The following is the oral testimony that Gary Gensler, Chairman of the CFTC, gave before the U.S. Senate Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, in Washington, DC on November 3, 2011. A copy of it is also available on the CFTC’s website.
Good morning Chairman Levin, Ranking Member Coburn and members of the Subcommittee. I thank you for inviting me to today’s hearing on the changing nature of the derivatives market and on position limits.
The derivatives markets have changed significantly since the CFTC opened its doors in 1975.
First, the swaps market emerged in the 1980’s and now is seven times the size of the futures market.
Second, instead of being traded in trading pits, more than 80 per cent of futures are traded electronically.
Third, while the futures market has always been where hedgers and speculators meet, a significant majority of the market is made up of swap dealers, hedge funds and other financial traders.
Fourth, the vast majority of trading volume is day trading or trading in calendar spreads.The CFTC is focused on ensuring our regulations are responsive to today’s markets. This summer, the Commission turned the corner and began finalising Dodd-Frank rules to make the swaps marketplace more open and transparent for participants and safer for taxpayers. To date we have completed 18 final rules and have a full schedule for the rest of this year and into next year.
We completed a rule giving the CFTC enhanced anti-manipulation and anti-fraud authority. It extended the Commission’s reach to include the reckless use of fraud-based manipulative schemes. The new authority expands the CFTC’s arsenal of enforcement tools and strengthens its ability to effectively deal with threats to market integrity.
The CFTC also approved a final rule on large trader reporting for physical commodity swaps. For the first time, clearinghouses and swaps dealers must report to the Commission information about the swaps activities of large traders in the commodity swaps markets.
The CFTC also completed rules on aggregate positions limits for physical commodity futures and swaps.
A position limits regime is a critical component of comprehensive regulatory reform of the derivatives markets. Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce.
At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring the markets do not become too concentrated.
In the Dodd-Frank Act, Congress mandated that the CFTC set aggregate position limits for physical commodity derivatives, including, for the first time, position limits on certain swaps and certain linked contracts traded on foreign boards of trade.
The final rule achieved this.
The Dodd-Frank Act tightened the definition of bona fide hedging to ensure that to qualify for such an exemption, a transaction or position must serve to mitigate a risk in the cash market for a physical commodity.
The final rule achieved this.
The Dodd-Frank Act mandated that the CFTC set position limits for energy, metals and agricultural commodities for the spot month, individual month and all months combined.
The final rule achieved this for 28 physical commodities.This rule reestablishes position limits for energy and metal markets, which had existed until 2001 and the late 1990s, respectively.
Before I close, I’d like to briefly mention the events this week at MF Global.Earlier this week, the CFTC and SEC determined that a 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 the MF Global situation is the shortfall of customer money at the firm. Segregation of customer funds is the core foundation of customer protection in the commodity futures and swaps markets. Segregation must be maintained at all times. That means at every moment of every day.
The Commission intends to take all appropriate action, within the purview of the Commodity Exchange Act and of the Bankruptcy Code, to ensure that customers maximise their recovery of funds and to discover the reason for the shortfall in segregated customer money.
The CFTC, the SEC and other regulators will continue to closely coordinate actions.