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No Definite Answer from Gensler as to Whether CFTC Would Use Emergency Powers to Curb Energy Speculation

Thursday, March 29, 2012
Fanni Koszeg | Bloomberg Law CFTC, Testimony Before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government (Mar. 21, 2012) Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), testified at a hearing of the Senate Appropriations Financial Subcommittee to explain why a 50 percent increase in the CFTC's budget was necessary for 2013. Senators spent a significant amount of time questioning Gensler on the CFTC's position limits rule and new legislation (CFTC Bill) introduced by Sen. Bernie Sanders (I-Vt) asking the CFTC to invoke its emergency powers to curb excessive speculation.

"Good Investment for America"

In his prepared testimony, Gensler emphasized that an effective CFTC is a good investment for the American people because a well-funded agency can better ensure that derivatives markets work for non-financial companies that use futures and swaps to hedge risks. These so-called "commercial end-users" provide 90 percent of jobs in the real economy, but they represent only about 15-20 percent of derivatives markets. About 75 percent of the futures market and 90 percent of the swaps market is made up of financial actors and speculators according to Gensler. When Sen. Jerry Moran (R-Ka) pointed out that some financial actors prefer not to be called "speculators" because of the term's negative connotations, Gensler said that he believes financial firms are a crucial part of derivatives markets, but it is critical that "there is an agency that brings a bright sunshine to those markets."

Dodd-Frank Rules Will Be Completed

Sen. Frank Lautenberg (D-NJ) asked why the CFTC needed such a significant budget increase and whether a failure to provide the funds would mean that derivatives would remain largely unregulated. Gensler said that the CFTC would likely complete Dodd-Frank rules by the end of 2012 even without the additional funding. However, the CFTC would not have the resources to assist market participants with their compliance efforts and would be unable to ensure that they follow the new rules and business practices.

What if Position Limits Rule Is Struck Down?

Many of the senators were particularly concerned with the CFTC's controversial position limits rule. In particular, Sen. Moran argued that companies are "overwhelmed by the volume and speed the CFTC issues new regulations." Moran asked Gensler why "the CFTC has converted" a well-working system of regulations in futures markets that was based on "guidance and core principles" into a more rigid prescriptive rule regime. Gensler said that the CFTC is building on its existing regulatory regime, but determined that loose guidance would not be appropriate for the regulation of swaps markets. Moran said implementation of CFTC rules had been "haphazard." In addition, he wanted to know what the CFTC would do if the position limits rule was struck down given that the judge reviewing a case filed by industry associations had indicated he may do so. Gensler said that the CFTC decided to phase-in the implementation of most rules based on advice from Congress and commenters. On position limits, CFTC lawyers are looking into the potential consequences of an unfavorable decision. In Gensler's opinion, the CFTC had a strong mandate to issue the rule, and as a first step, the court must decide a motion for preliminary injunction. Gensler also emphasized that position limits were in place for decades for agricultural products first and energy markets later, and the percentage formula adopted under the current rule was also inspired by prior rules.

Senate Bill on CFTC Emergency Powers

Sen. Dick Durbin (D-Ill) asked Gensler about a letter sent to him by Senator Carl Levin and several others requesting that the CFTC enact strong position limits. Their argument was based on expert statements, including a study by Goldman Sachs estimating that speculation had driven up the price of gasoline as much as 50 cents a gallon. Durbin asked how likely the CFTC was to use its emergency authority based on the CFTC Bill. Gensler argued that while it was clear that financial actors in commodity derivatives markets influenced the price of commodities, studies "split on by how much and in what direction." Gensler has asked for advice on the extent of the CFTC's emergency authority, but pointed out that this authority has been used only four times in the CFTC's history and only in very extreme circumstances. Despite intense questioning, Gensler refused to opine on whether market manipulation was the cause of high energy prices and, if so, whether the problem warranted the CFTC's use of its authority. Nonetheless, Gensler assured the Senators that approximately 50 people in the CFTC's surveillance unit are continuously monitoring energy futures and swaps markets.

Scarce Resources—Are Fees the Solution?

Several Senators questioned Gensler whether he thought having a funding system similar to that of the Securities and Exchange Commission, where the regulated industry covers some of the agency's costs through transaction fees, would be appropriate for the CFTC. Durbin argued that he personally had misgivings about such a system because his "friends" in the Chicago marketplace worry that it would put the U.S. marketplace at a competitive disadvantage. Gensler, however, said that he had no "philosophic bias" and just wanted to work with legislators to come to the best possible solution. Gensler said that if a fee were to be imposed in such a huge market (including the 300 trillion swaps market), the fee per transaction would likely be negligible. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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