EXAMINING THE IMPACT OF THE 

VOLCKER RULE ON MARKETS, BUSINESSES, 

INVESTORS, AND JOB CREATION 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

AND THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JANUARY 18, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–95 

( 

EXAMINING THE IMPACT OF THE VOLCKER RULE ON MARKETS, BUSINESSES, 

INVESTORS, AND JOB CREATION 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

75–067 PDF 2012

EXAMINING THE IMPACT OF THE 

VOLCKER RULE ON MARKETS, BUSINESSES, 

INVESTORS, AND JOB CREATION 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

AND THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JANUARY 18, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–95 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(IV) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

January 18, 2012 .............................................................................................. 1 

Appendix: 

January 18, 2012 .............................................................................................. 77 

WITNESSES 

WEDNESDAY, JANUARY 18, 2012 

Carfang, Anthony J., Founding Partner, Treasury Strategies, Inc., on behalf 

of the U.S. Chamber of Commerce ..................................................................... 49 

Elliott, Douglas J., Fellow, The Brookings Institution ......................................... 53 

Evans, Scott, Executive Vice President, President of Asset Management, 

TIAA–CREF .......................................................................................................... 51 

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

(CFTC) ................................................................................................................... 12 

Gruenberg, Hon. Martin J., Acting Chairman, Federal Deposit Insurance 

Corporation (FDIC) .............................................................................................. 14 

Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan 

School of Management ......................................................................................... 52 

Marx, Alexander, Head of Global Bond Trading, Fidelity Investments .............. 55 

Peebles, Douglas J., Chief Investment Officer and Head of Fixed Income, 

AllianceBernstein, on behalf of the Securities Industry and Financial Markets Association’s Asset Management Group .................................................... 58 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission (SEC) ............................................................................................................. 11 

Standish, Mark, President and Co-CEO, RBC Capital Markets, on behalf 

of the Institute of International Bankers (IIB) .................................................. 60 

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

System ................................................................................................................... 10 

Turbeville, Wallace C., on behalf of Americans for Financial Reform ................ 57 

Walsh, Hon. John, Acting Comptroller of the Currency, Office of the Comptroller of the Currency (OCC) ............................................................................. 15 

APPENDIX 

Prepared statements: 

Garrett, Hon. Scott ........................................................................................... 78 

Hinojosa, Hon. Ruben ....................................................................................... 80 

Carfang, Anthony J. ......................................................................................... 83 

Elliott, Douglas J. ............................................................................................. 94 

Evans, Scott ...................................................................................................... 97 

Gensler, Hon. Gary ........................................................................................... 139 

Gruenberg, Hon. Martin J. .............................................................................. 143 

Johnson, Simon ................................................................................................. 161 

Marx, Alexander ............................................................................................... 165 

Peebles, Douglas J. ........................................................................................... 180 

Schapiro, Hon. Mary L. .................................................................................... 187 

Standish, Mark ................................................................................................. 198 

Tarullo, Hon. Daniel K. .................................................................................... 211 

Turbeville, Wallace C. ...................................................................................... 220 

Walsh, Hon. John ............................................................................................. 232 

Page

VI 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hinojosa, Hon. Ruben: 

Letter from the Small Business Investor Alliance ......................................... 242 

Perlmutter, Hon. Ed: 

Chapter written by Adair Turner ................................................................... 244 

Schweikert, Hon. David: 

Letter from the American Bankers Association ............................................. 249 

Written statement of BlackRock, Inc. ............................................................. 251 

Written statement of the Bond Dealers of America ...................................... 258 

Letter from the Business Roundtable ............................................................. 262 

Letter from CMS Energy ................................................................................. 264 

Comment letter of Professor Darrell Duffie ................................................... 267 

‘‘Market Making Under the Proposed Volcker Rule,’’ by Professor Darrell 

Duffie, Stanford University .......................................................................... 269 

Written statement of ICI Global ..................................................................... 300 

Written statement of the Investment Company Institute ............................ 307 

Written statement of the Securities Industry and Financial Markets Association ......................................................................................................... 319 

Written statement of SVB Financial Group ................................................... 372 

Carfang, Anthony J.: 

Written responses to questions submitted by Representatives Peters, 

Grimm, and McCarthy ................................................................................. 382 

Evans, Scott: 

Written responses to questions submitted by Representative McCarthy .... 386 

Written responses to questions submitted by Representative Peters .......... 387 

Gruenberg, Hon. Martin J.: 

Written responses to questions submitted by Chairman Bachus ................. 388 

Written responses to questions submitted by Representative Biggert ........ 390 

Written responses to questions submitted by Representative Peters .......... 391 

Written responses to questions submitted by Representative Huizenga ..... 392 

Written responses to questions submitted by Representative Grimm ......... 393 

Written responses to questions submitted by Representative McCarthy .... 394 

Marx, Alexander: 

Written responses to questions submitted by Representatives Peters and 

McCarthy ....................................................................................................... 395 

Peebles, Douglas J.: 

Written responses to questions submitted by Representatives Peters and 

McCarthy ....................................................................................................... 407 

Schapiro, Hon. Mary L.: 

Written responses to questions submitted by Chairman Bachus ................. 426 

Written responses to questions submitted by Representative Peters .......... 440 

Written responses to questions submitted by Representatives Huizenga 

and Peters ...................................................................................................... 442 

Written responses to questions submitted by Representative Grimm ......... 443 

Written responses to questions submitted by Representative Biggert ........ 448 

Written responses to questions submitted by Representative McCarthy .... 449 

Standish, Mark: 

Written responses to questions submitted by Representative McCarthy .... 450 

Written responses to questions submitted by Representative Peters .......... 452 

Tarullo, Hon. Daniel K.: 

Written responses to questions submitted by Chairman Bachus ................. 454 

Written responses to questions submitted by Representatives Huizenga 

and Peters ...................................................................................................... 461 

Written responses to questions submitted by Representative Peters .......... 462 

Written responses to questions submitted by Representative McCarthy .... 463 

Turbeville, Wallace C.: 

Written responses to questions submitted by Representatives Peters, Carson, and McCarthy ........................................................................................ 464 

Walsh, Hon. John: 

Written responses to questions submitted by Chairman Bachus, and Representatives Peters, Huizenga, Grimm, and Biggert ................................. 472 

(1) 

EXAMINING THE IMPACT OF THE 

VOLCKER RULE ON MARKETS, BUSINESSES, 

INVESTORS, AND JOB CREATION 

Wednesday, January 18, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, AND

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 9:33 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the Subcommittee on Financial Institutions and 

Consumer Credit] presiding. 

Members present from the Subcommittee on Financial Institutions and Consumer Credit: Representatives Capito, Renacci, 

Royce, Manzullo, McHenry, Pearce, Westmoreland, Luetkemeyer, 

Huizenga, Duffy, Canseco, Fincher; Maloney, Gutierrez, Watt, 

Hinojosa, McCarthy of New York, Baca, Lynch, Miller of North 

Carolina, Scott, and Carney. 

Members present from the Subcommittee on Capital Markets 

and Government Sponsored Enterprises: Representatives Garrett, 

Schweikert, Royce, Manzullo, Biggert, Neugebauer, Pearce, Posey, 

Hayworth, Hurt, Dold, Grimm, Stivers; Maloney, Waters, Sherman, 

Hinojosa, Lynch, Miller of North Carolina, Green, Ellison, Perlmutter, Donnelly, Carson, Himes, and Peters. 

Ex officio present: Representatives Bachus and Frank. 

Chairwoman CAPITO. This hearing will come to order. 

I would like to welcome everybody back from the Christmas and 

New Year’s holiday. We want to start with a good hearing, and I 

think that’s what we have in front of us today. 

I would like to thank both panels of witnesses for coming this 

morning. The participation in this morning’s hearing will help our 

members of the Capital Markets and the Financial Institutions 

Subcommittees better understand the complexities and the farreaching nature of the proposed Volcker Rule. 

Members and our witnesses should note that the first panel will 

be excused at noon; and, as we do expect Floor votes around 1 p.m., 

we will see what happens from there. Given the size of the second 

panel, we will likely recess and then come back at the call of the 

Chair. 

2 

Today’s hearing will examine implementation of Section 619 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

commonly referred to as the Volcker Rule, after former Federal Reserve Chairman Paul Volcker. This rule will prohibit U.S. bank 

holding companies and their affiliates from engaging in proprietary 

trading. We are going to learn a lot about the definitional boundaries of proprietary trading today. 

Proponents of Section 619 have made assertions that proprietary 

trading, the practice of banks buying and holding securities for 

their own accounts, was a key contributor to the financial crisis. 

On the contrary, Chairman Volcker himself has admitted that proprietary trading in commercial banks ‘‘was not central to the crisis.’’ I think this raises questions about the size and scope of the 

problems that Section 619 is seeking to resolve. 

The Federal financial regulators have been tasked with writing 

rules to carry out the objectives of Section 619. The result of their 

efforts is a proposed rule that is nearly 300 pages long and asks 

more than 1,300 questions for comment from market participants. 

This has led to significant confusion—I will put myself in that 

vote—and many unanswered questions over the consequences of 

implementing Section 619. 

This morning’s hearing will give members of the Capital Markets 

and Financial Institutions Subcommittees the opportunity to better 

understand the decision-making process of the Federal agencies. 

Our second panel of witnesses will testify to the potential effects 

the proposed rules will have not only on financial institutions but 

also institutional investors, pension funds, shareholders, and the 

American public in general. 

I would like to really thank our witnesses for joining us here 

today. This is a very serious issue, and the participation of the 

principals from the financial regulators is greatly appreciated by 

this chairman and the entire committee. 

At this point, I would like to yield to the ranking member of the 

Financial Institutions Subcommittee, Mrs. Maloney from New 

York, for the purpose of making an opening statement. 

Mrs. MALONEY. I want to thank the chairwoman for calling this 

very important hearing, and to welcome all of our distinguished 

guests, particularly two who were former residents of the great 

City of New York: Mary Schapiro and Gary Gensler. We look forward to your testimony. 

We are here today because of the financial crisis and recession which cost American families over $17 trillion in household wealth 

and business wealth, and over 5.5 million jobs. We are still recovering from this crisis, and a very important part of that recovery 

and the Dodd-Frank reform legislation was the Volcker Rule which 

we are discussing today, which some believe is the most important 

part of Dodd-Frank in terms of preventing another crisis. And I 

might add that as recently as September, building on the crisis we 

already had, the Swiss bank UBS lost $2.3 billion, thanks to a 

rogue unregulated trader; and MF Global, although not a depository institution, still cannot find over $1.3 billion. So, we clearly 

have a challenge. 

This past crisis, like most, was caused primarily by unregulated 

areas of the market through loan defaults, unconventional banking 

3 

activities such as mortgages, loans, and commercial real estate, 

which led to no market liquidity, no capital, and dried-up credit 

markets. The risky proprietary trading activities of some financial 

institutions, including some of the largest broker-dealers—Bear 

Stearns, Merrill Lynch, and Lehman Brothers—contributed to 

these conditions. Other losses at financial institutions would have 

brought them to bankruptcy had there not been extraordinary government intervention taken. 

Chairman Volcker proposed a ban on proprietary trading because 

he believed financial firms should be serving their clients, rather 

than taking risky bets for their own book of business, which in 

some cases would have put depositors at risk. Bonuses were tied 

to excessive risk-taking, unlike the Volcker Rule. Now, bonuses are 

rightly tied to fees and bid-ask spreads. The regulators have taken 

his simple, clear goal and made it overly complex, in my opinion, 

with over 298 pages of rules that are accompanied by over 1,000 

questions. 

I agree with the testimony last month by Sheila Bair—the 

former Chairman of the FDIC—before the Senate Banking Committee, where she stressed that the rule is too complex, particularly 

in seeing the bright line between proprietary trading and market 

making. Some financial institutions have already ended proprietary 

trading and have literally set up separate financial institutions for 

this purpose. 

Chairman Volcker has said that recognizing proprietary trading 

activity should be simple: You know it when you see it. But I do 

not see how you can see it unless you have access to the data. 

I am hearing some concerns from some of my constituents that 

the burden of providing this data is overwhelming. I would like to 

know from the panelists today to what extent the new compliance 

requirements are different from what financial institutions have 

had to provide in the past, and how are they different or are they 

the same as what the new Office of Financial Research will be collecting. 

While there were many causes that helped create the financial 

crisis, an inability of regulators and interested parties to see financial transactions was certainly one of them. Regulation did not 

cause the financial crisis, but we are discussing today ways to prevent another one in the future, and the Volcker Rule is an important part of that discussion and an important part of that prevention. It is important that we get it right. 

I look forward to your testimony today, and to seeing your final 

rule. 

Thank you. 

Chairwoman CAPITO. Thank you. 

I would like to recognized the chairman of the full Financial 

Services Committee, Chairman Bachus, for 3 minutes. 

Chairman BACHUS. Thank you, Chairwoman Capito, for holding 

this hearing, along with Chairman Garrett. 

To the regulators, I know that what you are doing is trying to 

carry out Section 619. That is what the Congress asked you to do, 

to prohibit proprietary trading, and I think that was a mistake. I 

think Section 619 was a mistake, and I think that is where the 

problem lies, that our request to you was a mistake. 

4 

None of us want to go through what we did in 2008 and 2009; 

we want to avoid the mistakes of 2008 and 2009. But proprietary 

trading was not one of those mistakes. Secretary Geithner has said 

that it did not cause the financial crisis. I am not sure that it contributed to the financial crisis. There were companies engaged in 

proprietary trading that did other dangerous activities, undercapitalized, overleveraged, and we certainly want to avoid that. 

And with Basel 3, I think the entire global community is going towards greater capital standards and we are addressing liquidity— 

leverage. You are addressing that. 

But what we are hearing from not only companies but consumers 

is that this rule will threaten the United States and its financial 

markets, its capital markets. They are the deepest and the most 

liquid in the world. And proprietary trading actually contributes to 

that liquidity. It contributes to that availability of capital. If we 

had not had liquid assets during the financial crisis, many of the 

loans to companies that otherwise would have failed would not 

have been made. 

These rules, I will admit are a responsible request from this Congress, from Dodd-Frank, but Section 619, in my opinion, will be a 

self-inflicted wound on this country, its economy, and its financial 

markets, because a country will not have a strong economy if its 

financial markets are not stable. They have to be safe, but they 

also have to be liquid. There has to be capital for investment. I believe this will restrict capital, I believe it will drive up the cost of 

loans, and I believe it will make our financial markets and, thus, 

our economy and our country less safe. 

So thank you—and let me end by saying that it will also cost 

jobs. I think that is becoming evident to all of us. It will cost hundreds of thousands of jobs. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize the ranking member of the Capital Markets Subcommittee, Ms. Waters from California, for 3 minutes. 

Ms. WATERS. Thank you very much, Chairwoman Capito and 

Chairman Garrett, for holding this joint hearing on the Volcker 

Rule. 

Three years ago, this country experienced the worst financial crisis since the Great Depression; and families continue to struggle 

with the resultant unemployment, foreclosures, and loss of equity 

in their homes. And while observers will disagree about the central 

cause of the crisis, I think there is wide agreement that a number 

of factors played a role in what we experienced in 2008. 

One of these factors certainly was proprietary trading or when 

banks make speculative investments in financial instruments from 

their own accounts rather than on behalf of the clients. This type 

of trading, while profitable during good times, proved to be tremendously harmful when bets on real estate and other assets started 

to soar. The GAO reports that in the 5 quarters during the financial crisis, the 6 largest U.S. holding companies lost a combined 

$15.8 billion from stand-alone proprietary trading desks. 

The Dodd-Frank Act, under the provision commonly known as 

the Volcker Rule, attempts to grapple with this particular cause of 

the financial crisis not by prohibiting proprietary trading altoVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
5 

gether, but by stating that banks which have access to the Federal 

safety net cannot use that advantage to make speculative bets in 

the market. 

The Volcker Rule likewise prohibits commercial banks from investing in hedge funds and private equity funds with certain small 

exemptions. The rationale behind this provision is that, while there 

is a justification for government support for commercial banks 

whose presence ensures a stable and continued flow of credit to 

small businesses and individuals, there is no public policy rationale 

for taxpayer subsidies for banks trading. 

However, even with clear prohibitions under the Volcker Rule, 

Congress recognized that commercial banks should still be able to 

serve clients through underwriting and market making or acting as 

an intermediary between buyers and sellers in a securities market 

and gave regulators significant flexibility to implement this provision. So I think the approach that Congress adopted under the 

Volcker provision was very measured and attempted to surgically 

excise only those elements of trading that posed the greatest risk. 

As one of our witnesses will testify to today, of course, the devil 

is in the details; and I am curious to hear from the witnesses here 

today on how they think this rule is being implemented by the 

interagency group of regulators on the first panel. In particular, I 

want to make sure that market making is not impeded and that 

the rule is not bogged down in complexity that will hinder compliance. 

So as I have said during on previous hearings on the implementation of Wall Street reform, I hope that the regulators are being 

responsive to legitimate industry concerns while they also uphold 

the intent of what we did in Dodd-Frank. 

I look forward to the witnesses’ testimony today, and I yield back 

the balance of my time. 

Chairwoman CAPITO. Thank you. 

I recognize Mr. Royce for 2 minutes. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

On the topic of international cooperation, 2 years ago we had the 

Deputy Treasury Secretary Wolin say we are working closely with 

our G-20 partners to make sure that we get a regime that works 

worldwide so that we don’t have new opportunities for arbitrage. 

That was the view then. 

Then, about 6 months ago, Michel Barnier, the European Union’s 

top financial regulator, came back and said that European regulators won’t seek a measure similar to Volcker. ‘‘We don’t have the 

same approach,’’ is what he said. 

So what has become clear in the months since passage is that 

neither Asia nor Europe are on board, and we are nowhere near 

a regime that works worldwide. And, instead, we go along with the 

hope that this approach will protect our markets here from another 

crisis. 

Unfortunately, better protecting our capital markets doesn’t come 

from micromanaging financial institutions. It comes from ensuring 

that no institution is too-big-to-fail, and enforcing higher capital requirements and liquidity standards. So if Volcker is going to be a 

priority for the Administration, it needs to be clear and concise, 

6 

something that Paul Volcker noted, and there needs to be international buy-in. 

And unfortunately, the proposed rule is anything but clear or 

concise. Ironically, we seem to get intra-national coordination. 

Among the five regulators responsible for this, we can’t seem to get 

them on board, let alone the implementation of the larger international cooperation we are seeking here. We have a problem internally getting concurrence on this. 

So until our capital markets operate effectively and allow for failure, the best policy response is to make the rules so simple that 

everyone can understand and enforce them, thus preventing carveouts and special favors. Volcker takes us in the opposite direction 

here. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Scott is recognized for 2 minutes for the purpose of an opening statement. 

Mr. SCOTT. Thank you very much, Chairwoman Capito. 

This is indeed an important hearing, examining the impact of the 

Volcker Rule on markets, businesses, investors, and job creation. 

In October, our Federal regulators issued a joint proposal on implementation of the rule, and it totaled 300 pages, over 1,300 questions, and 400 topics. Originally, the comment period established 

by Federal regulators had been scheduled to end last Friday, January 13th. However, to me and to many of my House colleagues, this 

timeline seemed much too brief in order to effectively capture the 

impact of this extensive and lengthy proposal. 

Therefore, I joined with 120 Members of Congress in cosigning 

a letter to our regulators requesting that the comment period for 

the rule be extended, and I expressed in the letter that there remained several unanswered questions about the Volcker Rule that 

must be carefully examined before its adoption. The rule will affect 

capital formation for United States’ businesses and, thus, the national economy in general at a time when a recovery is needed 

more than ever. 

I was and I remain a very strong supporter of the Dodd-Frank 

financial legislation from which the Volcker Rule’s provisions originated. However, this is my concern. We must be sure that the implementation of such a far-reaching rule will not have negative effects on overall market liquidity, thereby limiting economic growth. 

Our national economic health has an opportunity to improve, and 

it is improving greatly as we speak, and any action must be made 

deliberatively to warrant a healthy and lasting economic recovery. 

That is paramount. 

I look forward to the questions. Thank you very much, Madam 

Chairwoman. 

Chairwoman CAPITO. Thank you. 

I recognize Mr. Neugebauer for 11⁄2 minutes for an opening statement. 

Mr. NEUGEBAUER. I thank the chairwoman and I thank Mr. Scott 

for being one of the 121 Members who signed that letter, and I appreciate the regulators’ response to that. 

I would remind you there were three parts of that letter. One 

was to extend the comment period, and the second part of that was 

7 

to re-propose a rule after you had all of these comments. We have 

a piece of a rule here that has over 300 pages, and asks 1,300 questions. And so, you have to believe that after you hear back from 

all on those questions that obviously re-proposing the rule is the 

only right solution to make sure that after you have heard the answers to those questions obviously, hopefully, it makes the rule 

more effective. 

And then the third part of that is, because of this process, to 

move the deadline for implementation, because while you kept the 

comment period open, you did not extend the effective date. 

But I think interwoven into that, which is extremely important, 

is to have a comprehensive cost-benefit analysis. Because what we 

are hearing from both industries, from other countries, that this 

has far-reaching effects on the financial markets moving forward. 

Studies out there are saying this is going to cost investors billions 

of dollars, going to cost borrowers billions of dollars, and really basically change the landscape on transactions that we have been 

doing for a very long period of time. 

So I hope as we move forward today that we can have more discussion about what kind of cost-benefit analysis is actually going 

on and has been developed through this process, and I thank the 

chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize the ranking member of the full Financial Services Committee, Mr. Frank, for 3 minutes. 

Mr. FRANK. For how much time? 

Chairwoman CAPITO. I was informed it would be 3 minutes. 

Mr. FRANK. Thank you. 

I speak as one of the 315 Members of the House who hasn’t 

asked to you delay this. I must say that it does seem to me the 

delay here was a stalking horse for opposition in the case of most 

people, and I am particularly struck in general by people who don’t 

like regulation, and who think things are actually running pretty 

well from the legal standpoint during the time when all the troubles were accumulating, they have said they really are concerned 

about uncertainty and they blame a lot on uncertainty. So what are 

they asking for now? More uncertainty. They are asking for a delay 

in this rule. It is in the statute. It is coming. I don’t understand 

how you reconcile an argument that uncertainty is our major problem with a plea for more uncertainty by delaying the rule. 

We are also told that this is going to be putting us in international disadvantages by some. My understanding—and I hope 

this will be elaborated on in the testimony—is that in England, our 

major competitor in the financial area, they have a proposal called 

‘‘ring-fencing.’’ I don’t know what that means in England, but, 

whatever it is, as I read it, it seems to be more restrictive on the 

deposit-taking institutions than what we are proposing. 

And I think we do sometimes have financial institutions, when 

they talk about international regulation, they follow the motto of 

the teenage child of divorced parents playing mommy off against 

daddy, claiming that, ‘‘He will let me do it,’’ or ‘‘She will let me do 

it.’’ I do think, as I said, England has gone even further here. 

Then, we are told we shouldn’t do anything about it because it 

wasn’t the cause of the crisis. I agree this particular thing was not 

8 

the cause of the crisis. But the notion that in adopting regulation, 

we should deal only with things that have already proven to be 

problematic and not try to anticipate and not try to make other improvements, I think is a grave error. I do think that there is a reason to do this in a very comprehensive way. 

Finally, there is a complexity argument. As I understand the 

complexity argument, you are guilty, you regulators, of trying to 

accommodate some of the concerns that the financial institutions 

had. There are people who have Glass-Steagall nostalgia. They talk 

about how it was six pages. A very simple rule could have been formulated, but it would not have accommodated the concerns that 

you heard from the financial institutions. So, to some extent, they 

are complaining about your having accommodated them. 

The final thing—I said final, but there is one last point. 

Chairwoman CAPITO. If I may interrupt the ranking member for 

just a moment, I was informed incorrectly. You are to have 5 minutes. So, you don’t have to talk so fast, or you don’t need to wrap 

up so quickly. You have an additional 2 minutes. 

Mr. FRANK. There is the option of repeating myself, but we all 

take advantage of that. That comes with the territory. 

I will talk about—and I appreciate that, Madam Chairwoman. 

I was talking about complexity. One of the legitimate concerns 

we have heard is that market making is important because of liquidity. Although I was impressed with a chapter I just read in a 

compilation put out by the London School of Economics by Adair 

Turner, the head of the Financial Services Authority, in which he 

makes the argument, I think persuasively, that doing anything 

that increases liquidity, even by a very small amount, regardless 

of what it might mean in terms of instability, is not a good idea. 

There is a cost-benefit analysis that has to be applied for people 

who say anything that gives us more liquidity—I have bonds, and 

I would like them to be able to sell, but I don’t think they would 

have to be sold in 8 seconds for me to be satisfied. 

Market making is, however, a legitimate concern here. And what 

I am told by some is, well, yes, we understand that the regulators 

say they will allow market making by institutions regardless—that 

the Volcker Rule will allow them to engage in market making, but 

we are afraid that they will overregulate, that they will be too 

tough; and, therefore, institutions fearful of excessive rigidity and 

harshness, fearful of vindictive regulatory action if they come to 

close to the line will pull back too far. 

My question there is, in what universe have people been living 

in which the problem has been that financial regulators have been 

too tough, too harsh, too vindictive, have extracted too great a penalty for errors of misunderstanding? In fact, I think the record is 

very clear that our regulators over time, both parties have—if anything, we have underregulated and underapplied the rules. 

But one of the things I will ask our witnesses is, and I think this 

is important, my understanding is that the regulators do appreciate the importance of market making because of the legitimate 

contribution it makes to liquidity. And I would think a very good 

thing to do to not have uncertainty would be to get the rule put 

in place in a reasonable time period, not further delaying it and 

having the regulators demonstrate in fact what I hope they will 

9 

demonstrate today rhetorically that they appreciate the importance 

of market making and do not intend to enforce this rule in any way 

that will impinge on legitimate market-making activities. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I now recognize Mr. Grimm. 

Mr. GRIMM. Thank you, Madam Chairwoman. 

First, let me state that I disagree with my colleague on the other 

side of the aisle, the ranking member. I think the Volcker Rule is 

a terrible idea, and I think it should be repealed. 

Proprietary trading, as we just heard, was not a driving cause in 

the financial crisis, and this rule I think will do little more than 

add needless costs and complexity to an untold number of financial 

transactions. So, with that being said, it is my opinion that the regulators have also been a bit overzealous in proposing the rule and 

somehow found a way to make—through incredibly creative ways, 

actually—a terrible rule even worse. 

You take the exemptions of municipal securities, for example. 

Dodd-Frank is silent on the distinction between general obligation 

bonds and limited obligation bonds. Yet, the regulators saw fit to 

insert into the rulemaking language that explicitly subjects limited 

obligation bonds to the Volcker Rule. This decision will limit liquidity in these securities and raise the borrowing costs of municipalities for cities like New York City. 

With that, I will yield back. 

Chairwoman CAPITO. Thank you. 

And, finally, I would like to recognize Mr. Canseco for 1 minute 

for the purpose of making an opening statement. 

Mr. CANSECO. Chairwoman Capito, I would like to thank you and 

Chairman Garrett for having this hearing. 

When Dodd-Frank was passed a year-and-a-half ago, we were 

promised that there would be international coordination to ensure 

that the U.S. financial industry would not be left at a competitive 

disadvantage. Yet in the case of the Volcker Rule, the United 

States finds itself charging ahead while competing markets wait to 

find out just how big of an advantage they may have. 

In the international context, Volcker was supposed to be one of 

our field of dreams regulations: If we build it, they will come. Yet, 

no other country has adopted anything similar to the Volcker Rule, 

and as we will hear from our second panel today, the proposed rule 

would have a negative impact not just on U.S. competitiveness but 

on the individual investors, pensioners, and small businesses that 

rely on our capital markets for economic security. These types of 

outcomes have indeed become a disturbing trend in the wake of 

Dodd-Frank, and I am eager to hear from our witness today on this 

very important matter. 

Thank you. 

Chairwoman CAPITO. Thank you. 

That concludes our opening statements. I would now like to introduce our witnesses for the purpose of giving a 5-minute opening 

statement. 

I will begin with the Honorable Daniel Tarullo, Governor, Board 

of Governors of the Federal Reserve System. 

Welcome. 

10 

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

SYSTEM 

Mr. TARULLO. Thank you, Chairwoman Capito, Chairman Bachus, Ranking Member Waters, Ranking Member Frank, and other 

members of the committee. 

I should begin by saying that I think our goal—certainly at the 

Federal Reserve but really of all the regulators—is to implement 

the Volcker Rule in a manner that is faithful to the language of 

the statute but in a manner that maximizes financial stability and 

other social benefits at the least cost to credit availability and economic growth. That is, we begin with the statutory language and 

we work from there. 

I found that the biggest drafting challenge in implementing the 

Volcker Rule is to distinguish between prohibited proprietary trading on the one hand and underwriting, market making, and hedging on the other. In my prepared remarks, I used market making 

to make this point and I will try to do so briefly in this oral presentation. 

While there are relatively obvious examples of pure proprietary 

trading, and at least a textbook version of pure market making, in 

the broad middle between these two clear cases falls a good bit of 

what we actually see in firms. The difficulty is that a proprietary 

trade and a trade pursuant to market making can be indistinguishable based solely on the features of the trade itself. In both activities, the banking entity is acting as principal, holds the position for 

a relatively short time, and gains a profit or suffers a loss based 

upon any price variation in the security during the time it is held. 

The statute recognizes this difficulty and uses an intent test to 

distinguish between the two types of trade. Thus, the definition of 

trading account refers to the purpose of near-term resale and the 

intent to profit from short-term price movements. 

Obviously, it will be difficult for regulators to monitor purpose 

and intentionality directly. So, the agency proposal sets forth a 

framework that includes the factors that the agencies see differentiating prohibited and permitted trades, includes a requirement 

that firms establish a compliance program in accordance with those 

factors, and includes data collection and reporting requirements to 

facilitate monitoring of firm compliance and the potential development of more precise guidance over time. 

There is no question that this is not a simple test. Staffs and 

principals from the agencies considered various possible alternative 

approaches. And while some alternatives may seem simple when 

described in a sentence, they proved to promise considerable complexity or deviation from the statutory standards in practice. That 

is, as we thought through what they would mean in practice. So 

that is why the proposed rule takes the approach that it does. 

But we are clearly open to a better idea if there is one out there. 

I would only ask that anyone making such a proposal first remember that we have to follow the statute and, second, to give us 

enough detail so we can make a comparison of the relative efficiency and efficacy of that idea relative to the proposed agency 

rule. 

Thank you very much. 

11 

[The prepared statement of Governor Tarullo can be found on 

page 211 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Next, I would like to recognize the Honorable Mary Schapiro, 

Chairman, U.S. Securities and Exchange Commission, welcome. 

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

Ms. SCHAPIRO. Thank you. 

Chairwoman Capito, Chairman Bachus, Ranking Members 

Waters and Maloney, and members of the subcommittees, thank 

you for the opportunity to testify regarding the Commission’s joint 

proposal with the Federal banking agencies to implement Section 

619 of the Dodd-Frank Act, commonly referred as to the Volcker 

Rule. 

The proposal reflects a collective and extensive effort by the 

agencies to design a reasonable and balanced rule implementing 

the required prohibitions and restrictions on proprietary trading 

and investing in covered funds in a way that is consistent with the 

language and purpose of the statute. 

As you know, the statute defined a number of key terms, including banking entities subject to the rule, proprietary trading, and 

trading accounts. Under the law, any position that is in a banking 

entity’s trading account is subject to the statutory provisions. 

The proposed rule captures all SEC-registered dealers and security-based swap dealers accounts as trading accounts. The proposal 

also recognizes the need for these entities to be able to provide critical liquidity to our markets, capital for issuers, and intermediation 

services to customers. Therefore, while the proposal, consistent 

with the statute generally, prohibits proprietary trading, it does 

allow market making, underwriting, and risk mitigating hedging. 

In drafting the proposed rule, the Commission and its staff focused on these three activities because they are absolutely integral 

to the effective operations of the securities markets. 

In particular, underwriting activity is important to capital formation and economic growth. The proposal, like the statute, continues 

to permit trading activities that serve an important role in support 

of effective underwriting. 

Much like underwriting, the proposal recognizes the very important benefits of market making, including customer intermediation 

and market liquidity. Permitting legitimate market making in its 

different forms should facilitate market liquidity and efficiency by 

allowing covered banking entities to continue to provide customer 

intermediation and liquidity services in both liquid and illiquid instruments. 

As acknowledged in the proposal, effective market making also 

involves hedging of market making positions and anticipatory market making related trading activity. 

The proposal also recognizes that an overly broad interpretation 

of underwriting market making or risk mitigating hedging could 

result in these exemptions being used for evasive purposes. In addition, where exemptions are permitted, an exemption is not available if the transaction or activity involves a material conflict of interest, higher risk assets or trading strategies, or a threat to a covVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
12 

ered banking entity’s safety and soundness or to U.S. financial stability. 

Further, a key component of the proposed rule is the requirement for a tiered compliance program reasonably designed to monitor a banking entity’s permitted activities including, again, underwriting, market making and hedging, and investing in covered 

funds and to ensure compliance with the specific requirements of 

the statute and the proposal. 

As an additional means of monitoring market-making activities 

and preventing evasion of the prohibition on proprietary trading, 

the proposal sets forth specific quantitative measurements that certain covered banking entities would be required to calculate, report, 

and record for their trading units engaged in market-making activities. 

The statute also specifies that a banking entity may not invest 

in or sponsor a hedge fund or a private equity fund, which are defined in the proposed rules as ‘‘covered funds.’’ The Commission 

recognizes that it is critical to define covered fund in a manner that 

would implement the purposes of the statute; and, thus, the proposal seeks extensive comment on the proposed approach as well 

as alternative ideas. We expect that commenter input will help inform our understanding of the potential scope and impact of the 

proposed definition. 

Finally, the proposal includes a joint request for comment on the 

potential impacts of the proposed implementation of the statute, including the potential compliance costs, competitive effects, and impacts on market liquidity and efficiency. In addition, the proposal 

seeks commenters’ views on the costs and benefits of all aspects of 

the proposal, as well as comment on whether alternative approaches to implementing the Volcker Rule would provide greater 

benefits or involve fewer costs. We encourage commenters to provide quantitative data to the extent possible in support of comments regarding the potential economic impact of this proposal. 

In conclusion, we are committed to working closely with our fellow regulators to carefully review the comments and to further refine the rule prior to adoption. 

I will be happy to answer your questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 187 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is the Honorable Gary Gensler, Chairman, 

Commodity Futures Trading Commission. 

Welcome. 

STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, 

COMMODITY FUTURES TRADING COMMISSION (CFTC) 

Mr. GENSLER. Good morning, and thank you, Chairwoman Capito, Chairman Garrett, and Ranking Members Maloney and 

Waters. It is also good to see Chairman Bachus and Ranking Member Frank of the full committee. Thank you for inviting me to 

speak today on the Volcker Rule. I also am glad to join my fellow 

regulators in testifying today. 

13 

Following Congress’ mandate last week, the CFTC-proposed 

Volcker Rule is consistent with the joint rule proposed in October 

by Federal regulators. 

The Commission’s proposal also included additional questions. I 

know there were 1,300, but we added a few additional questions 

seeking public comment on whether certain provisions of the common rules are even applicable to CFTC registrants which are part 

of a banking entity. 

The Dodd-Frank Act, as we have all just been talking about, 

amended the Bank Holding Company Act to prohibit banking entities from engaging in proprietary trading, yet also permitted certain activities. The one that has gotten the most talk here is about 

market making and risk mitigating hedging. So the law requires 

the banking entities with significant trading activities to have policies and procedures in place to identify and prevent violations of 

this statutory provision on proprietary trading. 

The Dodd-Frank Act directs the CFTC to write rules implementing the Volcker requirement for just those parts of the banking entity for which the agency is a primary regulator. So what 

does that mean in real terms? The CFTC’s role with regard to the 

Volcker Rule is significant, but it is a supporting member along 

with the bank regulators who have the lead on bank holding companies. 

The Dodd-Frank Act requires that the various regulators consult 

and coordinate, and that is what we have done, though we were a 

bit later than others, just sheer capacity issues at the CFTC. But 

the proposed rule would apply to the activities that we register at 

the CFTC. What is that? Futures Commission merchants and swap 

dealers. 

For a swap dealer that is part of a larger bank, the CFTC rule 

applies just to the activities of the swap dealer, not the broader activities of the bank. Or for a Futures Commission merchant that 

is also registered as a broker-dealer, our rule would be about their 

futures activities. For their brokerage activity, that would be over 

at Chairman Schapiro’s Commission. 

In adopting the Volcker Rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers 

at risk. But, at the same time, Congress permitted banking activities to engage in market-making activities, something that is vital 

to the liquidity of the capital markets. So one of the challenges that 

we as regulators are all faced with is finalizing the rule in achieving these twin goals that Congress laid out for us. 

I think it will be critical to hear from the public on how best to 

achieve Congress’ twin mandates, as I would call them here. The 

public has been invited to comment on this for 60 days, in our case, 

which hopefully brings us in line with the other regulators. I think 

there will be substantial public input, and we look forward to it. 

As with other rules, the CFTC is working to implement this rule 

in a thoughtful, balanced way, not against the clock; and the Commission specifically requests comments from the public regarding 

the cost, benefits, and economic effects of the proposed rule. 

In Chairmen Capito and Garrett’s letter to us inviting us to 

speak here today, you solicited and asked us questions about the 

economic effect, which I believe are included in the CFTC’s release. 

14 

But further in conversations with Chairman Bachus and a number 

of the chairs of the subcommittees, you have stressed the importance as we move forward to finalize the rule in taking into consideration the economic effects of the rule; and I think consistent with 

these conversations, we will do just that—carefully consider all of 

the incoming public comments, importantly including those on the 

economic effects. 

I thank you and look forward to your questions. 

[The prepared statement of Chairman Gensler can be found on 

page 139 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is the Honorable Martin J. Gruenberg, Acting 

Chairman, Federal Deposit Insurance Corporation. 

Welcome. 

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, 

ACTING CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Mr. GRUENBERG. Thank you very much, Chairwoman Capito, 

Chairman Garrett, Chairman Bachus, Ranking Members Frank, 

Waters, and Maloney, and members of the subcommittees. Thank 

you for the opportunity to testify today on behalf of the FDIC on 

the proposed regulations to implement the so-called Volcker Rule. 

Section 619 of the Dodd-Frank Act is intended to strengthen the 

financial system and constrain the level of risk undertaken by 

firms that benefit from the safety net provided by Federal deposit 

insurance and access to the Federal Reserve’s discount window. 

While Section 619 broadly prohibits proprietary trading, it provides several permitted activities that allow banking entities to 

continue to offer important financial intermediation services and to 

ensure robust and liquid capital markets. Most notably, Section 

619 allows banking entities to take principal risk to the extent necessary to engage in bona fide market-making and underwriting activities, risk mitigating hedging, and trading activities on behalf of 

customers. 

The statute also prohibits acquiring and retaining an ownership 

interest in or having certain relationships with a hedge fund or private equity fund subject to certain exemptions. The challenge to 

the regulators—and I really think this has been articulated by all 

of us this morning—in implementing the Volcker Rule is to prohibit 

the types of proprietary trading and investment activity that the 

statute intended to limit while allowing banking organizations to 

provide legitimate intermediation in the capital markets. 

Consistent with the requirements of Section 619 of the DoddFrank Act, the FDIC participated in a coordinated interagency 

rulemaking effort with the Federal Reserve, the OCC, the SEC, 

and the CFTC. In drafting the proposed rule, the agencies also benefited from the required FSOC study on implementing the Volcker 

Rule and the many comments received from interested stakeholders. 

As drafted, the proposed rule is intended to carry out the statutory requirements to prohibit proprietary trading and establish 

prudent limitations on interest in the relationships with hedge 

funds and private equity funds consistent with Section 619. It is inVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
15 

tended to allow banking entities to continue to engage in permitted 

activities including bona fide market-making and underwriting activities, risk mitigating hedging, trading on behalf of customers, 

and investments in covered funds consistent with the statutory 

mandates. The goal is to allow banking organizations to continue 

to provide important financial intermediation services. 

While most proprietary trading has been conducted by the largest bank holding companies, the FDIC and other agencies have 

carefully considered and limited the potential impact of the proposed rule on small banking entities and banking entities that engage in little or no covered trading activities. Accordingly, the 

agencies have proposed to limit the application of certain requirements such as reporting and recordkeeping requirements and compliance program requirements for those banking entities that engage in less than $1 billion of covered trading activities or covered 

fund activities and investments. 

Further, the FDIC and its fellow agencies recognize that there 

are economic impacts that may arise from the proposed rule and 

its implementation; and, therefore, we specifically requested public 

comment and information on this issue. As has been noted, we extended the comment period until February 13th to allow interested 

persons more time to analyze the issues and prepare their comments. The agencies will analyze the potential impacts of the rule 

based on the comments received and work to minimize the burden 

on the industry and the public while meeting the statutory requirements set by the law. 

Thank you very much, and I will be glad to respond to your questions. 

[The prepared statement of Acting Chairman Gruenberg can be 

found on page 143 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our final witness is Mr. John Walsh, Acting Comptroller of the 

Currency, Office of the Comptroller of the Currency. 

Welcome. 

STATEMENT OF THE HONORABLE JOHN WALSH, ACTING 

COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC) 

Mr. WALSH. Thank you, Chairmen Garrett and Capito, Ranking 

Members Waters and Maloney, members of the subcommittees, and 

Chairman Bachus and Ranking Member Frank. I appreciate the 

opportunity to appear today to provide an update on the work of 

the Office of the Comptroller of the Currency in connection with 

the Volcker Rule. 

As you have heard the OCC, the Fed, the FDIC, and the SEC 

published our implementing regulation on November 7, 2011. The 

legislation itself is complex, and its impact and the impact of its 

implementing rules will have significant consequences for the operations of our Nation’s banking firms and the financial system as a 

whole. 

Recognizing these considerations and to enable commenters to 

react to the CFTC’s subsequently proposed rule to implement Section 619, the OCC, the Federal Reserve, the FDIC, and the SEC 

recently extended the deadline for submitting comments on our 

16 

proposal by 1 month, to February 13th. We are hopeful that this 

extension will give the public more time to evaluate the proposal 

and provide robust comments. 

As described in my written statement, the agency’s proposal implements the prohibitions, restrictions, permitted activity exceptions, backstops, and rules of construction of Section 619. This combination of statutory provisions alone is quite complex. 

The proposed rule also establishes requirements for statutorily 

permitted activities and interprets many of the permissible activity 

provisions conservatively, including in particular the provisions for 

underwriting, market-making related activities, and risk mitigating 

hedging. Admittedly, the proposal’s approach for implementing the 

statutorily permitted activities introduces a number of operational 

complexities in an effort to be precise in drawing distinctions between permissible and prohibited activities. 

The proposed rule also requires banking entities engaged in any 

permitted activity to develop and implement a compliance program 

that addresses internal policies and procedures, internal controls, 

a management framework, independent testing, training, and recordkeeping. The extent of these requirements escalates depending 

upon the volume of activity. 

It has been noted by many that the proposal contains an unusually large number of questions. While the number of questions may 

seem daunting, they were driven by our desire to understand what 

may be quite complicated and significant consequences of elements 

of the proposal and to provide a sound legal basis for adjusting key 

areas of the rule where the agencies deem that necessary. 

As the regulator of many of the banks that will be most affected 

by the Volcker Rule, the OCC is particularly concerned with how 

to strike the right balance in identifying and preventing impermissible activities without undermining activities that are safe, sound, 

and profitable; that help reduce a bank’s overall risk profile; and 

that contribute to healthy and liquid markets. 

We also recognize the compliance burdens on banking entities of 

all sizes arising from the proposal and therefore will be keenly interested in whether comparably effective compliance results could 

be achieved through less burdensome approaches. 

We appreciate the concerns raised about the potential burden of 

the proposed regulation in addition to the Volcker Rule statutory 

provisions. To date, the OCC has completed an assessment of the 

impact of the proposal on OCC-regulated entities under the Unfunded Mandates Reform Act and the Regulatory Flexibility Act. 

We are also soliciting extensive comments on the full economic impact of the proposal, including its impact on market making and 

liquidity, cost of borrowing by businesses and consumers, and the 

price of financial assets. We have strongly encouraged comments on 

these issues and hope that the extended comment period will facilitate thoughtful and robust responses. 

The letter of invitation also solicits views on whether the proposal places U.S. banking entities at a competitive disadvantage. 

Competitive consequences here have various sources. There are 

competitive consequences that follow from provisions of the statute 

that reflect legislative choices made by Congress that may differ 

from approaches adopted in other jurisdictions. These differences 

17 

are based on policy as well as risk management grounds, and it is 

not unique for the United States and other jurisdictions to have 

differences on such issues. 

Second, the manner in which the provisions of the statute are 

implemented by regulation can affect its competitive impact. This 

is why we welcome comments on the impact of the proposed rulemaking on the competitiveness of U.S. banking entities as well as 

comments on the flexibilities that may exist in the statutory requirements. 

I appreciate the opportunity to update the committee on our 

work. This is very much a work in process. We appreciate your concerns and will certainly keep the committee advised of the status 

of the rulemaking effort. 

I am happy to answer your questions. 

[The prepared statement of Acting Comptroller Walsh can be 

found on page 232 of the appendix.] 

Chairwoman CAPITO. Thank you. 

I want to thank all the witnesses, and I would like to begin the 

questioning. 

Governor Tarullo, you mentioned—I think one of the most telling 

parts of your statement was when you said you are clearly open to 

new ideas. And I think all of you have expressed a real eagerness 

to see the comments and the comment period, but you have asked 

for backup data and details to legitimize that. I am concerned—and 

I think many of us have expressed this—in this time of economic 

slowdown, what kind of effect this would have on the man on the 

street here in West Virginia or other various States in terms of obtaining credit, in terms of our community banks being able to supply funds for small businesses, home mortgages, etc. Is this one of 

the effects that you are going to be looking at in more detail as you 

move through this comment period? 

Mr. TARULLO. Certainly, as I said, Madam Chairwoman, the task 

for us is to figure out the most effective and efficient way to implement the statutory language. To my mind, that includes considering the effects of the various alternatives that are available. The 

impact on credit and credit availability which would presumably 

come through the liquidity channel that several of your colleagues 

have mentioned would be one of those. 

Chairwoman CAPITO. Thank you. 

Chairman Schapiro, we were talking in the back room, and somebody mentioned that Mr. Volcker had said of proprietary trading, 

‘‘You will know it when you see it.’’ And then you and I discussed 

whether proprietary trading desks were still going forward, and 

you had mentioned that some of them have already closed their solitary proprietary trading desks but that some proprietary trading 

would be embedded in other areas of an investment bank. 

How are the differentiations—it seems so very complicated. I 

have the flow chart here. That certainly put me to sleep last night 

when I got to about page 3 trying to flow through the flow chart. 

How are you going to make these distinctions when you get into 

the guts—or how are they, I guess—it is going to be incumbent 

upon them to be distinguishing, people sitting side by side, basically on appearance moving in the same direction but by definition 

18 

or definitionally maybe engaging in market making or maybe engaging in proprietary trading. 

Ms. SCHAPIRO. That’s a great question, Madam Chairwoman. I 

think the easy part maybe has been answered, that the bright line 

proprietary trading desks are easy to identify. Many firms have in 

fact, as you and I talked about, already moved ahead and disbanded those. 

The proposal tries to help regulated entities think about how to 

distinguish proprietary trading from market making. In fact, it lays 

out a series of principles around risk management, source of revenues, revenues relative to risk, customer facing activities, payment 

of fees, commissions, and spreads, and in thinking through each of 

those areas helps to determine what might be market making and 

what might be proprietary trading. So, for example, market makers 

generally earn fees, commissions, and spreads. Proprietary traders 

routinely pay fees, commissions, and spreads. 

Source of revenues are different—not entirely, not perfectly, not 

with a bright line between them—but they tend to be different for 

market makers versus proprietary traders. Customer facing activity is obviously different for market makers than it is for proprietary traders. So the rule tries to give guidance on how to think 

about distinguishing market making from proprietary trading. 

I want to say in addition that we recognize as a capital markets 

regulator in particular the absolute criticality of market making to 

successful capital markets. For issuers, investors, and traders, market making is a critical function. So we have asked a lot of questions about whether we have gotten this exemption for market 

making right in the proposal and how might we change it if that’s 

what is necessary to ensure that critical function continues for 

trading purposes and in support of underwriting and hedging. 

Chairwoman CAPITO. Thank you. Mr. Walsh, I would like to ask 

you, you mentioned this in your statement, but I think this is a 

source of concern, and it has been voiced by some of our U.S. allies—Japan, the United Kingdom—that the Volcker Rule could 

cause some operational and transactional cost of trading in their 

bonds and that they are concerned about that. Do you have a comment to make about that? 

Mr. WALSH. I didn’t speak directly to that, but obviously— 

Chairwoman CAPITO. You talked about competitive advantages 

around the world, so— 

Mr. WALSH. Right. It is certainly something to which we will 

want to pay careful attention. The Canadians, the Japanese, the 

U.K., have expressed some concerns about trading in their sovereign bonds, and so we want to certainly take a look at that as 

we consider the final— 

Chairwoman CAPITO. Is that contained in the rule as it is created 

right now? 

Mr. WALSH. I think their concern is that there is preferential 

treatment of U.S. Treasuries while other instruments are caught 

by the rule, and that it will create a distinction that may affect 

them adversely. So, we will want to take a look at that. 

Chairwoman CAPITO. Thank you. I would like to recognize Mr. 

Frank for questioning for 5 minutes. 

19 

Mr. FRANK. Thank you. Let me begin on the market-making 

issue, and again, I want to stress one of the things I think we 

should be looking at is the extent to which liquidity is a goal, and 

as I believe the erroneous notion that—liquidity is almost like the 

magic word; if it increases liquidity, it trumps other considerations. 

But market making is truly a very important, legitimate liquidity 

function, and the concern is that, I have heard voiced, even though 

you collectively say you respect market making and that it is going 

to be important, because of the ambiguity, because it depends on 

motive, that people will stop short of what you might allow because 

of fear of excessive regulation. 

So let me ask all of you, do you believe that if the rule were to 

be adopted substantially, as proposed, you could administer it in a 

way that would allow market making, legitimate market-making 

activity to go forward and, as that happened, give the institutions 

the confidence that they could continue engaging in it? 

Let’s start with Mr. Tarullo. 

Mr. TARULLO. I believe we can. I think— 

Chairwoman CAPITO. If I could interrupt for just a moment. 

Some of the Members are having trouble hearing, so if you could 

pull the microphone close and sort of speak up, it would be to our 

benefit. 

Mr. TARULLO. Is that better? 

Chairwoman CAPITO. That is better. 

Mr. TARULLO. Okay. I think we can. The rule, the proposed rule, 

as you can tell, is informed by an expectation that there is going 

to be an iterative quality to its implementation. That is why we are 

asking each of the firms to develop a compliance plan that is consonant with the principles and factors that we lay out in the proposed rule. It is also why we are going to be requiring reporting, 

so that we can monitor how different kinds of market making are 

in fact proceeding, and give us the opportunity to monitor whether 

this is or is not market making. 

Mr. FRANK. Let me go— 

Mr. TARULLO. I think the combination of the conformance period 

and the firm-specific compliance will allow us to, over time, develop 

the application of the rule in such a way that legitimate market 

making should be— 

Mr. FRANK. And it is your intention to protect legitimate market 

making? 

Mr. TARULLO. Oh, of course, absolutely. 

Mr. FRANK. Chairman Schapiro? 

Ms. SCHAPIRO. I really don’t have anything to add. I agree completely with Governor Tarullo. I think we can administer it in a 

very rational way. We are not intending, in any sense, to be doing 

trade-by-trade analysis, to look at every transaction to see if it is 

proprietary trading or market making but, rather, to collect data 

that will allow us to see over time what the— 

Mr. FRANK. Let me just ask, as SEC enforcement has come up, 

people have been saying you have to be tougher. If some bank in 

the process engages in activities which it turns out weren’t market 

making, what are you going to do to them? 

20 

Ms. SCHAPIRO. I think it would depend a lot on what their intent 

was. Was their intent to violate the Volcker Rule or was their intent to— 

Mr. FRANK. So if it is inadvertent— 

Ms. SCHAPIRO. —engage in market making and they just get it 

wrong sometimes? We have no interest in pursuing activity where 

people are intending to provide market-making services but get it 

wrong. 

Mr. FRANK. Chairman Gensler? 

Mr. GENSLER. As the CFTC has done in other rules, we hope that 

when we finalize this, it will be a policies and procedures approach, 

that these banking entities have to have policies and procedures to 

ensure something, but that they actually are the ones ensuring 

that they can do market making—I believe that is critical—but 

they are not doing proprietary trading. But I would say we are 

going to be informed by the comments as well. This is really important, as we say, to get balance, to get it right. So if people point 

out that we don’t have it right, that we make adjustments. 

Mr. FRANK. But also in practice, I guess part of it is what is the 

mindset that you approach? That is, I think it is important to affirm that you all agree that market making is legitimate and that 

you understand there is an ambiguity there, so people should not 

worry about getting too close to the line because an inadvertent 

crossing of the line, especially in the early phases, isn’t going to 

bring forward some terrible punishment. 

Mr. GENSLER. I think that is correct. I think even Congress addressed that because there is a conformance period that the Federal Reserve will oversee, but that conformance period is not one 

with a lot of teeth. 

Mr. FRANK. Thank you, Mr. Gensler. I am not sure about the implications of ‘‘even Congress,’’ but that is okay. 

Mr. Gruenberg. 

Mr. GRUENBERG. Congressman Frank, I think it is important to 

underline that there is a 2-year compliance period provided by the 

statute for these companies to implement the rule, so in some 

sense there will be an extended period of engagement between the 

regulators and the companies. 

Another point to make is we have a tiered approach for reporting 

trading activity. At the end of the day, it is going to be a relatively 

small number of large companies that are going to be impacted by 

this, so we are going to have an opportunity to work through this 

process. At the extremes, it is clear when it gets close— 

Mr. FRANK. Let me just, if I could just for a few seconds, I don’t 

want to exclude Mr. Dugan. 

Mr. WALSH. He was my predecessor— 

Mr. FRANK. Mr. Dugan, I am sorry. We did exclude Mr. Dugan. 

Mr. Walsh—you would think since I am from Massachusetts, I 

could get those names straight. 

Mr. WALSH. In any case, I agree with all that has been said. 

Mr. FRANK. Let me just summarize, if I could have 10 seconds, 

Madam Chairwoman. I think it is very clear. If people don’t like 

the rule, they don’t like the rule. But if you look at the implementation, if you look at the way our regulators have worked, I think 

the notion that people are going to be scared away from doing marVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
21 

ket making because of an excessive rigidity has no real foundation. 

And I am encouraged to know that these five regulators all are 

committed to making sure that market making goes forward and 

understand the importance of a regulatory framework in which 

people are encouraged to do that. Thank you. 

Chairwoman CAPITO. Thank you. I would like to recognize the 

chairman of the full Financial Services Committee, Chairman 

Bachus, for 5 minutes for questions. 

Chairman BACHUS. Thank you. I would say to Ranking Member 

Frank, famous last words, if you don’t think some individual regulator or examiner will not misinterpret. You are asking, and I think 

every witness has said you are asking regulators to determine motive and intent, and that is a tremendously difficult, problematic— 

Mr. FRANK. Will the gentleman yield? We ask 6 processors to do 

that all the time. 

Chairman BACHUS. I will if I have additional time. Now, Ranking 

Member Frank, you will recall that we looked at this in the House 

and decided against the Volcker Rule. It was only sort of at the last 

hour that Senator Carl Levin and Senator Shelley Berkley and 

some others urged us to go forward with the Volcker Rule. That 

was my understanding. It certainly didn’t pass out of the House. 

Mr. FRANK. If I could get 15 seconds, the gentleman is right; it 

wasn’t in the House, but there was a press conference in the White 

House that I attended long before it got to the end. But it was not 

in the House bill, I agree. 

Chairman BACHUS. Yes. And you will recall around that same 

time, Paul Volcker—let me tell you, we all have tremendous respect for him, and I think that is how we got here, is we all respected him, and when he said this is something you need to do, 

no one wanted to cross him, at least some people didn’t. But he 

said you can’t draw a bright line between these activities, yet, we 

have asked these five agencies to do just that. 

Now, Chairman Schapiro, you have said that you are not going 

to look at individual trades. I don’t know how you don’t end up on 

some occasion in the future looking at an individual trade. I know 

you probably will assure me that you won’t, but I can’t imagine 

how you can enforce a rule if you don’t look at trades. 

Ms. SCHAPIRO. If I could respond to that, the statute, the rule is 

done largely under the Bank Holding Company Act. 

Chairman BACHUS. I agree, bank holding companies are prohibited from doing this. 

Ms. SCHAPIRO. With respect to our narrow part of it, which is 

really broker-dealers and security-based swap dealers, and for 

those provisions that are done under the Bank Holding Company 

Act, although there are several that are also done jointly under the 

Exchange Act, but for those under the Bank Holding Company Act, 

our only mechanism, after notice and opportunity for hearing, 

would be to direct a company to terminate an activity or divest an 

investment. It is only with respect to the compliance program and 

the reporting and recordkeeping requirements that the SEC’s Enforcement Division would have its full panoply of enforcement powers. 

Chairman BACHUS. Of course. But let’s say that it is almost impossible to distinguish. Paul Volcker said it is going to be imposVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
22 

sible to draw a bright line. So, companies are going to legitimate 

hedging, underwriting, market making, which can all be beneficial, 

which all create jobs in the United States, and which did not contribute to the last financial crisis. Those jobs will go someplace 

else. We talked about our relationships with Canada, with England, with Japan. We were assured—in the Conference, we had a 

discussion where Mr. Kanjorski assured us that most of the G20 

nations would go along with this, and I offered an amendment that 

we wouldn’t—it took a majority of the G20, and it was rejected. But 

we were told that they would, we are sure our allies will all go 

along with this. None of them have. And these jobs are going to go 

overseas. They are going to go to Canada. Plus, I have relatives in 

Canada who come to Arizona for the winter. Well, they do. We 

have snow birds, and they all come down to Florida. This tourist 

trade in Florida depends on the Canadians. 

In our second panel, Mark Standish will testify that they will 

move those jobs that are presently in the United States to Canada 

because their ability to meet their customers’ orders or investments—they are not going to be able to do so. 

To the regulators—they said to us, ‘‘We are following your orders;’’ all five of them said, ‘‘We are doing what you asked us to 

do.’’ I am not blaming them. They have been given an impossible 

order. 

I am over my time. I am just going to close with what Jamie 

Dimon said, and Governor Tarullo, I think you referred to this in 

a different manner. This is psychology. He talked about how—and 

I don’t think it is an exaggeration—every trader is going to need 

a psychiatrist and a lawyer sitting next to him. We have all done 

things that later on we were accused of doing something terrible 

when it was legitimately hedging, when it was—yes, but we are— 

we have all been there. When we have to interpret people’s motives, we are on thin ice. Thank you. 

Chairwoman CAPITO. Thank you. I would like to recognize the 

ranking member of the Capital Markets Subcommittee, Ms. 

Waters, for 5 minutes. 

Ms. WATERS. Thank you. I will yield— 

Chairwoman CAPITO. I am going to stick to 5 minutes now. I 

gave them both an extra minute there. 

Ms. WATERS. I would like to yield 10 seconds to the ranking 

member of the full Financial Services Committee, Mr. Frank. 

Mr. FRANK. I won’t be substantive about this, but I disagree with 

the chairman’s summation of the history. It is true that the Volcker 

Rule per se, in those words, was not in the House bill. There were 

things in the House bill that the gentleman from North Carolina, 

the gentleman from Colorado, Mr. Kanjorski himself, all had 

versions of things that approached it. And in fact, there was a 

press conference early in 2010, long before the Senate began to 

take up the bill, in which several of us endorsed the Volcker Rule. 

So he is right, it wasn’t in the House bill, but it was not a lastminute addition. 

Chairman BACHUS. Will the gentleman yield for 15 seconds to 

me? 

23 

Mr. FRANK. It is not my time. If we could—could we give another 

15 seconds—not from the gentlewoman’s time? I would hope we can 

do that. 

Ms. WATERS. The gentlewoman will yield another 10 seconds. 

Chairman BACHUS. I am just saying in the Senate and in the 

conference, it grew into something else. 

Mr. FRANK. No, I—the gentleman has— 

Chairman BACHUS. And the gentleman from Colorado will tell 

you that. 

Mr. FRANK. This is what we said in a press conference earlier in 

the year. It was not something that just came out of— 

Chairwoman CAPITO. I am going to ask the gentlemen to cease 

and let the gentlewoman continue with her questions. 

Mr. FRANK. I would ask unanimous consent that the gentlewoman have an additional 30 seconds. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Ms. WATERS. Thank you very much. I would like to continue on 

the discussion about market making that was initiated by Ranking 

Member Frank. One of the concerns that has been expressed by financial institutions is a requirement that regulators distinguish 

between market-making activities and proprietary trading activities. Members of Congress who supported the Volcker Rule during 

Dodd-Frank consideration felt that, done properly, market making 

is not speculative and could be compensated from spreads and fees 

rather than from changes in the prices of the financial instrument. 

When you first gave your testimony, Mr. Tarullo, you indicated 

that you believed that you could distinguish between proprietary 

trading and market making, and you also offered that if anybody 

has a better mousetrap, you certainly would like to hear it, and 

that we have this extended period of time where you will be entertaining some ideas. 

Now, as I understand it, all of this coordination has been going 

on between all of the agencies. And I guess, Mr. Gensler, you have 

had some responsibility, even though you say it is not significant, 

with this coordination, with the Treasury having the lead role. 

Does everyone agree that given the law, Dodd-Frank, as it is, 

that you have to move forward in describing how you can distinguish between market making and proprietary trading and that 

you are all committed to doing that? I will start with you, Mr. 

Gensler. What is your role? 

Mr. GENSLER. The CFTC has a significant role. 

Ms. WATERS. I can’t hear you. 

Mr. GENSLER. The CFTC has a significant role with regard to 

swap dealers that are part of bank entities and also the Futures 

Commission merchants. And yes, to your question, I think that we 

are to move forward to achieve these twin goals of prohibiting proprietary trading, permitting market making, and making sure that 

this can be fostered, and comments are going to help inform us tremendously. 

Ms. WATERS. So in the coordination that has been going on, is 

everyone on board for moving forward in the way that Mr. Tarullo 

explained at this time? Each person, yes or no? 

Mr. GENSLER. Yes. 

Ms. SCHAPIRO. We are very open to additional— 

24 

Ms. WATERS. I can’t hear you. 

Ms. SCHAPIRO. We are very open to additional ideas and approaches, yes. 

Mr. GRUENBERG. Yes. 

Ms. WATERS. Yes? 

Mr. WALSH. Yes. 

Ms. WATERS. All right. So, no one at the table this morning is 

here to talk about repeal of the Volcker Rule, but rather, how you 

are working to try and be consistent with the law as it is described 

in Dodd-Frank; is that correct? 

Does anyone at this point in time have new ideas or better ideas 

or more information about market making that would make it easier to distinguish between market making and proprietary trading 

activities at this time? Any more information we should know 

about? 

Ms. SCHAPIRO. There is a long history at the SEC of regulating 

market making in the equity and fixed-income markets, and much 

of that thinking has been incorporated into the proposal that the 

agencies have generated together. A lot of it hinges on the ability 

and the willingness to hold yourself out as being willing to make 

markets and provide two-sided quotes on a continuous or a regular 

basis, and to be a buyer to sellers. 

We recognize that is not perfect, that historical basis upon which 

market-making exemptions have been based, but it is a starting 

point, and we have asked commenters lots of questions to give us 

better information or different ideas about how to make the market-making exemption effective going forward. 

Ms. WATERS. We have a few more seconds. Would anyone like to 

add anything to that? Mr. Gruenberg? 

Mr. GRUENBERG. Just to say that I think it is important to acknowledge that we are still in the midst of the comment period, the 

extended comment period. And I think the proposed rule went to 

great effort to solicit a broad public comment on a range of issues, 

and in particular the ones that you raised, and I think Chairman 

Schapiro pointed this out. I think the feedback we get will be very 

important in terms of formulating the final rule. 

Ms. WATERS. I think that your presence here this morning is extremely important, and maybe one of the most important things 

that will come out of your presence here this morning is that you 

are all working together, the coordination is taking place, you are 

committed to making the Volcker Rule work, you want to make 

sure that you get additional input, and that period has been extended, regulatory period has been extended in order to do that. 

And so, I think that clears up in my mind that you are not working 

to advise us that the Volcker Rule should be repealed at all but, 

rather, it can be worked with. I yield back the balance of my time. 

Chairman GARRETT [presiding]. The gentlelady yields back the 

balance of her time. And just coming into the committee, I appreciate the opportunity to see the panel today and for your statements and for the questions. I will now recognize myself for 5 minutes and, without objection, I will put my opening statement in the 

record. 

Despite what the ranking member just said, we are obviously 

dealing with an extremely complicated issue here—a rule, with 

25 

over 1,300 individual questions, and obviously, there are a number 

of issues that are still out there. So I would like, for the first question, to just quickly run down through the panel. Do you believe 

individually, as your agencies, that you have the authority to waive 

the implementation date for the rule? 

Mr. TARULLO. The Federal Reserve, Mr. Chairman, has authority 

under Dodd-Frank to extend the conformance period. 

Chairman GARRETT. Okay. Yes. 

Mr. TARULLO. That was— 

Mr. GENSLER. I believe under the Bank Company Holding Act, 

it is the Federal Reserve. 

Mr. GRUENBERG. I agree with that. 

Chairman GARRETT. Everyone agrees. So then, the next question 

is easy. Will you agree, in light of the questions that have already 

come up and in light of the questions I presume that are going to 

come up afterwards, that it is necessary to do so and to not put 

a burden on the businesses? Because we have heard about the extraordinarily astronomical billions of dollars that it will cost to 

comply with this in following this hearing to put a—within 30 days 

to waive the statutory deadline so we can have a longer period of 

time. 

Mr. TARULLO. I am sorry; we may be conflating two things here, 

Mr. Chairman. 

Chairman GARRETT. Okay. 

Mr. TARULLO. One is the final date for the final rule, and then 

the other is the period within which the rule has to be implemented. The latter is committed by Dodd-Frank to the Fed alone. 

The former would be a joint decision of all the agencies. 

Chairman GARRETT. Exactly. And so, I will restate the question 

quickly. Would we agree here today that we should extend that period of time? 

Mr. TARULLO. If you are talking about the first point, which is 

when there should be a final rule in place, I think it depends on 

the kind of comments that we are getting and the extent of the 

changes that we think we would need to make. I think we extended 

it for 30 days. 

What normally happens in a rulemaking is you look at all the 

comments you get in, and then you make an assessment as to how 

much you are going to have to modify your proposed rule. Sometimes, it is around the edges. 

Chairman GARRETT. I take it the answer is ‘‘no.’’ The point here 

is, at this point in time, as you know, industry is—stakeholders are 

already trying to answer the questions that are out there and also 

are already trying to change their businesses in light of what the 

proposed rules are taking or proposal to take. So, it would help if 

we actually had that extension now so that they would actually 

know that in light of all the complexity of this issue, because it is 

unlike almost any other issue, but I understand the question. 

Commissioner Gensler, many people have said that you move too 

quickly on some of your proposed rules and regulations, myself included. On this one, of course, you came out a little bit after the 

fact. Commissioner Sommers raised the question at the last hearing, and so let me ask this question to you now. Assuming for the 

sake of argument that each of the regulators sitting next to you on 

26 

the panel decides to repropose their rules in light of information 

that comes out, what would be your intention at that point? To 

issue a reproposed rule as well so that there is one final joint rule 

coming out at the same time? How would that work? 

Mr. GENSLER. At the CFTC, we are committed to getting the 

rules right and balanced and not against a clock, and we have reproposed some other rules. We are actually looking forward to reproposing a very important rule for the markets called the block 

rule for swaps as well. That would probably be the third or fourth 

time we have reproposed something. So if the other regulators 

came to that conclusion, I assume that we would come to that conclusion jointly and do the same with them. 

Chairman GARRETT. I appreciate that, thank you. 

Mr. Tarullo, the language of Section 619(g)(2) expressly says this, 

and I will read it: ‘‘Nothing in this Section shall be construed to 

limit or restrict the ability of a banking entity or a nonbank financial company supervised by the board to sell or securitize loans in 

a manner permitted by law.’’ 

So, given this language, can you clarify how the risk retention 

Section of 941 and the restrictions on banks owning funds in the 

proposed rules will impact upon the issuers of asset-backed securities? 

Mr. TARULLO. Obviously, the risk retention rules, I think—are 

you asking a question about how the two would— 

Chairman GARRETT. Yes, jibe, which is— 

Mr. TARULLO. —intersect? 

Chairman GARRETT. Right. 

Mr. TARULLO. Our presumption would be that the Volcker Rule 

enforcement would take as given whatever the requirements of the 

final rules on risk retention would be, and would try to ensure that 

there not be any further constraint on securitization beyond what 

those rules or other exogenous rules would require. 

Chairman GARRETT. So you would see to it that there would 

not—your goal would be to see to it that there is not a cumulative 

effect, I guess is what I am thinking of? 

Mr. TARULLO. I think the aim is to make sure that you don’t 

have some incremental inhibition upon securitization beyond what 

rules are, by their own nature, intended to do with respect to regulating securities. 

Chairman GARRETT. All right. And then a final question, along 

that line. Do you believe, in general, that the proposed rules, as 

many people suggested, will negatively impact upon liquidity in the 

markets, in the corporate bond markets, corporate markets such as 

for the—especially for the mid-cap companies and such? 

Mr. TARULLO. Will there be some incremental effect on liquidity 

in some markets at the margin? I think the answer is probably 

‘‘yes.’’ 

Chairman GARRETT. It is only going to be at the margin, though? 

Mr. TARULLO. Well, no; I said would there be some. Beyond that, 

I think the answer to the question depends upon two things. First, 

how well we do at implementing the intention everybody here has 

stated, which is to try to make sure that market making is preserved. 

27 

Chairman GARRETT. And if you don’t do it, will it go past the 

margins then? 

Mr. TARULLO. It could, sure. And second, the degree to which 

nonregulated firms pick up, particularly proprietary trading, and I 

think at least one firm has already stated publicly that they see 

enormous opportunities here. 

Chairman GARRETT. I appreciate that. My time has expired. I 

yield to the gentlelady from New York, Mrs. Maloney, and recognize her for 5 minutes. 

Mrs. MALONEY. I thank the gentleman for yielding. And all of the 

panelists, one of our other colleagues on the other side of the aisle, 

or several, have said that if we enact the Volcker Rule, that our 

banks will move overseas. I would venture that the model overseas 

is very different from the efficient model we have in America that 

has made us the strongest capital market in the world. In Europe, 

large banks can invest in industrial companies, so if you bail out 

the bank, you get to bail out the bank and the industrial companies 

in which they have invested. The model is very different in America, and it is one that has traditionally been stronger and more efficient. 

My colleague, Chairman Bachus, expressed some concern that 

the regulators are going to have difficulty determining the motive 

and intent and the difference between proprietary trading and 

market making. And I would venture to say that the CEOs and executives in the American financial systems have the same concern. 

They want to make sure that their organization is market making 

and not doing illegal proprietary trading, so they will be partners 

in helping to place a window on what is happening in these areas. 

The author of the amendment, Paul Volcker, has said, ‘‘Proprietary trading is easy; you know it when you see it.’’ But I would 

venture to say it is difficult to see it if you don’t have the data to 

analyze it and understand what is taking place. 

I therefore would like to ask, and I am going to ask Governor 

Tarullo to comment on it, but also to get in writing back from the 

panelists—because I think this is an important point—to what extent would the new compliance requirements involve the collection 

and reporting of data that banking entities have not been required 

to report in the past? I would venture that a lot of what they are 

reporting is what they have had to do in the past. And how do the 

metrics that you have created in the proposed rule ensure that you 

will be able to know it when you see it, and what metrics would 

be different, really, and information different between market making and proprietary trading? 

We are also moving, as you know, for a research center that 

would have information on the content, and how important do you 

think is this information in preventing crises and problems in the 

future, Governor Tarullo? 

Mr. TARULLO. Ranking Member Maloney, I think that the first 

point is that there are some firms which currently collect information in a way that would allow distinctions to be drawn, or at least 

give insight into market making or hedging versus proprietary 

trading. Others do not. So, the interagency proposal would move towards some standardization of both the management information 

systems of the firms and, consequently, their reporting to us. 

28 

Second, I think that when we start getting that information, we 

will be substantially better positioned to draw the kinds of distinctions that all of you are asking about, because I think it is important to note that what market making consists of in one kind of 

market, say for corporate bonds of Fortune 500 companies, is different from what market making may be in the case of a less traded instrument,, and we are going to need data that distinguishes 

among those different markets in order to oversee this rule effectively. 

Mrs. MALONEY. Thank you. The Volcker Rule is basically five 

words: market making, underwriting, risk mitigation. Yet, when 

you look at this rule, it is roughly 300 words, 25 pages, if not more. 

And I would like to ask the panelists what is in this 295 pages? 

How much of it is exceptions and how much of it is truly defining 

the real Volcker Rule? I will start with Mr. Gensler. 

Mr. GENSLER. A lot of it is questions, 1,300, as people have 

noted. I don’t know what page count that takes, but it could be half 

of the document. But a lot of it is really trying to get at achieving 

these twin goals—market making or, of course, underwriting and 

hedging, which are so critical to the capital markets. 

Mrs. MALONEY. How much is exceptions? 

Mr. GENSLER. I think Congress actually laid out seven key permitted activities or, if you wish, exceptions. And underwriting, 

market making, and hedging are three critical ones, but there are 

others as well, and we want to fully comply with the intent of Congress. 

Mrs. MALONEY. Chairman Schapiro? 

Ms. SCHAPIRO. It is largely—a lot of it is the exceptions, the permitted activities, the criteria for determining the permitted activities, and then a discussion about the compliance program and the 

kind of metrics, records, and reporting that would need to be done 

so that financial institutions and regulators are in a position to understand if those exemptions are being appropriately applied. 

Mrs. MALONEY. And I noticed there was no enforcement in these 

200-some, almost 300 pages, no enforcement if there is a violation. 

Would anyone like to comment on that? 

Mr. TARULLO. Towards the end of the regulation, there is a subSection on what can be done in the event of noncompliant activities. But because this is part of the Bank Holding Company Act, 

our full panoply of supervisory, regulatory, and enforcement tools 

would be available to us in appropriate circumstances. 

Mrs. MALONEY. My time has expired. Thank you. 

Mr. SCHWEIKERT [presiding]. Thank you, Mrs. Maloney. I yield 

myself 5 minutes—great timing. And this is for anyone on the 

panel, but we will start with—and I always mispronounce your 

name; is it ‘‘Tarullo?’’ 

Mr. TARULLO. ‘‘Tarullo.’’ 

Mr. SCHWEIKERT. In an environment where we are stepping into 

Basel 3 and the level of reserves and the definitions of Tier 1 and 

Tier 2 and what can be held there, how does that all mesh when 

we now head into the proprietary trading rules in Volcker and 

what can be moved and what can’t? Am I causing damage? Are the 

rules combined, this new regulatory scheme? How much damage to 

liquidity, to where capital is, are we going to have certain amounts 

29 

of idle capital? Explain to me how they mesh together and how 

they don’t. 

Mr. TARULLO. That is an important question because the Basel 

3 exercise, actually it was Basel 2.5, the part of the Basel 3 exercise that was concluded a couple of years ago addressed specifically 

the trading book, and thus we are in the same universe that we 

are talking about with the Volcker Rule. There was a widespread 

view, a correct one I think, that capital regulation of trading activities had been seriously inadequate in the years running up to the 

crisis, and so a good bit of what Basel 2.5 did was to adjust the 

risk weights for traded assets. 

There is an intention to take another look at the trading book 

more generally, because those were some quick changes that were 

obviously related to the sources of the crisis. And in taking that 

look, I think obviously when one looks at the amount of risk associated with a particular pattern of trading, you are going to want to 

have higher capital associated with higher risk, which is open position, so in that sense the two do merge. 

Mr. SCHWEIKERT. Okay. Does anyone else want to touch on that 

point? Madam Chairman? 

Ms. SCHAPIRO. I would just note that, and I have not had a 

chance to read this carefully yet, but a study was released earlier 

this week by Darrell Duffie at Stanford University that suggests 

that in lieu of trying to define market making and put limitations 

on market making, that much more rigorous capital and liquidity 

requirements might be another way to approach the kinds of issues 

that we are seeking to address through Volcker. But I haven’t read 

it carefully, so I can’t tell you whether I agree with it or not. 

Mr. SCHWEIKERT. But in some ways, that is ultimately what at 

least the Basel 3 is heading towards; am I correct? 

Mr. TARULLO. It may in the next iteration of the trading book review, although, again, Congressman, to the degree that an activity 

is not being pursued within a firm, then the higher capital requirements that would otherwise be associated with it would obviously 

not be applicable to that firm. 

Mr. SCHWEIKERT. I made the mistake of leaving some of my 

notes over there, but I will try to do part of this off the top of my 

head. 

Has anyone—and I know you are working through thousands of 

comments out there, trying to build a velocity model, a model that 

basically says if we did a far-reaching version of the Volcker Rule 

through definition, what happens to the banking system, particularly the large banks, how much less velocity, how much is now sitting in reserves, how much idle capital? Is anyone out there building an economic model for the regulation to do the tests? 

Mr. TARULLO. I think it would be premature to try to work 

through that kind of analysis since, as several of my colleagues 

have noted, we are in the process now of gathering comments and 

then eventually refining the rule. And I think as we keep saying 

in response to many of your questions and comments, we want to 

ensure that to the degree possible, the kinds of market-making operations that are going on now that are entirely legitimate continue 

as such. 

30 

The other issue, of course, is going to be something I mentioned 

before, which is the degree to which straight proprietary trading is 

going to be picked up by other firms, hedge funds or others who 

see new market opportunities. 

Mr. SCHWEIKERT. Mr. Gruenberg—and I don’t have it in front of 

me, but the letter that came out from the Canadian banking regulator—explain to me their concerns and why—first explain their 

concerns, and we will go on to the second part of that. 

Mr. GRUENBERG. I think under the Volcker Rule, there is an exception for companies to trade in U.S. securities, U.S. Government 

securities, but that benefit is not extended to the government securities of other countries. And I think the focus of the letter from 

the Canadians was on that issue, that they would want the ability, 

at a minimum, to have the exception for trading in their own government securities that U.S. firms have in regard to U.S. Government securities. 

I would note that in the preamble to the rule, we raise a question 

specifically on this issue, whether we should consider some flexibility in that area, and I think we will be getting comments, and 

this will be one of the issues we will be looking at. 

Mr. SCHWEIKERT. All right. I have so many questions, but I am 

out of time. I believe now it is 5 minutes to Mr. Gutierrez. 

Mr. GUTIERREZ. Thank you very much. It seems like we are discussing—sometimes we just forget how we all got here or why we 

are here. I kind of remember back in 2008 the cardiac arrest our 

economy went into, and now we are discussing whether or not we 

should lower our fat intake or exercise or maybe stop smoking; 

maybe it is okay, let’s light up once again. That is what it really 

seems like to me, instead of taking into consideration how it is we 

don’t need to go see the doctor again. 

So I want to ask Chairman Schapiro, there has been a lot of— 

and maybe you don’t have this, someone else might have this information or an idea. There is this continuing questioning on the 

basis of the cost of the implementation, not of Frank-Dodd, but 

today of the Volcker Rule. And on more than one occasion, I have 

heard this morning, it is going to cost the industry billions of dollars in order to implement the Volcker Rule. What is your assessment, Chairman Schapiro? 

Ms. SCHAPIRO. We have asked for extensive comment in the joint 

release about the costs of implementation as well as the costs and 

impacts on competitiveness of the Volcker Rule. Separately in the 

Sections that the SEC promulgated under our statutory authority, 

we have asked for specific comment on the costs of the compliance 

program and the reporting metrics, but we have also asked about 

the effect on competition of broker-dealers, for example, that have 

to comply with the reporting requirements of the compliance program and those that don’t, the disincentives to engage in market 

making or underwriting. So there is a very, very broad request for 

comment on costs and a request for data from the industry, which 

is where the data would reside to help us be more informed about 

the costs overall. 

Benefits, as you know, are much harder to quantify. Every rule 

has that challenge for us. The benefits to the public tend to be general and diffuse, and costs are much more easy to identify at least, 

31 

if not necessarily to quantify. So as we go forward, we have to try 

to balance exactly those things. 

Mr. GUTIERREZ. How does someone arrive at billions of dollars? 

Ms. SCHAPIRO. There are a number of studies that have been 

done recently that seek to quantify the costs. I believe SIFMA commissioned Oliver Wyman to do a study that looked at the market 

liquidity impacts of the Volcker Rule and suggested that the range 

could be from $90 billion to $315 billion in loss of value for investors as a result of higher interest rates to compensate for liquidity 

risk, higher transaction costs, and mark-to-market loss of value. 

So, that is a pretty wide range. 

It is not clear to me how well-grounded that study is. I just don’t 

know. But it is clearly information that we will be looking at. I 

think, again, benefits are always hard to quantify. Costs can be 

easy to identify but then hard to quantify. 

Mr. GUTIERREZ. Mr. Tarullo, do you have any idea, or would you 

care to share with us your thoughts on the cost? 

Mr. TARULLO. As I said earlier, Congressman, I think it depends 

on two things: first, it is going to depend on how effective we are 

in this iterative process of ensuring that market making and underwriting and hedging can be done; and second, the degree to 

which straight proprietary trading is picked up by other firms. 

One comment, though, on the Oliver Wyman study; it is actually 

a more general comment. I think we all need to be a little bit wary 

of the false precision that sometimes is associated with analytic advocacy. If you are asked to do something that produces a number, 

you have to start making assumptions. So, they made a bunch of 

assumptions about how liquidity would be affected, a set of assumptions that really weren’t grounded in any particular explanation. They didn’t include the possibility that other firms would 

pick up such business as may be lost, and they used as their base 

period the height of the crisis as opposed to a more normal period. 

So, if you relaxed those assumptions or used other assumptions, I 

think you would probably get very different numbers, and that is 

going to be true from any perspective. Whenever anybody does analytic advocacy— 

Mr. GUTIERREZ. So when do you think we— 

Mr. TARULLO. The assumptions you make at the beginning— 

Mr. GUTIERREZ. When do you think we will know with some degree of certainty? One year into it, 2 years? 

Mr. TARULLO. I think when we are a year into the conformance 

period, we are going to have a much better sense of how this process is working out, and we will be happy to talk with you during 

that period. 

Mr. GUTIERREZ. Let me ask you and the chairman, so the rulemaking process that we are in, will it be completed and the rule 

in place by January of 2013? 

Ms. SCHAPIRO. It depends very much on the process going forward. We have extended the comment period until the middle of 

February. CFTC’s comment period goes somewhat beyond that. Depending upon what the comments suggest, the extent to which we 

might modify the rule— 

Mr. GUTIERREZ. Let me just ask one last question. 

Ms. SCHAPIRO. Sure. 

32 

Mr. GUTIERREZ. Because I enjoy listening to your answers. 

I just want to ask the last question, and that is to Mr. 

Gruenberg. At the FDIC, in the last 2 years, what has been the 

cost to the Federal Deposit Insurance? How much have you paid 

out? 

Mr. GRUENBERG. In 2010, we had 157 institutions fail. This past 

year, in 2011, we had 92 institutions. I would have to go back and 

check the exact dollar loss, but it was— 

Mr. GUTIERREZ. And hundreds failed in 2009? 

Mr. GRUENBERG. No, in 2009, 25 failed. So the big failures really 

occurred in— 

Mr. GUTIERREZ. And what was the cost to the Federal Deposit 

Insurance? 

Mr. GRUENBERG. Approximately a $30 billion cost over the past 

2 years. 

Mr. GUTIERREZ. Thank you. 

Chairman GARRETT [presiding]. And I thank the gentleman. Mr. 

Renacci is recognized for 5 minutes. 

Mr. RENACCI. Thank you, Mr. Chairman. And thank you to all 

the witnesses for being here today. 

Chairman Gensler, you stated earlier, in your verbal testimony, 

that the Volcker Rule gives you, you have a twin mandate, and risk 

mitigation but assuring that there is still market-making availability. And then later on, you talked about a twin goal of making 

sure there is still market-making availability but prohibiting proprietary trading. 

Isn’t there a little conflict in that as to how you can make sure 

that there is still market-making availability with mitigating risk; 

and don’t you, at some point in time, have to determine how much 

tolerance you can take? 

Mr. GENSLER. I think that is correct. I think Congress said, let’s 

prohibit proprietary trading in banking entities, banking entities 

that might have availability to the discount window or other backing of the taxpayers. To lower risk to the taxpayers might bail out 

these banking entities once again, and at the same time, importantly, keep the vital function of market making, and that is the 

challenge that we are all addressing in this rulemaking. So, I agree 

it is a challenge, but I think with the help of the public comment 

period, we will get it balanced and get it finalized. 

Mr. RENACCI. Okay. And when Ranking Member Frank asked all 

of you, do you believe we can still get market-making, it can still 

occur, Governor Tarullo, you said, ‘‘I think we can, based on firmspecific compliance.’’ Chairman Schapiro, you said, ‘‘I think we 

can.’’ Chairman Gensler, you said, ‘‘We hope so.’’ And the other two 

of you didn’t get to finish your answers, but I assume you are on 

that same track. 

It leads me to believe that based on everything we know today, 

we are not really sure if we can. Is that correct? I would ask for 

just a ‘‘yes’’ or ‘‘no’’ from each one of you. Based on what you have 

today—and I know you are bringing in all these—the information, 

you are requesting information, but today, as we stand, you would 

not be able to implement that and be affirmative that we can make 

this happen; is that a correct statement? 

33 

Mr. TARULLO. If it were in effect today, without the kind of information that Ranking Member Maloney was talking about earlier, 

no, we couldn’t do it. But that is exactly why we are asking for this 

kind of information, so that we are able to draw appropriate distinctions. 

Ms. SCHAPIRO. I would agree with that. We can do it, but we just 

have to be able to draw the contours correctly, and that is why the 

comment process is so important. 

Mr. GENSLER. I would say that it is just a proposal. We have 

been generous, maybe overly generous with 1,300 questions, but I 

think we will greatly benefit from input from participants in the 

markets. 

Mr. GRUENBERG. I agree with the points that have been made. 

Mr. WALSH. I think market making will continue. The question 

is, will you restrict legitimate activity if you draw the rule too 

tightly? And that is why we have asked the questions, to try to get 

that right. So, that is where we are. 

Mr. RENACCI. Again, and I appreciate what you are doing, and 

I think that is why rushing into something without having all the 

information could be a worse situation than making sure that we 

evaluate this before we do it. 

Chairman Garrett asked a question, and I am just going to try 

and get some more specifics. In regard to joint examinations, how 

are you going to develop a single coordinated view of the firm’s activities if you have joint examinations going? What in advance are 

you planning to do in regards to joint examinations? 

Mr. TARULLO. I can start, but others can chime in. I don’t think, 

Congressman, this will be fundamentally different from other important regulatory issues when we do joint examinations, either 

the banking agencies among themselves, or with our colleagues at 

the market regulators for broker-dealers and commodities dealers; 

which is to say, you do begin from the base of the same regulations, 

and you understand who has primary responsibility, and who has 

backup authority. But I think, more importantly, you try to keep 

a common understanding of the expectations you have for the firms 

in question. As I said, I think that is something that the agencies 

all learned a lot about in the run-up to, during, and after the crisis—and I would say, I think, across-the-board that kind of coordination, particularly at the largest institutions is substantially better than it was a few years ago. 

Mr. RENACCI. But you would all agree that, from the standpoint 

of the individual entity, it is going to be almost impossible to try 

and determine which way all of you are going if in advance, you 

don’t come up with similar— 

Mr. TARULLO. Absolutely. I think that is why we are—we have 

the contemplation of a compliance plan on a firm-specific basis, 

that any of the—any regulators who have relevant jurisdiction can 

take a look at. 

And just one other thing I would add. On this issue, as on some 

others, because it really disproportionately affects the very largest 

firms, I think we at the Fed are going to make sure that we have 

a pretty centralized way of looking at what is going on at all of the 

major firms, so this won’t be something that can just go off the 

rails at individual firms around the country. We are going to make 

34 

sure that our risk people here are seeing all the plans and are 

being able to evaluate how it is being implemented everywhere. 

Mr. RENACCI. Thank you. I yield back. 

Chairman GARRETT. The gentleman yields back. Mr. Watt is recognized for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. I actually have several 

questions. I will get through as many of them as I can. 

First, Ms. Schapiro, you referred to a paper that had been written by a Stanford University professor in which he suggested that 

higher capital requirements would be a better way or a way of 

dealing with this. If you concluded that were the case, would you 

have the authority under the current legislation to accommodate 

that approach as opposed to dealing with this in the way that, 

under our proposed rule, has been proposed? Let me just get all of 

the questions out, and then maybe I will get the answers in the 

order that I ask them. 

Second, a number of my insurance company constituents have 

raised questions about whether you intentionally exempted or 

whether you intended for an ownership interest in a covered fund 

to be exempted under the exemption for general accounts. And to 

the extent that you can answer that, I would appreciate it, Mr. 

Tarullo, and Mr. Gensler. 

And third, Mr. Walsh, a number of people have raised questions 

about the extent to which businesses or jobs are going—would be 

driven offshore by this set of proposals. And perhaps Mr. Walsh, 

since he hasn’t had much to say, could address that issue if we 

have time. So in that order, though, I would like to have the responses. 

Ms. SCHAPIRO. I am happy to. First, I want to make it clear that 

I don’t agree with Darrell Duffie necessarily. I was just trying to 

respond that there was this alternative that had been proposed, 

but I don’t think that we could go that route under the statute. I 

think we are on a path— 

Mr. WATT. So that would require us doing something legislatively 

to— 

Ms. SCHAPIRO. I believe so, and maybe Governor Tarullo may 

have a view about that as well. 

On insurance companies, the statute does exempt from the proprietary trading ban trading by an insurance company for its general account. But it does not do that for insurance company investments in covered funds. In order for us to create that exemption, 

we would have to meet a very high threshold to show that it would 

promote the safety and soundness of the banking institution or the 

financial stability of the United States. 

That said, we have asked questions about it in the release, and 

we have met with a number of insurance companies, I believe, and 

we would welcome their comments and suggestions on that, but— 

Mr. WATT. And you intend to clarify that further into the process? 

Ms. SCHAPIRO. We will, but we hope to get comment on it, because it is quite clear on proprietary trading that insurance companies can engage in trading, but not investing in covered funds. 

Mr. WATT. Do you agree with that, Mr. Tarullo? 

Mr. TARULLO. I do, Congressman. 

35 

Mr. WATT. And Mr. Walsh, on the driving of business and jobs 

offshore, give me your general assessment of the arguments that 

are being made. 

Mr. WALSH. As Governor Tarullo alluded to, there is a question, 

if certain activities are prohibited in banks, the question is, where 

will that activity go? Some of it may go to unregulated entities in 

the United States, hedge funds and others may take up that business. Some of it may go to foreign firms in the case of activities 

that are limited. It is not unusual to have prohibitions, limitations, 

capital charges, and other features of the regulatory framework, so 

we are creating some such limitations, and that business will presumably migrate elsewhere. 

Mr. WATT. But I assume the extent to which that migration will 

take place will depend on the extent to which you all get this rule 

right or adjusted? 

Mr. WALSH. It will, but to the extent that there are certain 

things that are clearly prohibited, that activity will no longer be in 

banks; it will move elsewhere. 

Mr. WATT. All right. I think I got all three of my questions asked 

and answered in my 5 minutes, so I will yield back. 

Chairman GARRETT. That is always a good record if you can do 

that. Very good. The gentleman from New York is recognized for 

5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

I will ask Chairman Schapiro first. If the rule as proposed does 

not limit liquidity, does not increase the spreads, does not increase 

the cost of doing business, why would we need an exemption for 

treasuries and municipalities for their municipal securities? 

Ms. SCHAPIRO. I believe the exemption is really premised on the 

idea on the municipal side that it doesn’t raise the same kinds of 

concerns about short-term trading that other proprietary trading 

does, and so the statute exempted government obligations generally from the proprietary trading ban. But I understood in your 

opening comments a concern to be that we have construed that too 

narrowly, to only include the obligations directly of the State or 

State agency and not, for example, the Turnpike Authority or other 

political subdivisions. And we have flagged that in the proposal and 

sought comment directly on whether we should use a broader definition of government obligations, like the definition of municipal 

securities under the 1934 Act to provide a broader exemption. 

Mr. GRIMM. Okay, thank you. If we have a small or mid-sized 

company that needs access to liquidity, short-term cash flow, and 

they want to float $25 million of commercial paper and they go to 

a brokerage firm to do this, and the firm says, well, we can place 

$20 million right away, we have that, but the other $5 million we 

are going to have to hold it and work it over the next week or so, 

would that transaction be considered a proprietary trade for that 

broker-dealer, Mr. Tarullo? 

Mr. TARULLO. I think you are touching here on the underwriting 

exception, and the specifics would obviously depend on the kinds of 

practices that are necessary to underwrite. As you know, when an 

investment bank underwrites an issue, it does often take some risk 

if it pulls into its own inventory the uncommitted securities. 

36 

Mr. GRIMM. And that is the scenario I am giving you. They place 

20, they can’t place the other 5, they are going to work it. This happens every day. So, it is not some— 

Mr. TARULLO. Yes. So I don’t want to—one always is hesitant to 

address any specific hypothetical because others will take it. But 

I will say the whole point here is to look at the kinds of practices 

in underwriting that are conventional so that conventional underwriting can continue to be performed, and that, again, will be part 

of the process of the firm-based compliance and the kind of metrics 

that we get. And if you are talking about a situation that is similar 

to what we see every day, presumably that would fall within the 

exception, and we will give that clarity to the firms going forward. 

Mr. GRIMM. Okay. My understanding, though, is that we are 

leaning towards looking at if—to try to decide whether something 

is proprietary or not, it is my understanding—and I could be dead 

wrong, please correct me—that if the firm is making most of their 

money on fees, on spreads, but not on the value increasing over 

time, then it is not proprietary trading. But in this case scenario, 

if they are working a position, they very well may make more 

money because the value could go up in that week. 

Ms. SCHAPIRO. If I could just elaborate. I think when a brokerdealer purchases securities from the issuer with the purpose of reselling them, if not immediately, in a reasonable period of time, to 

the public, that is clearly in furtherance of underwriting and would 

be permissible under the rule. 

Mr. TARULLO. Yes. It is important to make the point here, Congressman, with respect to underwriting or market making, the fact 

that a firm will in some instances make money because of a shortterm price movement does not in and of itself make it a prohibited 

trade. 

Mr. GRIMM. That is what I want to make sure of. 

Mr. TARULLO. Right. The point is, is it market making, is it underwriting? And of course, the underwriter takes a risk that the 

market likes the issue less 2 weeks after issuance than beforehand. 

Mr. GRIMM. Exactly. Okay, very good. If a non-U.S. firm ultimately sells a security to a U.S. institution, a proprietary, the nonU.S. entity definitely did a proprietary trade and ultimately sells 

that security to a U.S. institution, does that fall under the purview 

of U.S. regulators? Is that subject to the Volcker Rule? 

Chairman GARRETT. And we will make this the final question. 

Mr. GRIMM. Final question. Chairman Schapiro? 

Mr. TARULLO. Can you give us the facts again? 

Mr. GRIMM. Okay, sure. We have a non-U.S. entity with non-U.S. 

subsidiaries doing proprietary trades. Let’s just say they bought 

whatever security, they have held it, it has appreciated, and they 

now sell that appreciated security that they have a proprietary 

profit on to a U.S. entity. Does that fall under the Volcker Rule? 

Are we going to try to enforce these rules— 

Mr. TARULLO. And they have been doing that overseas, Congressman? Sorry. 

Mr. GRIMM. Right. 

Ms. SCHAPIRO. I believe, and I would like to confirm this for you, 

that if the foreign banking entity sells to a U.S. customer, they lose 

the exemption from the Volcker Rule. 

37 

Mr. GRIMM. Right. And so, that begs the question, how do you 

plan on enforcing Volcker on non-U.S. entities, and would that not 

drive business to non-U.S. entities if they are not—you are saying 

they are not subject to the exemption. 

Chairman GARRETT. The gentleman’s time— 

Mr. GRIMM. Okay. 

Chairman GARRETT. And I say that because it was a great question and a good point, but I understand now that the panel is leaving at noon, so we are going to try to get as many people in as we 

can, so we will try to adhere to the 5-minute rule. 

The gentleman from Texas, Mr. Hinojosa, is recognized for 5 

minutes. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

I ask unanimous consent that my opening statement be included 

in today’s— 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. HINOJOSA. I want to make reference to an article that appeared in today’s—January 18th—Bloomberg News saying that the 

attack by lobbyists for U.S. banks is seen as exaggerating the cost 

of disruption to the bond markets. 

We have been discussing this morning the proposal championed 

by former Federal Reserve Chairman Paul Volcker. According to 

the article, it says that the lobbyists are saying that it will constrain the largest banks from betting on—sorry—anyway, this article says that their fears are greatly exaggerated. The industry’s 

claim ignores the fact that when the largest banks stop doing this 

kind of trading—and I’m reading from that article—that somebody 

else will step in to do it, and we have to weigh those costs against 

the risk of banks blowing up. 

This discussion has been very interesting; and I want to ask a 

question as it refers to the smaller institutions, community banks 

and credit unions in particular, because they didn’t cause the recent economic decline. Some fear that additional regulations will 

harm the smaller financial institutions that arguably serve currently as the foundation of our Nation’s economy. 

It is my understanding that Section 619’s prohibitions on proprietary trading do not apply to small business investment companies 

known as SBICs, allowing for banks to invest in them. So I ask my 

first question, which is, does the Dodd-Frank Act and proposed 

rulemaking provide other exemptions that benefit small business 

resulting in job growth? 

That first question is for Governor Tarullo of the Federal Reserve 

System. 

Mr. TARULLO. Thank you, Congressman. 

I think probably from the standpoint of a small business or medium-sized business, somebody who has access—would normally 

have access to public capital markets, probably the most important 

thing is the line of questioning that we were engaged in a few minutes ago, which is to say making sure that the underwriting exception is interpreted and applied in such a fashion that they are able 

to get underwriting services. Because sometimes the issue of a 

smaller firm will be less liquid than that of a larger firm and they 

are going to want to know that the underwriter can in fact hold 

the inventory as appropriate and then sell it later. 

38 

I think that is probably the most important thing in addition to 

the SBIC exception that you referred to a moment ago. 

Mr. HINOJOSA. I will ask the same question of Chairman 

Gruenberg of the FDIC. 

Mr. GRUENBERG. I agree with the point Governor Tarullo made, 

and I also think it is worth noting that in terms of small banks, 

community banks, they by and large don’t engage in this activity 

and should not be impacted directly by the Volcker Rule. The activity is really principally by our largest financial companies. 

Mr. HINOJOSA. Thank you. 

The Comptroller of the Currency, John Walsh, what is your answer? 

Mr. WALSH. I agree with what has been said. It is also the case 

that public welfare investments that banks make in community 

projects are also exempted. 

Mr. HINOJOSA. Very good. 

The U.S. Chamber of Commerce will testify in the second panel, 

and they contend that the Volcker Rule as currently constructed 

will not reduce systemic risk nor will it improve economic wellbeing, but will in fact increase systemic risk. Governor Tarullo, 

what concerns address the possibility that if the Volcker Rule were 

implemented, banks would be unable or unwilling to underwrite 

public and private bonds for corporations, municipalities, health 

care providers, and our universities? 

Chairman GARRETT. We will have that be the last question. The 

gentleman can answer. 

Mr. TARULLO. Again, going back to what I said a moment ago, 

Congressman, that the intentions with respect to the underwriting 

exception are quite clear to make sure that underwriting can continue to be pursued as appropriate. 

Chairman GARRETT. I thank the gentleman. The gentleman 

yields back. 

Mr. Luetkemeyer is now recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Gruenberg, in our work papers here and briefing papers 

there is a statement that says that Chairman Volcker has argued 

that activities such as proprietary trading and sponsoring hedge 

funds and private equity funds should not be conducted by firms 

that benefit from a Federal safety net such as deposit insurance or 

access to the Federal Reserve System discount window. Proponents 

of the rule have argued that by moving certain risky non-core activities out of institutions that benefit from deposit insurance and 

access to the window, restrictions would better protect taxpayers 

and help create a more resilient U.S. banking system. What is your 

reaction to that statement? 

Mr. GRUENBERG. I think the underlying premise to the proponents is that the activity here is speculative short-term trading— 

Mr. LUETKEMEYER. Right. 

Mr. GRUENBERG. —relying on funds that are generated as a result of the public safety net of deposit insurance and access to the 

discount window. I think that is, for the proponents, the key issue, 

and that is why they want to constrain that activity, that it is inappropriate to, in effect, engage in speculative trading activity utilizing funds derived from the public safety net. 

39 

Mr. LUETKEMEYER. A while ago, I think Mr. Gutierrez asked you 

a question about the costs to the FDIC insurance fund over the last 

several years. You gave a $30 billion cost to the failures. What proportion of that would you say would be as a result of the kind of 

activities that we are talking about this morning, that the Volcker 

Rule would affect? 

Mr. GRUENBERG. I don’t know that you can discern from the 

failed institutions that there is a relationship to proprietary trading activities. 

Mr. LUETKEMEYER. Out of the banks, the 200 banks that failed 

in the last couple of years, I am sure a lot of those were community 

banks, which you just testified weren’t part of the problem. Of the 

bigger folks that have caused some difficulties for the other 

banks—obviously, the big banks were consolidated and a lot of 

them didn’t fail as a result of the too-big-to-fail doctrine, but there 

are a lot of folks who were inadvertently affected by this. No figures on that? No guess? 

Mr. GRUENBERG. In terms of tying it to the proprietary trading 

activity, I think it has— 

Mr. LUETKEMEYER. I think there are hedge funds and private equity funds, too. This is what the Volcker Rule was addressing here. 

That is why I read the whole question. 

Mr. GRUENBERG. I think the proponents—and that includes Mr. 

Volcker—have indicated that they view the proprietary trading restriction essentially as a forward-looking— 

Mr. LUETKEMEYER. How much risk do you think is appropriate 

for the banks to take on utilizing these instruments? Do you think 

there should be a different weighting of this when you start looking 

at adequate capital with regards to the size of the institution, the 

amount of activity they have? Are there certain criteria that you 

think would be necessary there? 

Mr. GRUENBERG. The Volcker Rule is focused on the question of 

what mechanism you want to use to try to address the risk identified here. 

One approach would be capital requirements relating to these activities. Another, which is really the statutory provision in Section 

619, goes to constraints on the activity itself. There are two alternative approaches. I think the statute chose the latter. 

Mr. LUETKEMEYER. I am running out of time here. I have two 

more questions I want to get to. 

One is—Ms. Schapiro, you and I have discussed this before. It is 

a little bit off the topic here. But it is with regard to activities with 

regulatory stuff coming from different departments. The Department of Labor issued a proposed ruling on the definition of fiduciary. Have you been working with the Department at all on this 

issue and can you give us a quick update in about 15 seconds? 

Ms. SCHAPIRO. We have had a number of conversations and discussions with them. As you know, they are interpreting their rules 

under ERISA. 

Mr. LUETKEMEYER. Are you working with them and making sure 

that your point of view and your oversight over this is not impacted? 

Ms. SCHAPIRO. Yes, we have had a number of conversations. 

40 

Mr. LUETKEMEYER. Mr. Tarullo, you were trying to address with 

Congressman Grimm here a minute ago with regards to the question he had on enforcement of these foreign entities who are dealing with proprietary trading activities. I thought it was a great 

question, and we didn’t get an answer. Would any of you like to 

jump in here, how is enforcement mechanism going to work on 

folks who are offshore who are doing business here? Can you explain the oversight on that? 

Mr. TARULLO. If they have a subsidiary or branch or an agency 

here in the United States— 

Mr. LUETKEMEYER. In order to sell here, they have to have a 

branch or subsidiary? 

Mr. TARULLO. Well, no, that wouldn’t necessarily be the case, 

Congressman. It could be they had a branch which was unrelated 

directly to the proprietary trading but that is still an avenue in for 

enforcement because you have jurisdiction over the entity. If it is 

purely an entity overseas, there could be a jurisdictional question 

of what kind of— 

Mr. LUETKEMEYER. In other words, if an entity overseas is doing 

business with an individual or a company here and selling these 

types of—or doing these activities back and forth, is there a question of jurisdiction, who would be able to enforce? 

Chairman GARRETT. That will be the last question. 

Mr. TARULLO. Well, remember, the firms we are going to primarily be concerned with are those that are operating in the 

United States and they would have one of the subsidiaries or agencies or branches that I referred to a moment ago. 

Mr. LUETKEMEYER. Thank you very much. 

Thank you very much, Mr. Chairman. 

Chairman GARRETT. The gentleman’s time has expired. 

Obviously, we will have some other questions that we will probably want to submit to the panel in writing. 

The gentlelady, Mrs. McCarthy, is now recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, and 

I thank the witnesses for their patience. 

When you start thinking about these committee hearings, you 

think about what questions you want to ask, and of course when 

it gets down to you, most of the questions you wanted to ask have 

already been asked. But I would like to talk about the aspect of the 

implementation that is equally important, part of the whole process 

that we are on right now, and that is making sure that the agencies have the staff but also who have the knowledge. I know we 

had a hearing several years ago, and one of the things we found 

out is that a lot of your agencies didn’t actually have the expertise 

of having someone who worked in compliance on Wall Street and 

knew what to look for and things like that. I am wondering if that 

has changed? 

And what additional resources might you see a need for in the 

future as far as staff, and do you anticipate that you are going to 

need to perform the duties—are you going to be able to have the 

staff that you need to perform the duties that you are talking 

about? Because with all of you sitting here, we know that there will 

be a heck of a lot of staff behind you also doing that work. 

41 

As far as the money—the market making, when you conduct 

your warranted exams, what happens when each and every one of 

you come together? How are you going to analyze the data if you 

have different opinions? Who takes the lead on coming down with 

the final decisions? 

Mr. GENSLER. I am going to take the opportunity to say at the 

CFTC, no, we do not have enough staff. We have been asked to 

take on a market 7 times the size of the futures market, a $3 trillion swaps market. So I am hopeful as it relates to the Volcker 

Rule that we can leverage off of this to some of the agencies at this 

table who are, frankly, self-funded. 

I think that is why I am being pragmatic about this. If it is a 

swap dealer or Futures Commission merchant that is part of a 

broader banking entity, at the CFTC, we are going to look to be 

efficient by leveraging off of some of the examination authority at 

the banking authorities. 

Mr. TARULLO. I would say, we may be self-funded, but we don’t 

regard ourselves as having a blank check. I think the entire government is aware of the need to conserve resources. What the 

needs will be over time, I think we will have to wait and see. 

One thing I will say, though, is that right now there is an awful 

lot, obviously, of staff time being devoted to drafting a lot of regulations, Dodd-Frank regulations, Basel-Committee-derived regulations, and the like. And I would anticipate that once that process— 

doesn’t come to an end, exactly, but once it slows down and the 

peak levels of activity have diminished some, we will be able to redeploy people. 

But you made a critical point, I think, in the premise of your 

question, which is having the right kind of people to implement 

and administer not just the Volcker Rule— 

Mrs. MCCARTHY OF NEW YORK. All of the rules. 

Mr. TARULLO. —but the kind of supervision we do know. 

This is not just an advanced form of making sure that loans are 

underwritten properly. It requires a set of skills and expertise that 

are different. 

And a point on coordination—as I said earlier, I think we are actually coordinating in general quite well both with respect to rule 

writing and with respect to individual supervision. Every agency 

does have to fulfill its statutory mandate. We have primary responsibility for the institutions that are assigned us by the Congress. 

But, for example, if we are doing a holding company with a big 

national bank, the supervisors from the Fed and the OCC routinely—and by routinely, I mean daily—consult with one another, 

and if there are differences of views on policy matters, they are 

both expected to push those up the line where, if necessary, eventually, John and I will discuss them. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Ms. SCHAPIRO. For the SEC, we will obviously be responsible for 

broker-dealers and security-based swap dealers that are affiliated 

with depository institutions; and so, I would imagine that we will 

rely heavily, as the CFTC will, on the Fed and the bank regulators 

to take the lead. But, we obviously have a key role to play with respect to the broker-dealers. I do think the standardization of the 

metrics and the data will enable all of us to see the same informaVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
42 

tion and work together very closely on our different components of 

the banking entities. 

Chairman GARRETT. The gentlelady’s time has expired. 

The gentleman from Texas has a letter from the Small Business 

Investor Alliance (SBIA) which is to be entered into the record. 

Mr. HINOJOSA. Yes, I ask unanimous consent that the SBIA letter— 

Chairman GARRETT. Without objection, it is so ordered. 

The other gentleman from Texas is recognized for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

As I said in my opening statement, we sent you a letter from 121 

Members of Congress, and that was a bipartisan letter. A number 

of committee chairmen signed that letter. 

And you know when you look at—I pulled up a copy of DoddFrank a while ago. It was 11 pages for this Section in Dodd-Frank, 

and it has turned into 300 pages of regulation and 1,300 questions 

that you put out for part of your rule. When somebody starts asking a lot of questions, it leads me to believe that there are some 

conclusions that were not drawn prior to the rule coming out. 

And when you look at—the current estimate is 6.2 million 

manhours to comply with this piece of legislation. We have other 

countries saying that they are not going to go in the same direction 

as Dodd-Frank. So, it obviously creates some bifurcation in the 

marketplace. 

Back to the letter we sent you, as I mentioned, we mentioned 

three things, one was to extend the comment period. But, more importantly, after asking all of those questions and receiving answers 

to 1,300 questions and 400 issues, there appears to be at least one 

conclusion, and that is that you are going have to go back and rethink and re-look at those different issues after you have had those 

questions answered and send the proposal back out and see if everybody then is on the same page. Is there disagreement that is not 

a good strategy, Mr. Tarullo? 

Mr. TARULLO. I think it depends, Congressman, on the answers 

that we get to the questions that have been asked. 

And, as I said earlier, as is the case I think in all administrative 

rulemakings, the pattern is you look at the responses that have 

come in and you make an assessment as to whether you need to 

adjust your proposed rule at the margin or whether you need to 

make some significant changes that don’t fundamentally affect the 

structure of it or whether you need to change the structure of it. 

And I think that what will happen is, once the comment period has 

ended, we are all looking at the staffs and we are all looking at the 

comments, and we will need to make an assessment as to which 

of those three categories we are in. 

I would say if we were in a category in which we thought we had 

to change the basic approach, then one would expect that a re-proposal would probably be what you do. But if, on the other hand, 

you are making adjustments to the basic approach that you have 

made, we may well not feel the need to re-propose the regulation 

as opposed to making changes but then go final and, as I said earlier, have the opportunity for further refinement during the conformance period. 

43 

Mr. NEUGEBAUER. Ms. Schapiro, have you ever seen a rule that 

had 1,300 questions in it? 

Ms. SCHAPIRO. I can’t say that I have. I have seen rules and we 

have done rules at the SEC where we have asked hundreds of 

questions to inform our process. The goal of the questions was not 

to give everybody out there who is commenting lots of work to do, 

but to really help inform us about how to draft this rule, and these 

exemptions in particular, correctly. So, it was really our effort to 

make sure we covered all the bases. 

Mr. NEUGEBAUER. Mr. Gensler, have you ever seen a rule with 

1,300 questions? 

Mr. GENSLER. I don’t know that I have. As I say, while we may 

have been overly generous, it really is to solicit public input on a 

challenge here of how to achieve these twin goals of prohibiting one 

thing, permitting another thing, the two overlap, and so how to 

deal with that overlapping, fulfill congressional intent to lower risk 

to taxpayers. 

But to the chairman and subcommittee question earlier, and 

your chairman as well, to the two chairmen, we have been willing 

at the CFTC to re-propose on a number of occasions when it is not 

a logical outgrowth, and if that is the collective view at some point 

this spring or summer when we are getting to that point we 

would— 

Mr. NEUGEBAUER. Isn’t the goal here to do this right? 

Mr. GENSLER. Absolutely. Do it right, in a balanced way to fulfill 

congressional mandates. 

Mr. NEUGEBAUER. And so with something as important as this, 

it seems to me that we should make sure we get it right. I think 

the question that a lot of people are asking is, what in this new 

rulemaking process, this 300-page rule, would have prevented the 

financial crisis from transpiring? 

Mr. Tarullo, can you point to a Section? 

Mr. TARULLO. There are a couple of things, and some people alluded to this earlier. First, yes, there was some proprietary trading. 

Would I identify it as at the core of what led to this financial crisis? 

No. But one is always enjoined not to fight the last war as one goes 

forward, and so I assume that the motivation was to address other 

issues. And if you don’t have a balanced book, obviously, you have 

more risk in one other than you otherwise would. 

I want to say one more thing on the questions, and the questions 

are in the 300 pages. There are a lot of questions. But part of what 

the questions do actually is to reveal to the public how we have 

been thinking about the rulemaking. They don’t have to answer— 

you can send in a one-page comment or you can send in a 100-page 

comment. It is not like one of my old law exams where the kids 

had to answer everything whether they wanted to or not. This is 

one where you pick the questions you want to answer. 

But I do think they actually serve a transparency function as 

well by giving an insight into the way in which we are debating 

within the agencies. 

Chairman GARRETT. That will be the last question that this gentleman asks. 

Mr. Miller is recognized now for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

44 

There has been some question in this committee about whether 

propriety trading played a role in the financial crisis, but one thing 

that obviously did play a role was the repo market, the repurchase 

market. The repurchase market is largely still unregulated, it is 

opaque, dimly understood certainly by Congress and by the public, 

and huge. At the time of the crisis or just before, it was the equal 

of all deposits and lent itself to great instability by matching up 

short-term borrowing with longer-term lending. 

Before the crisis, Bear Stearns was borrowing $40 billion overnight in the repo market and using those funds to purchase mortgages. So, that obviously creates a great deal of instability. Yes, it 

creates liquidity, but it also creates a great deal of instability. 

I understand that there is an exception in the proprietary trading rule designed to get at repo lending, the repurchase. That if 

you take a security as collateral, even though it is characterized as 

a purchase, if it is in fact a loan with collateral, that is not treated 

as proprietary trading. I want to find some ways to get at the repo 

market and the instability that it creates, but I think that rule 

probably makes sense. 

Sheila Bair and others have suggested that the way the rule is 

written, it will also exempt purchase of assets financed through the 

repo market. MF Global—you are shaking your head; I am glad to 

see that—was using a financing technique called ‘‘repo-to-maturity.’’ They were buying European sovereign debt with the European sovereign debt as the security, as the collateral for the purchase. It was basically 100 percent financing. 

Sheila Bair and others have suggested that the rule would in fact 

allow that and not treat that—if done by an institution subject to 

the proprietary trading rule, it would have exempted that. 

Mr. Tarullo, you have already shaken your head ‘‘no.’’ Do you not 

read the rule that way? 

And I would like to hear from the others as well. 

Mr. TARULLO. I think you have it exactly right on all three 

counts, Congressman. 

One, the repo exception is meant to recognize the fact that it is 

essentially a borrowing relationship. It is not a trading relationship, even if title passes back and forth. 

Two, if the repo is the financing, what you do with the financing, 

whether you get the financing from deposits or from long-term 

bond issuance or from repo, what you do with it is what the 

Volcker Rule addresses. So, short-term trading for proprietary purposes, whether you financed it through deposits or through repo or 

through a long-term bond, it will still be prohibited. 

The third thing you got right is MF Global would not have been 

subject to this because they don’t have a depository institution. 

Ms. SCHAPIRO. I was going to add that I agree with all of that 

completely, that had they been associated with a depository institution, the fact that they were engaged in repo would not change the 

character of the underlying purchases of the sovereign bonds. And 

assuming those were not done pursuant to market making or underwriting, they would likely have been proprietary trading and 

prohibited. 

Mr. MILLER OF NORTH CAROLINA. Does anyone disagree? 

45 

Do any of you think there should be some limitation on the repo 

market? We had a hearing in the Oversight Subcommittee of this 

committee on MF Global—of course, there have been a lot of hearings in Congress—and certainly one of the lessons I took from that 

hearing was that the repo market, although we have heard testimony in this committee that it is now vastly changed from what 

it was before the crisis, is still a remarkable source for instability. 

I think the assumption in Europe is that things will get really 

chancy for the financial system when there is a fault. I suspect 

things will get really chancy when the repo market starts requiring 

a lot more collateral for sovereign debt when sovereign debt is used 

as collateral. 

Mr. Tarullo, is there any regulation in the works? 

Mr. TARULLO. We certainly have been looking at the repo market 

in the context of wholesale funding and what is sometimes referred 

to as the shadow banking system more generally. If you think 

about it, there are really two big goals that I think regulatory reform post-crisis needed to have. One was the too-big-to-fail issue 

where we have made some progress. We are not there yet, but I 

think we have the tools in place to do it. 

The second is in wholesale funding more generally in the areas 

in which there is a potential for runs under circumstances in which 

the value of collateral all of a sudden becomes a question to those 

who have been taking it. 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. TARULLO. With respect to all of these, you will need more attention. Sorry. 

Chairman GARRETT. The gentleman’s time has expired. 

The gentlelady from New York is recognized. 

Dr. HAYWORTH. Thank you, Mr. Chairman, and I thank all of the 

panelists. With great respect for the little time remaining, during 

this hearing it has been most impressive that all of you take a very 

thoughtful and thorough approach to this almost seemingly impossible task, and I give you great credit for that. 

But clearly, as Chairman Neugebauer has indicated, it seems as 

though it would be very reasonable to consider that this rule, this 

proposal is not what, as a scientist, being a physician—it is not the 

most elegant solution to the problem that we face, which is that we 

have certainly put taxpayer dollars at great risk and we have expended an enormous amount of taxpayer money to rescue financial 

institutions that have acted unwisely. The causes for that or the 

conditions that have been conducive to that kind of action of course 

are at the crux of this problem. I think those of us who feel Federal 

intervention in the markets has augmented the moral hazard 

would automatically take a different approach. 

Would any of you be willing to say that statutorily, it would be 

appropriate for us to give very serious consideration to legislation 

that removes this particular burden, and perhaps we should direct 

our legislative efforts toward again a more elegant solution such as 

really strictly limiting the circumstances under which we will indemnify institutions for losses? 

Mr. TARULLO. I can start. I think too-big-to-fail is an agenda, and 

the moral hazard that comes from it is an agenda that we should 

46 

all share and we should all pursue, regardless of what happens in 

other areas. 

Having said that, there are going to be major consequences to 

the financial system if a major financial institution fails, even if it 

does fail and is resolved by Chairman Gruenberg and the FDIC in 

a way that does not involve the expenditure of taxpayer funds. So 

financial instability and harm to the system can result even if you 

are not in a position of bailing out a firm. 

And I think with respect to capital and other rules, that is part 

of the motivation of thinking as to how we are going to both move 

towards a situation of more market discipline, avoiding too-big-tofail, and to in an anticipatory fashion mitigate the consequences 

that would ensue even from the resolution as opposed to bailout of 

a major financial institution. 

We are moving forward now on implementation. We are waiting 

for the comments to see whether there is a better approach. Although, as I said in my prepared remarks, I haven’t seen it yet. I 

welcome it if it does come, but someone has to elaborate it. 

The only thing I would say to you is, as we go through—assuming we go through with this framework and this approach, as we 

go through the conformance process, if there are things that we 

think would need legislative attention, we will certainly come back 

to you. 

Dr. HAYWORTH. But it seems clear, especially from Representative Grimm’s question, that we are—and we can’t deny the fact 

that we are in a competitive global marketplace, and that certainly 

creates great challenges for our financial services sector as we try 

to compete, as we have U.S.-based companies competing with those 

that are based overseas. That has to be a concern for all of you as 

you— 

Mr. TARULLO. Sure, absolutely. That is why we paid as much attention as we did in the capital area which I think is critical to 

making sure not only do other countries adopt Basel 3 but that 

they actually implement them in their firms in a rigorous fashion 

so their risk weighting is done like ours. So I agree with that proposition. 

It is a little different, though, to ask the question, does every 

country need to have exactly the same regulations for all of its 

firms. And some other countries don’t have—they put constraints 

on their firms in ways that we don’t. So, we have to make a judgment I think collectively as to whether this is something that goes 

to the heart of the ability of a big international financial firm to 

compete. 

Chairman GARRETT. The gentlelady’s time has expired. 

I understand this panel was told that they would be out of here 

by noon. With the panel’s permission, I would like to have an even 

number from both sides of the aisle to be able to question the 

panel. Mr. Scott has just come in, and I recognize him for questions. 

Mr. SCOTT. Thank you, Mr. Chairman, for that time. 

I want to share with the committee my major concern with the 

implementation of the Volcker Rule. This is not whether or not we 

should do it, but it is to make sure we do it right. 

47 

I am very concerned. We are moving forward in a very, very 

strong economic recovery period. The unemployment level has come 

down to 8.5 percent. We have increased jobs just last month in the 

private sector of 200,000 jobs that have come on. Auto sales are up. 

We have General Motors moving from the doorsteps of bankruptcy 

now to we have them pivoted right back up to the top as being the 

number one automobile manufacturer in the world, passing Toyota. 

Great signs, which means consumer confidence is going up and 

business confidence is going up. 

This Volcker Rule goes at the central nervous system of our entire financial system and could really have a devastating impact, 

in my opinion, if it is not done right, because the general thrust 

of this Volcker Rule is in capital formation, which clearly impacts 

the whole question of liquidity. So as we move forward with this 

interpretation of this rule, let us keep in mind that we do not want 

to do anything that would get us off course from the great upward 

movement we are making in our economic recovery. 

I have two central questions. First of all, Ms. Schapiro, one 

area—it touches every area, but one of the areas that we talked 

about is in the swaps and in the hedging. And I want to commend 

you, first of all, for meeting with and the work that you have done 

with the IntercontinentalExchange. That is particularly within the 

portfolio margining requirement for clearing members. I commend 

you for that, and I hope you will proceed in extending that margining of portfolios for customers as well, because I would think it 

would help. 

But I understand there is a pending request before your Commission for an exemption to permit the commingling of security-based 

swaps with index-based CDS’s in an account overseen by the 

CFTC. Here is how this little wrinkle works, for example. Has your 

staff made any progress on this request or identified any policy 

issues that stand as an impediment to granting this request, which 

I understand is critical to ensuring the buy side utilize central 

clearing for these same products? And this is particularly in fact 

because the CFTC has an impact on this as well. How does that 

work between the two of you? 

Ms. SCHAPIRO. Congressman, I am going to have to get back to 

you—I am sorry—for status from my staff on exactly where those 

conversations are, but Chairman Gensler may have more information. 

Mr. GENSLER. If I could take it, the two agencies are working together on swaps and securities-based swaps regulation. In this one 

area that you mentioned, credit default swaps, where narrow based 

and individual swaps are the jurisdiction of the SEC and the index 

steps are over at the CFTC, I share the goal that you mention, that 

market participants can get the benefit of central clearing and the 

benefit of portfolio margining. And, of course, the devil is in the detail because of the two statutory regimes. But I know staffs have 

been working together with market participants on how to achieve 

that, and the CFTC, I believe, is committed to do that. I haven’t 

heard of a concern from the SEC, but, given the capacity of all that 

we are doing, your highlighting helps just to remind us to keep attention on it. 

Mr. SCOTT. Thank you so much. 

48 

My time is getting short, but back to my general concern about 

the overall health of this economy, making sure that we get this 

rule right so it doesn’t interfere with the great progress we are 

making in the economic recovery, there are some studies that have 

shown there could be a significant impact on U.S. companies, particularly our financial companies, in increased borrowing costs if 

the Volcker Rule is not implemented the right way. Now, given the 

complexity of this task, the significant downside of getting it wrong 

and the fact that the CFTC just released its rule, what is the 

downside of taking comments and re-proposing with greater clarity 

based on these comments? 

Mr. TARULLO. As I said earlier, Congressman, I think whether 

we do that or not will depend on the assessment we make of the 

comments we have received. If there is not a fundamentally different track down which to head, then I think it would actually be 

in everyone’s interest, including the firms, to have a sense sooner 

rather than later what the rule will look like. 

If, on the other hand, we do think that we need to change fundamentally—I haven’t seen it yet, but— 

Mr. SCOTT. Do any of you believe that in the process of interpreting this rule and putting it in place, there is a downside to it, 

having a negative impact on the great advances we are making 

with our economic recovery, especially in the job creation? 

Mr. TARULLO. I think if, as you say, the rule is implemented 

properly—and that is probably most importantly focused on making sure that the underwriting and market-making functions are 

able to proceed in a productive fashion—then, we shouldn’t see that 

kind of impact. 

Might we see some shifts from one firm to another in, for example, being able to run a proprietary desk? Yes, I think we may see 

some of that. But that was the congressional judgment that that 

kind of proprietary trading in a firm with a depository institution 

was not necessary for the firm itself and raised certain financial 

stability risks. If we do underwriting and market making right, I 

think that the capital flows with which you are most concerned are 

going to be preserved. 

Mr. SCOTT. Thank you very much. 

Chairwoman CAPITO [presiding]. I am going to conclude the first 

panel. I want to thank the witnesses. I think you answered some 

great questions and have been very forthright, and I appreciate it. 

Thank you. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

I will call the second panel up as soon as they are able to switch 

places. 

If I could ask everyone to take their seats, and we will proceed. 

At this time, we have the second panel of witness before us, and 

I will introduce them individually. I understand Congresswoman 

Hayworth will make an introduction, which I will save until we get 

to your constituent. 

49 

Our first witness is Mr. Anthony J. Carfang, partner, Treasury 

Strategies, Inc., on behalf of the U.S. Chamber of Commerce. 

STATEMENT OF ANTHONY J. CARFANG, FOUNDING PARTNER, 

TREASURY STRATEGIES, INC., ON BEHALF OF THE U.S. 

CHAMBER OF COMMERCE 

Mr. CARFANG. Thank you, Madam Chairwoman, and members of 

the committee. We are pleased to speak to the committee today on 

an issue of such profound importance to the stability of the financial system. 

My name is Tony Carfang, and I am a partner at Treasury Strategies. We are the world’s leading consultancy in the areas of treasury management. For 30 years—in fact, today is our 30th anniversary—we have been working with corporate treasurers and CFOs, 

helping them manage their daily cash flows and growing their 

businesses. 

We also consult to the financial institutions who provide treasury 

and liquidity services to those corporations. 

We are speaking today on behalf of the U.S. Chamber of Commerce, its 3 million members, and the 3 million treasurers of those 

companies who will have to deal with these regulations. And what 

I would like to do today is share with you the untold story of how 

these regulations will impact the daily management of America’s 

businesses. As a matter of fact, there are five points I would like 

to make here, five chapters to this story. 

Number one, American businesses are the most capital-efficient 

in the world, and the Volcker Rule will change that. 

Number two, as every treasurer knows, risk can neither be created nor destroyed, only transformed. And while the Volcker Rule 

may remove this risk from the banking system, it puts it right in 

the lap of every U.S. corporation. 

Number three, the rulemaking process that you were discussing 

earlier is so unaligned in terms of the comment periods and in 

terms of the implementation, that it further adds to the uncertainty and increases the possibility that all except the largest 

banks will either scale back or reduce the number of services they 

offer altogether. 

Number four, this is one of four major pieces of regulation impacting corporate treasurers along with Basel, along with proposed 

additional money market fund regulations, and along with derivatives regulations, all four of these designed to impact financial institutions, but frankly landing right on the desk of every corporate 

treasurer in America. 

Number five, there are no do-overs here. Corporate treasurers 

will be realigning their balance sheets, reprogramming their ERP 

systems as they change banks and change the way they manage 

risk and raise capital. Those are long-term changes. Now, it may 

take 12 to 18 months for even a mid-sized company to make these 

changes, and once made, they are not going to be easily reversed. 

I would like to dwell on the first point of capital efficiency, because at Treasury Strategies, we are with our corporate treasurers 

day in and day out helping them manage their cash. U.S. corporations keep cash balances of about $2 trillion here in the United 

States, which is 14 percent of U.S. GDP. In Europe, the comparable 

50 

ratio is 21 percent, about 50 percent higher. Should banks exit 

some of the capital raising and risk management businesses, companies will need to increase their cash buffers, and essentially, we 

will see the cash deficiency decline. 

Should that 14 percent rise to the European level of 21 percent, 

that would mean an extra $1 trillion. Corporations would have to 

raise and, frankly, idle, sideline $1 trillion if capital efficiency decreases to European levels, which could well happen under the 

Volcker Rule. That $1 trillion is more than the entire TARP bailout. That $1 trillion is more than the stimulus. That $1 trillion is 

more than the recent Federal Reserve’s quantitative easing. And to 

take that money out of the system and sideline it would have huge 

economic impacts. That can only be done through downsizing or deferring growth and expansion plans, postponing maintenance and 

capital investment, not a good outcome. We encourage you to think 

very carefully about how all of this plays out. 

There are four major regulations designed to impact national institutions that will impact the way corporate treasurers manage 

their cash day in and day out: the Volcker Rule; potential money 

market fund regulations; derivatives regulations; and Basel 3 capital requirements. All of these are untested, yet are going to hit the 

markets simultaneously. 

Ladies and gentlemen, this has not been thought through. We 

would encourage you to take the time necessary to think this 

through. 

Finally, the ultimate question is, when a U.S. corporate treasurer 

calls his or her bank in order to raise capital or manage risk, will 

there be anybody there to answer the phone? 

Thank you very much. 

[The prepared statement of Mr. Carfang can be found on page 83 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

Mr. CARFANG. I am happy to answer any questions. 

Chairwoman CAPITO. Thank you. 

I now recognize Ms. Hayworth for an introduction. 

Dr. HAYWORTH. I have the pleasure of introducing Mr. Scott 

Evans, who happens to be a constituent of mine. I am privileged 

to be his Representative in Congress in the 19th Congressional District of New York. He is the executive vice president and president 

of asset management of TIAA–CREF. He is the chief executive officer of the company’s investment advisory subsidiaries, so he has 

oversight of nearly $441 billion in combined assets under management. 

He previously served as chief investment officer and, prior to 

that, he was head of CREF Investments. His BA is from Tufts University, his MM from Northwestern University’s Kellogg School of 

Management, and he is a chartered financial analyst and a member of the New York Society of Security Analysts. 

I am privileged to welcome you, Mr. Evans, and I thank you for 

your testimony. 

Thank you, Madam Chairwoman. I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Evans? 

51 

STATEMENT OF SCOTT EVANS, EXECUTIVE VICE PRESIDENT, 

PRESIDENT OF ASSET MANAGEMENT, TIAA–CREF 

Mr. EVANS. Thank you, Congresswoman Hayworth, for that kind 

introduction. 

Chairwoman Capito, Chairman Garrett, Ranking Members Maloney and Waters, my name is Scott Evans. I am the executive vice 

president with TIAA–CREF and president of our Asset Management Division. I appreciate the opportunity to speak with you 

about some of the effects of the Volcker Rule on the insurance industry, specifically as it relates to our ability to invest in certain 

financial vehicles. 

Please allow me to tell you just a little bit about TIAA–CREF. 

We are the Nation’s largest provider of retirement benefits. We 

have a not-for-profit heritage, serving 3.7 million Americans in the 

academic, research, medical, and cultural fields. We are an insurance company managing $464 billion in assets, providing over $10 

billion a year in retirement income to teachers, nurses, campus 

service personal, and others in the not-for-profit sector. 

In order to provide our participants, our clients with a comprehensive set of financial solutions, we also own a thrift institution. Many of our participants have a lifetime relationship with 

TIAA–CREF and trust us to provide for their long-term financial 

success. Our thrift further enables us to meet our participants’ lifetime financial needs by providing them with a banking partner as 

they live to and through retirement. 

Now, our thrift currently compromises less than a tenth of a percent of our total assets. However, it still qualifies as an insured depository institution under the proposed rule and thus subjects our 

entire enterprise to the investment and sponsorship restrictions of 

the Volcker Rule. 

While the proposed regulations provide an exemption from proprietary trading restrictions for insurance companies, this exemption does not expressly extend to allowing insurers to hold an ownership interest in covered funds defined to encompass private equity funds. This is a concern for TIAA–CREF and, quite frankly, 

others in the insurance industry, since private equity investments 

are an integral part of our long-term investment strategy. These investments are widely used by insurers to diversify our portfolios 

and enable us to deliver on long-term commitments that we have 

to our participants. 

Our insurance portfolio primarily compromises core investments 

with stable return characteristics. Private equity investments allow 

us to diversify our portfolio while also seeking higher yields over 

extended investment horizons. This investment blend enables us to 

meet the long-term financial goals of our participants, providing 

them a steady stream of income in retirement built on a variety of 

asset classes. 

Additionally, many private equity investments provide essential 

long-term capital to important sectors of the economy, including infrastructure, projects to build roads, airports, water treatment facilities, desalination plants, and energy distribution facilities. 

We believe that the intent of Congress with respect to the 

Volcker Rule as stated in the Dodd-Frank Act was to appropriately 

accommodate the business of insurance. We do not believe the proVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
52 

posed rule follows this intent as it subjects our entire enterprise to 

limitations designed to regulate the investment activities of the 

thrift. 

TIAA–CREF appreciates that Congress is conducting responsible 

oversight of the regulations to implement the Volcker Rule, and it 

is our hope that final regulations will not result in any significant 

disruption for insurers or the individuals depending on us for their 

long-term financial security. 

Thank you again for the opportunity to testify before you today, 

and I look forward to taking your questions. 

[The prepared statement of Mr. Evans can be found on page 97 

of the appendix.] 

Mr. SCHWEIKERT [presiding]. Thank you. 

Professor Johnson? 

STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF 

MANAGEMENT 

Mr. JOHNSON. Thank you very much. 

I would like to make three points, if I may. 

The first is with regard to the cost of financial crisis, including 

the cost of the last crisis and the cost of any future crisis. I have 

listened to the hearing so far this morning, and I have heard little 

discussion of what we lost and what we could stand to lose in the 

future. 

You can measure it in different ways. You could talk about more 

than 8 million jobs lost. You can talk about the loss of growth that 

we will not get back. I will stress the fiscal cost. According to the 

Congressional Budget Office, the change in medium-term debt of 

the United States, the Federal Government debt held by the private sector is roughly 50 percent of GDP, $8.5 trillion. That is a 

huge cost. 

What is the mechanism through which we encountered the previous financial crisis? What are the risks we face going forward? 

This is my second point. A lot of these risks come from the behavior of very large banks; and, despite the best intentions and attempts by Congress to deal with this problem of so-called too-bigto-fail banks, I am afraid these structures are still with us. There 

is a distorted set of incentives that these banks have. They get the 

upside when things go well. They get the profits, the compensation 

for executives. When things go badly, the risks, the costs get 

shoved on to, ultimately, the American taxpayer. That is the point 

of the $8.5 trillion in losses. 

And the way that you blow up a bank, the way that Lehman was 

destroyed, the way that Bear Stearns was destroyed, the way that 

Merrill Lynch incurred such large losses was precisely and exactly 

through proprietary trading, properly defined, as defined by the 

statute, as defined by Mr. Tarullo in his remarks this morning. It 

was exactly the intent of those institutions to buy and to hold securities, hoping to benefit from short-term price movements, that led 

them into what were regarded as very highly rated investments. 

Triple A securities were in fact where they suffered the most damaging losses. 

53 

Mr. Tarullo said this morning we shouldn’t always be fighting 

the last war; and, of course, he is right. And the advantage of the 

Volcker Rule, as written and as attempted now to be implemented, 

is precisely on a forward-looking basis to prevent the big banks 

from again putting their hand into the pocket of the American taxpayer. 

My third point is, I understand that the industry is concerned 

about this, and I have read carefully the documents that SIFMA 

has sponsored, put out through various organizations and individuals. And I am deeply skeptical, for the reasons expressed in my 

written testimony, of the estimates of the so-called liquidity costs 

or reduction in liquidity. I think these are massively overstated. I 

think the methodology that is used, for example, in the Oliver 

Wyman report, is deeply flawed. I have explained that in my testimony. I am happy to take that up with you further. 

However, let’s say there are small liquidity costs. Let’s say we 

should be evaluating and thinking about potential costs, and you 

all have done that very carefully this morning. We must weigh 

those costs surely against the benefits. Surely the question is not, 

can you find this or that small nickel and dime cost in various 

parts of the economy, but what are you doing to the risks that this 

society will face another massive, devastating financial crisis because we have banks that are so big that when they threaten to 

fail they can bring down the entire economy? 

We can talk about alternative approaches. We can argue there 

should be more capital in the financial system. I argue this day in, 

and day out with regulators both here and around the world. But 

you won’t get it. Basel 3 will not give you enough capital. There 

is nothing else on the table that will make meaningful progress in 

this area. 

I would close by reinforcing and reiterating the point made by 

Barney Frank in this morning’s panel, which was, if uncertainty is 

an issue and you want to get past the process of resolving what 

happened before and what is the basis for the rules going forward, 

then you shouldn’t have more delay. You need to have rules now. 

And the rules are available. The rules can be put into place. And 

I would urge you not to encourage the regulators to delay any further. 

Thank you very much. 

[The prepared statement of Professor Johnson can be found on 

page 161 of the appendix.] 

Mr. SCHWEIKERT. Thank you, Professor Johnson. 

Mr. Elliott? 

STATEMENT OF DOUGLAS J. ELLIOTT, FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. ELLIOTT. Thank you all for the opportunity to testify today 

on the Volcker Rule. I should note that, while I am a Fellow at the 

Brookings Institution, my testimony today is solely on my own behalf. 

I believe that the Volcker Rule is fundamentally flawed and will 

do considerably more harm than good for the economy. I base this 

on 2 decades on Wall Street, as well as on the years I have spent 

at think tanks since them. 

54 

Despite being a former banker, I should note that my views on 

the Volcker Rule do not stem from opposition to the Dodd-Frank 

reforms. Indeed, I am on record as a strong supporter of the overall 

approach of the legislation. 

My core problem with the Volcker Rule is that it tries to eliminate excessive investment risk at our major financial institutions 

but without measuring either of the two key attributes: the level 

of investment risk; and the capacity of the institution to bear the 

risk. Instead, the rule focuses on the intent of the investment. 

I believe that the globally agreed-upon Basel rules on bank capital take a more intelligent approach by explicitly measuring both 

investment risk and the adequacy of capital to absorb those risks. 

One can validly argue about the techniques used to do this, but it 

makes a lot more sense to fix any flaws in that approach than to 

act as if we have no ability to measure risk or capital. 

Focusing on intent instead creates multiple fundamental problems. For starters, the concept of proprietary investments is highly 

subjective. I surmise that the underlying rationale is to try to separate out activities that are integral to banking from those that are 

not. By focusing on investments alone, the Volcker Rule implicitly 

assumes that lending is good. In addition, some investment activities are recognized as integral to banking, as we have discussed 

this morning. Others are not. 

This raises several concerns for me. Most fundamentally, finance 

has evolved over the last few decades to the point where corporate 

borrowers switch easily between borrowing via loans and via securities. This means that securities activities are now integral to 

modern corporate banking just as lending has always been. Further, it is extremely hard to draw the line between acceptable and 

unacceptable activities under the Volcker Rule. 

Operationalizing the arbitrary and subjective distinctions will 

force regulators to peer into the hearts of bankers, which will be 

extremely difficult. We are in danger of forcing regulators to micromanage banks in one of their core activities, the ownership and 

trading of securities. 

In addition, the rule misses investments that are taken on with 

an acceptable intent but which still represent excessive risk. For 

example, we want banks to hold safe and highly liquid securities 

to meet sudden demands for cash without having to make a fire 

sale of their loans or other assets. Therefore, the proposed rules 

provide an exemption for liquidity activities, but a large portion of 

the investment losses at commercial banks in the crisis were on 

their holdings of securities purchased for liquidity purposes. They 

bought AAA mortgage-backed securities, as Professor Johnson 

noted, which were quite liquid at the time of purchase; thus, the 

intent would have been considered acceptable, but banks still lost 

a lot of money. 

These critical flaws mean that the Volcker Rule will do a poor 

job of identifying or eliminating excessive investment risk, will be 

costly even when it correctly identifies risk, and will be even more 

costly when it discourages risk-taking that is incorrectly treated as 

if it were excessive. Thus, the rule will raise the cost of credit to 

our suffering economy. Securities markets will be harmed by a substantial reduction in the liquidity provided by banks. This will 

55 

widen bid-ask spreads and make new issuances of securities more 

expensive. 

Meanwhile, banks themselves will have a reduced role in profitable lines of business that are integral to modern banking, forcing 

them to recoup the lost revenues through other ways of charging 

more to their customers. As a result of all this, businesses will pay 

more for funds to invest in new plants or R&D or to hire additional 

workers. 

The decreased efficiency of markets will also spur investors to demand higher risk premiums, reducing the price of existing stocks, 

bonds, and other assets, potentially including housing. U.S. banks 

will also lose market share to global competitors. This will further 

reduce their profits, leading to the pass-through to customers of 

more costs and destroying some high-paid U.S. jobs. 

Ideally I would like to see Congress repeal the Volcker Rule. 

Failing that, Congress should send a clear signal that regulators 

are to implement the rule in a modest and relatively simple fashion 

that focuses on only stopping those activities that very clearly violate the rule. 

Thank you again for the opportunity to testify. I look forward to 

your questions. 

[The prepared statement of Mr. Elliott can be found on page 94 

of the appendix.] 

Mr. SCHWEIKERT. Thank you, Mr. Elliott. 

Our next speaker is Alexander Marx, head of global bond trading, Fidelity Investments. 

STATEMENT OF ALEXANDER MARX, HEAD OF GLOBAL BOND 

TRADING, FIDELITY INVESTMENTS 

Mr. MARX. Thank you. Chairmen Capito and Garrett, Ranking 

Members Maloney and Waters, and members of the subcommittees, 

thank you for your opportunity to testify today. My name is Alex 

Marx, and I am the head of global bond trading for Fidelity Investments. In this role, I am responsible for the bond trading that supports the investment products for which Fidelity serves as investment adviser, including Fidelity’s mutual funds. 

Fidelity is one of the world’s leading providers of financial services, with assets under administration of $3.4 trillion, including 

managed assets of more than $1.5 trillion. Fidelity provides investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services 

to more than 20 million individuals and institutions, as well as 

through 5,000 financial intermediary firms. We manage over 400 

mutual funds across a wide range of disciplines, including equity, 

investment-grade bonds, high-income bonds, asset allocation, and 

money market funds. The assets we manage belong not to Fidelity 

but, rather, to the funds and the shareholders and customers who 

have entrusted us with their savings. 

In this role, Fidelity has a fiduciary duty to serve in the best interests of these clients, who are mostly small investors, such as retirees, parents saving for college, and other individual investors, as 

well as pension plan participants and institutional investors such 

as governments, universities, nonprofits, and other businesses. 

56 

It is in this fiduciary capacity that I appear before you today to 

make you aware that the implementation of the Volcker Rule, as 

proposed, would have significant negative impacts on Fidelity’s customers. Fidelity is not here to represent the interests of Wall 

Street, but is a buy-side capital markets participant who is interested in ensuring the U.S. capital markets remain the most liquid 

and efficient in the world. 

We have two primary concerns with the regulations that have 

been proposed to implement the Volcker Rule. First, the rules as 

proposed will have significant burdens on banks when they engage 

in principal trading. The result of this is that the funds will need 

more cash available to accommodate shareholder redemptions, 

causing a loss of investment opportunities and higher transaction 

costs, which in turn will lead to reduced return investors across the 

fund industry. 

Second, the proposed rule could slow growth in the economy by 

raising the cost of capital issuance for U.S. companies and municipalities, which would come at a particularly unfortunate time as 

the economy continues to strive for recovery. As an investment adviser, Fidelity is not a bank that would be directly regulated by the 

proposed rules. Indeed, we recognize that the Volcker Rule, as 

passed by Congress, regulates banks and seeks to reduce the likelihood that proprietary trading conducted by those banks could put 

the U.S. economy at risk. The banks provide liquidity in the capital 

markets through their ability to commit capital to trade securities 

with our funds at any point in time. 

This customer-facing principal trading with the dealer as the 

principal on one side of the trade and Fidelity’s funds as the principal on the other is significantly different from the speculative proprietary trading that the Volcker Rule sought to limit, yet this distinction is not adequately addressed in the proposed rules. We are 

concerned that the proposed market-making exemption will be so 

burdensome for the dealers that they will either have to charge 

market participants more for trades or, in some cases, dealers will 

choose to exit market making in certain businesses altogether, resulting in less liquidity, increased volatility, and higher transaction 

costs for investors. 

Additionally, banks regulated by the Volcker Rule serve critical 

roles as underwriters in the capital markets. As underwriters, the 

banks purchase securities from corporate and municipal issuers 

and sell these securities to investors such as Fidelity’s funds. The 

proposed rules will likely affect the manner in which banks conduct 

underwriting services, potentially resulting in higher costs of capital issuance for borrowers. Higher borrowing costs for small- to 

mid-cap issuers could potentially cause downstream effects on the 

health of U.S. businesses and their ability to hire workers and invest in new markets. The resulting higher capital costs and less efficient markets may also compromise the competitiveness of U.S. 

businesses globally. 

Lastly, due to the narrow definition of municipal securities in the 

proposal, there will be higher debt costs for many municipal 

issuers, impairing their ability to fund critical projects. 

The impact of the Volcker Rule proposal would have significant 

impact on equity markets as well as fixed-income markets. For exVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
57 

ample, the proposal would jeopardize the abilities of dealers to engage in block or program risk trading with large institutional investors like Fidelity’s funds. My written statement includes additional details on the effect on equity markets. 

In conclusion, we look forward to working with Congress and the 

regulators to ensure that any final rulemaking is appropriately tailored and will not create negative, unintended consequences for investors, capital formation, and economic growth. I would like to 

thank the subcommittees and their staffs for their work on issues 

important to investors in the financial markets and for holding this 

hearing to consider the implications of the proposed regulations related to the Volcker Rule, and I would be happy to answer any 

questions. 

[The prepared statement of Mr. Marx can be found on page 165 

of the appendix.] 

Mr. SCHWEIKERT. Thank you, Mr. Marx. 

Our next witness is Wallace Turbeville, on behalf of Americans 

for Financial Reform. 

STATEMENT OF WALLACE C. TURBEVILLE, ON BEHALF OF 

AMERICANS FOR FINANCIAL REFORM 

Mr. TURBEVILLE. Thank you. Today, I speak on behalf of Americans for Financial Reform, a coalition of more than 250 organizations who have come together to advocate for reform of the financial sector. I am reminded today of a time 33 years ago when as 

a young attorney I was commissioned to write testimony for a partner of Goldman Sachs to be delivered to a committee of Congress 

on behalf of the Securities Industry Association. That is the predecessor organization of SIFMA that represented investment banks. 

The goal of the testimony was to resist repeal of Glass-Steagall, so 

to protect investment banks from competing with commercial 

banks and the cheap and plentiful capital that they would have. 

Those issues are really sort of still central to what we are talking 

about today. 

Now, there has been discussion of the Volcker Rule as based on 

intent or based on looking into the hearts of people or using psychiatrists and what not. In reality, in looking at the rules, the Volcker 

Rule is all about prohibiting a line of business which has a purpose, so you have to define what the purpose is of the business. 

That is a direct threat in terms of a run on the financial system. 

In other words, proprietary trading large positions where margin 

calls are required, regardless of what the crisis is, regardless of 

what the causes are, the vehicle that is most threatening to the financial system has historically in this country been a run on it, 

and that is what it does. Proprietary trading is not made illegal. 

Trading demand can, and, under the rule, will be met by other institutions in the system. 

The Act surgically excises only those trading practices which 

cause the greatest risks and tries to leave as permissible client-oriented trading. However, what has happened over the years is client-oriented trading, the fever of proprietary trading has sort of infiltrated client-oriented trading, so it is hard to tease out what is 

client-oriented and what is not. That is why the rules are so long 

and complex. 

58 

Ninety percent of the 300 pages is about discussion, and of those 

300, that 90 percent, most of it is about trying to tease out what 

is client-oriented and what is not. Having prevailed with the insertion of numerous exceptions and permissions in the Volcker Rule, 

it is ironic that banks now complain that the rules are complex. 

That was somewhat inevitable. 

The industry sets forth a number of objections, but the centerpiece is that liquidity in the traded markets will dry up, imposing 

large costs on society, and studies are put forth to support that, but 

these studies don’t withstand scrutiny. 

For example, an explicit assumption of the Oliver Wyman study 

that SIFMA commissioned is that reduced bank activity will not be 

replaced. That assumption is transparently false. Proprietary trading that is profitable and useful and makes sense will migrate out 

of banks and into other organizations, and the capital behind that 

will follow it. It is really remarkable that all of the industry comments assume that this will not be replaced. They pound the 

drums about the business moving off to Dusseldorf, but they ignore 

the possibility, when they do their numbers and come up with their 

costs, that the business might actually just move across the street. 

The claim about the cost of lost liquidity is a complex one. In 

fact, a lot of the trading that is going to be prohibited isn’t actually 

about liquidity, it is about—it is trading of other types. 

There is an interesting study done by Professor Thomas 

Philippon of NYU Stern School that found that the overall financing costs in the entire real economy have actually increased over 

time, despite greater IT efficiencies. In his words, the finance industry that sustained the expansion of railroads, steel, and chemical industries, and the electricity and automobile revolutions was 

more efficient than the current financing industry. 

This reduction of liquidity asserted by the commenters is based 

on all these misleading assumptions using market data from stress 

situations and the rest; but worse, the commenters ignore the costs 

and risks arising from subsidized, too-big-to-fail trading. And finally, in all of the cost benefits, the value to the public of avoiding 

bailouts is not even considered. 

Thank you for the opportunity to speak, and I am happy to answer questions. 

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

220 of the appendix.] 

Mr. SCHWEIKERT. Thank you. 

Our next witness is Douglas Peebles, chief investment officer and 

head of fixed-income, AllianceBernstein, on behalf of the Securities 

Industry and Financial Markets Association Management Corp. 

STATEMENT OF DOUGLAS J. PEEBLES, CHIEF INVESTMENT 

OFFICER AND HEAD OF FIXED INCOME, 

ALLIANCEBERNSTEIN, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION’S ASSET 

MANAGEMENT GROUP 

Mr. PEEBLES. Good afternoon, Chairmen Garrett and Capito, 

Ranking Members Waters and Maloney, and members of the subcommittees. My name is Douglas Peebles. I am the chief investment officer and head of fixed-income at AllianceBernstein, a global 

59 

asset management firm with approximately $400 billion in assets 

under management. AllianceBernstein is a major mutual fund and 

institutional money manager, and our clients include, among others, State and local pension funds, universities, 401(k) plans, and 

similar types of retirement funds and private funds. 

Today, I will focus on provisions of particular concern to 

AllianceBernstein and SIFMA’s Asset Management Group. We believe significant changes must be made to the implementing regulations, particularly with respect to the market-making exemption. 

Market making is a core function of banking entities and provides 

liquidity needed by all market participants, including pension 

funds and individual investors. The simplest market-making activity involves exchange-traded equity securities, where in most cases, 

market makers are generally able to resell securities quickly. 

Other markets, however, are more complex and less liquid. In 

the fixed-income market, for example, a single issuer may have 

many debt instruments outstanding with different terms, and as a 

result, there is fragmentation and intermittent liquidity for any 

single debt issue. Because in fixed-income, market buyers and sellers are much less likely to wish to trade at the same moments in 

time, market makers bridge the gap and provide the immediate liquidity necessary for these markets to function. In carrying out 

this function, market makers are required to evaluate all the risks 

in purchasing the securities and transact with investors at a price 

that reflects those risks. 

The Dodd-Frank Act expressly seeks to protect these functions by 

providing an exemption for the purchase, sale, acquisition, or disposition of securities and other instruments in connection with underwriting or market-making related activities. 

Unfortunately, there are several problems with the proposed regulations. One significant issue is that they were drafted from the 

perspective of regulated market-making activities for equity securities traded on organized markets such as exchanges where intermediaries generally act as agents. The proposal clearly fails to account for different types of market-making environments, particularly those related to fixed-income and other over-the-counter markets. 

We believe the failure to take into account different OTC marketmaking activities reflects a major oversight in the proposal and 

could have devastating effects on fixed-income markets that exhibit 

intermittent liquidity. 

The potential impact on liquidity would have negative consequences for mutual fund investors. Products that feature less liquid investments, like many fixed-income funds, could experience 

difficulties with subscription and redemption activity. If banking 

entities reduce their role to agents, and there is no other 

counterparty available, then mutual funds might face challenges in 

redeeming shares at the stated net asset value. The result could be 

either few NAV-style products in the market or a limited universe 

of securities for them to invest in, which would harm capital availability. 

Such a change could have consequences to the average retail consumer. For those who are living on a fixed-income, such as seniors, 

if these assets are illiquid or have significant decrease in value, it 

60 

could have a negative impact on our aging population’s ability to 

take care of themselves. It is also important to note the negative 

impact it will have on those individuals who are doing the right 

thing by saving for their future retirements. 

Rather than establishing applicable standards to governmentpermitted market-making activities, however, the proposal creates 

a presumption that any covered financial position held for a period 

of 60 days or less is a prohibited proprietary transaction, essentially prohibiting market makers from holding inventory. The proposal allows for rebuttal of the 60-day presumption if the banking 

entity can demonstrate the position was not acquired for any of a 

several list of purposes. 

We believe this combination of a negative presumption with a list 

of restrictive conditions will encourage market makers to dispose of 

every position as quickly as possible to avoid the possibility that 

the transaction will be considered a prohibited, proprietary trade. 

It is imperative that the implementing regulations take into account the fact that market making often involves a need to take 

short-term positions that will result in profit and loss. This activity 

is the natural economic result of a market maker’s willingness to 

commit capital to facilitate orderly trading. This proposal fails to 

recognize that there are not perfect hedges for all securities. It is 

impossible to predict what the behavior of even the most highly 

correlated hedge will be versus the underlying asset being hedged. 

In general, the realization of some profit and loss is unavoidable, 

even when a market maker commits capital to facilitate orderly 

trading of liquid securities with properly structured hedges. 

The impact of the regulations will have broad implications. The 

ability of the corporate issuers to raise capital in the United States 

by selling their debt securities is dependent on the availability of 

secondary market liquidity, which is largely provided by banking 

entities through their market-making activities. We are convinced 

that the proposal will significantly reduce the liquidity of the secondary market for debt securities and is likely to have a profound 

and unintended adverse effect on our capital markets. 

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

180 of the appendix.] 

Mr. SCHWEIKERT. Thank you, Mr. Peebles. 

Our next witness is Mark Standish, president and CEO, RBC 

Capital Markets, on behalf of the Institute for International Bankers. 

STATEMENT OF MARK STANDISH, PRESIDENT AND CO-CEO, 

RBC CAPITAL MARKETS, ON BEHALF OF THE INSTITUTE OF 

INTERNATIONAL BANKERS (IIB) 

Mr. STANDISH. Thank you, Chairmen Capito and Garrett, Ranking Members Maloney and Waters, and members of the subcommittees. My name is Mark Standish, and I am president and co-CEO 

of RBC Capital Markets, the corporate and investment banking 

platform for the Royal Bank of Canada. Now, as someone who is 

British by birth and American by choice, it is an honor to testify 

before you on behalf of the Institute of International Bankers. 

The IIB’s members consist principally of foreign banks that have 

substantial banking, securities, and other financial operations in 

61 

the United States. Our members contribute significantly to the 

depth and liquidity of U.S. financial markets and to the overall 

U.S. economy. IIB members’ U.S. operations have approximately $5 

trillion in assets, generate a quarter of the commercial and industrial bank loans made in this country, employ tens of thousands of 

Americans, and directly contribute to the U.S. economy more than 

$50 billion in annual expenditures. Our U.S. operations are subject 

to U.S. regulation and supervision, our activities outside the 

United States are subject to regulation by authorities in the countries in which we operate, and our home country regulators supervise our global activities. 

Like U.S. banks, we have concerns regarding how the proposal 

impacts our U.S. operations. However, today my remarks will focus 

on the cross-border implications of the proposed regulations. 

The IIB supports the goal of financial reform. We acknowledge 

the agencies’ hard work and the challenges in developing regulation to implement the Volcker Rule. However, we submit, the proposal as currently formed is inconsistent with Congress’ intent and 

will not advance reform goals. Congress was clear that foreign 

banks trading or funds activities conducted outside of the United 

States are not subject to the rule, recognizing that these activities 

are regulated under foreign law by home country supervisors. The 

proposed regulations, however, fail to adhere to this long-standing 

U.S. policy. 

For example, the proposal would restrict a foreign bank’s trading 

desk in London, Toronto, or Tokyo from buying or selling for its 

own account any securities traded on a U.S. trading platform, including the New York Stock Exchange, or under the proposal, our 

employees in Houston would not be able to market a non-U.S. fund 

to clients in South America. A Canadian bank could not sell interests in Canadian mutual funds to the 1.2 million Canadian snowbirds who regularly visit the United States. Foreign banks would 

be restricted from transacting in liquid securities of home-market 

issuers necessary to fulfill our roles in supporting our domestic 

trading markets. And finally, the proposal would frustrate our ability at the parent-bank level to actively and dynamically manage 

our balance sheets in currencies outside of our home countries. 

In short, the extraterritorial reach of the proposed regulations restricts activities that would pose no threat to the United States 

but, rather, directly and indirectly support U.S. jobs and the U.S. 

economy. 

The proposal exempts trading in U.S. Government securities but 

fails to allow principal trading in non-U.S. Government securities. 

Regulators in Canada and Japan have written to the agencies explaining that such an uneven playing field could undermine the liquidity of government debt markets outside of the United States as 

well as impede the ability of foreign banks to manage their liquidity and funding needs. IIB strongly urges the agencies to adopt an 

exemption for trading foreign government securities. 

Lastly, I would be remiss not to comment on the extremely complex compliance requirements. They impose extensive quantitative 

reporting requirements on banks that engage in permitted activities, such as market making and risk-mitigating hedging. Apart 

from the questionable usefulness of the approach, such requireVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
62 

ments should not apply to the non-U.S. operations of foreign banks 

without regard as to whether the U.S. taxpayer is put at risk. 

In conclusion, we are very concerned that the burdens of the proposed regulation will far outweigh the alleged benefits. It will encroach on the autonomy of foreign banks and regulators, and it will 

harm the competitiveness of U.S. markets, and the global markets 

that U.S. counterparts transact in. 

We urge the agencies to take their time in developing regulations 

to implement the rule to make sure they get it right, and we would 

submit that the Basel 3 requirements very well may achieve the 

objectives sought to be addressed by the Volcker Rule. Thank you 

and I look forward to your questions. 

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

198 of the appendix.] 

Mr. SCHWEIKERT. Thank you, Mr. Standish. 

I recognize Mrs. Biggert for 5 minutes for questions. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and my questions are 

for Mr. Evans to start out with, and I am glad you are here. I did 

not have the opportunity to ask the regulators about the insurance 

issue, but I am going to submit several questions that I had for 

them also, so I think that your testimony has been very helpful. 

You stated in your testimony that the Dodd-Frank Act provides 

an exemption from the Volcker Rule for insurance companies, but 

there seems to be part exemption and a question about private equity. If you could give some examples of the private equity investments that are attractive to insurers that invest for long term, and 

could you explain how that will—do those investments differ from 

private equity firms like Carlyle or Bain, but is there a clarification 

in the Volcker Rule that these are acceptable as exemptions or not? 

Mr. EVANS. Thank you, Congresswoman, for the question. The 

Dodd-Frank Act says that the regulators should appropriately accommodate the business of insurance, and the accommodations 

could take the form of giving an exemption for proprietary trading 

or giving an exemption for covered funds, private equity funds, 

hedge funds, etc. 

The interpretation of the rulemaking seems to be that it exempts 

only proprietary trading, which makes no sense when you think 

about it, because proprietary trading is a short-term activity. Insurance companies invest for the long term to provide, in our case, 

lifetime income for 3.7 million people in the academic, medical, and 

cultural fields, and so for us, it is extraordinarily important that 

we maintain an ability to make these type of investments. 

Now, we do all kinds of investing that would be considered covered-fund investing, but to give you some examples of long-term investing that helps us allow our 3.7 million participants to have 

large and stable lifetime income, we are invested in a power plant 

in the Northeast, a toll road in the Southeast, an electricity transmission business in the Southwest, and a clean coal gasification 

plant in the Midwest. These are long-lived investments, 20, 30, 40 

years in duration. They are designed to provide steady streams of 

income that can support average working people’s lifetime income 

after their working years. 

Mrs. BIGGERT. Okay. Then, obviously, we have been working on 

making sure that insurance companies, which are regulated by 

63 

States—and so this bothers me that they are really bringing this 

into the Volcker Rule on this. How do State insurance investment 

laws add a layer of protection from equities speculation by insurance companies affiliated with banks? 

Mr. EVANS. State regulators have regulated insurance companies 

like TIAA–CREF for many, many years, and they have a number 

of restrictions. It is no accident that insurance companies are structured in a conservative manner and made it through the recent 

downturn in relatively good shape, because we are under strict regulations. In our case, the State of New York is the primary State 

regulator. We have restrictions on the type and amount of coveredfund type investing that we do. There are very strict regulations 

on that. Those regulations work well, and we are working with the 

new Federal insurance overseer to make sure there is consistency 

and not duplication of regulations as we transfer to Federal regulation. 

Mrs. BIGGERT. Do you think that Congress intended to allow insurance companies just to be able to engage in proprietary trading 

and also to invest in the private equity and hedge funds? 

Mr. EVANS. It is our belief that Congress intended, when it said 

that the rulemakers should appropriately accommodate the business of insurance, that they were speaking of both proprietary 

trading and covered funds, particularly since insurance companies 

don’t engage in proprietary trading, so in our minds, they must 

have meant covered funds. And we think it is very important that 

the rules, as they become finalized, specifically exempt covered 

funds’ activities for the reasons that I mentioned. 

Mrs. BIGGERT. Thank you very much. 

Mr. EVANS. Thank you. 

Mrs. BIGGERT. Mr. Carfang, do you think that the Volcker Rule 

has the potential to raise the cost of capital for both large nonfinancial companies and small to mid-sized American businesses? 

Mr. CARFANG. Thank you for the question, Congresswoman. Absolutely. Because of the Volcker Rule’s eliminating or restricting 

the activities of market participants, the costs will go up. There are 

fewer bidders to bid down the price. But I think an even greater 

concern is the crowding out of small businesses. As we continue to 

have concentration in the larger banks—and the Volcker Rule exacerbates that—the largest companies will still have access to—the 

largest and highest credit rated companies will still have access to 

capital, albeit at a higher cost. There is a real question of whether 

there is enough capital to avoid the crowding out of smaller businesses at any cost. 

Mrs. BIGGERT. We have been working to try and increase jobs 

and take down the barriers for small businesses to be able to do 

that. The only jobs that the Dodd-Frank bill seems to have increased is compliance jobs, and so is this one of the costs that 

would be increased? 

Mr. CARFANG. Exactly. Costs will go up in terms of, first of all— 

Mr. SCHWEIKERT. And I hope you will forgive me, Mrs. Biggert— 

Mr. CARFANG. —the cost of the services, the rates, the operating 

services across-the-board. 

Mrs. BIGGERT. Thank you. I yield back. 

Mr. SCHWEIKERT. Thank you, Chairwoman Biggert. 

64 

Ranking Member Maloney has asked us to make sure we work 

through Members on her side who did not get a chance to ask a 

question before. Mr. Ellison, I think you are next. 

Mr. ELLISON. Thank you, Mr. Chairman, and also thank you, 

Congresswoman Maloney. And also, thank you to the panel. I appreciate all of the help that you have given us to understand these 

issues, but I just want to ask kind of a basic question first. 

Do you all agree with the basic premise that trading operations 

of banks shouldn’t be subsidized with deposit insurance access to 

the discount window and other Federal subsidies? Do you agree 

with that basic idea? How about you, Mr. Carfang? 

Mr. CARFANG. I generally agree with that statement. However, 

like everything else in this bill, it is subject to— 

Mr. ELLISON. Thanks a lot. I only have limited time. Does everybody basically agree with that or is there anybody who disagrees? 

Professor Johnson? 

Mr. JOHNSON. If I understood the question correctly, you are asking whether we agree with the subsidies, with the existing structure of subsidies? 

Mr. ELLISON. No, no. What I am asking is, do you basically agree 

with the goal and intent of the Volcker Rule? Do you agree with 

the premise that trading operations of banks should not be subsidized? 

Mr. JOHNSON. Absolutely, Congressman. 

Mr. ELLISON. Oh, I know you agree. I know you agree, and I 

know Mr. Turbeville agrees, but I am kind of curious— 

Mr. ELLIOTT. It is a more complex question than it might appear 

on the surface. 

Mr. ELLISON. I hear you, Mr. Elliott, and I want to ask you about 

that. So if you agree on the basic idea that banks should not be 

subsidized by deposit insurance or, basically, the taxpayer, if they 

want to engage in investment which could lose or gain money— 

Mr. ELLIOTT. I don’t believe they should be subsidized in any of 

their activities based on things like deposit insurance. However, if 

you subsidize them at all, the money is fungible. You end up effectively subsidizing any of the things that they choose to do. That is 

why I view it as a more— 

Mr. ELLISON. Okay, now, thank you for asking that because before I came to Congress, I was a public defender. This stuff is complicated. But I am aware that between the establishment of GlassSteagall and Gramm-Leach-Bliley, for a long time banks couldn’t— 

the core functions of banks and insurance companies and investment banks were separated, and they couldn’t do this kind of stuff, 

and the system seemed to be pretty stable. And now that they can 

do it, things seem kind of unstable, and what everybody except for 

Mr. Johnson and Mr. Turbeville seem to be saying is that we absolutely have to allow banks trading operations to use subsidized deposit insurance and discount window access and the monies and 

the accounts associated. We have to do that because if we don’t, we 

won’t have access to capital, overseas investors will outcompete us, 

we will lose jobs. That seems to be the—tell me why the system 

was stable for so long when we couldn’t do this and how it is so 

essential that we have to do it now. Mr. Turbeville, maybe you 

can— 

65 

Mr. TURBEVILLE. I actually remember the old system. 

Mr. ELLISON. Okay. Me, too. 

Mr. TURBEVILLE. I think you have hit on the real issue, which 

is not that this business is going to, poof, go away, but we are really talking about moving the business from being capitalized by subsidized capital to being subsidized by free market properly priced 

capital. I think it is absolutely correct, and I think that what one 

of the things that was part of the genius of the New Deal was they 

figured out, yes, you put in the safety net for the banks, but you 

also separate out this trading activity so that one doesn’t overlap 

the other. I think Mr. Elliott is absolutely right, even though deposit insurance, for instance, doesn’t directly subsidize the capital, 

it indirectly does because you can’t let those institutions go. 

Mr. ELLISON. It seems to me, in the absence of something like 

the Volcker Rule, we have a ‘‘heads-I-win, tails-you-lose’’ system in 

which, if I am a bank, I can go out and buy mortgage-backed securities, AAA rated, and if they make a bunch of money, I keep that. 

I don’t give that to depositors whose money I use. But if I lose a 

bunch of money, then I am coming to the taxpayer to save me, and 

it just seems so unfair. 

And as we go through this debate, a lot of you guys who are so 

smart, you know so much, and I am so impressed, but it seems like 

what you are doing is saying, ‘‘There are 10 exceptions, no, 20, no 

30, no 50. You know what, it is too complicated, let’s just keep it 

how it was since 1999.’’ And it just doesn’t seem right. It seems like 

if we can’t fix and have everything perfect that we can’t do anything, which of course is a good deal because if I said, ‘‘Look, I am 

going to use somebody else’s money, invest it, maybe put it in mortgage-backed securities, if I make a bunch of money, I keep that; if 

I lose a bunch of money, somebody else pays.’’ And of course, why 

would anybody want to stop that, if they are on the plus side of 

it? 

And I guess what everybody except for Mr. Johnson and Mr. 

Turbeville is saying is, right, we don’t want to stop it, we like it. 

So tell me why I am wrong. 

Mr. ELLIOTT. If I could just briefly say, as I mentioned in my testimony, I have been a strong supporter of Dodd-Frank, which contains many things that are far from perfect but move us in a safer 

direction. So I want to be clear about that. 

Mr. ELLISON. Okay. 

Mr. ELLIOTT. The thing is, the premise of your question and the 

explicit comments of Professor Johnson are that the Volcker Rule 

would actually increase safety in some appreciable way. That I do 

not actually believe. For instance, holding the mortgage-backed securities. The holding of mortgage-backed securities, most of them 

would have been perfectly okay under the Volcker Rule. You can 

lose money on these investments without being in danger from the 

Volcker Rule. 

Mr. ELLISON. Does anybody—well, let me— 

Mr. JOHNSON. Congressman, you are exactly right. The Volcker 

Rule proposes to remove the subsidies from some very powerful 

people in our society. Not surprisingly, they would like to keep 

those subsidies, and they are telling you that today. 

66 

And with regard to access to capital and the cost of capital, this 

is not just unfair, Congressman, this is incredibly inefficient. What 

has destroyed access to capital, what has destroyed access to jobs 

in this country over the past 4 years, was the behavior of the biggest firms in the financial sector, the way they used those subsidies 

in a reckless and excessive manner, and they will do it again. 

Mr. SCHWEIKERT. Mr. Ellison? 

Mr. ELLISON. I am out of time? 

Mr. SCHWEIKERT. Yes. It was getting interesting, but we are out 

of time. 

Mr. ELLISON. Sorry about that. 

Mr. SCHWEIKERT. Thank you, Mr. Ellison. 

Without objection, the following statements will be made a part 

of the record: the American Bankers Association; BlackRock, Inc.; 

the Bond Dealers of America; the Business Roundtable; CMS Energy; ICI Global; SIFMA; Silicon Valley Bank; and Stanford Professor Darrell Duffie’s comment letter. 

Mr. SCHWEIKERT. I am going to yield myself 5 minutes and see 

if I can actually do a little continuing on parts of this discussion. 

Professor, I actually heard a couple members of the panel, at 

least one but maybe two, touch on Basel 3 and Basel 2.5 that are 

already out there. Basel 3 is also creating a capital safety net. Can 

you comment on that? 

Mr. JOHNSON. Yes, Congressman. Basel 3 is very unlikely to provide enough capital for the financial system. Remember, this is a 

least common denominator negotiation across leading countries, industrialized countries. It includes the Europeans, and as I am sure 

you are fully aware— 

Mr. SCHWEIKERT. Are you picking on the Europeans? 

Mr. JOHNSON. They brought it on themselves. 

Mr. SCHWEIKERT. I should share, I think, that in Germany, the 

first stage of downgrade may have happened today. 

Mr. JOHNSON. I missed that. 

Mr. SCHWEIKERT. Germany. 

Mr. JOHNSON. What about Germany today? 

Mr. SCHWEIKERT. Downgrade. 

Mr. JOHNSON. I am sorry, I didn’t hear that, I didn’t hear the 

point. 

The Europeans don’t want capital in their banks, so Deutsche 

Bank, for example, is a very lightly capitalized bank. They have 

consistently resisted, from all accounts within the Basel Committee, attempts to raise capital standards, even to the levels proposed by the Federal Reserve, even to the levels that Mr. Tarullo 

was recommending. So the idea that Basel 3—from an American 

perspective, does Basel 3 do enough to make our system safer? Absolutely not. Capital requirements should be increased way beyond 

what you will get in that framework. 

Mr. SCHWEIKERT. Okay. To that point, Mr. Standish, you actually 

touched on Basel 3. Help me understand where the professor is 

right, or half right, or wrong. 

Mr. STANDISH. Thank you, Congressman. We have actually 

adopted in Canada large parts of Basel 3, and by the 1st of January 2013, we will have also adopted Basel 3 in our trading books. 

The effect of that from pre-crisis levels has probably been to inVerDate Nov 24 2008 17:57 Sep 20, 2012 Jkt 075067 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 K:\DOCS\75067.TXT TERRIE
67 

crease the amount of capital supporting our trading activities by 2 

to 3 times. 

In order for Members to understand Basel a little better, on the 

key characteristics of Basel 3, banks will need to hold substantially 

more capital than is required today, and again I just mention that 

additional capital is heavily in linked to trading books. 

Bank capital will be comprised predominantly of common equity, 

and that is versus Tier 2/Tier 3 types of paper capital. Banks will 

need to hold substantially more unencumbered liquid assets to enhance their liquidity positions and reduce dependency on shortterm financing, and that also includes increased term funding of 

their businesses. Banks will be required to establish loan loss reserves that consider full economic cycles, and here we are talking 

about countercyclical capital. When things are great, everyone 

thinks it is going to continue, so you don’t think you need to hold 

much capital against those exposures. That will be reversed. Banks 

will be subject to global leverage ratios that will govern balance 

sheet leverage, and that includes bringing onto balance sheets the 

impact of off-balance sheet vehicles that were the cause of a lot of 

the problems with the shadow banking system. 

So I feel that Basel 3 actually does a tremendous job and actually does, I think, a better job than Volcker of addressing the shortfalls in the financial system. Obviously, Basel 3 is then applied 

globally differently by jurisdiction, depending on the risks in individual jurisdictions. 

Mr. SCHWEIKERT. And Professor, maybe you could quickly respond, because there are a couple other areas I want to touch on? 

Mr. JOHNSON. Just to counter on the point of whether there is 

enough capital, Deutsche Bank, which is, as far as I am aware, almost Basel 3-compliant at this point, has total assets of around 1.9 

trillion euros, it has bank capital compliant with Basel 3 of about 

60 billion euros. It faces potential losses on, of course, its sovereign 

lending and exposure to other banks within the European context. 

This is a very thinly capitalized major bank around which the Germans and the Europeans are negotiating. 

They also own Talus Corporation in the United States, that is 

more than 50-to-1 leveraged according to the official Federal Reserve statistics, and that is okay also, apparently, under the way 

we operate. 

Mr. SCHWEIKERT. Only because I am down to a minute left, but 

I would love to have a side conversation with you on this. I actually 

have some real interest in the ECB issues. 

Mr. Evans, your book of business is somewhat unique with what 

you do and the population you serve. How would we exempt you? 

How would the hedging practices, particularly the number of folks 

who—and I must admit, I think actually I even have some resources with you also, the annuities and the other products. Tell 

me what the Volcker Rule does to you and mechanically how you 

see yourself either needing to be exempt, or the costs we just 

pushed on to your members. 

Mr. EVANS. Thank you, Congressman. I think it is actually pretty 

straightforward. If the rulemakers adjust their interpretation of 

your intent to include, your intent to appropriately accommodate 

the business of insurance to include an exemption for covered-funds 

68 

activity, I think that does the trick, because that will enable us to 

make these investments in what are loosely defined as private equity securities, but what we recognize as very long-term investments in infrastructure and other assets. So, I think it is actually 

pretty straightforward in terms of what needs to be done to correct 

this. 

Mr. SCHWEIKERT. You win the award for the simplest answer of 

the day. My time has expired. 

I now recognize Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman, and to the panel, excellent testimony. I think all of you make legitimate points. I draw 

some different conclusions than some of you do. 

And Mr. Carfang, you really had a cogent—you laid it out nicely 

to begin with, and then you sort of countered by the professor, and 

sitting here as kind of the political guy, the decision-maker, we 

want to have robust, efficient markets, yet we don’t want to stick 

the taxpayer with a ton of responsibility if those efficient markets 

somehow fail. And so, the more efficient they are going up, the 

more efficient they are going down. And in America, we try to sort 

of limit that a little bit, and that started with the New Deal, with 

the Glass-Steagall separating investment banking from commercial 

banking, and over time, that eroded; unitary banking went, the investment banking piece went, we still have the FDIC, which I 

think is the third piece of Glass-Steagall that is left. 

So when this all came to us, we started out, and Mr. Miller and 

I had a one-page amendment that was more or less not the Volcker 

Rule but sort of the precursor to the Volcker Rule that said—I first 

said if you are a systemically significant organization, it could have 

been an insurance company, it could have been a bank, whatever, 

and your trading places the economy at risk, then you can be ordered to divest it. So, there was a danger piece to it. 

Mr. Miller said, we ought to have that for banks generally. So 

we added banks, but there was a danger piece to it. We did some 

carveouts for the insurance industry for their hedging and their 

covering and all of that stuff, went to the Senate. They said, no, 

we are just—we don’t like it, but we will do a few exceptions. And 

then, it went to the Conference Committee who said, you can’t do 

this except—and they go through all of the market making, insurance kinds of issues, foreign banks, holding companies. And now, 

we have placed the regulators with the responsibility to take what 

I think—Section 619 is a pretty prescriptive Section. We ask them 

to make rules from this to try to deal with who can trade and who 

can’t, and when can they and when they can’t. So, from my point 

of view, I think we did a pretty good job. 

I appreciate some of the comments Mr. Peebles and you, Mr. 

Standish—and do we have two Englishmen on the panel today? 

Mr. JOHNSON. I am also an American, Congressman. 

Mr. PERLMUTTER. I know, but— 

Mr. JOHNSON. The accent, yes, does originate elsewhere. 

Mr. PERLMUTTER. Okay. All right. Americans, but English by 

birth? Okay. It is nice to have you guys on the panel. 

Mr. STANDISH. We came over on separate boats. 

Mr. PERLMUTTER. Okay. So, let’s go back. We are where we are, 

we had a tremendous fall, and it may be a trillion dollars in costs 

69 

and inefficiency to the capital market, but by my calculation, just 

the drop in the stock market between the summer of 2008 and the 

end of 2008 was 6,000 points. That is $1.3 billion per point or $7.8 

trillion. That is $26,000 for every man, woman, and child in America. And so, we have to deal with that. I have to deal with that. 

I don’t think we can delay this any further. We are not going to 

go back to Glass-Steagall, that is the bright-line test. 

Mr. Carfang, do you disagree with what I have said? Don’t we 

have to have some restrictions in there? 

Mr. CARFANG. I absolutely agree that unbridled risk-taking 

should not be supported by taxpayers, by deposit insurance. The 

issue is the gray area and the lack of clarity around the regulations 

and the lack of a precise definition of proprietary trading. Much of 

what could be falling into this gray area has become standard risktaking practices that every company uses, and even individuals 

use. And without that lack of clarity, the fear on the part of corporate treasurers is banks will err on the side of conservatism and 

withdraw from businesses, making medium-sized to small businesses totally without access to capital raising and risk management tools. We absolutely agree that— 

Mr. PERLMUTTER. So my question to you then is, I am not sure 

it is the rulemaking as it is getting rid of—from your position—getting rid of Section 619. 

Mr. CARFANG. We already have a robust system of capital requirements that Basel 2 is making even stronger with the additional capital requirements for systemically important institutions. 

In addition to that, regulators have substantial latitude in terms 

of the risk weighting of assets on bank balance sheets, and I think 

that is where you manage the problem, not simply coming up with 

hundreds of pages of prescriptions on how 3 million U.S. treasurers 

should do their job every day. That is not doable. 

Mr. PERLMUTTER. Thank you. 

Mr. RENACCI [presiding]. Thank you. I yield 5 minutes to myself. 

Mr. Elliott, in the book, you write that we will survive the implementation of the Volcker Rule, but that it is an unnecessary, selfinflicted wound. You also write that you would like to see Congress 

repeal the rule. 

Is it possible for the regulators to adopt a Volcker Rule that does 

not have the negative consequences you describe, or has Congress 

given the regulators a mandate that simply cannot be fulfilled in 

a way that the benefits will outweigh the costs? 

Mr. ELLIOTT. Frankly, I think it is the latter. I think there is 

such a lack of clarity as to what proprietary trading is, an inherent 

lack of clarity that there isn’t some platonic answer that if we just 

searched for it, we would find it. It is inherently subjective and an 

arbitrary choice. It creates all these other issues. 

I would rather have seen, as I mentioned, an approach similar 

to the Basel approach. If you end up feeling that isn’t nearly conservative enough, then quadruple the levels or something, but at 

least it would say, we are going to measure risk and we are going 

to measure the capital to take the risk, and we will make sure 

there is enough. 

70 

Mr. RENACCI. It is interesting because one thing I seem to have 

learned today from both panels is there is still a lot of uncertainty 

in the implementation. 

Mr. Marx, you testified that the Volcker Rule will reduce liquidity, which will have a negative effect on Fidelity’s customers. Can 

you expand on that? Who are your customers? Why do they invest 

with Fidelity? What does reduced liquidity mean for them? Will the 

Volcker Rule mean that your customers may have to work longer 

to retire or won’t be able to save as much for their children’s education, for example, or things like that? 

Mr. MARX. Sure. As I mentioned in my statement, the customers 

that we have are retail investors, parents saving for college for 

their children, 401(k) pension plan participants, institutional investors as well. When I talk about the fact that it is going to cost 

more, I talk mostly in the markets arena where the transaction 

costs are going to be precipitously higher, depending upon the asset 

class that you are referring to. So, the ability for investors to get 

in and out of funds with regards to redemptions, the ability for 

issuers where they are trying to come into the market, it is going 

to give us a moment of pause as far as investments on behalf of 

our shareholders, and therefore ask for more from issuance. All 

around it is going to cost more people, it is going to cost the issuers 

whether they are corporations or municipalities, in order to give us 

the protection that we need for our investors. And that is just the 

buffer, that is not that they are getting something incremental in 

a new issue. It is just to give them the buffer to get out from the 

liquidity perspective. 

Mr. RENACCI. Do you have some modifications that you think 

would work, that would make the Volcker Rule work as far as liquidity in bringing some of those issues to the table? 

Mr. MARX. I think at a high level, the most important thing— 

there are two or three important things. One is really, truly identifying the difference between principal risk-taking and proprietary 

speculative risk-taking. I think if you can take the time to figure 

out how to separate the two, you are going to be in a lot better 

space, and it will allow dealers to feel more comfortable that they 

are not going to get in trouble with the regulators. I think that is 

the biggest thing. 

The second issue for me is when you think about this legislation 

and other legislation that is trying to be enacted right now, it is 

too granular. You are trying to solve for all of the answers at once. 

And I think if you take it up—we use the term ‘‘take it up’’—to 

50,000 feet as opposed to try to get it all done at 10,000 feet, and 

you give it time to sort of focus through, you are going to realize 

what the unintended consequences are as opposed to all of a sudden them being right there for you. 

Mr. RENACCI. And again, I think your response relates back to 

a lot of things I have heard today about just trying to figure out 

the differences, and we need to take that time. 

Professor Johnson, if market making becomes the purview of 

nonbanks because it is difficult to distinguish from proprietary 

trading, won’t the risks to the financial markets be even greater 

given that nonbank firms like MF Global would not be subject to 

the same strict oversight that bank holding companies are? 

71 

Mr. JOHNSON. No. No, Congressman, not at all. Under DoddFrank, you have the ability, the regulators have the ability to designate any institution, any financial institution as systemically important and therefore to regulate them. 

I am well aware of the arguments put forward by Professor Darrell Duffie, for example, in the paper he submitted and you put into 

the record, but it doesn’t make any sense. If there is anybody who 

is a significant player becoming a significant market maker who 

you think is generating potential damage to the financial system, 

they can absolutely be covered under the systemically important 

provisions of the Dodd-Frank Act. 

Mr. RENACCI. Thank you. My time has expired. I now recognize 

Representative Carney for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman, and thank you to the 

panel for coming. I must apologize; I wasn’t here for your opening 

statements, so I am probably going to ask some of you to repeat 

some of what you said. 

But in the first panel, I know some of you were here, Governor 

Tarullo said that if there is—kind of an astounding comment—a 

better idea out there, we are open to it. Does anybody have a better 

idea? I have heard some specifics, but does anybody have a better 

idea of an approach? 

That is one question, and part of that question is, I have heard 

some of you say that you don’t think it is possible to make the distinction clearly enough, I think Mr. Elliott, between market making and proprietary trading. And so, I guess I would be interested 

in what everybody thought about that. So, start off with those two 

quick questions, and I only have 5 minutes. Please. 

Mr. CARFANG. Sir, you know, it is our sense that among the better ideas are many of the regulations that are already in place, as 

I mentioned earlier, on capital requirements and on risk 

weightings. There are four major pieces of regulation that are impacting corporate treasurers, none of which have been tested: the 

capital requirements of Basel 2; the Volcker Rule; money fund regulations; and derivatives regulations. We think a better idea is to 

not do all four of them at the same time. 

Mr. CARNEY. Okay. He mentioned Basel 2. How about Basel 3? 

Are you saying that the Volcker Rule and Basel 3 are unnecessary, 

they are—in some ways, Basel 3 accomplishes what the Volcker 

Rule is attempting to accomplish? 

Mr. STANDISH. Yes, Congressman, I do. I think the issue currently with Basel 3 is the current overall implementation plan is 

2019 globally. I would contend that should be accelerated and sped 

up, and it will, I believe, meet certainly all of the checks and balances on the financial system. 

Mr. CARNEY. I don’t know the details, but don’t Basel 2 and 3 

essentially deal with capital requirements? 

Mr. STANDISH. They do, but it take it to another level. They focus 

not just on increasing trading book capital. One of the negatives, 

I will admit, is that it penalizes or applies more capital to support 

market-making trading activities in lower-rated securities. So 

where I do have an issue with someone else stepping up and supporting markets is in smaller, lower-rated companies. I think that 

72 

will end up being a bit of a black hole in the market that should 

concern the Members. 

Mr. CARNEY. Unless there is somebody else who has a better 

idea—quickly, please. 

Mr. JOHNSON. In my written testimony, Congressman, I suggested that putting the firms in charge of compliance, which is 

what— 

Mr. CARNEY. I read that. 

Mr. JOHNSON. That strikes me as not a good idea, and that is a 

relatively easy thing for Mr. Tarullo and his colleagues to address. 

Mr. CARNEY. Right. So I would like to go to this fixed-income 

market question. So what dynamic are you saying will create the 

effects that you just mentioned in response to Mr. Renacci’s question? What does the Volcker Rule limitations do to the fixed-income? I have talked to some of the folks from Fidelity and Vanguard, and I have heard some of those arguments. I would like you 

to state them for the record. 

Mr. MARX. I think if you take a very basic example, if you take 

a look at the high-income market versus the investment-grade corporate market, the investment-grade corporate market is probably 

3 times the size from a new issue perspective on an annual basis 

over the last couple of years. So if you think that there is any sort 

of fear that liquidity will dry up, which it will, based upon people’s 

inability to take risks or for fear of dealers to take risks because 

they don’t want to be at odds with the regulators and the rules 

that are being implemented, you are going to see a market that is 

3 times the size of the high-income market approach spreads that 

are in liquidity that are in the high-income market, and that is a 

significant change as far as the liquidity that is going to be provided. 

Mr. CARNEY. So people have their hands up; would you like to 

add to that? 

Mr. PEEBLES. I completely agree with what Mr. Marx just said. 

To give you a very simple example, so Fidelity or AllianceBernstein 

manages a mutual fund, but let’s say we own all corporate bonds 

in that mutual fund. Today, there is a trading notion that takes 

place in those bonds, and tonight we receive redemption orders 

from our clients, right? And those redemption orders we process at 

today’s closing price. We wake up tomorrow, we see collectively 

that we have redemptions, we have to go in the marketplace to sell 

the securities to fund those redemptions. The price that we expected to be there as of close of last night is very far away. So the 

65-year-old woman from Iowa who wanted to raise $1,000 now has 

$750 in terms of her redemption. That is a big problem. 

Mr. CARNEY. I have 10 seconds left. How do you fix it? I had another part of that, but I only have 10 seconds. Is there a fix? 

Mr. MARX. To me, the fix truly is identifying the difference between principal risk-taking and proprietary risk-taking. We need 

prudent risk-takers in the market and not speculative risk-takers. 

Mr. CARNEY. Mr. Johnson, I would love to hear from you, if my 

colleague from Ohio would allow it. 

Mr. JOHNSON. Congressman, it strikes me that we should have 

more confidence in the market. The assumption here is that the liquidity will only be provided by the existing big banks that are 

73 

highly subsidized, and if you withdraw those subsidies, that somehow the liquidity provision will go away. Why? If it only exits because of subsidies, that may be true. But if there is genuine opportunity there, if there is really profit to be made in these markets, 

making the markets, that business will shift. That is the problem 

with the Oliver Wyman study, very extreme assumptions, but the 

logic should be that the market will adapt, that is the basic principle of how the deep financial markets work. 

Mr. CARNEY. Thank you. 

Mr. RENACCI. I want to recognize Ranking Member Maloney for 

5 minutes. 

Mrs. MALONEY. First, Mr. Turbeville, you had your hand up, you 

wanted to comment? 

Mr. TURBEVILLE. Yes, there is another way to look at this, is that 

when someone goes out and places a block, and they are going have 

a liquidation or they need to buy some securities, they go to a bank 

and they put the block with the bank. And what is happening there 

is that institution is renting the bank’s balance sheet because they 

are saying, we are going to move these securities at a price over 

to your balance sheet. 

So the question is this, and Professor Johnson is right: Do you 

want the balance sheet that is rented to be a subsidized balance 

sheet supported by too-big-to-fail, or do you want it to be an unsubsidized balance sheet with an institution that is not subject to the 

safety net and subject to too-big-to-fail guarantees? 

Mrs. MALONEY. Thank you. Mr. Peebles—and I know that many 

people have questions on it and we can follow up with written 

questions on it—are you familiar with the global legal entity identifier? 

Mr. PEEBLES. No, I am not. 

Mrs. MALONEY. Anybody on the panel? You are? 

Mr. TURBEVILLE. Yes. 

Mrs. MALONEY. Do think that this identifier will enable financial 

regulators and the public sector to have a better review of the benefits and to better control what is happening? Do you think that 

this is important to manage finance and prevent failures and risk 

the identifier? 

Mr. TURBEVILLE. Aside from the issues we are talking about 

today, perhaps actually to be able to monitor the markets and understand what is going on, having data is absolutely the most important thing. 

The first threshold issue is the legal entity identifier, which is to 

sort out what the legal entities are that are involved in all these 

transactions. I believe the fact is that Lehman Brothers had 2,500 

or more separate entities inside it when it went under and caused 

a massive systemic problem. So the legal entity identifier is the 

linchpin, the first of getting a handle on what is actually going on 

in the financing markets. 

Mrs. MALONEY. Who do you believe should bear the cost of implementing the legal identifier? 

Mr. TURBEVILLE. I believe the cost—if I were in charge of everything, the industry would bear the cost. 

Mrs. MALONEY. And going on to the implementation of the 

Volcker Rule, do you believe that we will see an increase in trading 

74 

firms? People are saying people will be moving overseas. There is 

a likelihood they might move across the street and open a trading 

firm. Can you comment on whether or not you think this will have 

an impact on increasing trading firms or not? 

Mr. TURBEVILLE. I that is right. I think it will increase trading 

firms and trading will change in the different firms. Even Professor 

Duffie in his paper talks about that. Nobody really believes this 

business. If it is a sound business, if it is profitable, if it makes 

sense, if the trading business makes sense, that people will find a 

place to do it and the capital will find its way to those institutions. 

Mrs. MALONEY. But won’t that increase liquidity? 

Mr. TURBEVILLE. I think it not affect liquidity, because I think 

what will happen is it will find its own surface. I think what will 

happen, though, is that if you don’t have capital devoted to trading 

that is too-big-to-fail kind of capital, subsidized, that some kind of 

trading that probably doesn’t—I am sure it doesn’t add anything to 

liquidity, but probably is a drag on the economy—some of the layers of intermediation and some of the trading that has nothing do 

with liquidity and nothing to do with the things that have been 

talked about on this panel will dry up. That kind of trading will 

cease. 

Mrs. MALONEY. Will too-big-to-fail banks’ revenues increase or 

decrease in your opinion? 

Mr. TURBEVILLE. I think too-big-to-fail banks’ revenues will decrease, except for the years in which they blow themselves to 

smithereens and create massive financial problems for the economy. But I think also their capital will shrink and their businesses 

will change. 

Mrs. MALONEY. In your opinion, what will be the impact on the 

financial industry? And more importantly, how will market hedge 

funds, public and banks react to increased trading volumes? What 

effect will this increased trading volume have on the whole system? 

Mr. TURBEVILLE. The overall volume may or may not go up. The 

liquidity will survive and that liquidity purpose will be fulfilled. It 

is entirely possible—and I meant to suggest that in my oral statement—it is possible that the system itself now, the financing system and the trading system is efficient from the bank’s perspective 

but is not efficient from corporate America’s perspective. So that 

the actual cost of financing and raising capital is higher now than 

it was 50 years ago. There is some research that suggests that. So 

it is entirely possible that in the post-Volcker world, if indeed moving proprietary trading out of banks causes some of this not productive trading except for financial institutions to go away, that it 

will actually be beneficial. 

Mr. RENACCI. I want to thank—did you want additional time? 

Mrs. MALONEY. I would like Mr. Johnson to comment if he could 

briefly, there were many causes out there for the financial crisis, 

but would you say that one of them was the inability of regulators 

and interested parties to see financial transactions and track what 

is happening and see what is happening? One of our goals is that 

we created an Office of Financial Research that would be capable 

of providing risk assessment and stress tests based on realtime 

data, and would that have an impact that could prevent loss and 

prevent crises. Some CEOs who testified before us said that this 

75 

central system could be very effective in preventing crisis in the future. What is your opinion? 

Mr. JOHNSON. Congresswoman, I was the chief economist of the 

International Monetary Fund in 2007 through August 2008. I was 

involved in discussing the details of the financial crisis as it developed, including at the highest levels of government, both in this 

country and around the world. And the lack of data was a very big 

problem. 

But my concern is that even now, even after the creation of the 

Office of Financial Research, with derivatives markets in particular 

remaining so completely opaque in many regards and with crossborder transactions continuing to be extremely complex, are now 

under massive pressure because of what is happening in Europe, 

I am afraid the sensible steps taken to collect better data and to 

provide better analysis are not enough. You also need to supplement that with many other measures, including the Volcker Rule. 

Mrs. MALONEY. Thank you. 

Mr. RENACCI. Mr. Perlmutter? 

Mr. PERLMUTTER. In keeping with the theme dealing with England, I would like to offer and place in the record an excerpt from 

a chapter by Adair Turner, a professor at the London School of Economics, on the future of banking. 

Mr. RENACCI. Without objection, it is so ordered. 

Again, I want to thank the panel members for their testimony 

today. The Chair notes that some Members may have additional 

questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, the hearing is adjourned. 

[Whereupon, at 1:40 p.m., the hearing was adjourned.] 

(77) 

A P P E N D I X 

January 18, 2012 

78 


75067.001
79 


75067.002
80 


75067.003
81 


75067.004
82 


75067.005
83 


75067.006
84 


75067.007
85 


75067.008
86 


75067.009
87 


75067.010
88 


75067.011
89 


75067.012
90 


75067.013
91 


75067.014
92 


75067.015
93 


75067.016
94 


75067.017
95 


75067.018
96 


75067.019
97 


75067.020
98 


75067.021
99 


75067.022
100 


75067.023
101 


75067.024
102 


75067.025
103 


75067.026
104 


75067.027
105 


75067.028
106 


75067.029
107 


75067.030
108 


75067.031
109 


75067.032
110 


75067.033
111 


75067.034
112 


75067.035
113 


75067.036
114 


75067.037
115 


75067.038
116 


75067.039
117 


75067.040
118 


75067.041
119 


75067.042
120 


75067.043
121 


75067.044
122 


75067.045
123 


75067.046
124 


75067.047
125 


75067.048
126 


75067.049
127 


75067.050
128 


75067.051
129 


75067.052
130 


75067.053
131 


75067.054
132 


75067.055
133 


75067.056
134 


75067.057
135 


75067.058
136 


75067.059
137 


75067.060
138 


75067.061
139 


75067.062
140 


75067.063
141 


75067.064
142 


75067.065
143 


75067.066
144 


75067.067
145 


75067.068
146 


75067.069
147 


75067.070
148 


75067.071
149 


75067.072
150 


75067.073
151 


75067.074
152 


75067.075
153 


75067.076
154 


75067.077
155 


75067.078
156 


75067.079
157 


75067.080
158 


75067.081
159 


75067.082
160 


75067.083
161 


75067.084
162 


75067.085
163 


75067.086
164 


75067.087
165 


75067.088
166 


75067.089
167 


75067.090
168 


75067.091
169 


75067.092
170 


75067.093
171 


75067.094
172 


75067.095
173 


75067.096
174 


75067.097
175 


75067.098
176 


75067.099
177 


75067.100
178 


75067.101
179 


75067.102
180 


75067.103
181 


75067.104
182 


75067.105
183 


75067.106
184 


75067.107
185 


75067.108
186 


75067.109
187 


75067.110
188 


75067.111
189 


75067.112
190 


75067.113
191 


75067.114
192 


75067.115
193 


75067.116
194 


75067.117
195 


75067.118
196 


75067.119
197 


75067.120
198 


75067.121
199 


75067.122
200 


75067.123
201 


75067.124
202 


75067.125
203 


75067.126
204 


75067.127
205 


75067.128
206 


75067.129
207 


75067.130
208 


75067.131
209 


75067.132
210 


75067.133
211 


75067.134
212 


75067.135
213 


75067.136
214 


75067.137
215 


75067.138
216 


75067.139
217 


75067.140
218 


75067.141
219 


75067.142
220 


75067.143
221 


75067.144
222 


75067.145
223 


75067.146
224 


75067.147
225 


75067.148
226 


75067.149
227 


75067.150
228 


75067.151
229 


75067.152
230 


75067.153
231 


75067.154
232 


75067.155
233 


75067.156
234 


75067.157
235 


75067.158
236 


75067.159
237 


75067.160
238 


75067.161
239 


75067.162
240 


75067.163
241 


75067.164
242 


75067.165
243 


75067.166
244 


75067.167
245 


75067.168
246 


75067.169
247 


75067.170
248 


75067.171
249 


75067.172
250 


75067.173
251 


75067.174
252 


75067.175
253 


75067.176
254 


75067.177
255 


75067.178
256 


75067.179
257 


75067.180
258 


75067.181
259 


75067.182
260 


75067.183
261 


75067.184
262 


75067.185
263 


75067.186
264 


75067.187
265 


75067.188
266 


75067.189
267 


75067.190
268 


75067.191
269 


75067.192
270 


75067.193
271 


75067.194
272 


75067.195
273 


75067.196
274 


75067.197
275 


75067.198
276 


75067.199
277 


75067.200
278 


75067.201
279 


75067.202
280 


75067.203
281 


75067.204
282 


75067.205
283 


75067.206
284 


75067.207
285 


75067.208
286 


75067.209
287 


75067.210
288 


75067.211
289 


75067.212
290 


75067.213
291 


75067.214
292 


75067.215
293 


75067.216
294 


75067.217
295 


75067.218
296 


75067.219
297 


75067.220
298 


75067.221
299 


75067.222
300 


75067.223
301 


75067.224
302 


75067.225
303 


75067.226
304 


75067.227
305 


75067.228
306 


75067.229
307 


75067.230
308 


75067.231
309 


75067.232
310 


75067.233
311 


75067.234
312 


75067.235
313 


75067.236
314 


75067.237
315 


75067.238
316 


75067.239
317 


75067.240
318 


75067.241
319 


75067.242
320 


75067.243
321 


75067.244
322 


75067.245
323 


75067.246
324 


75067.247
325 


75067.248
326 


75067.249
327 


75067.250
328 


75067.251
329 


75067.252
330 


75067.253
331 


75067.254
332 


75067.255
333 


75067.256
334 


75067.257
335 


75067.258
336 


75067.259
337 


75067.260
338 


75067.261
339 


75067.262
340 


75067.263
341 


75067.264
342 


75067.265
343 


75067.266
344 


75067.267
345 


75067.268
346 


75067.269
347 


75067.270
348 


75067.271
349 


75067.272
350 


75067.273
351 


75067.274
352 


75067.275
353 


75067.276
354 


75067.277
355 


75067.278
356 


75067.279
357 


75067.280
358 


75067.281
359 


75067.282
360 


75067.283
361 


75067.284
362 


75067.285
363 


75067.286
364 


75067.287
365 


75067.288
366 


75067.289
367 


75067.290
368 


75067.291
369 


75067.292
370 


75067.293
371 


75067.294
372 


75067.295
373 


75067.296
374 


75067.297
375 


75067.298
376 


75067.299
377 


75067.300
378 


75067.301
379 


75067.302
380 


75067.303
381 


75067.304
382 


75067.305
383 


75067.306
384 


75067.307
385 


75067.308
386 


75067.375
387 


75067.376
388 


75067.309
389 


75067.310
390 


75067.311
391 


75067.312
392 


75067.313
393 


75067.314
394 


75067.315
395 


75067.316
396 


75067.317
397 


75067.318
398 


75067.319
399 


75067.320
400 


75067.321
401 


75067.322
402 


75067.323
403 


75067.324
404 


75067.325
405 


75067.326
406 


75067.327
407 


75067.328
408 


75067.329
409 


75067.330
410 


75067.331
411 


75067.332
412 


75067.333
413 


75067.334
414 


75067.335
415 


75067.336
416 


75067.337
417 


75067.338
418 


75067.339
419 


75067.340
420 


75067.341
421 


75067.342
422 


75067.343
423 


75067.344
424 


75067.345
425 


75067.346
426 


75067.347
427 


75067.348
428 


75067.349
429 


75067.350
430 


75067.351
431 


75067.352
432 


75067.353
433 


75067.354
434 


75067.355
435 


75067.356
436 


75067.357
437 


75067.358
438 


75067.359
439 


75067.360
440 


75067.361
441 


75067.362
442 


75067.363
443 


75067.364
444 


75067.365
445 


75067.366
446 


75067.367
447 


75067.368
448 


75067.369
449 


75067.370
450 


75067.371
451 


75067.372
452 


75067.373
453 


75067.374
454 


75067.377
455 


75067.378
456 


75067.379
457 


75067.380
458 


75067.381
459 


75067.382
460 


75067.383
461 


75067.384
462 


75067.385
463 


75067.386
464 


75067.387
465 


75067.388
466 


75067.389
467 


75067.390
468 


75067.391
469 


75067.392
470 


75067.393
471 


75067.394
472 


75067.395
473 


75067.396
474 


75067.397
475 


75067.398