ASSESSING THE REGULATORY, ECONOMIC, 

AND MARKET IMPLICATIONS OF THE 

DODD-FRANK DERIVATIVES TITLE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 15, 2011 

Printed for the use of the Committee on Financial Services 

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ASSESSING THE REGULATORY, ECONOMIC, AND MARKET IMPLICATIONS 

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ASSESSING THE REGULATORY, ECONOMIC, 

AND MARKET IMPLICATIONS OF THE 

DODD-FRANK DERIVATIVES TITLE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 15, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–5 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 15, 2011 ............................................................................................ 1 

Appendix: 

February 15, 2011 ............................................................................................ 73 

WITNESSES 

TUESDAY, FEBRUARY 15, 2011 

Cawley, James, Chief Executive Officer, Javelin Capital Markets, on behalf 

of the Swaps and Derivatives Market Association (SDMA) ............................. 58 

Donahue, Donald F., Chairman and Chief Executive officer, The Depository 

Trust & Clearing Corporation (DTCC) ............................................................... 53 

Duffy, Terrence A., Executive Chairman, CME Group Inc. ................................. 55 

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading Commission 

(CFTC) ................................................................................................................... 10 

Giancarlo, J. Christopher, Executive Vice President, GFI Group Inc. ................ 60 

Reiners, Craig, Director of Risk Management, MillerCoors LLC, on behalf 

of the Coalition for Derivatives End-Users ........................................................ 51 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission (SEC) ............................................................................................................. 8 

Tarullo, Hon. Daniel K., Governor, Board of Governors of the Federal Reserve 

System ................................................................................................................... 11 

Thompson, Don, Managing Director and Associate General Counsel, 

JPMorgan Chase & Co., on behalf of the Securities Industry and Financial 

Markets Association (SIFMA) ............................................................................. 57 

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 74 

Hinojosa, Hon. Ruben ....................................................................................... 75 

Cawley, James .................................................................................................. 77 

Donahue, Donald F. .......................................................................................... 81 

Duffy, Terrence A., ........................................................................................... 257 

Gensler, Hon. Gary ........................................................................................... 277 

Giancarlo, J. Christopher ................................................................................. 288 

Reiners, Craig ................................................................................................... 309 

Schapiro, Hon. Mary L. .................................................................................... 312 

Tarullo, Hon. Daniel K. .................................................................................... 323 

Thompson, Don ................................................................................................. 330 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written responses to questions submitted to Hon. Gary Gensler ................ 337 

Editorial from The Wall Street Journal dated February 11, 2011, entitled, 

‘‘The Futures of America’’ ............................................................................. 348 

Hinojosa, Hon. Ruben: 

Written responses to questions submitted to Donald F. Donahue ............... 350 

Letter from The Financial Services Roundtable to David A. Stawick, 

Secretary of the Commission, CFTC ........................................................... 353 

Written responses to questions submitted to James Cawley ........................ 357 

Written responses to questions submitted to Terrence A. Duffy .................. 361 

Written responses to questions submitted to Hon. Gary Gensler ................ 364 

Page

IV 

Hinojosa, Hon. Ruben—Continued 

Written responses to questions submitted to J. Christopher Giancarlo ...... 366 

Written responses to questions submitted to Hon. Daniel Tarullo .............. 369 

Perlmutter, Hon. Ed: 

Written response to a question submitted to Craig Reiners ......................... 370 

Waters, Hon. Maxine: 

Editorial from The New York Times dated February 14, 2011, entitled, 

‘‘Vanishing Act: ‘Advisers’ Distance Themselves From a Report’’ ............ 371 

(1) 

ASSESSING THE REGULATORY, ECONOMIC, 

AND MARKET IMPLICATIONS OF THE 

DODD-FRANK DERIVATIVES TITLE 

Tuesday, February 15, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Lucas, Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry, 

Marchant, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, 

Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, 

Canseco, Stivers; Frank, Waters, Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Capuano, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, Green, Ellison, Perlmutter, Carson, 

Himes, Peters, and Carney. 

Chairman BACHUS. In the interest of time, I am going to submit 

my written statement for the record and will not make an opening 

statement. And I will recognize some members on our side until 

our 10 minutes has expired. 

I urge members to give a brief statement or submit a written 

statement so we can move along. We will adhere to the 10 minutelimit on each side. Without objection, all members’ written statements will be made a part of the record. 

I want to welcome our witnesses and I look forward to your testimony. And with that, I recognize the ranking member for his opening statement. 

Mr. FRANK. Thank you, Mr. Chairman, and I will ask to be recognized for 3 minutes. We will stay within the 10 minutes. The hearing today is a prelude to a very important set of decisions we are 

going to be making today on the Floor. 

We have two very able and dedicated regulators who were extremely cooperative with us as we drafted the bill. We actually 

have three, but Mr. Tarullo is not on the Floor this week with his 

appropriation since his agency doesn’t receive one. 

The budget that we have been presented for the Securities and 

Exchange Commission (SEC) and the Commodity Futures Trading 

Commission (CFTC) prevent them from doing the job the American 

people need them to do. The CFTC is a very small agency compared to the massive industry we have asked them to regulate. 

2 

I believe it is clear. We will hear more about this from the people 

on the Financial Inquiry Commission that the lack of regulation of 

derivatives in various aspects contributed greatly to the financial 

crisis. 

We gave the Commodity Futures Trading Commission and the 

SEC instructions with some latitude as to how to deal with that. 

We are, at this point, in jeopardy of their not being able to carry 

out that mandate. The SEC has other responsibilities in investor 

protection and elsewhere that are in jeopardy. 

So I hope we will, as we go through this hearing, and talk about 

the importance of this to be done thoughtfully and in coordination 

between the SEC and the CFTC, keep in mind that an absence of 

funding will make all of this invalid. 

Agencies that are not well-funded are not going to do a good job. 

I would say to people in the industry, the laws and the rules, the 

law has already been adopted, the rules are about to be promulgated, it is not in anybody’s interest to have agencies that are not 

well-funded, not able to have the equipment they need, not able to 

have the personnel they need to carry these out. 

And that, I think, is the overhanging question as we go through 

this hearing. We are about to debate a budget from my Republican 

colleagues that will provide such inadequate funding for the SEC 

and the CFTC as to make all of this academic. I will be offering 

an amendment to increase funding for the SEC. The CFTC does 

not come under the jurisdiction of this committee so I have no 

amendment to offer there. 

I believe the Administration has made some neutral proposals 

about how to increase its funding, and I hope that those are also 

adopted. But we will be voting on an amendment to raise the 

SEC—not to the level I wish it could be at, but to a far closer level 

to what is needed. 

And as we go forward and we talk about the importance of doing 

this, and I would say even to those who are critical, who wish we 

hadn’t done some of what we did, unfunding the rules that remain 

in place is the worst of all approaches. 

Chairman BACHUS. I thank the ranking member. 

Mr. Royce is recognized for 1 minute. 

Mr. ROYCE. Thank you, Mr. Chairman. One of the lessons of the 

recent sale of the New York Stock Exchange, a great symbol of 

America’s financial strength, to a German exchange is that our 

markets are now competing against mature financial hubs throughout Europe and Asia. 

And much of this competition is because of the unfriendly business environment we have managed to create here in the United 

States. We have the second highest corporate tax rate in the developed world. We have the most active trial bar in the world. And 

we have a regulatory structure that burdens business without 

yielding many benefits. 

In the derivatives realm, if transaction costs to end users of derivatives increase because of duplicative rules, because of complex, 

unworkable prescriptions, because of damage liquidity, then end 

users simply will send their business to European dealers, whether 

it is Barclays or Deutsche Bank, with whom many already have 

trading relationships. 

3 

Failure to create a commonsense regulatory structure that recognizes this fact will do little to protect investors, but will go a long 

way to benefit these growing financial hubs around the world. 

While Title VII wasn’t what I would have liked to have seen, the 

benefit was that it gave the regulators, the supposed grownups in 

the room, the final say. Unfortunately, all signs thus far indicate 

that this, too, was a mistake. 

I look forward to hearing from the panel. And I yield back. 

Chairman BACHUS. Mr. Lucas? 

Mr. LUCAS. Thank you, Mr. Chairman, for holding today’s hearing. In the last Congress, I worked with my colleagues on this committee, as well as the Agriculture Committee, to bring meaningful 

and responsible reform to derivatives regulation. 

Although I was not supportive of the final legislation, it is now 

critical that we work together to ensure that the implementation 

of Title VII is done right. These new regulations will undoubtedly 

have a tremendous impact on our country’s financial sector and 

overall economy. 

As we work our way through the rulemaking process, it is important that the process be accomplished in a thoughtful and transparent manner, and that the necessary regulatory certainty be provided for all market participants. I remain concerned that the current timeline for implementation is unrealistic and that more time 

is needed to adequately implement the law. 

Additionally, we must ensure that the new rules are consistent 

with the congressional intent of Dodd-Frank. I look forward to continuing this discussion and hearing from our witnesses, and I yield 

back the balance of my time, Mr. Chairman. 

Chairman BACHUS. Mr. Scott, for 2 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. As we have seen from the 

recent financial crisis, derivatives bring with them a number of certain potential dangers if not properly backed with capital, or if the 

market lacks sufficient transparency. But despite these past troubles, derivatives do serve a very valuable purpose for American 

businesses by protecting them against legitimate risk. 

The Dodd-Frank legislation passed in large part by our committee aims to regulate credit default swaps and other derivatives. 

Title VII of the law requires central clearing and exchange trading 

for derivatives that can, and I emphasize can, be cleared and provides the role of both regulators and clearinghouses in determining 

which contracts should be cleared. 

In addition, the law adds financial safeguards by ensuring that 

dealers and major swap participants have adequate financial resources to meet their responsibilities. And regulators now have the 

authority to impose capital and market requirements to swap dealers and major participants. 

These regulations on derivatives were passed as part of DoddFrank to increase accountability and transparency and to encourage stability in financial markets following the 2008 crisis. However, the effectiveness of this law depends heavily on how such 

rules are implemented by the regulators. 

I look forward to hearing opinions from today’s witnesses on how 

the requirements enacted in Dodd-Frank are being adhered to now, 

how the regulatory process is proceeding, and how those regulaVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
4 

tions are contributing to increased financial stability, which is the 

end result we all seek. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Garrett is recognized for 2 minutes. 

Mr. GARRETT. I thank the Chair. I thank the entire panel. Over 

the last several months, there has been a tremendous volume of 

discussion on all the rulemaking coming out of Dodd-Frank and the 

profound effects that it is going to have on the derivatives markets 

and the broader economy as well. 

But when you look at this freight train of rulemaking that is 

really running down the track to a July deadline, I think not 

enough alarm has been raised over the potentially devastating impact that this rulemaking may have on the U.S.-based derivatives 

marketplace. 

And when I talked to several market participants, they told me 

that if the rulemaking, particularly of the CFTC, were to be implemented in its current form it could literally spell the end of the 

U.S.-based derivatives market. It would simply cease to exist. 

That is because the potential negative consequences are many 

and far-reaching, from making it prohibitively expensive for thousands of your small, Main Street companies to engage in responsible risk mitigation, to making it basically impossible for many of 

our financial firms to compete around the world. So the real world 

impact, of course, will be felt in the loss of jobs, lots of jobs. 

Millions of manufacturing jobs have been lost, jobs over the last 

several years, but we have still remained a leader in financial services. But if these rules get implemented as is, that will no longer 

be the case. 

We will hemorrhage millions of excellent, high-paying jobs to 

other localities around the world where there will be little to no appetite, I think, to follow some of the more outlandish rulemakings 

that are part of a grand and I would say unnecessary expense that 

could have massive negative consequences. 

It is bad enough, I think, that Title VII was written literally in 

the middle of the last night of the Dodd-Frank conference back in 

June. So let us not here now exacerbate the mistakes made that 

night by rushing through a rulemaking process that is even more 

far-reaching than that contemplated by the bill’s authors. 

Derivatives, I think, have been a favorite whipping boy, if you 

will, of many critics. But if we continue down this road, and there 

is not a lot of time to change course, there is—literally may not be 

a U.S.-based derivatives market to kick around in this country anymore. I yield back. 

Chairman BACHUS. Mr. Lynch for 3 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I thank the ranking 

member. I would also like to thank the witnesses for coming to this 

committee today to help us with our work. The derivatives title of 

the Dodd-Frank Act is essential to reforming our financial system. 

I believe the derivatives market, its opacity and extreme leverage, 

caused a great deal of the difficulty and pain of the financial crisis. 

The interconnectedness of derivatives products and their use 

magnified among anonymous counterparties that concentrated risk, 

and much of it outside of the reach of our regulatory framework. 

5 

We have asked the SEC and the CFTC to issue numerous 

rulemakings and hold public hearings and begin the process of regulating the over-the-counter derivatives market, which neither 

agency has held jurisdiction over in the past. 

I am concerned, however, that despite the increased responsibilities through Dodd-Frank, the SEC and the CFTC have received 

flat funding due to the extension of the continuing resolution. The 

ability of these agencies to police the markets and enforce securities and commodities laws is severely limited under current funding levels. 

What is particularly concerning is that by holding these agencies 

to Fiscal Year 2010 budget levels, neither has been able to hire 

staff with expertise in the OTC derivatives markets, which differ 

significantly from their prior responsibilities in securities and futures markets. 

And to make matters worse, the Republican proposal for a full year C.R. would cut $178 million from the SEC and $174 million 

from the CFTC. And that would force both of these agencies with 

new responsibilities to lay off staff. 

We need to ensure that these regulators have the tools and resources to complete the objectives that Congress has laid out. Don’t 

worry about the markets running away to Europe. They are trying 

to strengthen their markets just the way we are trying to. This is 

a red herring. And if you think regulation is costly, how about the $7 trillion 

that we just lost from not regulating the derivatives market? That 

has not been taken into consideration. I look forward to the testimony. I thank you, Mr. Chairman. And I yield back. 

Chairman BACHUS. Mr. McHenry, for 1 minute. 

Mr. MCHENRY. Thank you, Mr. Chairman, for yielding time. 

Over the past few decades, the derivatives market has developed 

into a highly sophisticated and yet essential market for U.S. businesses of all sizes. Therefore, it is vital that the regulators who 

have been empowered under Dodd-Frank continue to allow American businesses to manage their risk and protect themselves 

against market volatility. This is about jobs. 

A recent survey suggests that higher capital requirements could 

potentially cost end users on Main Street billions of dollars each 

year and put up to 130,000 jobs at risk. That is something we simply cannot afford to do while our economy is attempting to regain 

its strong footing. I would encourage the regulators to keep this in 

mind. And certainly our oversight hearings here in Congress will 

keep that in mind. And I yield back. 

Chairman BACHUS. Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I will yield back 

my time. Thank you. 

Chairman BACHUS. Ms. Hayworth, for 1 minute. 

Dr. HAYWORTH. Thank you, Mr. Chairman. Senior colleagues 

here have rightly noted that the United States has become an increasingly hostile environment for investment relative to other developed nations. 

I am very concerned that our highest duty in this Congress is to 

ensure the security and freedom of our Nation and our people. The 

specifics of what we do here have a material effect on jobs and on 

6 

prosperity. And that is literally the dignity and sustenance of our 

families. 

If we impede enterprise, as would be the case through excessive 

regulation of end user derivatives, and to wit, a Fortune 100 employer in my district would have to curtail key investment if required to meet capital requirements for end users as may be specified in Dodd-Frank, then we will lose our mission as a Congress 

and endanger our future as a nation. 

So I look forward to hearing your comments on how we can relieve that burden from our American enterprise. Thank you. I yield 

back my time. 

Chairman BACHUS. Thank you. 

Mr. Dold? 

Mr. DOLD. Thank you, Mr. Chairman. 

Chairman BACHUS. One minute. 

Mr. DOLD. I want to thank the witnesses for their time and for 

coming out today. And I certainly share some of the concerns that 

have been addressed by some of my colleagues today. 

Derivatives have been productively and efficiently used for a significant period of time by reducing risk and reducing price volatility, increasing stability. These derivatives markets directly benefited companies, employees, consumers, and our overall economy. 

In the past several years, certain companies have made some 

mistakes in the derivatives markets, to be sure. They didn’t verify 

that their counterparties had sufficient collateral. They didn’t 

verify that their counterparties had the ability to pay. They didn’t 

determine whether their counterparties had too much exposure in 

other derivatives markets or market risk. 

However, as far as I can tell, the end users did not make these 

mistakes systematically. And now these end users are faced with 

the uncertain prospects of margin regulations that sufficiently and 

unnecessarily change their longstanding successful businesses’ 

models while focusing them to play capital inefficiently. 

If they are forced to do so, then we will unnecessarily force scarce 

capital to be unparked unproductively on the sidelines. I believe 

that we will lose jobs here in the United States, and we will damage our economy. 

And instead of reducing risk and reducing price volatility and increasing stability for businesses, employees, consumers, and indeed, I believe all Americans, we will get the opposite result as 

risks that would otherwise have been absorbed into the derivatives 

markets are passed along. I thank the chairman for the time. And 

I yield back. 

Chairman BACHUS. Thank you, Mr. Dold. 

Ms. Waters, for 1 minute. 

Ms. WATERS. Thank you very much, Mr. Chairman. The DoddFrank Wall Street Reform and Consumer Protection Act was designed to address the lack of transparency and capital in the derivatives market, to prevent the industry and its clients from needing another taxpayer-funded bailout. 

Specifically, the legislation calls for the SEC and the CFTC to 

regulate the OTC derivatives market to pre-approved contracts before clearinghouses can clear them, and to punish bad actors. In 

7 

fact, the Dodd-Frank Act charges the SEC to promulgate seven 

rules to implement reforms to the OTC markets. 

Some critics of the Dodd-Frank Act incorrectly represent that 

these reforms to the OTC market will result in fewer jobs. On the 

contrary, creating a system with transparency and regulation allows market participants to know what the rules of the game are 

and protects them from the impact of reckless trading of the sort 

that led to the 2008 financial crisis. 

We saw that impact in 2008. Two years later, we are still seeing 

the effects of high unemployment, lack of credit, and limited business investment that resulted from the 2008 financial crisis. The 

Dodd-Frank Act will provide the transparency and regulation the 

OTC market needs to protect counterparties and taxpayers. In the 

process, it will save jobs. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman BACHUS. I thank you. 

Mr. Canseco, for a minute-and-a-half. 

Mr. CANSECO. Thank you, Mr. Chairman. And thank you very 

much for being here today, members of the panel. The breadth of 

rulemaking as a result of Dodd-Frank is extraordinary. According 

to the Committee on Capital Markets Regulations, the CFTC and 

the SEC are both making about 10 times the amount of rules per 

year than they did before Dodd-Frank was passed. The amount of 

days it takes for a rule to get from the proposed stage to implementation has been halved at the SEC. 

These two agencies, along with the Federal Reserve and others, 

have been asked to take on an incredible task that has serious implications for our financial markets and economy. Dodd-Frank left 

a great deal of discretion to the agencies. That is why today’s hearing is so important. Our job is to ensure that as the Federal agencies write these rules, they do not negatively impact the ability to 

hedge risk in our economy. 

From my experiences in the private sector, where I actually 

worked with the derivatives, I know how important the ability of 

a company to hedge its risk using derivatives is to our economy 

and to our consumers. 

Many of the benefits of derivatives are hidden to consumers. But 

when our fellow citizens go to the store to buy gas, milk, clothes 

or whatever else, they sometimes don’t realize that the affordability 

of these products is due in large part to the manufacturer’s ability 

to hedge risk. With this in my mind, I look forward to hearing from 

today’s witnesses on this important issue. And I yield back my 

time. 

Chairman BACHUS. Mr. Carson, for 1 minute. 

Mr. CARSON. Thank you, Mr. Chairman. I welcome the opportunity to review Dodd-Frank to ensure the bill accomplishes what 

we intended it to do when it was written in this committee last 

year. 

However, I am deeply opposed to defunding the bill because our 

friends on the other side were opposed last year, and continue to 

be opposed. The bottom line is that no legislation is perfect, and 

the opposition has a right to propose changes. 

8 

However, banks and financial institutions have brought reform 

upon themselves. It was through their carelessness and disregard 

for the rights of citizens that our economy nearly collapsed and 

spurred action by Congress in the first place. Thank you, Mr. 

Chairman. I yield back. 

Chairman BACHUS. Thank you. 

The last speaker on our side is Mr. Stivers, for a minute-and-ahalf. 

Mr. STIVERS. Thank you, Mr. Chairman. I would like to thank 

the witnesses for being here today. It is really important that we 

get Title VII right, both in law as well as regulation. There are 

companies in my district including American Electric Power who 

are end users. That company has 4,000 jobs in my district. There 

are many other companies who use derivatives to reduce risk in 

their business model. 

And I am really concerned about the inconsistency between the 

SEC and the CFTC on their rules and regulations, especially with 

regard to the definition of a dealer or trader as well as capital requirements. 

And because this is so important both to reducing risk in our system, cost to consumers, and jobs in our districts, I really look forward to hearing from the witnesses and working with the witnesses to make sure we take a consistent approach that doesn’t affect jobs or increase prices but looks out for the safety and soundness of the system. Thank you so much. 

And thank you, Mr. Chairman, for holding this hearing. 

Chairman BACHUS. Thank you. And now we introduce our first 

panel: the Honorable Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission; the Honorable Gary Gensler, 

Chairman of the U.S. Commodity Futures Trading Commission; 

and the Honorable Daniel K. Tarullo, member of the Federal Reserve Board of Governors. 

I want to welcome all our witnesses. Without objection, your 

written statements will be made a part of the record, and you will 

each be recognized for a 5-minute summary of your testimony. 

Chairman Schapiro. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) 

Ms. SCHAPIRO. Thank you very much, Chairman Bachus, Ranking Member Frank, and members of the committee. Thank you for 

inviting me to testify today on behalf of the Securities and Exchange Commission regarding our implementation of Titles VII and 

VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is a pleasure to appear with my colleagues, Chairman 

Gensler and Governor Tarullo. 

As you know, these provisions are intended to bring greater oversight and transparency to the derivatives markets and to clear any 

payment and settlement activities and with that, to increase the 

stability of our financial system. 

While implementing these provisions is a complex and challenging undertaking, particularly in light of our other regulatory 

responsibilities, we recognize the importance of this task, and we 

are committed to getting it right. 

9 

These rules are intended, among other things, to reduce 

counterparty risk by bringing transparency and centralized clearing to security-based swaps, reduce systemic risk, protect investors 

by increasing disclosure, and establish a regulatory framework that 

allows OTC derivatives markets to continue to develop in a transparent, efficient, accessible, and competitive manner. 

Since passage of the legislation, we have been engaging in a very 

open and transparent implementation process seeking input on the 

various rules from interested parties even before issuing new rule 

proposals. 

Our staff has sought meetings with a broad cross-section of interested parties. We joined with the CFTC in holding public 

roundtables. And we have been meeting regularly with other financial regulators to ensure consistent and comparable definitions and 

requirements across the rulemaking landscape. 

Today, the SEC has proposed nine swaps-related rules. Among 

them are: rules that would address potential conflicts of interest at 

security-based swap clearing agencies, execution facilities and exchanges that trade security-based swaps; rules that would specify 

who must report security-based swap transactions, what information must be reported, and where and when it must be reported; 

rules that would require security-based swap data repositories to 

register with the SEC; rules that would define security-based swap 

execution facilities and establish requirements for their registration 

and ongoing operation; and rules that would specify information 

that clearing agencies would provide to the SEC in order for us to 

determine if the swap must be cleared and specify the steps that 

end users must follow to rely on the exemption from clearing requirement. 

In addition, with the CFTC, we proposed rules regarding the 

definitions of many of the key terms under the Act. Our staff also 

is working closely with the Federal Reserve Board and the CFTC 

to develop a common framework for supervising financial market 

utilities, such as clearing agencies, which are designated by the Financial Stability Oversight Council as systemically important. 

In the coming months, we expect to propose rules regarding 

standards for operating and governing of clearing agencies, rules to 

establish registration procedures for security-based swap dealers 

and major security-based swap participants, and rules regarding 

business conduct, capital, margin, and segregation and recordkeeping requirements for dealers and participants. 

We will also propose joint rules with the CFTC governing the 

definitions of swap, security-based swap, and the regulation of 

mixed swap. We recognize the magnitude and interconnectedness 

of the derivatives market. And so, we intend to move forward at 

a deliberate pace, continuing to thoughtfully consider issues before 

proposing and adopting any specific rules. 

The Dodd-Frank Act provides the SEC with important tools to 

better meet the challenges of today’s financial marketplace and fulfill our mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formulation. 

As we proceed with implementation, we look forward to working 

closely with Congress, our fellow regulators, and members of the financial community and the investing public. 

10 

Thank you for inviting me to share with you our progress on and 

plans for implementations. And I look forward to answering your 

questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 312 of the appendix.] 

Chairman BACHUS. Thank you. 

Chairman Gensler? 

STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, 

U.S. COMMODITY FUTURES TRADING COMMISSION (CFTC) 

Mr. GENSLER. Good morning, Chairman Bachus—congratulations 

on your chairmanship—Ranking Member Frank, and members of 

this committee. I thank you for inviting me to speak about the 

Dodd-Frank Act. 

I am pleased to testify on behalf of the Commodity Futures Trading Commission. And I also want to thank my fellow Commissioners and all of the staff of the CFTC for all their hard work and 

dedication in fulfilling our mission. 

I also am pleased to testify along with Chairman Schapiro and 

Governor Tarullo. President Obama announced our nominations on 

the same day back in December of 2008. And I guess this is the 

first time we are appearing in public together at a hearing. 

But it reminds me that in 2008, the financial system and the financial regulatory system both failed the American public. It 

wasn’t one or the other. But I think it was, in fact, both. The effects of that crisis reverberated throughout the American and global economies. 

In the United States, hundreds of billions of taxpayer dollars 

were put on the line to bail out the financial system, ultimately to 

secure the American public’s economy. But millions of jobs have 

been lost and are still lost. 

Though the crisis has many causes, the unregulated swaps market played a central role. And Congress, I believe, responded by 

passing Dodd-Frank, specifically Title VII, to bring transparency 

and to lower risk in the swaps market. 

The CFTC is working closely with the SEC, the Federal Reserve, 

and other regulators to implement those features. We also are coordinating our consultation internationally. And we have received 

thousands of comments from the public, both before we have made 

proposed rules and after we have made some proposals that inform 

the Commission. And yes, the final rules will change based on 

those comments. 

One area where the CFTC is seeking input is with regard to the 

implementation of various requirements of margin, which many 

Members here have raised with us. And in the Dodd-Frank Act, 

Congress recognized different levels of risk posed by transactions 

between financial entities on the one hand and those involved with 

non-financial entities or what many people are calling end users. 

Consistent with this, consistent with what Congress said that the 

non-financial end users would be exempt from clearing, we believe 

at the CFTC that margin requirements should focus only on transactions between financial entities rather than those transactions 

with the non-financial end users that so many Members have 

talked about in their opening statements. 

11 

To adequately fulfill our statutory mandate, the CFTC does re- quire additional resources. The U.S. futures market today, $40 trillion notional size. The U.S. swaps market, roughly $300 trillion, 

roughly 7 times the size, far more complicated, and it is very important for all the end users to have transparency, openness, and 

competition. 

Yesterday, the President submitted his fiscal budget for 2012 that included $308 million in funding for the CFTC. This is essential for us to be able to fulfill our mission. 

In 1992, our agency had 634 people. It shrank. From 1992 to 

2008, it was down to 440 people right in the midst of the crisis. 

Only last year, with the help of this committee and all of Congress, 

did we get back to our 1990s headcount, about 680 people. 

But staff is not enough. Technology is critical. The only way to 

really regulate these vast markets is with sufficient funding for 

technology to be efficient. Our small agency has to be efficient, 

working closely with the SEC and international regulators. 

Furthermore, I would say that the CFTC’s funding, if it were returned to the 2008 levels when we were only 440 people, the agency would be unable to fulfill its statutory mission. Every program 

would be affected. 

It would be market surveillance, industry oversight, enforcement. 

We would be unable to pursue Ponzi schemes and other frauds or 

market manipulation. Inevitably, we would have to develop a backlog of registration applications or rule reviews or appellate filings 

and the like. 

The CFTC, I would contend, is a good investment for the American public. Its mission, ultimately, is to promote transparency, 

open and competitive markets which lower costs to end users and 

helps promote economic activity. We will get this margin thing 

right. We understand congressional intent on that. 

The CFTC is a cop on the beat that ensures markets are protected from fraud, manipulation, and other abuse. I look forward 

to working with Congress to ensure that we can accomplish our 

mission of protecting the public. Thank you and I would be happy 

to take questions. 

[The prepared statement of Chairman Gensler can be found on 

page 277 of the appendix.] 

Chairman BACHUS. Thank you. 

Governor Tarullo? 

STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. TARULLO. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee. I appreciate this opportunity to provide the Federal Reserve Board’s views on the implementation of Title VII of the Dodd-Frank Act. 

The Board’s responsibilities fall into three broad areas. The first 

relates to consultation and coordination with other authorities, 

both foreign and domestic. Dodd-Frank requires that the CFTC and 

the SEC consult with the Board on rules to implement Title VII. 

In providing feedback to their request for consultation, we have 

tried to bring to bear our experience from supervising dealers and 

12 

market infrastructure and our familiarity with markets and data 

sources to assist the commissions. 

But important coordination activities related to derivatives regulation also are occurring internationally. Most prominently, the 

group of 20, or ‘‘G20,’’ leaders set up commitments related to reform of the OTC derivatives market that would form a broadly consistent international regulatory approach. 

The Basel Committee on Banking Supervision has recently 

strengthened international capital standards for derivatives and 

created leverage and liquidity standards applicable to them. 

The Committee on Payment and Settlement Systems is working 

with the International Organization of Securities Commissions to 

update international standards for systemically important clearing 

systems, including central counterparties that clear derivatives instruments, and trade repositories. 

The goal of all these efforts is to ensure a level playing field that 

will promote both financial stability and fair competitive conditions 

by preventing activity from flowing to less regulated jurisdictions. 

The second task given to the Federal Reserve with respect to 

Title VII relates to the strengthening of infrastructure. Central 

counterparties are given an expanded role in the clearing and settlement of swap and security-based swap transactions. 

If properly designed, managed, and overseen, central counterparties offer an important tool for managing counterparty credit risk 

and thus can reduce risk to market participants and to the financial system. 

Title VIII of the Act complements the role of central clearing to 

heighten supervisory oversight of systemically important financial 

market utilities. This heightened oversight is important because financial market utilities such as central counterparties concentrate 

risk and thus have the potential to transmit shocks throughout financial markets. 

As part of Title VIII, the Board was given new authority to provide emergency collateralized liquidity in unusual and exigent circumstances to systemically important financial market utilities. We 

are carefully considering how to implement this provision in a 

manner that protects taxpayers and limits the rise in moral hazard. 

The third task, committed to the Board by Dodd-Frank with respect to Title VII, is that of supervision. Capital and margin requirements are central to the prudential regulation of financial institutions active in derivatives markets, as well as to the internal 

risk management processes of those firms. 

The major rulemaking responsibility of the Board and other prudential regulators under Title VII is to adopt capital and margin 

regulations for the non-cleared swaps of banks and other prudentially regulated entities that are swap dealers and major swap participants. 

The Board and the other U.S. banking agencies played an active 

role in developing the enhanced capital leverage and liquidity regime agreed to in the Basel Committee. These requirements will 

strengthen the prudential framework for OTC derivatives by increasing risk-based capital and leverage requirements and by requiring banking firms to hold an additional buffer of high quality 

13 

liquid assets to address potential liquidity needs resulting from 

their derivatives portfolios. 

The statute also requires the prudential regulators to adopt rules 

imposing initial and variation margins on non-cleared swaps to 

which swap dealers or major swap participants that they supervise 

are party. 

The statute directs that these margin requirements be riskbased. Within these statutory constraints and instructions, the 

Board and other prudential regulators are working to implement 

the margin provisions in a way that takes appropriate account of 

the relatively low systemic risk posed by most end users. 

For example, one approach under consideration is to allow a 

banking organization that is a dealer or major participant to establish a threshold with respect to an end user counterparty based on 

a credit exposure limit that is approved and monitored as part of 

the credit approval process below which the end user would not 

have to post margin. 

The Board understands that posting margins imposes costs on 

end users, possibly inhibiting their ability to manage their risks. 

The Board also believes that the margin regime should be applied 

only to contracts entered into after the new requirement becomes 

effective. 

Thank you for your attention, and I would be pleased to answer 

any questions you might have. 

[The prepared statement of Governor Tarullo can be found on 

page 323 of the appendix.] 

Chairman BACHUS. Thank you. There were two Presidents in recent history who actually reduced government spending as a percentage of GDP, President Clinton and President Reagan. So I say 

that in a bipartisan way, one on each side. A part of that was a 

growing economy, and I think that is going to be the key to us facing our national debt and our deficit. 

So I want to applaud, Chairman Gensler, your statement today. 

And I think, if I heard it correctly, it is that all end users would 

be exempt from CFTC clearing and margin requirements— 

Mr. GENSLER. Yes, sir. 

Chairman BACHUS. —the way they are on the over-the-counter 

swaps? 

Mr. GENSLER. Consistent to how Congress exempted the non-financial end users from clearing, as we take up these rules at the 

CFTC, which we hope to in the near term, that the same end 

users—(h)287 is the provision in the statute, would not have any 

margin requirements. It is really consistent with what Congress 

did on the clearing requirement. 

The financial company consistent with what Congress did might 

be. Again, we are still sorting through these proposals to put them 

forward to the public and get comments. 

Chairman BACHUS. I know Members on the Majority feel it is 

critically important that we don’t impose margin requirements or 

clearing requirements on end users. And by end users, you said 

non-financial companies, these that do not hedge risk as a part of 

their inherent business. 

Mr. GENSLER. That is correct. Hedging is a really important 

thing. Tens of thousands of commercial end users use these prodVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
14 

ucts, used them successfully before 2008, and need to use them for 

our economy to prosper. Dodd-Frank at its core though promotes 

transparent, open, and competitive markets. And markets that are 

transparent and competitive get the lowest pricing. 

I believe Dodd-Frank at its core will lower costs to these commercial end users because of the transparency and competitiveness and 

also because they will be less prone to risk. The American public 

did have to stand behind that $700 billion in the TARP. So it is 

a balancing that actually Congress put forward. 

Chairman BACHUS. Of course, the $700 billion, none of that was 

a result of commercial non-financial end users, yes? 

Mr. GENSLER. But it did at its core have a risk from the unregulated swaps marketplace, particularly credit default swaps. And 

then we all know the story of AIG. 

Chairman BACHUS. I appreciate you and I—do you need the cooperation of Congress? Do we need legislation to clarify that these 

over-the-counter swaps will not be required to have margin requirements for clearing? 

Mr. GENSLER. We at the CFTC believe that the Act is well-written and it gives us sufficient authority to ensure that such margin 

requirements on the swap dealers do not cover the non-financial 

end users. But that authority is there for us to move forward. Of 

course, it will be subject to notice and comment, public comment. 

Chairman BACHUS. Governor Tarullo, you looked at that provision. Do you agree? 

Mr. TARULLO. Mr. Chairman, what we have done is to read the 

statute as it is written. The statute as it is written tells us that 

each registered swap dealer and major swap participant for which 

there is a prudential regulator has to meet minimum capital and 

minimum initial and variation margin requirements. That applies 

broadly and there is obviously no exception provided for any class 

of counterparties. 

However, the statute goes on to say that these standards shall 

be risk-based. And bringing to bear the risk-based or systemic riskbased perspective, which we have tried to bring to our activities on 

Title VII generally, what we are thinking in terms of is a riskbased approach to margin requirements which would recognize 

that for end users, generally there is much less risk associated with 

derivatives transactions. 

So in essence we will create—if this approach turns out to be the 

one we adopt, and it is the one that is being worked on internally 

now—these thresholds within which or under which margins would 

not be required. 

And precisely because end users in general present substantially 

less systemic risk—and in many cases no systemic risk—the 

threshold for end users would be substantially higher than those 

for financial market participants. 

Chairman BACHUS. All right, thank you. Let me very briefly, I 

think the proper sequencing of your rule needs to have a definition 

of swap and commercial risk prior to some of your other definitions. 

Are you aware that you are going to need to define those terms 

fairly soon? 

Mr. GENSLER. The statute defines many terms. Jointly with the 

SEC, we made proposals in December on ‘‘swap dealer’’, ‘‘major 

15 

swap participant’’ and the like. The comment period actually closes 

February 22nd. 

And what we encourage the public to do, and we posted this on 

our Web site, is if you have comments on any of our other proposals at the CFTC, even if the comment period is closed, please 

include those comments in the definition comments so that we can 

consider them. 

We do have discretion, even after a comment period is closed, to 

get those comments to the right files, to the right team. I know as 

a Commissioner, we will read them. 

Chairman BACHUS. But the definition of ‘‘swap’’ and ‘‘commercial 

risk’’, your other definitions are going to depend on that— 

Mr. GENSLER. We also put out the definition of ‘‘commercial risk’’ 

in December— 

Chairman BACHUS. Okay. 

Mr. GENSLER. —and that is open through the same period of 

February 22nd. We look forward to hearing broadly from the public 

whether we got that right, consistent with what Congress did. 

Ms. SCHAPIRO. I would just add, I think we all share your concern that we get the sequencing right so that particularly those 

who have to comment understand the full scope of the potential implications of all the rules on them, whether or not they are going 

to be determined to be a dealer or a major swap participant or 

some other kind of participant in the marketplace. 

So we have gotten a lot of that done. The not-so-narrow but important issues of swap, mixed swap, security-based swap are—they 

are basic statutory definitions, but obviously there is more work for 

us to do there and we are very committed to getting those out 

quickly. 

Chairman BACHUS. Thank you. 

Ranking Member Frank? 

Mr. FRANK. Thank you. Let me ask Mr. Gensler, you talked 

about, and Mr. Tarullo has concurred and I assume Ms. Schapiro 

does too, that we are not going to see margin requirements imposed 

on end users and they don’t have to clear. 

I do want to address though the perception some may have that 

therefore nothing has changed. You did mention the transparency. 

So what will be the effect with regard to end users? 

Ms. SCHAPIRO. Even the uncleared swaps have to be reported to 

the swap data repository and public— 

Chairman BACHUS. Which means the price will be made public? 

Ms. SCHAPIRO. Yes. Price and calling information, yes. 

Mr. FRANK. Which is what we—I will tell you that I had a visit 

that validated that in my mind from a couple of people in the financial industry. It was an older one and a younger one from two 

companies. And the younger one said that they had these problems. 

And I said, we are not going to go after the end users and all we 

are talking about is price being made public. 

And he said yes, that is what we don’t like, then people could 

come in ahead of us. And I asked if that meant that he was afraid 

of competition? And his older colleague said, we are not really 

pressing that argument. So I just want to make it clear we are not 

talking about margin requirements and clearing requirements. 

16 

We are talking about reporting requirements, which have, if I am 

correct, the advantage first of all of giving the end users some ability to get a better price because they will not now be captives and 

they will get to know what other people are charging. 

And secondly, you won’t have an unknown quantity of those in 

the economy. Will there be mechanisms for us therefore keeping 

track of what the totals are that are out there, Ms. Schapiro? 

Ms. SCHAPIRO. I think the transparency is really the critical 

piece here because it allows market participants to understand, 

particularly with respect to post-trade transparency, at what price 

those transactions have occurred and that will encourage price 

competition. 

There is a provision that will allow for blocked trades to be disseminated on a delayed basis so that the concern about the potential for front running a large position or front running the hedging 

of a large position should be able to be dealt with through the delayed dissemination there. 

Mr. FRANK. Because, as someone said, we are talking about making it more pro-competitive— 

Ms. SCHAPIRO. Absolutely. 

Mr. FRANK. Because people can’t be competitive if they don’t 

know the number. Now, I want to just ask you about the budget 

proposals. You have been urged to take more time but also be more 

thorough. 

At the levels that have been proposed in the budget that came 

out of the Appropriations Committee, Mr. Gensler, what effect will 

that have on your capacity to accommodate what members of this 

committee are asking you to do? 

Mr. GENSLER. The number, I believe, was to take us from $168 

million in the continuing resolution down to $112 million. We 

would have to have a significant curtailment of our staff and resources. We would not be able to police or ensure transparent markets in futures or swaps. 

Mr. FRANK. So that is—the new responsibilities you get for the 

derivatives market, including primarily, as you said, the financial 

part, the AIGs, the credit default swaps, you would not be able to 

undertake those responsibilities? 

Mr. GENSLER. There is no doubt in my mind. We would have to 

go from 680 staff, actually smaller than 440 if it was for the whole 

year because we are already halfway through the year. We would 

have to shrink even further than that. 

Mr. FRANK. Ms. Schapiro, you were given in the bill new responsibilities, investor protection and elsewhere. What would the effect 

of the proposed budget be on your ability to carry those out? 

Ms. SCHAPIRO. I am sorry. It will have a very real effect on the 

SEC’s ability not just with respect to Dodd-Frank implementation 

but also with respect to our core mission, which is already being 

impacted by the continuing resolution. But most particularly, we 

have responsibilities now for hedge fund examinations starting 

after hedge funds are registered in July. 

So we have to build a registration capability. We have to be able 

to examine and have examiners deal with hedge funds. We will be 

recipients of large amounts of data that are required under the Act 

17 

for systemic risk reporting purposes for hedge funds, being a mechanism for managing— 

So let me say, because I don’t want to go over the time, and the 

systemic risk in the data is important again. 

Ms. SCHAPIRO. —right and over-the-counter derivatives surveillance. We cannot rely on an SRO in that space. That task will fall 

to the SEC. 

Mr. FRANK. I remember when Mr. Bernanke told us in 2008 that 

he was going to have to advance $80 billion to AIG. And a week 

later, they needed another $90 billion or $100 billion because nobody, including AIG, had any idea what the exposure was. And 

that presumably will no longer be the case. 

But just to summarize with regard to hedge funds and derivatives, many of us believe they were insufficiently, not just regulated, but we didn’t have much information about them, that they 

were a blank slate. And we have with hedge funds fairly light regulation but registration and monitoring. With derivatives, the financial entities are regulated but the end users are not. 

But I take it that if you were to get the budget levels that were 

proposed in the bill that came out of the Appropriations Committee, neither one of your agencies would be able to do anything 

significant regarding your new responsibilities involving derivatives and hedge funds. Is that correct? 

Mr. GENSLER. That is correct. We would basically be involved in 

a large reduction in force, about 65 percent— 

Mr. FRANK. Right, but you—the effect of that would— 

Mr. GENSLER. —the end users wouldn’t benefit from any transparency. 

Mr. FRANK. Ms. Schapiro? 

Ms. SCHAPIRO. I don’t know whether it will be in reduction of 

force or technology decline, but we will certainly not be able to 

operationalize many of the rules that are we implementing as a result of the new law. 

Mr. FRANK. Thank you, and I should mention just one more 

thing. The total amount of money for the two agencies together 

that you are asking—that is in the President’s budget is how 

much? 

Ms. SCHAPIRO. President sought for the Securities and Exchange Commission $1.4 billion. 

Mr. FRANK. And Mr. Gensler? 

Mr. GENSLER. In 2012, 308, in 2011, 261. 

Mr. FRANK. All right, so for this current year, about a billionand-a-half. And Ms. Schapiro, how much money does the SEC take 

in to the Federal Government? 

Ms. SCHAPIRO. I believe last year our budget was $1.1 billion and 

we brought into the Treasury on just from transaction fees about 

$1.3 billion to $1.4— 

Mr. FRANK. So at the expense of getting adequate regulation, we 

are going to turn you into a profit center. Thank you. 

Chairman BACHUS. Thank you. Thank you, Mr. Frank. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Chairman Gensler, in your testimony, I believe you said something along the lines that unregulated swap markets played a cenVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
18 

tral role in our economic crisis. I am assuming you are mainly alluding to AIG. Is that correct? 

Mr. GENSLER. Yes, but also I think it helped accelerate the asset 

bubble in housing, credit default swaps more generally. 

Mr. HENSARLING. Okay, just to remind us all of the record, in 

March of 2009, the head of the OTS, Mr. Polakoff, testified to a 

question that I asked. Again, in retrospect it wasn’t the lack of authority. It wasn’t the lack of resources. It wasn’t the lack of expertise. You just flat out made a mistake. Is that a correct assessment? Answer, yes, sir. In 2004, we failed to assess how bad the 

mortgage economy, the real estate economy would become in 2008. 

So at least the regulator in question thought they had the authority and the expertise. I peeked into the testimony, into the testimony of the panel to follow yours. So to some extent, I am going 

to try to foist a bit of a conversation here. We are going to hear 

from a gentleman, Craig Reiners with the MillerCoors Company. 

And quoting from his testimony, ‘‘A requirement for end users 

like MillerCoors to post margin to its counterparties would have a 

serious impact on our ability to invest in and grow our business. 

Though end users are not directly subject to the trading requirements, excessive capital requirements imposed on our counterparties aimed at forcing end users onto regulated exchanges, execution 

platforms and clearinghouses could significantly increase our cost.’’ 

Chairman Gensler, a provision that was supposedly aimed at 

Wall Street may be increasing the cost of a six pack. And I think 

you just got the attention of the American people. 

[laughter] 

Has your agency considered the pass-through cost concerns in 

your economic analysis as you develop these new rules? 

Mr. GENSLER. I read very closely the testimony of MillerCoors. 

We have met with MillerCoors. We are aware and focused on the 

cost of a six pack because we also oversee agricultural markets. 

And I would say our intention is not to have margin requirements 

apply to an end user such as MillerCoors. So very directly to his 

point, we are very focused on his testimony and his concerns. 

Mr. HENSARLING. We will be monitoring your progress at the 

local convenience store. I also saw testimony from Mr. Terry Duffy, 

executive chairman of the CME Group. And he testified, ‘‘Entities 

such as CME often cannot fully anticipate the meaning of a proposed rule when that proposed rule is reliant on another rule that 

is not yet in its final form.’’ 

For example, rules dealing with the definitions of swaps, security-based swaps, swap dealer as you well know, Mr. Chairman, 

the list goes on. Mr. Duffy goes on to say as such, ‘‘They must be 

established before interested parties can meaningfully address 

other proposed rules.’’ 

So your Commission, I believe, has proposed some rules, comment periods have closed on other rules, and yet many commentators don’t even know without the proper definition clarity whether 

or not certain rules will apply to them. So how can you have a 

meaningful comment period, Chairman Gensler? 

Mr. GENSLER. I have read Mr. Duffy’s testimony very closely as 

well, and we have indicated to Mr. Duffy, with whom we are meetVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
19 

ing at 2:45 today, that we want all of the CMEs and all of the 

public’s comments. 

If these rules have been staggered partly because we are humans, we need to just move them out. But if you have comments 

on earlier proposals where closed periods have happened and they 

relate to this definitions rule, include them. 

Send them in. We will use our discretion. We will distribute 

them. We will get them into the right comment files, just like this 

entire hearing, I think we are going to put in our comment file. Everything that you all have to say is important to our process as 

well. 

Mr. HENSARLING. I think the gentleman makes a good argument. 

I hope you can find a better way to run a railroad because I think 

again we are dealing with trillions of dollars. We are dealing with 

capital. We are dealing with jobs. And I just think it is so critical 

that we have an effective rulemaking process. 

I see my time is winding down. One more question for you, 

Chairman Gensler. I understand that you are advocating the adoption of position limits even for passive investors such as commodity 

index funds. Is that correct? 

Mr. GENSLER. Consistent with the Dodd-Frank Act, we have put 

out a proposal in January and we look at forward to the public 

comments. So I think it is consistent with what— 

Mr. HENSARLING. Does the CFTC have any data to indicate how 

the proposed position limit rule would affect the operation of these 

passive funds? 

Mr. GENSLER. We publish data regularly on passive funds or 

index investments in the marketplace, and that is on our Web site. 

We have included some of that data in the preamble in the rule, 

but we look forward to the public comment in the proposed rules 

on agricultural, metals, and energy position limits. 

Mr. HENSARLING. I see my time has expired. Thank you, Mr. 

Chairman. 

Chairman BACHUS. Thank you. 

Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. I am very 

concerned about the representation that Dodd-Frank is going to 

lead to fewer jobs. And I understand that many of those who are 

critics have been citing a study by the Business Roundtable that 

claims that the margin requirements in Dodd-Frank will result in 

100,000 fewer jobs. First, just quickly, let me ask each of our witnesses today. 

First, Ms. Schapiro, have you seen this study? 

Ms. SCHAPIRO. That was released yesterday, so yes, I did have 

an opportunity to look at it, but I have not studied it in detail. 

Ms. WATERS. Mr. Gensler, have you seen the study? 

Mr. GENSLER. I read the survey, the Keybridge survey last night 

around midnight on the Web. 

Ms. WATERS. And Mr. Tarullo, have you seen the study?’ 

Mr. TARULLO. I did read it. Yes, ma’am. 

Ms. WATERS. Can you tell us how effective regulation of the derivatives market can actually help to save jobs? Let me start with 

Mr. Gensler. 

20 

Mr. GENSLER. I think that at the core, we lost over 7 million jobs 

in this country because both the financial system and regulatory 

system failed the test and swaps were part of that. So I think it 

saves jobs by just making the whole system safer for America. 

It also helps end users have more transparency and lower costs, 

competition in the marketplace. As long as we handle I think congressional intent on this margin and many of the other end user 

issues, which we want to work with you on, transparency promotes 

economic activity, transparency, and competition in the market. 

Ms. WATERS. Thank you. 

Ms. Schapiro, I agree with Mr. Gensler that failed regulation 

caused a loss of jobs. So how can better regulation cause a loss of 

jobs? Can you discuss a little bit how better regulation, effective 

regulations can help to save jobs? 

Ms. SCHAPIRO. I think effective regulation can promote capital 

formation, which is in essence the creation of jobs. When companies 

feel that they can go to the market and raise capital, that their 

stocks will be priced fairly, that investors will have the opportunity 

to invest in their company, buy their shares of stock and sell those 

when they want to, it enables companies to raise the money necessary to create jobs. 

By the same token, when investors have confidence in the safety 

and the soundness of our financial institutions and the regulatory 

regime, they have a level of comfort in investing. So I think there 

are a number of studies that will show that good regulation, intelligent regulation—it is not overregulation, not underregulation— 

can actually lower the cost of capital for industry. 

Ms. WATERS. Mr. Tarullo? 

Mr. TARULLO. Ms. Waters, I would just say that the study to 

which you alluded acknowledged that what it did was a kind of 

quick and dirty economic assessment because the study didn’t have 

access to all the data they would need to give a more sophisticated 

response. 

What they basically did was to say, ‘‘Based on our survey, here 

is what we think the relative level of utilization of derivatives is. 

And we are going to multiply that by a margin requirement which 

we think might be imposed. And that gives us the cost—that the 

cost of the margin requirements—’’ 

Ms. WATERS. I am sorry, so you are saying it was not a scientific 

study? 

Mr. TARULLO. They couldn’t—they were not being misleading in 

the least. They basically just said, ‘‘We are going on the basis of 

a survey and extrapolating. We don’t really have the data.’’ 

But I think, ma’am, the most important point to make is that 

they were assuming that there would be margin requirements applicable to all these end users surveyed. And what you have heard 

this morning is that is not going to be the case. 

Ms. WATERS. And so can you tell us how effective regulation of 

the derivatives market can actually help to save jobs? 

Mr. TARULLO. Yes. From our point of view again, which is one 

of systemic risk and trying to contain systemic risk, I think the 

keys are always watching for leverage and transparency. And because in the absence of transparency, you have ineffectively operVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
21 

ating markets, and as we see, you can have runs during crisis periods. 

And in the presence of excessive leverage, you can have collapses 

of institutions and markets as well. So I think a well-honed, wellconceived regulatory system in the financial sector is one that is 

designed to allow the allocation of capital to its most productive 

uses. 

Ms. WATERS. So basically, all three of our witnesses at the table 

today really do believe that an effective regulation of the derivatives market can actually help to save jobs. Is that correct? 

Mr. GENSLER. Yes. 

Ms. SCHAPIRO. Yes. 

Mr. TARULLO. Yes, although, of course, ‘‘effective’’ is what everybody is going to be discussing as we go through this regulatory 

process. 

Ms. WATERS. Thank you very much. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. Mr. Gensler, as to the application of the CFTC proposed rules to foreign counterparties and 

to foreign dealers, I was going to ask you about a concern here over 

regulatory arbitrage and over the fact that they are going to wait 

this out. 

You implement your policies here. We see more and more derivatives business go to Europe. And at the end of the day, we have 

American financial companies severely disadvantaged vis-a-vis 

their foreign competitors. 

I mentioned in my opening statement that in the long run, onerous rules that are unnecessary will without doubt drive capital to 

non-U.S. markets. And you have testified here that you are in contact with regulators in Europe, you expect them to follow the 

American approach, but how do you have those concrete assurances? Do we have a Memorandum of Understanding with European regulators? Tell me how you assure us of that fact? 

Mr. GENSLER. We are working very closely—all three of our 

agencies are working very closely with the Europeans and Asian 

regulators. We actually share our pre-proposal documents, 

memos— 

Mr. ROYCE. Right. 

Mr. GENSLER. —and drafts with them. I think, depending upon 

budgets, I guess, but I will be back over in Europe in March in 

front of the European Parliament possibly. 

So we are working very closely. Their proposals, I am optimistic, 

are quite consistent on clearing this end-user approach, swap data 

repositories, the dealer regimes. They are a little bit time-wise behind us, a little later than us. 

Mr. ROYCE. Yes, they are going to be later. And I don’t know 

where Brazil and Toronto and Singapore are going to be here, but 

I think it is going to be very hard to try to convince us that American firms are not going to lose business to European competitors 

when that is already happening now. 

Let me ask you another question, and that has to do with the 

fact I know today the SEC and the CFTC, you are saying they are 

trying desperately to get this collaborative environment. But on the 

22 

most important rules, you are failing to get that kind of collaboration between the two agencies. 

The differences in the derivatives markets you oversee are virtually nonexistent. There is a lot of overlap there in products and 

users. And the fact is that you insist on producing two very different sets of regulations here. 

And if this is the end result, end users and investors are not 

going to be better off. It is going to be a boon for foreign companies. 

I will just give you a few of the—in terms of what is discussed in 

the business press—real-time reporting, where the agencies have 

different rules for the definition of what real-time means. 

First, block trade definition and reporting time for block trades, 

the number of data fields that must be reported is different, which 

entity is tasked with submitting trade information to the public, all 

different. 

Second, we have the block trade definition where the SEC wisely 

asked for further public comment and will likely embrace different 

definitions, depending on asset class and liquidity, whereas, the 

CFTC has offered a rigid, one-size-fits-all approach that many 

argue is overly restrictive. 

And then third, we have the swap execution facility rules, where 

the CFTC requires sending a request for a quote to at least five liquidity providers. The SEC takes, I think, a more reasonable approach here in allowing the customers to choose how many liquidity providers it will request quotes from. 

But the bottom line is, it is different in every case. And I would 

like your comment on that as well, if you would. 

Ms. SCHAPIRO. I would be happy to comment on that, Congressman. I would say a couple of things. One is that we are working 

very closely together and there are many more things that are the 

same than that are different, although, you have pointed out, I 

think, some important differences. 

Mr. ROYCE. I picked up 50-some in the business press that have 

been pointed out— 

Ms. SCHAPIRO. I will— 

Mr. ROYCE. —where they differ. 

Ms. SCHAPIRO. We are still at the proposal stage so there is lots 

of opportunity through the comment process and through our extensive meetings with industry and others to bring these rules closer together. 

And when we propose something, for example, it is different than 

the CFTC. We actually ask people what would be a better approach? Is the CFTC’s approach a better, more realistic approach 

or is the SEC approach better, or is there yet a third way to go 

about dealing with this? 

I would say also that there are some differences in the markets 

that we are regulating. The security-based swap markets, which 

really just represents about 5 percent of the notional value of the 

swap markets, trade quite differently than the interest rate markets do, for example. And so, to some extent, the differences in the 

marketplace will dictate—some things that are different. 

But I will—let me please agree with you though, that where our 

rules are going to fall upon institutions that are contracting and 

working in both markets, it really is incumbent upon us to make 

23 

them as close to identical as possible so that institutions aren’t put 

under the burden of two separate sets of rules. 

Where the rules go to, for example, differences in the way orders 

might interact within the marketplace, there might be some justification for slightly different rules because of the nature of the 

products that are being traded. 

Mr. ROYCE. Mr. Chairman, thank you. Mr. Chairman, I have 

questions for the record, without objection, on position limits, 

which were meant to curtail speculation but could end up hitting 

the long-term passive investors. I meant to ask that question, but, 

I will put that in the record and then get the response from the 

witnesses. Thank you, Mr. Chairman. 

Chairman BACHUS. All right. Thank you, Mr. Royce. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you, Mr. Chairman, and I thank all of the 

panelists for your public service and your testimony today. In the 

continuing resolution, there is—literally on the Floor this week, 

there is a drastic cut in funds from what the President requested 

in his 2011 budget for the SEC and the CFTC. 

And our Republican colleagues have proposed that the SEC 

budget and the CFTC budget be cut back to 2008 levels. Now, that 

is the level and the year that the economy cratered and fell. And 

I can hardly imagine that any of my colleagues are pleased with 

the level of oversight that was performed by our regulatory agencies in 2008. 

So cutting them even more than what they had then, I feel will 

make it impossible for them to implement Dodd-Frank and be responsible regulators. According to the Inspector General of the 

SEC, the Republican proposal would force the agency, the SEC, to 

cut roughly 600 in staff. Is that correct, Ms. Schapiro? 

Ms. SCHAPIRO. I believe that is correct, although I will say, I 

think the budget proposal coming out of the House is not to put 

the SEC all the way back to 2008 levels, although it does represent 

a cut off of the continuing resolution number. 

Mrs. MALONEY. I would say that if you put it in perspective with 

the numbers, a total loss of household wealth as a result of this 

‘‘Great Recession’’ has been estimated to be approximately $14 trillion and the over-the-counter derivatives market is valued at about 

$600 trillion. And in 2010, the GDP of the entire world was just 

over $74 trillion and the infamous flash-crash on May 6th temporarily wiped out over $1 trillion. 

So it seems to me rather penny wise and pound foolish not to invest in the agencies that are required to come forward with the 

new rules, the new studies, and to prevent the Madoffs of the future. Now, as I understand it, and correct me if I am wrong, the 

Dodd-Frank bill calls for 95 new rules from the SEC. Is that correct? 

Ms. SCHAPIRO. It depends a little bit on how you count but that 

has been the ballpark estimate, yes. 

Mrs. MALONEY. And 61 from the CFTC, right? 

Mr. GENSLER. We think it is more on the order of 45. 

Mrs. MALONEY. Forty-five? Okay. 

Mr. GENSLER. That is right. But I don’t know. People can count 

different ways. 

24 

Mrs. MALONEY. And how many studies are you required—I know 

the bill had 60 studies—to do? 

Ms. SCHAPIRO. The SEC is required to do 20 studies—more than 

20 studies and to create 5 new offices within the agency. 

Mrs. MALONEY. How in the world are you going to do that with 

a reduced budget? Can you hire the people to oversee the new— 

the derivatives and everything that you have to do? 

Ms. SCHAPIRO. No. Clearly, we will not be able to operationalize 

the rules that we are promulgating and ultimately adopting under 

Dodd-Frank under that budget scenario. I will say, if we were able 

to hire people, we can get them. 

We are getting amazing talent willing to come to the Securities 

and Exchange Commission at this time and work with us on all of 

these important issues. But we are under a hiring restriction right 

now. 

Mr. GENSLER. And I would just say this: The staff of the CFTC 

has been excellent under this uncertainty of the budget. They are 

just doing terrific work. I think we will be able to, working with 

the SEC and the public, continue writing rules, but there is no 

doubt that in 2012, we will not be able to oversee the markets and 

ensure the transparency in the markets. 

If we were taken back to 2008 levels, however, then we would 

be in a very different circumstance because we are in a unique circumstance where we were just growing back to where we were in 

the 1990s, so taking us back to 2008 would have to entail, unfortunately, significant reductions in force. 

Mrs. MALONEY. The OTC derivatives market is valued at about 

$600 trillion, and in 2010, the budget for the CFTC was just $169 

million. So as my colleagues call for more oversight and accountability, we certainly need to give the tools to the oversight agencies 

to get the job done. So I certainly hope that my colleagues on both 

sides of the aisle will support appropriate funding for the CFTC 

and the SEC. 

There has been talk that we are not competitive in the world. 

Some of my colleagues said that we have a competitive disadvantage, but with Basel II the capital requirements are the same. Is 

that correct? Our capital requirements are not higher, are they, 

Mr. Tarullo? 

Mr. TARULLO. That is correct. 

Mrs. MALONEY. So we are in an even playing field on the capital 

requirements and the leverage requirements? Are we on an equal 

playing field there? 

Mr. TARULLO. Yes. We have internationally agreed upon a leverage ratio, yes. 

Mrs. MALONEY. So do you believe that our markets are in some 

way disadvantaged— 

Mr. TARULLO. First— 

Mrs. MALONEY. —because we have regulations? 

Mr. TARULLO. Certainly with respect to— 

Mrs. MALONEY. But a regulation that didn’t appear to work in 

2008. 

Chairman BACHUS. Mrs. Maloney, we will let him answer the 

question. 

Mrs. MALONEY. Okay. Yes. 

25 

Mr. TARULLO. Certainly with respect to capital, we have been 

able to standardize across all the members of the Basel Committee. 

There is obviously still discussion going on about the standards to 

be applicable to central counterparties as such. Those are the ones 

that Chairman Gensler was referring to a few moments ago. 

Chairman BACHUS. Thank you. 

Mrs. Biggert? 

Mrs. MALONEY. But my time has expired. 

Mrs. BIGGERT. Thank you, Mr. Chairman. This first question is 

for Chairman Gensler. Currently, the CFTC is looking at setting 

position limits on swap data. And my concern is—and I know I 

asked this question, I think of you and of Secretary Geithner in 

2009—whether there was an analysis that looked at the critical 

and necessary data regarding this? 

And it seems—I am concerned that—and in fact, multiple futures 

exchanges have raised concern that without this critical data, there 

will be improperly set position limits which would negatively impact liquidity and effective price risk hedging. And it seems like 

you are putting the cart before the horse if you don’t have the 

study of this data that is so important. 

And, I think it—not analyzing it before you put a new regulation 

in, and my concern, not only here, but there is talk of some dealers 

looking at moving abroad, and we are going to lose those jobs. 

Could you comment on that? 

Mr. GENSLER. The proposal the Commission put out in January 

is consistent with the congressional provisions that we put something out with regard to the physical commodities, metals, energies, and agriculture. The agency has had, in working with the exchanges, position limits and most of these for what is called the 

spot month, but also looking at the other months, what is called 

the back months. 

And there really would be three steps to this. A proposal phase— 

we have asked the public for comment on the very data that you 

are talking about. We are going to be well-informed. Final rules 

will not be taken into consideration until we get comments. We got 

8,200 comments on an earlier position limit proposal a year ago. No 

doubt, we will get a lot of public input, and it will be helpful. 

We changed the proposal based on those earlier comments. We 

will probably change the final based on these comments. 

The third phase is actually getting data from the market when 

the swap data repositories are stood up, and we anticipate that 

that is going to take some time. 

Mrs. BIGGERT. But that is really crucial in how you are going to 

be able to set those limits so that there won’t—there won’t be 

something done before you get that data? 

Mr. GENSLER. We have actually anticipated that the proposal 

says that even once it is a final rule, it would not be implemented 

until there is data upon which to apply a formula. Position limits 

historically have been done based on a formula of the total size of 

the market. How big is the market and so— 

Mrs. BIGGERT. But my concern is that we are going to have some 

of these traders that are going to go abroad because they can’t 

wait, with all the comments and then to have the—to set that later 

26 

on. It seems like you are putting the cart before the horse in not 

having the data before you really set those limits. 

Mr. GENSLER. Again, Congress asked us to put proposals out. We 

are soliciting comments. It is very important to get comments on 

these 28 physical commodity markets. We have had position limits 

in the agricultural markets for decades. There were positions in the 

energy markets and metals markets in the 1980s and 1990s, in 

fact, all the way through 2001. 

And we look forward to public comments. But it does say in the 

proposal that they would not go into effect until they are based on 

the actual statistics on the size of the futures market as well as 

the swaps market. 

Mrs. BIGGERT. Okay. Now Congress may have been wrong in how 

they designated that should be done, but—let me go on to another 

question. 

Chairman Schapiro, the Department of Labor has proposed a 

new definition of ‘‘fiduciary’’ which would significantly modify 35 

years of established law defining who is an investment advice fiduciary and then the SEC has completed their 913 study which looks 

at the standard of care required of broker-dealers and investment 

advisors providing personal investment advice about securities to 

retail customers. 

Both of these proposals will be setting advice standards for retail 

IRAs. Have the DOE and the SEC consulted on these proposals or 

is there something that could come out differently as opposed to— 

Ms. SCHAPIRO. Congresswoman, you are right, we published our 

investment advisor broker-dealer fiduciary study several weeks 

ago. We were very clear there to say that it does not implicate the 

fiduciary standard under ERISA. 

And you are also correct that the Department of Labor has recently proposed to expand the fiduciary definition under ERISA 

and that has the potential to affect some ongoing arrangements 

and relationships between broker-dealers and their IRA clients. 

We are very prepared to work with the Department of Labor. We 

have offered any information or expertise that we can provide to 

them about the regulation, in particular of broker-dealers in the 

context of advising ERISA accounts. And we will continue to reach 

out to them and see if we can be of help. 

Mrs. BIGGERT. But have you actually been in contact with them? 

Ms. SCHAPIRO. Yes. 

Mrs. BIGGERT. Okay. Thank you. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman. I would like to use my 

time here to kind of zero in on the part of this that I had the most 

involvement in, Section 733, which became known as the WattMeeks amendment, and ask a couple of questions about the proposed regulations that cover that section. 

It seems to me that one of the great accomplishments of DoddFrank was to pull derivatives trading out of the shadows and into 

the sunlight, requiring standardized swaps to be traded on swap 

execution facilities or exchanges that create pre-trade price transparency. 

27 

Section 733, known as the Watt-Meeks amendment, even includes a rule of construction and directs the SEC and the CFTC to 

update their rules to require the use of the best technology available for creating pre-trade price transparency. 

We were intentional in not asking for flexibility for swap dealers. 

When swap dealers had flexibility before Dodd-Frank, they chose 

the least transparent method of trading, which was telephone calls. 

So instead, Congress said that swap execution facilities must give 

multiple participants the ability to trade swaps by accepting bids 

and offers made by other participants using the best technology for 

pre-trade price transparency. 

Chairman Gensler, it seems to me that your draft rule comes 

pretty close to doing what we were trying to get to. Am I correct 

that you require a swap execution facility to include a central trading screen where everyone can see everyone else’s prices? 

Am I clear that you are not going to allow swap dealers to trade 

only on some dark corner of the platform where one participant 

asks for quotes that only he or she can trade and that dealers will 

have to put their prices on the central trading screen? Am I correct 

that is what you intend? 

Mr. GENSLER. It is correct that the proposal brings transparency, 

that the facilities have to allow any participant to put a live bid 

or offer. So everybody can see that. 

Mr. WATT. Okay. All right. 

Mr. GENSLER. But no one will be required to do it. There is no 

market maker obligation. It is just if you want to, you get a choice. 

But the end users would also have a choice if they didn’t want to 

put a firm bid or a firm offer, they could also use a request for 

quotes. 

Mr. WATT. All right— 

Mr. GENSLER. But you have that— 

Mr. WATT. —and then let me go to Chairman Schapiro. Because 

it seems to me that your proposal differs and hasn’t taken Congress’ directive as seriously as the CFTC is, because you are allowing security-based swap execution facilities—and I am quoting from 

your proposal ‘‘could simply enable every participant to choose to 

send a single request for a quote to just a single liquidity provider,’’ 

which seems to me not to be what we are trying to get to here. 

Are you all interpreting these things differently? Or are you setting up a situation here where you are going to have the potential 

for a race to the bottom with the two agencies potentially interpreting this thing differently or setting up a different set of rules 

and enabling participants to argue that the lowest common denominator ought to be at play here? 

Ms. SCHAPIRO. I don’t think so, Congressman, and we have taken 

it very seriously but we have taken a slightly different approach, 

I think in part dictated by the fact that the security-based swap 

market, which were swaps on single issuers or of narrow indices 

of securities, are really quite different than the much more liquid 

foreign exchange or interest rate or commodity swap markets. 

So we thought that it did dictate for a slightly different approach 

in our proposal. And again, it is just a proposal. We would not permit single dealer platforms under our proposal. What we would do 

is define SEF as a trading platform that allows more than one parVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
28 

ticipant to interact with the trading interest of more than one participant. 

And under that, the quote requesting party must have the ability 

to send a single request for quotes to all the participants on that 

trading platform. But if that party also seeks to limit the number 

of participants to whom their quote goes to, they would have, at 

their option only, not at the SEF’s option, the capability to do that. 

Mr. GENSLER. And if I might say, where the two agency’s proposals line up is both of them say that to be an execution platform, 

you must allow any market participant, even if you all weren’t in 

Congress and you set out to be a market participant, you could get 

in and make a live bid, a live offer, put your capital at risk and 

compete. 

Markets work best when they are transparent and there is competition, and both rules have that. There is a little bit of difference 

on this request for quote approach, and we are looking for public 

comment to see if they should be synched up as well. 

Mr. WATT. Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you, Mr. Watt. 

Mr. Garrett, the subcommittee chairman? 

Mr. GARRETT. I thank the Chair. And so, when you think of all 

the rules that have already come out and all the regulations, the 

proposed and the mounds of paperwork that have come out in just 

a short period of time, with these agencies not specifically funded 

to the level that they want to be funded at, I can only hazard a 

guess what we would be looking at right now if they had all the 

money that they really asked for. 

I guess the takeaway from this hearing so far is, from the other 

side of the aisle, the solution to all the problems that we have is 

to simply spend more money on it. And I guess the takeaway from 

this side of the aisle so far is the solution to the problems is we 

want to get it right as far as the rules or regulations that these 

agencies are promulgating. 

If you look at past history. If you look at reg—NMS and you look 

at—compare that to what we are doing today. Now that was regs— 

and rules coming out of the law of around 80-some-odd pages. We 

are looking at 1,000-some-odd pages. 

That took, I am told, from 4 to 6 months from rulemaking—period of time, here. There they did it for approximately 15 months, 

and there they took over, I guess, oh, about a 3-year period of time 

to roll them all out and actually get into implementation. 

Here, we are compressing this into a much, much shorter period 

of time and a much larger area of the environment where we are 

going to ask the industry to come up with an entirely new architecture, structure, build new complex—new technology systems that 

they don’t have yet, create a whole new operational process they 

don’t have yet, a whole new legal documentation process that they 

don’t have yet, creation of new clearinghouses, SEFs, connectivity 

between all these entities. 

All of that wasn’t there in the past. You are trying to do it now 

in an extremely expedited manner. So it goes to the point I raised 

before. If we do it in the way—in the timeframe that you are talking about now, won’t this lead to a seizing up of the derivatives 

market? 

29 

Won’t it lead to a sending of the derivatives market overseas, or 

at the very least won’t it create unfair advantages between the big 

players in the marketplace and the very small players who cannot 

simply keep up with what you are trying to do? I will leave that 

to Mr. Gensler right now. 

Mr. GENSLER. We have asked, in the midst of each of these 

rulemakings, and we have asked more generally, to hear from the 

public on the phasing of the implementation. Congress allowed us 

some discretion, both agencies, that no rules should become effective sooner than 2 months after the July date, the implementation 

date. But it could be later. 

So for the same reason that you just raised, Congressman, we 

want to hear from the public as to what rules can be done a bit 

sooner which rules need more time. Because there is a cumulative 

cost of this. It is a paradigm shift, as you are referring to, and I 

think we want to, as you say, get it right. 

Mr. GARRETT. Ms. Schapiro? 

Ms. SCHAPIRO. I would agree with that. I think, unlike the statutory deadlines that we have been working through, we have much 

more discretion with respect to the implementation timing and sequencing. So that we can put the rules out and make them effective in an order that actually makes sense for the industry in order 

to build systems, develop compliance— 

Mr. GARRETT. Right, so can both of you, realizing that the feedback that you are already getting on all those points, can both of 

you sit here today and tell us that you would like Congress to give 

you more time? Because we know we have a deadline of July. 

Do either one of you think that you can do this appropriately and 

meet the deadline of July and still have fairness to the marketplace 

that we are talking about? 

Mr. GENSLER. I think we actually already have the discretion on 

the implementation. 

Mr. GARRETT. On implementation, but how about the rule promulgation? 

Mr. GENSLER. I feel that with the significant crisis of 2008, which 

was a very real crisis, and the excellent staff at the CFTC and 

Commissioners, what timing has been put out there is doable. We 

are human. Some of these will happen after July, no doubt. 

Mr. GARRETT. That is not in the statute. It is— 

Mr. GENSLER. It is not like a firm deadline that I understand. 

We are going to get this right and some of these will be after July. 

But we are also going to take up final rule writing in the spring 

and summer. 

Mr. GARRETT. One aspect of it, and I will ask both of you this, 

is under the—President Obama’s Executive Order instructing certain Federal agents to review regulations to ensure they do not stifle job creation and make the economy less competitive, this doesn’t 

apply to either one of you, I don’t believe, by the Executive Order. 

But is it part of your process that you are going through, that 

you wish to comply with that Executive Order so you make sure 

we don’t stifle jobs and we don’t hurt the economy? 

I will start with Ms. Schapiro. 

Ms. SCHAPIRO. Sure. Congressman, as you and I have discussed, 

the terms of the Executive Order don’t apply to the Securities and 

30 

Exchange Commission. But we have determined that it makes 

sense for us to try to act as though they do. I should say right off 

the top that much of what is in there, we already do. We already 

comply with the Paperwork Reduction Act, the Regulatory Flexibility Act— 

Mr. GARRETT. So you are going to try to comply with it? 

Ms. SCHAPIRO. —cost-benefit analysis. But in terms of being able 

to go back and look at some of the rules that have been around for 

many, many years, and see if they are having an unintended consequence given all the changes in our economy and in technology, 

in particular, we want to do that. We want to look at the impacts 

on small businesses. 

And we have been very focused in our rulemaking over the last 

year, in particular, to make sure that where we can give delayed 

compliance dates for small business, we are trying to do that and 

be as accommodating as we possibly can. 

Mr. GARRETT. Mr. Gensler? 

Mr. GENSLER. We took a very close look at the Executive Order. 

Our practices are consistent, though Congress has given us directions on how to do cost-benefit analysis. It is called 15A of our act. 

So we have to follow congressional mandate rather than an Executive Order. 

In terms of looking at our entire rulebook, we do plan to do the 

120-day plan where we would tell the public how we are going to 

look at our entire rulebook, even if it is not related to Dodd-Frank. 

Chairman BACHUS. Thank you, Mr. Garrett. 

Mr. Sherman, before I go to you, Mr. Hinojosa has a brief unanimous consent request. 

Mr. HINOJOSA. Thank you, Mr. Chairman. I am asking unanimous consent that my statement be made a part of the record. 

Chairman BACHUS. Yes, and all statements will be. 

Mr. HINOJOSA. Together with two letters, one by Richard Whiting of the Financial Services Roundtable dated February the 7th, 

and the other is a statement by Craig Reiners of MillerCoors Corporation. 

Chairman BACHUS. Thank you, and let me say this to all members, at the end of this hearing, you can submit any letters for the 

record, if you would like. Thank you. 

Thank you, Mr. Hinojosa. 

Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. Dodd-Frank redirects 

the CFTC to adopt commodity position limits in order to prevent 

excessive price fluctuation and, of course, deliberate market manipulation. I know some of my colleagues have asked about this or 

other aspects of this particular provision. 

As part of this authority, the CFTC is entitled to consider exemptions for different classes of investors to allow for enhanced protections without unduly restricting investors’ options. I am concerned 

that the Commission’s proposed regulations make no distinction between investor classes, treating market speculators the same as ordinary commodity index fund investors. 

Is that the way these regulations should work? Or should there 

be a distinction between commodity index funds that buy and hold, 

31 

versus those that are in and out of the market in days, hours or 

minutes? 

Mr. GENSLER. We put out proposed rules that, as Congressman 

Sherman has said, did not make a distinction because the statute 

doesn’t make a distinction in that way. The statute does make a 

distinction between bona fide hedgers, which in the statute, and 

this has been true in our statutes since the 1930s in some regard, 

relates to having some physical commodity in a merchandising 

channel. 

Congress, in Dodd-Frank, tightened that definition. So we have 

to comply with the intent of Congress. And it tightened it with regard to swap dealers. Swap dealers were, under various No-Action 

letters from the CFTC, able to be bona fide hedgers. 

And Congress tightened that to say, only to the extent that you 

actually are helping somebody on the other side hedge something 

who has the physical commodity in a merchandising channel, and 

so forth. So we are trying to take this up as Congress decided. But 

we look forward to the public comments on it. It is going to be a 

very thick comment file. 

Mr. SHERMAN. Every time I ask a regulator about something, 

they always say it is Congress’ fault. Has your Commission recommended a technical fix? Or do you think that it is appropriate 

as a matter of policy not to distinguish between the in-and-out investor on the one hand and the commodity index fund on the 

other? 

Mr. GENSLER. We have not recommended a technical fix. This 

was something that was debated in many committee hearings, 

maybe not in this committee, but in other committees, about the 

role of index investors and so forth. 

But we do look forward to the public comment and your comments and, as to getting this— 

Mr. SHERMAN. Yes, I may disagree with you on whether the existing statute gives you the flexibility here. The statute does say 

you are supposed to adopt limitations as appropriate. And I look 

forward to working with your attorneys to convince them that we 

don’t need the technical fix. 

Assuming your attorneys do come to you and say, ‘‘Yes, you can 

distinguish between classes of investors in these regulations,’’ as a 

matter of policy, should there be a difference between the index 

fund on the one hand and the day trader on the other? 

Mr. GENSLER. I think I am just going to say I am going to keep 

an open mind. With 8,200 comments on the last position limit rule, 

I think this one is going to be such a thick comment file and I am 

going to keep an open mind as a Commissioner, to these views. 

Some have recommended there be class limits on all indexers. 

Some have recommended that there should be no limit. So there is 

a wide set of comments that we are already receiving on index investing. 

Mr. SHERMAN. I hope you are able to give a clear and more definite response to some of my other colleagues’ questions. But on this 

one, I just gather that you are keeping an open mind as to both 

the law and the policy. And I yield back. 

Chairman BACHUS. Thank you. 

32 

Let me say this: This first panel will be excused at 12:15. And 

we will seat the second panel. And I know Mr. Reiners from 

MillerCoors is sitting there on the first row, ready to testify. So we 

will find out what your announcement this morning does to the 

price of beer, whether—if it helps it or hurts— 

Mr. GENSLER. Hopefully, the transparency will keep beer for all 

Americans well-priced. 

Chairman BACHUS. I think the margins requirements may help. 

Mr. GENSLER. I hope so. 

Chairman BACHUS. Mr. Neugebauer? Thank you, sir 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Gensler, I 

have some serious concerns about the high cost and the severe consequences and burdens that Dodd-Frank is going to be putting on 

a number of different agencies. 

And I have asked all of the entities that are affected by DoddFrank to furnish us information of what is the startup cost and 

what is the continuation cost of just implementing Dodd-Frank. 

I have heard from your counterparts on either side. I got a nice 

thank-you letter for me sending you a letter. But I am looking for 

a little bit more robust and detailed response to that letter from 

your agency, as well. 

Mr. GENSLER. I think that you received it this morning. And I 

apologize if maybe it is just in transit. But I would be glad to take 

any questions about the letter. 

Mr. NEUGEBAUER. Thank you. I think one of the things we saw 

in the President’s budget that he laid out is that he is estimating 

that it is a $6.5 billion number to implement Dodd-Frank, maybe 

going to hire over 5,000 new people. I believe that number, when 

we do the calculations and I think when we get some history on 

that, I think it is going to be a much bigger number than that. 

But one of the things I am concerned about is, for example, the 

CFTC’s chief compliance officer rule requires firms to designate a 

chief compliance officer; establish and administrate a complete new 

set of compliance policies, including implementation and compliance with hundreds of pages of business conduct rules; prepare an 

annual report to regulators; perform a review of every requirement 

under the Commodity Exchange Act, and your agency’s estimate of 

what this would cost the market participants is $13,600. 

Everybody else out there who is about to implement this said 

this is going to cost millions of dollars to comply with that. And so 

one of the things that I think is flawed about this and the fact that 

we are accelerating this process and putting these rules out at 

record levels is we are not doing any cost-benefit analysis of these 

rules. 

And we have underestimated, in many cases, the cost of complying with these. So as we talk about Dodd-Frank, in the sense 

that we think this is going to be a wonderful thing for transparency 

and integrity in the markets, the question is, what are the markets 

going to look like when we get through making them more transparent and operating with integrity? Are they actually going to be 

incrementally more transparent and is there going to be incremental integrity in the markets? 

But also, the cost of achieving that? And what I am very concerned about is, long term we are going to be pushing those marVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
33 

kets to other places. In fact, in the past few weeks, I have sat down 

with some of the people who are participating in these markets. 

These markets are looking for a pressure relief valve because they 

are looking at these kinds of costs. And for our smaller participants, this is an extremely big problem. 

And so I guess the question I have to you is, what kind of costbenefit analysis is going on as you are churning these regulations 

out to actually determine the cost of compliance and the impact of 

that cost of compliance to the markets? 

Mr. GENSLER. And if I might also answer your earlier question, in the letter and in the budget, this agency has talked about $308 

million, $77 million related directly to Dodd-Frank, and about 240 

positions directly related to Dodd-Frank in the 2012 numbers. 

We as an agency are mandated by our statute, Section 15A, on 

how to do cost-benefit analysis, which was adopted many Congresses ago. That has directions, actually rather detailed, about 

taking into consideration the price discovery function, the lowering 

risk, about the integrity of markets to which you just referred. 

We also asked, in each of our rules, a question to please help us. 

As commenters come back with the cost, because those are important for our consideration before we move to final rules, to actually 

hear from the public. 

I think the figure you might have referred to—though I don’t 

know every rule by heart, is within the Paperwork Reduction Act 

piece of it. We asked for comments on those costs as well as the 

cost-benefit analysis costs so that as we go forward to consider final 

rules, we get the public’s thoughts on that, as well. 

Mr. NEUGEBAUER. So are you doing cost-benefit analysis? 

Mr. GENSLER. Oh, absolutely, in compliance with our statute. 

Mr. NEUGEBAUER. When in the process are you doing that, before 

you send out the rule or after you get comments from the rule? 

Mr. GENSLER. It is an ongoing process, but it is pre-proposal, it 

is part of the proposal phase, and then it is informed further by 

commenters as we move to the final rule, as well. 

Mr. NEUGEBAUER. Is that cost-benefit analysis made available to 

the people that you are requesting comments for so they can 

record— 

Mr. GENSLER. Yes. 

Mr. NEUGEBAUER. —kind of respond to your analysis and— 

Mr. GENSLER. Yes. And I don’t know if Chairman Schapiro—we 

are under different guidelines, but yes. 

Ms. SCHAPIRO. We publish our cost-benefit analysis. Our economists develop data the best they can. They might use survey information. They might look to analogous rulemakings to see what 

costs were associated there. We see comments on the cost-benefit 

analysis. And it is, as Chairman Gensler said, further informed by 

the comment process. 

Oftentimes the people who have the best handle on costs are 

going to be the industry charged with complying with the rules or 

implementing the rules. And so we are highly reliant on their information. 

Mr. NEUGEBAUER. So is this— 

Chairman BACHUS. I thank the chairman. And I will thank the 

gentleman from Texas. 

34 

Mr. NEUGEBAUER. Thank you. 

Chairman BACHUS. Mr. Meeks? 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Gensler, I just have a couple of quick questions that I wanted to ask. I was pleased to see you refer to the cooperation with 

foreign counterparts in your prepared testimony. The Dodd-Frank 

Act, of course, recognizes the limits of the U.S. jurisdictional authority by clarifying that provisions of Title VII do not apply to activities outside of the United States unless they have a direct and 

significant connection with activities in, or effect on commerce of, 

the United States. 

My first question is, what steps have you taken or do you propose to take or intend to take to ensure that United States firms 

can compete internationally on a level playing field with their foreign competitors and foreign jurisdictions? 

Mr. GENSLER. We have had extensive dialogue and discussion 

with regulators around the globe and with the very industry that 

you are referring to, the large international banks. The international banks that are not headquartered here, that are in Europe 

and in Asia, have largely come in and say they anticipate registering as swap dealers to offer swaps to U.S. counterparties. 

So whether you are a European bank or Asian, you want to offer 

swaps to U.S. counterparties. The U.S. banks, of course, have considered that they would be registering, sometimes not once, but 

maybe two or three different legal entities would register. 

But at the core, we are working with the other regulators sharing our drafts with them. Of course, we have a statute that has 

been passed. And the only other country that has one so far is 

Japan. The European Parliament is taking their proposal up this 

spring. 

Mr. MEEKS. So there is continuing dialogue, do you think, because I am interested especially with the— 

Mr. GENSLER. There is continuing dialogue, but there is also, 

through international forums, something that Chairman Schapiro 

I think co-chairs, IOSCO, which is an international forum. There 

are panels that the Federal Reserve sits on. We are just a small 

agency. We are usually the junior member. 

But these international forums have actually pretty aligned and 

consistent rules on clearing, for instance, data repositories. And we 

are also going to be entering in to Memorandums of Understanding 

with at least a half a dozen other foreign regulators. 

Mr. MEEKS. Let me also—because you also noted in your testimony that the CFTC recently proposed position limits on several 

commodities. And I have been told that the experience in London 

shows that it could be difficult to ascertain the true position in aggregate of traders. 

Do you believe that sufficient transparency exists for the CFTC 

to effectively enforce such limits? And can you speak on the impact 

of position limits in curbing speculation in commodities such as oil? 

Mr. GENSLER. I believe with the passage of time, there will be 

such transparency because the statute allows that all the information for swaps will come into data repositories. We will benefit from 

that information. And that is why the rule has a bit of delayed implementation until some of that information is in. 

35 

The CFTC is not a regulator that regulates prices. We are a regulator that ensures transparent, open, competitive markets that 

have integrity. And so it is in that context that position limits have 

been used to just ensure, in essence, that there are not concentrated positions, particularly in the spot month where corners 

and squeezes in physical commodities can happen. 

Mr. MEEKS. I will tell you one concern that I have, how do we 

protect the United States from speculation, especially on things 

like oil occurring outside of the United States, which then has a direct impact on us? Could you tell us what we could do to try to 

curb and monitor the risk of speculation occurring outside of the 

United States? 

Mr. GENSLER. If I might, speculators have a role in the markets. 

Hedgers and speculators need each other and meet in a marketplace. This has been true in our markets even when the corn producer or wheat producer wanted to know, how do I hedge my crop, 

come the harvest? There was a speculator on the other side. So 

speculators are part of the commodities markets. They are part of 

the swaps marketplace. 

Position limits authority, which was put in place in the 1930s, 

was to guard against burdens that might come from excessive speculation. One of those burdens that we know about like corners and 

squeezes, or that the size of the crowd is so small that there are 

only a handful of speculators that might have concentrated positions in a marketplace. 

I don’t know if that answers your question. The oil market, the 

energy markets are global. The financial markets are global. Risk 

does not know any geographic boundary in today’s modern, technological, and communications world. 

Mr. MEEKS. I am out of time. 

Chairman BACHUS. I thank the gentleman. 

Mr. McHenry? 

Mr. MCHENRY. Thank you, Mr. Chairman. And to follow up on 

my colleague from New York’s questions, we have missed having 

a Federal Reserve comment on this question about international 

competition. 

And to that, Mr. Tarullo, looking at the derivatives marketplace, 

do you foresee a major shift in markets other than the United 

States as a possibility? 

Mr. TARULLO. Congressman, I suppose anything is possible. But 

I think—what I think you are hearing today is that there are two 

kinds of processes under way, which actually intersect to a considerable degree. The first is a domestic regulatory reform exercise 

driven by statute and implemented by the agencies you see in front 

of you and some others as well. And the second is an international 

process, which pre-existed the crisis, but which has been energized 

and extended because of the crisis. 

As I noted in my response to an earlier question, on the capital 

regulatory side we have been able to achieve a considerable harmonization of the kinds of requirements that would be applied to derivatives as well as to other credit and market risk exposures. 

In the payment systems arena, I think there is an awful lot of 

interest among other countries because, frankly, they have seen 

what can happen when you don’t have a transparent, wellVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
36 

collateralized market functioning in derivatives, or indeed, any 

other set of areas. 

So while I can’t sit here today and tell you that I think the agencies have collectively gotten the level of agreement, much less implementation, they would like to see, my impression in this area— 

and it is only an impression—is that things are moving in the right 

direction. 

I think it is important to note that each of the other financial 

centers that people talk about as growing as the emerging market 

world grows is in a jurisdiction which is a member of the Financial 

Stability Board and the Basel Committee. So these people are at 

the table. 

Mr. MCHENRY. Thank you. 

Ms. Schapiro, in a Financial Times article today, the Muni Enforcement Division Chief is quoted within—from one of your SEC 

employers—employees—is quoted as saying that muni disclosures—or the municipal bond market has become, ‘‘a top priority 

of the SEC.’’ Can you comment on that? 

Ms. SCHAPIRO. Sure. When we set out to reform how our enforcement program worked 2 years ago, one of the goals we said was 

to create specialized units where we could have staff focus on particular types of cases become very deep, very expert, more efficient 

in bringing just those kinds of cases. And municipal securities was 

an area we thought was particularly important for us to focus 

upon. 

We have seen, as you have read in the paper and seen in some 

of the cases we have brought, real concern about the quality of disclosure on municipal issuers to investors. And we don’t have the 

authority at the SEC to dictate or to tell municipal issuers the way 

we can corporate issuers what they must disclose. 

We tried to get at that through the intermediaries that buy and 

sell municipal securities. So we will tell broker-dealers, you can’t 

buy and sell these securities unless you ensure that the municipal 

issuer is making the following kinds of disclosures. 

So that is an indirect tool. It is all we have really with respect 

to the disclosure except for our anti-fraud authority. So to the extent that a municipal issuer is misleading in its disclosure documents about the state of its pension liabilities or something else 

that is material, we are able to pursue that as a matter of antifraud. 

Mr. MCHENRY. Is there a challenge between the government accounting standards and the financial accounting standards— 

Ms. SCHAPIRO. There is— 

Mr. MCHENRY. —a real challenge? 

Ms. SCHAPIRO. —a challenge. We can’t dictate what accounting 

standards they use— 

Mr. MCHENRY. GASB. 

Ms. SCHAPIRO. —either. Many municipalities use GASB. Some 

use FASB and I—there are other alternatives out there. But we— 

so we have a—sometimes have a lack of comparability as a result 

of not having required accounting standards. 

Mr. MCHENRY. And that lack of comparability it—does that pose 

a challenge in understanding disclosures— 

Ms. SCHAPIRO. It— 

37 

Mr. MCHENRY. —and enforcement? 

Ms. SCHAPIRO. —it is a challenge for investors, we understand. 

The other problem is the timing of disclosure. We can’t say that 

you must report year-end results within 90 days or a set period of 

time. And so some municipalities disclose their financial results a 

year or even more, in some few instances, later. 

I will say one of the big improvements in this area has been the 

creation by the MSRB of the EMMA System, which allows for a 

great deal of electronic disclosure. And I think that has made life 

a bit easier for investors. 

Mr. MCHENRY. Is there more authority that the SEC would need 

to have accurate disclosures? 

Ms. SCHAPIRO. There is authority we would need. We have been 

in the process—although for resource reasons we have had to shut 

it down or pulled in field hearings around the country. We did one 

in San Francisco and one in Washington to collect the information 

about the state of the municipal markets, particularly, with respect 

to disclosure and sales practices, accounting, and other issues, so 

that we could build a really strong record for what we think the 

real issues are, and how we might come to Congress and ask for 

you to help us in solving those. 

While we haven’t continued the field hearings at this point, we 

are still collecting lots of comments and meeting with lots of people 

who have an interest in this market. And I suspect we will come 

to Congress at some point with some proposals. 

Mr. MCHENRY. Thank you. 

Chairman BACHUS. At this time, I will recognize Mr. Lynch. But 

before I do, the witnesses who are on the second panel, if you want 

to be excused for 10 or 15 minutes and just be back at 12:15, you 

may want to take a break now. 

Mr. LYNCH. Thank you, Mr. Chairman. And again, I thank the 

witnesses. I was reading this morning in one of the reports that the 

notional value of the derivatives market is about $600 trillion. 

I am also concerned that 97 percent of the U.S. market in derivatives outstanding is actually represented by just 5 commercial 

banks. They have a very concentrated market here. They also have, 

not surprisingly, 97 percent of the clearinghouses owned by just 5 

banks. 

I had an amendment in the Dodd-Frank Bill that was sort of watered down in the Senate regarding the governance of these clearinghouses, and the ownership of these clearinghouses. And I know 

that we have a proposed rule that is out there. 

But there are some real conflict-of-interest risks out there, concerns. One is that these clearinghouses could operate—being operated by these five banks, basically, could operate for their own benefit. 

They could operate as cartels. They could restrict the products 

that are cleared, who gets to play. And probably the most dangerous risk is that we are going to allow these clearinghouses to 

set their own risk management standards. We are going to allow 

them to establish their own collateral requirements. 

And while we have taken that risk and dealt with it on the 

bank’s side, we are going to allow in these clearinghouses this 

38 

small group of individuals to establish how much collateral they 

are going to be required to put up. 

And, it is just ironic that we are seeing a huge shift in risk from 

the banks that are now being dealt with. But we have a gap here, 

in my opinion, on the clearinghouse side. 

Chairman Schapiro, I know you have been doing great work on 

this, as all of you have. But where are we on this proposed rule? 

And do you believe that we are heading in the right direction on 

this? 

Ms. SCHAPIRO. Thank you, Congressman. I think we obviously 

have taken very seriously the requirement that we seek to mitigate 

conflicts of interest in both the clearing agencies and the swap execution facilities. And we have identified the same risks you have. 

The risks that too few products will actually clear, the risk that 

a small group of dealers if they are in control might limit access 

by other participants to the marketplace. And the concern that 

they could lower risk management controls to reduce their collateral requirements. 

So what the SEC did was to propose two alternatives for how to 

deal with ownership in voting within clearing agencies. And we 

have set some numerical thresholds. One alternative would say 

that no single participant can vote more than 20 percent of the voting interest. 

And all the clearing agency participants collectively would have 

an aggregate cap of 40 percent. And then, we would have some requirements on the board of directors and on the nominating committee to have independent directors on those. 

And the other alternative was to say no individual participant 

could have more than 5 percent of the voting interest. There would 

be no aggregate cap. But the board would have to be majority independent and the nominating committee solely independent. 

What you can see by that is we are trying a couple of different 

triggers and combinations to see if we can try to mitigate the conflicts of interest that exist. And at the same time, the access rules 

that we will ultimately propose that will provide for as maximum 

access to clearing agencies as possible is yet a third way to help 

mitigate the conflicts. 

I can tell you that almost nobody liked our proposals. We got lots 

and lots of— 

Mr. LYNCH. That is a good sign. 

Ms. SCHAPIRO. I am not sure. Some people thought that they 

weren’t tough enough and some people thought they— 

Mr. LYNCH. Oh, okay. 

Ms. SCHAPIRO. —were way too tough. And we have to balance 

this with the need to have entities willing to invest in these entities so that we can have robust and strong clearing agencies. So 

where we are in short is that we are working through many, many 

comment letters and continuing to refine our approach and continuing to talk and meet with people. And I couldn’t honestly tell 

you right now where we will land 

Mr. LYNCH. Okay. Thank you. 

Mr. Gensler? 

Mr. GENSLER. I would associate my remarks with Chairman 

Schapiro. But I think on the point of access, Congress said that 

39 

clearinghouses have to have that open access, meaning membership has to be broadened out. 

The futures marketplace and the securities marketplace have 

pretty open access to clearinghouses in each of the spaces. The 

swaps marketplace has been more concentrated. The Congressman 

is absolutely correct on that. 

And so we proposed some rules in December to try to open up 

that membership consistent with what Congress said—nondiscriminatory access. These access provisions are critical. We want the 

public comment, but I suspect there will be some commenters opposed and some for. 

Mr. LYNCH. If I could suggest, rather than just having independent directors who might be agnostic, I think what might work 

in that context is actually having competing commercial interests 

on those boards, not necessarily adversarial but having competing 

interests. That will work as a regulatory force in sort of balancing 

out the operation of these clearinghouses. I think that is what we 

have to get at. 

Ms. SCHAPIRO. I think that is an excellent point and we actually 

have fair representation requirements in other contexts that would, 

for example, have institutional investors be represented on the 

Board. And so that is something we are very interested in. 

Chairman BACHUS. Thank you. And I think we have— 

Mr. LYNCH. Thank you. 

Chairman BACHUS. —gone over a quite a bit, so thank you. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Chairman BACHUS. What we will do is we will take two more on 

each side, in fact it, would it be okay if we took three more on each 

side? Would that be okay with the panelists? And so, we will take 

three more on each side. 

Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Tarullo, in your testimony you say that a much discussed 

part of the Act is the requirement that banks push portions of their 

swap activity into affiliates or face restrictions to their access at 

the discount window of deposit insurance. 

I guess my question is, what percentage of—I think the gentleman, Mr. Lynch, a minute ago made a comment that 97 percent 

of the trades are done by 5 percent or 5 banks. Is that basically 

correct? 

Mr. TARULLO. I think that may be a little bit high. I would say 

it depends on the market. In the commodity swaps market, it is far 

more diverse, with many more participants. 

Mr. LUETKEMEYER. Okay. 

Mr. TARULLO. In the interest rate market, it is a pretty common 

rate. 

Mr. LUETKEMEYER. Okay, the point I want to get out though is 

the risk that the banks have with these entities that are under 

their corporate umbrella that would be exposed to FDIC insurance. 

I think it is imperative that we get those out so we minimize exposure not only to the banks but to the taxpayers, and I am wondering where you are at with that and how your rulemaking is 

going on there. 

40 

Mr. TARULLO. The rulemaking is a joint rulemaking, of course, 

by all the regulatory agencies. And we don’t have a proposed rule 

on that out yet. I would be happy to get back to you with the status 

of where we will be. 

Mr. LUETKEMEYER. Okay. I think that is very important because 

I think otherwise we are getting the taxpayer on the hook again 

for some risky behavior that was the cause of the problem. And we 

still have them there rather than getting it out of the depositor’s 

pocket. 

Mr. TARULLO. And Congressman, sorry, but as one of your colleagues was asking earlier about the coordination of the rulemaking, of course this is somewhat related to the Volcker Rule 

rulemaking as well because you have the same set of issues of activities being moved out of organizations. 

Mr. LUETKEMEYER. Okay, along that same line though with other 

Federal entities that have branches here in the United States and 

then have access to the Fed window, how do you minimize our exposure to them through this rulemaking authority? 

Mr. TARULLO. Actually, Congressman, as the statute is drafted, 

it appears as though the exemption that is provided for insured depository institutions for some kinds of derivatives activities—government securities and agencies and high quality bonds—would not 

be applicable to domestic branches of foreign banking institutions. 

So actually, there is an asymmetry there, which has been brought 

to our attention by foreign governments. 

Mr. LUETKEMEYER. Okay. In your own testimony, you say that 

they may require foreign firms to recognize their existing U.S. derivatives activity to a greater extent than U.S. firms. 

Mr. TARULLO. Right, that it might require them to restructure in 

order— 

Mr. LUETKEMEYER. Right. 

Mr. TARULLO. —to have it outside of any— 

Mr. LUETKEMEYER. Okay. 

Mr. TARULLO. —insured depository institution. 

Mr. LUETKEMEYER. I guess the question is, how concerned are 

you with the ability of foreign entities to be able to access our Fed 

window and have our taxpayer dollars involved? 

Mr. TARULLO. Congressman, all borrowing at the discount window is fully collateralized with haircuts. And that applies regardless of who is accessing the discount window. Also, of course, discount window access is contingent upon supervision, which ensures 

that we or our colleagues in the other banking agencies have adequate knowledge of the liquidity and capital position of the institution accessing the discount window. 

So it is only when there is supervision here and when we have 

full collateralization with appropriate haircuts that discount window lending is possible. 

Mr. LUETKEMEYER. Are you looking to revise those rules and the 

circumstances around them right now with what is going on in Europe? 

Mr. TARULLO. Not provoked by anything going on in Europe, pardon me. We are of course always looking at the appropriate haircut 

levels and whether there is a need to refine our discount window 

access features. But as I say, any accessibility is going to be based 

41 

upon an entity present here in the United States which is supervised here in the United States. 

Mr. LUETKEMEYER. Okay, thank you. My time is about up here. 

I just have a really quick question for basically all of you. One of 

the things that is of concern to everybody here today is end users. 

You all recognize that they were not a part of systemic risk of the 

problems that were in 2008? Do you—is that an agreed-to statement or is that not? 

Mr. GENSLER. They didn’t cause the problems. They ultimately 

were— 

Mr. LUETKEMEYER. Were caught up in the problem? 

Mr. GENSLER. They got caught up into it. 

Mr. LUETKEMEYER. Okay. 

Mr. GENSLER. —and part of that is to make sure they are not— 

Mr. LUETKEMEYER. Okay, I am running of time. I understand 

that, but by the same token, if they are not part of the problem, 

you raked them into the problem. And yes, they are—by doing this 

you now—if we don’t go with the letters of intent from Senator 

Dodd and Senator Lincoln about what was going on here with regards to not imposing some sort of other barriers to end users, we 

may get there. 

And I think this should be a very narrowly focused ruling and 

regulatory mandate from you and not impose other additional risks 

or concerns onto the end user. 

Mr. GENSLER. I am agreeing with you that the CFTC does not 

intend to have a requirement of margin with these non-financial 

end users. 

Mr. LUETKEMEYER. Okay. 

Mr. GENSLER. But they did get caught up in the problem. 

Mr. LUETKEMEYER. Chairman Schapiro, I assume you agree with 

that? 

Ms. SCHAPIRO. We haven’t formulated any proposals in this area 

yet at the SEC, but I think it is safe to say we are extremely focused on this concern that has been raised multiple times this 

morning. The end users likely to be using the very narrow category 

of swaps that we regulate are going to be financial institutions— 

Mr. LUETKEMEYER. Okay, my comment is they are not the problem, so don’t make them the problem— 

Ms. SCHAPIRO. We are not going to make them the problem. 

Mr. LUETKEMEYER. —by imposing rules and regulations that 

they don’t need, okay? Thank you. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I have a question or two about the ‘‘take my ball and go home’’ 

argument that if the regulations here are unpalatable here in the 

United States or for that matter even if we coordinate with European systems and have similar regulations that some other countries might become host to derivatives trading, which reminded me 

of how reinsurance is regulated. 

Reinsurance companies that are in actual markets are beyond 

the reach of State regulators, but State regulators get at those 

42 

markets by their requirements on their insured, the company’s insurance companies domesticated in their State. 

If they want to get credit for solvency regulation purposes for reinsurance contracts, the reinsurance companies have to meet certain requirements, basically that they be able to pay on the reinsurance contracts. 

Governor Tarullo, how are derivatives, credit default swaps in 

particular but derivatives generally, treated for purposes of safety 

and soundness regulation now? 

Mr. TARULLO. Right now, Congressman, they are subject to two 

kinds of capital requirements. First, a trading or market risk that 

is the value of the derivatives goes up and down regardless of who 

the counterparties are. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. TARULLO. And second, with respect to counterparty or credit 

risk, that is if I have a derivatives transaction with you, I rely on 

your creditworthiness to be able to perform. But we have both 

kinds of capital regulation in place. 

Mr. MILLER OF NORTH CAROLINA. Okay. So if American financial 

institutions purchased derivatives, credit default swaps or other derivatives from a market that was neither transparent nor had collateral requirements, you would be in a position to deny those contracts credit as an asset and perhaps still consider them as a liability? 

Mr. TARULLO. Or certainly we are in a position to require appropriate capital set aside depending on the identity of the 

counterparty. That is absolutely true— 

Mr. MILLER OF NORTH CAROLINA. Okay. Well— 

Mr. TARULLO. —so long as we regulate the U.S. institutions. 

Mr. MILLER OF NORTH CAROLINA. The reinsurance regulation 

through States, through the insurance companies proves to be fairly effective regulation. Do you have any doubt that you will be able 

to avoid circumventing all U.S. laws by your regulation of safety 

and soundness of financial institutions? 

Mr. TARULLO. I think two things. One, with respect to regulated 

U.S. financial institutions, we are in a position to understand what 

they are doing and to require them to have appropriate safeguards 

in place depending on their counterparties. That is not to say with 

respect to all derivatives activity that we would be in a position to 

ensure that it was being conducted in a safe and sound fashion. 

But the CFTC and the SEC have another regulatory scope and 

then, as we have all said, we are in discussions with other important financial centers to make sure that they, too, are putting some 

of these things in place. If I could add one thing, Congressman, 

there is a degree to which counterparties are attracted to markets 

that are well supervised— 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. TARULLO. —precisely because they give assurance that these 

trades will be completed in a timely fashion. 

I think people have always understood that the success and liquidity of our securities markets in the United States was in no 

small part due to the fact that the New York Stock Exchange on 

its own imposed a lot of requirements on transparency. 

43 

Mr. MILLER OF NORTH CAROLINA. Derivatives are frequently justified as risk management, but according to witnesses who sat at 

that table in the past, only about 10 percent of derivatives contracts involve a party that actually has any interest in the underlying risk, has any risk to manage. 

And there have been stories, rumors at least that in many cases 

companies have bought large credit default swap positions for 

when they were in a position to cause default and have done that. 

An example, again, a rumor that is denied by Morgan Stanley 

was that they were bondholders for one of the largest banks in 

Kazakhstan, which was taken over by the government of 

Kazakhstan. And the bond agreements provided that the bondholders could require that the bonds be paid immediately. 

All the bondholders initially said, ‘‘Don’t worry about that. If you 

are making the payments, that is fine.’’ And then Morgan Stanley 

changed their mind and demanded immediate payment, which the 

bank could not do, causing a default. 

The rumors were that Morgan Stanley had bought large credit 

default swap positions and benefited greatly from the seeming— 

what appeared to be the illogical conduct of precipitating default of 

a performing debt. 

There are other examples of—where at least arguments that 

Goldman Sachs was in a position to know things about AIG’s solvency that their counterparties did not know. Should there be— 

what protections are there now for that kind of insider—what 

might be considered insider trading in the securities arena with respect to credit default swaps? 

Ms. SCHAPIRO. The credit default—we have actually prosecuted 

one case with respect to credit default swaps being invoked in insider trading. I will say the problem that you are talking about is 

really what we call the anti-creditor problem where you have more 

of an incentive to see the institution against whom you are holding 

insurance fail than you do as a bondholder even to work out their 

problems in an orderly way. 

And it is a distortion certainly in the marketplace and it is an 

area that we have been quite focused on as we look at issues 

around things like empty voting in the proxy context and more 

broadly at the reporting and other requirements. 

Chairman BACHUS. Thank you, Mr. Miller. 

Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. 

I can’t help but think the best fix for future crises is to have 

some accountability for the first crisis, for the cause of the first crisis. And I believe you know this is coming, Chairman Schapiro, 

what kind of accountability have we had at the SEC with the people who helped cause the last crisis to date? 

Ms. SCHAPIRO. Congressman, I think you know that we have 

worked tirelessly over the last 2 years to try to reform the Securities and Exchange Commission and to make it an agency that is 

worthy of the public’s— 

Mr. POSEY. I have a limited amount of time. Has anybody had 

their wrist slapped yet? 

Ms. SCHAPIRO. I understand. As you also know, most of the employees were— 

44 

Mr. POSEY. Wait, please, just—has anyone had their wrist 

slapped yet? Has anyone been reprimanded? I know nobody has 

been fired or put in jail but have we blamed anybody? Have we actually told anybody they are responsible for doing wrong and 

slapped their wrists yet? 

Ms. SCHAPIRO. Most of the employees involved are gone. For the 

remaining employees involved with Madoff against— 

Mr. POSEY. That—listen— 

Ms. SCHAPIRO. —whom discipline was recommended, we are— 

Mr. POSEY. —that is like saying— 

Ms. SCHAPIRO. Completing— 

Mr. POSEY. —a burglar left the neighborhood to burgle another 

neighborhood. 

Chairman BACHUS. All right. Mr. Posey. Mr. Posey, if you could 

let the chairman answer the question and then— 

Mr. POSEY. She is not answering it, Mr. Chairman. 

Ms. SCHAPIRO. I am. We are concluding the appeals process for 

the final stages of those employees against whom discipline was 

recommended. That should be completed shortly. 

Mr. POSEY. Thank you. So the answer is just no. 

Ms. SCHAPIRO. The answer is the disciplinary process, which is 

laid out in Federal law and is one which I am beholden to follow 

is winding its way— 

Mr. POSEY. I know there is some kind of unwritten rule about 

giving a yes or no answer here but it would have saved a whole 

lot of time. Thank you. 

Mr. Gensler, how comparable do you think the community— 

Chairman BACHUS. Let me say this to all the members. I think 

that the witnesses are not on trial. And I think they are due a certain amount of decorum and respect. I know that these are intense 

questions or they are emotional questions, but I do believe the 

Chairman was trying to answer the question. 

And I am not talking to any one member. I am just saying I 

think it is important that this body treat the witnesses with the 

dignity and respect that they are due. So I appreciate it. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Mr. Gensler, at last week’s agriculture— 

Chairman BACHUS. Was he through? Oh I am sorry. Mr. Posey, 

I apologize. You were not through. You have additional time. 

Mr. POSEY. Mr. Gensler, do you think the Commodity Futures 

Trading Commission was culpable in any way in the cause of the 

last crisis? 

Mr. GENSLER. I think the entire regulatory system failed the 

American public, so I would have to include all of us regulators, in 

a sense and yes, in the broadest sense. I think the futures marketplace worked very well—so the futures marketplace did not fail. 

Mr. POSEY. I appreciate the ‘‘yes’’ answer, thank you. Has there 

been any disciplinary action taken against any of the employees 

who were culpable in your agency? 

Mr. GENSLER. No. 

Mr. POSEY. Thank you for the direct answer. 

Governor? 

45 

Mr. TARULLO. I agree with Chairman Gensler that there were 

widespread problems in the regulatory structure and then in the 

implementation of the regulatory structure by the regulatory institutions. 

What the Federal Reserve has tried to do is to determine how, 

with the changes in the law, and with what was learned from the 

last crisis, we can have more effective supervision going forward. 

So there have been lots of changes, both at the Board and at Reserve Banks in terms of reordering supervision, who is in charge, 

which people we have working on which matters. 

There haven’t been any disciplinary proceedings. I wasn’t at the 

Board at the run-up to the crisis, but Congressman, I am not 

aware of misconduct of any sort. What I am aware of is the collective failure of our regulatory agencies, including the Fed, to determine what was needed and to have the resolve to go and do it. 

Mr. POSEY. Thank you. Does effective regulation involve government stopping businesses from making bad decisions? Just a quick 

yes or no from each of you if possible. 

Ms. SCHAPIRO. ‘‘No’’, unless it is going to hurt investors. 

Mr. POSEY. Okay. 

Mr. GENSLER. ‘‘No’’, unless it is going to break the law. 

Mr. TARULLO. It is ‘‘no’’, unless it puts Federal taxpayer funds or 

the safety and soundness of the financial system at risk. 

Mr. POSEY. Okay. And then thirdly, I think we all know, but I 

would just like to get your answer on this. Is it possible to stop 

somebody from failing and still allow them to succeed in the free 

enterprise system, to guarantee nobody fails? 

Ms. SCHAPIRO. No. We should not guarantee that nobody fails. 

We should allow institutions to fail. 

Mr. GENSLER. I think there has to be a freedom to fail. I think 

there will be banks that fail in the future as there have been for 

centuries in the past. 

Mr. TARULLO. I agree. 

Mr. POSEY. Thank you very much. 

Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. I thank the gentleman. 

Governor Tarullo, I think, pointed out that he was not at the 

Board during the financial meltdown or the events leading up to 

it and that is also true of Chairman Gensler— 

Mr. POSEY. Me? 

Chairman BACHUS. No, I am not talking about—Bill, there is 

nothing—I am not talking about you. I promise this has nothing to 

do with your remarks. I was just telling the new members that 

Chairman Schapiro was not there, and Chairman Gensler was not 

there, and they inherited quite a mess. So Mr.—who is that—Mr. 

Green? 

Mr. SCOTT. Scott. 

Chairman BACHUS. Mr. Scott, I am sorry. 

Mr. SCOTT. Thank you, Mr. Chairman. Mr. Gensler, last week I 

asked you about this concept of margin separation, if you recall the 

Agriculture Committee meeting, and how it could potentially raise 

the cost of clearing with only a small amount of management risk 

management benefits. 

46 

I still feel it could be very expensive for market participation if 

directed towards a problem that does not seem to exist since we are 

not requiring the same customer protection in future clearinghouses which have never failed. And I know you answered at that 

time that it was only preliminary, which led me to believe you are 

reviewing that and taking a look at it. 

So I want to explore it a little bit further with you with these 

questions. First of all, can you please tell me what the CFTC’s rationale for using the advanced notice of proposal rulemaking was? 

Did someone specifically, did someone explore this issue and ask 

you for this particularly, because it was not included in the DoddFrank Bill? 

Mr. GENSLER. The Dodd-Frank Bill says that for swaps that 

brought into clearing, the funds that the people put up shall not 

be comingled. And then it goes on to say, except for convenience. 

We had a roundtable to answer your question. 

We had a roundtable on this whole topic in the fall and numerous parties from the asset management side who have had segregated collateral accounts would like to continue to have that. I 

would say some from the clearing community and dealing community did not. 

And they all raised very thoughtful considerations. So we 

thought we would put out what is called an advanced notice of proposed rulemaking, ask the public, and we are considering this before even making a proposal, we are considering those comments. 

Mr. SCOTT. Would you, could you characterize for us the general 

feeling within the industry itself? Where are there disagreements? 

Does the buy side agree with their counterparts on the selling side, 

for example? 

Mr. GENSLER. No, I would say there is a wide variety of views. 

Some on what is called the buy side or asset managers currently 

have segregated accounts, and they want to continue to have that. 

In the clearing community, you are absolutely correct. 

They have been accustomed for decades, our agency has said for 

convenience you can comingle even though the statute said not to 

except for convenience. That started in the 1930s. Convenience in 

the 1930s was different than convenience in the 21st Century. 

So we are trying to sort that through. We may end up exactly 

as it is in the futures world. We may end up proposing some alternatives. We have been very well-informed. There is a range of 

views on that. 

Mr. SCOTT. Let us take the buy side. Are they of one mind? Is 

there disagreement internally within the buy side? 

Mr. GENSLER. I would say that there are a variety of views even 

on the buy side. 

Mr. SCOTT. Have the clearinghouses weighed in with you on this 

issue yet? 

Mr. GENSLER. Yes, and their comments are all on our Web site 

in a public file. 

Mr. SCOTT. Let me ask you one other question, Mr. Gensler. 

What would you say—would you say that the CFTC is effectively 

managing the resources that it has? 

Mr. GENSLER. We are doing—I think the team at the CFTC is 

remarkable, and yes, we are not perfect. There are always some 

47 

things that are going to go on and surprise you on any given day 

of the week. But it is a remarkably talented group of individuals 

who are trying to protect the public and ensure transparent markets. 

Mr. SCOTT. And in the budget the President just released, you 

and the SEC are two of the agencies that—two of the very few that 

have received a substantial increase in your budget. How do you 

characterize this increase? Is this efficient? 

Mr. GENSLER. It is a good investment for the American public. 

We have been asked to take on a market that is about 7 times the 

market we currently oversee, and it is far more complicated. It has 

fewer transactions, but the swaps market means more to all these 

end users than most people even understand. So I think it is a good 

investment of taxpayer money. 

Mr. SCOTT. And then I would like to get on record your response 

to, if you could provide some insight very briefly on how the CFTC 

is adhering to Dodd-Frank requirements. 

Mr. GENSLER. Dodd-Frank requirements said to consult with 

other agencies, to consult broadly with the public and international. That is what we were doing. We have had over 500 meetings. We put those on our Web site. We have had close to 4,000 

comments that have come in, all on our Web site of course. 

And we are complying with the statute. We don’t want to 

overread the law. We take the comments here very seriously and 

we don’t want to underread the law obviously as well. 

Mr. SCOTT. Thank you, Mr. Gensler. 

Thank you, Mr. Chairman. 

Mr. GARRETT. [presiding] And I thank the gentleman. And just 

to let the panel know, and everyone else in the room know as well, 

we will have two more members questioning, Mr. Hurt and then 

Mr. Green, and then this panel will be dismissed. 

Mr. HURT. Thank you, Mr. Chairman. And thank you all for 

being here. I just had really one question, but I was hoping that 

each of you could answer it. Considering that small banks are subject to the new clearing requirements unless the SEC and the 

CFTC use their authority to treat them as end users, I was wondering if you could comment on whether they should be included 

as end users in light of the high costs of compliance against the 

small percentage of swaps that they make up. 

But I was wondering if you could comment on whether they 

should be and whether they will be? Thank you. 

Mr. GENSLER. Maybe I will address it first, because banks generally are in the interest rate space and currency space that the 

CFTC oversees. We put out a series of questions to get information 

from the public. 

We have been working closely with the Federal Reserve, the 

FDIC, and also the Farm Credit Administration and the National 

Credit Administration because those institutions are all involved. 

And so, we have not put a proposal out. 

These small banks, as some of the members have said, were not 

at the heart of the systemic crisis. But they are interconnected and 

so the freedom to fail of a large bank sometimes will be dependent 

upon if they would bring down the community banking system. 

48 

You would want to let the large bank fail and not bring down the 

community banking system. So that is where the risk can propagate. But we are looking for the public comment to see if Congress 

has directed to consider this possible exemption. 

Ms. SCHAPIRO. Small banks are not likely to be heavy users of 

part of the swaps markets. The SEC will regulate the securitybased swaps. But we did propose as an alternative a small bank 

exemption. 

Mr. HURT. But—just to be clear, it sounds like that is something 

the SEC has proposed but the CFTC is not inclined— 

Mr. GENSLER. No, in fact what we did was we— 

Mr. HURT. —to support? 

Mr. GENSLER. I wouldn’t want to leave you with that impression. 

It is really we are in the midst of a process of getting economic 

data and public comment on how to move forward. So we didn’t 

make a formal proposal. We said, give us help on this from the 

public. We are doing the same with the Federal Reserve and all of 

the various regulators. 

Mr. TARULLO. Congressman, you perhaps won’t be surprised to 

hear that our position before, during and after the legislation has 

been we do think that there is good reason for smaller bank exemption precisely because we want them to be able to do the business 

of banking. They are not swaps dealers, obviously. They would be 

regulated if they were. But of course, it is not committed to us by 

Congress to make that decision. We are just a commenter. 

Mr. HURT. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. GARRETT. Thank you. And the gentleman yields back? 

Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member and the chairman for allowing the time, and I will be 

sharing it with Mr. Perlmutter. I will move as expeditiously as possible. Let me ask you, Ms. Schapiro, is it true that if the projected 

budget cuts take place you will have to cut personnel? 

Ms. SCHAPIRO. It is not exactly clear yet how we will balance the 

impact on personnel spending with the impact on our technology 

spending. We are a larger agency than the CFTC so we have a little bit more flexibility as between those two major buckets of our 

expenditures, and we haven’t worked those issues out yet. 

Mr. GREEN. If you have to cut your technology, does this mean 

that you will not be able to upgrade your systems? 

Ms. SCHAPIRO. I think it would be virtually devastating for the 

SEC to have to cut its technology budget. When I arrived 2 years 

ago, I discovered that we are many, many years behind our markets in our use of technology, sophistication of our technology, our 

capabilities with respect to technology. We have made a concerted 

effort over the last 2 years to try to improve that situation and putting the brakes on it is painful. 

Mr. GREEN. And I will quickly add this, currently you have about 

3,000—3,800 employees, correct? 

Ms. SCHAPIRO. That is right. 

Mr. GREEN. And you oversee approximately 35,000 entities? 

Ms. SCHAPIRO. Yes, if you count public companies for whom we 

review the public disclosure, as well as 11,000 investment advisors 

49 

and 5,000 broker-dealers and exchanges and electronic trading— 

electronic communication networks and transfer agents and clearing agencies, we get pretty close to that number. 

Mr. GREEN. And also those advisors that you mentioned. They 

manage about $33 trillion? 

Ms. SCHAPIRO. Yes. 

Mr. GREEN. So you have a pretty big job. 

Ms. SCHAPIRO. We do. We have about 12 examiners for every trillion dollars of assets under management compared to about 19 examiners just a few years ago. 

Mr. GREEN. And cutting you would—if you had to cut personnel, 

would it hurt your ability to police? 

Ms. SCHAPIRO. I believe it would. That is not to say we can’t continue to find, and we have a Tiger Team working on the efficiencies 

and savings because there undoubtedly are some. 

Mr. GREEN. And may I add— 

Ms. SCHAPIRO. Yes, I would agree. 

Mr. GREEN. —I admire you for being as delicate as you are because I understand that the integrity of the system hinges on your 

every word. So I appreciate the delicate fashion in which you have 

handled this. But I, on the other hand, don’t have to be quite as 

delicate. 

And I would hope that we would not take the cops off the beat 

at the time that we need them greatly. We have seen what can 

happen when markets have a sharp downturn and when integrity 

is lost. So my hope is that we won’t do this. Now, I have to yield 

to Mr. Perlmutter, the balance of my time. 

Ms. SCHAPIRO. I agree with you though. Investor confidence is 

absolutely critical to our economy, and the cop on the beat is important to that equation. 

Mr. GREEN. Thank you. 

Mr. GARRETT. We appreciate those remarks and we will move— 

Mr. PERLMUTTER. Thank you. I thank the Chair. But I found another microphone, and I just want to follow up on what Mr. Green 

just had to say. 

First, let me just put something to bed, Mr. Gensler, please. On 

the end user derivatives, hedging for the future by somebody like 

Coors that wants to buy barley next summer, because they have a 

business that they have to conduct from year to year. That is not 

where you are not talking about putting margins on that, are you? 

Mr. GENSLER. Absolutely correct. We are not talking about putting margins on them. And barley swaps would be allowed under 

a proposed agricultural swap proposal we put out. 

Mr. PERLMUTTER. But I mean just generally, end users hedging 

for products that they will need as part of their business are not 

part of the margin requirement that you are considering? 

Mr. GENSLER. We have yet to propose that, but that is correct for 

non-financial end users. 

Mr. PERLMUTTER. Okay. Good. And let me just get back to the 

basics, though. The basics and what I am bothered about by particular questions of my Republican colleagues is that there seems 

to be a mass case of amnesia, that 2 years ago, 21⁄2 years ago under 

the Bush Aministration, the stock market and every financial marVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
50 

ket crashed terribly, multiplied by derivatives, financial generally 

in nature. 

And my question to the entire panel is based on what happened 

when so many people lost their jobs, so many people lost their pensions, so many people lost wealth all across this country, do we 

need people in positions to regulate Wall Street and the financial 

transactions that take place there? And will the budgets that have 

been proposed by the Republicans cut into your ability to do that? 

Mr. GENSLER. Yes, we need people. We are a good investment. 

We are only 680 people, to use arithmetic, that oversees the futures 

market. It is about $60 billion of futures per person. But swaps, we 

will have a half a trillion dollars of swaps per person. The budget 

as proposed— 

Mr. PERLMUTTER. Half a trillion per person? 

Mr. GENSLER. Per person. We think we need more people. And 

we need more technology. 

Mr. PERLMUTTER. I think we can end on that. I thank you. And 

I yield back to the chairman. 

Mr. GARRETT. And I thank the gentleman for yielding back. And 

I thank the gentleman for reminding us of the Bush Administration, as well. 

Mr. PERLMUTTER. I didn’t want you to feel left out. 

Mr. GARRETT. Without this term. And I would like to thank all 

the members of the panel and also for all the staff that you bring 

with you to these meetings, as well. 

Ms. WATERS. And Mr. Chairman, may I have a unanimous consent request? I would like to have unanimous consent to enter into 

the record a story from the New York Times that appeared last 

night which notes that some economists who were listed as advisors on the Business Roundtable study that I noted in my questioning, have requested that their names be removed from the 

study? 

Mr. GARRETT. Without objection, it is so ordered. 

Ms. WATERS. Thank you. 

Mr. GARRETT. And again, I thank the panel. And the Chair also 

notes that some members may have additional questions for this 

panel, which they may wish to submit in writing. So without objection, the hearing record will remain open for 30 days for members 

to submit written questions to these witnesses and to place their 

responses in the record. 

And as soon as this panel makes their way out, we will be looking forward to our next panel. 

I thank the members of the panel for their patience, but more 

importantly, for their testimony that we are about to receive. So let 

me begin. And I will be brief, as we run through panel two. I think 

it is set up in the same order that I have here, from left to right, 

my left to right: Mr. Craig Reiners, director of commodity risk 

management, MillerCoors, on behalf of the Coalition of Derivative 

End Users; Mr. Donald F. Donahue, chairman and chief executive 

officer of the Depository Trust & Clearing Corporation, the DTCC; 

Mr. Terry Duffy, executive chairman, CME Group; Mr. Don 

Thompson, managing director and associate general counsel, 

JPMorgan Chase, on behalf of the Securities Industry and Financial Markets Association, SIFMA; Mr. James Cawley, chief execuVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
51 

tive officer, Javelin, on behalf of the Swaps and Derivative Market 

Association, SDMA; and Mr. Chris Giancarlo, executive vice president, corporate development, GFI Group, Inc. And I thank the 

panel for being with us today. 

At this time, before I proceed, I will turn to Mr. Dold from Illinois for an introduction. 

Mr. DOLD. Thank you, Mr. Chairman. I just wanted to take this 

opportunity to introduce one of the panelists to my colleagues. 

Coming from the Chicagoland area, having worked in the Chicago 

Mercantile Exchange early on in college, I wanted to take this opportunity to introduce Chairman Duffy, who has been a CME member since 1981. 

He started out as somebody on the floor, at the bottom, and has 

worked his way up to be the top of the chain, the food chain, if you 

will, and he certainly represents a number of people. He was one 

of the chief architects in 2007 of the merger between the Chicago 

Board of Trade and the Chicago Mercantile Exchange, which is 

now the world’s leading and most diverse derivatives marketplace. 

He also, at the request of President Bush, served on the National 

Saver Summit on retirement savings, and is a member of the Federal Retirement Thrift Investment Board. He is widely recognized 

as a leader and expert in his field. He has testified numerous times 

before Congress; I don’t know if that is a good thing or a bad thing. 

But we certainly appreciate your time today, as we do all the panelists. And so, we thank you very much and I just wanted to give 

a little background for my colleagues. 

Mr. GARRETT. And I appreciate that. We will now turn to the 

panel. And I guess one of the most interesting aspects of the entire 

panel that was already referenced earlier today, and that is the 

price of beer, okay, going forward. 

Mr. Reiners, 5 minutes. 

STATEMENT OF CRAIG REINERS, DIRECTOR OF RISK MANAGEMENT, MILLERCOORS LLC, ON BEHALF OF THE COALITION 

FOR DERIVATIVES END-USERS 

Mr. REINERS. Good afternoon, Mr. Chairman, and members of 

the committee. My name is Craig Reiners. I am a beer guy from 

Milwaukee. My team manages the commodity price risk for 

MillerCoors. I am also testifying on behalf of the Coalition for Derivatives End Users. I am very pleased to have this opportunity to 

offer perspectives on rulemaking relating to the Dodd-Frank derivatives title. 

MillerCoors operates breweries in California, Ohio, North Carolina, Texas, Georgia, Virginia, Colorado, and Wisconsin, as well as 

the Leinenkugel’s Craft Brewery and two microbreweries. Last 

year, we shipped 67 million barrels and sales reached $7.6 billion. 

Our 9,000 employees share a vision to create America’s best beer 

company by driving profitable industry growth. MillerCoors insists 

on building its brands the right way through quality, responsible 

marketing, environmental stewardship, and community involvement. 

Rather than read verbatim from my submitted statement, allow 

me to highlight our key six messages. Number one, we fully support market transparency. Number two, as an end user, our use of 

52 

derivatives is strictly used to manage price volatility intrinsic to 

physical commodities. Number three, our Board-approved commodity risk management policy strictly prohibits speculation. 

Number four, we support a broad end user exemption. Number 

five, we urge regulators to avoid creating unnecessary trading requirements with the unintended consequences of forcing companies 

to either retain more risk or seek alternatives offshore. 

And finally, number six, we urge caution relative to a compressed rulemaking timeline, which may not allow market participants the opportunity to provide valuable feedback. 

Now, to a bit more clarification. We support this committee’s efforts to ensure derivatives markets operate efficiently and are wellregulated. We agree that proper regulation should reduce systemic 

risk and increase transparency in the over-the-counter markets. At 

the same time, the prudent risk of derivatives by end user companies such as MillerCoors does not generate risk or instability in the 

financial marketplace and played no role in the financial crisis. 

On the contrary, these risk management tools are critical to reducing commercial risk and volatility in our day-to-day businesses. 

Our commitment to our customers is to produce the best beer in 

the United States and deliver it at a competitive price. In order to 

achieve those goals, we must prudently manage our commodity 

risks. 

I believe the use of derivatives offers end users of physical commodities the risk management tools to provide a necessary degree 

of predictability to our earnings. Our single largest risk is aluminum. Our agricultural risks, of course, include malt and barley, 

corn and hops. Our energy risk portfolio includes coal, natural gas, 

deregulated electricity, and diesel fuel. 

As I mentioned before, our Board-approved commodity risk policy 

clearly forbids any and all speculation. The policy allows us to use 

over-the-counter swaps to precisely match the timing and prices of 

our complex manufacturing and distribution process. 

For example, we match our OTC swaps for aluminum with the 

actual use of cans over the same exact timeframe. This risk management technique allows us to manage costs, reduce price volatility, and manage cash flow within a reasonable parameter. In 

fact, we would create significantly more price volatility in our business by not hedging. 

We believe that end users generally share the concern that if the 

cost of hedging our risks rises significantly, entry into swaps may 

no longer be economical. The result would be a reduction in risk 

mitigation through hedging, which, ironically, could increase risk 

and exposure to market volatility. We believe that a broad end user 

exemption is critically important as the CFTC and SEC creates 

their final rules. 

During the regulatory process, we have sought to ensure that the 

exemption created by Congress would not be unduly narrowed. In 

particular, we have urged regulators to give thoughtful consideration to key definitions to ensure that end users like us are not 

saddled with bank-like regulation. 

I would like to address the prospect of margin being imposed on 

future, even previously entered contracts. This requirement would 

be particularly burdensome to end users like MillerCoors. RetroVerDate Nov 24 2008 15:02 Jul 21, 2011 Jkt 064554 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\64554.TXT TERRIE
53 

active application of margin requirements would upset the reasonable expectations we had when we entered into our existing risk 

management contracts. 

We engaged in extensive negotiations with our financial counterparties to develop our ISDA agreements, which established our expectations for the future and included vigorous credit stipulations. 

Any retroactive application of margin requirements would be punitive. 

MillerCoors urges the financial regulators to avoid creating rigid 

and expensive trading requirements that unintentionally could 

cause companies either to retain more risk or seek risk management alternatives. By utilizing OTC swaps, we are able to customize our hedges to perfectly match the underlying exposure. 

The current rulemaking timeline is compressed, which may force 

regulators to prioritize speed over quality. We urge Congress to 

provide regulators with more time for rulemaking and for regulators to allow market participants sufficient time for implementation. I am confident in the way that these products are utilized by 

our company and other end users, actually benefits the economy by 

reducing volatility and increasing stability. 

On behalf of MillerCoors and the Coalition, I thank the committee for allowing me to appear today to discuss these important 

issues. And I am happy to answer any questions you may have. 

That concludes my testimony. 

[The prepared statement of Mr. Reiners can be found on page 

309 of the appendix.] 

Mr. GARRETT. And sir, thank you for your testimony. 

I believe you were all advised of this beforehand, but I will just 

reiterate, since some of you have testified before the committee before and others have not. And that is the clock in front of you has 

green, yellow, and red lights. The yellow light gives you the 1- 

minute warning so you can begin to sum up. 

Mr. Donahue? 

STATEMENT OF DONALD F. DONAHUE, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, THE DEPOSITORY TRUST & CLEARING 

CORPORATION (DTCC) 

Mr. DONAHUE. Chairman Garrett, members of the committee, I 

am here today representing the Depository Trust & Clearing Corporation a non-commercial industry utility that in 2010 settled 

roughly $1.7 quadrillion of U.S. securities transactions. 

Since 2006, we have operated the Trade Information Warehouse, 

a global swaps data repository currently covering about 98 percent 

of all credit derivatives transactions, some 2.3 million contracts, 

with a notional value of $29 trillion. 

I appreciate this opportunity to share our thoughts on the implementation of Title VII of the Dodd-Frank Act. In particular, I will 

focus on the swap data repository system for providing the necessary transparency into the global OTC derivatives markets. 

We share Congress’ goal of ensuring more transparency in these 

markets to further global regulatory oversight and systemic risk 

mitigation. As many of the regulatory aspects of Dodd-Frank remain in development, transparency is a policy option that is most 

right for implementation. 

54 

I make two fundamental points today. First, transparency is key 

to any attempt to mitigate systemic risk in the swap markets. All 

swaps, cleared and uncleared, must be reported to swap data repositories. 

To the extent derivatives contributed to the financial crisis, it 

was due to the lack of a unified view of which categories of market 

participants held wide exposures in the swap markets. The model 

needed to address this transparency concern has since been largely 

formalized for the credit default swap market in DTCC’s Trade Information Warehouse. 

Leveraging the warehouse, late in 2008 we began providing 

standard position risk reports to appropriate authorities worldwide 

and publishing comprehensive market information free of charge. 

More recently, as we announced just this morning, we inaugurated an online portal through which global regulators, currently 

19 worldwide, can securely and directly access detailed data from 

the warehouse’s global data sets. 

Had this level of transparency about the CDS market existed in 

the run-up to the 2008 crisis, it would have mitigated a substantial 

amount of uncertainty that then contributed to market instability. 

DTCC believes that the most immediate and cost-effective approach to meeting Dodd-Frank’s transparency goals will rely on 

proven repository infrastructure that currently provides regulators 

and the public this type of comprehensive market information. 

Providing transparency in the CDS market is a cooperative effort. I focused on the warehouse achievement to bring to the committee’s attention why it has been successful. It would not have 

been possible without a substantial degree of global regulatory cooperation and support. 

But while this global supervisory push was a critical element, it 

was also important to the success that DTCC is not a commercial 

entity. We have no motivation other than to provide a central place 

for reporting and regulatory access to the data for both market and 

risk surveillance purposes. 

This removes commercial concerns from what is and must remain a market utility-based regulatory and supervisory support 

function. The structure created works because all market participants and all clearers and trading platforms with any significant 

volume are cooperating. If this cooperation were to fail, the data 

published and made accessible to regulators would fragment leading inevitably to misleading reporting of exposures. 

What would follow would be an exceptionally expensive if not politically impossible task for regulators to rebuild complex data aggregation and reporting mechanisms that the industry and regulators themselves have already created in a single place at DTCC. 

Both of these results appear undesirable in the extreme. 

The challenge ahead is to bring similar transparency to other 

parts of the swap markets. I commend the work of both the SEC 

and the CFTC in their thorough and thoughtful approach to this 

very complex challenge. 

It is our sense as an industry-governed utility with both buy and 

sell side members on our governing bodies that market participants 

are poised to undertake the significant cooperative effort necessary 

55 

to complete the transparency of these markets as contemplated by 

Dodd-Frank. 

I urge the committee in exercising its oversight function to focus 

on removing obstacles to this process and to continue to use proven 

infrastructure while avoiding injection of commercial considerations 

that could hinder the cooperative attitude that so far has made 

progress possible. 

Thank you, and I am available for any of your questions. 

[The prepared statement of Mr. Donahue can be found on page 

81 of the appendix.] 

Mr. GARRETT. Thank you. 

Mr. Duffy? 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CME GROUP INC. 

Mr. DUFFY. Thank you. Chairman Garrett and members of the 

committee, I want to thank you for the opportunity to testify on the 

regulatory implementation of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act. I also want to thank Congressman 

Dold for that kind introduction and of course his leadership, not 

only in Congress but back in his district. 

As the Congressman said, I am Terry Duffy, executive chairman 

of the CME Group, which includes our clearinghouse and our four 

exchanges: CME; CBOT; NYMEX; and COMEX. In 2000, Congress 

adopted the Commodity Futures Modernization Act which leveled 

the playing field with our foreign competitors and permitted us to 

recapture our position as the world’s most innovative and successful regulated exchange and clearinghouse. 

As a result, we remain an engine of economic growth in Chicago, 

New York, and the Nation. In 2008, the financial crisis focused 

well-warranted attention on the lack of regulation of OTC financial 

markets. 

The Nation learned painful lessons regarding unregulated derivatives trading. But we also demonstrated that regulated futures 

markets and futures clearinghouses operated flawlessly before, during, and after the crisis. Futures customers were protected. 

Congress responded to the financial crisis by adopting the DoddFrank Act to reduce systemic risk through central clearing and exchange trading of derivatives, to increase data transparency and 

price discovery, and to prevent fraud and market manipulation. We 

support these goals but our concern is that the CFTC’s regulation 

of futures exchanges and clearinghouses will impose unwarranted 

cost and stifle innovation. 

We are not alone. Several Commissioners have cautioned against 

regulations that unnecessarily expand the Commission’s workforce. 

While we are proponents of an adequate budget for our regulator, 

we object to the expansion of the Commission and its budget to enforce regulations that are uncalled for by Dodd-Frank or that take 

over responsibilities from SROs. 

We object to regulations that are not cost-benefit justified. Much 

of the problem results from the CFTC’s efforts to expand its authority by changing its role from an oversight agency, whose purpose has been to assure compliance with sound principles, to a 

56 

front-line decision-maker that imposes its business judgments on 

every operational aspect of derivatives trading and clearing. 

This role reversal will require a doubling of the Commission staff 

and budget. It will also impose astronomical cost on the industry 

and the end users of derivatives. There is no evidence that any of 

this is necessary or even likely to be useful. Dodd-Frank was not 

an invitation to pile regulatory burdens on regulated exchanges 

and clearinghouses. 

For example, Congress preserved and expanded a principlesbased regulatory approach by expanding the list of core principles 

and granting self-regulatory organizations reasonable discretion in 

establishing the manner in which a self-regulatory organization 

complies with the core principles. The Commission asked for and 

Congress gave it power to adopt rules respecting core principles but 

Congress did not direct the agency to put an end to a principlebased regime. 

Yet, the Commission immediately and for no apparent reason 

proposed comprehensive regulations to convert most of the key core 

principles into prescriptive rules-based regulatory system. This is 

the ultimate solution in search of a problem. The crisis of 2008 did 

not arise from a failure of the regulated transparent futures markets. 

And the scope of Dodd-Frank is narrower than many of the 

CFTC rules proposed would suggest. Implementation would be 

similarly tailored. My written testimony includes numerous additional examples of misdirected or improper rulemaking. We welcome the outreach Chairman Gensler has recently demonstrated in 

seeking public input on Dodd-Frank implementation. 

This is a step in the right direction but more needs to be done. 

The Congress can mitigate some of the problems that have plagued 

the CFTC rulemaking process. They can do this by expanding 

Dodd-Frank’s effective date and the rulemaking schedule so that 

professionals including exchanges, clearinghouses, dealers, market 

makers, and end users can have their views heard. 

This would give the CFTC a realistic opportunity to assess those 

views and measure the real cost imposed by these new regulations. 

Otherwise, the unintended adverse consequences of those ambiguities and the rush to regulation will stifle effective exchange innovation. 

We are concerned that overly prescriptive regulations, which are 

inconsistent with the sound industry practices, will make it more 

difficult to reach Dodd-Frank’s goal of increasing transparency and 

limiting risk. 

I thank the committee for its time this morning. 

[The prepared statement of Mr. Duffy can be found on page 257 

of the appendix.] 

Mr. GARRETT. Thank you for your testimony. 

Mr. Thompson? 

57 

STATEMENT OF DON THOMPSON, MANAGING DIRECTOR AND 

ASSOCIATE GENERAL COUNSEL, JPMORGAN CHASE & CO., 

ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL 

MARKETS ASSOCIATION (SIFMA) 

Mr. THOMPSON. Chairman Garrett and members of the committee, my name is Don Thompson. I am the senior derivatives 

lawyer at JPMorgan, and I am here today on behalf of SIFMA. 

Thank you for inviting me to testify. 

As this committee is well aware, American companies use overthe-counter derivatives to manage a wide variety of risks that they 

encounter in their day-to-day business, such as interest rate risk, 

foreign exchange risk, and commodity price risk. We act as a financial intermediary to help clients manage these risks in a flexible 

manner. 

Many clients choose to manage risk from the over-the-counter 

market and as the committee has heard in testimony from American companies, the use of over-the-counter derivatives has a significant impact on their ability to compete internationally. While 

over-the-counter derivatives have many benefits, it is also the case 

that there have been problems with their use and with their oversight. 

We support many of the provisions in Title VII including mandatory registration of regulation of swap dealers, mandatory clearing 

of standardized contracts between financial firms, and greater pre 

and post-trade transparency. 

It is worth keeping in mind that these and other reforms taken 

together will fundamentally alter the market structure of the overthe-counter derivatives market, which will impact liquidity and efficiency in these markets. 

Given these wholesale changes, it is critical that the regulations 

implementing them be done thoughtfully to ensure that American 

companies continue to have access to these products. We are increasingly concerned, however, that the accelerated pace of rulemaking, risks, unintended consequences that will put American 

end users at a competitive disadvantage. 

We are also concerned that the statutory deadlines may be too 

aggressive, limiting regulatory flexibility to craft appropriate rules. 

For example, for real-time reporting in block trade levels, gathering 

data from market participants is a necessary prerequisite to setting 

effective standards and such data should inform these 

rulemakings. 

In the rush to meet statutory deadlines, there has been insufficient focus on the statutory mandate to examine the effects of proposals on market liquidity. Without care, there is a real risk that 

the current proposals will drive liquidity out of U.S. markets and 

increase the cost of or even the ability to manage risk. 

We believe the agencies need to carefully implement the statute 

to preserve liquidity, enable American companies to continue to 

manage their risks in an increasingly volatile and competitive global marketplace. 

Despite transatlantic dialogue over derivatives regulation, we are 

also concerned about the competitive harm resulting from differences in final regulations between the United States and Europe. This concern extends to the gap in implementation dates in 

58 

Europe and other jurisdictions, as well as confusion over the 

extraterritorial application of Title VII’s provision. 

This problem can be addressed by a simple clarification of the intended extraterritorial reach of the Act, by harmonizing the implementation timetables between the United States and the E.U., or 

by both. 

In addition, certain proposed regulations treat very similar products differently in a way that will create duplicative reporting and 

compliance regimes that will be burdensome and will reduce the 

transparency benefits of information ultimately reported to the 

public under those regimes. 

I would like to conclude by saying that JPMorgan is committed 

to working with Congress, regulators, and industry participants to 

ensure that Title VII is implemented appropriately and effectively. 

I appreciate the opportunity to testify before the committee. I look 

forward to answering any questions you may have. 

[The prepared statement of Mr. Thompson can be found on page 

330 of the appendix. ] 

Mr. GARRETT. I thank you, sir. 

Mr. Cawley, please, for 5 minutes. 

STATEMENT OF JAMES CAWLEY, CHIEF EXECUTIVE OFFICER, 

JAVELIN CAPITAL MARKETS, ON BEHALF OF THE SWAPS 

AND DERIVATIVES MARKET ASSOCIATION (SDMA) 

Mr. CAWLEY. Thank you. Congressman Garrett and members of 

the committee, my name is James Cawley. I am CEO of Javelin 

Capital Markets, an electronic execution venue of OTC derivatives 

that expects to register as a SEF or swap execution facility under 

Dodd-Frank. Thank you for inviting me here today to testify. 

I am here to represent the interests of the Swaps and Derivatives Market Association, which is comprised of multiple independent derivatives dealers and clearing brokers, some of whom 

are the largest in the world. When called to testify today, I was reminded of the main reason for which we are here, to fix the derivatives market such that we never again have to call upon the U.S. 

taxpayer to bail out Wall Street. 

The bilateral counterparty risk baked into every credit derivatives and interest rate swap contract still constitutes an unacceptable systemic risk to the national financial payment system specifically and to the broader economy as a whole. Simply put, such bilateralism acted as an accelerant to the crisis much like gasoline 

does to a forest fire. 

To help ensure in the future that the government and more specifically the U.S. taxpayer doesn’t have to bail out the next trading 

firm that fails, we must ensure that central clearing and, more importantly, transparent execution of OTC derivatives is a success. 

We must transition away from ‘‘too-interconnected-to-fail’’, where 

one firm fails and pulls three others down with it. 

Central clearing membership requirements should be objective, 

publicly disclosed, and permit fair and open access as Dodd-Frank 

requires. This is important because clearing members act as the 

gatekeepers to clearing. Without open access to clearing, you will 

not have universal clearing of options, increased transparency, and 

lessened systemic risk. 

59 

Clearinghouses should seek to be inclusive, not exclusive, in their 

membership criteria. They should learn from their own experience 

in the list of derivatives space of futures and options. 

In those markets, central clearing has operated successfully since 

the days of post-Civil War Reconstruction nearly 150 years ago, 

long before spreadsheets and risk models. In those markets, 

counterparty risk is spread over 100 disparate and non-correlated 

clearing firms. It works well, and no customer has ever lost money 

due to a clearing member failure. 

To complement broad participation, clearinghouses should not 

have unreasonable capital requirements. Capital should be a function of the risk a member contributes to the system. Simply put, 

the more you or your customers trade, the more capital you contribute. The SDMA supports the CFTC’s call for clearing broker 

capital requirements to be proportionate in scale relative to the 

risk introduced to the system. 

We support the CFTC’s call that the clearing firms’ minimum capital be closer to $50 million rather than the closer to the $5 billion or $1 billion threshold that certain clearinghouses have originally suggested. It is worth remembering that Lehman Brothers 

and Bear Stearns would have met the $1 billion threshold until the 

days of their failure. 

Certain clearinghouse operational requirements for membership 

that have no bearing on capital or capability should be seen for 

what they are, transparent attempts to limit competition. Specifically, clearing members should not be required to operate swap 

dealer desks just so they can meet their obligation in the default 

management process. 

These requirements can easily be met contractually through 

agreements with third party firms or dealers. Clearinghouse governance should be balanced and transparent. Such governance bodies should represent the interests of the market as a whole and not 

the interest of the few. 

With regard to conflicts of interest with a clearing member, 

Dodd-Frank is clear. Dealer desks should not be allowed to influence their clearing member colleagues and strict Chinese law 

should exist. With regard to trading derivatives, clearinghouses 

must accept trades on an execution blind basis. 

Customers should be allowed to trade with whom they want. 

They should not be forced to execute trades in such a way where 

one side of that trade is done with an incumbent dealer. 

They should also be able to trade with dealers who do not selfclear but make markets nonetheless and provide the liquidity so 

vital to the integrity of the system. For their part, swap execution 

facilities should also offer open access. 

They should offer pre and post-trade transparency in an otherwise opaque marketplace. SEFs should seek to report their trades 

within seconds, as is the case in other markets. It is well-established with the introduction of greater transparency, more market 

makers and increased competition, a safer playing field will emerge 

to directly enhance liquidity and market integrity which in turn 

lowers the systemic risk. 

In conclusion, the CFTC and the SEC should be commended for 

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60 

cessible throughout the entire process. They have adapted to industry suggestion when appropriate, and Congress should provide 

them funding that they need. 

We must move away from ‘‘too-into-connected-to-fail.’’ We must 

work together to ensure that when the next investment house fails, 

and they do, that we are properly prepared for it. I thank you for 

your time. 

[The prepared statement of Mr. Cawley can be found on page 77 

of the appendix.] 

Mr. GARRETT. And I found that illuminating. Thank you very 

much for the testimony and from the gentleman from the great 

State of New Jersey and the 5th District as well. 

Mr. Giancarlo please? 

STATEMENT OF J. CHRISTOPHER GIANCARLO, EXECUTIVE 

VICE PRESIDENT, CORPORATE DEVELOPMENT, GFI GROUP 

INC. 

Mr. GIANCARLO. Thank you, Congressman, and thank you members of the committee. I am Chris Giancarlo, executive vice president of GFI Group, an American company and a global wholesale 

broker of swaps and other financial products. 

I am also a Board member and former chairman of the Wholesale 

Markets Brokers’ Association. As such, I speak from the perspective of the wholesale brokerage industry that handles over 90 percent of intermediated over-the-counter swaps trading in the United 

States and around the world today. 

Wholesale brokers are the prototype of competing swap execution 

facilities or SEFs. The core impact of Title VII of Dodd-Frank is to 

replace a market in which swaps are often traded directly between 

counterparties with a system for most transactions where a central 

clearing facility acts as a single counterparty to each market participant and where transactions are executed on regulated trading 

facilities including the newly created definition of SEFs. 

The goal of these two initiatives, clearing and intermediation, is 

better safety and soundness for U.S. swaps markets. Dodd-Frank 

promotes a market structure where competing SEFs and exchanges 

vie with each other to provide better services at lower cost in order 

to win the execution business of market participants. 

Dodd-Frank rejected the anti-competitive single silo exchange 

model for the futures industry where clearing and execution are 

intertwined. Dodd-Frank expressly permits swaps to be executed 

by SEFs using ‘‘any means of interstate commerce.’’ 

Congress left it to the marketplace to determine the best modes 

of execution and thereby foster technological innovation and development. Congress specifically did not choose to impose a federallymandated one-size-fits-all transaction methodology on the swaps 

market. 

Liquidity in today’s swaps markets is fundamentally different 

than in futures and equities markets and naturally determines the 

optimal mode of market transparency and trade execution. 

Wholesale brokers are experts in fostering liquidity and transparency by utilizing trade execution methods that feature a hybrid 

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61 

nology that are specifically tailored to the unique liquidity characteristics of particular swaps market. 

There are three critical elements that regulators need to get 

right. First, SEFs must not be restricted from deploying the many 

varied trade execution methods successfully used today. It would be 

detrimental to market liquidity to mandate restrictive transaction 

methodologies or to experiment with rules taken from the highly 

commoditized equities or futures markets. 

Moreover, U.S. regulations need to be in harmony with those of 

foreign jurisdictions to avoid driving liquidity toward overseas markets that may offer greater flexibility in modes of trade execution. 

Second, the goal of pre-trade transparency can be realized 

through means that are already developed by wholesale brokers to 

garner and disseminate pricing information and not by artificial 

mechanisms that may restrict market liquidity for end users and 

other traders. 

Third, regulators need to carefully structure a public trade reporting system that takes into account the unique challenges of 

swaps trading. The objective must be to strike a balance between 

price transparency and market liquidity. 

If the rules do not properly define the size of block trades, information, and time delays, they will surely cause a negative impact 

to liquidity, disturbing end users’ ability to hedge commercial risk 

and to plan for their future. 

The Wholesale Markets Brokers’ Association has proposed a 

block trade standards advisory board of recognized experts from 

data repositories and SEFs to make recommendations to the regulators for appropriate blocks trade rules. 

The regulators and their staff deserve to be commended. They 

are working very hard to get this right. It is crucial that they gain 

a thorough understanding of the many modes of swaps trade execution and price dissemination deployed by wholesale brokers and accommodate those methods in trading practices in their SEF rules. 

It is only with such understanding that they can draft regulations that are properly tailored and effective. I am optimistic that 

given enough time and resources, regulators will craft SEF rules 

that are well-suited to the existing trading methods in the swaps 

market resulting in shorter and more effective implementation periods. 

As the adage goes, ‘‘measure twice, cut once.’’ We certainly don’t 

want to have to cut this thing twice. Congress can assist with needed technical corrections to Dodd-Frank and crucially, by providing 

regulators with adequate time and resources to thoroughly understand the challenges and solutions to garnering trading liquidity in 

the swaps markets. Taking adequate time to get the regulations 

right will expedite the implementation of the worthy goals of DoddFrank, that is, central counterparty clearing and effective trade 

execution and provide end users and other traders with more competitive pricing, increased transparency, and deeper trading liquidity for their risk management needs. 

I thank you and I look forward to your questions. 

[The prepared statement of Mr. Giancarlo can be found on page 

288 of the appendix.] 

Mr. GARRETT. Thank you. And I thank the entire panel. 

62 

We will now turn to the gentleman from New York, Mr. Grimm. 

Mr. GRIMM. Thank you, Mr. Chairman, and thank you to the 

panel. Mr. Giancarlo, since you just finished, I will start with you 

if I may? I wanted you to expand a little bit about the multiple 

modes of execution. 

I for one think it is important: voice, hybrid, electronic. These 

modes, if you can expand why it is so important to have multiple 

modes rather than wholly electronic platform, I would ask you that 

question. 

Mr. GIANCARLO. Thank you, Congressman. Liquidity in the 

swaps market is very different than in the futures and equities 

markets, the nature of liquidity. Just to give you an example, 80 

percent of the reference entities, swaps on 80 percent of the reference entities in the credit derivatives market, trade less than 5 

times a day. 

It is not the same type of marketplace where you have a continuous tape that you do in a futures market or an equities market, 

and therefore the means by which experienced intermediaries bring 

parties together in this marketplace are very different. 

At GFI Group, and at our competing wholesale brokerage firms, 

we use a range of methodologies. Everything from online auction 

systems to fixing and matching session as well as fully electronic 

online platforms. But we also use a mix of humans and electronic 

systems. And often, that is very effective at bringing parties together. 

Mr. GRIMM. That begs the question, if I may, it appears to me 

that the CFTC has relied heavily upon the regulations governing 

the futures contract in drafting the proposed rules for the swaps. 

Are the regulations for the futures industry appropriate for the 

swaps industry, and if not, why? 

Mr. GIANCARLO. There may be some elements of what is—how 

regulations work in the futures industry that are appropriate but 

many, many other ways they are inappropriate. And in the proposed regulations, there are a number of areas where the proposed 

regs simply just don’t apply, just simple things like referring to 

products listed on SEFs or members of SEF. These are concepts 

that really don’t exist in the swaps market. And yet as we read the 

proposed rulemaking, these concepts still come through, and are inappropriate for what takes place in the swaps market. 

Mr. GRIMM. Thank you very much. I appreciate that. 

If I can switch over to Mr. Donahue. Your testimony expressed 

concerns about fragmentation of data. Doesn’t the technology exist 

already for the regulators to easily consolidate the data it receives 

from various swap data repositories? 

Mr. DONAHUE. Congressman, I would certainly agree it exists. I 

don’t think I would use the word ‘‘easily.’’ You can consolidate the 

data. I think our point is the data is already consolidated. The data 

has been unified in a swap data repository. 

Having that consolidated view and having the infrastructure that 

we have to permit regulators in the market access to that consolidated view is very, very key to meeting the transparency goals that 

the Act has and that Congress had in adopting the Act. 

Trying to—allowing that to fragment and allowing the data to 

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63 

ferent data vendors and then imposing the obligation to then reunify that and consolidate that is, we think, going to be a fairly difficult process, a complex process, an expensive process and certainly add very significant time to the market’s ability to establish 

the transparency that Congress and the regulators want. 

Mr. GRIMM. One more question, Mr. Donahue, other than the 

congressional mandate that trades be reported, explain why we 

need repositories please? 

Mr. DONAHUE. Again, the repository gives a consolidated view of 

all of the activity within a particular asset class so that you can 

see all of the exposures. You know who has what exposures. You 

can see information about contracts conducted globally. This is a 

global market. 

Mr. GRIMM. Could I just ask you, why can’t the clearinghouses 

collect the information since they are the central nexus for the derivatives and let them send the information to the SEC and the 

CFTC? 

Mr. DONAHUE. Your question answers that, okay? The clearinghouses necessarily will fragment the data and you are going to be 

dealing with different groups of data reflecting different activities, 

different contracts. 

You may see offsetting contracts in different clearinghouses. You 

have to bring it together in some place. You have to aggregate it 

to see the entire view. That is precisely what swap data repositories do. Going there and using that infrastructure from day one 

we believe is the appropriate public policy choice. 

Mr. GRIMM. I yield back, Mr. Chairman. 

Mr. HENSARLING. [presiding] The gentleman yields back his time. 

The Chair now recognizes the gentlelady from New York for 5 minutes. 

Mrs. MALONEY. Thank you very much, and I thank all the panelists. On the central repository, in your statement you said that it 

should be a utility and could you expand on why you describe 

DTCC as—why can’t we use it as a for-profit model? Why should 

it be a utility? If you could expand? 

Mr. DONAHUE. Congresswoman, I think the crucial point there is 

the very, very deep degree of market cooperation and collaboration 

that is needed to make a repository work. 

Mrs. MALONEY. Yes. 

Mr. DONAHUE. DTCC is a market-governed utility. We are operated on a not-for-profit basis. We have a governing board or a governance committee that has all of the constituencies in the market 

involved in the governance. 

They view us as a neutral meeting place where they can have a 

particular market need addressed in a way that is responsive to 

their concerns and meets the needs of the broad range of market 

constituencies. That is what a utility or an industry cooperative 

does. 

That is very, very crucial to getting the level of cooperation and 

collaboration that is needed to achieve rapid implementation of the 

transparency mechanisms that the repository provides. So we think 

getting the kind of market cooperation both within the United 

States and also crucially from overseas is very much facilitated by 

having a market utility supporting that function. 

64 

Mrs. MALONEY. When you mentioned overseas, we are definitely 

in a global market, and DTCC just has activities here in America, 

correct? 

Mr. DONAHUE. No, we actually have offices both in Asia and in 

Europe and we actually have an implementation of our derivatives 

support capability in Europe as well as in the States. 

Mrs. MALONEY. So that allows you see the entire picture? Is everything in DTCC internationally and locally? 

Mr. DONAHUE. With respect to credit default swaps the Trade Information Warehouse is a global infrastructure. It has trade feeds 

from 1,800 counterparties in 52 countries around the world. The 

reference entities referenced in the warehouse originate from 90 

countries around the world. 

The regulator transparency mechanism that we announced this 

morning gives information to 19 regulators around the world and 

that number will grow. So it is very much a global infrastructure, 

and that is very key given the global nature of the marketplace. 

Mrs. MALONEY. In your written testimony, you mentioned that it 

would be, and I am quoting from it, it would be ‘‘an exceptionally 

expensive if not politically impossible task for regulators to rebuild 

complex reporting mechanisms.’’ Yet there were several amendments in Dodd-Frank that would have done this earlier. 

Mr. Gensler from CFTC I believe was testifying that he thought 

he would build his own clearinghouse. Can you comment on that? 

Do you think other repositories are necessary in order to have all 

the information to see the exposure, see the risk, and prevent another catastrophe like we had in 2008? 

Mr. DONAHUE. Our view is very much that you need a consolidated view per swap asset class. All right? So for credit default 

swaps, the trade information provides that. You would need a consolidated view, a repository for interest rate swaps, as an example, 

for over-the-counter equity swaps. 

And consolidating all that information into a unified view, we believe, is very crucial to having the kind of transparency that the 

market needs. The CFTC could do that. The regulators could do 

that, consolidating information from a variety of sources. That is a 

fairly expensive proposition. It is a fairly time-consuming proposition. 

Mrs. MALONEY. Would it offer more information than what 

DTCC now offers— 

Mr. DONAHUE. It would— 

Mrs. MALONEY. —or would it be a duplication? 

Mr. DONAHUE. I think it would be fair to characterize it as a duplication. We are within weeks of having the Trade Information 

Warehouse in a form that is completely compliant with Dodd-Frank 

requirements in terms of the breadth of the data we maintain, the 

kinds of information, and the kinds of counterparties we have reflected. 

So I don’t see that—pushing, that the regulator level would add 

anything other than additional expense replicating what already 

exists. 

Mrs. MALONEY. In my opening comments, I talked about the 

flash-crash, and how we need to try do everything we can to prevent it, and I would like to ask the panelists, how do SEFs prevent 

65 

events like May 6th, which has been called a flash-crash or the recent hacking into NASDAQ, which was very troubling to many of 

us? How can you minimize or prevent these type of intrusions or 

shocks or disruptions to our financial markets? 

Mr. GIANCARLO. Congresswoman, if I may? 

Mrs. MALONEY. Sure. 

Mr. GIANCARLO. As I noted in my testimony, we and other wholesale brokers operate a hybrid model of execution which we call a 

melding of man and machine. It is a combination of human brokers 

and very sophisticated electronic trading technology. 

In that type of environment, the risks of the machines taking 

over, if you will, are minimized because the humans are sitting 

there side-by-side watching trading activity, and they are very experienced in the way markets work. It is almost as if you have a 

pilot in an airplane; if there is any turbulence, they could take it 

back off autopilot, take it back into manual control. 

One of the concerns we have with proposed regulations that 

would seek to impose a sort of an electronic model on a marketplace that right now operates on a hybrid model is that would exacerbate the risks of an electronic malfunction— 

Mrs. MALONEY. Okay. 

Mr. GIANCARLO. —taking the market in a direction that is unintended. 

Mrs. MALONEY. Yes, just tell me—Mr. Donahue, do you have a 

comment? Thank you. 

Mr. HENSARLING. You can be brief, sir. 

Mr. DONAHUE. Certainly, and I think we—obviously with respect 

to the NASDAQ point you make, Congresswoman, we certainly 

have taken very serious note of what happened. Obviously, we 

don’t really understand all the details. 

It is something that we are very focused on, and I would think 

most market participants are very focused on ensuring that their 

systems are safeguarded against some incident like that, so it is 

something that gets a lot of focus and a lot of attention. 

Mrs. MALONEY. Thank you. 

Mr. HENSARLING. The time of the gentlelady has expired. I wish 

to announce to the remaining members that votes are expected 

within the next few minutes. We will recognize Mr. Duffy on the 

Majority side, and Mr. Perlmutter on the Minority side. And then, 

we will have to adjourn the hearing. 

The Chair now recognizes the gentleman from Wisconsin for 5 

minutes. 

Mr. DUFFY OF WISCONSIN. Thank you, Mr. Chairman. I, too, 

want to thank the group for coming in and answering our questions 

and giving your testimony. You all look nice and tight together, 

very nice. We looked like that earlier today. 

Specifically, Mr. Reiners, I would like to ask you a few questions. 

I am also from Wisconsin, the 7th District. We like our beer in Wisconsin, and cheap beer or inexpensive beer, I should say, not cheap. 

Also, our district is home to Leinenkugel’s, which is a great employer in Chippewa Falls, Wisconsin, and they make great beer 

there. 

And so I think some questions that are relevant to the impact 

of the Dodd-Frank rules and the beer industry. If you look at the 

66 

regulations that are about to come down—is it going to be more expensive for you to enter into derivatives contracts to hedge your 

risk? 

Mr. REINERS. We do, both vanilla over-the-counter trades. We do 

futures trades. We do customized trades as I mentioned in my testimony. So should there be a change in the margin requirements 

for end users that would change the complexion of our working 

capital. It would certainly have an impact across-the-board. 

Certainly, commodities are a component of our final price and 

how we manage that price. But it is not the only factor relative to 

pricing beer. 

I have to also speak on behalf of the Coalition that these margin 

requirements that were discussed off and on really could impact 

capital investment, could impact how your working capital is employed. 

Mr. DUFFY OF WISCONSIN. And with the cost increases, potentially those would, obviously, be passed on to consumers? 

Mr. REINERS. If the marketplace—it would be up to the marketplace. 

Mr. DUFFY OF WISCONSIN. Okay. And if they are passed on, obviously, the cost of our six packs would go up, is it fair to say? 

Mr. REINERS. It would certainly have an impact on the cost of it, 

yes. 

Mr. DUFFY OF WISCONSIN. Okay. I knew that was coming. 

Mr. CAWLEY. Congressman? Excuse me, Congressman? If I could 

just go back because— 

Mr. DUFFY OF WISCONSIN. Oh, yes. I am sorry. 

Mr. CAWLEY. —there is one other cost you need to consider when 

you are considering the end user away from margin and the actual 

processing of a trade. You need to consider the execution costs as 

well, and sometimes that can go up and go down. So one thing I 

think will be interesting to look at is when a marketplace becomes 

more transparent, the execution costs actually go lower. 

There is estimated to be about $50 billion worth of execution 

costs, currently, in interest rate swaps in CDS today on an annual 

basis. And if you allow central limit order books and transparency 

into the marketplace where buyers and sellers can meet each other 

directly, those fees should tend to go down. We estimate that those 

fees could go down by as much as $30 billion to $40 billion. 

Mr. DUFFY OF WISCONSIN. In regard to the issue of transparency, 

I think everyone here would agree that companies like AIG and all 

of their contracts we should have more transparency or could have 

stopped the crisis that I think AIG played a big part in. 

But is there a concern of, say MillerCoors is entering into contracts for aluminum, and we talked about the liquidity in the marketplace with aluminum contracts. If you are entering into a contract, and it is probably a big contract—does that have an impact 

on the market if you are forced to disclose the contract that you 

are entering into? Is there a cost component with the transparency 

of end users with an over-the-counter contract? 

Mr. REINERS. —in regards to transparency, Congressman, I think 

it is really all about the details and the careful implementation of 

any new rules. We would, as a beer guy and someone who actually 

67 

uses these tools that we are talking about, the level of confidentiality is certainly critical. 

You have kind of touched on that, and I think the rules would 

allow for that, but I think the issue of additional costs, the devil 

is in the details again. We don’t want to add additional cost to the 

regulatory system because that does translate right in to our cost 

of goods sold. 

Mr. DUFFY OF WISCONSIN. Okay. And just if I could ask the 

panel one other question? If you look at what we are doing here 

with our rules, it appears that we are leading the way with reforming our rules and regulation in regard to derivatives as opposed to 

the E.U. and other Asian markets. If this raises the cost of our contracts—is it possible or feasible that we are going to see more of 

our derivatives markets go to places like Singapore and Hong Kong 

or others? 

Mr. THOMPSON. We are already hearing from clients, especially 

European clients who deal with multiple banks including our London branch—things like it is not clear to me whether we will be 

caught up in Dodd-Frank, but if we deal with Barclays or Credit 

Suisse or a European bank, we won’t be subject to this. Why should 

we take the risk of dealing with you and having to clear our contracts? 

Mr. DUFFY OF WISCONSIN. So it is— 

Mr. HENSARLING. The time of the gentleman has expired. 

Mr. DUFFY OF WISCONSIN. Thank you, Mr. Chairman. 

Mr. GARRETT. [presiding] They have just called votes on the 

Floor. We should have time to clear the two remaining members’ 

questions. 

The gentleman from Colorado is recognized for 5 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman, and I just appreciate the panel being here today waiting through all the questioning of the three previous witnesses. And I know that I have 

had a chance in the first round of Dodd-Frank to talk to at least 

the first four of you or your companies, and learned a lot in that 

process. Derivatives are something that I never expected to have 

to deal with on an ongoing basis as we seem to be dealing with it, 

but a couple of points. 

I will start with you, Mr. Reiners. We tried in that bill to limit 

margins or capital requirements for end users in connection with 

their having to deal with future risk, you guys buying barley on a 

forward basis or aluminum or whatever it might be. 

Listening to Chairman Gensler, I am comfortable that he got 

that as part of the bill. I appreciate your company’s caution that 

some regulator doesn’t get out of hand. And I think you brought 

it clearly to my attention, and I will keep an eye on it. Do you have 

indications in a rule that they are going to call and require margin 

against barley for next year? 

Mr. REINERS. No, Congressman. Thanks for the comment. I 

heard the same thing from the Honorable Chairman Gensler, and 

I had a prior personal discussion with him on this several months 

ago, and I heard the same thing here during his testimony. I have 

to say though that I think I heard some inconsistencies by some 

other participants today that give me pause. 

68 

Mr. PERLMUTTER. All right. I appreciate that, and we will keep 

an eye out and look to you guys, just something like that to advising us, so we can be a good oversight committee. 

The other thing that I am hearing though from several folks is 

that we have to take time in devising and implementing the rules, 

and I don’t think there is any question about it. But what is your 

understanding, Mr. Thompson, as to what the timing is of the rules 

from either the SEC or the CFTC? When are they going to be promulgated? 

Mr. THOMPSON. My understanding of the timing, first, with respect to the CFTC is they have already put out a draft of many 

of the 30 rulemaking work streams that they are charged with promulgating rules on there. 

And my understanding of Mr. Gensler’s timetable, based upon 

his public statements, is that he intends to have most, if not all of 

them, in place by the July 17, 2011, Dodd-Frank Title VII effectiveness date. 

Mr. PERLMUTTER. Do you think that date is not a doable date,? 

Is it premature? Is that your concern? 

Mr. THOMPSON. I think sticking to that date runs the risk of serious unintended consequences, in large part, because many of these 

issues are complex. One thing the chairman notes is that he has 

gotten a tremendous amount of input from the market. I check the 

CFTC Web site every day for the comments that come in, and I 

don’t see how they are keeping up with the information that is 

coming back in to them. 

Mr. PERLMUTTER. Let me stop you right there because we want 

to do this right, but there has to be some point where you get them 

done. I mean you can always analyze these to the nth degree. 

I would ask that both your company, JPMorgan, which is a big 

player, obviously, and SIFMA, which is a major association, speak 

on behalf of these agencies, the CFTC and the SEC to the degree 

they may need people to get stuff done. And I don’t know how you 

want to react to that, if you want to react to that or Mr. Duffy, I 

know CME has been involved in this. 

Mr. THOMPSON. I will just react by saying both JPMorgan and 

SIFMA have actively provided the comment letters to the agencies 

on a wide variety of issues where we feel that they need assistance, 

technical advice or market-based input. And again, my concern is 

that given the sheer volume of information coming in to them, I am 

concerned about their ability to— 

Mr. PERLMUTTER. —get it done? 

Mr. THOMPSON. —take a step back, analyze that, think about it 

thoughtfully, and incorporate it into the final rulemaking. 

Mr. PERLMUTTER. Mr. Duffy? 

Mr. DUFFY. I will just say really quickly and just add to what 

Mr. Thompson said, we have a huge internal legal team analyzing 

each and every one of these rules. We have huge external legal 

firms working on these rules. We can’t keep up with it. We are 

kind of perplexed. 

How in the world can a couple of Commissioners with a few staffers and their lawyers actually understand what these rules mean 

and what the effects of them could be for this country 6 months or 

6 years down the road? So we do think that the prudent thing 

69 

would be to take some time and for people to understand these in 

more detail. 

Mr. PERLMUTTER. And make sure it is properly staffed. 

Mr. THOMPSON. As an order of magnitude in following up on Mr. 

Duffy’s comments, Mr. Gensler was describing the size of his agency as roughly 400-and-some-odd people. At JPMorgan in New York, 

we have a team of about 350 people working on various phases of 

this. 

Mr. PERLMUTTER. Okay. Thank you. 

Mr. THOMPSON. It is a monumental undertaking. 

Mr. PERLMUTTER. Thank you very much, and I yield back. 

Mr. GARRETT. Thank you, and before the gentleman leaves, actually, we have a little bit more time, so I am going to yield, split 

our time— 

Mr. HENSARLING. Sure. 

Mr. GARRETT. —two-and-a-half minutes, Mrs. Biggert?. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I appreciate that. I 

have just a couple of quick questions that I would like to ask Mr. 

Duffy. The futures exchanges currently employ limits in most physically-delivered contracts to mitigate potential congestions and to 

help identify threats that might to manipulate the markets. 

It seems like there has been a proposal in the President’s recent 

Executive Order which turns this over to the CFTC. Wouldn’t it be 

better to learn to leave it back within the market rather than put 

another cost to the Federal Government? 

Mr. DUFFY. I do agree it would be best to leave it with the exchanges. We have been doing it for a number of years, and we have 

done it quite successfully. We have never had a customer lose one 

penny due to a clearing member default, and that is a 156-year 

record that we are very proud of, Congresswoman. 

So I think we have done an excellent job of managing risks when 

it comes to these types of problems as it relates to the limits. We 

have limits on all of our deliverable products, so we already have 

the limits put in place today. 

When it comes to energy, we have hard limits coming in to the 

last 3 days. We have accountability levels 30 days out on our grain 

products. They all have government-mandated limits imposed on 

them today, so these are things that are already in place today. 

So I am kind of confused on why the regulator is trying to impose 

more restrictive limits on the regulated market when Congress told 

him to go figure out how to rein in the over-the-counter market. 

And once you do that, then make sure you don’t disenfranchise the 

listed market. So we are very confused on the process the way it 

is unfolding— 

Mrs. BIGGERT. Okay. Thank you. One more quick question, and 

that is with the European Union and foreign jurisdictions, if they 

adopt a less restrictive regime, and considering what we talked 

about, I asked Chairman Gensler earlier this morning that on the 

position limits, isn’t that going to force companies to go abroad? 

Mr. DUFFY. They already have. We talked earlier about business 

going abroad. Our natural gas contract at the New York Mercantile 

Exchange that we own, once Congress—or once the rhetoric came 

out that they are going to impose these very stringent limits, we 

70 

saw a big shift of open interest from our nat gas contracts over to 

the London nat gas contract. So we definitely saw that. 

Last week or 2 weeks ago, I think it was Michel Barnier or one 

of the other European officials came out and said exactly—I just 

met with him in August. 

I met with Chairman Gensler and they said that they are going 

to be in lockstep with the United States and our regulations. This 

was back in August. I asked him when they passed Dodd-Frank in 

Europe. They don’t have Dodd-Frank in Europe. 

Also, they just came out last week and said they are not going 

to impose hard position limits on energy products, but yet they 

have the ability to do so. This is exactly what this Congress told 

our regulator to do, but our regulator looks at it in a different light. 

Mrs. BIGGERT. Thank you. 

Mr. DUFFY. Thank you. 

Mr. GIANCARLO. Congresswoman, if I could just add on foreign 

competition? We are following very closely the directives coming 

out of MiFID and others coming out of Europe, and they don’t also 

adopt the similarly restrictive approach to modes of execution for 

SEFs, that is—appear to be coming out of the CFTC. 

And we think that if Europe adopts a more flexible approach to 

intermediation by SEFs that business could also go overseas within 

that regard as well. 

Mr. GARRETT. I thank the gentlelady, and we are really—I am 

sorry. I am pressed for time here, so I will just throw out a couple 

of things to Mr. Giancarlo, with regard to the SEFs, two quick 

things. 

One is a little bit in the weeds, and it is the difference in approach with regard to the SEC and the CFTC. The SEC seems to 

me a little bit more reasonable as far as it goes. The CFTC says 

no, you have to have five quotes. So if you go out to two car dealers 

and you get prices, now you have to go out to three more before 

we are allowing you to proceed. Can you just comment on that 

briefly? 

Mr. GIANCARLO. Yes. 

Mr. GARRETT. And two, one of my opening lines here was all that 

we are doing here is impacting upon jobs and job creation. Can you 

just talk with regards to SEFs—how does this—and how do we 

quantify any of this as well? 

Mr. GIANCARLO. Sure, absolutely. The SEC has a long history of 

regulating over-the-counter markets, and as we see in their rulemaking, their approach to regulating the over-the-counter swaps 

market appears to adopt a great deal more flexibility in their approaches. The CFTC does take a more, shall I say, restrictive or 

proscriptive approach to the swaps market. It is actually dictating 

a whole series of methodologies that intermediaries need to adopt. 

In the RFQ area, you cited one, which is going out to five—having to receive five quotes, but we see that type of proscriptiveness 

running throughout a lot of the CFTC proposals, less proscriptive 

at SEC. 

And just on the issue of jobs, that is an important issue for us. 

Wholesale brokers such as ourselves employ thousands of Americans in jobs all over the country from places like Houston, Texas, 

to southern California, to right in our State, New Jersey, where we 

71 

have operations in Englewood, New Jersey, and also in the New 

York City area where our industry probably employs close to 

10,000 people. 

Their work is what we call the hybrid model where it is a combination of the human brokers and very, very sophisticated trading 

technology, technology that is licensed worldwide. But it is the 

combination of the person and the machine that gives these markets their particular nature. 

And what we are worried about is in the very proscriptive type 

of rulemaking that would require or force all of this in to an electronic-only— 

Mr. GARRETT. Right. 

Mr. GIANCARLO. —methodology that it would have a severe impact on the hiring that we do. 

Mr. GARRETT. I appreciate that, but I am just getting a buzz in 

my other ear that I have to be down on the Floor. We have to be 

on the Floor in less than 2 minutes, so I want to thank the panel 

for their answers. 

I would like to enter in to the record with unanimous consent, 

if I may, from the Wall Street Journal, an editorial dated February 

11th, entitled, ‘‘The Futures of America.’’ 

And I would also like to say that the Chair notes that some 

members may have additional questions for this panel which they 

may wish to submit in writing. And so without objection, the hearing record will remain open for 30 days for members to submit 

questions to these witnesses and to place their responses in the 

record. 

And with that being said, this hearing is adjourned. And again, 

I thank the members of this panel. 

[Whereupon, at 1:45 p.m., the hearing was adjourned.] 

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