Testimony of CFTC Chairman Gary Gensler before the U.S. Senate Homeland Security
and Governmental Affairs Permanent Subcommittee on Investigations
November 3, 2011
Good morning Chairman Levin, Ranking Member Coburn and members of the Subcommittee. I thank you for inviting me to today’s hearing on position limits and the changing nature of the derivatives markets. I also thank my fellow Commissioners and CFTC staff for their hard work and commitment to implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act and the CFTC’s existing futures market oversight.
Before I get to the CFTC’s position limits rulemaking, I would like to first discuss how markets have changed over time and update the subcommittee on the CFTC’s work to ensure our 21st century markets have 21st century regulations.
Changing Nature of the Derivatives Markets
The derivatives markets have changed significantly since the CFTC opened its doors in 1975.
A new unregulated derivatives market – the swaps market – developed in the 1980s. The swaps market has grown in size and complexity to the point where it now is more than seven times the size of the futures market.
The futures market has changed dramatically as well.
First, there has been a significant increase in electronic trading. Instead of being traded in trading pits, more than 80 percent of futures and options on futures were traded electronically in 2010.
Second, the makeup of the market has changed. In contrast with the early days of the
CFTC, swap dealers now comprise a significant portion of the markets. Also, many investors today treat commodities as an asset class for investment. Based on published CFTC data, financial actors, such as swap dealers, managed money accounts and other non-commercial reportable traders, make up a significant majority of many futures markets.
For example, based upon CFTC data as of October 25, 2011, only about 12 percent of long positions and about 18 percent of short positions in the WTI crude oil market were held by producers, merchants, processors and users of the commodity. Similarly, only about 13 percent of gross long positions and about 31 percent of gross short positions in the Chicago Board of Trade wheat market were held by producers, merchants, processors and users of the commodity.
Third, CFTC data shows the vast majority of trading volume in key futures markets – more than 80 percent in many contracts – is day trading or trading in calendar spreads. Only a modest proportion of average daily trading volume results in reportable traders changing their net long or net short futures positions for the day. This means that about 20 percent or less of the trading is done by traders who bring a longer-term perspective to the market on the price of the commodity. This summer we published on our website historical data on net position changes to enhance market transparency. The data reflects trading that changes or creates an end-of-day position, as contrasted with trading that does not change a trader’s end-of-day net position, such as spread or day trading.