April 19, 2010
Thank you for the invitation to be with you today. I’m particularly pleased to be able to speak about issues relating to FERC/CFTC interactions and responsibilities. We both have a lot on our plates, and this is a good time to think about how we plan to move forward to do the best we can for the American public.
Like many people, I was a fan of Tiger Woods’ golfing ability. What a superb athlete. He’s now 35 years old, and he’s already won over 70 PGA tour events, including 14 championships. He is one of only five players in the history of golf to have won all four major professional championships in his career, and he’s the youngest player to do so. Those are some incredible statistics. He has left an extraordinary legacy not only for golfers, but also for professional athletes generally.
But I do read the papers and watch television. So I’m aware there have been, shall we say, a few bumps in the road for Tiger. And the way I figure it, continuing to admire his golfing expertise in one thing, but holy cow, does he have a lot to teach us about how to react to a problem. It is as if there is now a manual on what not to do:
• DON’T ignore the mistake
• DON’T deny that you made the mistake
• DON’T rewrite history concerning the mistake (there are other words for it, but I’m being nice)
• DON’T bury your head in the sand trap and pretend the mistake didn’t happen
• DON’T make a creepy commercial about the mistake that makes us all think you may have lost touch with reality.
We have had a few bumps in the road ourselves in recent years, to put it mildly. In addition, we might look at Tiger’s playbook, and consider “how we react”. While we have pulled ourselves back from the brink of the economic crisis, there are still safeguards that need to be put in place to ensure that American consumers don’t pay the price for market and regulatory failures. I’d like to spend some time today talking about a few actions I think government can and should take to put us on the right track. I want to make sure that consumers are not taken on the energy price roller coaster they have been riding over the past couple of years, and that our markets serve their intended functions, free from fraud and manipulation. Let us learn from some of Tiger’s mistakes, and look at how we should react so that we can achieve those goals.
Speculative Position Limits
The first topic I’d like to touch on is speculative position limits in energy markets. Last summer, the Commission held three days of public hearings on this topic. We heard from a couple dozen witnesses from all sectors of the energy industry and from government. We got a wide variety of viewpoints, and all sides of the issue were fully, comprehensively—you might say exhaustively—debated. (In fact, at times it seemed there were more opinions in the room than people.) For me, after reading, listening, and thinking a lot about this, the regulatory response seems very clear: the CFTC should act to propose some kind of limits in energy markets.
It seems strange to me that this idea has received the incredible push-back that it has. I’ve been told that it will force markets overseas, that it will move trading into unregulated markets, that a poorly designed limit would harm price discovery and risk management. Wow. Perhaps energy position limits will start the Cold War again too, raise childhood obesity levels, and create more volcanoes.
Perhaps, but I doubt it. We’re not going to do anything that is over the top or ill-conceived—I’m talking about sensible limits to give us a handle on these markets. This is a common-sense, reasonable solution to a real-life, real-world, real-time problem. Again, let’s think about the Tiger playbook—let’s not deny there’s been a problem, let’s not rewrite history. Let’s show the American public how responsible regulators react, and put a proposal out there on which we can act.
We now have three Congressional bills out there on financial market regulatory reform: one from the House, one from the Senate Banking Committee, and one from the Senate Agriculture Committee, released just last Friday. I’m pleased to see that all these bills would increase transparency over currently “dark markets’—the $600 trillion over-the-counter market that currently operates complete outside the purview of federal oversight. In addition, these proposals would give regulators the needed authorities to detect, deter, and prevent fraud and manipulation in financial markets to protect consumers and ensure that the markets perform their essential functions. In the coming weeks, Congress will move to discuss the various bills, put forth amendments, meld the results into one piece of legislation and—I hope—produce a financial market regulatory reform bill for the President’s signature. And again, think about how not to react: don’t ignore the problem, don’t pretend it didn’t happen, and don’t try to fix it with some inappropriate response. The American public cannot afford for Congress not to do the right thing here—we need strong, comprehensive legislation to ensure that we do not repeat our past mistakes. If we have learned anything from the economic mess, it needs to be that the status quo regulatory regime is unacceptable.
I am particularly interested in talking with you today about the issue of FERC and CFTC jurisdiction. Much has been said and written about this, and there’s been a fair amount of gnashing of teeth and rending of cloth over it. I’d like to see that end. As someone once said, maybe a president, I’m not sure, this isn’t rocket surgery. We can figure this out. In addition, we can do it by remembering that we both have the same boss: the American public. We’re two agencies, but we’re one government. We are both charged with protecting the public weal—put that first, in every decision we make, and I guarantee that other issues seem petty in comparison.
Let me start with some first principles. One, I don’t believe that either agency should have its jurisdiction enlarged or diminished at the expense of the other. In fact, one could say that question has already been “asked and answered” by Congress. In 2005, Congress enacted the Energy Policy Act (EPAct) that provided enhanced manipulation authority for FERC. There was a great deal of angst over whether this encroached on CFTC jurisdiction. We can go through the angels-dancing-on-the-head-of-a-pin legal analysis (although I’d rather not), but the simple answer is, if Congress had meant to change either agency’s jurisdiction at that time, it would clearly have said so. And it didn’t.
That leaves us with the responsibility—and the challenge—of working together to interpret our organic statutes to both fully carry out our respective mandates and at the same time ensure that we respect the jurisdictional lines drawn by Congress. To be sure, the markets that FERC and CFTC regulate are inextricably intertwined and interdependent. They involve the same parties, the same events, and yes, sometimes the same contracts. However, I believe we—our two agencies—are smart enough to figure out how to give full meaning to our statutes without stepping on each others’ toes.
Here’s a case in point: recently, the CFTC filed an 18-page comment letter with FERC regarding a proposed rulemaking on credit reforms in wholesale electricity markets. I applaud FERC for moving ahead with this effort—it’s critically important.
The second point I want to make is that, in writing this comment letter, the CFTC took pains (and FERC, if you didn’t notice at the time, I’m telling you now) to ensure that we didn’t make any claims of jurisdiction beyond our jurisdictional border, we didn’t encroach on what is not our territory, and we didn’t tell you how to do your job. What we did do (and I was just kidding—I know our staffs worked together to make sure this process worked smoothly)—was to provide FERC with extensive recommendations on one of our areas of particular expertise, specifically, financial market risk management. This is one of the things we do best—we’ve been overseeing financial markets for over 30 years, and frankly, we’re pretty good at it. We have a “deep bench”—truly excellent staff with an exceptional level of proficiency and skill in this area. Our comment letter was a good example of interagency cooperation and coordination—I would like to see that kind of thing continue.
Indeed, as markets innovate and develop, as we’ve seen in the area of financial transmission rights (FTRs), it will be more and more necessary to share information and know-how regarding market oversight. FTRs are financial instruments—they allow providers to hedge against the possibility of congestion in their supply paths. In addition, here’s a good example of why we need to work collaboratively: these instruments are the subject of a large default case, currently ongoing both at FERC and in federal district court. The specifics of the case involve a hedge fund called the Tower Capital that is alleged to have deliberately caused an affiliate to default on FTR obligations by saddling it with certain high-risk, losing positions and then hedging those same positions with another affiliate. This is precisely the kind of area where the CFTC, as a financial market prudential regulator, can provide some useful expertise—not trying to assert jurisdiction, but giving the benefit of our oversight experience in this area. As FERC moves more and more into the arena of overseeing markets involving financial contracts, there’s a mutual benefit to sharing information about financial market oversight.
So when the CFTC says, here’s how we think you might want to go about ensuring financial responsibility in a certain market, that doesn’t mean we’re trying to assert jurisdiction; it means we’re sharing our expertise. Conversely, if FERC has information about cash market activities that may be affecting futures market prices, I know they’ll be sharing that with CFTC enforcement staff. These are just a couple of examples of how we can work together to enhance our common interests.
I’m not naïve enough to think this is all wine and roses. I know we’ve had difficult interactions in the past, and I know that there will be challenges in the future. But we are not doomed to repeat our past mistakes. Let’s again, take a deep breath, and show the American public that we know how to react, not only appropriate and promptly, but to their ultimate benefit.
The CFTC has recently been working closely with another sister regulator on harmonizing regulatory efforts. As you know, the markets overseen by the SEC and by the CFTC are broadly associated and interrelated. In fact, sometimes we have difficulties in ascertaining whether certain products are correctly identified as securities or as futures. Last September our agencies did something unique, something I had been asking for since I arrived at the Commission in 2007: we held two days of joint public meetings to discuss issues of mutual interest and concern. The objective was to look at areas of regulatory overlap, look at areas where there may be gaps, and come up with ways of harmonizing our respective regulations to increase transparency, reduce “regulatory arbitrage” and bring more consistency to our oversight.
I have been very pleased with these efforts, which have borne fruit in terms of several regulatory and legislative proposals to streamline and enhance our agencies’ market oversight. We’ve even created a new CFTC/SEC advisory committee. This effort was so successful, in fact, that today I’d like to make a specific call for similar joint public meetings of our two agencies. I think the benefits of such meetings between FERC and the CFTC are two-fold: first, and most obvious, the public that we serve is given the opportunity to hear and comment on our actions, and second, those of us who are the ultimate decision-makers are held publicly accountable for the success or failure of those actions. I have little patience with the often-used Washington excuse of “this was held up by staff.” If something doesn’t get done, or doesn’t work right, or fails to happen when it should, well, Harry Truman was right—the buck stops here. Markets and consumers should look to the Commissioners, and should have an opportunity to publicly hear and comment on our work—I think that shining a light on agency deliberations has an extremely positive effect. If we succeed—let us know, and if we fail, then by all means let us know that, too. It’s my job, and my responsibility, to listen, and respond, to the public.
As I’ve said, I’ve been very pleased with the results following the SEC/CFTC meetings. So as of today, I’m going to be pushing for the same kind of public discussions with FERC—it’s high time, and as Martha Stewart would say, it’s a good thing.
Our two agencies have incredibly important mandates, and I think we are both working hard to do the best we can for the American consumer. But that doesn’t mean we can’t do better. We can. We’ve talked today about some actions that we—regulators and Congress—can take now to address our current problems, and we are accountable to the public to act decisively and promptly. Americans know there is still a problem—too many people are still out of work, household budgets are pushed to the limit—and they are waiting and watching to see “how we react.” We must do better to fix our current system; to paraphrase a famous saying, failure is not an option. I think we can do better—it is just a matter of how we react.
Last Updated: January 24, 2011