred percent of $11 trillion could go into speculation in commodities if they so chose. Mr. Gensler. So some of these ratios that we had earlier could go up. There would be more financial actors. Senator Levin. Do you have an opinion as to whether or not if they got rid of that limit and there is now a possibility of $11 trillion getting into speculation in commodities, whether or not, in fact, there would be a significant increase in mutual funds' purchase of those investments or betting on commodities? Do you think there would be an increase? You do not have an opinion on it? Mr. Gensler. I just have not developed a view. I mean, this is the first discussion I have had on it. I am glad to look at it and come back and meet with you or at the least---- Senator Levin. No, you do not have to do that. I would just ask you that question for the record so you can discuss that with your staff as to whether the elimination of that 10- percent limit on mutual fund purchases and investments so that they could invest more than 10 percent of their funds in commodity speculation, whether or not that would have an increase--whether there would be an increase in speculation in commodities. That is my question. You can take that for the record.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 12 which appears in the Appendix on page 308. --------------------------------------------------------------------------- Mr. Gensler. It certainly would expand the pool of parties that could invest. Senator Levin. How about the amount of money that would be or could be invested? Mr. Gensler. It would expand the pool of money. Senator Levin. But you do not have an opinion as to whether it would lead to that? Mr. Gensler. I have not talked to any mutual funds. I am not familiar with the---- Senator Levin. Could you get yourself familiar with us and let us know? Mr. Gensler. Sure. I will try my best. Senator Levin. For the record--I assume if you try your best that we can count on you to give us an answer for the record to that question.\1\ Mr. Gensler. Yes, of course. Senator Levin. Well, we thank you. It has been a long morning. You have a huge amount on your plate, and you are doing the very best that you can to follow the congressional wishes and intent, which are the wishes of our people, to get a cop back on the beat, and Wall Street needs it big time. And you are one of the folks that can bring it back. We hope you do it with gusto, and we will stand adjourned. Mr. Gensler. Thank you. [Whereupon, at 12:08 p.m., the Subcommittee was adjourned.] A P P E N D I X ---------- [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]