Public Statements & Remarks

Keynote Address by CFTC Commissioner J. Christopher Giancarlo
Commodity Markets Council, State of the Industry Conference
Miami, Florida

End-Users Were Not the Source of the Financial Crisis: Stop Treating Them Like They Were

January 26, 2015


Good afternoon. Thank you for your warm welcome. Thank you for inviting me to speak today. I am delighted to be at the CMC conference that brings together so many important participants in the markets regulated by the Commodity Futures Trading Commission (CFTC).

Let me begin by saying that my remarks reflect my own views and do not necessarily constitute the views of the CFTC, my fellow CFTC Commissioners or of the CFTC staff.

It is an honor to be on a program that includes both Chairmen of the House and Senate Agriculture Committees. Having spent time with both men, I can say that we are all very fortunate to have two experienced friends of agriculture chairing the Committees that oversee the CFTC and the markets we regulate.

I appreciate the opportunity to give this keynote address. I want to discuss a few issues that are important to the commodity and energy markets. These markets and your companies help to feed the globe’s population, heat and power millions of homes, and fuel the trains, planes, ships and trucks that deliver the commodities you produce and trade to the far corners of the world.


I dare say that before the Dodd-Frank Act was signed into law in July of 2010, some of you in the room, particularly in the energy space, did not have many dealings or interactions with the CFTC. There’s no doubt that since then, many of you have become intimately more familiar with the agency.

That was certainly true for me. Before the Dodd-Frank Act, I didn’t pay a lot of attention to the CFTC, but I gained a lot of experience in the global swaps markets. When I first left my law practice in 2000 and entered the swaps industry, I was struck by the fact that swaps brokerage was a regulatorily recognized activity in most overseas trading markets, but NOT in the U.S. I always felt this omission was somewhat detrimental to the ability of the U.S. swaps markets to compete against overseas markets such as London.

In the years before the financial crisis, I came to see that certain reforms would improve the swaps industry. In the mid-2000s, I became a supporter of central counterparty clearing of swaps when I saw how its emergence in the energy swaps markets increased trading and market participation. In 2005, I led an effort to develop a clearing facility for credit default swaps. That initiative ultimately led to the creation of ICE Clear Credit, the world’s leading clearer of credit derivative products.

Six years ago, I saw how the lack of regulatory transparency into swaps counterparty credit risk exacerbated the financial crisis. I remember very well an early morning phone call the second week of September 2008. It was from one of the principle U.S. bank prudential regulators. He was asking about widely gapping credit spreads in bank CDS protection, including Lehman Brothers. The regulator wanted to understand what was going on in trading markets. After a short conversation, I said that I would be glad to explain the current market situation to him face-to-face. He suggested a date in mid-October. I said “sure, but it all may be over by then.” It became clear to me then that regulators needed to have a far more transparent window into swap counterparty credit risk.

So as you can see, by the time Congress began drafting the bills that would become Title VII of the Dodd-Frank Act, I was already a confirmed advocate for its three key pillars of:

  • Central counterparty clearing;
  • Swap data reporting; and
  • Regulated swaps execution.

My support for these reforms is driven by my professional and commercial experience, not academic theory or political ideology. I believe that well-regulated markets are good for American business and job creation. That is why I consider myself pro-reform. That is why I support clearing more swaps through CCPs, reporting swap trades to trade repositories and executing swaps on regulated trading platforms. Unfortunately, many of the rules governing who and how swaps are traded do not conform to marketplace reality.


Unfortunately, caught up in some of the collateral damage surrounding the Dodd-Frank reforms were the traditional commodity and energy markets and the end-users who depend on them for a variety of uses. Yet, end-users were not the source of the financial crisis. That is why Congress undertook to exempt end-users from the reach of swap trading regulation. It is our job at the CFTC to make sure that our rules do not treat them like they were the cause of the crisis.

Proposed Changes to Rule 1.35

In a number of key areas that I will discuss, reforms born from or inspired by Dodd-Frank are overly burdening end-users. For example, in 2012, the CFTC revised Rule 1.35. The revised rule requires the keeping of all oral and written records that lead to the execution of a transaction in a commodity interest and related cash or forward transaction in a form and manner “identifiable and searchable by transaction.” This recordkeeping must be done (with certain carve outs) by futures commission merchants (FCMs), retail foreign exchange dealers, introducing brokers, and members of designated contract markets and swap execution facilities.

As I have said before, the revised rule proved to be unworkable. Its publication was followed by requests for no-action relief and a public roundtable at which entities covered by the rule voiced their inability to tie all communications leading to the execution of a transaction to a particular transaction or transactions. End-user exchange members pointed out that business that was once conducted by telephone had moved to text messaging, so the carve out in the rule for oral communications gave little relief. They pointed out that it was simply not feasible technologically to keep pre-trade text messages in a form and manner “identifiable and searchable by transaction.”

Last fall, I voted against a proposed CFTC rule fix that did not do enough to ease this unnecessary burden on participants in America’s futures markets. That proposal was a well-intentioned, but insufficient attempt to provide relief from unworkable Rule 1.35 requirements. Rather than facilitating the collection of useful records to use in investigations and enforcement actions, the rule imposes senseless costs that fall especially hard on small intermediaries between American farmers, manufacturers, and U.S. futures markets.

Many of the small and medium-sized FCMs are used by America’s farmers and producers to control the costs of production. Unfortunately, today we have around half the number of FCMs serving our farmers than we had a few years ago. FCMs, particularly smaller ones, are being squeezed by the current environment of low interest rates and increased regulatory burdens. They are barely breaking even.

We should not be further squeezing American Agriculture and manufacturing with increased costs of complying with rules such as 1.35, if we can avoid it. The stated purpose of the Dodd-Frank Act was to reform “Wall Street.” Instead, we are burdening “Main Street” by adding new compliance costs onto our farmers, grain elevators, and small FCMs. Those costs will surely work their way into the everyday costs of groceries and winter heating fuel for American families, dragging down the U.S. economy.

End-Users Captured As “Financial Entities”

Another example is the Dodd-Frank definition of “financial entity.” It concerns the inadvertent capture of many energy firms as “financial entities.” As we have seen, imposing banking law concepts onto market participants that are not banks and that did not contribute to the financial crisis is not only confusing, but adds more risk to the system. It has the practical effect of preventing these firms from taking advantage of the end-user exemption for clearing or from mitigating certain types of commercial risk. Again, let’s not punish market participants who played no role in the financial crisis.

Swap Dealer De Minimis Level

Requiring that the Commission take a vote before a major shift in its regulations takes effect seems like a basic tenet of proper administrative law. However, in the CFTC’s final rule defining who would be captured as a “swap dealer,” the Commission abdicated this responsibility. Instead, the rule allows the “de minimis” threshold of $8 billion dollars of swap business per year to automatically lower to $3 billion in only a few short years without any affirmative vote of the Commission. This automatic lowering may occur regardless of the conclusions of a formal study of the matter required by the Commission – even if the study concludes that lowering the threshold is a bad thing to do! This is simply ridiculous.

A few months ago at a CFTC public hearing, I said as much for the official record. Later, I was characterized as “slamming” the particular rule. If calling a bad rule a bad rule is “slamming,” then I guess I did so. But it is merited.

Unquestionably, an arbitrary 60% decline in the swap dealer registration threshold from $8 billion to $3 billion creates significant uncertainty for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers. It will have the effect of causing many non-financial companies to curtail or terminate risk hedging activities with their customers, limiting risk management options for end-users, and ultimately consolidating marketplace risk in only a few large swap dealers. Such risk consolidation runs counter to the goals of Dodd-Frank to reduce systemic risk in the marketplace. The CFTC must not arbitrarily change the swap dealer registration de minimis level without a formal rulemaking process.

Contracts with Volumetric Optionality

Another topic of concern is risk management contracts that allow for an adjustment of the quantity of a delivered commodity. These types of contracts, known as “Forward Contracts with Embedded Volumetric Optionality,” or EVO Forwards, are important to America’s economy. They provide farmers, manufacturers and energy companies with an efficient means of acquiring the commodities they need to conduct their daily business – at the right time and in the right amounts. This includes providing affordable sources of energy to millions of American households. EVO Forwards do not pose a threat to the stability of financial markets. They should not be regulated in the same manner as financial derivatives.

Forwards are expressly excluded from the definition of a “swap” under the Commodity Exchange Act. The CFTC’s original guidance on how to determine when an EVO Forward should also be considered a forward, and thus excluded, using a “Seven-Factor Test” has been burdensome, unnecessary and duplicative. The Commission captured a large swath of transactions that were not and should not be regulated as “swaps,” including EVO Forwards.

Fortunately, the Commission recently proposed through regular order an amended interpretation of the Seven-Factor Test. That proposal is a good start for providing some sensible relief from the problems arising from the test. We are sorting through the many comments we received. I believe the best approach would be a new and more practical product definition. Short of that, my staff and I will listen carefully to industry’s recommendations for a better interpretation.

If not corrected, the regulation of these transactions will actually have the effect of increasing companies’ costs of doing business. It will force some businesses to curtail market activity and thereby consolidate risk in the marketplace rather than transfer and disperse it. That will ultimately raise costs for consumers. Such costly and unnecessary regulation thwarts the intent of Congress under the Dodd-Frank Act. We need your help to get this rule right.

Position Limits

Let me now turn to everyone’s favorite CFTC rule proposal: position limits that was proposed for the second time in November of 2013.

Shortly after I arrived at the Commission this summer, the CFTC staff hosted a public roundtable to hear concerns from market participants on the position limits rule proposal. In preparing for the roundtable I reviewed the underlying legal authority in Congress’ mandate that the CFTC prevent “excessive speculation.” After listening to almost a full day of testimony, I began to form the view that the CFTC was responding to Congress’ mandate to restrict “excessive speculation” the same way that the Transportation Safety Administration (TSA) goes about the task of catching airplane hijackers. That is, the CFTC intended to subject every single market participant to new federal position limits unless they affirmatively qualified for one of several detailed exemptions. The rule would operate the same way the TSA operated when it made every single passenger, including six-year-old boys and 82-year-old grandmothers, take off their shoes and belts and go through metal detectors before boarding a plane.

It struck me that there had to be a better way. There had to be a way to limit excessive speculation that was not so burdensome on America’s energy producers and hedgers, along with its farmers, ranchers and manufacturers.

The Dodd-Frank Act instructed the CFTC on how to define what constitutes a bona fide hedging transaction so those trades would not count towards position limits. The statutory definition states that the reduction of risk inherent to a commercial enterprise is a factor in determining what qualifies as a bona fide hedging transaction.

Instead, the currently proposed CFTC rule contains a number of provisions that will weigh heavily on hedgers, including:

    (1) articulating 14 categories of transactions it deems bona fide hedges and requiring staff “guidance” before any other type of transaction qualifies;

    (2) for the first time and without adequate explanation, the proposal requires not only a qualitative correlation but also a quantitative correlation of 80% or better between the futures price and the spot price of two commodities before a cross-commodity hedge is considered bona fide; and

    (3) the proposal reverses course and eliminates the long-standing, flexible process for obtaining a so-called un-enumerated hedge exemption.

I am very concerned that the effect of the CFTC’s bona fide hedging framework is to impose a federal regulatory edict in place of business judgment in the course of risk hedging activity by America’s commercial enterprises. The CFTC must allow greater flexibility. It must encourage – not discourage – commercial enterprises to adapt to developments and advances in hedging practices.

The CFTC is a markets regulator, not a prudential regulator. The CFTC has neither the authority nor the competence to substitute its regulatory dictates for the commercial judgment of America’s business owners and executives when it comes to basic risk management.

The LAST thing our economy needs is the federal government dictating the conduct of everyday business risk management.

I believe the Commission should carefully consider many of the well-informed comments and suggestions on position limits raised by market participants. These include:

  • updating and modernizing deliverable supply estimates;
  • carving out ERISA plans;
  • modifying or eliminating the limitations on cross-commodity hedging;
  • restoring bona fide hedging status to anticipatory merchandising hedges; and
  • creating an aggregation policy that focuses on effective control over trading decisions, rather than primarily on ownership.

The CFTC should work closely with market participants to make sure the enhanced federal rules strike the right balance between regulation and well-functioning markets.

It is worth noting that there is a complete paucity of real Commission generated research or data to justify a sweeping new position limits regime. While we are all familiar with the various academic studies that make conclusions on both sides of the speculation issue, the only CFTC analysis cited in the position limits proposal was generated three decades ago related to the Hunt Brothers. Surely we can do better than that.

Let me be very clear. As a Commissioner, I believe the lack of CFTC analysis of the impact of “excessive speculation” is of fundamental significance to any decision to adopt a final position limits regulation.

Surely the Commission should look at the recent market events surrounding the decline in the price of crude oil over the past six months and determine why gasoline is averaging around two dollars a gallon these days. Even the President commented in the State of the Union address that we now produce more oil at home than we buy from the rest of the world—something that hasn’t happened in almost twenty years.1 Further, the President’s own Energy Information Administration (EIA) has stated repeatedly that the price of oil is directly related to global supply and demand and a recent revolution in American production.2 I cannot understand why this isn’t relevant to consider in any final version of a position limits regime put forward by the Commission.


As a final note, I want to put in a plug for the CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC) that I have been fortunate enough to be asked to sponsor. The EEMAC Committee hasn’t met since 2009, which, ironically, is actually a violation of the Dodd-Frank Act, which requires that EEMAC meet at least twice a year. Since its last meeting, we have had a sea-change in the CFTC’s impact on U.S. energy markets, all while the markets themselves are undergoing the largest technological and structural change in a generation. I am very optimistic the EEMAC will provide an open forum to discuss many of the issues I have mentioned today. I hope the EEMAC will be a catalyst to drive necessary improvements in CFTC rules and regulations. I welcome your participation and support and would like to thank the Commission for approving the membership just this morning.

In closing, I want to tell you how pleased I am to be a Commissioner of the CFTC. It is the highest honor to be nominated by the President and confirmed by the U.S. Senate to serve my country. After 30 years in the private sector advising clients, building businesses and operating trading venues, I have the opportunity to put my swaps knowledge and experience to good use.

I pledge to you today my full engagement on the many complex issues facing U.S. risk hedging markets. I intend to be:

  • A diligent student of market evolution and structure;
  • A champion for market efficiency and liquidity;
  • A protector of end-users’ rightful exemption from overly burdensome rules; and
  • A proponent for the proper use of U.S. commodity and energy markets in durable service to the American public.

Thank you very much for your time. I look forward to your questions.

1 See President Barack Obama, State of the Union Address, Jan. 28, 2014, available at

2 See Administrator Adam Sieminski, Energy Information Agency, U.S. Department of Energy, Statement Before the U.S. Senate Committee on Energy and Natural Resources, July 16, 2013, available at; See also Sieminski, EIA, Statement Before the U.S. House of Representatives Committee on Energy and Commerce, Dec. 11, 2014, available at

Last Updated: January 26, 2015