SEC ANNOUNCES FISCAL YEAR 2014 "A STRONG YEAR FOR ENFORCEMENT"

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that in fiscal year 2014, new investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.  

In the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures.  In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties.  In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.

The agency’s enforcement actions also included a number of first-ever cases, including actions  involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

 “Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” said SEC Chair Mary Jo White.  “The innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.”

“Time and again this past year, the Division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”

In addition to the first-ever cases, Chair White noted that the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative was an important effort that began in the last fiscal year.  The SEC reached a settlement with a California school district for charges of misleading bond investors, making it the first settlement under the initiative targeting municipal disclosure. 

Director Ceresney added that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment adviser and municipal securities cases, microcap fraud, insider trading, and cases against gatekeepers.

SEC Enforcement in Fiscal Year 2014

Combatting Financial Fraud and Enhancing Issuer Disclosure

Charged more than 135 parties with violations relating to reporting and disclosure.  Cases include actions against Bank of America Corporation;Fifth Third Bancorp and its former CFO; snack food maker Diamond Foods Inc. and its former CEO and CFO; five executives and finance professionals from collapsed law firm Dewey & LeBoeuf LLP; animal feed company AgFeed Industries Inc. and eight executives; and CVS Caremark Corp. and its retail controller.

Continued to devote resources to combat market manipulation and microcap fraud, including by filing multiple actions against penny stock promoters and others who created a false appearance of genuine interest in various stocks, and by using trading suspensions to neutralize threats to investors after questions arise concerning the adequacy or accuracy of an issuer’s disclosures.  The SEC also suspended trading in hundreds of dormant shell companies that were ripe for abuse in the over-the-counter market.

Filed several actions to halt international investment frauds, including those that spread through social media and targeted, among others, immigrant communities.  These cases include actions against 11 operators and promoters in a scheme known as CKB and CKB168, plus related entities; against World Capital Market Inc., WCM777 Inc., and their founder; and against eight operators and promoters of TelexFree, Inc. and related entities.  The Enforcement Division will continue to root out pyramid and Ponzi schemes that prey on vulnerable investors.

Brought coordinated charges against 34 individuals and companies for violating laws requiring them to promptly report information about their holdings and transactions in company stock, under a new initiative using quantitative analytics to identify especially high rates of filing deficiencies.

Ensuring Exchanges, Traders and Other Market Participants Operate Fairly

Brought first-ever actions under a rule requiring firms to establish adequate risk controls before providing customers with market access.  One action was resolved against Knight Capital Americas LLC, and another is continuing against Wedbush Securities Inc. and two of its executives. 

Obtained the largest penalty to date against an alternative trading system, Lavaflow Inc.

Charged dark pool operator Liquidnet Inc. with improperly using subscribers’ confidential trading information in marketing its services. Also charged the co-owner of brokerage firm Visionary Trading LLC with manipulative trading, and charged the owner, two firms, and four other individuals with registration violations.

Imposed the largest penalty ever for net capital rule violations, in a case against high frequency trading firm Latour Trading LLC and a former senior executive.

Charged four officials from clearing firm Penson Financial Services, including its CEO and CCO, relating to violations of Regulation SHO arising from its securities lending practices.

Filed significant enforcement actions against the New York Stock Exchange and brokerage subsidiaries for their failure to comply with exchange rules; brokerage subsidiaries and former employees of ConvergEx Group, including its former CEO, for deceiving brokerage customers with hidden fees; and Wells Fargo Advisors LLC, in the Commission’s first case against a broker-dealer for failing to protect a customer’s material nonpublic information.

Uncovering Misconduct by Investment Advisers and Investment Companies

Brought first-ever action under investment adviser “pay-to-play” rule, charging private equity firm TL Ventures Inc. with providing certain services within two years after an associate made contributions to two political candidates.  Also charged this firm and an affiliated adviser with improperly acting as unregistered investment advisers.

Filed first action arising from a focus on fees and expenses charged by private equity firms.  The Commission instituted an action against private equity firm Clean Energy Capital LLC and its president, alleging fraud in the allocation of expenses to the firm’s funds.

Charged three investment advisory firms with failures to maintain adequate controls on the custody of customer accounts.  The misconduct at Further Lane Asset Management, GW & Wade, and Knelman Asset Management Group involved failures to maintain client assets with a qualified custodian or to engage an independent public accountant to conduct surprise exams as required by the custody rule.  Also charged the CEO of Further Lane and the CEO and chief compliance officer of Knelman for custody rule and other violations.

Pursued other types of wrongdoing by asset managers, and leveraged proactive risk identification initiatives such as the Aberrational Performance Inquiry that uses proprietary analytics to identify hedge funds with suspicious returns.

Increasing Activity in Whistleblower Program

The program awarded nine whistleblowers with total awards of approximately $35 million in FY 2014.

Brought the first charges ever under new authority to bring anti-retaliation enforcement actions.  The SEC charged hedge fund advisory firmParadigm Capital Management with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission, and charged the firm’s owner in connection with the principal transactions.

Awarded more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action, making it the largest-ever whistleblower award.

Holding Gatekeepers Accountable

Held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry. 

Cases include an action against Ernst & Young LLP relating to auditor independence rules, and against audit firm Sherb & Co. LLP and four of its auditors for their roles in the failed audits of three China-based companies.

The Commission charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent, and charged transfer agent Registrar and Transfer Company and its CEO for violations involving improper distributions of billions of shares of unregistered stock.

In its fraud case against animal feed company AgFeed Industries Inc., the Commission charged the company’s audit committee chair, who learned of the misconduct in question and failed to take meaningful action to investigate it or disclose it to investors after learning of it.

Rooting Out Insider Trading 

Charged 80 people in cases involving trading on the basis of inside information. The Commission also is implementing and developing next generation analytical tools to help identify patterns of suspicious trading.

Among those charged are a former hedge fund trader, a portfolio manager, the co-chairman of a board, an investment banker, an investor relations executive, an accountant, husbands who traded on information they learned from their wives, and a group of golfing buddies and other friends.

Upholding Disclosure Standards in Municipal Securities

Focused on upholding appropriate standards of disclosure in securities issuances by local and state governments.  Cases this year included an emergency court order against a Chicago suburb and its comptroller, featuring the Commission’s first emergency action to halt a municipal bond offering; charges against the state of Kansas; and the first penalty imposed against a municipal issuer.

Announced the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encourages and rewards self-reporting of certain violations by municipal issuers and underwriters.  Under the MCDC Initiative, these parties may self-report inaccurate statements in bond offerings about their prior compliance with certain continuing disclosure obligations.  In exchange, they may receive settlement terms that reflect credit for their self-reporting.  In the first action to arise from this Initiative, the Commission reached a settlement with a California school district for charges of misleading bond investors.

Cracking Down on Misconduct Involving Complex Financial Instruments

Filed enforcement actions against RBS Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and three Morgan Stanley entities for misconduct involving mortgage-backed securities and collateralized debt obligations.  The SEC also held global investment bank and brokerage firm Jefferies LLC responsible for its failure to properly supervise trading on its mortgage-backed securities desk.

Combatting Foreign Corrupt Practices and Obtaining Highest-Ever Penalties Against Individuals

Filed significant actions under the Foreign Corrupt Practices Act (FCPA) against Alcoa Inc., Weatherford International Ltd., the Archer-Daniels-Midland Company, and the Hewlett-Packard Company.  Additionally, in concluding its case against former Siemens executives who were charged with bribery in Argentina, the SEC also obtained the highest-ever FCPA penalties against individuals.

Demanding Admissions in Important Cases Enhancing Public Accountability

Demanded and obtained acknowledgements of wrongdoing under the admissions policy announced in the previous fiscal year.  Cases from this fiscal year involved fraud on clients concerning trading prices, a longstanding failure to comply with registration provisions, and failures to provide the Commission with accurate information during its investigations, among other things. 

Staff considers requiring admissions in cases where the violation of the securities laws includes particularly egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct obstructs the Commission’s investigation, where an admission can send a particularly important message to the markets, or where the wrongdoer poses a particular future threat to investors or the markets. 

Successful Litigation

Obtained a jury verdict against Samuel Wyly and the estate of the late Charles Wyly in a matter alleging a longstanding fraudulent scheme to use offshore trusts to conceal their ownership of tens of millions of shares of public companies.  This was the first litigation in which a defendant testified at trial against his co-defendants after agreeing to settle on terms requiring a written acknowledgement of wrongdoing.  The court issued a preliminary decision under which defendants are required to pay disgorgement of approximately $187 million and substantial prejudgment interest.

Obtained a jury verdict against a Minneapolis attorney and entities he controls for fraud in connection with unregistered offerings in a real estate fund.  The court ordered almost $20 million of monetary relief.

Obtained a jury verdict finding a Connecticut hedge fund manager liable for fraud after he funneled money to a Ponzi scheme.  The court ordered more than $80 million of monetary relief.

Obtained a jury verdict against Massachusetts advisory firm Sage Advisory Group, LLC and its principal in a case charging a scheme to induce the principal’s former brokerage customers to transfer their assets to his new advisory firm.  The court will later determine whether and what relief to impose against the defendants.

Additional data on the SEC’s FY 2014 enforcement results will be available as part of the SEC’s upcoming Agency Financial Report.

CFTC O'MALIA'S STATEMENT AT TECHNOLOGY ADVISORY COMMITTEE MEETING

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Commissioner Scott D. O’Malia, 11th Meeting of the Technology Advisory Committee

February 10, 2014

I am pleased to call the 11th TAC meeting to order since we reconstituted it in July 2010. I thank all of our TAC participants for joining us here today after the January 21 meeting was snowed out. I appreciate everyone’s willingness to accommodate the change in date.

I would like to acknowledge that our new Acting Chairman Mark Wetjen is here with us today. Chairman Wetjen has shown a great interest in our technology issues and a real willingness to ensure that the data we are collecting will be used in a thorough and automated manner. I was pleased to join with Chairman Wetjen and Commissioner Chilton a few weeks ago to announce that the Commission is taking concrete steps to address the challenges we face in optimizing our data.1

Specifically, on January 21, the Commission announced the formation of a cross-divisional data team that will focus on identifying problems faced by each division and developing solutions to resolve problems with the Commission’s regulatory data. The data team will also solicit comments from market participants on recommended rule changes to the Commission’s data rules. Based on this input, the data team will make written recommendations on a corrective path forward. Until now, no one in the Commission has taken ownership to fix the problems. This has now changed.

Enhancing the Commission’s swaps reporting rules will improve data quality, minimize confusion regarding reporting workflows, and increase standardization.

In addition, the Commission staff will continue to work on the data standardization effort, led by the Office of Data and Technology. The first phase of this work has been reported to TAC,2 but much work remains to harmonize many more fields and asset classes.

Agenda

Today’s TAC agenda is packed with three very important and timely topics that are also at the top of the Commission’s policy agenda.

Panel I -- Data: Where Does the Commission Stand and How Do We Fix What’s Broken?

First, we will hear from a collection of the Commission’s division directors who have critical market oversight responsibilities, as well as our Office of Data and Technology and our new Chief Economist. They will discuss where the Commission has been successful in utilizing swap data repository data, identify areas that are not working, and explain where changes must be made.

In thinking about our goals, I reviewed the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS / IOSCO) Final Report issued in January 2012 entitled, “Report on OTC derivatives data reporting and aggregation requirements.”3 Significantly, the report identifies key reporting standards and goals for data reporting, aggregation, and sharing among regulators.

The report also establishes several high level objectives for data utilization that the Commission should be able to achieve. These objectives include:

1. Assessing systemic risk and financial stability

2. Conducting market surveillance and enforcement

3. Supervising market participants

4. Conducting resolution activities

5. Bringing greater transparency to OTC markets

While it is clear we have achieved objective 5 with a partially complete swaps data report and a real-time swaps data ticker, I believe we have a long way to go on the other fundamental data objectives.

Working hand-in-hand with the division directors, I want to better understand how we will tackle these key objectives, and further learn about the data priorities of each division and the progress being made to achieve these priorities.

Panel II -- Concept Release on Automated Trading

Our second panel will focus on a question that TAC has extensively discussed over the past three and a half years: What is the appropriate level of pre-trade functionality deployed by traders, futures commission merchants, and exchanges to protect market integrity against rouge trades which can cause market disruption?

The first TAC meeting4 addressed this topic and by the third TAC meeting,5 there were recommendations for minimum standards.6 Subsequently, we established a Subcommittee on Automated and High Frequency Trading to define high frequency trading and explore other policy questions related to automated trading.7

Today, we will discuss the Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments.8 The comment period closed on December 11, 2013,9 but my colleagues have generously agreed to reopen the comment period until February 14, 2014 to include this panel discussion and any additional comments. We have received a variety of comments and ideas regarding these standards, and I have asked four witnesses and Commission staff to participate on this panel. I also encourage our TAC members, many who submitted comments on the concept release, to share their views on this matter.

I recognize that there are very strong opinions regarding automated trading and I believe that we will have a robust discussion.

Panel III – Made Available-to-Trade Determination

Finally, the third panel will address swap execution facilities (SEFs) and the recent Made Available-to-Trade (MAT) determinations.

The Division of Market Oversight (DMO) has deemed certified several MAT submissions for standard interest rate benchmark swaps and credit default swaps. While I am supportive of the MAT determinations for the benchmark contracts, I do not believe that the appropriate research and consideration has been given to package transactions tied to benchmark contracts. I believe that we can transition many of these contracts to mandatory trading in the near future, but we must first complete some additional analysis.

As part of our research and analysis, we are focusing panel III’s discussion on package transactions and the Commission staff will hold a roundtable on February 12.

While I am pleased that the Commission staff is working to provide relief from the mandatory trading requirement for package transactions, I did raise serious concerns with the MAT process in my January 16 statement that was tied to DMO’s announcement that it deemed certified Javelin’s MAT determination.10 My concerns have nothing to do with Javelin as a company or with their offering. They just happened to be the first mover to submit an application, which exposed the flaws in the MAT process. In many respects, it is appropriate for a company called Javelin to be the first mover, or rather the “tip of the spear.”

DMO’s memo to the Commission on the MAT determinations did not include any discussion of the types of package transactions that would be impacted by the MAT determination, nor did it address the concerns regarding technical or operational readiness or the jurisdictional issues involving these transactions.

The only insight provided in the staff memo regarding commenters’ requests for temporary relief for package transactions was the following statement: “[S]uch requests are not appropriate for consideration within the scope of the Commission’s process for reviewing a MAT determination.” (emphasis added).

Thankfully, the memo went on to say, “[t]herefore, the Division is taking these comments into consideration and may provide a future response or guidance as appropriate.” However, that was the extent of the discussion.

While I am frustrated that we are conducting the analysis on package transactions after making the MAT determinations, I am pleased that this TAC meeting will initiate the process for identifying and resolving the issues associated with such transactions.

I would like to see the market continue to benefit from the efficiency of package transactions and encourage the trading of such products on exchange. So, let's begin the process to figure out how to make that happen.

1 Press Release PR6873-14, CFTC to Form an Interdivisional Working Group to Review Regulatory Reporting, January 21, 2014, available at http://www.cftc.gov/PressRoom/PressReleases/pr6837-14.

2 This report is available at http://www.cftc.gov/ucm/groups/public/documents/file/dataharmonization.pdf.

3 The final report is available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf.

4 July 14, 2010 TAC meeting.

5 March 1, 2011 TAC meeting.

6 These recommendations are available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

7 The subcommittee presentations regarding high frequency trading and automated trading from the October 30, 2012 TAC meeting are available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg1.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg2.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg3.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg4.pdf.

8 78 FR 56542 (proposed Sep. 12, 2013).

9 All comment letters on the concept release are available through the Commission’s website at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1402.

10 The statement is available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement011614

CFTC CHAIRMAN GENSLER'S SPEECH BEFORE THE INTERNATIONAL MONETARY FUND CONFERENCE

FROM: COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Gary Gensler Before the International Monetary Fund Conference
March 20, 2013

Good afternoon. Thank you, José, for the kind introduction. I also want to thank the International Monetary Fund and Christine Lagarde for the invitation to speak today at your conference on commodity markets.

Derivatives Markets

Farmers, ranchers, producers, commercial companies and other end-users across the globe depend on well-functioning derivatives markets. These markets are essential so that end-users seeking to hedge a risk can lock in a future price of a commodity and thus focus on what they do best – efficiently producing commodities and other goods and services for the economy.

Derivatives markets have existed in the United States since the time of the Civil War. Initially, there were futures on agricultural commodities, including wheat, corn and cotton.

Futures allowed farmers to get price certainty on their crops. As they were planting their fields, farmers could lock in a price for harvest time. Farmers and producers also benefited from prices established in a central market, rather than just relying on competition for their harvested crops among local merchants.

In these central markets, hedgers seeking to reduce risk may meet other hedgers, but often meet speculators on the other side of the transaction.

In the 1920s, Congress brought the first federal oversight to the futures market. These reforms included bringing transparency to the marketplace by requiring that all grain futures be traded on central exchanges.

A federal regulator was established within the U.S. Department of Agriculture to oversee the grain futures market.

During the 1930s, President Roosevelt and Congress strengthened the common-sense rules of the road for these markets by adopting new prohibitions against manipulation, protections for customer funds and speculative position limits to promote market integrity.

By the 1970s, the futures market had expanded to include contracts on additional agricultural commodities, as well as metals.

Market participants also were considering further innovations to trade contracts on other risks in the economy, such as on energy products and financial instruments.

Congress understood this and broadened oversight of the futures markets to all commodities, including any that might be developed in the future.

The Commodity Futures Trading Commission (CFTC) was established as in independent regulator in 1975, and took on this broader role from our predecessor in the Department of Agriculture.

The word commodity in our oversight regime covers agricultural, metals, energy and financial commodities, as well as any other future to manage risk based on any "services, rights and interests."

Thus, the word "commodity" in our oversight regime is more expansive than you are generally discussing at this conference.

In 1981, a new derivatives product emerged. These derivatives, called swaps, were initially transacted bilaterally, off-exchange. While the futures market has been regulated by the CFTC, the swaps marketplace in the United States, Europe and Asia lacked oversight.

What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by the 1930s reforms, weathered the financial crisis.

President Obama and Congress responded and crafted the swaps provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

They borrowed from what has worked best in the futures market for decades – clearing, oversight of intermediaries and transparency. The law gave the CFTC responsibility for swaps and the Securities and Exchange Commission responsibility for security-based swaps.

CFTC Mission

As of last year, the CFTC is charged with overseeing both the commodity futures market and the swaps market.

The CFTC is not a price-setting agency.

The mission of the CFTC is to ensure market transparency – both pre- and post-trade. Transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.

The mission of the CFTC is to promote market integrity – to ensure that that the price discovery process is open, competitive and efficient.

The mission of the CFTC is to police the derivatives markets for fraud, manipulation and other abuses.

The mission of the CFTC is to lower the risks to the economy of clearinghouses and intermediaries, as well as ensuring for the protection of customer funds.

And the mission of the CFTC is to ensure these markets work for the real economy – the non-financial side that employs 94 percent of private sector jobs – so that hedgers and investors may use them with confidence.

Three years after the passage of the Dodd-Frank Act, the CFTC is nearly complete with the law’s swaps market reforms. The swaps marketplace is increasingly shifting to implementation of these common-sense rules of the road. For the first time, the public is benefiting from:
Greater access to the swaps market and the risk reduction that comes from centralized clearing.
Oversight of swap dealers; and
The transparency of seeing the price and volume of each swap transaction, available free of charge on a website like a modern-day tickertape.
Looking forward, it’s a priority that the Commission finishes rules to promote pre-trade transparency, including those for a new swaps trading platform, called swap execution facilities (SEFs), and the block rule for swaps.

Pre-trade transparency will allow buyers and sellers to meet and compete in the marketplace, just as they do in the futures and securities marketplaces. SEFs will allow market participants to view the prices of available bids and offers prior to making their decision on a swap transaction.

It’s also a priority that the Commission ensures the cross-border application of swaps market reform appropriately covers the risk of U.S. affiliates operating offshore.

If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with Bear Stearns, which failed five years ago this month, AIG, Lehman Brothers, Citigroup and Long-Term Capital Management.

Thus, as the CFTC completes guidance regarding the cross-border application of swaps market reform, I believe it’s critical that the Dodd-Frank Act’s swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S. Where there are comparable and comprehensive home country rules and enforcement of those rules abroad, we can look to substituted compliance, but the transactions would still be covered.

Changing Markets

Since the 1980s, the swaps market has grown in size and complexity. It is now eight times as big as the futures market. From total notional amounts of less than $1 trillion in the 1980s, the notional value now ranges around $250 trillion in the United States.

Together, the notional value of the U.S. futures and swaps markets is approximately $300 trillion – or roughly$20 of derivatives for every dollar of goods and services produced in the U.S. economy.

The futures market has changed dramatically as well.

There has been a significant increase in electronic trading. Instead of face-to-face trading on an exchange floor, more than 85 percent of the futures volume in 2012 was traded electronically.

In addition, the makeup of the market has changed. While the futures market has always been where hedgers and speculators meet, today a significant majority of the market is made up of financial actors, such as swap dealers, hedge funds, pension funds and other financial entities.

For example, based upon CFTC data as of last week, only about 14 percent of long positions and about 13 percent of short positions in the crude oil market (NYMEX WTI contracts) were held by producers, merchants, processors and other users of the commodity.

Similarly, only about 18 percent of gross long positions and about 27 percent of gross short positions in the Chicago Board of Trade wheat market were held by producers, merchants, processors and other users of the commodity.

Furthermore, CFTC data published in 2011 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.

Modern technology has led to other dramatic changes in the markets. With advancements in cell phone technology, a farmer in Africa or Asia can see the world prices for these markets, whether set in Chicago or elsewhere. This technological advancement greatly increases access to the markets. Farmers around the globe can more fully benefit from the competitive market.

But modern technology also more tightly connects us all and highlights why we have to ensure the markets are transparent and free of fraud, manipulation, and other abuses.

Position Limits and Enforcement Authority

Since the reforms of the 1930s, the CFTC’s predecessor and now the CFTC have promoted market integrity with position limits, as well as the agency’s enforcement authority to police manipulative conduct.

Position Limits

Since the 1930s, Congress has prescribed position limits to protect against the burdens of excessive speculation, including those that may be caused by large concentrated positions.

When the CFTC set position limits in the past, the agency sought to ensure that the markets were made up of a broad group of participants.

At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring that markets do not become too concentrated.

Position limits are a critical tool to ensure that a single trader does not accumulate an outsize position that could potentially affect integrity or liquidity in the marketplace.

As required by Congress in the Dodd-Frank Act, in October 2011 the CFTC finalized a rule to establish position limits for futures, options and swaps on 28 physical commodities.

A group of financial associations is challenging this rule in court. I believe it’s critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities.

Enforcement Authority

In the United States, we have strong prohibitions against misconduct that can affect the integrity of our markets, which were further strengthened by Congress in the Dodd-Frank Act.

Our laws prohibit successful manipulations, where the wrongdoer intended to and actually did manipulate a price.

But we also cover a much broader swath of misconduct.

Our laws prohibit all attempts at manipulation, and all manipulative or deceptive schemes, where the wrongdoer acted recklessly. In addition, our laws prohibit the transmission of false information that may tend to affect the price of a commodity.

These laws, aggressively and fairly enforced, are designed to protect market participants and the integrity of our markets. The international community can draw on these provisions to enhance their own regulatory regimes.

International Coordination

Other market jurisdictions have made progress on position limits and attempted manipulation provisions.

In November 2011, the G-20 leaders endorsed an International Organization of Securities Commissions (IOSCO) report noting that market regulators should have and use formal position management authorities, including the power to set position limits, to prevent market abuses.

Most jurisdictions with commodity derivatives markets have subsequently implemented or are moving forward on position management authorities. For instance, the European legislative bodies are considering a position limit regime for the European Union.

In addition, European legislative bodies are considering proposals that would include attempted market manipulation within its regulatory framework.

As the CFTC works with our global counterparts on swaps market reform, we are advocating for a consistent approach with regard to these reforms.

The Importance of an Effective Market Regulator

In conclusion, farmers, ranchers, producers and consumers need to have confidence that derivatives markets are free of fraud, manipulation and other abuses.

The end-users in the non-financial side of the economy benefit from transparency both before and after the trade. End-users benefit from open and competitive markets where no one party has an outsized position.

The CFTC is nearly complete with the swaps market reforms that have brought clearing, oversight of intermediaries and transparency to the once dark swaps market.

But for the CFTC to effectively ensure market integrity, it is critical for the agency to be well-resourced.

At 684 people, we are just 7 percent larger than we were 20 years ago.

Simply put, the CFTC is not the right size for the new and expanded mission Congress has directed it to perform.