Panel III of a Hearing of The Subcommittee on Oversight and Investigations of The House Energy and Commerce Committee - Energy Speculation and Regulation Part II

Statement

REP. STUPAK: Well thank you, and thank you for your testimony. This is our second hearing, and we're already talking about a third hearing. The changes in the farm bill, we're going to make sure the oversight role of this Committee is done, especially when it comes to energy. And as I think you'll see this week, there'll be other pieces of legislation on the floor to try to take away speculation.

Let me ask you this, if you may, because it's -- our last hearing was on December 12th and apparently the CFTC has reversed its position in that you will now -- even though you didn't do it in December, but now you indicated that you will require the same position limits and accountability levels which apply to U.S. markets to apply to ICE futures in the U.K. Is that correct?

MR. LUKKEN: That is correct.

REP. STUPAK: Okay. Is it -- is the CFTC going to require the positions taken on both exchanges be added together when exchange -- assesses compliance? For example, can a trader holding maximum limits on both exchanges or will they be able to double that limit by trading on two different places?

MR. LUKKEN: Each exchange would set its own limits.

REP. STUPAK: So it's not the aggregate. Each exchange would have its own limits, right?

MR. LUKKEN: That is correct.

REP. STUPAK: Okay. Are there -- what, 18 different exchanges?

MR. LUKKEN: Trading crude oil? West Texas --

REP. STUPAK: Right.

MR. LUKKEN: There's two currently. There's the London market and there is the NYMEX market.

REP. STUPAK: Okay. What about Dubai? Are they going to be trading on Dubai?

MR. LUKKEN: Dubai has not listed a West Texas. The Dubai Mercantile Exchange, which has an access letter with the CFTC, has not listed the West Texas Intermediate contract. There is the Dubai Gold and Commodity Exchange, which has no relationship to the CFTC; there's no access letter that we've granted them. They do have a West Texas contract. They do have --

REP. STUPAK: (Inaudible.)

MR. LUKKEN: -- about 12,000 contracts volume in June.

REP. STUPAK: And you expect that to go up, do you not, since there's recently been some action on Dubai being able to -- or NYMEX being allowed to trade on Dubai?

MR. LUKKEN: Well, again, this is -- the Dubai Mercantile Exchange would be set -- would have large trader reporting and the imposition of position limits. That exchange that has an access letter with us would be subject to position limits.

REP. STUPAK: Okay. So every exchange I have, I can have whatever position limit that is. That's what I can trade up to, that position, correct?

MR. LUKKEN: That's correct.

REP. STUPAK: Okay. Turn to tab 14 in the book there, right there in front of you. That's our exhibit book. This is a chart which shows that 64 percent of the trading for the West Texas crude oil contract on ICE Futures exchange originates in the U.S. during 2007.

So my question is if a foreign board of trade consistently has a majority of its trade originating in the United States, why shouldn't that foreign board of trade be subject to CFTC regulation and register as a designated contract market?

MR. LUKKEN: Actually, these figures -- I'll have to -- ICE can talk about these figures as well -- but these also include, as U.S. trades, trades that are happening both in the U.S. and in -- overseas. So actually, if you just look at those that originate here in the U.S. and you break it down by size, it's about 45 percent of the market.

But having said that, even at 45 percent, I think your question holds valid, which is why should we not try to impose the U.S. regulatory structure on these markets? I think, for us, we recognize that there are -- these are global markets, that the ICE exchange has been in existence for 25 years, regulated by the FSA, and that we have to recognize that.

There are certain things that we can condition, information and controls that are important --

REP. STUPAK: Well, why can't you hold these exchanges to the same rules and regulations that you do NYMEX? I mean, again, tab 14, you say 45 percent. I'm looking at volume from all terminals, volumes from U.S. terminals, percent from U.S. terminals, 64.1 percent. Why won't they come underneath the same regulation? Sixty-four percent of the trades are here in the United States.

MR. LUKKEN: Again, this is something the Commission looked at in 2006 and held public hearings on this. It went out for public record and trying to get comments about this. And our recognition process allows us to recognize foreign regulators as the home country regulator, but then condition -- (inaudible) --

(Cross talk.)

REP. STUPAK: I agree, but the question was why shouldn't foreign board of trades be subject to CFTC regulation and register as a designated contract market? I know all the reasons why you made these changes, but why shouldn't they be the same, especially when 64 percent of the trades are occurring here in the United States?

MR. LUKKEN: Well, certainly Congress could make the choice to get rid of our program, but that's not going to stop trades from happening overseas.

REP. STUPAK: No, it won't stop trades, but won't it bring transparency? We'll know who's trading, how many contracts are -- (inaudible) -- and what the price is?

MR. LUKKEN: Correct.

REP. STUPAK: Isn't that what we're trying to do here?

MR. LUKKEN: Well, that's correct. And our program has allowed us to see the transparency on these markets. We see not only U.S. participants on ICE, but we also see the two-thirds of those participants, according to open interest, of the foreign participants.

So we're seeing not only U.S. participation --

REP. STUPAK: But if you're seeing all that, why do you have -- why did you have to put out a special call-in --

MR. LUKKEN: No, this is --

(Cross talk.)

REP. STUPAK: -- for information. I know, that's for swaps.

MR. LUKKEN: Right.

REP. STUPAK: So you don't -- you can see the swaps. And as testimony earlier today was, most of them showed that swaps is a major problem here.

MR. LUKKEN: Right, and that's something that the agency about a month ago asked for more data about swaps. Typically, swaps are aggregators in our markets. They bring multiple positions to the markets. They have clients, such -- Morgan Stanley, I think, openly talks about having the airline industry as a client. Southwest was mentioned as well.

These businesses bring all of this to the futures markets where they manage their risk. And so that's -- typically we just look to what the swap dealers are bringing. We don't look beyond into who their clients are. That's the information we're going to get.

Come September 15th we hope to provide Congress with more information about what swap dealers are doing in these markets.

REP. STUPAK: Well, I'm looking at -- a June 18th Bloomberg article quoted that the CFTC's head of enforcement, Mr. Gregory Mocek, is saying that at this time we have no evidence that speculation in ICE on Western Texas Intermediate crude contracts are manipulating the markets. Secretary Bodman basically said the same thing. Secretary Bodman -- I'm sorry, Secretary Paulson -- has pretty much said the same thing too.

But do you think it's reasonable for your head of your enforcement to be making such claims during an open investigation when you've put out a special call trying to get the information? It sounds like you already pre-determined, before you got the information, that there is no speculation or manipulation going on.

MR. LUKKEN: Well, manipulation is a different term, and I'd like to clarify it. Our act defines manipulation in somebody intentionally trying to come into the market to their own advantage collaboratively with a group to benefit for profit. And we've seen this in cases, famous cases that this Committee's well aware of, including Amaranth and those types of cases.

I think what's being discussed currently is that there may be so much financial money coming into the market that it may be artificially creating a bubble. That is something different, typically, than what we look at. So we can never rule out definitively that manipulation is not happening, because that's what we do.

We police the markets, just as policemen police for crime. They can't prevent it all, but when they do, they go after it aggressively. And that's something I think our enforcement director would say, is we have not seen that ICE is causing a part of this bubble that's going up. But we can't ever rule out that manipulation is not occurring anywhere.

REP. STUPAK: But having been a police officer, you do get a sense that something is going on, and you start digging a little bit.

So let me ask you this: Excessive speculation is prohibited by the Commodities Exchange Act over a certain amount of speculation in the markets necessary to provide liquidity. What concerns me is the increasing level of speculative money purchasing oil futures contracts.

So what would you consider speculative -- excessive speculation?

MR. LUKKEN: Well, it's something, as you mentioned, I think your chart had the 70 percent. Those are figures -- a lot of that growth is the swap dealers. Trying to figure out what the swap dealers are doing. So that what we need more information on, greater detailed information.

We've sent out our special calls to get that, to find out how much of that business -- a lot of it may be commercial. And in fact I think I've passed out a chart to the Committee members --

Swap dealers are currently flat in the market, or virtually flat in the market. They have as many short positions -- meaning they would benefit from the prices going down -- as they do long positions. So you would think if all this index money was overtaking these markets that you would see more on the long side.

But right now, and this has been studied for a long period of time, swap dealers have actually been -- had as many short positions as long positions --

REP. STUPAK: Sure. There's your chart there, the one you passed out to the Committee today. We just had a chance to take a look at it.

But isn't this argument really sort of flawed? I mean, the law of supply and demand is still in effect, and new demand in any market forces prices higher to attract new sellers. So there's a parallel shift up in every -- in price every time an index buyer buys or holds. So a new entrance -- and the exit point is higher than if there were no large index buyer in the market.

So every time you roll one of these over and take a new one, the price is higher. As you can see, (nearby ?) future prices, look at that. Shot right up on there. Sure, it stays pretty much the same. You want to say it's flat, but look what it's done to the price because it's a new contract.

Every time there's a short and long, it's a new contract; therefore, the price has to go up because the flow of money into this market, which is unreasonable, that led to excess speculation. Wouldn't you agree?

MR. LUKKEN: Well, as you mentioned, there's the short for every long, so there's somebody that will lose for every winner. So that's important to remember. And as long as those prices continue to go, we continue to drive the floor up each time we make one of those, no matter where it occurs.

REP. STUPAK: Right.

MR. LUKKEN: I think what this chart -- you know, we can't make and hard and fast conclusions with this chart, but it does indicate that it's worth the effort that we're going through to get the information from these swap dealers, to use this interagency task force to look at this.

We've got DOE and FERC and FTC and others looking at this information with us so that we can make sound, informed decisions.

REP. STUPAK: Well, I agree with you, but I think your chart disproves what you're trying to say. And as I said earlier, Secretary Paulson, after you issued your special call, three days later he says, and I quote, "My position, and I've looked at this very carefully, is I don't believe financial investors are responsible for any significant degree of this price movement. This is the supply and demand. Financial investors are on both sides of the markets. They are long; they are short. They don't set trends; they follow trends."

A fair reading seems to me that the secretary has apparently rushed to judgment, and I don't know if your interagency task force you've been talking about or your special call is going to change the secretary's mind. Sounds like he's made up his mind before we ever even had any information come forth.

MR. LUKKEN: Well, as a regulatory, independent regulatory agency, we have to keep an open mind and evolve with circumstances. And that's why we're trying to get the better information.

I think everybody has agreed that more information is needed on these swap dealers, and that's what we're going to do.

REP. STUPAK: Very good.

Mr. Whitfield for questions, please.

BREAK IN TRANSCRIPT

REP. STUPAK: All right. Well I have many more questions but I guess we're going to have to go with the next panel. Just -- just one question if I may.

We've had testimony that there's about 12.5 percent of the sovereign funds may hold as much as 12 percent, but yet talking with CFTC it may be only in your letter you sent to us was only one that you knew of. How can you get such a big discrepancy with as much as 12.5 percent in sovereign wealth fund clients, but you can only find one?

MR. LUKKEN: What we reported was directly those sovereign wealth funds on our markets directly using the futures markets. I think what we will try to find out in getting more data from swap dealers is whether some of the sovereign wealth funds are coming through swap dealers indirectly onto the futures markets.

REP. STUPAK: Very good. Very good. I said I'd only take one more, I get many more, we'll put them in writing and we'll send it up to you, I think we're going to move onto our next panel. Thank you for your time here today Mr. Lukken.

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