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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


Location: Washington, DC

REP. GREG WALDEN (R-OR): Thank you, Mr. Chairman.

Mr. Lukken, thank you for being here today. Does the CFTC have the authority, do you have all the authority you need to go after somebody if they're on ICE or one of the other exchanges and adversely affecting our market?

MR. LUKKEN: Well, if they're trading on ICE, and I would assume they're U.S. participants, we can certainly -- that's an illegal act and we can go after those U.S. participants for that, sure. Certainly.

REP. WALDEN: So do you need any additional authority from us, from the Congress?

MR. LUKKEN: For policing those, I think what's being considered is trying to codify some of the things that we've talked about. I think that would be helpful. And we're trying to think through whether we have the legal ability to go after all of this.

We certainly would advise this Committee if we feel we're missing something.

REP. WALDEN: And when would that advice come to this Committee?

MR. LUKKEN: As quickly as possible -- (chuckles) -- if we feel we need something. But right now, part of this too is we have the ultimate authority, which is to pull the no-action letter.


MR. LUKKEN: So we can ensure work with the exchanges, work with the FSA to get people out of positions. We can sue participants that are trying to manipulate the markets. So we have quite a few tools in this area.

REP. WALDEN: Now, there are a lot of folks, some who've testified today, believe that market manipulation, not just speculation, is going on and could account for, some say, as much as 25 (dollars), 35 (dollars), 60 dollars a barrel. What's your estimate?

MR. LUKKEN: Well, I think certainly manipulation, illegal manipulation, somebody who's trying to control the market by holding a position, that in our experience has been a short-term effect.

It's somebody able to hold a position at the expiration of a contract. And we've seen this very famously in -- silver prices and with Amaranth working off of two marketplaces to do that. But typically, they can't hold those positions very long.

I think what people are concerned about is more of a structural effect, too much financial money, and that's something we're trying to get our arms around with this swap dealer special call authority. But as far as trying to estimate, it's difficult for me to know.

REP. WALDEN: Okay. And then you've heard the talk today about putting in different margin requirements. What's your recommendation to us with regard to margin requirements, especially in some of these trades?

MR. LUKKEN: Well, I think margin is a pretty imprecise tool to try to go after the activity you're trying to go after. There are other ways to get it through transparency and the controls I've talked about. But margin would raise the cost on some of these businesses significantly, it could potentially move them to other markets like London or underground.

Without -- and I think the other concern for us is that these are meant -- margin is meant to protect the clearinghouse. We want to make sure that that is a targeted protection, and if we start toying around with margin when prices are too high or too low, I'm not sure what sort of precedent that would set. But I think there are other ways to get at the type of controls that you're after.

REP. WALDEN: And tell us about the OTC, the over-the-counter market, and your regulatory authority toward that, those sorts of trades. Do you have much authority there?

MR. LUKKEN: Well right now, if there's a participant in our markets and we see an anomaly in their trading, we're able to reach through into the over-the-counter market to get that data on a case- by-case basis and determine whether they're trying to use the over- the-counter market in conjunction with the futures markets to manipulate the price of a given commodity. So we -- the over-the- counter market's a very large market, it's not necessarily a price discovery market like the futures markets have been and some even exempt commercial markets like ICE have become, so we try to only go into the over-the-counter market on a need-to-know basis and see what's going on, and it's been effective.

REP. WALDEN: When it comes to these giant investment firms coming into the market, we read about the CalPERS, the California -- I assume it's Public Employee Retirement System -- coming in and weighing in with, what 4-and-a-half percent or something that they're --

MR. LUKKEN: (Off mike.)

REP. WALDEN: What impact are you seeing as a result of that in the market and where do these funds go in today's economy, butt end of the commodities?

MR. LUKKEN: Well, I think everybody can agree that there's been an influx of financial money from pensions and endowments. They typically go through swap dealers, which we've talked about. Swap dealers are bringing a lot of business into the futures markets including a lot of commercial businesses. So I'm not sure -- I don't think under the sort of portfolio diversification theory, you know commodities help improve the returns for these commodities pension -- these pension organizations. I'm not sure -- I'm sure there are other assets that they can go back to if Congress felt that they were somehow artificially driving up prices.

REP. WALDEN: Now some of the most vocal opponents of your organization and this administration have called for closing the so- called Enron loophole. That was done to a large extent in the FARM Bill and some of those vocal advocates didn't bother to vote for the FARM Bill which closed that loophole. Tell me, though, the -- from your standpoint, the closing of that loophole, could that get done properly? Is there more work to be done there? Are there additional authorities that you need?

MR. LUKKEN: I think it is going to be a very effective tool for us because our concern as, you know, our Act requires us to protect the price discovery process wherever that may occur. So it may occur in a futures market, but it may occur in the over-the- counter market on these electronic exchanges. And so that's where we drew the line, and said that's when the public interest arises and we need additional authorities, is when price discovery begins to occur. And so I think that has been a very effective way to think about this is that we're going to protect the fully regulated marketplace and these swap electronic marketplaces and become price discovery vehicles. And we're hopeful to get those authorities in place as quickly as possible.

REP. WALDEN: All right.

Thank you, Mr. Chairman. Thank you.

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