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75–116 PDF 2012

S. HRG. 112–503 

CONTINUING OVERSIGHT 

OF THE WALL STREET 

REFORM AND CONSUMER PROTECTION ACT 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

DECEMBER 1, 2011 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

Available via the World Wide Web: http://www.fdsys.gov/ 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

DEBBIE STABENOW, Michigan, Chairwoman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

E. BENJAMIN NELSON, Nebraska 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Jr., Pennsylvania 

AMY KLOBUCHAR, Minnesota 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

PAT ROBERTS, Kansas 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

SAXBY CHAMBLISS, Georgia 

MIKE JOHANNS, Nebraska 

JOHN BOOZMAN, Arkansas 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

JOHN HOEVEN, North Dakota 

CHRISTOPHER J. ADAMO, Majority Staff Director 

JONATHAN W. COPPESS, Majority Chief Counsel 

JESSICA L. WILLIAMS, Chief Clerk 

MICHAEL J. SEYFERT, Minority Staff Director 

ANNE C. HAZLETT, Minority Chief Counsel 

(II) 

(III) 

C O N T E N T S 

Page 

HEARING(S): 

Continuing Oversight of the Wall Street Reform and Consumer Protection 

Act ......................................................................................................................... 1 

Thursday, December 1, 2011 

STATEMENTS PRESENTED BY SENATORS 

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, Chairwoman, Committee on Agriculture, Nutrition and Forestry ............................ 1 

Roberts, Hon. Pat, U.S. Senator from the State of Kansas .................................. 2 

Panel I 

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

Washington, DC; accompanied by Hon. Jill Sommers, Commissioner, Commodity Futures Trading Commission ................................................................. 4 

Schapiro, Hon. Mary, Chairman, Securities and Exchange Commission, Washington, DC ............................................................................................................. 6 

APPENDIX 

PREPARED STATEMENTS: 

Chambliss, Hon. Saxby .................................................................................... 48 

Gensler, Hon. Gary ........................................................................................... 52 

Schapiro, Hon. Mary ........................................................................................ 63 

QUESTION AND ANSWER: 

Stabenow, Hon. Debbie: 

Written questions to Hon. Gary Gensler ........................................................ 70 

Written questions to Hon. Mary Schapiro ...................................................... 84 

Roberts, Hon. Pat: 

Written questions to Hon. Gary Gensler ........................................................ 73 

Written questions to Hon. Mary Schapiro ...................................................... 85 

Chambliss, Hon. Saxby: 

Written questions to Hon. Gary Gensler ........................................................ 76 

Written questions to Hon. Mary Schapiro ...................................................... 90 

Grassley, Hon. Charles: 

Written questions to Hon. Gary Gensler ........................................................ 79 

Thune, Hon. John: 

Written questions to Hon. Gary Gensler ........................................................ 80 

Written questions to Hon. Mary Schapiro ...................................................... 94 

Gensler, Hon. Gary: 

Written response to questions from Hon. Debbie Stabenow ......................... 70 

Written response to questions from Hon. Pat Roberts .................................. 73 

Written response to questions from Hon. Saxby Chambliss ......................... 76 

Written response to questions from Hon. Charles Grassley ......................... 80 

Written response to questions from Hon. John Thune .................................. 80 

Schapiro, Hon. Mary: 

Written response to questions from Hon. Debbie Stabenow ......................... 84 

Written response to questions from Hon. Pat Roberts .................................. 85 

Written response to questions from Hon. Saxby Chambliss ......................... 90 

Page

IV 

Schapiro, Hon. Mary—Continued 

Written response to questions from Hon. John Thune .................................. 94 

(1) 

CONTINUING OVERSIGHT 

OF THE WALL STREET 

REFORM AND CONSUMER PROTECTION ACT 

Thursday, December 1, 2011 

UNITED STATES SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, 

Washington, DC 

The committee met, pursuant to notice, at 10:07 a.m., in Room 

106, Dirksen Senate Office Building, Hon. Debbie Stabenow, Chairwoman of the committee, presiding. 

Present or submitting a statement: Senators Stabenow, Conrad, 

Baucus, Nelson, Brown, Klobuchar, Gillibrand, Roberts, Chambliss, 

Johanns, Boozman, Grassley, Thune, and Hoeven. 

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR 

FROM THE STATE OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

Chairwoman STABENOW. Good morning. Thank you for being 

here. We thank our witnesses this morning. This is the Committee 

on Agriculture, Nutrition and Forestry. We will call the meeting to 

order. 

Today’s hearing is part of this committee’s continuing oversight 

of the Wall Street Reform and Consumer Protection Act. We know 

why reform was needed. The collapse of the financial industry cost 

taxpayers hundreds of billions of dollars and we lost eight million 

jobs. We passed Wall Street Reform to prevent systemic failures 

and to ensure that taxpayers are never again asked to bail out our 

financial institutions. 

Wall Street Reform addressed four key areas: Systemic risk, full 

accountability and transparency, greater consumer protections, and 

better capitalization for the largest, most systemic institutions. The 

priority all along has been to protect consumers and to ensure that 

consumers can trust the integrity of our financial markets. 

The crisis in Europe is a reminder of how important it is to get 

these rules done and to get them done right. We have already seen 

with the bankruptcy of MF Global how dangerously exposed our 

economy is to what is happening in Europe. The implications of 

this cannot be overstated. 

Chairman Gensler, Chairman Schapiro, as you work to finalize 

all of the rules, I encourage you to harmonize your rules with each 

other and other prudential regulators, working closely with your 

global counterparts. We need a consistent set of rules, not conflicting or duplicative regulations. 

2 

And as you both know, a priority for me and many members of 

this committee has been protecting commercial end users—farmers, 

ranchers, manufacturers, co-ops, others who use the swaps market 

to hedge legitimate business risk. We put protections in place in 

Wall Street Reform for those end users and regulators, in my judgment, must follow Congressional intent. 

The Wall Street Reform Act is bringing transparency and accountability to over-the-counter swaps for the first time. The MF 

Global bankruptcy underscores the importance of having effective 

oversight in all of our financial markets. We need these markets 

to function properly, and we need consumers to have faith in them. 

MF Global’s customers included farmers, ranchers, co-ops, small 

businesses, and individuals who use these markets to hedge their 

business risk. They believed their money would be handled appropriately. They believed that the markets would function properly. 

They believed in the guiding principle of these markets, that their 

money would be kept separate from the firm’s money. 

Now their confidence is shaken and MF Global’s customers are 

understandably very angry. With hundreds of millions of dollars of 

customers’ money missing, maybe more than a billion dollars, it is 

clear that something went terribly wrong. As the committee continues to investigate this bankruptcy, we will be asking where the 

money is, how to get customers their money back, whether the 

bankruptcy was preventable, and whether the rules were appropriately crafted to protect customers’ money. 

I want to thank our witnesses today. You have been before us before. We appreciate very much your willingness on an ongoing 

basis to be with us, Chairman Gensler and Chairman Schapiro. I 

also appreciate that Commissioner Sommers is here to respond to 

any questions that Chairman Gensler feels he cannot answer about 

the MF Global bankruptcy. I appreciate the time and effort all of 

you have put into writing these rules, and we realize the task that 

we gave you, and for being here and being available to the committee. 

At this point, I would turn to my friend and our Ranking Member, Senator Roberts. 

STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE 

STATE OF KANSAS 

Senator ROBERTS. Well, thank you, Madam Chairwoman. I appreciate your calling this hearing today. CFTC oversight, as you 

have indicated, is a critically important function of this committee. 

Our last hearing on this subject was about six months ago, and in 

light of recent events, I am looking forward to hearing from our 

witnesses for an update on how our regulatory authorities are coordinating their efforts with regard to the Dodd-Frank legislation. 

It is time to get back, as you have indicated, to the core fundamentals over at CFTC. Congress created the agency back in 1974 

to make sure the use of risk management tools, such as futures 

markets, were safe and secure for all of the participants. Unfortunately, in response to the financial crisis, the CFTC, in my view, 

has been off on a series of tangents, proposing one regulation after 

another. 

3 

Meanwhile, back at the ranch, for the first time ever, we have 

a major problem—a major problem—with one of our larger Futures 

Commission merchants. I am referring, as the Chairman has indicated, as well, to the collapse and bankruptcy of MF Global, the 

seventh or eighth largest bankruptcy in United States history, a 

collapse that occurred under the leadership of one of our former 

colleagues, Jon Corzine, and under the watch of the Commodity 

Futures Trading Commission headed up by Chairman Gary 

Gensler, also a former colleague of Mr. Corzine at Goldman Sachs. 

On behalf of many investors, agri-businesses, farmers, ranchers, 

and their bankers across the country who are caught up in the 

events surrounding MF Global’s bankruptcy, I want to thank the 

Chairwoman again for agreeing to schedule a hearing on December 

13 for this committee to hear from the key players. Through no 

fault of their own, folks in Kansas, Michigan, all across the country, have been severely damaged economically by the actions and 

subsequent bankruptcy of MF Global. They want to know what 

happened and see that it does not happen again. But more importantly, they want to know what is being done to get this money 

back in the hands of rightful owners as soon as possible. We must 

find out what happened with MF Global and we must do so in a 

manner that restores faith in the futures markets and maintains 

them as a legitimate trusted risk management option for numerous 

producers and small businesses. 

Madam Chairwoman, we cannot look past the critical oversight 

issues we must address regarding Dodd-Frank. I know that, and 

there are many. However, MF Global is the most pressing issue 

facing us today. Thousands of our constituents are looking at the 

possible loss of hundreds of millions of dollars and it has nothing 

to do with Dodd-Frank. We are getting more calls today in my 

home State of Kansas on this issue than we are having on the farm 

bill. 

For many decades, the futures market has served as a way for 

agriculture producers and numerous small businesses to hedge 

risk. Without this ability, many could not stay in business. 

Throughout those decades, they have never once questioned the 

stability of the futures market until now. We need to get to the bottom of exactly what happened with MF Global. The lead in those 

efforts should be the CFTC and Chairman Gensler. I know that the 

CFTC is working hard, and I know Chairman Gensler has tried to 

step aside or be a nonparticipant or be recused and not let his past 

ties to Mr. Corzine create questions about the CFTC role in this 

process. 

Unfortunately, the manner in which Mr. Gensler chose to step 

aside or recuse himself has raised more questions than it has answered. Why did he not recuse himself from MF Global issues from 

the beginning of his term if there was a conflict based on his previous relationship? Why did he wait until November 3 to decide he 

should step aside instead of doing it immediately on October 31, 

when everything came unraveled and MF Global declared bankruptcy? Why did it take the Chairman another five days to provide 

a recusal letter to his agency ethics officer? And why did it take 

him an additional two weeks to provide me a copy of that letter 

after I had requested it twice? 

4 

We must restore faith in the futures market so that our ranchers 

and farmers and small businesses can again know they can use futures to provide the risk management they so desperately need. 

This task and understanding what happened with MF Global must 

be our top priorities. A key first step on this path will be getting 

a better understanding today from Mr. Gensler on the answer to 

many questions that I have outlined. 

Madam Chairwoman, I again thank you for holding this hearing 

and for an additional hearing you have scheduled on MF Global for 

December 13. 

Chairwoman STABENOW. Thank you very much, Senator Roberts. 

As is the custom of the committee, we will ask members to submit opening statements for the record so we can move to our witnesses today. 

We have two distinguished witnesses who have been with us before. We are well aware of your distinguished backgrounds and appreciate again having your time and effort coming forward in cooperating with the committee. 

So we will first start with Chairman Gensler, and we would ask 

you keep your statements to five minutes and then we will turn to 

Chairman Schapiro. Thank you. 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, 

DC; ACCOMPANIED BY HON. JILL SOMMERS, COMMISSIONER, COMMODITY FUTURES TRADING COMMISSION 

Mr. GENSLER. Thank you, Chairwoman Stabenow, Ranking 

Member Roberts, members of the committee. I am pleased to testify 

on behalf of the CFTC. I am also glad to be here with Chairman 

Schapiro and CFTC Commissioner Jill Sommers. 

Three years ago, both the financial system and the financial regulatory system failed, and as the Chairwoman said, more than 

eight million Americans still have lost their jobs and many Americans are struggling. And swaps played a central role in the crisis. 

There were other causes, as well. But swaps so important for managing and lowering risk for end users across this land also concentrated risk within the financial system. 

In response, Congress and the President came together and 

passed Dodd-Frank. The CFTC is now working to complete DoddFrank rules thoughtfully, not against a close. The CFTC has actually benefited from public comment, over 25,000 comments, 1,100 

meetings, 14 roundtables. 

What have we done? We have substantially completed the proposal phase earlier this spring and we turn the corner to finalizing 

rules. We finished 18 rules but have a full schedule in front of us 

the rest of this year and well into next year. Each of the final rules 

have benefited from careful considerations of cost and benefits, and 

we appreciate all that people have sent in on that. 

Just mentioning a few of the key rules we have completed, large 

trader reporting for physical commodity swaps, registration of the 

data repositories themselves, aggregate position limits, and risk 

management for the clearinghouses themselves. We have also finished rules giving the Commission more authority to prosecute 

wrongdoers that recklessly manipulate markets. 

5 

And next week, on Monday, we are going to take up a number 

of rules, one of them considering enhanced customer protections regarding the investment of customer funds, and we will look soon 

to finish rules on segregation of customer funds for cleared swaps. 

Segregation of funds is at the core foundation of the customer protection regime, as both the Chair and the Ranking Member noted, 

and both of these rules that we will take up shortly, I think, will 

help enhance the critical safeguards to customers. It will not be 

enough, though, and we are continuing to review all of our rule 

sets and audit and examination programs. 

In addition, the Commission will consider rules next Monday 

with regard to registering foreign boards of trade. 

Moving forward, we are working to finish shortly key transparency rules, including specific data to be reported to regulators 

through data repositories that will give the public more critical information. And as mandated by Dodd-Frank, we are working closely with the SEC on key definitions, definitions of swap dealer and 

swap which we hope to complete early next year. 

The Dodd-Frank Act gives non-financial end users the choice of 

whether or not to use central clearing, the so to speak end user exception. Consistent with Congressional intent, and I think it is 

clear what Congressional intent is on this, the CFTC’s margin proposal states that non-financial end users will not be required to 

post margin for uncleared swaps. The swaps market and the futures market are meant to be there so end users of all sorts can 

hedge risk, lock in a price of corn, wheat, or a rate, and then focus 

on what they do best and not be brought into the margining or 

clearing and so forth. We are conscious of that. We are dedicated 

to it. 

The Commission is actively coordinating internationally to promote consistent standards. For instance, next week, Chairman 

Schapiro and I will be meeting with our counterparties over in 

Paris. Counterparties from Asia and Canada are also coming. I 

know Commissioner Sommers also heads up our Global Markets 

Task Force and we work closely trying to get this consistent around 

the globe. 

I also anticipate the Commission will explicitly week public input 

on what is called the extraterritoriality application of Dodd-Frank, 

or there is a Section 722(d) was the specific section. 

As we finalize rules, let me just say we do need additional resources. With just 700 staff members, we are about ten percent 

larger than we were at our peak in the 1990s, and since then, the 

futures market has grown fivefold and Congress has given us this 

new task to look at a market that is seven times greater than that 

fivefold market, or roughly $300 trillion in size. Without sufficient 

funding, the nation cannot be assured the CFTC can oversee the 

futures and swaps markets and enforce the rules to promote transparency and critically to protect the public, whether it is protecting 

customer funds or protecting against systemic risk. 

Furthermore, the current debt crisis in Europe is just but a stark 

reminder that we need to complete financial reform and have adequate resources for the CFTC. Far more costly might be if the public were to maintain—to remain unprotected from the risks of the 

swaps market. 

6 

I thank you. 

[The prepared statement of Mr. Gensler can be found on page 52 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Chairman Schapiro, welcome. 

STATEMENT OF HON. MARY SCHAPIRO, CHAIRMAN, 

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, DC 

Ms. SCHAPIRO. Thank you very much, Chairwoman Stabenow, 

Ranking Member Roberts, and members of the committee. Thank 

you for inviting me to testify today regarding implementation of 

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

As you know, title VII primarily relates to the regulation of overthe-counter derivatives, creating an entirely new regulatory regime 

and directing the SEC to write a number of rules designed to bring 

greater transparency and oversight to this market. Since its enactment in July 2010, the SEC has proposed or adopted more than 

three-fourths of the many rules required by the Dodd-Frank Act 

and we continue to work diligently to implement all provisions of 

title VII. 

As part of that effort, we have engaged in an open and transparent process, seeking input from interested parties throughout. 

Our Commissioners and staff have met with a broad cross-section 

of market participants. We joined with the CFTC to hold public 

roundtables. We have been meeting regularly with other financial 

regulators to ensure consistent and comparable definitions and requirements across the rulemaking landscape. 

In addition, as Chairman Gensler mentioned, next week, we are 

convening with the CFTC and the European Securities Markets 

Authority a meeting of international regulators to talk through the 

status of derivatives regulation implementation in other jurisdictions and to address cross-border issues that are arising. We are 

working closely with foreign regulators to adopt consistent approaches to OTC derivatives market regulation that will both reduce cross-border risks to the financial system and address domestic U.S. competitiveness concerns. 

To date, the SEC already has proposed rules in 13 areas required 

by title VII, including rules that would prohibit fraud and manipulation in connection with security-based swaps; address potential 

conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and exchanges that trade security-based swaps; specify who must report security-based swap 

transactions, what information must be reported, where and when 

it must be reported, and what information will ultimately be disseminated to the public; require security-based swap data repositories to register with the SEC; define security-based swap execution facilities and establish requirements for their registration and 

ongoing operations; specify information that clearing agencies 

would provide to the SEC in order for us to determine which swaps 

must be cleared, and specify the steps that end users must follow 

to rely on the exemption from clearing requirements; establish 

standards for how clearing agencies should operate and be govVerDate Nov 24 2008 12:46 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\75116.TXT MICHA
7 

erned; impose certain minimum business conduct standards upon 

security-based swap dealers and major security-based swap participants when those parties engage in security-based swap transactions; and establish registration procedures for security-based 

swap dealers and major market participants. 

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

the further definition of the key terms within the Dodd-Frank Act, 

including swap, security-based swap, swap and security-based swap 

dealers, and major market participants. 

In the coming months, we expect to propose the last of our title 

VII rules regarding capital, margin, segregation and recordkeeping 

requirements for security-based swap dealers and swap participants. 

In addition, because the OTC derivatives market has become a 

truly global market, we are evaluating carefully the international 

implications of title VII. Rather than deal with these implications 

piecemeal, we intend to address the relevant international issues 

holistically in a single proposal. 

After proposing all of the key rules under title VII, we will seek 

comment on an implementation plan that will facilitate a rollout of 

the new requirements in a logical, progressive, and efficient manner that minimizes unnecessary disruption and cost to the markets. 

In conclusion, 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 formation. As we 

proceed, we look forward to continuing to work closely with Congress, our fellow regulators, and members of the financial community, affected end users, and the investing public. 

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

plans for implementation, and I look forward to answering your 

questions. 

[The prepared statement of Ms. Schapiro can be found on page 

63 in the appendix.] 

Chairwoman STABENOW. Thank you very much to both of you. 

As we begin, we do intend to do more than one round of questions today, so I will ask my colleagues to remain within the fiveminute time frame for each round and we will do at least two, and 

depending on interest and time, we can go from there. 

Before I ask my opening questions, though, I know that Senator 

Brown has to preside, so on behalf of all of us, we thank you for 

presiding over the Senate and I will yield to you for a moment to 

submit some questions for the record. 

Senator BROWN. Thank you. Thank you, Madam Chair. I actually 

would—I have to leave in a few minutes, but thanks for that, and 

I would just like to say a few words and ask a question now and 

they can answer it either now or later, whatever works. Thanks, 

Madam Chair. 

Chairwoman STABENOW. Sure. 

Senator BROWN. First of all, thank you for your public service, 

both of you, Mr. Chair, Madam Chair. I appreciate that. 

As we know, the MF Global episode is just the latest example of 

the dangers of inadequate oversight. In 1984, a downturn in the 

8 

energy markets caused the failure and bailout of the bank Continental Illinois. The 1998 crisis in East Asia and in Russia caused 

the failure and bailout of the hedge fund Long Term Capital Management. And more recently, the mortgage market caused the failure and bailout of many of our most prominent financial institutions. So there are many lessons. 

One of the lessons is not all crises, of course, not all crises are 

exactly the same. That is why we need to give the market watchdogs adequate resources so they can oversee these markets and 

prevent, or at least minimize, the damage of the next potential crisis. That means giving CFTC the necessary funding to carry out 

both the great responsibilities we have given them in the DoddFrank Act and the everyday responsibilities to supervise derivatives markets. Trading volume, for instance, increased 400 percent 

from 2000 to 2010, while CFTC staff increased nine percent, completely apart from, previous comments notwithstanding, completely 

apart from Dodd-Frank. 

Wall Street allies in Congress, and there are far too many of 

them, are trying to cut funding because they do not like the idea 

of greater oversight and transparency of these markets. As we have 

seen in MF Global, this is a dangerous game, this cynical, almost 

Orwellian contention that the financial crisis was because of too 

much government and the dangerous game because of underfunding agencies that need to be watchdogs. It puts at risk the 

companies in States like Ohio and Michigan that Senator Roberts 

mentioned. It puts those companies at risk in those States that use 

these markets. 

So a couple of questions, Mr. Chairman, if I could ask you. What 

sort of decisions will CFTC have to make with regard to its priorities in this funding situation, what you can project? What are the 

implications of these decisions for your role in overseeing markets? 

And third, can you effectively implement Dodd-Frank at that funding level? If you could sort of pull all three of those together. 

Mr. GENSLER. It is a challenge. I think that we will be successful, 

or, I say, largely successful completing the rule set, but we will not 

have the people to help oversee the market or even answer all the 

questions that people have, the hundreds if not thousands of questions, interpretation, registration, applications, and that is a challenge for us. Congress just increased our funding by $3 million for 

this coming year we are in right now, but ringfenced $18 million 

additional dollars for technology, and we sorely need more money 

for technology, but the arithmetic means we have to find $15 million of cuts elsewhere because they took the top line up three and 

ringfenced $18 million elsewhere. 

This means we will not do things. We currently—there are many 

things we should do already that we are not doing, like annual examinations of the clearinghouses. We do not yet do that. We do not 

have on-site people. We do not, as the recent questions—we rely on 

the self-regulatory organizations to examine what is called Futures 

Commission Merchants. We do not individually go in there. That 

is the routine we have. 

So there is a lot that we probably will not do, but we will be able 

to complete the rules, largely. I mean, it is a human exercise. 

9 

Maybe some will not get done. But we will complete the rules but 

not have the people to oversee the markets. 

Senator BROWN. Do you, Chairman Gensler—MF used window 

dressing tactics, this sort of repo to maturity, borrowing client 

funds against its sovereign bond investments to mask its exposure. 

Its auditor, CME, did not detect these actions until, frankly, too 

late, apparently. Your fellow Commissioner Chilton said that you 

have the authority to conduct deep data dives into companies. Have 

you directed your staff to use that authority? Do you agree with 

Commissioner Chilton that you do have that authority, and second, 

are you doing that? 

Chairwoman STABENOW. I would ask you to be brief in your answer. 

Mr. GENSLER. I am not familiar with his quote, but we do have 

general authority to ask for data from Futures Commission Merchants, and what we are doing right now is doing, along with the 

CMA, a limited review of all the Futures Commission Merchants 

about their segregated accounts. 

Senator BROWN. Okay. 

Mr. GENSLER. We hope to complete that by the end of this 

month. 

Senator BROWN. Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much, and we will now 

move back to regular order. 

As we look, to both Chairman Gensler and Chairman Schapiro, 

when we look at all of the issues involved, in some ways, it is hard 

to know where to begin in terms of the questions. But one thing 

that bothers me is that MF Global’s collapse has shattered the 

faith of many in the futures markets. I am very concerned that customers are now questioning whether they will ever use the futures 

market to manage risk again. The protection of segregated customer funds, as we have mentioned, has been a cornerstone of the 

futures industry for years, but the MF Global situation has brought 

all of that into question. Customers were shocked to find out that 

their money could be invested without their consent. And it is even 

more shocking that certain risky transactions were considered permissible investments. The idea of sacred segregated customer funds 

has really been thrown out the window. 

Chairman Gensler, you have spoken about the fact that there are 

rules that you have looked at that would limit the permissible investments of customer funds. They have been looked at earlier this 

year. You are now having a meeting next week. But my first question is, why has the rule not been finalized up to this point? Have 

there been disagreements among the Commission, the Commission 

members regarding the rule, and if so, can you explain those disagreements? 

Mr. GENSLER. We in October of 2010 proposed enhancements to 

the investment of customer funds. I have personally consistently 

felt that we need to do it. It is not necessarily just Dodd-Frank. 

And we have a very busy agenda. We did provide such final drafts 

to Commissioners this summer and there was still continued debate, so I chose to continue to have the dialogue with my fellow 

Commissioners. But I think next Monday, we will take this up. 

Segregation is the key foundation of this and I think it is imporVerDate Nov 24 2008 12:46 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\75116.TXT MICHA
10 

tant that we limit how funds can be used, as Congress intended. 

The statute only allows investments in Treasuries and three or 

four other areas and this would really narrow an earlier exemption 

that in 2005 the Commission granted. 

Chairwoman STABENOW. And is your expectation that the rule 

will be adopted next week? 

Mr. GENSLER. I think it would be fair that I let the process go, 

that Commissioners vote on Monday and I not get ahead of individual Commissioners. But I certainly scheduled the vote hoping 

that they would have that support. But there still may be some deliberation. 

Chairwoman STABENOW. Thank you. 

I would like to ask both of you about the question of red flags, 

both with MF Global but broadly as we look at the companies 

under your jurisdiction. MF Global was a significant player in the 

global futures markets, significant customer base. It was also an 

example of a company with a history of problems. And so, broadly, 

looking at companies, using this as an example, the CFTC fined 

this particular company in 2009 for risk supervision failures, including a $141 million trading loss on wheat futures. We have documents that show 35 regulatory actions taken by FINRA against 

MF Global. Also, MF Global’s annual report filed earlier this year 

indicated dangerous leverage and risky exposures to European debt 

crisis, and I have great concern about the implications for other 

companies, as well, if we are going to see other companies in the 

same situation. 

But these are very serious red flags and examples. So as we look 

broadly at this kind of an example, for companies like this with 

this kind of a record, should there be more oversight, such as additional disclosures or more frequent audits that could identify problems before they are too late? And where do we go with this at this 

point? And, Chairman Schapiro, I would ask you to respond first. 

Ms. SCHAPIRO. I would be happy to. Thank you. Let me just say 

that, by comparison, the securities business at MF Global was 

quite small. There were only 400 active securities accounts. But 

nonetheless, FINRA, which is the self-regulatory organization upon 

which the SEC relies in large measure for broker-dealer oversight, 

had been in the firm over the summer, quite concerned about 

whether there was sufficient capital supporting the repo to maturity transactions which involved the sovereign debt and required 

the firm to increase its capital levels. The firm actually appealed 

that to the SEC and we supported FINRA’s decision that they 

needed to infuse capital into the firm at that time. 

I will say that while our equivalent of the segregation rules, 

15c3–3, are also quite strong rules and are a foundation of brokerdealer solvency and customer protection, we are also looking at 

whether there are additional rules that ought to be in place on the 

securities side. One that we actually proposed earlier this year that 

I hope the Commission will take up and finally adopt relates to the 

requirement for a more regular audit by a Public Company Accounting Oversight Board registered auditing firm of the custody 

arrangements that broker-dealers have. We put in place two years 

ago a similar rule with respect to investment advisors post-Madoff. 

We have now proposed to extend that toe broker-dealers and we 

11 

think that such a rule that would look very carefully through the 

leverage of a third party accounting firm at whether a firm is complying with its financial responsibility rules could be very helpful. 

I will also say that FINRA recently put in place requirements for 

qualifications exams and registration of back office personnel, 

which I think would be very useful in the context of a situation like 

this, and they filed with us and it is now out for comment some 

additional rules for more detailed financial reporting that I think 

would also have been very helpful in monitoring the situation here. 

But I think that FINRA was there in the summer, supported by 

the SEC. 

Chairwoman STABENOW. Thank you very much, and in the interest of time, my time is up, so Chairman Gensler, I will come back 

to you at a later point to answer that question. I am going to turn 

to Senator Roberts. 

Senator ROBERTS. I thank you, Madam Chairman. 

Chairman Gensler, as I mentioned in my opening remarks, I had 

several questions pertaining to the Commission’s development of 

the new Dodd-Frank regulations. Thank you for your call the other 

day. We went over possibly five rulemaking issues and I appreciate 

that conversation. But before I get to those, I would appreciate 

clarification of your role—we may have to do that on the second 

round, maybe third round—in the events surrounding MF Global’s 

bankruptcy. When did you first know there was a problem with MF 

Global? 

Mr. GENSLER. I think as the week of October 24 developed, staff 

briefed our Commission, I think it was probably Wednesday. We 

normally have a briefing Wednesday, and then we had another 

briefing Friday of that week. 

Senator ROBERTS. Then that confirms my understanding that MF 

Global was downgraded on October 24, obviously, that Monday. Did 

that raise a real red flag at the Commission? Did you feel that this 

was a very serious problem at that time? 

Mr. GENSLER. Well, I understood that staff had increased monitoring. Other regulators and the CFTC were in contact increasingly 

as that week ended and into the weekend, and with the key focus 

being the protection of the customers and moving the customer positions in the funds throughout that weekend. 

Senator ROBERTS. All right. I understand the CFTC had staff in 

Chicago from Wednesday, October 26, through Friday, the 28th, 

looking into MF Global’s segregated funds. This tells me the CFTC 

had very serious concerns about these accounts five days before the 

bankruptcy. I also understand CME reconciled the segregated accounts on Wednesday. You folks were in your offices looking at the 

same accounts through Friday. Yet on Monday, almost a billion 

dollars was missing from these accounts. 

Now, this leads to several questions. What involvement to date 

have you had with MF Global, both since they began to deteriorate 

and regarding regulatory issues that might have affected their 

business prior to their bankruptcy? 

Mr. GENSLER. My involvement, sir, over that weekend, along 

with the regulators from the SEC and international regulators, was 

the focus on moving customer positions and ensuring the customers 

12 

were protected. There was a series of calls, particularly on Sunday, 

with that regard. 

Senator ROBERTS. Well, then why—given that, why did you step 

aside or, as you have said, step aside or recuse or non-participate, 

I am not too sure which one it is, as you have said previously, from 

MF Global issues? 

Mr. GENSLER. I had reached out to the agency ethics officers and 

General Counsel of the agency during that week of October 31 and 

they ensured me that there were no legal or ethical reasons that 

I needed to non-participate. But I told the General Counsel that 

Thursday that I thought that it would be best not to be a distraction to the really important work of this talented staff at the 

CFTC—— 

Senator ROBERTS. But why would it be a distraction? 

Mr. GENSLER. I just thought just there were—I had left Goldman 

Sachs 14 years ago, and though I had worked on Sarbanes-Oxley 

in 2002, a Senator at that time but then subsequently the CEO of 

the firm had worked a bit back in 2002, and the lawyers had assured me there was no reason—no legal or ethical reasons, but I 

thought it could be a distraction in the media and the press, and 

as that Thursday came, we were about to have a Friday closed-door 

surveillance meeting that we have that has been true for 30-plus 

years at the agency and I thought I should stand aside when it was 

clean and before the closed-door surveillance started to get into 

these very important matters of where is the money. 

Senator ROBERTS. Well, if you thought it was best to remove 

yourself from matters involving MF Global during its demise and 

you thought that would be a distraction because of your relationship with Mr. Corzine, Senator/Governor Corzine, why did you not 

remove yourself from all issues involving MF Global? Did something in your relationship change? 

Mr. GENSLER. No. What had changed was that there was a developing enforcement investigation specific to possible civil and criminal actions. 

Senator ROBERTS. I appreciate that. The time line surrounding 

your statement of non-participation is a little confusing to me. Your 

response to my letters raises questions about who was in charge of 

the work in the early days of this event. 

According to your letter, you notified your General Counsel that 

you would not participate in enforcement matters. Why did you 

come to this realization on November 3? As you have indicated, October 24 was the first big red flag, although there had been earlier 

indications that would be a problem. Had you not been participating in official CFTC actions regarding MF Global before this 

date? 

Mr. GENSLER. As I said, over those last days of the week and the 

weekend, along with other regulators from the SEC and around the 

globe, we were focused on really, first, monitoring, two, moving positions, and three, ensuring against any systemic risks. As it 

turned into potential enforcement, civil and criminal, and before 

the surveillance meeting that Friday, I was ensured by the General 

Counsel and the ethics folks their views, but I also indicated that 

I thought it could be a distraction for the really talented career 

staff doing their work—— 

13 

Senator ROBERTS. I appreciate that. 

Madam Chairman, I am over on time and we have other members here, but I want to continue this line of questioning at least 

for a short time before we get to the rulemaking questions and I 

appreciate that. Thank you. 

Chairwoman STABENOW. Thank you. 

Senator Baucus. 

Senator BAUCUS. Thank you, Madam Chairman. 

I would like you both to know, and I know you already know, 

that this is not an academic exercise for a lot of people. I am speaking about farmers and ranchers who legitimately hedge, want to 

lock in a price, a very common transaction, common exercise. It is 

what they do to help manage their operation as good businessmen 

and women. 

There is one fellow in Montana and his name is Marty Klinker. He has lost 300—actually, he had $336,000 in liquid assets at MF 

Global and 108,000 open trades with MF Global. As of this date, 

he has received about 60 percent. He is about 40 percent out. And 

the prospects for Marty getting the rest of his funds back are pretty grim, it seems. He legitimately is very put out. 

[The Hon. Max Baucus submitted an addendum for the above 

statement] 

[I would like to submit an addendum to my statement 

from the Agriculture, Nutrition, and Forestry Committee 

hearing that took place on December 1, 2011. I would like 

to clarify the amount of money that Montanan Marty 

Klinker has gotten back from his MF Global accounts. In 

my statment, I said Marty had received 60 percent of his 

money back. That is the amount he has received from his 

cash accounts. The amount he had received back as of December 1, 2011 from his open trade account was 20 percent. This is an important distinction and it should be 

noted in the official record.] 

There is a Grain Growers Convention going on in Montana as we 

speak and the talk there is not the farm bill. It is not anything 

else. It is MF Global and farmers there who have lost a good portion of their assets with MF Global, and they are a bit angry, and 

they should be angry. 

I mean, look what has happened. Right now, public opinion of 

Washington, D.C., is at an all-time low. Look what happened with 

the 2008 financial collapse. How can ordinary folks trust Washington with their money? How can they? I think, frankly, that the 

2008 debacle is very simply explained. It is just a bunch of greed 

without sufficient adult supervision. I mean greed up and down the 

lines, from the mortgage brokers, the bankers, and so on and so 

forth, and insufficient regulations, insufficient adult supervision, 

whether it is private supervision or government supervision. 

And here is a case where Marty, for example—and he is not 

alone—has lost a lot of money. He trusted the system and the system let him down. So how is Marty going to get— and other farmers and ranchers—how are they going to get their money back? 

And what can you say to Marty? What can you say to farmers 

around the country that, hey, you can still trust the system, you 

know, trust us? I mean, this is a pretty simple violation, it seems 

14 

to me, just as the failure to segregate accounts. That is basic and 

even something as basic as that was not honored by the company, 

by the self-regulator, and even by CFTC and the other appropriate 

agencies here. 

So, number one, when is Marty going to get his money back, and 

how much of it is he going to get back? And what can you say to 

farmers and ranchers and others who legitimately hedge as a good 

business practice and who are not being protected when agencies 

are not looking sufficiently at these companies to make sure that 

companies are doing what they are supposed to be doing? 

Mr. GENSLER. I think, as I am not participating in the specific 

matter, I might have to defer part of your question to CFTC staff 

or Commissioner Sommers, but if I could just generally say that I 

think you are absolutely right. The system has to work for the 

farmers and ranchers and energy companies and all of the people 

that need to lock in a price and segregation is at the absolute core 

of this system that has been existent for decades. Now, we do rely 

on self-regulatory organizations, and we are looking at every piece 

of the CFTC, with Commissioner Sommers’ help where I am not 

participating, but looking at every piece of the CFTC on how the 

audit function works and whether we should adopt some of what 

the SEC has, that there has to be a separate audit of the segregated accounts, how the examination function, which we do not 

actually do the examination, it is done at the self-regulatory organizations, as well—— 

Senator BAUCUS. But just basic, ordinary English. You are out at 

the Grain Growers Convention and the farmers there are asking 

you, Commissioner Gensler, what can you tell me that can reassure 

my trust that I can hedge and next year that my funds are protected? 

Mr. GENSLER. Uh—— 

Senator BAUCUS. What can you tell me? What assurance can you 

give me in plain English, what are you going to do, in the basic 

way people talk? 

Mr. GENSLER. Umm, what we are doing at our agency is turning 

over every rock in every corner as to our rules and what we can 

do better and being self-reflective because we know that this has 

to be better. These funds have to be separately segregated. I think 

that probably we need more transparency where these Futures 

Commission Merchants have to tell their customers where they are 

putting the money, as well. We are actually tightening up rules 

next week on how they invest the money that they get—— 

Senator BAUCUS. Do you think the current rules are insufficiently loose on—— 

Mr. GENSLER. Yes, I did in October of 2010 when I supported a 

rule to change investment of customer funds—— 

Senator BAUCUS. You think so today, too? 

Mr. GENSLER. What is that? 

Senator BAUCUS. You think so today, too—— 

Mr. GENSLER. I think what we might do next Monday will help, 

but yes, I think so. I think we have to tighten up something about 

use of money. You could actually since 2005 use customer money 

and lend it to another part of an affiliate or in-house at the same. 

You could lend it to the proprietary trading side of a firm. You 

15 

would have to get collateral back. It is called—something called repurchase agreements. But I think we need to tighten that up and 

I have felt that since October of 2010. 

Senator BAUCUS. Well, I just urge you—I mean, I do not want 

to over-dramatize this, but, you know, we are the hired hands. We 

are the employees, you and I. The employers are the people who 

work for it in the country and they want us to, as employers, to 

do what we are supposed to be doing, and that is making sure that 

there is an orderly procedure here and that their accounts and sufficiently protected. They will gamble, I mean—that is not the 

word— they will hedge, they will take that risk, that is legit. They 

want to make sure that their funds are in the appropriate account 

and somebody is not taking advantage of them by the proprietor 

taking their funds for their own account. 

Chairwoman STABENOW. Thank—— 

Senator BAUCUS. And they want you to make sure you are taking 

care of them. 

Chairwoman STABENOW. Thank you very much. Well said. 

Senator Grassley. 

Senator GRASSLEY. Thank you, Madam Chairman. 

Chairman Gensler, first of all, thank you for your forthright 

recusal and thank you for the gentlemanly conversation you had 

with me on that subject. 

I want to follow on where Senator Roberts left off. What specific 

event caused the CFTC staff concern with MF Global that week of 

October 21—no, October 24? As you had mentioned, staff concerns 

were raised at the beginning of that week. 

Mr. GENSLER. I am doing this from memory, sir, but I thank you 

for your thanks. It was a good conversation we had on that week 

about my not participating. 

Senator GRASSLEY. Sure. 

Mr. GENSLER. As I recall, the firm was downgraded by a rating 

agency, but I think it was Wednesday, the 26th, that staff first 

briefed us in our regular weekly briefing meetings they had been 

downgraded. I think that was the initial—they also may have reported a quarterly loss in their financials. 

Senator GRASSLEY. Okay. Then the second question, when CFTC 

analysts were examining the records of MF Global prior to October 

31, were there indicators that there were problems with the segregated accounts? What were those indicators? And how early did 

CFTC officials see those indicators? 

Mr. GENSLER. As this is all a matter of specific investigation, enforcement investigation, if I could just more generally answer that, 

because I do not want to say something that might prejudice an investigation that I am not even participating in, but the lawyers 

have said they do not want me to inadvertently prejudice something— 

Senator GRASSLEY. Okay. 

Mr. GENSLER. As I understand it, over those last days of the 

week and over the weekend, we as regulators were trying to ensure 

that customer positions and customer funds were fully segregated 

and could be moved. I participated in some phone calls on that 

Sunday throughout the day and into the 31st when, of course, the 

company officially said they had a deficiency. All companies, all FuVerDate Nov 24 2008 12:46 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\75116.TXT MICHA
16 

tures Commission Merchants have to give us a deficiency notice, 

and it happens from time to time. A bit of money moves inadvertently. It is usually a day and then it is cleaned up. That deficiency 

notice came on the 31st from them. 

Senator GRASSLEY. Okay. My next question, it has been reported 

that in the early morning hours of October 31, the CFTC was notified that customer money was missing from the segregated accounts at MF Global, who informed the CFTC of this shortfall in 

the segregated accounts. Who discovered the shortfall in the accounts? 

Mr. GENSLER. Again, I am not participating in these matters, so 

I might need to, to the extent CFTC staff or Commissioner 

Sommers would want to be referred to that, those questions about 

the specifics of the investigation. 

Senator GRASSLEY. Okay. Does that mean you want me to get an 

answer in writing, or you want somebody else to—I would like 

to—— 

Chairwoman STABENOW. Senator Grassley, if we might, we had 

asked through Chairman Gensler Commissioner Sommers, who is 

handling the investigation, to be here for questions. Commissioner, 

if you would want to step forward and answer Senator Grassley’s 

question. 

Senator GRASSLEY. Thank you. 

Ms. SOMMERS. Good morning, Senator. It is my understanding 

that on the morning of October 31, CFTC staff were informed by 

MF Global staff that there was a shortfall in the customer segregated funds account. 

Senator GRASSLEY. Okay. My last question, Chairman Gensler, 

prior to October 31, did you have any discussion with MF Global 

CEO Jon Corzine about the state of affairs at MF Global and 

whether MF Global was in trouble, and if you did have conversations, when were those conversations and what did Mr. Corzine 

convey to you? 

Mr. GENSLER. The only conversations I partook in with MF Global is with the regulators over that weekend, and I do not remember 

exactly, because Chairman Schapiro and I were on so many of 

those calls Sunday and into the a.m. of Monday, but the group of 

regulators from London and here were on calls that MF Global presented from time to time, and as I recall, the CEO of that firm at 

least once spoke up, but I am not sure because there were other 

people tying into a conference call that probably had 20 to 50 people on it. 

Senator GRASSLEY. But at least he was very much involved in 

the discussion with people of CFTC staff. 

Mr. GENSLER. I actually do not know, because—— 

Senator GRASSLEY. Okay. 

Mr. GENSLER. —I was not physically at the company. 

Senator GRASSLEY. Okay. 

Mr. GENSLER. But that long regulatory call, I only recall him 

speaking up once. 

Senator GRASSLEY. Yes. Madam Chairman, I thank you. I would 

like to associate myself with the remarks that Chairman Baucus 

made about how this affects people at the grassroots of America, 

because we have had calls. I am not sure that they are quite as 

17 

colorful as what he had, but still, we have had very concerned citizenry. 

Chairwoman STABENOW. Well, thank you very much, Senator 

Grassley. I think we all have received those calls and share your 

concern about this and I think that is certainly a general feeling 

of every member on this committee, a deep, deep concern about 

what has happened here. 

Senator Nelson. 

Senator NELSON. Thank you, Madam Chairman, and thank you 

all for being here today, both the Chairs of SEC and the Commodity Futures Trading Commission. 

I want to also associate myself with the comments about the correspondence and the calls we have gotten from Nebraskans who 

have felt the impact of this unfortunate situation. 

Madam Chairwoman, I appreciate you calling this hearing because I think it is important to get the oversight authority out in 

the open and find out what, in fact, has happened to try to protect 

future situations from happening, but also responding to the current situation, as well. 

I have got a couple of questions. I really want to make a comment or two or relate a comment or two from some Nebraskans 

who have been in touch with us. While today’s hearing is to focus 

on implementation of the Wall Street Reform and Consumer Protection Act, I have heard so many comments from folks back home 

that they are struggling with this bankruptcy. They have had their 

accounts frozen. They are uncertain if they will be made whole and 

when they might be made whole. Others received checks from their 

excess margin accounts only to have them returned when deposited. There appears to be a lack of information on which customers 

can rely to resume normal trading and risk management activities. 

And I understand there are some unprecedented circumstances 

surrounding this collapse. But I would like to know what rules are 

currently in place to protect customers like my constituents from 

Nebraska. What rules— they are inadequate, but what kind of 

rules are conceivably there? 

Mr. GENSLER. Senator, the rules are very clear. It is actually 

right in Congressional statute, and then there are associated rules 

that customer funds are to be segregated at all times of the day. 

It is not just at the end of the day. There is a once-a-day calculation at the end of the day, but no one should confuse that once-aday calculation that all times of the day the money is to be segregated in bank accounts or in various securities accounts. I do not 

know if there are similar rules on the security side, as well. 

Senator NELSON. Chairman Schapiro? 

Ms. SCHAPIRO. Yes, sir. We have a rule called 15c3–3 which requires that broker-dealers have physical possession and control of 

all fully paid and excess margin securities of their customers. It is 

a calculation that is done once a week because it is quite a complex 

calculation. But the goal is to tie up and protect customer funds 

and assets. And unlike the CFTC rule which Chairman Gensler is 

working hard to change, customer funds on the securities side can 

only be invested in government securities that are backed by the 

full faith and credit of the United States. So there is an additional 

level of protection there. 

18 

Senator NELSON. It would not be sovereign funds, for example. 

Ms. SCHAPIRO. No. Full faith and credit of the United States. 

Senator NELSON. All right. Exactly. Let me read from a letter 

that we got from a person from a small town in Nebraska. Vern 

says, ‘‘How can we stop people from stealing money from segregated accounts which are supposed to be safe? What can I do 

about this and what can my Senator do about it?’’ 

I have the same feeling that my colleague, Senator Baucus, had, 

that people back home expect all of us back here to protect them. 

Now, Vern understands that he has market risk when he hedges. 

He does not expect to have account risk, and they are different, entirely different. So I guess I tell Vern we are going to straighten 

out the account risk issue so that in the future he can take the 

market risk but he does not have to worry about whether his 

money will be in an account when he needs it, subject to, of course, 

market risk, but it is altogether different. 

The other one that I would like to read is from somebody who 

is an attorney representing a number of people who have now contacted him regarding MF Global, and he says, ‘‘Members of the Agriculture community are willing to take risk. We know that when 

we plant crops and pray for rain. We know that. However, it is unreasonable to expect farmers, commodity traders, and grain elevators to anticipate that MF Global would convert segregated customer funds into a financial play on European sovereign debt.’’ He 

goes on to say, ‘‘This has a chilling effect on trading in the agricultural markets. Market players can no longer trust the market. This 

has the potential to be a huge systemic problem in and of itself.’’ 

Do we run the risk of what we were worried about with the 

Dodd-Frank bill, the potential of not just one entity but systemic 

risk with all the entities in connection with account risk because 

of their investment in sovereign funds? Yes, Chairman Schapiro. 

Ms. SCHAPIRO. I think, Senator, there is not really any good news 

about MF Global and it is a tragedy, what has happened, particularly for people in your State and others who are relying on these 

markets for legitimate hedging and risk mitigation activities. 

But to the extent there is any silver lining, it is that MF Global 

ultimately was not systemic and did not cause—— 

Senator NELSON. No, as an entity, it is not, but is the fact that 

others are in this subject to the same situation a systemic risk 

until it is, in fact, taken care of by additional rule, regulation authority? 

Ms. SCHAPIRO. That would be very hard to judge, but I think it 

is really incumbent upon all the regulators to look at whether we 

do need to have stronger rules, whether we need to have better 

audit and oversight of custody arrangements, including segregation 

and reserve account arrangements. And at the end of the day, 

when people violate those rules, very tough enforcement, very 

strong sanctions in order to send a broader deterrent message 

throughout the financial community that these rules are sacrosanct. They absolutely are the underpinning of investor confidence in these markets and the regulators will take swift and 

sure action. 

19 

Senator NELSON. Is it safe to say that when rules are in place, 

it is anticipated that people will follow them, but enforcement is 

the way in which you deal with it when they do not follow them? 

Ms. SCHAPIRO. That is right. I mean, our system requires that we 

rely on people to obey the law, I mean, because we do not have a 

regulator in every firm. We do not have a policeman on every corner, as much as sometimes that seems like it would be a good way 

for us to go forward. We have to rely on people to be following the 

rules. 

That said, there has to be oversight of their activities through 

the self-regulatory organizations, through the regulatory agencies, 

through a strong rule set, through the rules we are trying to go forward with, that would have accounting firms sort of enlisted in 

our—to our assistance and making sure that funds are where they 

are supposed to be. And then, as you say, enforcement. 

Senator NELSON. Thank you, Madam Chair. Thank you both. 

Chairwoman STABENOW. Thank you very much. 

Senator Boozman is next in terms of appearance, but I understand you are deferring to Senator Johanns, is that correct? 

Senator BOOZMAN. Yes, ma’am. 

Chairwoman STABENOW. Senator Johanns. 

Senator JOHANNS. Thank you, Madam Chairman. 

If I could have the Commissioner return to the table, and this 

is probably a question for both the Commissioner and the Chairman. We have just heard that we need more rules and this and 

that and the next thing. But as a lawyer, this seems real straightforward to me. 

You know, when you practice law, you have a trust account and 

your client will sometimes put on deposit money to pay filing fees 

or deposition costs. Then you have your bank account to pay your 

staff salaries and whatever else, the draw you took out of the law 

firm, whatever it was. And if you mix those two, or if you took that 

money out of the trust account and used it for your personal desires, whether it was gambling in Vegas or buying and selling 

stock, you committed a crime. 

No matter how we sanitize this, it seems to me, would you not 

agree, that we have a situation where you have a trust account 

where trusting people put their money into that and somebody 

abused that trust and took that money and basically played like 

you would play in Vegas. They made very bad bets and now the 

money is gone. Do you disagree with that characterization, Commissioner? 

Ms. SOMMERS. I do not disagree, Senator. I do not disagree. I 

think that, like Chairwoman Schapiro, I believe that you can have 

the strongest and most effective oversight and it may not prevent 

people from violating the law. 

Senator JOHANNS. Mr. Chairman, would you agree with my assessment of this? 

Mr. GENSLER. Well, I want to be careful because I am not participating on the particular company. But as a general, general matter, I think it is pretty straightforward that segregated accounts 

are meant to be segregated, similar to your analogy of the escrow 

accounts at a law firm. It is not always technically the same, but 

they are really supposed to be segregated, invested prudently. The 

20 

statute says there are only four or five things it can be invested 

in. We did as an agency back in 2005 widen that. It is my hope 

that we can narrow that back down again. But they are still supposed to be kept for one reason, for customers. 

Senator JOHANNS. You know, Mr. Chairman, I am not going to 

give you the same kudos that Senator Grassley gave you, and here 

is why. As you know, for about three years, I sat in a similar position to yours, huge operation, the USDA. But when I was called to 

task by the Senators, they did not give me a pass. I was not able 

to say, well, this is a big organization and we have got offices all 

over the world and, gee, I do not know this and I do not know that. 

They wanted answers. 

Here is my concern with where you are at. My concern is that 

a week ago or so, you said, ‘‘I will recuse myself.’’ It looks to me 

like you are trying to avoid the heat. You certainly did not recuse 

yourself all of the other weeks and months and days while MF 

Global was doing what it was doing. Why is it that they could get 

away with this and all of a sudden we have got innocent people in 

States like Nebraska and Montana and Arkansas, et cetera, who it 

looks to me are going to come up on the short end of the stick. Do 

you agree with me, you folks failed? 

Mr. GENSLER. I take very seriously the responsibility that I have 

as a Commissioner and Chairman and the responsibility of the 

whole agency to ensure for the protection of customers and their 

funds. That is why I was involved that weekend, along with other 

regulators, to ensure that customer positions and funds were properly moved. As it went into an enforcement and investigative matter, though I had not worked at the similar firm for 14 years with 

an individual who might be actually the individual themselves 

might be under investigation, I thought I did not want to distract 

from that very important matter for the career staff. 

But that does not absolve me in any way from the broader responsibilities that are the agency’s, just as you said. You had a bigger agency to run, but I take very seriously that we have got to 

go back through every piece of what we are doing as an agency, 

whether it is our rules, our reliance on the self-regulatory organizations and the examination functions, and really see how we can foster greater confidence in this important segregated accounts system. 

Senator JOHANNS. Commissioner, let me point that question at 

you. Would you agree with my assessment that you folks failed? 

Ms. SOMMERS. Senator, I think that the investigation is still ongoing with regard to what the actual events that happened at MF 

Global—what those actual events are, so I cannot comment on 

whether or not what ends up being found is the fault of the regulator. I think that we will find out, and if it is, obviously, there is 

something that needs to be done about the way that we implement 

our regulations. 

Chairwoman STABENOW. Thank you. 

Senator JOHANNS. Thank you, Madam Chairman. 

Chairwoman STABENOW. Thank you very much. 

Senator Klobuchar. 

Senator KLOBUCHAR. Thank you very much, Madam Chair. 

21 

As we know, the focus of today’s hearing was supposed to be on 

this oversight of the implementation of the Wall Street Reform and 

Consumer Protection Act, but today, this important topic is being 

overshadowed by the collapse of another over-leveraged financial 

firm that took on too much risk and did little to disclose its bets. 

Three years after the U.S. financial system was nearly toppled 

by this sort of recklessness, it seems that little has changed, and 

you look at those that say that Wall Street Reform was not necessary, that we have learned from our mistakes, that we do not 

need stronger rules, I would have you talk to the farmers in my 

State that cannot access their life savings and are not sure when 

or how much of it they will get back. 

Dean Tofetland from Luverne, Minnesota, a town of 4,600, his 

family grows corn and soybeans and raises pigs on their farm in 

Southwest Minnesota. He currently has over $200,000 in what was 

supposed to be a segregated MF Global account which he cannot 

access and which he does not know how much he will ever get 

back. He is not a speculator. He uses the futures market to manage 

risk, locking in prices of the growing season so he is protected 

against price fluctuations that can eat into his profits. Those are 

the kind of people that we have been hearing from in Minnesota. 

Now, I guess my first question is, we know some of the actions 

that are being taken. You mentioned, Chairman Gensler, that we 

are looking at the rules. But just for average people out there in 

my State trying to figure out how this all works, I know Chairman 

Schapiro mentioned that of MF Global, something like 400 accounts were under your jurisdictions, and those are not the ones 

we are talking about here. 

So then we have the CFTC, Chairman Gensler, that has jurisdiction, but in fact, the Chicago Mercantile Exchange somehow has jurisdiction, as well. Could you explain this so I can explain it to the 

farmers in my State? 

Mr. GENSLER. If I can explain it on the general side, just so I do 

not step over the line of where my counsel says I can go, because 

I am not participating on a particular company, but what happens 

is there are some firms that are regulated both by the Securities 

and Exchange Commission and the CFTC because they do both 

brokerage and they do futures business, and so they have both of 

us together. 

And to the extent it is over on our side of the watch, we rely on 

self-regulatory organizations such as the Chicago Mercantile Exchange to do the examinations and the day-to-day, and that has 

been true for decades. That is the nature of our agency. It is about 

a 700-person agency, as I have mentioned. 

We do get notices from companies if they are deficient, and the 

Chicago Mercantile Exchange as a self-regulatory organization 

works very closely with us and we do what is an examination of 

the SRO itself, but the SROs are the ones that are the front-line 

regulators. 

Senator KLOBUCHAR. Okay. And I do not know if Commissioner 

Sommers wants to come up for these questions here. So that is 

what happened, and supposedly they were filing these forms with 

the Chicago Mercantile Exchange and everything was supposed to 

be looking good until the very end here. And so I am just trying 

22 

to figure out what we need to do differently. In my second round, 

I am going to ask about this actual problem and how they recover 

their money. 

But in 2005, the rule was somehow expanded—Chairman 

Gensler, you mentioned this—so they could invest these segregated 

funds in more things, including sovereign debt, is that right? 

Mr. GENSLER. In 2005, it was expanded to include lending the 

money to another side of the firm and taking back collateral. It is 

called a repurchase agreement. The sovereign debt expansion 

might have been a couple of years earlier. 

Senator KLOBUCHAR. Two-thousand, I think, is that right? 

Mr. GENSLER. Yes. 

Senator KLOBUCHAR. Okay. So, over time, we have kept expanding, and now suddenly we are going to finally go back and look at 

it and retract it. But you clearly think that is one of the things that 

could solve this going forward? 

Mr. GENSLER. Well, I thought in October of 2010 that we should 

narrow back. As Chairman Schapiro says, over in the securities 

world, it is just government securities and the statute book. What 

Congress has actually said to the CFTC is a very short list of four 

or five things. From 2000 until 2005, we exempted and let it get 

wider. We are still deliberating as a Commission, but I think that 

we should not allow what is called affiliate repurchase agreements 

or in-house, where you take customer money and lend it to another 

side of the house. 

Senator KLOBUCHAR. Okay. Then another area I wanted to ask 

about as we look at solutions that I think Chairman Schapiro mentioned broadly, this idea of transparency and getting things out 

there more, one thing we know about this for sure is that a $6.3 

billion bet on the bonds of troubled European countries, such as 

Spain and Italy, set this chain of events into motion. It is further 

known that MF Global hid the risks that should have been on its 

books through complex repo transactions in which it pledged the 

bonds to a third party in return for a loan with a promise to buy 

the bonds back when same matured. When these risky bets came 

to light, this triggered a loss of confidence. The result is the eighth 

largest bankruptcy in U.S. history. Pain is being felt in little towns 

like Luverne, Minnesota. 

So one question I have is should we reexamine how companies 

disclose their off-balance sheet risk or the use of repo agreements 

altogether? 

Chairwoman STABENOW. And I would ask that— unfortunately, 

I know that is a very important question, but I would ask you to 

be very brief. 

Ms. SOMMERS. Maybe I will take that one. FASB recently revised 

the accounting standard for repos and the only repos now that 

qualify for off-balance sheet treatment are repos to maturity, the 

type that, as you mentioned, MF Global entered into with respect 

to the sovereign debt. And while the disclosure that surrounds 

those is an improvement over what used to exist, I think it is a fair 

question and we are discussing with FASB whether or not we need 

further revision of the disclosure and accounting standards around 

repo to maturity. 

23 

I also want to be very clear that we are investigating very carefully both the accounting treatment and the disclosure by the firm 

and we will be looking at it closely. 

Senator KLOBUCHAR. Whether it was legal, and then you are 

also—— 

Ms. SOMMERS. Whether it was in accord with GAAP and whether 

the disclosure was sufficient around how they disclosed the repos, 

the hedges that were expiring, window dressing. All of those issues 

are under investigation. 

Senator KLOBUCHAR. But there might be some further work that 

could be done to—— 

Ms. SOMMERS. And we are talking to FASB about whether further revisions are needed. 

Senator KLOBUCHAR. Thank you. 

Chairwoman STABENOW. Thank you very much. 

Senator Chambliss. 

Senator CHAMBLISS. Thanks, Madam Chairman. 

Chairman Gensler, in light of the recent collapse of MF Global 

and the related ongoing investigations, do you think it is really 

prudent to continue to impose a futures industry model on the OTC 

derivatives industry without a complete analysis of the practices of 

MF Global and the regulation of MF Global? 

Mr. GENSLER. Senator, I think that one of the core reasons of the 

2008 crisis was the swaps marketplace. It is seven times the size 

of the futures marketplace and I think we are making good 

progress, but I do think that we continue. We are not—there is a 

lot of very, very good features of the futures industry and the 

swaps industry already benefits from many of those features voluntarily, but I think it is important to bring that which we can into 

clearinghouses. That is just the standard part of the market. And 

that which we can to greater transparency, into data reporting, and 

to the public so that the public gets the benefit of that transparency. 

Senator CHAMBLISS. You just finalized a rule establishing the requirements applicable to clearinghouses that would set a minimum 

capital requirement for clearinghouse members at $50 million. 

That is much lower than the amount currently required by clearinghouses. It is my understanding that this $50 million threshold 

was criticized as being too low both by members of the Commission 

as well as other members of the industry. It is also my understanding that one of the firms pushing for the lower capital requirements was MF Global. Can you please explain how you arrived at the $50 million number and whether you did any sort of 

economic analysis to determine whether or not that number makes 

sense from a risk management perspective? 

Mr. GENSLER. One of the features of the Dodd-Frank Act was 

that the clearinghouses have open access. In the futures world, in 

fact, in the securities world, the public has benefited by the competition that brings, that people can use either a big firm or a 

smaller firm to help access the clearinghouse. In the swaps world, 

it has been more, shall I say, exclusive. Some of the swaps clearing 

was more exclusive. 

So we proposed, and then as you rightly said we finalized a rule 

that said that the clearinghouses would have to accept parties that 

24 

are smaller, but they can scale them. So if somebody only has $200 

million in capital, they cannot have the size that somebody with $2 

billion in capital. It has to be scaled, but they—to allow greater 

competition and more market access following Congressional intent 

to have open access. 

But I think that any clearing member has to have all the operational capabilities. They have to show that they can risk manage. 

And it is up to the clearinghouse as to set those operational risk 

management and how they scale based on capital. So I am agreeing 

with you. It is critical that every clearing member meets the robust 

and rigorous requirements to protect customer money and to be a 

member of a clearinghouse. 

Senator CHAMBLISS. You have been the Chairman now for going 

on three years, and you went through Dodd-Frank with us in great 

detail. What does your experience tell you with respect to how 

many systemically risky entities there are out there? What is an 

estimate? 

Mr. GENSLER. Were you counting just this country or Europe, as 

well, sir? 

Senator CHAMBLISS. Well, let us start with just this country. 

Mr. GENSLER. I think that the Dodd-Frank Act has the Financial 

Stability Oversight Council look at entities over $50 billion of assets, but the largest entities, there are maybe about ten or 12 that 

are over $250 billion, if I can recall the figures. And, of course, 

there are global organizations that I am not a member of but I 

have identified something called global systemically important financial institutions. 

Senator CHAMBLISS. Do you believe swaps dealers are in that category of systemically risky? 

Mr. GENSLER. Some of them. Not all of them, but some of them, 

sir, certainly are. 

Senator CHAMBLISS. So, obviously, that is a yes, then, I assume. 

That being the case, how can you justify capturing commercial entities who are clearly not systemically risky in that systemic category, that risky category? And by that, are you telling this committee that a collapse of a grain co-op in Omaha or a dairy co-op 

in Michigan would threaten the integrity of the U.S. financial system? 

Mr. GENSLER. Senator, I think that commercial enterprises are 

not going to be swap dealers, and there may be some swap dealers 

who are not large Wall Street banks, but I think it is going to be 

a group that are actively making markets, accommodating demand 

in the markets, regularly putting themselves to buy or sell swaps. 

And I think that the tens of thousands of end users will be end 

users. They are not going to be swap dealers. That grain merchant 

that you are referring to, unless I am mistaking which one you 

could be talking about, I cannot imagine would be a swap dealer. 

Senator CHAMBLISS. So it is not your intention to apply regulatory measures to them the same as the systemically risky entities? 

Mr. GENSLER. We are in agreement on that, sir. 

Senator CHAMBLISS. Okay. Thank you. 

Chairwoman STABENOW. Thank you. 

Senator Conrad. 

25 

Senator CONRAD. Thank you, Madam Chairman. Thanks for 

holding this hearing. Chairman Gensler, thank you for being here, 

Chairman Schapiro, as well. 

First of all, let me just say, we have had six contacts from my 

State, two customers, four broker-dealers. One of the broker-dealers has told us he has got $500,000 that is out there in the ether 

somewhere and, you know, that is a huge amount of money, certainly to that broker-dealer, and he is deeply concerned. He is asking, how can this happen? How can this conceivably happen? 

Let me go to that question. Under the law, it is my understanding that customers’ funds that are segregated can be invested 

in sovereign debt, is that correct? 

Mr. GENSLER. Under the Commodities and Exchange Act, they 

were not allowed to be in anything other than the sovereign debt 

of the U.S., but there was an exemption, I think it was in 2000, 

that the Commission granted to invest in sovereign debt if the customer gave you that currency. So it is in a narrow situation. If the 

customer gave you, for instance, the currency of the United Kingdom, Sterling, you could put it into the United Kingdom’s sovereign 

debt called Gilts. 

Senator CONRAD. So is that change that was made long before 

you were ever there includes any sovereign debt? 

Mr. GENSLER. I believe that the exemption that was granted and 

still is on the books is if a customer gives you a certain currency, 

you can invest it just in the sovereign debt of that country to which 

that currency—— 

Senator CONRAD. I see. But that is any sovereign debt. So it 

could be Greek. It could be Libyan sovereign debt. It could be—— 

Mr. GENSLER. I do not know the Libyan currency, but if somebody gave you the Libyan currency, I believe, but we could get back 

to you specifically, sir, on that. 

Senator CONRAD. So there was no standard with respect to rating 

agencies’ assessment of the risk of that sovereign debt? 

Mr. GENSLER. Let me just—I think I am going to have to get 

back to you, Senator. 

Senator CONRAD. Well, I would be interested to know. Is there 

any standard with respect to the sovereign debt? 

Mr. GENSLER. See, you have reminded me, and I am sorry. It 

took a moment. Your second question helped me a lot. The rules 

in place include a rating agency provision about being highly rated. 

Dodd-Frank actually said that we could no longer rely on rating 

agencies and we had to remove the reference to rating agencies in 

all our rules. So the current exemption does rely on ratings, highly 

ratings, so the Libya or the junk credit country maybe could not 

happen. 

Senator CONRAD. Okay. 

Mr. GENSLER. In October of 2010, we had to remove that in the 

proposal and it sort of lost part of this—it is part of this rule, is 

that we have to remove any reference to ratings. 

Senator CONRAD. Okay. Let me go back to where I started, because I want to make sure I have got this right in my head. The 

notion that money that is in segregated accounts, in a customer’s 

segregated account, separate from the company’s operating accounts, that can be invested by law in sovereign debt to the extent 

26 

that the customer provides the currency of the country for which 

that sovereign debt applies. 

Mr. GENSLER. That is the current rules. It may be limited right 

now to this rating agency, but, you know, that it had to be highly 

rated. But yes, that is, as I understand it. 

Senator CONRAD. The next question I have is the Securities Investor Protection Corporation provides insurance up to $500,000 on 

an account. Is that not true, Chairman Schapiro? 

Ms. SCHAPIRO. Yes, that is right. 

Senator CONRAD. But on the other side of the ledger—— 

Ms. SCHAPIRO. For securities accounts—— 

Senator CONRAD. That is for securities accounts. For futures accounts, there is no insurance available, is that correct? 

Mr. GENSLER. That is correct. 

Senator CONRAD. And what is the—again, this happened long before you were there, but do you understand what the rationale was 

for there not to be insurance? 

Ms. SCHAPIRO. It is long before my time, as well. I am not even 

sure when SIPC was created, maybe in the early 1970s—— 

Senator CONRAD. But you have got it in securities. 

Ms. SCHAPIRO. Yes. 

Senator CONRAD. You have got a $500,000—as I understand, you 

can get $500,000 of insurance. Is that $500,000 automatic? 

Ms. SCHAPIRO. Well, there is a claims process that the SIPC 

trustee would administer to determine whether—— 

Senator CONRAD. But, I mean, you have got automatic coverage 

up to $500,000 in order to—— 

Ms. SCHAPIRO. Effectively. 

Senator CONRAD. Yes. Why would there not be insurance on the 

futures side available? 

Ms. SCHAPIRO. I would say, and certainly Chairman Gensler 

should jump in, that is something that Congress certainly should 

consider, whether it does make sense. It has worked pretty well on 

the securities side. There are lots of questions about—— 

Senator CONRAD. Okay. 

Ms. SCHAPIRO. —how does a segregation regime and an insurance regime interact. There are lots and lots of questions, but—— 

Senator CONRAD. Let me go—— 

Ms. SCHAPIRO. —we would be happy to provide—— 

Senator CONRAD. I have got one other—Madam Chair—— 

Chairwoman STABENOW. Yes, if we do it briefly. Thank you. 

Senator CONRAD. The thing that is most curious to me, in the 

Wall Street Journal, they say MF Global’s trading frenzy might 

have attracted more attention if it had not been hidden. The purchases of European government bonds added up to several times 

MF Global’s entire market cap. But by using this repo to maturity 

technique, those trades were considered sold for accounting purposes and therefore they disappeared from MF Global’s balance 

sheets. 

I do not know if, Chairman Gensler, you are the appropriate one 

to ask, because you are recused from this investigation, but I would 

like to know, how is it possible that somebody is able to bet the 

farm multiple times here, multiples times their market cap, and it 

27 

disappears from their balance sheet because of this repo to maturity technique that considers them sold. 

Ms. SOMMERS. Senator, I will be happy to try to answer that. As 

I had mentioned to Senator Klobuchar. FASB recently revised their 

accounting standards around repos so that the only repos that do 

qualify for off-balance sheet treatment are repos to maturity. We 

are talking to FASB about whether that is a policy that ought to 

be changed. They did improve the disclosure around it, but there 

is a question, I think, about whether repos to maturity should be 

included on the balance sheet. 

And I want to also be very clear. We are investigating the disclosure and accounting by this firm. What they did disclose in their 

second quarter 10–Q was that they had net exposure to sovereign 

debt. They did disclose, but not very clearly, or not as clearly, their 

gross exposure. They reported that they had $16.5 billion in reverse repos of which 70 percent was collateralized by European 

sovereigns. So not as direct as the net exposure disclosure. 

I think these are—— 

Senator CONRAD. Well, I would just say in conclusion—— 

Ms. SCHAPIRO. —very fair questions for—— 

Senator CONRAD. —that is a loophole so big you could drive a 

Mack truck through it. My God, if that is not closed down, we have 

really got to ask ourselves what we are doing. 

Chairwoman STABENOW. Thank you. 

Senator Boozman. 

Senator BOOZMAN. Thank you, Madam Chair, and we do appreciate you all being here. 

Today, it sounds like we all agree very definitely that accounts 

must be segregated. If a person does not segregate an account and 

essentially steals the money, takes it and gambles it away—and we 

are not talking about any specific situation, but just in general— 

gambles it away, is that a rule breaking or is that a criminal process? Either one is fine. 

Mr. GENSLER. Well, it—— 

Senator BOOZMAN. What is the penalty for doing something like 

that, besides getting fined? 

Mr. GENSLER. It is quite clear in the statute and in the rules of 

the commodities world that customer funds need to be segregated 

and that those monies can only be invested in a certain list of permitted funds. 

Senator BOOZMAN. Mm-hmm. 

Mr. GENSLER. They are not to be used for some other purpose 

other than for the customer, and that is supposed to be all day 

long, every day. 

Senator BOOZMAN. Right. And if somebody does that, though, if 

they break that rule and they use those funds for riskier investments or whatever, what is the—what happens to the individual 

who does that? 

Mr. GENSLER. Under—— 

Senator BOOZMAN. Or individuals? 

Mr. GENSLER. I might have to defer to have staff to get back to 

you, but on the Commodities and Exchange Act, we just have civil 

money penalties that we pursue in segregation cases. So it is just 

civil money. 

28 

Ms. SCHAPIRO. The SEC is also a civil enforcement agency, so we 

would have the ability to fine someone, to—— 

Senator BOOZMAN. Yes. Well, I think the problem—— 

Ms. SCHAPIRO. —expel them from the industry—— 

Senator BOOZMAN. and I do not mean to—— 

Ms. SCHAPIRO. —but the criminal authorities could certainly pursue a criminal case if they can meet the standards of proof that are 

required there. Breaking the rules can and should lead to enforcement action and, where appropriate, criminal action, as well. 

Senator BOOZMAN. I guess the problem that I have, and I think 

the people of Arkansas, is that if you go into a financial institution 

and you rob the bank or you rob the financial institution, that is 

a Federal crime. That is highlighted if you saw ‘‘J. Edgar Hoover,’’ 

the movie, recently. But there is no ifs, ands, or buts. The resources of the Federal Government are going to come to bear and 

you are going to go to jail for that crime. 

If a person through doing this other essentially can steal hundreds of millions of dollars and there is no penalty except for some 

civil penalty, that is a real problem. 

Mr. GENSLER. Senator, if I can add, my good General Counsel 

was able to tell me the words. In the Commodities and Exchange 

Act, it does say if an individual knowingly and willfully—knowingly 

and willfully violates the Commodities and Exchange Act, that is 

a criminal violation for the individual. 

Senator BOOZMAN. And we have a history of prosecuting those 

kind of things? 

Mr. GENSLER. It has happened. 

Senator BOOZMAN. Well, that is not a history. And again, this is 

a real problem and this is why the American people are losing faith 

in their institutions. 

Now, tell me about you all in the sense that one of the concerns 

I have, you can be so close to these things that you almost do not 

really realize when things are going on. What is your protocol for 

investigating yourself in this process? Are your IGs involved now, 

or what is going on? 

Ms. SOMMERS. We will do a lessons learned review—— 

Senator BOOZMAN. So will you have an IG investigation regarding this? 

Ms. SOMMERS. I am not sure what they would investigate—— 

Senator BOOZMAN. Well, we had the meltdown in 2008, lots of 

stuff going on. We passed Dodd-Frank, tremendously increasing 

regulation. This stuff continues to go on. I guess I would like to 

know, and I think the American people would, to make sure that 

the individuals in your agency are actually doing the job that we 

entrust them to do. 

Ms. SOMMERS. Well, that is certainly very—— 

Senator BOOZMAN. And it is hard to self-regulate yourself. You 

said yourself a while ago that you are the policemen, and I agree 

with that. The policemen have separate departments when things 

happen, and something big has happened, to make sure that the 

people involved were doing the appropriate thing. 

Ms. SOMMERS. Senator, I agree, and we will carefully— I do not 

know through what mechanism at the agency’s response here, but 

we should be clear that this was potentially violations of a very, 

29 

very serious nature by the firm that caused this firm to fail. And 

while we will always look at our conduct to see if we can do better 

and do more, you know—— 

Senator BOOZMAN. We want to make sure, also, that there was 

not, how would I say it, just—well, for whatever reason, that the 

agencies did not do as good a job as they could have done in making sure that they were policing the— to make sure that this did 

not happen in regard to this instance. I mean, is that fair? 

Ms. SOMMERS. I think it is always important for regulators, when 

there has been a problem in an industry, whether it is the May 6 

Flash Crash or any other kind of event, to take a look at whether 

things could have been done differently. We always do that. 

Senator BOOZMAN. So an IG investigation would not be an overreach? 

Ms. SOMMERS. Well, we will take some approach to looking at 

what we can do to tighten up our rules, tighten up our procedures—— 

Senator BOOZMAN. Thank you. 

Ms. SOMMERS. —approach our examination processes differently, 

whether FINRA did, and I would imagine on the commodities side 

the CME did as effective a job as possible. 

Senator BOOZMAN. Madam Chair, I hope that we can talk about 

this again. I think that would be very, very appropriate. Thank 

you. 

Chairwoman STABENOW. Well, thank you, Senator. And as you 

are aware, we do have a specific hearing on December 13 regarding 

MF Global and we will—— 

Senator BOOZMAN. I cannot wait. 

Chairwoman STABENOW. We will have a number—starting with 

the victims, because I think that is the most important thing for 

us, is to make sure we understand what this is really about, and 

this is real people that have been hurt in this situation. So thank 

you very much. 

Senator Thune. 

Senator THUNE. Thank you, Madam Chairwoman, and I agree 

that this hearing has essentially evolved into an MF Global hearing already. 

But I think everybody here at the table—we have heard—several 

of my colleagues have shared what they have heard from their constituents who are suffering economic damage as a result of the failure, and I want to just read one of the messages that I received 

from a South Dakota grain elevator manager, and I quote, he said, 

‘‘This MF Global failure is causing tremendous stress in our and 

other business operations as we are unable to use our futures accounts and unable to access funds. The continuation of this may 

cause my industry to suspend purchasing grain from farmers as we 

are unable and unwilling to hedge our purchases in an exchange 

that is not secure. This lack of certainty and security is starting 

to make traders across the world question the security of all positions, even those not held in MF Global accounts. Timeliness is of 

utmost importance. The trust that we all have in the regulated futures industry is at stake,’’ end quote. 

And I guess the question I have is—an observation and a question—but marketing agricultural commodities through hedging and 

30 

use of futures has become nearly as important as growing the crop. 

What has occurred with MF Global has severely damaged these 

practices for many producers and facilities, and in plain and simple 

terms, what is your plan, not only of action items, but also in terms 

of outreach to the agriculture community, that use of hedging and 

futures markets can be safely continued. 

Mr. GENSLER. What we are doing at the agency, and Commissioner Sommers may have things to add to this specific to the individual company, but what we are doing is really asking ourselves 

and asking the staff and each Commissioner what we can do better. Specifically, what we are doing now, along with the CME and 

the National Futures Association, is conducting on-site reviews— 

they are limited reviews, but on-site reviews of all of the Futures 

Commission Merchants. We have taken the top dozen or 14 and we 

have gone in looking at the segregated accounts. The CME is taking the next 35 or 40. And then the NFA are taking the others. 

And we are hoping to finish these this month of December. 

But beyond that review of the segregated accounts, really looking 

at our whole procedures of audit. We do not audit, actually. There 

is an annual audit that is required under the law and under the 

rules. But should that be more robust and more enhanced? It is an 

audit of the Futures Commission Merchant. It is not an audit specifically of the segregated accounts. How do we add to it and enhance that? The examination functions of the self-regulatory organizations, how do we enhance that, working, of course, along with 

the CME, and just going straight across the board, but I do not 

know if Commissioner Sommers would want to add. Any lessons 

learned out of that particular company, of course, she and others 

will be closer to than I will because I am not participating now. 

Senator THUNE. Do you think these steps are going to be—and 

you said end of December? 

Mr. GENSLER. In terms of just our limited review—— 

Senator THUNE. Right. 

Mr. GENSLER. —of these large firms. 

Senator THUNE. And the steps that you intend to take, do you 

think that they are going to be adequate? I mean—— 

Mr. GENSLER. Well, I think it is important that customers have 

confidence, and the farmers and ranchers and the energy companies, they just have to have confidence that their funds are not 

only segregated, but they are theirs. They are not somebody else’s 

to, you know, to divert in any way. And that confidence is at the 

core, because these products are important so those farmers and 

ranchers focus on what they do well and then they lock in a price 

of wheat or corn or soy and they do not have, as I think Senator 

Nelson, was it, said, they do not have account risk. 

Senator THUNE. Right. 

Mr. GENSLER. And, in fact, they do not even want market risk 

because they are trying to lock in that price and then the focus on 

the risk of the rain and the yields and so forth. 

Senator THUNE. Well, I just—I guess the question I am trying to 

get at is how do you—can you assure us and those who have lost 

money as a result of MF Global that adequate protection is now in 

place so that this does not occur again in the future. I mean, I 

think that is, at the end of the day, what people want to know. 

31 

There is the money that has been lost and hopefully can be recovered. But then there is the concern about what steps are being 

taken so that there is certainty and confidence in the markets and 

in this process. 

Mr. GENSLER. Let me ensure you that I think all of us at the 

CFTC are focused on exactly that, that there is confidence in these 

markets so that end users can properly use these products, and 

that working along with the self-regulatory organizations, that segregation means segregation. 

Senator THUNE. Okay. I see my time has expired. Thank you, 

Madam Chairwoman. 

Chairwoman STABENOW. Thank you very much. 

Senator Hoeven. 

Senator HOEVEN. Thank you, Madam Chairman. 

My questions go to Dodd-Frank and then we will use MF Global 

as kind of the example to help you explain an answer to the questions I have. 

Given that you had Dodd-Frank, which the idea was to provide 

for more transparency, improvements in terms of reducing systemic 

risk, and enhancing regulators’ ability to make sure they understood the risk of firms on an individual firm basis and better oversee and regulate systemic risk throughout the financial services industry, what did Dodd-Frank—how did Dodd-Frank impact what 

happened at MF Global? Why was it not effective in helping prevent the kind of failure that occurred? How did it help? How did 

it not help? 

Ms. SCHAPIRO. Senator, I guess I would say that the violation of 

the segregation rules on the commodities side was already illegal 

long before Dodd-Frank. Those are rules that have been the cornerstone of futures regulation for many years. So I am not sure that 

Dodd-Frank specifically sought to address the kinds of issues that 

were at MF Global. 

I will say, I mean, what broke down here was the framework for 

the protection of customer assets based on the actions by this firm, 

which, as I say, not knowing exactly what happened yet, and hopefully we will know soon, may well have been illegal. 

Dodd-Frank did not really eliminate the potential for firms to go 

out of business. It sought to help us ensure that firms could be— 

that were systemically important unwound in an orderly way without creating reverberations throughout the financial system. And it 

sought to close gaps with respect to transactions, like over-thecounter derivatives that had not been subject to regulation. 

It also, importantly, created a process for the Financial Stability 

Oversight Council to look at firms like MF Global, that if they met 

certain trigger points would be subjected to an additional layer of 

regulation by the Fed, so at the $50 billion asset level and then hitting another trigger, like leverage or concentration or interconnectedness, could subject a firm to being designated as systemically important and subjected to additional oversight. But that process has 

not been put in place yet and FSOC has not made those determinations. 

Senator HOEVEN. So, Chairman Schapiro, you would say DoddFrank had no impact in this case? 

32 

Ms. SCHAPIRO. Well, I think much of Dodd-Frank is not implemented yet anyway. I do think that had the FSOC process been in 

place, potentially, MF Global is a firm that could have been on the 

radar screen. I do not know that, but I am just using that as an 

example of a way Dodd-Frank could potentially have made a difference. 

What happened here, and really Chairman Gensler should speak 

to this because it is on the commodities side, to the extent the segregation rules were violated by this firm, if they were, those are 

longstanding rules that well predate Dodd-Frank. 

Senator HOEVEN. Chairman Gensler. 

Mr. GENSLER. As I am not participating in matters with regard 

to this one firm, if I might just talk—the core of your question so 

is wrapped up in one firm, it is a little challenging, so can I take 

it just as a general question about Dodd-Frank? 

Senator HOEVEN. Well, we can try that, sure. 

Mr. GENSLER. All right. Otherwise, staff or Commissioner 

Sommers may be more appropriate to address your question. 

But Dodd-Frank really addressed in title VII the regulation of 

swaps for the first time and does have similar protections for the 

first time on segregation of customer funds in the swaps marketplace, and that is very clear that Congress’s intent was that people 

get the protections for segregated funds in the swaps world which 

they are meant to get in the futures world already. 

But as Chairman Schapiro said, Dodd-Frank also will not turn 

around the longstanding thing, that financial firms will, from time 

to time, fail. 

Senator HOEVEN. Specifically, and I understand, Chairman 

Gensler, you may not be in a position to answer this question based 

on your earlier testimony, but certainly Chairman Schapiro, specifically what are you doing to help customers recover, and specifically 

what recommendations would you have that would help prevent 

the kind of problems that we are experiencing with MF Global? 

Ms. SCHAPIRO. Well, Senator, let me just say again there are a 

very small number of securities accounts at MF Global. The trustee 

has identified less than 400, I think about 330 of them, that are 

non-affiliated and non-insider customer accounts that are custody 

accounts, and he is in the process of asking the court to permit him 

to transfer those securities accounts to another brokerage firm that 

is qualified to handle them. And that motion by the trustee was 

filed with the court yesterday. I think the court will hear it next 

week. And that will remove the vast majority of the securities accounts—— 

Senator HOEVEN. Would they be limited to their SIPC coverage 

or would they be transferred in whole? 

Ms. SCHAPIRO. The trustee has proposed in this motion that he 

will transfer cash and securities for these accounts at the SIPC net 

equity up to the limits of SIPC protection plus 60 percent of the 

net equity. In short, what that means is that about 85 percent of 

the securities account customers will be made whole through this 

transfer, because these were relatively small securities accounts, 

and, of course, quite small in number in comparison to the futures 

accounts. 

33 

Senator HOEVEN. If I could beg the indulgence of the Chairman 

for just another minute or so, specifically, your recommendations to 

prevent this kind of problem and do what we can to make sure that 

customers are made whole in the future, and then, Chairman 

Gensler, to the extent you are willing to take a shot at this same 

thing on the commodities side. 

Ms. SCHAPIRO. Well, on the securities side, we have proposed in 

June of this year rules that would require brokerage firms that 

have custody of customer assets to get an additional audit by a 

PCAOB registered accounting firm. That will give us another set 

of eyes on the financial responsibility compliance of the firms and 

I think that will be very important. 

We will look carefully at whether there are other things we can 

be doing. I hope that we will approve a rule proposal that is pending before us from the self-regulatory organization FINRA that 

would require additional financial reporting to them so they can 

monitor more closely issues like sovereign debt exposure at brokerage firms. And, of course, we are pursuing an active investigation 

with the potential for enforcement action at the end of the process. 

Senator HOEVEN. Thank you. 

Chairman? 

Mr. GENSLER. Again, let me just talk more generally, and then 

if others at the agency or Commissioner Sommers wish and you 

wish to chat with. But more generally, I do think it is important 

that we move forward on the rule that we are considering next 

Monday on the investment of customer funds, to sort of step back 

from some of the exemptions that we gave in 2005 and earlier for 

the use of customer money to be loaned to affiliates or in-house. I 

think that is an important step. 

But beyond that, I think that it is important for the agency to 

continue this process of looking at our relationship to the self-regulatory organizations and where the examination functions are and 

what transparency we can bring, greater transparency to the reporting to customers themselves as to where their money is. Currently, they sort of get one line item. 

Senator HOEVEN. Mm-hmm. 

Mr. GENSLER. And that transparency, so the customers can really see, are you in cash or securities or something else, I think 

would be a very important step. But I would not limit it to that 

transparency. I think we, as the firms relate to their self-regulatory 

organizations and the self-regulatory organizations relate to us, we 

need to sort of look at all of those pieces as to possible enhancements. 

Chairwoman STABENOW. Thank you. 

Senator HOEVEN. Thank you, Madam Chairman. 

Chairwoman STABENOW. You are welcome. 

As we move to the second round of questions, I want to back up 

a bit and talk about one piece of this certainly that has become 

very clear about impact on the European debt situation. But we all 

know that there is potential devastating impacts on the global 

economy. In fact, today, I am hearing of serious impacts on our 

American automobile industry. I am sure we could speak about numerous other impacts in other parts of our economy. We remain 

34 

hopeful that a deal will be worked out, but I think we need to prepare for the worst. 

So from your perspectives, what are your agencies doing to monitor the exposures of U.S. firms to these kinds of events? What are 

the ramifications of default or break-up of the Euro on the financial 

markets? And have you required firms with significant exposure to 

change their behavior? Chairman Gensler? 

Mr. GENSLER. We are monitoring the events in Europe, but mostly through our conversations with other regulators at the FSOC 

and reading as much as we can, of course. Our primary focus has 

been on the clearinghouses, the largest amongst them in London 

and Chicago and Atlanta, I guess, and we have had in-depth meetings with them as to if shocks were to come out of Europe, how 

they would withstand those shocks, because it is always a best— 

that we hope for the best, to also plan for possible shocks. 

We do not as an agency examine Futures Commission Merchants 

for their European exposures, but we do stay in communications 

with the Federal Reserve, the bank regulators, and the SEC with 

regard to the risks that they seek. 

Chairwoman STABENOW. Chairman Schapiro. 

Ms. SCHAPIRO. Yes. Well, we, of course, are also monitoring very 

closely the events in Europe, participating actively in the FSOC 

process where these issues are discussed really on a weekly if not 

more frequent basis. FINRA is also monitoring broker-dealer exposures to sovereign debt closely, and we are particularly focused at 

the SEC on the exposure of money market funds to European sovereign debt and stress testing that is going on in those funds to ensure that a default of the European sovereign or the commercial 

paper of a European bank might not cause a money market to 

break the buck, as happened during the financial crisis with Lehman paper, and create some severe consequences for money market 

fund investors. 

Chairwoman STABENOW. Thank you. 

Let me go back and talk a bit about audits. This has come up 

in a number of questions from colleagues and it certainly has come 

up as I have looked at the MF Global situation, where there is customer money missing, poor internal controls to prevent that from 

happening, which is, of course, absolutely unacceptable from the 

public standpoint, from a customer standpoint. 

I have serious concerns that our system of audits and reviews is 

inadequate to identify and address the kinds of problems that are 

exemplified by MF Global. If the internal controls are as bad as 

some have indicated, it would be shocking, frankly, that, again, a 

company like this could have passed an audit, in the case of MF 

Global in the Spring of 2011. I have a question how that happened. 

How did they pass that audit? 

So my question is, broadly, now, again, from a systems standpoint, are the scope and frequency of audits sufficient to understand the full exposures of companies? And again, use MF Global 

as an example of that. But the risks that they pose to the marketplace, should there not be a clean paper trail for companies like 

this? Chairman Schapiro. 

Ms. SCHAPIRO. Sure. I cannot speak to the examination process 

on the futures side. I will say that we are very reliant on self-reguVerDate Nov 24 2008 12:46 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\75116.TXT MICHA
35 

latory organizations on the securities side, as well. We have about 

300 examiners for 5,000 broker-dealers, so we are very reliant on 

FINRA to do risk-based audits of firms, examinations. 

But on the pure auditing side, Pricewaterhouse was the auditor 

for MF Global. We and the PCAOB, which is the direct regulator 

of auditing firms, the Public Company Accounting Oversight Board, 

are looking very closely at their role in this. 

The other thing I would add, and I have mentioned already, is 

that we proposed in June an additional level of auditing for brokerdealer custody arrangements, and I would hope that the Commission will go ahead and finalize that rule shortly. 

Chairwoman STABENOW. Chairman Gensler, broadly looking at 

this situation, what should be done on audits and accountability? 

Mr. GENSLER. I am jealous when I hear that Chairman Schapiro 

has 300 examiners because I do not think we have 20. But audits 

are required once a year of the financials. I think we really have 

to look at whether there also should be an audit, a separate audit 

of the segregated accounts themselves and whether we should 

change that and enhance that rule. The examination function, we 

are reliant on the self-regulatory organizations. They do those examinations once every nine to 15 months under our guidance, but 

we do not participate in those examinations. 

I think we need to really look as to whether there is enhancements and lessons learned. Again, others can—I will not participate. Others will come up with some of those working directly with 

the CME about the examination of this particular firm. 

But more generally, how we as an agency can work with the selfregulatory organizations, frankly, with limited resources. I do not 

envision Congress is going to give us a lot more resources this year. 

We are advocating for them, but I have to be realistic, too. 

Chairwoman STABENOW. So it does matter how many investigators, how many cops there are on the beat, even on the Wall Street 

beat. 

Mr. GENSLER. In this case, it is how many accountants, but yes, 

it very much matters. We have 125 Futures Commission Merchants and 40 or 50 of them are large enough to be clearing members at the CME. We do not examine any of them. Can I repeat 

that? 

Chairwoman STABENOW. Please do, although it is very concerning. 

Mr. GENSLER. Yes. I mean, we do not examine any of them. That 

is not the system we have. We rely on self-regulatory organizations. 

We do some for-cause limited reviews, a handful a year. We are 

doing them right now actively on these top 12 to 14, as I earlier 

explained. But the front line is this reliance on self-regulatory organizations, and it has been for decades. That is not a change. And 

I think that it can work, but we have to really work with them to 

make it work. 

Chairwoman STABENOW. Senator Roberts. 

Senator ROBERTS. Thank you, Madam Chairman. 

I am going to continue in regards to the line of questions that 

I had for the Chairman. The time line surrounding your statement 

of non-participation, I know everybody is talking about either 

recusing, stepping aside, or not participating. I am not too sure 

36 

what the difference is. Your response to my letters raises questions 

about who was in charge of CFTC’s work in the early days of this 

event. I am talking, obviously, about MF Global. 

According to your letter, you notified the General Counsel that 

you would not participate in enforcement matters. Why did you 

come to this realization on November 3? Had you not been participating in official CFTC actions regarding MF Global before this 

date? 

Mr. GENSLER. As I mentioned, Senator, I had conversations directly with the General Counsel and through my staff with the 

Ethics Officer himself throughout those days and they had indicated that it was warranted for my involvement to stay participating. I indicated to the General Counsel on that Thursday that 

I thought that it could be a distraction to the very important work 

of pursuing where was the cash, where was the money, get the 

money back, and any investigation or enforcement matters. 

Senator ROBERTS. Well, why would your participation be a distraction for that effort? Why? 

Mr. GENSLER. Though I had not worked at the same firm in 14 

years, and though I had not worked with the individual in nine 

years—— 

Senator ROBERTS. All right. You went over that. I am sorry. 

Mr. GENSLER. I am sorry. 

Senator ROBERTS. You jogged my memory. I think another question will help on that. Your statement of non-participation is dated 

November 8. My question obviously is, who was in charge between 

November 3, or you could go back to October 24, and November 8? 

Furthermore, Commissioner Sommers was not appointed the Senior Commissioner for this investigation until November 9. Who was 

steering the ship while you were deciding what you could and could 

not be involved in, or your attorney, or the Ethics Officer? 

Mr. GENSLER. Well, as most things at the CFTC, we have talented staff, very excellent staff in the enforcement and other divisions—— 

Senator ROBERTS. So staff was in charge? 

Mr. GENSLER. I—the reason it took until, if you can remind me, 

the 7th or 8th for me to sign a document is I—— 

Senator ROBERTS. It was November 8. 

Mr. GENSLER. I thank you. I turned it over to the General Counsel that Thursday and said, if he could work through how to document this and to work with the other four Commissioners in terms 

of what would be the proper oversight moving forward. 

Senator ROBERTS. Okay. A personal question. Why did it take 

you an additional 13 days and a follow-up letter from me to send 

your response on exactly what you are stating there? 

Mr. GENSLER. Part of it is just the press of business at an agency 

like ours. I had hoped that there was enough communication—— 

Senator ROBERTS. Okay. 

Mr. GENSLER. —but if there was not, I will try to work better to 

communicate with you personally and your office—— 

Senator ROBERTS. Okay, I appreciate that. 

Mr. GENSLER. —more promptly. 

Senator ROBERTS. Media reports say that you met with Mr. 

Corzine on Regulation 1.25. That is the regulation we are all talkVerDate Nov 24 2008 12:46 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 C:\DOCS\75116.TXT MICHA
37 

ing about. Is this true? If yes, why did you not recuse yourself 

then? 

Mr. GENSLER. As many, many companies have asked for phone 

calls or meetings, they asked for—it was actually a phone call in 

July of this year and we promptly put it on our website, as we have 

1,100 other similar circumstances. But I was participating in the 

general rule writing as I was then and continue to participate in 

general rule writing. 

Senator ROBERTS. Well, but did you meet with Mr. Corzine on 

Regulation 1.25? 

Mr. GENSLER. Well, there was this phone call that staff and I 

participated in July. 

Senator ROBERTS. I see. And you consider that a normal situation or business as usual, but now, since this has popped up, you 

have chosen to recuse yourself because of that, or the impression 

of that, or the perception of that, or—— 

Mr. GENSLER. No. It was really as of that Thursday of that week 

there had been a transition from a registrant had gone into bankruptcy and there was an ongoing investigative matter, and that 

Friday there was going to be an open surveillance meeting to discuss those matters, and I turned to General Counsel Berkovitz and 

asked him what I needed to do, and he said, you do not need to 

do anything different. And I said, let me tell you that I think it 

could be a distraction—— 

Senator ROBERTS. Well, it is now. 

Mr. GENSLER. —to the very good work of the government. 

Senator ROBERTS. I mean, if you determined that you met with 

Mr. Corzine on Regulation 1.25 and you know that in the back of 

your head, and then you say, well, from October 26 to November 

8, and I am asking who is in charge and you are saying staff, and 

then all of a sudden it pops out of the woodwork that we are either 

stepping aside or we are not participating or we are recusing—and 

I still do not know what any of that means really. I do not understand why you just did not recuse. 

Now you are going to have an investigation by Commissioner 

Sommers and the CFTC and this is going to drag on for a considerable amount of time until we find out really what happened to the 

money. And you have all sorts of conjecture in the press and the 

media about that and you are going to still be, what, non-participating? That just raises it up as a bigger distraction. 

I think you should have probably just gone ahead and said, hey, 

I am the Chairman. I can make these decisions. But now you have 

said that you are non-participating. We had two regulatory questions and you said, ‘‘I am non-participating.’’ That is a dodge, you 

know? That is not right. Can you clarify the Regulation 1.25 is not 

a Dodd-Frank prescribed regulation? In fact, did the CFTC not 

issue an Advance Notice of Proposed Rulemaking on Regulation 

1.25 before Dodd-Frank was signed into law? 

Mr. GENSLER. There is one component that relates to DoddFrank, but most of it is, you are right, is not necessarily DoddFrank. The one component is Dodd-Frank said we had to withdraw 

reliance on rating agencies in all of our rules, and that is a component of the 1.25 rule. 

38 

Senator ROBERTS. All right. As we go through this inquiry, or 

hearings here—not an investigation, but an inquiry, hearings, and 

I again thank the Chairwoman for her efforts in this regard—and 

I realize I am out of time, but I just—I am having a lot of trouble 

with your non-participation or recusal. Can you spell out the specific terms of your non-participation, or is it a recusal? I know you 

said you are going to step aside. And again, this is going to go on 

for quite some time and you are going to get an awful lot of questions and you are just going to say, ‘‘Well, I cannot answer that because I am non-participating.’’ I think it would be better for you to 

say, ‘‘I am recused,’’ or not being—or turn it around and say, ‘‘I 

made a mistake. I can answer these questions.’’ Because now it is 

a distraction, Gary. Come on. 

Mr. GENSLER. Senator, I am not participating in the matters, and 

the letter that you posted on your website, including the document 

of my non-participation, is of public record. I thank you for putting 

it on the website. I mean, I am not participating so that it is not 

a distraction to the hard working efforts of the staff on these matters, and that includes—the General Counsel will make determinations, but that includes the bankruptcy and the matters related 

to—the General Counsel was very clear with me that it would be 

broadly interpreted with regard to matters related to this company. 

Senator ROBERTS. All right. I will take it at that. 

Madam Chairman, I had just a couple of questions on the rulemaking, and I know that this has gone on for a long time and I 

think you have, as well. 

Chairwoman STABENOW. Yes. We can do—Senator Klobuchar is 

here. We can—— 

Senator ROBERTS. Oh, I am sorry. I apologize to the Senator. My 

apologies. 

Chairwoman STABENOW. No, no. That is okay. Thank you very 

much. We will, in fact, do another round, Senator Roberts, because 

I have additional questions, as well. 

Senator Klobuchar. 

Senator KLOBUCHAR. Very good. Thank you very much, Madam 

Chairman. 

Getting a little broader here and the effect this is going to have 

in general on the markets, I am just looking at the fact that this 

is rural America, people like Dennis Magnuson, who is a pork producer in Austin, Minnesota, that were not directly—and even those 

that were not directly impacted in the agriculture community have 

serious concerns. And my question is, what do you see as the longterm economic consequences of the MF Global failure? We certainly 

saw long-term consequences with Lehman Brothers and other failures. Are you concerned that a lack of confidence regarding the security of segregated accounts could lead to a less predictable and 

more volatile commodities market? 

Mr. GENSLER. I think it is critical for people, as you just mentioned—was it Dennis?—and others have confidence, because the 

economic welfare of Dennis and of America relies on people being 

able to protect themselves against price risk, as the price of corn 

or wheat or oil going up or down or interest rates going up or 

down, and focusing on what they really do best. And so I think we 

are all committed at the CFTC to ensuring in that confidence. 

39 

Firms will fail from time to time. We are not going to repeal that 

nature. Firms in every other field fail, not just the financial world 

fail. But what we have to ensure is when they fail, it does not become systemic, and when they fail, that the customers are protected and that the money and the segregation of that money is 

protected and it might be only invested in sort of a little bit boring 

stuff, but it is invested, you know, safely. 

Senator KLOBUCHAR. We like boring stuff in our State. 

There are a lot of questions, speaking of those damages, about 

the amount of the shortfall. The only public statement from the 

trustee has been $1.2 billion, almost double the early estimates 

that we heard from the CFTC and CME. Regardless of the number, 

we know there is going to be a shortfall. And I do not know if Commissioner Sommers can answer this, but what do you see as the 

legal recourse that the victims of this have? 

Ms. SOMMERS. Senator, the process that is ongoing right now includes several different distributions of customer money back to the 

customers. It started with the transfer of the open positions that 

were on the exchanges. That happened first, along with the margin 

that supported those positions. Approximately 60 percent different 

for different customers transferred with those positions. 

The next group of transfers that was approved by the court was 

cash only, people who did not have positions that had cash only at 

MF Global. They were given a distribution of approximately 60 percent. 

Now there are a couple other groups of people, people who liquidated after this SIPC bankruptcy went into effect on the 31st. 

Those people who liquidated in between October 31 and the time 

of the transfers, those people were not covered in the first two distributions, so they will be included in a motion that the trustee just 

filed this week to true up everybody who has not received distributions so far, to true those accounts up to approximately two-thirds 

of what was in the account. 

We are hopeful that we will be able to return all customer money 

to those customers, to make them whole. That is our goal and that 

is what we will be working with the trustee to make happen. What 

will probably happen after final distributions to true those accounts 

up is that all other claims will go through the formal claims process. 

Senator KLOBUCHAR. All right. Well, I really hope you are hopeful in the right way, that this happens, because, obviously, people 

are very, very concerned about this, and they have heard that twothirds number, but to get to the full reimbursement would obviously be our goal. 

Several constituents have had questions about CME’s $550 million guarantee, and I know you cannot speak for the Chicago Mercantile Exchange, but this guarantee certainly has a bearing on 

constituents. Can you discuss how this guarantee will work, because I know there is a lot of confusion. That will be my last question. 

Ms. SOMMERS. My understanding of the guarantee is that if the 

trustee were to distribute approximately 66 percent of the money 

back to the customers and in the end find that the shortfall in the 

customer funds account is more than what they anticipated so that 

40 

they had actually distributed more than they should have back to 

customers, this guarantee fund would cover any shortfall in the 

money that the trustee may have given out too much. 

Senator KLOBUCHAR. Right. So the extra money that we are looking for above the 66 percent, the two-thirds percent, they will have 

to find in other ways? 

Ms. SOMMERS. Right. It would be—if the shortfall is found in the 

end to be more than 34 percent, that guarantee fund would cover 

anything above that. 

Senator KLOBUCHAR. Okay. Thank you very much. 

Ms. SOMMERS. Sure. 

Chairwoman STABENOW. Thank you very much. 

Chairman Gensler and Chairman Schapiro, a number of times 

today, we have heard conversations about having resources, and we 

certainly want you to manage the resources that you have in the 

most effective way possible and to stretch every dollar. But I think 

it is realistic and important and fair to look at over the years what 

has happened, particularly on the CFTC side when in the last ten 

years we have seen the volume of future trades increase 435 percent and the staff budget go up nine percent. So that certainly does 

not correlate. And when we add to that the Wall Street Reform effort and title VII on top of that, this has created a very difficult 

situation. 

So I would appreciate both of you responding to the need for resources if we are going to truly oversee and protect markets and 

market integrity and market participants. We have seen calls to 

cut investigators and auditors in both of your agencies, and at the 

same time concerns are raised about customer protection, which is 

of great concern to me on behalf of the people I represent in Michigan and people I am hearing from in Michigan. 

We are told that there is great concern about not doing enough 

to look after the markets, but then the same folks will suggest cutting the resources, and again, the cops on the beat, the folks that 

are the investigators, the auditors, whatever is needed in terms of 

protecting American customers and their interests. 

Certainly MF Global is a stark reminder of the consequences if 

we play politics with agency resources, because, ultimately, we are 

talking about customers’ money and hard working people. I have 

heard from farmers. I have heard from retirees, grain elevators, 

other business people. Obviously, folks want us to take this very 

seriously. 

So I would like to ask each of you to respond to a level of funding 

that you believe you need to fully focus on the areas of concern that 

we have raised here in the committee. Chairman Gensler. 

Mr. GENSLER. I thank you. I think this is a good investment for 

the American public. Our funding this year was just boosted from 

$202 to $205 million. The President’s request for this year is for 

$308 million. And while our great nation is challenged by budget 

deficits, and so I appreciate that this is a hard request, taking on 

a market that is so vast and so complex as the swaps marketplace, 

I think it is in the order of probably, if it does not happen this year, 

I think it is going to be needed in the next two, three years to increase our funding about 40 to 50 percent. 

41 

Heavy emphasis on technology. Maybe it is technology goes up 

twice and staffing only goes up 30 to 40 percent. But we cannot 

send computers in front of judges, and you could not really have 

used a computer to do all the audits and examinations. I mean, we 

do need probably 30 to 40 percent more people. 

Chairwoman STABENOW. Thank you. 

Chairman Schapiro. 

Ms. SCHAPIRO. Thank you. We are obviously a lot larger than the 

CFTC, but the scope of our responsibilities is really extraordinarily 

broad when you think about issues ranging from market structure, 

mutual funds, money market funds, accounting, transfer agents, 

exchanges, broker-dealers, and clearing agencies. 

The President’s request for the SEC for this fiscal year—we are under a continuing resolution still—was $1.4 billion. Our goal with 

that would be to expand our enforcement and examination efforts 

and our core responsibilities, but also be able to operationalize the 

rules that we are in the process of finalizing for over-the-counter 

derivatives, hedge funds—those rules are finalized, to bring hedge 

funds over regulation—municipal advisors, credit rating agencies, 

and others. 

The one thing I think is important to note for the SEC is that 

we are deficit neutral. We have matched funding from industry fees 

and assessments that cover 100 percent of our appropriation. So 

depriving the SEC does not benefit other agencies in any way. 

Chairwoman STABENOW. Thank you very much. 

Finally, my last question, I cannot have both of you here and not 

talk about harmonizing rules, and so let me just ask, as you know, 

we in Congress require the agencies to consult and to coordinate, 

and I know that you are doing that, but we do have a lot of work 

left to do and then concerns that I have about really seeing that 

happen. The proposed rules are being released on separate time 

lines with significant differences in several key rules, notably swap 

execution facility rules. There are some differences certainly in 

commodities and securities markets, and having two separate systems, I understand there are differences, but it is really counterproductive, I think, and burdensome and simply makes market 

oversight tougher if we are not harmonizing definitions and rules 

and so on. 

You have both testified in the past that you are working together. I know that you are doing that. But at this point, despite 

the fact that there are a number of issues that I know that are 

quite contentious and quite complicated, it is absolutely critical 

from the customer standpoint, again, the public standpoint, that 

you be harmonizing what you are doing. 

So I would ask each of you, what are the greatest differences yet 

to be resolved between your two agencies and what final rules do 

you foresee being different in the future. Chairman Gensler. 

Mr. GENSLER. Well, we are working very closely on the definitions rules, on who is a swap dealer, a securities-based swap dealer 

and what is a swap and securities-based swap. Frankly, in that 

area, we will have some differences because the issue of forwards 

is so much more important that we do not inadvertently bring in 

some transaction on grain or energy into the definition of swap and 

it does not relate as much. So there is a lot of technical things that 

42 

you will be happy we are doing, but there will be some differences, 

I think. 

I think those two sets of definition rules, we really need to get 

out there, and the markets want to have that— lower that regulatory uncertainty. 

The swap execution facility rules might be in that later stage. 

You know, it will not be in January, for instance. I mean, I think 

it will take us a number of months more, and we are going to try 

to continue to narrow any differences in there. But as you mentioned, there might still be some differences because the futures 

market and the securities markets do have some differences, but 

we are trying to work to get in that where we can. 

Chairwoman STABENOW. Before Chairman Schapiro answers, I 

wonder if you might talk a little bit more specifically, though, 

about how close you are to finalizing the entity definitions and the 

product definitions, because those are really foundational rules, as 

you know, and important definitions that really need to be completed jointly. 

Mr. GENSLER. Though I had been optimistic throughout the 

month of October and November that we might vote on the entity 

definition rule this month of December, just given the press of business at both of our agencies, we have a document between us that 

is very close and it is getting final review by the economists and 

others. But I think that rule could be calendered—I will see if 

Chairman Schapiro will shoot me or not—for early to mid-January 

if we could get that last bit of work done. 

I think on the product side, we are a little bit behind because we 

only proposed that in April. Jointly, we proposed it in April. We 

have our comment summaries, our staff recommendations, and the 

two staffs are working on the actual document, but it may not be 

in front of Commissioners until January, which could then put off 

the vote for a little bit longer because Commissioners, of course, 

need to weigh in and deliberate, all ten Commissioners in this case. 

Chairwoman STABENOW. Chairman Schapiro. 

Ms. SCHAPIRO. I think that is a fair estimate for when we will 

be able to do the joint definitions. I think the effort right now is 

very much focused on the cost-benefit analysis and making sure it 

is as robust and thoughtful as it possibly can be. 

More broadly, you know, there are differences, obviously, between our rules and the CFTC’s rules, and Madam Chairwoman, 

as you point out, some of those distinctions or differences come 

about because of the distinctions between the products. Securitybased swaps and swaps can be quite different. They have different 

liquidity characteristics, in some instances different trading characteristics. 

But I think, also, each agency’s respective concerns about arbitrage with our existing markets has driven some of the differences, 

as well, for the CFTC between the OTC derivatives and the regulated futures markets, for us, between the derivatives and the primary equity markets. 

That said, I think that we have worked very well together. We 

are still trying to narrow differences where we can. I think the big 

differences really do come about in Reg SEF, the swap execution 

facilities, which we have defined basically multiple to multiple in 

43 

a different way. Around blocks, how to define block trades and the 

dissemination of block information to the marketplace is an area 

where we have some differences. There are some differences in the 

data elements for reporting between the two agencies. And then 

there are a number of other perhaps less significant ones. 

And I think a lot needs to come together as we do our implementation releases and talk about how we plan to build and sequence 

the rollout of these rules. 

Chairwoman STABENOW. Thank you very much. 

Senator Roberts. 

Senator ROBERTS. Thank you, Madam Chairwoman. 

Chairman Gensler, at a previous hearing, I posed to you a simple 

question regarding bona fide hedges that involved, as you recall, a 

Kansas grain elevator, and I understand that prior to your vote on 

the position limits rule, there is a colloquy between you and former 

Commissioner Dunn on this topic and the final rule. Were you able 

to resolve this issue? Yes or no. 

Mr. GENSLER. I think the answer is yes. We believe so. 

Senator ROBERTS. So all the country elevators out in Kansas can 

now not worry about putting up on their silos that they are a hedge 

fund, or that they continue to be a country elevator and not a 

hedge fund? 

Mr. GENSLER. They are country elevators. 

Senator ROBERTS. All right. Thank you. 

Chairman Schapiro, in July, the D.C. Circuit Court vacated your 

proxy rule based on your agency’s to be determined cost-benefit 

analysis. Some in the media have called the court’s opinion a stinging rebuke of the SEC’s methodology. You have already spoken to 

that to some degree with the Chairman on what you intend to do. 

I have long been, as I think everybody on the committee has been, 

an advocate for honest evaluation of the costs and benefits of our 

government regulations. That is the number one issue that I get 

in Kansas regardless of the other things that we are facing. 

What have you learned from this decision, and Chairman 

Gensler, how can other agencies like the CFTC learn from the 

court’s decision? 

Ms. SCHAPIRO. Thank you, Senator. We have learned from the 

decision. While we do not necessarily agree with all the court’s reasoning or findings, we have taken it very much to heart. We have 

continued to build our economic capability at the agency. We have 

a new Chief Economist and he is recruiting additional economists 

to our staff. 

We understand we need to better explain the choices that we 

make in our rulemaking and the costs and benefits of the different 

choices that we consider. We need to explain more effectively how 

we took commenters’ views into consideration as we proceeded with 

rulemaking. We have incorporated our economists much earlier in 

the process and kept them well incorporated throughout the entire 

rulemaking process so they can be part and parcel of the team that 

develops any regulatory proposals. We are seeking more economic 

data when we publish for comment our rule proposals and we are 

trying to do—and we are doing analysis at both the proposing stage 

and at the final stage. 

44 

So we are really redoubling our efforts in terms of a more robust 

process, more analysis where possible, recognizing that these can 

be very challenging analyses to do in particular circumstances. 

Senator ROBERTS. Well, the President issued an Executive Order 

clear back in January on this and another one in July and gave everybody, all independent agencies, 120 days to make a report. I do 

not know where yours is or that of the CFTC. 

Chairman Gensler, do you have any comment? 

Mr. GENSLER. We take the cost-benefit considerations very importantly. Our statute actually has a section, it is called 15a, but 

after the opinion to which you referred—I think it was in August— 

our Chief Economist and the lawyers all looked at that opinion and 

said, what do we need to do more? They produced yet another 

memo to all the team leads and to the Commissioners about that 

opinion. And so each of the rules that we are putting forward already had cost-benefit. We have vastly benefited from the public 

and their comments on this and we even hired a few more economists, as well, within the budget. 

In terms of the President’s Executive Order from January and 

July, though Section 15a does not exactly line up with the Executive Order, I think that it is consistent with the main themes of 

that Executive Order. And with regard to the 120-day review, we 

actually put something on our website. This was to review all of 

our former rules, anything in the rule book. We put something on 

our website to ask for public comment. I think we have actually— 

that comment period closed, where people sort of have come in and 

said, here are the things you should change in your former rules, 

and we need to do that, but we have not yet then gone back to revise the existing rulebook. 

Senator ROBERTS. Thank you. 

One final question, again, on your recusal. You indicated that 

staff, not a Senate-confirmed Commissioner, were in charge from 

November 3rd to November 8th. Can you tell us who ran the surveillance meeting on November 4th that you cited as a reason for 

stepping aside or being a non-participant on November 3rd? 

Mr. GENSLER. I was not there, but—so, Senator, when I am not 

there, when any Chairman is not there at the CFTC, the staff reports to the other Commissioners. So at the surveillance meeting, 

it would have been the Senior Commissioner who was there that 

Friday morning who—and it was not the first surveillance meeting 

I was not at. I mean, there are times where matters come up and 

it is the senior person. 

Senator ROBERTS. Sure. All right. Thank you. 

Chairwoman STABENOW. Well, thank you very much to both of 

you, again, for coming in and being available to the committee. 

I would just say for the notice of the members that additional 

questions for the record should be submitted to the clerk five business days from now, which is 5:00 on December 8. 

Let me also indicate that I have submitted a number of significant questions for the record to both of you regarding MF Global 

and other Dodd-Frank related matters, including high-frequency 

trading, inter-affiliate transactions, small business broker exemption, a question that deals with important competitiveness issues 

like bundling of services for swap data, repositories and derivatives 

45 

clearing organizations, and I would appreciate prompt answers to 

all of these questions. We have a number of important questions 

that we would appreciate your answers to. 

And to members of the committee, I would remind you that we 

will be holding a hearing on MF Global and the bankruptcy on December 13th in the morning. 

Finally, let me just say that this is about, again, customers. This 

is about American citizens, farmers, ranchers, retirees in Michigan 

that have contacted me, cooperatives, grain elevators, anyone who 

needs the markets to hedge their risk and trusts that the system 

is going to work and that their money is going to be where they 

thought it was going to be. And so as we move forward, we are 

going to let the facts take us wherever they take us. This is very 

serious. We take our oversight responsibility very seriously and we 

intend to work together to make sure that the people get the answers that they need. 

So thank you very much for being with us today. 

[Whereupon, at 12:34 p.m., the committee was adjourned.] 

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A P P E N D I X 

DECEMBER 1, 2011 

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