Rep. K. Michael Conaway 37th International Futures Industry Conference A Congressional Update
As prepared for delivery
Thank you for that kind introduction. It is good to be in Florida and it is good to be among many friends.
Last time I had the occasion to speak with some of you, we were in New York at the SEFCON Conference in October. Then, I talked about balancing new transparency regulations with the needs of market participants for flexibility. I still believe striking a balance in the Dodd-Frank regulation is the central challenge facing both regulators and the market today.
We continue to face uncertainties created by the scope, speed, and order of the CFTC’s regulatory roll out. I remain concerned that the Commission has not paid sufficient attention to the concerns that end-users, banks, and other financial service firms have shared on each rule proposal. But, perhaps most distressing, the Commission is still avoiding the economic analysis that needs to be done in order to write the best rules possible.
Tonight, I would like to quickly cover a few topics that I hope will be of interest to you. We will start with one that is close to my heart, cost benefit analysis. Then, I would like to share a few thoughts on the role of speculation in liquid markets, briefly touch on MF Global, and then close with an outline of where the House Committee on Agriculture is headed for the rest of year.
Before I came to Congress I made my living as a CPA; during my career, I have served as an auditor, a CFO for a small business, and a bank loan officer. That work has given me a deep appreciation for how important financial markets are for Main Street America.
While many portray the economy as Main Street vs. Wall Street, that is not the case. If you wear clothes, eat food, or ride in a car, you consume commodities that are traded, contracted, and hedged. It is these financial tools that allow producers to navigate uncertain economic times and still continue to produce the products that Americans need at a price they can afford.
Wall Street and Main Street are partners in economic growth and what hinders one will hinder the other. This is not to say that we ought to throw out the all the rules, but it is important that policy makers recognize they cannot regulate the financial services industry without affecting small businesses.
It is this deep connection to the heartland of America that makes financial reform so important to get right. Ranchers in Texas, farmers in Iowa, oil men in North Dakota, and manufacturers in Ohio will all feel the impacts of rules written in Washington. It is these businessmen and women that regulators ought to think of as they are writing the rules.
As many of you know, improving the cost benefit analysis done by the CFTC has been a goal of mine. Last year, I introduced H.R. 1840 with the strong, bipartisan support of my committee to change the way the Commission does business.
Our bill will finally require the CFTC to meet the same rigorous standards of analysis that every other federal department is expected to meet under a recent executive order signed by President Obama. Last month, H.R. 1840 passed out of Committee unanimously and I expect it to be brought to floor of the House this Spring for final passage.
For the past year, I have pushed, cajoled, and begged the CFTC to do a better job in analyzing economic impacts during their rulemaking. Chairman Gensler’s response has always been the Commission upholds the law by simply considering the costs and benefits of their proposals.
Often, this consideration takes the form of the Commission issuing rules, with check-the-box analysis that sorely underestimates the costs of the regulations and vaguely describes the benefits. Analysis done this way misses the point; cost benefit analysis should inform the regulations and result in tangible improvements in the rules that will bring the costs and benefits into alignment.
It may be the Commission’s current practices are upholding the minimum standard under the law, but that does not mean it is good enough. The Commission should utilize every tool it has to write the best rules it can. Simply checking the box is not good enough.
Recently, cost benefit analysis was compared to the Sword of Damocles, suspended by slender horsehair and dangling ominously over the Commissioners. It was suggested that from this perilous position, Commissioners were writing rules out of fear – fear of being sued for poorly justifying rules.
Instead of striking fear into the hearts of commissioners, quantifying the costs of their proposals should be an opportunity to write the best rules possible. I will continue to push for good analysis because I think it will lead to better individual rules, a stronger regulatory regime, and a healthier market for all participants.
One rule that should have had a more robust economic analysis was the position limits rule approved last October. Dodd-Frank was clear in its instruction: if the Commission can demonstrate why position limits are warranted to prevent excessive speculation, then it can impose them as appropriate to achieve that result. Yet, the justification for the position limits rule was dangerously deficient.
The fundamental question that should have been answered before we imposed position limits was: Are position limits worth the costs? We cannot know that, because to date, there has been insufficient data and insufficient analysis to understand the impact position limits will have on hedgers, the markets, and our economy.
High gas prices have again revived talk of position limits as a cure-all for rising and volatile commodities prices. Like in years past, there is a belief – although one not supported by much evidence – that speculators are behaving badly by increasing the price of oil.
While it is tempting for politicians to seek out scapegoats, the truth is the high price of oil is a problem of our own making. Policy decisions that were made years ago – failing to open new areas for production, boutique fuel mandates, and slow-walking new infrastructure – all contribute to today’s pain at the pump.
Compounding these regulatory burdens is a growing long-term supply problem. While we have experienced recent production gains, that may not be enough to offset the demands of an expanding global economy. As China, India, and others continue to industrialize, and as the United States shakes off its economic downturn, we will again see pressure on production to keep pace with demand.
Price signals are inescapable. Rising prices, while temporarily painful, provide a powerful signal to investors that there is a need to be filled. The signals producers in America have received over the past three years have led to an immense investment in new drilling technology and set off a production boom in places like North Dakota, Pennsylvania, and my home in the Permian Basin. This investment has lead to three straight years of increasing domestic production, adding an additional 120,000 barrels of oil a day in production last year alone.
The White House is right when it says that there is no magic solution to lower oil prices. Indeed, markets are rarely moved by magic. What the White House seems to ignore though, is that a price is not a goal, it is a consequence. They are the consequence of the decisions made by millions of people reacting to the particular circumstances they find themselves in.
If prices are too high, we should not complain or castigate producers, we should open access to more supplies. If it is worth it, Americans will produce the oil and bring down prices. Because the federal government controls huge quantities of oil, it has an important role to play in reducing high prices by adding to the long-term supply of the market. As important as our recent production gains are, we could be producing more oil, if the federal government would respond to what the market is clamoring for.
Efforts to blunt market signals by making it harder to trade commodities may provide a temporary reprieve from high prices, but it will come at a cost. In the long term, artificially lowered prices may lead to less investment and supply shortages. As market participants adjust to the new constraints put on them by this rule, there will be unintended consequences that the Commission has not fully explored.
Understanding the loss of customer money in the MF Global collapse is a priority for the House Agricultural Committee. To this day, there are still tens of thousands of Americans who are missing significant sums of money.
We are closely monitoring the investigations and carefully assessing whether there is an appropriate policy response to address the failures that led to the loss of segregated funds. But, that process cannot begin until we have a complete understanding of what happened.
As the Trustee, the CFTC, and the Department of Justice complete their investigations, the Committee will work with regulators and industry groups to address the problems identified. In the end, we will renew the long-standing assurance that segregated funds are safe.
Beyond MF Global, I expect that the Ag Committee is going to have a busy year. The foundation of this year will be writing a Farm Bill, the five year authorization of the programs that form the backbone of the farm safety net. Though it is a hard to write a farm bill in any political season, as we face shrinking budgets, it will be an even bigger challenge this year. As we write it, the risk management tools found in the futures markets will continue to grow in importance to the agricultural community.
The Committee will also continue a robust schedule of CFTC oversight, examining the economic burdens and general overreach that we have seen in many of the CFTC’s proposals. More specifically, we intend to proceed to the Floor with bipartisan legislation addressing important issues like the definition of “swap dealer” and a margin exemption for end-users.
We also intend to move in short order to consider legislation addressing the extraterritorial scope of Dodd-Frank, the “Pushout Rule”, and the indemnification provisions that may hinder coordination and information-sharing among international regulators. In addition, as the rulemaking process winds down, we are going to hold hearings on the collective costs and benefits of the entire regulatory regime.
Before I close, I want to commend Chairman Gensler on his openness and attentiveness, both with Members of Congress and market participants. He has led the Commission in an extraordinary campaign of meetings and public hearings as they are writing the new rules required by Dodd-Frank. This level of public participation is unprecedented for the CFTC and I thank him for it.
However, he has consistently left idle the most important tool at his disposal – cost benefit analysis. I fear that all his efforts in openness will not result in a better final product, because the Commission has not bothered with a sustained effort to consider the economic impact of its proposals or any of their alternatives.
Whether they know it or not, my constituents and all Americans are counting on the CFTC. American’s ability to manage their financial lives will be impacted by the rules finalized by the Commission. To that end, I will continue to insist the CFTC utilize every tool at its disposal to get them right.
I want to thank you all again for the opportunity to share some of my thoughts with you. If anyone has any questions, I would be happy to take them at this time.