“Value Regulations”

Remarks of Commissioner Bart Chilton to Metals Market Investors, Washington, D.C.

March 23, 2010



Thank you for taking the time to join in today. There has been an on-going dialogue with most of you who are participating in this session today, and I thank you for the conversation. What you have said, in brief, is that you are concerned about possible manipulation of the silver and gold markets. As someone who worked on Capitol Hill where we responded to thousands of constituents every week, I took it as part of my job to reply to folks. I continue to do that in my position as a Commissioner. This conference call today is part of my continuing efforts to respond to your concerns. And it’s my firm belief that not only is responding to you my responsibility, it’s also a great benefit. Some of the best thoughts and ideas come from folks communicating with government. Your contribution to the public and to this process—trying to ensure that these metals markets are free and fair and that they are devoid of fraud, abuse, and manipulation—is commendable.

Office of Consumer Affairs

Before we get into specifics, let me talk about a new endeavor that I’m trying to get underway at the CFTC. As part of an effort to better respond to the current issue, as well as numerous other concerns facing the American public, I believe that an office at the CFTC staffed by people dedicated solely to consumers would be a sure-footed step in the right direction. This new office, among other things, would be responsible for ensuring that folks who contact the agency get responses. The frustration that some of you have felt—and legitimately so—is one of the primary reasons that I am promoting this effort.

I’ve mentioned this to the Chairman and met with our Chief Operations Officer and there appears to be support for such an effort. I am hopeful that in the not-too-distant future, we will have such an Office that can, in significant part, be dedicated to responding to folks who communicate with the agency.

I’m excited by this idea, because I want the entire Commission to be able to benefit as I have from your input. While I have gained from these conversations and been educated by many of you, I don’t think that the CFTC as an entity, for the most part, has had a useful, effective communication portal for a direct relationship with the public.

One small example: I gave a speech entitled “Cop on the Beat” in October of 2007, which resulted in my responding to over 400 email comments about possible manipulative activity in the silver markets. I treated thoughtful comments seriously, and took the time to respond promptly. In contrast, I don’t think it’s acceptable that, as an agency, it took over eight months to develop a unified response to public comments on the silver issue (and, unfortunately, many thought when the agency finally did speak, it wasn’t very helpful). I think that an Office of Consumer Affairs, which would focus and coordinate these kinds of comments and answers to the public, would help avoid this kind of problem.

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In addition, a consumer affairs section would help address the misperception held by some that we are an unresponsive government agency. That characterization certainly does not at all represent the dedicated CFTC staffers who work hard every day. But without the basic logistical mechanism to respond to folks, the public doesn’t necessarily see that. That needs to change. We need to be responsive public servants, and we need to do a much better job of communicating with people, in addition to providing proactive outreach to aid and alert people to scams and fraud that are out there.

We also need to be doing our part to promote financial literacy. For example, I have talked about the rampant Ponzimonium that is going on in the wake of the Madoff scandal. These scams and others are taking place all over the nation—all over the world in fact.  They often take advantage of elderly folks and other vulnerable people with good hearts and limited incomes. We should be alerting the public about these scams, and a consumer affairs office would be a great place to consolidate and disseminate this information.

I’m going to continue listening to you and responding to you, because that’s my job. More than that, I’m going to work toward an institutional change at the Commission to make the agency as a whole more responsive to you as well.


After receiving and responding to emails about metals market manipulation and having asked our staff to look at the examples many of you sent to me, I asked (as did Commissioner Dunn) for an enforcement investigation into the silver markets. Then-Acting Chairman Lukken agreed, and an investigation began. For the record, this is the first enforcement investigation of the silver markets since CFTC began looking at the Hunt Brothers activity in 1979. Some have incorrectly suggested that there have been four such investigations, all turning up nothing and that this would be another do-nothing effort. That is inaccurate. Let me reiterate: this is the first agency silver investigation since the Hunt brothers case.

In my opinion, the current investigation, if it were simple, would be concluded. While I can’t give you specific details of the  examination, I can say that we are making significant progress and that it has been a valuable endeavor. We have taken testimony from dozens of witnesses and reviewed tens of thousands of documents. While I am hopeful that we will be able to share some of the results of the investigation soon, I am also aware that above all we need to get it right and ensure that we are moving forward in a thoughtful manner. We have looked at the silver market like we have never before and I think there is a window of success that has been opened for understanding about what has been going on and why. I cannot say more than that, but have every confidence in the folks who are working on this investigation.

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Value Regulations

For my conservative friends, and I have many, they have often claimed that business should be allowed to thrive without any government intervention. Let the free markets roll, they say. Well, we tried that over the last decade or so, and boy we all really were rolled. The banks were deregulated. They were allowed to offer high-wire mortgages, and then traders began exchanging credit default swaps that helped propel the economic collapse of American International Group, Bear Stearns, Lehman Brothers, and others everyone thought were “too big to fail.” The markets were deregulated and left, in many ways, to an unfettered free market. It has not worked out so well.

I know “regulation,” as a word and a concept, is not very popular to some, but there are many valuable regulations that we live by each day. Speed limits are a pretty good thing and save lives. I use the nutrition and product information on food products—required by USDA and FDA regulations—every day. I also think appropriate regulation that leads to open, competitive free markets is—as Martha Stewart would say—a good thing.

I’m not talking about an overzealous set of rules, but rather, I’m focused on thoughtful, tailored guidelines: what I call “value regulations.” These value regulations are important to consumers, to markets, and to our economy. Value regulations are rules that reflect the desire on the part of citizens to place significance and importance on a commonly-held objective; they are the rules to go by while you “keep your eyes on the prize.”

The task in developing such rules is to strike a reasonable balance between necessary restrictions, rights and desires. In the case of financial market regulation, there is a need to evaluate these value regulations in light of numerous, and sometimes competing, interests: ensuring the free flow of information and market utility, promoting the ability for businesses to compete domestically and internationally, and—most importantly—protecting consumers and markets from fraud, abuse, and yes . . . manipulation.

So, with that need for a sense of balance in mind, let us talk about three of these value regulations.

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Position Limits

First, many of you and others have complained there is a “crime in progress” because a few traders hold large percentages of the silver and the gold markets. Well, hold on a second. While I am not suggesting that there are not problems, as you will see, we need to remember that simple concentration of positions is not, in and of itself, per se manipulation. In fact, there is no statutory or regulatory hard limit on the amount of positions, other than in the expiration month. Let me repeat that: there is not a current limit during most of the trading period.

There has been some back and forth recently about whether an individual trader holds 20 or 40 percent of a given market. Either level is too high in my opinion, but the bottom line is that there is currently no limit during the majority of the trading period. An individual trader could have 60 percent—more than a majority—of a market and not be in violation of the law or our regulations. Frankly, it is enough to give attentive regulators night terrors. That is precisely why we need a value regulation here, to impose suitable position limits on metals to avoid concentration that could possibly lead to manipulation or attempted manipulation. That is the topic of the Thursday hearing.

For the record, it’s been my position that we should have included metals in the proposal that is currently out for comment on energy position limits. Frankly, there was not enough support for that at the time, and there may not be even today. I support position limits for the metals complex, as I do for all commodities of finite supply—like the soft agriculture commodities (coffee, cocoa, sugar, etc.). I think we should propose a rule on metals position limits now and move forward as swiftly as possible. We need to get this type of value regulation in place for these markets, to ensure that exchange-trading of metals accurately reflects the true economic prices of these commodities.


Second, many say that there is clear “manipulation” in metals and that we at the CFTC should merely “stop it.” Well, in order for the agency to prove manipulation in court we have to demonstrate, among other things, that there was a specific intent to manipulate the market. That means we have to show some sort of proof—be it an e-mail or voice recording, etc. That makes manipulation exceedingly hard to establish. I understand that when the man in the street talks about “manipulation,” he’s not talking about the legal definition of manipulation under the Commodity Exchange Act—he just wants the CFTC to step in and stop it, whatever it is. But under our Act, the violation of manipulation is a terribly hard legal hurdle to jump. In fact, in 35 years, there has been only one successful prosecution for manipulation. So if you ask me if the manipulation standard in the law is working, I’d have to say no. That is why I have called for Congress to amend our statute to give us the tools we need to deter, detect, and prosecute behavior that harms the pricing functionality of markets. We need a value regulation here. I believe that, through a change in our statute, Congress can make it easier to prove the types of scheming that we see going on in the markets that causes uneconomic pricing of commodities. We need to have a law that provides us with the professional grade regulatory tools to do our job and put folks in jail who try to rig and contort these markets.

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Over-The-Counter (OTC) Markets

Third, even if we as regulators look at the markets that we are sworn to oversee, there are myriad other areas that are related that could have an impact on the regulated futures and options markets that we do not see. That is why it is so important that Congress pass financial regulatory reform that provides the CFTC with oversight of the OTC markets—another value regulation that would be developed by a change in the law. These OTC markets can negatively impact commodity prices—both on and off regulated exchanges. I am not suggesting any specific fraud or manipulation here, only that the OTC markets—dark markets if you will—can provide a shield to appropriate oversight. That needs to change. If we have learned anything from the recent financial fiasco, it should be that we need to have a enhanced handle on what is going on and not allow things to slip below regulators’ radar.


Look, we have a long way to go. We need many things, including these value regulations: position limits for commodities of finite supply; a change to our law that will allow us to detect, deter, and prosecute activity that negatively affects the ability of the markets to reflect true economic prices of commodities; and the ability to oversee the OTC markets.  These should all be part of our effort to grow and adjust to a changing financial system, to be more adaptive and to be able to look around the corner and be nimble and quick. We need to be more like the police department and less like the fire department. We need to deter and prevent things from happening, rather than merely responding.

These are critical issues. We start on Thursday on position limits in metals. That is a good and needed step. However, we need to do more and we need to do better.

Thank you.

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Last Updated: January 24, 2011