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68–398 PDF 2011

S. HRG. 112–102 

BUILDING THE NEW DERIVATIVES REGULATORY 

FRAMEWORK: OVERSIGHT OF TITLE VII OF 

THE DODD–FRANK ACT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

CONTINUING THE OVERSIGHT OF THE IMPLEMENTATION OF TITLE VII 

OF THE DODD–FRANK ACT 

APRIL 12, 2011 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

JEFF SIEGEL, Senior Counsel 

BRIAN FILIPOWICH, Professional Staff Member 

ANDREW OLMEM, Republican Chief Counsel 

HESTER PEIRCE, Republican Senior Counsel 

MIKE PIWOWAR, Republican Chief Economist 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, APRIL 12, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

WITNESSES 

Mary L. Schapiro, Chairman, Securities and Exchange Commission ................. 4 

Prepared statement .......................................................................................... 40 

Responses to written questions of: 

Chairman Johnson .................................................................................... 88 

Senator Shelby ........................................................................................... 88 

Senator Hagan ........................................................................................... 89 

Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 5 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Chairman Johnson .................................................................................... 90 

Senator Shelby ........................................................................................... 90 

Senator Reed .............................................................................................. 98 

Senator Hagan ........................................................................................... 100 

Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System ......................................................................................................................... 6 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Chairman Johnson .................................................................................... 101 

Senator Shelby ........................................................................................... 101 

Senator Reed .............................................................................................. 102 

Senator Hagan ........................................................................................... 104 

Mary J. Miller, Assistant Secretary for Financial Markets, Department of 

the Treasury ......................................................................................................... 8 

Prepared statement .......................................................................................... 49 

Responses to written questions of: 

Senator Shelby ........................................................................................... 104 

Senator Reed .............................................................................................. 106 

Senator Hagan ........................................................................................... 118 

Thomas C. Deas, Jr., Vice President and Treasurer, FMC Corporation ............. 26 

Prepared statement .......................................................................................... 52 

Lee Olesky, Chief Executive Officer, Tradeweb Markets LLC ............................ 28 

Prepared statement .......................................................................................... 54 

Terrence A. Duffy, Executive Chairman, CME Group Inc. .................................. 29 

Prepared statement .......................................................................................... 59 

Ian Axe, Chief Executive, LCH.Clearnet Group Limited ..................................... 31 

Prepared statement .......................................................................................... 73 

Jennifer Paquette, Chief Investment Officer, Colorado Public Employees’ Retirement Association ............................................................................................ 33 

Prepared statement .......................................................................................... 79 

(III)

(1) 

BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWORK: OVERSIGHT OF 

TITLE VII OF THE DODD–FRANK ACT 

TUESDAY, APRIL 12, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 2:45 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I would like to call this hearing to order. 

Due to the length of this afternoon’s hearing, we will limit opening 

statements today to myself and Ranking Member Shelby, and I 

would ask the other Members of the Committee to please submit 

their opening statements for the record. 

Today we will review the implementation of the new regulatory 

framework for the OTC derivatives market required by the DoddFrank Act. This is our Committee’s first oversight hearing on this 

issue since the passage of Dodd-Frank. While I know there are 

many other issues that Senators may like to raise with the regulators before us today, we should focus our questions on the subject 

of this hearing. 

The Dodd-Frank Act brings needed transparency and accountability to our derivatives market and addresses problems that 

greatly exacerbated the 2008 financial crisis. I commend all of the 

regulators here today and their staffs for their extraordinary work 

and long hours they have dedicated to these important reforms. Putting in a new framework to regulate the vast $600 trillion 

swaps market in this age of instantaneous global capital movement 

is an enormously complicated task that demands close cooperation 

with international regulators. We must create new rules of the 

road to ensure that our financial markets remain the envy of the 

world. Our regulators should follow congressional intent to craft 

rules that are based on relevant data that reflect the unique structure of the swaps market while avoiding rulemaking for political 

expediency, and ask Chairman Gensler and Chairman Schapiro 

and all our regulators to work carefully to do what is necessary to 

get this right. 

This effort will require strong coordination both within and 

among regulators to review the full set of final rules in a holistic 

way before they are finalized. The regulators must also integrate 

2 

meaningful public input into this review. I urge our regulators to 

work together to craft a streamlined, harmonized set of workable 

rules that protect the ability to hedge risks in a cost-effective manner and minimize unintended consequences that could send American jobs overseas. 

With that, I turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

Today the Committee will examine the implementation of the 

Dodd-Frank Act’s new derivatives regulatory scheme. There is particular need for oversight in this area because Dodd-Frank has 

needlessly, I believe, created widespread uncertainty about the regulation of derivatives and threatens to impose huge costs on Main 

Street businesses as well as on our overall economy. 

The irony is that the proponents of Dodd-Frank told us that the 

new law would bring certainty to the market and stimulate economic growth. Instead, Dodd-Frank has set in motion a massive 

regulatory rulemaking process that is on an unrealistic timetable. 

Predictably, the result has been regulatory confusion and market 

uncertainty. 

Regulators are hastily proposing rules to meet the extremely 

short deadlines without fully considering either their economic impact or how they interact with the rules proposed by other regulators. Meanwhile, market participants are scrambling to understand how the numerous and complicated rules will impact their 

businesses. In fact, they have filed thousands of comments on the 

proposed rules. 

The comments reveal the gravity of their concerns as well as 

their confusion about how the rules will work in practice. This 

process is a direct result of the poorly conceived regulatory structure created by the Dodd-Frank legislation. Although numerous 

studies have recommended consolidating our financial regulators, 

Dodd-Frank actually dispersed authority for derivatives regulation. 

Unfortunately, the danger of having multiple regulators involved is 

a process marked by disorder and confusion. 

For example, although regulators have proposed numerous new 

rules for derivatives, the CFTC and the SEC have still not proposed rules that clarify the definition of a swap. This omission 

alone has had serious ramifications for our markets and the implementation process. After all, if regulators do not know what the 

definition of a swap is, how can they finalize their own rules governing swap dealers or major swap participants since it is unclear 

exactly who is covered by these rules? And if market participants 

do not know if they will be classified as a swap dealer or a major 

swap participant, how can they be expected to know when to submit comments? 

This is just one example of how Dodd-Frank has created a confused derivatives rulemaking process that is not proceeding in a 

logical order and creates significant uncertainty in our markets. 

The regulatory process is further hampered by the fact that the 

Dodd-Frank Act was so poorly drafted. Here is just one example, 

a simple example that illustrates my point. 

3 

One of the first Dodd-Frank rules promulgated by the CFTC was 

an interim final rule for ‘‘reporting pre-enactment swap transactions.’’ The stated purpose of the rule is to reconcile two conflicted Dodd-Frank provisions: Sections 723 and 729. 

The CFTC rule proposal specifically states, and I will quote, ‘‘The 

inconsistencies between these two reporting provisions must be reconciled in order to eliminate uncertainty with respect to the actual 

reporting requirements for pre-enactment swaps.’’ In other words, 

our regulators have been forced to undertake additional rulemaking in an effort to correct the inconsistencies and errors in the 

Dodd-Frank Act. And although I am not sure how rules can alter 

statutory requirements, it is clear that Dodd-Frank has some fundamental flaws and should be revisited. 

Today I look forward to hearing how the regulators plan to improve this broken regulatory process, particularly how they will 

consider and incorporate comments from the public. 

Make no mistake. The unprecedented scale and scope of agency 

rulemakings mandated by the Dodd-Frank derivatives title make it 

impossible for regulators to engage in deliberative and rational 

rulemaking and still meet the unrealistic deadlines imposed by the 

act. 

I am also concerned that the regulators are not fully considering 

the costs and benefits of the rules and the effect that these rules 

could have on our markets and job creation in the country. 

As the American economy continues to struggle, this may be the 

most important facet of the current regulatory process. I think it 

must not be overlooked. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. I would like to welcome and introduce the 

witnesses on our first panel: 

The Honorable Mary Schapiro is Chairman of the U.S. Securities 

and Exchange Commission. Previously, she was CEO of FINRA. 

Ms. Schapiro also served as Commissioner of the SEC from 1988 

to 1994 and Chairman of the Commodity Futures Trading Commission from 1994 to 1996. 

The Honorable Gary Gensler is Chairman of the Commodity Futures Trading Commission. Mr. Gensler previously served in the 

Treasury Department as Under Secretary of Domestic Finance and 

Assistant Secretary of Financial Markets. He also served as senior 

adviser to Chairman Paul Sarbanes. 

Daniel Tarullo is a member of the Federal Reserve Board of Governors. Prior to his appointment to the Board, Mr. Tarullo was a 

professor at the Georgetown University Law Center. He served as 

Assistant Secretary of State for Economic and Business Affairs as 

well as Deputy Assistant to the President for Economic Policy and 

Assistant to the President for International Economic Policy in the 

Clinton administration. 

Mary Miller is Assistant Secretary for Financial Markets in the 

Department of the Treasury. In that role she advises the Treasury 

Secretary on a variety of issues relative to domestic finance, financial markets, and other important policy matters. Previously, Ms. 

Miller worked as director of the Fixed Income Division for the T. 

Rowe Price Group and served as a research associate for the Urban 

Institute. 

4 

Chairman Schapiro, you may proceed. 

STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES 

AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Good afternoon, Chairman Johnson, Ranking 

Member Shelby, and Members of the Committee. Thank you for inviting me to testify today on behalf of the Securities and Exchange 

Commission regarding the implementation of Title VII and Title 

VIII of the Dodd-Frank Act regarding a regulatory framework for 

derivatives. It is a pleasure to appear with my colleagues Chairman Gensler, Governor Tarullo, and Assistant Secretary Miller. 

As you know, Title VII and VIII are intended to bring greater 

oversight and transparency to the derivatives markets and to payment, clearing, and settlement systems and activities and, with 

that, to increase the stability of our financial markets. 

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

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

are very committed to getting it right. 

These rules are intended, among other things, to reduce 

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

by increasing disclosure, and establish a regulatory framework that 

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

Since passage of the legislation, we have been very engaged in 

an open and transparent implementation process, seeking input on 

the various rules from interested parties even before issuing formal 

rule proposals. 

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

and hearings, and we have been meeting regularly with other financial regulators to ensure consistent and comparable definitions 

and requirements across the rulemaking landscape. 

To date, the SEC already has proposed a number of securitybased swap-related rules. Among them are rules that would address potential conflicts of interest at security-based swap clearing 

agencies, security-based swap execution facilities, and exchanges 

that trade security-based swaps; rules that would specify who must 

report security-based swap transactions, what information must be 

reported, and where and when it must be reported; rules that 

would require security-based swap data repositories to register 

with the SEC; rules that would define security-based swap execution facilities and establish requirements for their registration and 

ongoing operations; rules that would specify information that clearing agencies would provide to the SEC in order for us to determine 

if the swaps must be cleared and specify the steps that end users 

must follow to rely on the exemption from clearing requirements; 

and rules that establish standards for the operation and governance of clearing agencies. In addition, with the CFTC, we have proposed rules regarding the definitions of several of the key terms 

within the Dodd-Frank Act. 

Our staff also is working closely with the Federal Reserve Board 

and the CFTC to develop a common framework for supervising fiVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
5 

nancial market utilities, such as clearing agencies, which are designated by the Financial Stability Oversight Council as systemically important. In the coming months, we expect to propose rules 

to establish registration procedures for security-based swap dealers 

and major security-based swap participants and rules regarding 

business conduct, capital, margins, segregation, and record keeping 

requirements for security-based swap dealers and major securitybased swap participants. We will also propose joint rules with the 

CFTC governing the definitions of swap and security-based swap, 

as well as the regulation of mixed swaps. 

We recognize the magnitude and interconnectedness of the derivatives market, and so we intend to move forward at a deliberate 

pace, continuing to thoughtfully consider issues before proposing 

and adopting specific rules and working closely with our domestic 

counterparts and international regulators. 

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

better meet the challenges of today’s financial marketplace and fulfill our mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As we proceed with 

implementation, we look forward to continuing to work closely with 

Congress, all the regulators, and members of the financial community, and the investing public. 

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

plans for implementation, and I look forward to answering your 

questions. 

Chairman JOHNSON. Thank you, Chairman Schapiro. 

Chairman Gensler, please proceed. 

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY 

FUTURES TRADING COMMISSION 

Mr. GENSLER. Good afternoon, Chairman Johnson, Ranking 

Member Shelby, and Members of this Committee. I thank you for 

inviting me here today. I am pleased to testify on behalf of the 

Commodity Futures Trading Commission, and I also thank my fellow Commissioners and all of the staff at the CFTC for their hard 

work and commitment in implementing the Dodd-Frank Act. I am 

pleased to testify along with my fellow regulators Chairman 

Schapiro and Governor Tarullo, who I had the honor to be announced with by then President-elect Obama 21⁄2 years ago, so we 

get to be together, and Assistant Secretary Mary Miller. We have 

known each other now for about 15 years, so it is great to be here 

together. 

The CFTC is working very closely with the SEC, the Federal Reserve, and other regulators in the U.S. and overseas. We are coordinating and consulting with international regulators to harmonize 

oversight of the swaps market, and we have received thousands of 

comments today both before we have made proposals and after we 

have made proposals. At this point in the process, the CFTC has 

proposed rules in 29 of the 31 areas that the Dodd-Frank Act required us to do so, including proposing rules this morning on margin, which, of course, as well the Federal Reserve and other prudential regulators took up. 

Consistent with what Congress did in exempting nonfinancial 

end users from clearing, the proposed rule would not require marVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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gin to be paid or collected on transactions involving nonfinancial 

end users hedging or mitigating commercial risk. 

Over the next several weeks, it is our goal to largely complete 

the mosaic of proposed rules by proposing rules relating to capital 

as well as the joint product definition rule along with the SEC and 

segregation for cleared swaps. And it is our goal to try to complete 

that in the next several weeks. 

One component that we have asked the public about is phasing 

of implementation. We have not moved to any final rules yet. The 

whole mosaic will be out there, but implementation is very important. The SEC and the CFTC actually earlier today jointly announced that we would ask the public more on this. We have asked 

on every one of our rules, but we want to do it in a coordinated 

way. So early in May we are going to hold 2 days of public 

roundtables to hear about effective dates and implementation 

schedules, which compliance should come later, which may be earlier, how it should be phased, whether by asset class, by market 

participant, or by other characteristics. 

We have also put a dedicated comment file up on our Web site 

today so that people can comment on this very important issue. 

We will be considering final rules only after staff can analyze, 

summarize, and consider comments, after the Commissioners 

themselves can provide feedback, and after we can consult with 

other regulators not only here but around the globe. 

Before I conclude, I just want to briefly talk about resources. I 

appreciate any and all that this Committee did now that we are 

going to move forward and get some breathing room and certainty 

in 2011 funding. But the CFTC is a good investment, and it has 

been asked to take on a much more significant role than just overseeing the futures marketplace. The futures marketplace is about 

$40 trillion in notional size, maybe about $2.50 to $3 in futures for 

every dollar in the economy. But the swaps marketplace that we 

have been asked to oversee is $300 trillion in size here in the U.S. 

Give or take, $20 of swaps for every dollar in the economy. We 

share that role with the SEC, but clearly it is 7 times the futures 

marketplace. 

We are a good investment, even with what it just looks like Congress will be recommending this week, $202 million. It is dwarfed 

by the size of the financial industry itself, which is measured in the 

hundreds of billions of dollars in revenues. So the President has 

put forward a plan for us at $308 million next year. I look forward 

to working with this Committee and the appropriators on both 

sides of the aisle and in both Houses to see how we can assure that 

we have the resources to fulfill the mission. 

Thank you. 

Chairman JOHNSON. Thank you, Chairman Gensler. 

Governor Tarullo, please proceed. 

STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Mr. Chairman, Senator Shelby, and other Members of the Committee, thank you for this opportunity to provide 

the Federal Reserve Board’s views on the implementation of Title 

VII of Dodd-Frank. The Board’s responsibilities fall into three 

7 

broad areas. The first relates to coordination and consultation with 

other authorities, both domestic and foreign. 

As to domestic consultation, Dodd-Frank requires that the CFTC 

and the SEC consult with the Board on rules to implement Title 

VII. In providing comments to the two market regulators, we have 

tried to bring to bear our experience from supervising dealers and 

market infrastructures and our familiarity with markets and data 

sources. 

There are also very important international coordination activities related to derivatives. Most prominently, the Group of 20, or 

G-20 leaders, sometime ago established commitments related to reform of the OTC derivatives market that would form a broadly consistent international regulatory approach. In an effort to implement the various portions of that commitment, the Committee on 

Payment and Settlement Systems is working with the International Organization of Securities Commissions to update international standards for systemically important clearing systems, including central counterparties that clear derivatives instruments, 

and trade repositories. 

Even before the G-20 leaders initiative, the Basel Committee on 

Banking Supervision had established capital standards for derivatives. More recently, the committee has strengthened those standards and has created leverage and liquidity standards which will 

be applicable to them. 

The goal of all of these efforts should be a level playing field that 

will promote both financial stability and fair competitive conditions 

to the fullest extent possible. And I think for all of the agencies 

represented here today, the pursuit of this end is going to need to 

remain a priority for some time. 

The second task given to the Federal Reserve under Title VII relates to the strengthening of infrastructure. Central counterparties 

are given an expanded role in the clearing and settlement of swap 

and security-based swap transactions. If properly designed, managed, and overseen, central counterparties offer an important tool 

for managing counterparty credit risk, and thus reducing risk to 

market participants and to the financial system. 

Title VII of the act complements the role of central clearing by 

heightening supervisory oversight of systemically important financial market utilities. This heightened oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks 

throughout the financial markets. 

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

are at present carefully considering how to implement this provision in a manner that protects taxpayers and limits the rise in 

moral hazard. 

The third task committed to the Board by Dodd-Frank is that of 

supervision. Capital and margin requirements are central to the 

prudential regulation of financial institutions active in derivatives 

markets as well as to the internal risk management processes of 

those firms. The major rulemaking responsibility of the Board and 

the other prudential regulators is to adopt capital and margin regVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
8 

ulations for the noncleared swaps of banks and other prudentially 

regulated entities that are swap dealers or major swap participants. 

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

role in developing the enhanced capital leverage and liquidity regime that I mentioned before. These requirements will strengthen 

the prudential framework for OTC derivatives by increasing riskbased capital and leverage requirements and requiring banking 

firms to hold an additional buffer of high-quality liquid assets to 

address potential liquidity needs resulting from their derivatives 

portfolios. 

The statute also requires the prudential regulators to adopt rules 

imposing initial and variation margins on noncleared swaps to 

which swap dealers or major swap participants that they supervise 

are a party. 

The statute directs that these margin requirements be riskbased. In accordance with the statutory instruction, the Board and 

other prudential regulators proposed to implement the margin provisions in a way that recognizes the low systemic risk posed by 

most end users. The proposed rule would not specify a minimum 

margin requirement. Rather, it would allow a banking organization 

that is a dealer or major participant to establish a threshold based 

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

of the normal credit approval process, below which the end user 

would not have to post margin. 

Finally, I would note that the proposed regulation provides that 

the margin requirement should be applied only to contracts entered 

into after the new requirement becomes effective. 

Thank you for your attention. 

Chairman JOHNSON. Thank you, Governor Tarullo. 

Assistant Secretary Miller, please proceed. 

STATEMENT OF MARY J. MILLER, ASSISTANT SECRETARY FOR 

FINANCIAL MARKETS, DEPARTMENT OF THE TREASURY 

Ms. MILLER. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, thank you for inviting me to testify 

today about Treasury’s role in implementing Dodd-Frank’s derivatives provisions. 

As you know, the President signed the Dodd-Frank Act into law 

almost 9 months ago. The act established a framework for the 

country to build a stronger, safer, and more competitive financial 

system. It creates safeguards to protect consumers and investors, 

end taxpayer bailouts, and improve the transparency, efficiency, 

and liquidity of U.S. markets. The derivatives provisions are a critical part of that framework, and the Administration strongly supports them. Dodd-Frank’s derivatives provisions will shed light on 

a market that previously operated in the shadows. Central clearing, trade execution, and reporting requirements and business conduct standards will provide substantial benefits. The work that the 

Administration is undertaking in partnership with our colleagues 

at the CFTC, SEC, and Federal Reserve Board is vital in preventing the harmful buildup of risk that contributed so greatly to 

the financial crisis in 2008. 

9 

As other Treasury officials have previously testified, several 

broad principles guide our implementation efforts. First, we are 

moving quickly to meet the statute’s deadlines, but we are also 

moving carefully to make sure that as we implement the act we get 

it right. 

Second, we are bringing transparency to the process so that as 

many stakeholders as possible have a seat at the table, the American people know who is at that table, and anyone who wants to 

provide input on requests for comment and proposed rulemakings 

can do so. 

We are creating a more coordinated regulatory process. The Financial Stability Oversight Council is playing a key role by bringing together the financial regulatory agencies to help develop consistent and comparable regulations and supervisory regimes. 

Fourth, we are building a level playing field by setting high 

standards in the United States and working diligently with our 

international counterparts to follow our lead. 

Fifth, we are crafting rules of the road that will provide U.S. investors and institutions the conditions they need to invest capital, 

develop innovative products, and compete globally. 

Finally, we are committed to regularly keeping Congress informed about our progress. The Treasury Secretary has specific 

statutory responsibilities with respect to derivatives implementation and also has other responsibilities in his capacity as the Chairman of the FSOC. 

Starting with the specific, Congress gave the Secretary the authority to determine whether foreign exchange swaps and forwards 

should be exempt from the definition of swap in the Commodity 

Exchange Act. The Secretary must consider the statutory factors 

set forth by the Dodd-Frank Act, including the impact regulating 

FX swaps and forwards swaps under the CEA would have on systemic risk and financial stability; the existing regulatory regime 

and supervision of FX swaps and forward participants; and, finally, 

whether an exemption could lead to evasion of other regulatory requirements. 

We published a request for comments to solicit public input on 

a wide range of issues relating to a potential exemption. We received 30 comments in response, and Treasury staff has also conducted an independent analysis, including extensive discussions 

with a range of interested parties. 

We know that market participants, other stakeholders, and the 

Committee are closely following this issue. Regardless of the decision the Secretary makes, market participants need to be able to 

prepare for it. While we intend to move expeditiously, it is also critical that we take enough time to make the right decision for the 

safety and soundness of the markets. 

The Secretary also has derivatives implementation responsibilities in his capacity as FSOC Chairman. The FSOC recently approved the publication of a Notice of Proposed Rulemaking regarding the designation of systemically important financial market utilities. FMUs support and facilitate the transfer, clearing, and settlement of financial transactions, and they form a critical part of the 

Nation’s financial infrastructure. The notice was published on 

March 28th and will be open for comments for 60 days. 

10 

One final area I would like to touch on is the importance of comparable international standards, including derivatives oversight. 

The United States will set high standards, but today’s financial 

system is highly interconnected, mobile, and global. We must work 

not only to protect the competitiveness of U.S. financial markets 

but also to ensure that the reforms we implement here are not undermined by lax standards elsewhere. 

We will continue to work at home and abroad to build a regulatory framework for derivatives that will help our financial system 

become safer and sounder and a platform on which we can build 

strong financial markets that will fuel our economic growth. 

Thank you. 

Chairman JOHNSON. Thank you, Assistant Secretary Miller. I 

will start off the questions. Thanks for your testimony. 

I will remind my colleagues that we will keep the record open for 

statements, questions, and any other material you would like to 

submit. As we begin questioning the witnesses, I will put 5 minutes on the clock for each Member’s questions. 

Chairman Schapiro and Chairman Gensler, how do you plan to 

reconcile the different SEC and CFTC proposed rulemakings governing swap execution facilities, real time reporting, block trades, 

and other infrastructure consistent with Dodd-Frank’s requirement 

to assure regulatory consistency and comparability and treat functionally or economically similar products or entities in a similar 

manner? 

Ms. SCHAPIRO. Mr. Chairman, I would be happy to start. We are 

very, very focused, obviously, on the issues surrounding the fact 

that in a number of areas, and you just articulated several of them, 

we do have differences in our rule sets between the SEC and the 

CFTC. Some of those differences may actually be necessitated by 

the fact that the markets, while they are both derivatives markets, 

the products may trade differently, have different liquidity characteristics, and for that reason, some differences may actually be appropriate in order to continue to foster the development of these 

markets. But we have asked for comment on whether our understanding in that regard is correct. 

But I would also say that we are continuing to work extremely 

closely together through the proposing stage, and now that for a 

number of rules comment periods have closed, we were able to review the comments that have come in on our proposals as well as 

those that have come in on the CFTC’s proposals where they have 

gone in a slightly different direction and we are very committed to 

continuing to work through those differences, and if they are not 

grounded in very good market structure reasons because of the nature of the products, trying to get them as consistent as we possibly 

can. 

Where we have proposed after the CFTC, I would just add, on 

some rules, we have actually sought explicitly to get comment on 

their approach to see if that might be a better way to go forward. 

So in a number of areas where we do have differences, I believe 

because we are still at the proposing stage and not at the adopting 

stage, we will be able to work through many of those differences. 

And then, of course, through implementation, it may be necessary 

11 

for either or both of us to engage in some interpretation of our 

rules in order to ease implementation and make them consistent. 

Mr. GENSLER. I will keep it brief. I agree with what Chairman 

Schapiro said. It is a lot of consultation and coordination. It is also 

in the context of there are some differences between the futures 

marketplace and the securities marketplace that either have existed in statute or in rules or just in market practice for decades, 

and so we are trying to be as close as we can between swaps and 

securities-based swaps while also not creating some regulatory arbitrage and undercut, for instance, in our case, a futures marketplace that has worked with a great deal of transparency and low 

risk to the American public, and not undercut that marketplace 

through some differences, as well. And I suspect the same issues 

on your side. 

Ms. SCHAPIRO. If I could just add, it is critically important to us, 

as well, that because securities-based swaps can be economic 

equivalents to equity positions, that we want to make sure that we 

do not create, while we are trying to be more and more synched 

up with the swaps markets, between the security-based swaps and 

swaps markets, that we are not creating great distance between 

the security-based swap markets and the equity markets, as well. 

Chairman JOHNSON. Assistant Secretary Miller and Governor 

Tarullo, how are Treasury and the Fed working to harmonize international derivatives regulations through the G-20 and the Financial Stability Board, especially given the different international 

time frames for moving ahead on new rules? How are your efforts 

in this area being coordinated with the CFTC and the SEC to be 

sure that requirements for capital and other rules are both appropriate and consistent? 

Ms. MILLER. Well, we are following this very closely, because as 

I said, we are very interested in having good harmonization globally on these rules. So in many settings, Treasury staff are engaging with their counterparts in different international groups. There 

are a number of working groups on derivatives that are occurring 

through the Financial Stability Board in Europe. We are also interested in things that are going on in Asia. So we are following both 

the rulemaking process in the U.S. and we are engaging regularly 

with our counterparts in other countries. 

Mr. TARULLO. Mr. Chairman, let me add a couple of thoughts 

there. As you can tell from the testimony today, the other 

rulemakings that the SEC and the CFTC have ongoing, dealing 

with the international equivalents of Title VII and Title VIII, are 

going to implicate a number of different regulatory authorities in 

other jurisdictions. 

So I think what was looked for by the G-20 was a framework of 

agreement or commitment on a set of goals that would then be pursued in the various appropriate international bodies. What we have 

got now, I think, is a good bit of very productive work on efforts 

to get agreement on central counterparties, on electronic trading, 

on transparency for those counterparties, on risk management 

standards. That is being done, I think, through a lot of cooperation 

among agencies, but in particular, the Fed and the SEC, because, 

in fact, we have got a Reserve Bank President and a Commissioner 

of the SEC who are chairing the key international committees on 

12 

this point—President Dudley of the New York Fed and Commissioner Casey of the SEC. 

On capital, as I said in my prepared remarks, the Basel Committee on Banking Supervision has a set of capital requirements 

for derivatives in a part of its overall internationally recognized 

capital standards. They have been updated to take account of what 

was learned during the crisis, but they are already agreed among 

all the Basel Committee members, which constitutes not just the 

G-20 but some additional countries beyond the G-20. 

I think the one area where we probably need some more work 

now is on margins for noncleared derivatives and noncleared 

swaps. I think the fact that we, the prudential regulators and the 

market regulators are now moving toward a proposal for the U.S. 

is going to enable us to have a clear, coherent, and unified position 

internationally to try to move along some other countries which are 

actively, or in some cases not so actively, considering putting these 

requirements in place. 

With respect to coordination, I think it has been very good. As 

you can tell from just my recitation of the different committees, we 

need to have everybody involved because there are different 

expertises here, and from all accounts that I get from our staff and 

directly from talking to principals at other agencies, I think this is 

one area where the convergence of views and the cooperation 

among U.S. agencies has been quite good. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Assistant Secretary Miller, on our second panel today, we will 

hear from the Treasurer of FMC, a large manufacturing company 

here in the U.S., who has grave concerns, according to his testimony, about the excessive regulations mandated by Dodd-Frank. 

His testimony indicates that these regulations will increase operating costs, making it more difficult for his company to both create 

jobs and to manage risk. Do you believe that FMC Manufacturing 

Company, the end user, is the type of company that should be regulated under Dodd-Frank, and does Treasury have any concerns 

about the potential consequences of Dodd-Frank derivatives regulation on job creation? Have you done any work in this area? 

Ms. MILLER. OK. Thank you for the question. We have heard a 

great deal from end users, nonfinancial and financial in the markets, and I think that there is sufficient flexibility in the DoddFrank legislation to work with a company like FMC in terms of 

providing flexibility under derivatives regulation. 

Senator SHELBY. In other words, a company that is an end user 

that is managing risk but not in the pure financial speculation, is 

that right? 

Ms. MILLER. Yes. We have not done any specific work on the economic impact on job creation of this particular title. 

Senator SHELBY. Will you do some research, have Treasury do 

some research into that area? 

Ms. MILLER. Well, we have worked—— 

Senator SHELBY. Because this could have ramifications for creating jobs, could it not, if it is—— 

Ms. MILLER. There were many studies mandated by Dodd-Frank 

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13 

livered under the statute. So we have put out quite a bit on the 

financial market ramifications. 

Senator SHELBY. Foreign exchange swaps and another area. 

Treasury is charged with determining whether foreign exchange 

swaps and forwards should be subject to extensive Government 

regulation. In your testimony today, you stated that, quote—I will 

quote you—‘‘we want to move expeditiously with respect to making 

the determination that the treatment of foreign exchange—about 

the treatment of foreign exchange and swaps.’’ When will Treasury 

make its determination, in your judgment? 

Ms. MILLER. So I regret that I do not have that decision to give 

you today for the hearing. I think we are very close. We have been 

working on that—— 

Senator SHELBY. Would you furnish that for the record and the 

other Committee Members when you get it? 

Ms. MILLER. We absolutely will, and we would be delighted to 

come up and brief you on our decision either way. 

Senator SHELBY. Are you at Treasury aware of any market failure in the foreign exchange market that would justify further regulation? 

Ms. MILLER. There are many parts of the foreign exchange market. The FX swaps and forwards part that you just mentioned is 

one part of the foreign exchange market—— 

Senator SHELBY. Are you aware of any failures in that area that 

would justify further regulation? 

Ms. MILLER. I think there are many parts of that market that 

were under severe stress during the financial crisis and some parts 

of it will be subject to Dodd-Frank regulation. 

Senator SHELBY. To your knowledge, were any of the areas in derivatives where you are managing risk and you are an end user 

under extreme stress? I do not know of any. 

Ms. MILLER. I would be happy to reply to that question with further research if you want specific examples—— 

Senator SHELBY. Will you do that for the record? 

Ms. MILLER. Sure. 

Senator SHELBY. OK. Governor Tarullo, central clearinghouses is 

an area which is very important. Last week, Chairman Bernanke 

of the Federal Reserve gave a speech about the importance of properly regulating clearinghouses. He noted that one of the reasons 

that clearinghouses have not had trouble to date is, quote, ‘‘good 

luck.’’ We cannot always count on good luck, as you know. Beyond 

relying on luck, what steps can we take, or can you take, to ensure 

that taxpayers are never called upon to bail out clearinghouses because that was a concern of a lot of us when we were debating the 

Dodd-Frank legislation, as you will recall. 

Mr. TARULLO. Right. I do recall your questions on that topic, Senator, a year or two ago. So with respect to the central clearing parties that are designated as systemically important, there will be 

oversight by the appropriate market regulator, but the Federal Reserve has a role to play there as well. We have a consultative role. 

We hope to be involved in the exams, bringing to bear, if I can put 

it this way, a supervisory or prudential supervisory perspective on 

these institutions. So we would hope that they will all be subject 

14 

to strong prudential requirements for credit risk, strong liquidity 

buffers—— 

Senator SHELBY. What does ‘‘hope’’ mean? Now, you said you 

would hope—— 

Mr. TARULLO. The mechanism here is one—the primary regulators are the market regulators. 

Senator SHELBY. I know. We know. 

Mr. TARULLO. We have a consultative role—— 

Senator SHELBY. Oversight role. 

Mr. TARULLO. We have an oversight role, that is correct, and in 

that capacity, I think we will hope to contribute to the perspective 

on the supervision of these organizations. I suspect that there will 

be convergence among the agencies on the kind of standards that 

are important, and, as I said, I think we are going to draw on our 

experience not just with market entities, which we do have, but 

also supervising from a prudential point of view, looking to safety 

and soundness and not simply market operations. 

Senator SHELBY. In the same type area, the United Kingdom’s 

Financial Services Authority wrote a comment letter in response to 

a rule proposed by the CFTC on risk management requirements for 

clearinghouses. The FSA, the United Kingdom’s Financial Services 

Authority, warned the CFTC that lax eligibility requirements for 

firms to be members of clearinghouses could create new risk to the 

financial system. Do you agree with FSA’s comments, or are you 

concerned about that, too? 

Mr. TARULLO. Senator, I have not seen the FSA comment on the 

proposed CFTC rule. I would say that an effective member qualification and default set of standards is very important to the integrity of any central clearing party. 

Senator SHELBY. Should not you or we, we altogether, should not 

we do everything we possibly can do to ensure that there is no bailout of a clearinghouse? 

Mr. TARULLO. Absolutely, Senator. I think that is why we all, everybody up there, everybody at the table here, share an interest in 

having rigorous and effectively enforced standards for the central 

clearing parties. 

Senator SHELBY. Can I get Chairman Gensler’s comments on 

that, because that is in his area. 

Mr. GENSLER. It is a big yes. I think that central clearinghouses 

need robust oversight. I view it as a partnership with the Federal 

Reserve, even we might be the front line and, of course, the SEC 

has their clearinghouses, as well. I think they should not have central bank liquidity, though Dodd-Frank did allow for it in emergency exigent circumstances when the Secretary and the Board of 

Governors decide that. But I think that should be an absolute rare 

occurrence. It should not happen. 

Clearinghouses have not failed in this country. We have survived 

two World Wars and we have survived great crises. I think the 

clearinghouses have to have collection of margin. They have to 

have it on a daily basis. They have to be able to have proper default management and so forth—— 

Senator SHELBY. They have to make sure everything clears, do 

they not? 

15 

Mr. GENSLER. They absolutely have to make sure everything 

clears, and that which clears has available pricing, available liquidity. And I think also with regard to the comment letter that you 

referred from the—— 

Senator SHELBY. From the U.K.—— 

Mr. GENSLER. ——from the U.K., it is very important that these 

clearinghouses have open membership, that the access to the clearinghouse is not just so narrow—clearinghouses have greater risk if 

it is only narrow membership. But if it is broadened out, markets 

work best when they are open and competitive. 

Senator SHELBY. Since there are international implications to derivatives and derivatives trading and everything, should we not listen to our counterparts in Europe, like the United Kingdom and 

FSA and others who have similar concerns that we should have? 

Mr. GENSLER. Absolutely, and we are listening. We are consulting with sharing all our drafts, our term sheets, our memos 

with not just the FSA, but ESMA and the European Commission 

and the like. So their comment is very helpful, but we also believe 

that membership should be opened up, but the smaller members 

can only scale into that membership and not be like the large members. Right now, the clearinghouse they are thinking about has sort 

of an exclusive club deal and I think Congress spoke to that in the 

statute, saying there is supposed to be open access. 

Senator SHELBY. Yes. Exclusive clubs are dangerous things sometimes. 

Mr. GENSLER. Yes, and that is what occurs in swaps clearing 

today, not in futures clearing. Futures clearing is much more open. 

Securities clearing is much more open. Swaps clearing today has 

been more exclusive, but Dodd-Frank actually said it had to be 

more open and competitive. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

Let me begin by associating myself with the comments Senator 

Shelby made about the utility of clearing platforms to dissipate the 

risk vis-a-vis bilateral transaction, but the inherent danger of notwell-regulated trades create, and I know everyone at this table is 

acutely focused on that and I urge you, as Senator Shelby did, to 

keep your focus on that issue. 

But Secretary Miller, following up on another line of questioning 

of Senator Shelby about forex contracts, were these contracts part 

of the Lehman bankruptcy, i.e., were there losses incurred when 

Lehman failed because they could not fulfill forex contracts, and 

would those losses have been avoided if the contracts were traded 

or cleared? 

Ms. MILLER. There were open contracts with Lehman Brothers 

when they failed. Those contracts were settled, so they were able 

to be settled. 

Senator REED. And they were settled how? 

Ms. MILLER. A large number of them moved through a payment 

versus payment settlement system. I cannot give you the precise 

percentage that were settled that way, but it is my understanding 

that all of the open contracts through Lehman Brothers were settled. 

16 

Senator REED. Governor Tarullo, did the Federal Reserve in any 

way support the forex market during the months, the late months 

of 2008? 

Mr. TARULLO. Well, it was not support for the foreign exchange 

market as such, Senator. There was liquidity provided in the form 

of dollar liquidity, both through the discount window directly to institutions operating in the United States and to central banks of 

some other countries. But this was not in pursuit of settling foreign 

exchange swaps. This was as a byproduct of the general liquidity 

squeeze that—— 

Senator REED. But part of their exposure was the foreign exchange contracts? 

Mr. TARULLO. I do not think it was—I think it was much more 

a funding problem, a dollar funding problem. It was not a matter 

of failing on a contract but not having access to wholesale funding 

in dollars when you had obligations in dollars. 

Senator REED. But there is a possibility, if these contracts are exempt, that there could be another situation where—a liquidity 

freeze where it is not a question of settlement, they just cannot get 

the money to settle, and the Fed is prepared or will enter into supporting this sector? 

Mr. TARULLO. Well, Senator, under Dodd-Frank, we are not permitted to offer institutions specific assistance except obviously for 

the discount window or through the FMU provisions here. I 

think—and Secretary Miller alluded to this—I think most people 

who have studied this issue think that the problems in the foreign 

exchange market have largely concentrated on settlement. There is 

a quite short duration of most forex forwards. As you may know, 

all the international work on foreign exchange transactions began 

after the 1974 failure of Herstatt Bank, which produced these 

kinds of settlement problems. 

So I think that is where most of the attention has been focused, 

and today, there are, I would not say perfect or all comprehensive 

mechanisms for making sure that foreign exchange transactions 

settle, but there has been a substantial amount of improvement 

over the last 36 years. 

Senator REED. I have approximately a minute and a half, so Governor Tarullo, you can explain to me the interaction between the 

capital requirements of the Volcker Rule for companies that have 

derivative activities and Basel III and the general prudential 

guidelines for capital that you are developing for financial security, 

and the clock is ticking. 

[Laughter.] 

Mr. TARULLO. So, I am sorry, what are the three areas again? 

Senator REED. Under Dodd-Frank, the Volcker Rule has some 

specialized language with respect to companies, financial companies trading derivatives. There is also the Basel III requirements 

that talk about derivatives. And then there is just the general prudential safeguards for capital that the Fed can insist on a case-bycase basis—— 

Mr. TARULLO. Oh, sure. 

Senator REED. ——a general basis. So in your mind, are these 

separate categories, or does this blend into one sort of gut feeling 

about how much capital a company should have? 

17 

Mr. TARULLO. Well, now it is not going to be a gut feeling. There 

will be an analytic backdrop for it, and I think there already is. We 

devoted a lot of attention even before the Basel III process to improving the market risk part of the general capital standards and 

derivatives were one of the focuses for attention, including important upgrades to counterparty risk, evaluation and capital setasides, and also to making sure that you stressed the potential exposures as opposed to just a random test through a normal market 

environment. 

I think with respect to any capital authority that we have, our 

aim will be to have a set of rules, backstopped by specific supervisory oversight, which ensure that those activities are not creating 

risk to the institution that does not have an adequate set-aside. 

That is what existed in the precrisis period. There were opportunities for arbitrage that were readily taken by firms. I think there 

was inattention to counterparty risk, both at the firm level and 

among regulators. Those are the kind of changes that need to be 

put in place, and those are the kind of changes that are in the 

rules that we are promulgating under Basel III but with an eye to 

the specifics of a firm, not just to sort of a gut feeling about that 

firm. 

Senator REED. Thank you, Mr. Chairman. Thank you, Governor. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and I thank all of 

you for being here, as usual. 

I think the notion of a clearinghouse was something that—or focusing on clearing trades was something that was very bipartisan 

in nature. Obviously, you move into details and there ends up 

being some differences, especially on the end user piece. But for 

what it is worth, among market participants, and we, obviously, 

like you, are talking to many among those on the buy side and the 

sell side, and those who strongly supported Dodd-Frank and those 

who obviously oppose it, I think there is a concern about the rapidity that these rules are being put in place and even more so on 

their prescriptive nature, OK, and just being overly prescriptive. 

So with that, Mr. Gensler, I am going to focus on a few things 

with you. I noticed that people have to have five quotes now, for 

instance. Even a large institutional trader that might have a relationship with one institution has to have five quotes, and I am 

wondering, who is it you are trying to help or save, or what is the 

point behind that? 

Mr. GENSLER. Senator, I think you are referring to the swap execution facility—— 

Senator CORKER. That is right. That is right. 

Mr. GENSLER. ——in the proposed rule, and in that regard, Congress said that those transactions that are cleared and made available for trading would be brought to swap execution facilities. That 

is a mandate and it is transparency. Congress in the statute said 

that it would be to promote pretrade transparency. 

These are trades that are not large blocks. The blocks are ex- cepted. So it might be a $5 or $10 million trade, not a $500 million 

trade, and it is one that is cleared so it is anonymous. There is no 

credit risk. 

18 

On those trades, what Congress suggested we do and what we 

think we are doing in the rule is promoting transparency where 

multiple participants have an ability to execute against other multiple participants. In the futures marketplace, when a request for 

quote goes out, it goes out to the whole marketplace. It does not 

even go just to five. It goes out to a broader group in the marketplace, and the quotes that come back in are seen by the marketplace. So there is far more liquidity. What we are proposing is actually less transparency than the futures marketplace. 

Senator CORKER. So on the large block trades, they are excluded—— 

Mr. GENSLER. They are excluded. 

Senator CORKER. ——and do you think this was something wise 

that we asked you to do, just briefly, yes or no? 

Mr. GENSLER. Yes. 

Senator CORKER. OK. 

Mr. GENSLER. Yes. 

Senator CORKER. The real-time reporting, I noticed you have 

come up with a 15-minute time frame. I am just curious about 

what was magic about that. I know numbers of people think that 

is not long enough, especially in larger transactions. 

Mr. GENSLER. Well, I am glad you asked. Congress said that 

real-time reporting after the trade should be as soon as technologically practicable on the smaller trades, and then on the blocks, 

we could have a delay. So we looked at what delay do we have in 

the futures marketplace. It is about 5 minutes now. We proposed 

15 minutes if it is on a swap execution facility. If it is bilateral, 

we asked a lot of questions and sought comment. In the securities 

world, Chairman Schapiro could speak better, but I think their 

delay is 90 seconds now. So we looked at this and said it is three 

times the futures world, about ten times the securities world. We 

are going to get comments. The proposal will change once we get 

to a final rule, but that was the thinking. 

Senator CORKER. So on the larger trades, it may be much longer. 

It may be end of day. It may be something—— 

Mr. GENSLER. Well, I—— 

Senator CORKER. ——the block—— 

Mr. GENSLER. The larger trades that are on a swap execution facility, we proposed 15 minutes. 

Senator CORKER. Right. 

Mr. GENSLER. If it is a bilateral, we did not propose a specific 

time. We just asked a lot of questions. 

Senator CORKER. And is it your vision—a lot of people think that 

it is, so I will give you that editorial comment, but do you think 

the derivatives market and equity markets should be very similar 

when you finish all of these activities? 

Mr. GENSLER. I think that markets work best when they are 

transparent, open, and competitive, and those three core factors, 

whether it be futures or securities, or derivatives, ultimately help 

end users, investors, and I think it helps the economy grow. It does 

shift some of the information advantage to the tens of thousands 

of users away from the most sophisticated—— 

Senator CORKER. So that is a yes? 

Mr. GENSLER. I think it is a yes—— 

19 

Senator CORKER. I think there are a lot of concerns because people view the two instruments as being very different and I think 

there is some concern out there that that is your vision and it is 

not taking into account the differences between the instruments. 

Mr. GENSLER. Senator, I think you asked about equities and derivatives and we regulate futures. I think markets work best, 

whether they are futures, equities, or swaps, when they are transparent. When they are competitive, people get the benefit of that 

competition in contrast to a closed or dark market. 

Senator CORKER. If derivatives are moving out to electronic platforms, is there any concern about a growth of high-frequency trading taking place in that area? 

Mr. GENSLER. It is something that captivates our commission 

every day in the futures marketplace, when 85 to 90 percent of the 

marketplace is now electronic. It is something that we think is very 

much on our mind as we think about regulation in the swaps marketplace. 

Senator CORKER. And we look forward to having you in our office, and I am sorry we have not. 

If I could ask one more question to Mr. Tarullo or Ms. Miller, either one, you know, we had a lot of discussions, I remember, in the 

hearing room when Mr. Volcker came in and started talking about 

the Volcker Rule, sort of a flower in the middle of regulation. It 

ended up being a part of Dodd-Frank. And I am out, as I know all 

of you are, and certainly my colleagues. We talk with banks 

throughout our country, small community banks and others, about 

the Examiner in Charge, and the Examiner in Charge that comes 

into their institution, basically, their attitude, their understanding 

of whatever regulator it is they are working with changes pretty 

dramatically how their bank’s status is interpreted, OK. The Examiner in Charge is basically king. 

As you look at the Volcker Rule, again, Mr. Volcker, who I respect greatly and I think everybody up here does, could not really 

describe to us what propped trading was. You just know it when 

you see it. How are you all going to sort of institutionalize the 

whole Volcker issue when, again, you have these examiners, EICs, 

that are out amongst these various institutions that have judgment? I do not see how you do that properly and I would love to 

have any help with understanding that. 

Mr. TARULLO. Senator, I think there are a couple of things. First, 

when you are talking about 7,000 financial institutions as you are 

with some of the very basic prudential standards, the balance is always as between allowing for the local knowledge of the examinerin-charge, because he or she is going to understand the institution 

they are in better than anybody, on the one hand, and on the other 

hand, assuring a consistency in treatment across everybody in the 

United States because people deserve that. 

When it comes to something like the Volcker Rule or a number 

of the other provisions that we are talking about, you are almost 

surely dealing with a much smaller subset of institutions, and I 

think there, the kind of horizontal approach to regulation and supervision that we have been taking with respect to larger institutions is going to be particularly important. 

20 

So once we, the prudential regulators, come up with the regulations to implement the Volcker Rule, we are going to have to have 

a coordinated and coherent and unified approach to implementing 

and overseeing the implementation of that rule, and I would expect 

that as we have already done with some of our activities over the 

last couple of years, beginning with the stress tests in early 2009, 

we will have a process internally to make sure that these things 

are being implemented consistently, that the CPC teams, the leads 

of the teams that are in place in the large institutions, have a common framework of knowledge and training, and that we are making sure that the regulatees have an opportunity to come to us, 

that is to the Board, and to say, we are uncertain about what is 

going on here or we are not sure we are being treated the same 

way. 

So I think will it be a task? Yes. Will it be more difficult, I think, 

than a lot of the other supervisory tasks that we have now? I do 

not think so. That is not to understate the attention it is going to 

require. But once we get those rules in place, I think we do have 

a mechanism for making sure they are applied in a consistent fashion—that people have recourse to come to the Board to ask about 

the interpretation of a rule. 

Senator CORKER. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman, and thank you, all 

four of you, for your work on Dodd-Frank and getting the legislation passed. Passing this bill last July in so many ways was only 

the beginning of the effort to impose transparency and accountability and unregulated in the opaque and unregulated derivatives 

markets. It is pretty clear in newspaper reports that the opponents 

of transparency and the opponents of oversight lost the first fight, 

but they are working on budget issues to try to restrict a lot of the 

things that you are trying to do and trying to handcuff your efforts. 

Just listening to your testimony today and looking at the magnitude of the regulatory effort that you are undertaking I think 

really illustrates the importance of that, so thank you. 

Chairman Gensler, my questions are directed at you. I sent a letter to you back in January about gas price speculation and the importance of the CFTC’s position limits rules in curbing excessive 

speculation. I am concerned that excessive speculation can once 

again perhaps seriously hurt our economy. Every time there is a 

pipeline outage or a refinery fire or trouble in the Middle East, it 

seems that one reaction of that is speculators and oil companies 

move in to spike prices up, using that as a typical excuse for that 

happening. 

The Commodity Markets Oversight Coalition, a group of commercial end users, pointed to 57 studies conducted in the last 5 years 

showing the role of speculation in driving up asset and commodity 

prices. In the 1990s, speculative interest in commodities was about 

15 to 30 percent typically. Today it is closer to one-half to twothirds of the market. Financial companies account for over 51 percent of crude oil futures, an increase of 5 percent just in the last 

month. 

We know what this means to our economy potentially. We know 

what it means to individual motorists, to small businesses operVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
21 

ating on small margins to truckers, to so many others. And we 

have seen what speculation can do, similar price increases in other 

commodity markets. 

Last week, the CEO of Starbucks said financial speculators have 

come into the commodity markets and drove those prices up to historic levels, and as a result of that, the consumer is suffering. 

Chairman Gensler, talk to us about financial speculation, its effect on prices, and then answer this question, if you would. What 

authority under Dodd-Frank do you have now to combat speculation? What do you need from us in terms of additional tools to 

carry that out? 

Mr. GENSLER. Hedgers meet speculators in marketplaces. From 

the earliest days in the derivatives marketplace, a farmer planting 

corn or wheat or soy wanted to hedge a price and lock in that price 

at harvest time, and it was generally a speculator who was on the 

other side to assure that price. 

When our agency’s predecessors were formed, it was to make 

sure that markets were transparent; a hundred percent of the market had to come to a marketplace. Transparency is so important, 

and it is important that we have the tools, legal and other tools, 

to combat fraud and manipulation. Position limits were part of that 

toolkit that we were given in the 1930s. 

In Dodd-Frank, that was expanded. It was expanded not just to 

be futures but also for economically equivalent swaps. 

We are not a price-setting agency, but our agency is to ensure 

that markets have a certain basic integrity, you can have confidence in them, and they are not so concentrated. You are accurate 

that speculators, if you might say, somebody who is not in the 

physical marketing channel, somebody who is not producing or 

using the oil or natural gas or the corn or wheat, are a large part 

of the marketplace. They are well over half of the marketplace usually in different parts of the market statistics will show. We put 

these statistics out every Friday. They are public. 

So what we need to do, I believe, is complete a rule on position 

limits. Position limits have been in place in the agricultural products for decades and were in the energy products in the 1980s and 

1990s. We have a rule out and that the comment period just closed. 

We actually got—and I misstated it in my written testimony. We 

got 11,000 comments on this position limit rule, on the energy and 

agricultural limits. So we are going to need to sort through that. 

We are going to take a number of months. That is a lot of comments to sort through. Many of them are repetitive. 

To your question, we also need to promote transparency in this 

marketplace. I think the more transparent, the more market participants can see the aggregates as well as the pricing, that is a 

very important thing. And I think we need resources, if I might 

say. This small agency I think is a good investment to ensure the 

integrity of these markets. 

Senator BROWN. Thank you. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and thank you very 

much to all of you for testifying. 

I just cannot help but make one brief observation, which is— 

gosh, it is just amazing to me. I have here in my hand the CFTC 

22 

rule on position limits for derivatives. It looks like it is about a 4- 

point font. It is 25 pages long. And according to CRS, Dodd-Frank 

calls for 330 rules. 

It is not a criticism of this particular rule, but it strikes me as 

an incredible cost to the financial institutions that have to understand these, digest these, hire the manpower to then comply with 

these. And it strikes me as something that could approach a miracle if they are all perfectly consistent and compatible and operate 

exactly as intended with no unintended consequences. This is really a very, very difficult undertaking, it seems to me, an enormous 

cost to the financial institutions to comply with. I suppose the very 

large ones will be able to afford it. Smaller ones, I am not so sure. 

I would like to follow up with a question on the position limits, 

Mr. Chairman, if I could. 

One is my understanding of Dodd-Frank, which passed before I 

got here, but my understanding is that the bill does provide some 

flexibility in terms of how you go about imposing position limits. 

And my further understanding is that thus far the European regulators have not promulgated any rules whatsoever regarding position limits. 

Is there a danger that if we go ahead and impose position limits 

and they do not, we simply have a migration of business to other 

venues? Are you concerned about that at all? 

Mr. GENSLER. We are working closely with the European and 

Asian regulators. I think capital and risk do not know any geographic boundary, so whether it be position limits or other rules, 

Senator, that is something that we are very conscious of. 

On position limits, I think after numerous hearings, starting 

probably in 2007 and 2008 in the House and the Senate, our authorities were not only broadened to include economically equivalent swaps, but also something very important, the exclusion from 

those position limits, called bona fide hedging, was narrowed a bit. 

So we take congressional direction on this as well. 

Senator TOOMEY. I understand that, but are you concerned that 

in the absence of comparable European regulation that we have the 

opportunity for regulatory arbitrage across borders? 

Mr. GENSLER. I would have to say yes, but not just with regard 

to position limits. That is why we have been so active in Europe 

and elsewhere to try to harmonize where we can. But in terms of 

position limits, what we are looking at in the proposal is about futures and options on futures, where we have set them for decades 

in agriculture. We did in energy in the 1980s and 1990s along with 

the exchanges, and the exchanges took the lead. And it is looking 

to reimpose those, and we are benefited because, as I said, we have 

11,000 public comments in the file right now. So this is one that 

the public is very engaged in. 

Senator TOOMEY. Well, I am concerned about this apparent developing disparity between the regulatory regimes. 

Another quickly question, if I could, on the real-time reporting. 

We had a little discussion earlier about speculators and the fact 

that speculators—and I completely agree with your observation. 

Speculators provide a great deal of liquidity. It is often the case 

that speculators also need to have a certain amount of anonymity, 

23 

and while transparency has many virtues and can be very important, sometimes anonymity is important, too. 

My understanding is—and maybe you could correct me if I am 

mistaken—that the CFTC’s 15-minute disclosure requirement is 

different than the SEC, which has a longer period of time before 

a comparable transaction has to be disclosed. So is there a difference between the two? 

Ms. SCHAPIRO. There is, Senator, a difference with respect to 

block transactions, the larger transactions, which are the ones that 

would give rise to the concern about whether too much information 

was being revealed that might allow somebody to run ahead of the 

hedge, for example, on the block. 

Senator TOOMEY. Right. 

Ms. SCHAPIRO. We have not actually proposed yet standards for 

how we will define a block transaction. We have asked for comment 

on that, and then we will propose some specific standards. But we 

have said that while we would recommend disseminating the price 

of the transaction in real time, the size of the transaction would 

not be disseminated for as long as 8 to 26 hours after the transaction. 

Senator TOOMEY. OK. And, Mr. Gensler, would your goal be to 

have a harmonization with respect to the SEC’s approach? 

Mr. GENSLER. We are working very closely together, not just on 

real-time reporting, but to try to bring them together as much as 

we can. Of course, there are differences in the underlying markets. 

There are differences between futures and securities, and the interest rate market, which is a vast and large market, is different than 

the credit default swap market, which is largely over at the SEC. 

So there will still be some differences, but whether it be on the 

block role, the real-time reporting role, the swap execution role, we 

are looking to try to get as close as we can, but also respect that 

there are some gaps between the underlying futures and securities 

markets. 

Senator TOOMEY. Well, thank you very much. I see my time has 

expired. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. 

Chairman Gensler, I would like to discuss the core principles 

issue with you. First of all, I would say just generally the complaint I get from the futures industry is that the CFTC is working 

at such a furious pace. Difficult to keep up with your rulemaking. 

I think there are 60 rulemaking procedures ongoing. Difficult to 

conduct business and continue to comment on the things that are 

happening at the CFTC. But more troublesome to me is the implementation of a provision in Dodd-Frank that seems unnecessary to 

me, and that is that the CFTC has operated under a core principles 

regime, and I think most observers would say survived the disaster 

of several years ago in a very solid way, in a sound way. And yet 

as I recall, you asked the House Agriculture Committee in my days 

there that you have the authority to abandon the core principles 

and move to a more SEC-type regulatory environment for the futures industry. And I would just question you as to why you believe 

that the core principles method of regulating the futures industry, 

24 

which at least in my view or the view of observers that I read and 

hear, worked well and were moving in an entirely different direction. And I recall this conversation in the House Agriculture Committee with Chairman Peterson in which we were assured that this 

is a backstop, if it becomes necessary, the CFTC does not intend 

to go down this path of changing the nature of its regulatory environment in the futures industry. But that is certainly not the way 

it has turned out to be. 

Where would you characterize my understanding as wrong? 

Mr. GENSLER. I would never like to do that with a Senator, 

but—— 

Senator MORAN. I appreciate that attitude, but I know you would 

be thinking it if you did not say it. 

[Laughter.] 

Mr. GENSLER. No, I just want to give a little clarification. The 

CFTC, as part of the Commodity Futures Modernization Act, got 

core principles for two areas, but it was not in all the areas. It was 

for clearing and for trading platforms. We do not have today nor 

have we had it on oversight of what is called intermediaries, the 

futures commission merchants and the like. There are many rules 

there. 

You are absolutely correct, Dodd-Frank gave us a little bit greater ability on the clearing and the trading, and particularly on clearing because now there is a mandate to move what may be $200 to 

$300 trillion of derivatives into the clearinghouses, that it was 

thought and I still believe it is thought that this is a place that 

needs robust risk management, and that we cannot as Americans 

just rely solely on the good risk management standards of the 

clearinghouses themselves, but that regulators and the whole Financial Stability Oversight Council have a role and the Federal Reserve has an important role to play advising us and joining in those 

examinations. So I think in clearing very much so. 

I could say, Senator, though Congress also set a 1-year time limit 

to put out the rules, we have proposed rules—it is actually 47 as 

of this morning. We have proposed rules, but we have not finalized 

any. We are going to get the rest of the proposals out hopefully in 

the next handful of weeks. The whole mosaic will be out there. 

Though some comment files have closed, we have discretion to continue to take comments, and using that discretion we do continue 

to take comments. And we are only going to move forward on final 

rules when we can sufficiently summarize comments, get Commissioner feedback, get regulatory feedback. We are not going to make 

the July deadline. I know many people in the markets are probably 

pleased to hear that. We are only going to do this according to 

when we are ready to move over the spring, summer, and well into 

the fall on the timing issue. 

Senator MORAN. Chairman, I have two responses to your comments. One, do you have examples of where the regulatory environment that the CFTC operated failed in regard to the circumstances 

that we found our economy in that cause you to have that sense. 

And then, second, just generally, your comment about the mosaic, 

would it be your plan for the industry and for Congress to be able 

to see the whole mosaic before any of the rules are individually approved and implemented? 

25 

Mr. GENSLER. I think to your second question, yes. As the mosaic, we are hopeful to complete, as I said, in the next 3 to 5 weeks 

working with the SEC on one very important joint rule and the 

capital rules and so forth. 

Senator MORAN. So we can see the big picture before we get any 

ruling taking—— 

Mr. GENSLER. That is right, and we are also doing some joint 

meetings that we announced today with the SEC on implementation phasing that we are going to be doing in early May. We have 

an open comment file that we have put up on that phasing as well. 

I think in terms of your other question, I think that we did not 

regulate—as a Nation, we did not regulate the swaps marketplace, 

and it contributed to the crisis that we had in 2008. It was not the 

only reason, but all we need to do is think about credit default 

swaps and AIG and the interconnectedness of the financial system. 

So part of the cost—and Senator Toomey referred to the cost the 

financial industry is taking on, part of that cost is so that the taxpayers do not have to bear as great a risk to bail out financial institutions in the future. 

Senator MORAN. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you all of our witnesses on our first 

panel. 

I would ask those on our second panel to take your place at the 

witness table. While you get seated, I would like to welcome and 

introduce the witnesses on our second panel. 

Thomas Deas is vice president and treasurer of the FMC Corporation, a Philadelphia-based company focused on ag, industrial, 

and specialty markets. Mr. Deas has served in this position since 

2001 overseeing financing pension investments, insurance, risk 

management, and other company functions. 

Lee Olesky is chief executive officer of Tradeweb Markets, a provider of online trading services for derivatives. Prior to working for 

Tradeweb, Mr. Olesky was the CEO and founder of BrokerTec, an 

electronic brokerage platform, and also worked at Credit Suisse 

First Boston in a variety of positions. 

Terry Duffy is executive chairman of the CME Group, which operates several major futures and derivatives exchanges and online 

trading platforms. Mr. Duffy has served in his current position 

since 2006 and has been a member of CME’s board since 1985. 

Ian Axe is chief executive of LCH.Clearnet Group, which is an 

independent clearinghouse group serving exchanges, platforms, and 

OTC markets. Mr. Axe previously served as global head of operations for Barclay’s Capital. 

Jennifer Paquette is chief investment officer of the Public Employees’ Retirement Association of Colorado. Ms. Paquette has held 

this position since 2003. She oversees the investment process for a 

public pension fund that provides benefits to employees of the Colorado State government, Colorado municipalities, public schools, 

universities, and colleges, and other public entities. 

Before we begin the testimony, I will recognize Senator Toomey 

for some brief remarks. 

Senator TOOMEY. Thank you very much, Mr. Chairman, for giving me the opportunity in particular to welcome Mr. Thomas Deas. 

26 

Mr. Deas is the vice president and treasurer of FMC Corporation, 

which is headquartered in Philadelphia. FMC is one of the world’s 

foremost diversified chemical companies with leading positions in 

agriculture and industrial and consumer markets. Mr. Deas has 

served as vice president and treasurer of FMC since 2001. He has 

responsibilities for the worldwide treasury function, including finance treasury operations, pension investments and funding, and 

insurance and risk management. He brings over 20 years of experience in this field, and I have had the pleasure of having a number 

of discussions with Mr. Deas, especially about the end user issue 

as it applies to derivative use. 

And I just wanted to welcome you today and thank you very 

much for coming to testify. 

Mr. DEAS. Thank you, Senator. 

Chairman JOHNSON. Mr. Deas, you may proceed. 

STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND 

TREASURER, FMC CORPORATION 

Mr. DEAS. Thank you, Mr. Chairman. Good afternoon to you and 

to Ranking Member Shelby and the Members of the Committee. 

In addition to my role in FMC Corporation, I am also president 

of the National Association of Corporate Treasurers. FMC and 

NACT are together members of the Coalition for Derivatives End 

Users, representing thousands of companies across the country 

that employ derivatives to manage day-to-day business risk. I 

would like to express my gratitude to you, Mr. Chairman, and to 

Ranking Member Shelby, for your bipartisan efforts on behalf of 

derivative end users, and particularly to Chairman Johnson for 

your work last week with the other Committee Chairmen in support of end user margin exemption. We also appreciate Senator 

Johanns’ effort to extend the statutory effective date for the proposed regulations, and I thank you, Senator Toomey, and Ranking 

Member Shelby for your kind words about FMC Corporation and 

your care and interest for manufacturing companies of which we 

are a proud one. 

In fact, FMC Corporation was founded almost 130 years ago to 

provide spray equipment to farmers. Today, in addition making agricultural chemicals that farmers apply to protect their crops, our 

5,000 employees have worked hard to make FMC a leading manufacturer and marketer of a whole range of agricultural, specialty, 

and industrial chemicals. We have achieved this longevity by continually responding to our customers’ needs with the right chemistry delivered at the right price. This year marks our 80th anniversary of listing on the New York Stock Exchange. I had the valuable experience on a newer financial market, one that we have 

been discussing today. I had the opportunity to negotiate and execute some of the very first derivatives—currency swaps—going 

back to 1984. I have seen the derivatives market grow from its inception in the mid-1980s to its current size by adapting and responding to market participants’ needs. 

We support this Committee’s efforts to redress the problems with 

derivatives experienced during the financial crisis in 2008, but I 

want to assure you that FMC and other end users were not and 

are not engaging in risky speculative derivatives transactions. We 

27 

use over-the-counter derivatives to hedge risks in our business activity. We are offsetting risks, not creating new ones. 

FMC is the world’s largest producer of natural soda ash, the 

principal input in glass manufacturing, and we are one of the largest employers in the State of Wyoming. We can mine and refine 

soda ash products in southwestern Wyoming, ship them to South 

Asia, and deliver them at a lower cost and with higher quality than 

competing Chinese producers. We have achieved this export success 

in part because of the derivatives we enter into to hedge natural 

gas prices. These derivatives are done with several banks, all of 

which are also supporting FMC through their provision of almost 

$1 billion of committed credit. Our banks do not require FMC to 

post cash margin, but they take this risk into account as they price 

the transaction with us. This structure gives us certainty so that 

we never have to post cash margin while the derivative is outstanding. 

But the current system, where end users and their counterparties decide collaboratively whether and how margins should apply 

is changing. Today the FDIC proposed a rule that could in the future subject end users to margin requirements. While we are still 

reviewing the details, it appears regulators, not market participants, will now determine how margin will be set. Regulators will 

have the final say over how much cash an end user will have to 

divert to a margin account where it will sit unavailable for productive uses. 

In our world of finite limits and financial constraints, posting 

cash margin would be a direct dollar-for-dollar subtraction from 

funds that we would otherwise use to expand our plants, build inventory to support higher sales, conduct research and development 

activities, and ultimately sustain and grow jobs. 

In fact, a coalition survey of derivative end users extrapolated 

the effects of margin requirements across the S&P 500, of which 

FMC is also a member, to predict the consequent loss of 100,000 

to 120,000 jobs, depending on these proposed thresholds. The effect 

on the many thousands of end users beyond the S&P 500 would be 

proportionately greater. 

Although I have focused here on margin, end users are also concerned about the more than 100 new rules that will determine 

whether we can continue to manage business risk through derivatives. We have heard also about capital requirements that our 

counterparties would be required to hold, and we have heard 

through the publication of rules today that uncleared over-thecounter derivatives, the kind that we employ to hedge our business 

risk, are singled out as high-risk transactions, which will attract 

additional capital we are concerned could be almost punitive and 

could end that ability of end users like FMC to hedge their business risk with them. 

Thank you very much for your attention. I would be happy to answer your questions. 

Chairman JOHNSON. Thank you, Mr. Deas. 

Mr. Olesky, please proceed. 

28 

STATEMENT OF LEE OLESKY, CHIEF EXECUTIVE OFFICER, 

TRADEWEB MARKETS LLC 

Mr. OLESKY. Mr. Chairman and Ranking Member Shelby and 

Members of the Committee, good afternoon and thank you very 

much for inviting me to participate in this hearing. 

My name is Lee Olesky. I am the chief executive officer and a 

founder of Tradeweb, and I appreciate the opportunity to testify 

today about the regulatory framework for implementation of Title 

VII of Dodd-Frank. 

For the last 15 years, Tradeweb has been at the forefront of 

building regulated electronic markets for the trading of OTC fixed 

income securities and derivatives. Tradeweb’s core competency centers around leveraging technology to create more transparent and 

efficient electronic markets that provide a valuable service to the 

institutional buy-side and banks that are our clients. 

Before electronic markets like Tradeweb were established in 

fixed income, institutional clients picked up the phone and spoke 

to different dealers to obtain prices and trade U.S. Government 

bonds. This phone-based trading model is how the OTC derivatives 

market largely functions today. 

In the late 1990s, due to technological advances and the acceptance of the Internet, we saw an opportunity to provide buy-side clients with greater pretrade price transparency and execution efficiency in the U.S. Government bond market. In 1997, we established Tradeweb and created the first multibank electronic Request 

for Quote marketplace for U.S. Treasury securities. Our RFQ model 

gave clients the ability to run an electronic auction among banks 

to get the best price and automate a manual trading process. 

Tradeweb’s RFQ marketplace for U.S. Government bonds helped 

transform a phone-based and largely opaque Government bond 

market into a more transparent and competitive and efficient market, with the added benefit of reducing operational risk. As a result 

of this evolution, institutional clients such as asset managers and 

pension funds now have access to regulated trading systems that 

provide greater price transparency and more efficient execution. 

Today on Tradeweb’s global platform for Government bonds, we 

trade on average approximately $40 billion each day with 1,000 institutional clients located in every financial center around the 

world. Among all of our platforms and products, the daily volume 

on Tradeweb is in excess of $300 billion per day. 

Tradeweb supports the goals of Dodd-Frank, which we believe to 

be enhanced transparency and reduction of systemic risk. However, 

it is vitally important to understand and give due consideration to 

the needs of market participants in promulgating rules for implementing Title VII. The aim must be to achieve the goals of the act 

without materially disrupting the market and the liquidity it provides to end users. 

Market participants need confidence to participate in these markets, and if careful consideration is not given to what the rules say, 

we fear that this confidence could be materially shaken. 

The key for achieving the policy objectives for SEFs is to provide 

for flexibility in the way market participants can interact and trade 

swaps. Creating arbitrary or artificially prescriptive limitations on 

the manner in which market participants interact and trade could 

29 

result in liquidity drying up, increased costs to trade swaps, and 

market participants seeking other, less efficient ways to manage 

their risk. 

Finally, there has been a great deal of discussion recently about 

how best to implement the proposed rules. There is no doubt that 

an overly hasty timetable for implementation could directly impact 

the health of the derivatives market, given the complexity of the 

system. Implementing these regulations in one big bang is unrealistic, so phasing in the rules is a very sensible approach. 

However, market participants need clear guidance on when the 

rules will be effective. This is particularly true for firms such as 

Tradeweb that commit capital to build technology to support these 

markets. We believe it is very important for the SEC and CFTC to 

set clear time frames for when rules will be effective as soon as 

practical, and we commend Chairman Gensler for taking the initiative to discuss this in an open forum in early May and take public 

comment on the time frames. 

Furthermore, any difference in rules between the SEC and CFTC 

should be largely eliminated. If there are material differences between the two regulators’ rules, the costs for compliance and building technology will go up considerably. By ensuring that the SEC 

and the CFTC rules retain sufficient flexibility for market participants, clients can trade in a manner that suits their trading strategies and risk profiles. Some institutions may want to transact on 

live prices. Others may want to use a disclosed RFQ model. And 

still others may want to trade anonymously in an order book. Regulators should not mandate that clients or platforms pick one 

model or offer all models. Flexibility that allows for innovation 

among technology providers is critical to attract the capital necessary to fund the investments in these technologies. 

In conclusion, we support the goals to reform the derivatives 

market, and indeed we provide the very solutions the regulation 

seeks to achieve. But we are concerned that the Commissions may 

be overly prescriptive and, in doing so, create unintended consequences for market participants and the marketplace as a whole. 

We hope our experience in the electronic markets can be helpful 

and instructive as Congress and the regulators take on the great 

challenge of implementing Title VII of Dodd-Frank. 

Thank you. 

Chairman JOHNSON. Thank you, Mr. Olesky. 

Mr. Duffy, please proceed. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CME GROUP INC. 

Mr. DUFFY. Chairman Johnson, Ranking Member Shelby, Members of the Committee, thank you for the opportunity to testify on 

the implementation of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. I am Terry Duffy, Executive Chairman 

of CME Group, which includes our clearinghouse and four exchanges, CME, CBOT, NYMEX, and COMEX. 

In 2000, Congress adopted the Commodity Futures Modernization Act. This leveled the playing field with our foreign competitors 

and permitted us to recapture our position as the world’s most innovative and successful regulated exchange and clearinghouse. As 

30 

a result, we remain an engine of economic growth in Chicago, New 

York, and the Nation. 

In 2008, the financial crisis focused attention on over-leveraged, 

under-regulated banks and financial firms. In contrast, regulated 

futures markets and futures clearinghouses operated flawlessly before, during, and after the crisis. Congress responded to the financial crisis by reining in the OTC market, to reduce systemic risk 

through central clearing and exchange trading of derivatives, to increase data transparency and price discovery, and to prevent fraud 

and market manipulation. We support these goals. 

But we are concerned that the CFTC has launched an initiative 

to undo modern regulation of futures exchanges and clearinghouses. We are not alone. Most careful observers and some Commissioners have concluded that many of the proposed regulations 

roll back principle-based regulation and unnecessarily expand the 

Commission’s mandate. The CFTC is attempting to change its role. 

It is an oversight agency whose purpose has been to assure compliance with sound principles. Now, it appears as if it is trying to become a frontline decision maker, empowered to impose its business 

judgments on every operational aspect of derivatives trading and 

clearing. 

This role reversal is inconsistent with Dodd-Frank. It will require doubling of the Commission’s staff and budget. It will impose 

astronomical costs on the industry and the end users of derivatives. 

My written testimony includes numerous examples of rulemaking 

that will have costly adverse consequences on customers, intermediaries, exchanges, and the economy. Obviously, the increased 

cost will have an indirect impact on business and employment in 

the United States. Of equal concern, the creation of international 

regulatory disparities will drive business overseas. We recognize 

that the CFTC has been working to induce international regulators 

to be equally prescriptive. However, that effort seems to be failing, 

as other jurisdictions capture U.S. business that the CFTC is driving offshore. 

The threat of prescriptive position limits and restrictions on 

hedging in the United States are already driving business overseas 

and into unregulated markets. The threat that margin control will 

be used to influence prices of commodities will even be more disastrous. Broad, undefined prohibitions on so-called disruptive trading 

practices and strategies will not only drive liquidity providers from 

the U.S. markets, but also impair hedging and price discovery. 

We are strong proponents of an adequate budget for our regulator and support sufficient funding to modernize this technology. 

However, we strongly object to the expansion of Commission staff 

to enforce regulations that are uncalled for by Dodd-Frank or that 

duplicate the duties now being performed by SROs, which are selfregulatory organizations. This comes at no cost to the Government. 

Chairman Gensler cited earlier about the size of the market. The 

Commission justifies its budget demands by pointing to the growth 

of the notional value of the contracts it oversees on regulated futures markets and the notional value of the swaps market that it 

will be responsible for under Dodd-Frank. But there is no valid relationship between the notional value and the regulatory burden. 

The swaps market that the CFTC will regulate involves only 4,000 

31 

to 5,000 transactions per day and the parties are all sophisticated 

investors. The futures market has grown to millions of transactions 

a day, but has become a highly sophisticated electronic marketplace with a perfect audit trail and high tech enforcement rules. 

The CFTC’s budget should reflect the positive impact of technology and the necessary regulatory obligations imposed by DoddFrank. Congress should encourage a full and fair cost and benefit 

analysis for every proposal. 

It also should extend Dodd-Frank’s effective date to permit a realistic opportunity to comment. Otherwise, we believe that the 

well-regulated futures industry will be burdened by overly prescriptive regulations. This is inconsistent with the sound practices. Furthermore, it will make it more difficult to reach Dodd-Frank’s goal 

of increasing transparency and limiting risk. 

I thank you for your time and look forward to your questions. 

Chairman JOHNSON. Thank you, Mr. Duffy. 

Mr. Axe, please proceed. 

STATEMENT OF IAN AXE, CHIEF EXECUTIVE, LCH.CLEARNET 

GROUP LIMITED 

Mr. AXE. Thank you, Mr. Chairman. Chairman Johnson, Ranking Member Shelby, Members of the Committee, my name is Ian 

Axe and I am Chief Executive of LCH.Clearnet Group Limited. On 

behalf of the Group, I would like to thank the Committee for asking me here today. 

If I may, let me briefly introduce our company. We operate two 

of Europe’s leading clearinghouses and a fast-expanding office in 

New York. We are 83 percent owned by members and 17 percent 

owned by exchanges, such as NYSE Euronext. We clear interest 

rate, credit default, and energy swaps, bonds and repos, equities, 

metals, and listed derivatives. We have been clearing commodities 

for 120 years and pioneered the development of swap clearing in 

1999 with our SwapClear service. This operates under a DCO license and has been subject to CFTC regulation since 2001. 

SwapClear clears over 50 percent of the global interest rate swap 

market, with over $276 trillion in notional outstanding, and last 

year it cleared over 120,000 swaps trades, for U.S. counterparties 

with a notional value of $64 trillion. We recently extended our 

SwapClear service to include a client clearing service for U.S. end 

customers. Twelve members have since joined up to provide this 

service, and U.S. end users have cleared swaps through them. 

We have U.S. members on our sell and buy side committees 

which meet monthly to discuss the development of our swap service. Our buy side working group includes major U.S. asset managers and hedge fund investors. 

Our group played a critical role following the Lehman Brothers 

collapse, successfully managing the world’s largest ever clearing 

member default. On its default, the firm had a $12 trillion portfolio 

of risk at LCH.Clearnet, including a $9 trillion swap book. This 

was liquidated without loss or impact on surviving members. On 

completion, we returned $850 million of margin to U.S. bankruptcy 

administrators. 

We are strong supporters of the Dodd-Frank Act goals and believe that the legislation will improve stability in the marketplace 

32 

and greatly reduce systemic risk. In particular, we welcome strong 

risk management and heightened financial service standards for 

clearinghouses, a greater level of supervision for clearinghouses, 

and mandatory clearing obligations. 

We have followed the CFTC and SEC rulemaking process closely 

and applaud the thoughtfulness of the agencies in this task. We 

have participated in roundtables, attended open meetings, responded to the proposed rulemakings, and met with the Commissioners. 

It is key that the legislation and rules emerging from the U.S. 

and Europe are as closely aligned as possible. This will reduce regulatory arbitrage, ensure consistent risk standards internationally, 

and make certain that the G-20 commitments are met. A lack of 

harmonization may impact the economy, jobs, and the recovery. 

I will set out three of the greatest areas of concern as regards 

the difference between the U.S. and Europe in our international 

oversight. 

First, ownership and governance. We believe that Congress correctly rejected aggregate ownership and voting caps for clearinghouses during passage, and are concerned to see the agencies 

might reintroduce such caps. Aggregate restrictions on clearinghouse ownership or governance may limit innovation, reduce competition, and increase costs. 

Second, risk management and access rules for clearinghouses. 

The CFTC risk management provisions at present are aligned to 

the futures clearing business. Swaps need to be reviewed as having 

different risk management techniques and processes. We expect futures and swaps to converge over time, but it is inappropriate now 

to impose futures clearing criteria on swaps. We also believe access 

criteria for swap clearing members must be proportionate to the 

risk introduced and contingent on default management and risk 

underwriting participation, such that the clearinghouse, its nondefaulting members, and their clients are fully protected. 

And third, customer protection. Security is key. Customers clearing swaps, many of them pension funds and other long-term saving 

institutions, must be protected from fellow customer risk. The introduction of customer safeguards that deliver such security would 

ensure that U.S. clients have the same protection as clients in Europe. 

In conclusion, we believe that the agencies’ final rules should afford individual customers the option of legal segregation. Further, 

any final rules on clearinghouse ownership or governance should be 

applied at an individual level. Finally, access requirements should 

do nothing to compromise the integrity of clearinghouses. We look 

forward to extending our safeguards deeper into the U.S. marketplace and to further growing our U.S. staff and operations in support of the Act. 

Thank you for inviting me here today. I am happy to take any 

questions. 

Chairman JOHNSON. Thank you, Mr. Axe. 

Ms. Paquette, please proceed. 

33 

STATEMENT OF JENNIFER PAQUETTE, CHIEF INVESTMENT 

OFFICER, COLORADO PUBLIC EMPLOYEES’ RETIREMENT ASSOCIATION 

Ms. PAQUETTE. Thank you, Chairman Johnson and Ranking 

Member Shelby, for holding this important hearing. I am Jennifer 

Paquette, Chief Investment Officer of Colorado PERA. 

I would like to share with you a school teacher’s interest in derivatives and share some concerns on proposed rulemaking. A Colorado teacher told me years ago about a problem she had in her 

classroom with a first grade boy. She required all the students to 

read aloud in front of the class and this little boy was very shy and 

could not do it. She allowed the student to sit in the chair with his 

back to the class and whisper to the blackboard instead, and over 

the course of the year, she took the chair and moved it inch by 

inch, so that at the end of the year, it faced the class. The chair 

was empty at the end of the year and instead, the boy was standing in front of the class reading aloud with great pride. 

And when she told me the story, it struck me how much I had 

in common with her. The care that she took with every student in 

her class is the same care that we give to every single investment 

that we oversee for her retirement plan. She would not know how 

to invest a $39 billion institutional portfolio, but I and my investment colleagues in Denver, we know how to do that on her behalf. 

She would not know how to execute a total return swap to mitigate 

risk, but we know how to do that. We know how to employ futures 

to mitigate risk when we are doing portfolio transitions. 

The investment vehicles that we use matter to all of our members. It is why I have come here for the honor of just a few minutes 

before you. 

Derivatives are tools we use for mitigating risk. While derivatives are only a modest portion of our total market value, they are 

very useful. You will find in my written testimony we have concerns about how public plans may be affected by CFTC proposed 

rules. CFTC’s proposed rules include public pension plans as a special entity. In order for us to enter into a swap, the swap dealer 

would need to have a reasonable basis to believe we have a representative that meets certain requirements. We are concerned 

that there is a conflict of interest for one party in a transaction to 

also be responsible for determining who is qualified to represent 

the other side of the transaction. We are also uncomfortable with 

how this could potentially impair negotiations with a dealer. We 

fear higher costs for executing transactions and are concerned that 

strong counterparties may not want to do business with us for reasons including potential liability. 

Colorado PERA and a number of public pension funds whose assets total over $700 billion have suggested a voluntary alternative 

approach be created. I have included a letter in my written testimony signed by these pension funds which describes the approach. 

It would allow us to voluntarily undergo a certification process to 

meet the independent representative requirement. This would include passing a proficiency exam. I think it supports the intent of 

protecting investors while avoiding some potential conflicts and unintended consequences. 

34 

I have the utmost respect for the time and care you and others 

are expending on these matters. We would like to continue to access the swaps markets for the same portfolio reasons we have 

used them effectively for years. 

On behalf of almost half-a-million current and former employees, 

public employees of Colorado PERA, I ask that you and all those 

involved in this process consider our concerns. I owe it to all of our 

Colorado PERA members and to that particular teacher I told you 

about to advocate on this issue. That little boy who was afraid to 

speak, who is not so little anymore, I see every day, and he is my 

reminder to speak on issues that matter to the investors that are 

our members. 

Thank you for your time. 

Chairman JOHNSON. Thank you, Ms. Paquette. I will start off 

with a few questions. Thank you for your testimony. 

I will remind my colleagues that we will keep the record open for 

statements, questions, and any other material you would like to 

submit. As we begin questioning the witnesses, I will put 5 minutes on the clock for each Member’s questions. 

Mr. Olesky, how would the proposed CFTC rule on swap execution facilities requiring five requests for quotes impact market liquidity and potential earning? What would be the impact on your 

company if the SEC and CFTC proposed rules for SEFs are not reconciled? 

Mr. OLESKY. Thank you. Currently, Tradeweb trades interest 

rate swaps in the U.S. and Europe and we have processed and had 

about 75,000 interest rate swap transactions over the last several 

years, and one of our concerns is that as the rules have been proposed by the CFTC in this RFQ process, which is an auction that 

customers, such as the clients that are at this table, would run in 

order to get the best prices, that clients would be forced to send out 

an inquiry to at least five different dealers. 

That is not the way the market operates today. In fact, that is 

not the way the U.S. Government bond market operates today. In 

our U.S. Government bond franchise, the average inquiry goes out 

to just three banks and there are some very good reasons for this. 

Clients need to assess how they are going to get the best possible 

price in the marketplace, and at times, that means going to just 

one or two dealers, not five. So that is an example of a rule that 

has been proposed that is not mindful of the way the market operates today and would require a change. I am not sure what that 

change entirely would be, but we, as a company that provides services to our clients, are advocates for our clients, which are the large 

buy-side firms, public pension funds, institutions that want to be 

able to access liquidity in a way that makes the most sense to 

them. 

Chairman JOHNSON. Mr. Duffy and Mr. Axe, how would applying 

the Title VII clearing requirements to transactions with foreign 

counterparties impact the competitiveness of U.S. markets? 

Mr. DUFFY. I would be happy to start things. One of the ways, 

Mr. Chairman, that that would impact us is if the CME had a client that was in Europe and they wanted to do a counterparty 

transaction with a party in the U.S., we would have to make sure 

that the CME clearinghouse was registered in the U.K. or in any 

35 

other jurisdiction that that client—the trade was coming from. This 

is a very long, burdensome process throughout the U.K. In the 

U.S., it takes about 6 months to get approved to become a clearing 

member. So this is absolutely a very difficult thing for us to do 

going forward. So that is one of the big competitive issues that we 

have. 

I will let Ian make a comment, then—— 

Mr. AXE. Thank you, Mr. Chairman. We currently clear trades 

both in the U.S. and in Europe, and to refer to my oral testimony, 

I think the fear we have in terms of regulatory arbitrage is if we 

don’t ensure that we do have consistent standards. We appreciate 

the ability to achieve licensed status is one thing, but actually having different systems and different regulatory systems across the 

different geographies would create inconsistencies and would not 

be advisable in the ideology of harmonization. 

Chairman JOHNSON. Mr. Deas, from your perspective, how would 

the proposed definition of swap dealers impact end users? 

Mr. DEAS. Chairman Johnson, the definition for swap dealers, if 

it is not done properly, could pick up larger companies who are still 

engaged in hedging underlying business activities, and there is a 

fundamental difference between a financial institution acting as a 

swap dealer and a large U.S.-based company that is doing that. 

End users are always hedging underlying business activity. The 

derivative when valued together with that underlying business exposure creates a neutral position. Swap dealers are maintaining an 

open position. They are market makers. We believe it is appropriate for them to centrally clear and margin their trades, but because end users are always balanced, if you impose margin on 

them because you have defined them through this definition to be 

a swap dealer, then you take a balanced pair of transactions that 

create a neutral position and you actually impose a new and unwelcome risk, at least for treasurers, that risk of having to fund periodic margin payments with all the attendant uncertainty of that. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Mr. Deas, in your testimony today, you warned that regulators 

could impose costs on companies that would inhibit their ability to 

produce goods and hire workers in the United States. Chairman 

Gensler has begrudgingly, I would say, agreed to make some accommodations for companies that use derivatives to hedge their 

business risk, like yourself. But he also argues that doing so, and 

I will quote, ‘‘only benefits Wall Street and does not benefit Main 

Street or the corporation that provides service to America.’’ Do you 

agree with Chairman Gensler’s assessment here? 

Mr. DEAS. No, sir, I do not. As I have indicated in my testimony, 

we are manufacturing the goods that are consumed in the U.S. and 

we have been able to export them successfully overseas, and we do 

that—— 

Senator SHELBY. It helps you compete, does it not? 

Mr. DEAS. Yes, sir, it does, and it helps us offset risks that we 

cannot otherwise control. 

Senator SHELBY. And the consequences—I think you alluded to 

it earlier. What would be the consequences of imposing unnecessary regulatory burdens on companies like yourselves ability to 

36 

hedge your unique business risks? A lot of these risks are tailored, 

are they not? 

Mr. DEAS. Yes, sir. One of the problems is, for instance, I talked 

about our ability to export. If, as was questioned of the Assistant 

Secretary of the Treasury, if the Secretary of the Treasury declares 

that foreign exchange transactions are swept up in this new mechanism, then it could force exporting companies like FMC to incur 

higher costs, and one unfortunate way to lower those costs would 

be for U.S.-based exporters to move their manufacturing facilities 

offshore to the countries where their customers are to achieve in 

that way a better match between their costs and the currencies in 

which their customers are paying them. I would hate to see that 

happen to U.S.-based manufacturers, Senator. 

Senator SHELBY. Would requiring companies to use standardized 

cleared products or forcing them to post margin, as we have talked 

about here, increase risk in the financial system or decrease it? 

Would it not increase risk for you because it costs more? 

Mr. DEAS. Senator, it would increase risk in two ways. First of 

all, as I have described, the over-the-counter derivatives market became as—grew to the size it is today because of its ability to respond and to provide customization. The fact that these hedges are 

effective—— 

Senator SHELBY. You are talking about tailoring your risk, are 

you not? 

Mr. DEAS. Yes, sir, and the fact that we are able to achieve that 

customization means that we have exactly offset the business risk. 

Failure to make it match up exactly if we were forced to use a 

standardized derivative would mean there would be residual risk 

we would retain that could come home to manifest itself in higher 

costs for us. 

Senator SHELBY. Mr. Duffy, Governor Tarullo—you were here— 

explained that central clearinghouses concentrate risk and thus 

have the potential to transmit shocks throughout the financial 

markets. What would happen, for example, if CME—we hope it 

never would—or another clearinghouse failed, and what type of 

contingency plans has the CME prepared to make sure that if it 

were to fail, that one of more of its members does not threaten the 

entire financial system? 

Mr. DUFFY. Senator, that is a great question, and one of the 

things we can go off of to start with is our record. In the 156 years, 

the CME has never had a customer—— 

Senator SHELBY. I know. 

Mr. DUFFY. ——lose anything due to a clearing member default. 

So that is the first thing. 

The second thing is the way we do clearing at the CME Group. 

We settle twice a day mark-to-market. So if the customer does not 

have the funds up and the market runs away from them, we either 

take them out of the market if the money is not coming forward. 

So that is one of the things. We have the ability to do that on an 

hourly basis. We hold over $100 billion of our customers’ capital to 

make sure that these transactions are protected. And so we have 

many, many safeguards. Risk management is something that we 

spend a lot of our time on at the CME Group and I think it is what 

has made us what we are today. 

37 

Senator SHELBY. That is good. I want to pronounce your name 

right. Is it ‘‘Paquette’’? How do you say it? 

Ms. PAQUETTE. ‘‘Paquette.’’ 

Senator SHELBY. Paquette. Ms. Paquette, the letter that you and 

a number of other pension funds submitted to the Commodities Futures Trading Commission noted that however well-intentioned the 

goal of, quote, ‘‘protecting vulnerable or gullible parties in the swap 

market might be,’’ the CFTC’s proposed business conduct standards 

may be so onerous that pension plans are, quote, ‘‘left to deal with 

less desirable counterparties, if they could find any at all.’’ If the 

CFTC’s proposal were adopted in its current form, would it make 

it harder to manage the nearly $40 billion of retirement money for 

which you are responsible to manage? 

Ms. PAQUETTE. Thank you, Ranking Member Shelby. If the proposed rules were put in—— 

Senator SHELBY. Were adopted in its current form—— 

Ms. PAQUETTE. ——adopted in their current form, we think it 

would be more challenging for us to manage our $40 billion—— 

Senator SHELBY. And by ‘‘challenging,’’ it would be harder. It 

would be more difficult, would it not? 

Ms. PAQUETTE. It would be more difficult in certain areas of our 

portfolio, yes. 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

Mr. Duffy, earlier, I asked Chairman Gensler questions about 

why he felt it was necessary to impose prescriptive rules that override core principle regime that we have had at CFTC previously, 

or currently, and the Chairman said it was because the instruments like swaps, and that is why DCOs needed prescriptive rules. 

However, to my knowledge, there were no swap DCOs. The only 

clearing organizations pre- Dodd-Frank were regulated exchanges. 

Clearing organizations seem to have performed well in 2008. And 

furthermore, it seemed that the prescriptive regulations have gone 

beyond DCOs and are actually imparting the exchange—I mean, 

affecting—excuse me, impacting exchanges, as well. 

Can you characterize more specifically how the CFTC is dismantling the core principle regime and how it would negatively—let me 

be more unbiased—how it would impact CME’s exchanges and 

clearing organizations, and also, did any of the DCOs fail in 2008 

that would warrant Chairman Gensler’s concerns that have led 

him to override core principles for DCOs? 

Mr. DUFFY. No, sir. None of them did fail. Prior to 2008 and 

2007, CME cleared $1.2 quadrillion of notional value of trade without one hiccup. So that is just for starters. And the way Chairman 

Gensler is trying to roll back some of the Modernization Act of 

2000, for example, would be on product. If we want to launch a 

new product, we have the ability to self-certify that product. We innovate it. We should have the ability to self-certify it so we can be 

first to market. Some of these new rules would call for the CFTC 

to have days, weeks, months to put this out for public comment 

again and give everybody an opportunity to look at what CME is 

trying to innovate. Well, there would be no incentive to innovate 

new products. So that is one example. 

38 

Another example of that would be products we now currently 

may trade in a block trade or an OTC fashion because there are 

very few participants in the transaction, so we list it on a facility 

just for a handful of participants and we still essentially clear it. 

He is saying that within—if you do not have 85 percent of that 

trade done, the volume done, you have to delist the product or put 

it on a central limit order book. So that would kill the product. 

Euro-dollar contract is the largest contract in the world today, 

and the short-term interest rates, and long-term interest rates. 

When we listed that, if we went by the prescriptive rules back then 

that they have in place today, we would not have a Euro-dollar 

contract for folks to manage their interest rate risk like they do 

today to protect their pensions, mortgages, and other things. So 

these are just a couple examples why I think the Chairman is 

wrong on this. 

Senator MORAN. The CME is a significant financial institution. 

You also may have heard my raising the concern that I have heard 

about the difficulties that the futures industry is having in keeping 

up with the ongoing proposed regulations, running their business 

and responding. My guess is that it may be easier for the CME to 

meet that challenge than it is the smaller exchanges. Am I missing 

something there? I do not want you to—I do not expect you to say 

it is easy for you, but I would worry also about, in my case, Kansas 

City, for example, the ability just to keep up with the volume of 

activity at the CFTC right now, to actually make intelligent decisions about responses to proposed rules. 

Mr. DUFFY. We have a very large outside law firm. We have a 

very large inside law firm. We cannot keep up with the comment 

periods that are coming forward with all the new rules and do it 

in a very thoughtful way. I have talked to the CEO of the Kansas 

City Board of Trade, Jeff Borchardt. I know they are having similar issues and they are a much smaller institution. We do do business with them, so obviously we have an interest in what their 

thoughts are on this, also. It is almost impossible to keep up. So 

when the CFTC is proposing these rules, trying to do them in a 

very short period of time, and for us to digest and see what the 

consequences are with major outside law firms and a large inside 

law firm, as a very large institution and we cannot keep up with 

it, I am concerned how others can. 

Senator MORAN. Your response to my question about innovation, 

new product, would that then create a disadvantage to being an 

American, a United States company? Will other countries’ exchanges be better capable of innovating than the United States in 

bringing new products to market? 

Mr. DUFFY. Absolutely. If they can self-certify product throughout the world and we do not get a first look at it like they would 

get a first look at our product, you would put the United States of 

America innovation in financial services right down the drain. 

Senator MORAN. Mr. Duffy, thank you very much. 

Chairman Johnson, thank you. 

Chairman JOHNSON. Thank you. 

As the rulemaking process moves forward, this Committee will 

continue to provide robust oversight of the reforms to the OTC derivatives market. Striking the right balance for how best to reguVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
39 

late derivatives should not be a partisan issue and I urge Senators 

on both sides of the aisle to continue working with our regulators 

to build a stronger foundation for our financial markets. 

We did not reach a quorum today to vote on pending nominations 

as was scheduled. We are going to look for a time within the next 

2 days to hold this vote off the Senate floor after a roll call vote. 

My staff will send a notice when we find an appropriate time. 

Thank you again to all my colleagues and our panelists for being 

here today. 

This hearing is adjourned. 

[Whereupon, at 4:58 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

40 

1See, Bank of International Settlements, Positions in Global Over-the-Counter (OTC) Derivatives Markets at End-June 2010, Monetary and Economic Department (Nov. 2010), http:// 

www.bis.org/publ/otclhy1011.pdf. 

PREPARED STATEMENT OF MARY L. SCHAPIRO 

CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

APRIL 12, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee: 

Thank you for inviting me to testify today on behalf of the Securities and Exchange Commission regarding its implementation of Titles VII and VIII of the DoddFrank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’ or 

‘‘Act’’), which primarily relate to the regulation of over-the-counter (OTC) derivatives 

and the supervision of systemically important payment, clearing, and settlement 

systems. These titles require the SEC, among other regulators, to conduct a substantial number of rulemakings and studies. Although this task is challenging, particularly when viewed in the context of the SEC’s other Dodd-Frank Act rulemaking 

responsibilities, we are committed to fulfilling the objectives of the Act in a responsible and diligent manner, while seeking the broad public input and consultation 

needed to get these important rules right. My testimony today will briefly describe 

our progress and plans for implementing Titles VII and VIII of the Dodd-Frank Act, 

with a particular focus on the regulation of the OTC derivatives marketplace. 

Background 

OTC Derivative Marketplace 

As has been frequently noted, the growth of the OTC derivatives marketplace has 

been dramatic over the past three decades. From its beginnings in the early 1980s, 

when the first swap agreements were negotiated, the notional value of these markets has grown to almost $600 trillion globally. 1 However, OTC derivatives were 

largely excluded from the financial regulatory framework by the Commodity Futures 

Modernization Act of 2000. As a securities and capital markets regulator, the SEC 

has been particularly concerned about OTC derivatives products that are related to, 

or based on, securities or securities issuers, and as such are connected with the markets the SEC is charged with overseeing. 

Dodd-Frank Act 

The Dodd-Frank Act mandates oversight of the OTC derivatives marketplace. 

Title VII of the Act requires that the SEC and CFTC write rules that address, 

among other things, mandatory clearing, the operation of security-based swap and 

swap execution facilities and data repositories, capital and margin requirements and 

business conduct standards for dealers and major participants, and regulatory access to and public transparency for information regarding security-based swap and 

swap transactions. This series of rulemakings should improve transparency and facilitate the centralized clearing of security-based swaps, helping, among other 

things, to reduce counterparty risk. It should also enhance investor protection by increasing disclosure regarding security-based swap transactions and helping to mitigate conflicts of interest involving security-based swaps. In addition, these 

rulemakings should establish a regulatory framework that allows OTC derivatives 

markets to continue to develop in a more transparent, efficient, accessible, and competitive manner. 

Title VIII of the Act provides for increased oversight of financial market utilities 

designated as systemically important and financial institutions that engage in payment, clearing, and settlement activities designated as systemically important by 

the Financial Stability Oversight Council. The purpose of Title VIII is to mitigate 

systemic risk in the financial system and promote financial stability. 

Implementation Generally 

The implementation of these titles is a substantial undertaking and raises a number of challenges. Accordingly, we have been engaging in an open and transparent 

implementation process, seeking input on the various rulemakings from interested 

parties even before issuing formal rule proposals. We will continue to seek input on 

each proposal with the goal of producing effective and workable regulation of derivatives activities and oversight of financial market utilities designated as systemically 

important and financial institutions that engage in payment, clearing, and settlement activities designated as systemically important. 

41 

Public Consultation 

We have enhanced our public consultative process by expanding the opportunity 

for public comment beyond what is required by law. For instance, we have made 

available to the public a series of e-mail boxes to which interested parties can send 

preliminary comments before rules are proposed and the official comment periods 

begin. These e-mail boxes are on the SEC Web site, organized by topic. We also specifically solicited comment, along with the CFTC, on the definitions contained in 

Title VII of the Act. 

In addition, our staff has sought the views of affected stakeholders. This approach 

has resulted in meetings with a broad cross-section of interested parties. To further 

this public outreach effort, the SEC staff has held joint public roundtables and hearings with the CFTC staff on select key topics. Through these processes, we have received a wide variety of views and information that is useful to us in proposing and, 

ultimately, adopting rules that are appropriate for these markets. 

Coordination With the CFTC and Other Regulators 

In implementing Title VII, our staff is meeting regularly, both formally and informally, with the staffs of the CFTC, Federal Reserve Board, and other financial regulators. In particular, SEC staff has consulted and coordinated extensively with 

CFTC staff in the development of the proposed rules. Although the timing and sequencing of the CFTC’s and SEC’s proposed rules may vary, they are the subject 

of extensive interagency discussions. The SEC’s rules will apply to security-based 

swaps and the CFTC’s rules will apply to swaps, but our objective is to establish 

consistent and comparable requirements, to the extent possible, for swaps and security-based swaps. Due in part to differences in products, participants, and markets, 

some of our rule proposals contain different approaches to various issues. Nonetheless, as we move toward adoption, the objective of consistent and comparable requirements will continue to guide our efforts. 

In addition, as required by the Act, we are working with the CFTC to adopt joint 

rules further defining key terms relating to the products covered by Title VII and 

certain categories of market intermediaries and participants. Joint rulemaking regarding key definitions will promote regulatory consistency and comparability, and 

thus help to prevent regulatory gaps that could foster regulatory arbitrage and overlaps that could confuse, or impose unnecessary added costs upon, market participants. 

Finally, we recognize that other jurisdictions are also developing regulatory 

frameworks that will address many of the areas covered by Title VII. The manner 

and extent to which we and foreign regulators regulate derivatives will affect both 

U.S. and foreign entities and markets. Consequently, as we progress with the implementation of Title VII, we will continue to consult with regulatory counterparts 

abroad in an effort to promote robust and consistent standards and avoid conflicting 

requirements, where possible. The SEC and CFTC are, in fact, directed by the legislation to consult and coordinate with foreign regulators on the establishment of consistent international standards governing swaps, security-based swaps, swap entities, and security-based swap entities. We believe that bilateral discussions with foreign regulators, as well as our engagement in the IOSCO Task Force on OTC Derivatives Regulation, which the SEC cochairs, and our participation in other international forums will help us achieve this goal. 

In short, we remain committed to working closely, cooperatively, and regularly 

with our fellow regulators to facilitate our implementation of the regulatory structure established by the Dodd-Frank Act. 

Rulemaking 

Actions Already Taken 

The SEC has taken significant steps in implementing the rulemaking required by 

Titles VII and VIII of the Act. To date, the SEC has proposed a number of 

rulemakings required by these titles. 

In October 2010, we proposed rules to mitigate conflicts of interest involving security-based swaps. These proposed rules seek to address conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and exchanges that trade security-based swaps. 

In November 2010, we proposed antifraud and antimanipulation rules for security-based swaps that would subject market conduct in connection with the offer, 

purchase, or sale of any security-based swap to the same general antifraud provisions that apply to all securities and reach misconduct in connection with ongoing 

payments and deliveries under a security-based swap. We also proposed rules regarding trade reporting, data elements, and real-time public dissemination of trade 

information for security-based swaps. Those rules lay out who must report securityVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
42 

based swap transactions, what information must be reported, and where and when 

it must be reported. In addition, we have proposed rules regarding the obligations 

of security-based swap data repositories, which would require security-based swap 

data repositories to register with the SEC and specify other requirements with 

which security-based swap data repositories must comply. 

In December 2010, we proposed rules relating to mandatory clearing of securitybased swaps. These rules would set out the way in which clearing agencies would 

provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. We also proposed rules relating to the exception to 

the mandatory clearing requirement for end users. These rules would specify the 

steps that end users must follow, as required under the Act, to notify the SEC of 

how they generally meet their financial obligations when engaging in security-based 

swap transactions exempt from the mandatory clearing requirement. In addition, we 

proposed joint rules with the CFTC regarding the definitions of swap and securitybased swap dealers, and major swap and major security-based swap participants. 

These rules lay out objective criteria for these definitions and are a first step in 

helping the SEC appropriately address the market impacts and potential risks 

posed by these entities. 

Thus far in 2011, we have proposed rules regarding the confirmation of securitybased swap transactions, which would govern the way in which certain securitybased swap transactions are acknowledged and verified by the parties who enter 

into them. We also proposed rules regarding registration and regulation of securitybased swap execution facilities, which would define security-based swap execution 

facilities, specify their registration requirements, and establish their duties and core 

principles. And most recently, we proposed rules to establish minimum standards 

concerning the operation, governance, and risk management of clearing agencies. At 

the same time, we reopened the comment period for our October proposal regarding 

conflicts of interest at security-based swap clearing agencies, security-based swap 

execution facilities, and exchanges that trade security-based swaps. 

In addition, we adopted interim final rules in October 2010 regarding the reporting of outstanding security-based swaps entered into prior to the date of enactment 

of the Dodd-Frank Act. These interim final rules require certain security-based 

swap dealers and other parties to preserve and report to the SEC or a registered 

security-based swap data repository certain information pertaining to any securitybased swap entered into prior to the July 21, 2010, passage of the Dodd-Frank Act 

and whose terms had not expired as of that date. 

Our staff also is working closely with the Federal Reserve Board and the CFTC 

to develop, as required by Title VIII of the Act, a new framework to supervise systemically important financial market utilities, including clearing agencies registered 

with the SEC, that are designated by the Financial Stability Oversight Council as 

systemically important. For example, SEC staff has been actively coordinating with 

the other agencies to develop rules regarding submission of notices by designated 

financial market utilities with respect to rules, procedures, or operations that could 

materially affect the risks presented by such designated financial market utilities. 

The SEC proposed these rules in December. In addition, in March, the Financial 

Stability Oversight Council, of which the SEC is a member, issued a notice of proposed rulemaking regarding the criteria and analytical framework for designating 

financial market utilities under Title VIII and the processes and procedures that 

would be used to make such designations. 

Our staff also has been actively coordinating with the other agencies on the new 

authority granted to the SEC and CFTC to develop standards for designated financial market utilities. Moreover, the SEC and CFTC staffs have begun working with 

staff from the Federal Reserve Board to jointly develop risk management supervision programs for designated financial market utilities pursuant to Title VIII. The 

SEC, CFTC, and Federal Reserve Board also are working together closely to prepare 

a joint report to Congress required under Title VIII that will make recommendations for improving consistency in the oversight of designated clearing entities, promoting robust risk management, and monitoring the effects of such risk management on the stability of the financial system. 

Upcoming Actions 

In the coming months, we expect to propose rules regarding registration procedures, business conduct standards, and capital, margin, segregation, and record 

keeping requirements for security-based swap dealers and major security-based 

swap participants. We also expect to propose joint rules with the CFTC governing 

the definitions of ‘‘swap’’ and ‘‘security-based swap,’’ as well as the regulation of 

‘‘mixed swaps.’’ 

43 

The SEC has been carefully reviewing all the comments received regarding the 

rules that already have been proposed and we are in the process of considering 

those comments. We also are continuing discussions with various market participants about their concerns and ideas regarding the proposed rules. This information 

is invaluable as we move toward consideration of final rules designed to further the 

purposes of the Dodd-Frank Act and the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, promote the prompt and accurate clearance 

and settlement of securities transactions, and facilitate capital formation and provide effective regulation of the security-based swap markets without imposing unjustified costs or having unforeseen adverse consequences. We will, of course, be engaged in the same process for our upcoming proposed rulemakings, and I would like 

to take this opportunity to encourage market participants and the public to continue 

submitting comments on these upcoming proposed rulemakings. 

Anticipated Completion of Rulemaking 

We are working to complete the rulemaking proposal and adoption process under 

Titles VII and VIII and are mindful of Congress’ deadlines for implementation. 

Nonetheless, this is a very challenging task. The OTC derivatives markets are large 

and interconnected. The issues are complex and do not lend themselves to easy solutions. We are progressing at a deliberate pace, taking the time necessary to thoughtfully consider the issues raised by the various rulemakings before proposing specific 

rules. We are taking a similar approach as we move toward consideration of final 

rules. As we do so, we are also devoting careful thought to sequencing the implementation of final rules in such a way that market participants will have sufficient 

time to develop the infrastructure necessary to comply. We understand that getting 

the rules right and implementing them in the right order is important, and this will 

continue to guide our efforts in coming months. 

Impact of Rulemaking on Existing Markets 

There are unique challenges involved in imposing a comprehensive regulatory regime on existing markets, particularly ones that until now have been almost completely unregulated. For example, in proposing margin rules, we will be mindful 

both of the importance of security-based swaps as hedging tools for commercial end 

users and also of the need to set prudent risk rules for dealers in these instruments. 

We also need to carefully consider how our rules might impact preexisting contracts. 

For example, in developing rules that concern the capital and margin requirements 

for security-based swap dealers, we will need to consider dealers’ preexisting security-based swaps. The application of new rules to existing security-based swaps 

could be very disruptive and impose burdens on dealers or their counterparties that 

they did not bargain for or anticipate. We discussed this issue, along with the end 

user margin issue, with various stakeholders at a joint SEC–CFTC roundtable in 

December, and are taking the input we received at the roundtable and from other 

sources into account in writing proposed rules. 

Conclusion 

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

challenges of today’s financial marketplace and fulfill our mission to protect investors, maintain fair, orderly, and efficient markets, promote the prompt and accurate 

clearance and settlement of securities transactions, and facilitate capital formation. 

As we proceed with implementation, we look forward to continuing to work closely 

with Congress, our fellow regulators, and members of the financial and investing 

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

implementation. I look forward to answering your questions. 

PREPARED STATEMENT OF GARY GENSLER 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION

APRIL 12, 2011 

Good afternoon Chairman Johnson, Ranking Member Shelby, and Members of the 

Committee. I thank you for inviting me to today’s hearing on implementing Title 

VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I am 

pleased to testify on behalf of the Commodity Futures Trading Commission (CFTC). 

I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation. I am pleased to testify alongside my fellow regulators from the Securities and Exchange Commission (SEC), Federal Reserve and Treasury Department. 

44 

The Dodd-Frank Act 

On July 21, 2010, President Obama signed the Dodd-Frank Act. The Act amended 

the Commodity Exchange Act (CEA) to establish a comprehensive new regulatory 

framework for swaps and made similar amendments to securities laws for securitybased swaps. Title VII of the Act was enacted to reduce risk, increase transparency 

and promote market integrity within the financial system by, among other things: 

1. Providing for the registration and comprehensive regulation of swap dealers 

and major swap participants; 

2. Imposing clearing and trade execution requirements on standardized derivatives products; 

3. Creating robust record keeping and real-time reporting regimes; and 

4. Enhancing the Commission’s rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the 

Commission’s oversight. 

The reforms mandated by Congress will reduce systemic risk to our financial system and bring sunshine and competition to the swaps markets. Markets work best 

when they are transparent, open and competitive. The American public has benefited from these attributes in the futures and securities markets since the great regulatory reforms of the 1930s. The reforms of Title VII will bring similar features 

to the swaps markets. Lowering risk and improving transparency will make the 

swaps markets safer and improve pricing for end users. 

Title VIII of the Dodd-Frank Act 

The CFTC has overseen clearinghouses for decades. Title VIII of the Dodd-Frank 

Act provides for enhanced oversight of these clearinghouses. In close consultation 

with our fellow domestic and international regulators, and particularly with the 

Federal Reserve and the SEC, the CFTC proposed rulemakings on risk management 

for clearinghouses. These rulemakings take account of relevant international standards, particularly those developed by the Committee on Payment and Settlement 

Systems and the International Organization of Securities Commissions (CPSS– 

IOSCO). 

The Dodd-Frank Act gives the Financial Stability Oversight Council (FSOC) and 

the Federal Reserve Board important roles in clearinghouse oversight by authorizing the Council to designate certain clearinghouses as systemically important and 

by permitting the Federal Reserve to recommend heightened prudential standards 

in certain circumstances. 

The FSOC proposed a rule last month that complements the CFTC’s rulemaking 

efforts. Public input will be valuable in determining how the Council should apply 

statutory criteria to determine which clearinghouses qualify for designation as systemically important. 

Implementation 

The Dodd-Frank Act is very detailed, addressing all of the key policy issues regarding regulation of the swaps marketplace. To implement these regulations, the 

Act requires the CFTC and the SEC, working with our fellow regulators, to write 

rules generally within 360 days. At the CFTC, we initially organized our effort 

around 30 teams who have been actively at work. We had our first meeting with 

the 30 team leads the day before the President signed the law. 

A number of months ago we also set up a 31st rulemaking team tasked with developing conforming rules to update the CFTC’s existing regulations to take into account the provisions of the Act. 

The CFTC is working deliberatively and efficiently to promulgate rules required 

by Congress. The talented and dedicated staff of the CFTC has stepped up to the 

challenge and has recommended thoughtful rules—with a great deal of input from 

each of the five Commissioners—that would implement the Act. We have thus far 

proposed rulemakings or interpretive orders in 28 of the 31 areas. 

The CFTC’s process to implement the rulemakings required by the Act includes 

enhancements over the agency’s prior practices in five important areas. Our goal 

was to provide the public with additional opportunities to inform the Commission 

on rulemakings, even before official public comment periods. I will expand on each 

of these five points in my testimony. 

1. We began soliciting views from the public immediately after the Act was signed 

and prior to approving proposed rulemakings. This allowed the agency to receive input before the pens hit the paper. 

2. We hosted a series of public, staff-led roundtables to hear ideas from the public 

prior to considering proposed rulemakings. 

45 

3. We engaged in significant outreach with other regulators—both foreign and domestic—to seek input on each rulemaking. 

4. Information on both staff’s and Commissioners’ meetings with members of the 

public to hear their views on rulemakings has been made publicly available at 

cftc.gov. 

5. The Commission held public meetings to consider proposed rulemakings. The 

meetings were webcast so that the Commission’s deliberations were available 

to the public. Archive webcasts are available on our Web site as well. 

Two principles are guiding us throughout the rule-writing process. First is the 

statute itself. We intend to comply fully with the statute’s provisions and Congressional intent to lower risk and bring transparency to these markets. 

Second, we are consulting heavily with both other regulators and the broader public. We are working very closely with the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Controller of the Currency and other 

prudential regulators, which includes sharing many of our memos, term sheets and 

draft work products. We also are working closely with the Treasury Department and 

the new Office of Financial Research. As of Friday, CFTC staff has had 598 meetings with other regulators on implementation of the Act. 

In addition to working with our American counterparts, we have reached out to 

and are actively consulting and coordinating with international regulators to harmonize our approach to swaps oversight. As we are with domestic regulators, we 

are sharing many of our memos, term sheets and draft work product with international regulators as well. Our discussions have focused on clearing and trading 

requirements, clearinghouses more generally and swaps data reporting issues, 

among many other topics. 

Specifically, we have been consulting directly and sharing documentation with the 

European Commission, the European Central Bank, the U.K. Financial Services Authority and the new European Securities and Markets Authority. Three weeks ago, 

I traveled to Brussels to meet with the European Parliament’s Economic and Monetary Affairs Committee and discuss the most important features of swaps oversight 

reform. 

We also have shared documents with the Japanese Financial Services Authority 

and consulted with Members of the European Parliament and regulators in Canada, 

France, Germany, and Switzerland. 

Through this consultation, we are working to bring consistency to regulation of 

the swaps markets. In September of last year, the European Commission released 

its swaps proposal. As we had in the Dodd-Frank Act, the E.C.’s proposal covers the 

entire derivatives marketplace—both bilateral and cleared—and the entire product 

suite, including interest rate swaps, currency swaps, commodity swaps, equity 

swaps and credit default swaps. The proposal includes requirements for central 

clearing of swaps, robust oversight of central counterparties and reporting of all 

swaps to a trade repository. The E.C. also is considering revisions to its existing 

Markets in Financial Instruments Directive (MiFID), which includes a trade execution requirement, the creation of a report with aggregate data on the markets similar to the CFTC’s Commitments of Traders reports and accountability levels or position limits on various commodity markets. 

We also are soliciting broad public input into the rules and have set up mailboxes 

for the public to comment directly prior to the Commission’s rulemaking process. As 

of yesterday, we had received 2,907 submissions from the public through the e-mail 

inboxes as well as 8,991 official comments in response to notices of proposed rulemaking. 

For the vast majority of proposed rulemakings, we have solicited public comments 

for a period of 60 days. On some occasions, the public comment period lasted 30 

days. 

Additionally, many individuals have asked for meetings with either our staff or 

Commissioners to discuss swaps regulation. As of yesterday, we have had 675 such 

meetings. We are now posting on our Web site a list of all of the meetings CFTC 

staff and I have with outside organizations, as well as the participants, issues discussed and all materials given to us. 

At this point in the process, the CFTC has come to a natural pause as we have 

now promulgated proposals in most of the areas. As we receive comments from the 

public, we are looking at the whole mosaic of rules and how they interrelate. We 

will begin considering final rules only after staff can analyze, summarize and consider comments, after the Commissioners are able to discuss the comments and provide feedback to staff, and after the Commission consults with fellow regulators on 

the rules. We hope to move forward in the spring, summer and fall with final rules. 

46 

One component that we have asked the public about is phasing of implementation. The Dodd-Frank Act gave the CFTC flexibility as to setting implementation 

or effective dates of the rules to implement the Dodd-Frank Act. For example, even 

if we finish finalizing rules in a particular order, that doesn’t mean that the rules 

will be required to become effective in that order. Effective dates and implementation schedules for certain rules may be conditioned upon other rules being finalized, 

their effective dates and the associated implementation schedules. For instance, the 

effective dates of some final rules may come only after the CFTC and SEC jointly 

finalize the entity or product definitions rules. 

The Commission has the authority to phase implementation dates based upon a 

number of factors, including asset class, type of market participant and whether the 

requirement would apply to market platforms, like clearinghouses, or to specific 

transactions, such as real time reporting. For example, a rule might become effective for one asset class or one group of market participants before it is effective for 

other asset classes or other groups of market participants. We are looking to phase 

in implementation, considering the whole mosaic of rules. We look forward to hearing from market participants and regulators, both in the U.S. and abroad, regarding 

the phasing of implementation. 

End User Margin 

One of the rules on which the CFTC is working closely with the SEC, the Federal 

Reserve and other prudential regulators will address margin requirements for swap 

dealers and major swap participants. 

Congress recognized the different levels of risk posed by transactions between financial entities and those that involve nonfinancial entities, as reflected in the nonfinancial end user exception to clearing. Transactions involving nonfinancial entities 

do not present the same risk to the financial system as those solely between financial entities. The risk of a crisis spreading throughout the financial system is greater the more interconnected financial companies are to each other. Interconnectedness among financial entities allows one entity’s failure to cause uncertainty and 

possible runs on the funding of other financial entities, which can spread risk and 

economic harm throughout the economy. Consistent with this, proposed rules on 

margin requirements should focus only on transactions between financial entities 

rather than those transactions that involve nonfinancial end users. 

Conclusion 

Before I close, I will briefly address the resource needs of the CFTC. The futures 

marketplace that the CFTC currently oversees is approximately $36 trillion in notional amount. The swaps market that the Act tasks the CFTC with regulating has 

a notional amount roughly seven times the size of that of the futures market and 

is significantly more complex. Based upon figures compiled by the OCC, the largest 

25 bank holding companies currently have $277 trillion notional amount of swaps. 

The CFTC’s current funding is far less than what is required to properly fulfill 

our significantly expanded mission. Though we have an excellent, hardworking and 

talented staff, we just this past year got back to the staff levels that we had in the 

1990s. To take on the challenges of our expanded mission, we will need significantly 

more staff resources and—very importantly—significantly more resources for technology. Technology is critical so that we can be as efficient an agency as possible 

in overseeing these vast markets. 

The CFTC currently is operating under a continuing resolution that provides 

funding at an annualized level of $168.8 million. The President requested $261 million for the CFTC in his proposed fiscal year (FY) 2011 budget. This included $216 

million and 745 full-time equivalent employees for prereform authorities and $45 

million to provide half of the staff estimated at that time needed to implement the 

Act. Under the continuing resolution, the Commission has operated in FY2011 at 

its FY2010 level. The President’s FY2012 budget request included $308 million for 

the CFTC and would provide for 983 full-time equivalent employees. 

Given the resource needs of the CFTC, we are working very closely with self regulatory organizations, including the National Futures Association, to determine what 

duties and roles they can take on in the swaps markets. Nevertheless, the CFTC 

has the ultimate statutory authority and responsibility for overseeing these markets. Therefore, it is essential that the CFTC have additional resources to reduce 

risk and promote transparency in the swaps markets. 

Thank you, and I’d be happy to take questions. 

47 

PREPARED STATEMENT OF DANIEL K. TARULLO 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

APRIL 12, 2011 

Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, I appreciate this opportunity to provide the Federal Reserve Board’s views 

on the implementation of title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Board’s responsibilities with respect to 

over-the-counter (OTC) derivatives fall into three broad areas: consultation and coordination with other authorities, both domestic and international; efforts to 

strengthen the infrastructure of derivatives markets; and supervision of many derivatives dealers and market participants. 

Consultation and Coordination 

The Dodd-Frank Act requires that the Commodity Futures Trading Commission 

(CFTC) and the Securities and Exchange Commission (SEC) consult with the Board 

on the rules they are crafting to implement several provisions of title VII. Immediately after passage of the act, the staff from the commissions and the Board met 

to fashion a process for this consultation; at the Board, we identified members of 

the staff with relevant expertise, both here and across the Federal Reserve System. 

Our staff have commented on proposed rules of the commissions at each stage of 

the development process to date. In providing feedback, we have tried to bring to 

bear our experience from supervising dealers and market infrastructure as well as 

our familiarity with markets and data sources to assist the commissions. 

Important coordination activities related to derivatives regulation also are occurring within international groups. Most prominently, the Group of Twenty (G-20) 

leaders have set out commitments related to reform of the OTC derivatives markets 

that, when implemented by national authorities, will form a broadly consistent 

international regulatory approach. Work on the G-20 commitments is being done by 

numerous groups of technical and policy experts, and staff members from the Federal Reserve are actively participating in these groups. 

More generally, the Board participates in many international groups that serve 

as vehicles for coordinating policies related to the participants and the infrastructure of derivatives markets. These groups include the Basel Committee on Banking 

Supervision (Basel Committee), which has recently enhanced international capital, 

leverage, and liquidity standards for derivatives, and the Committee on Payment 

and Settlement Systems, which is working with the International Organization of 

Securities Commissions to update international standards for systemically important clearing systems, including central counterparties that clear derivatives instruments, and trade repositories. Public consultation on these revised international 

standards is currently under way. 

The goal of all of these efforts is to develop a consistent international approach 

to the regulation and supervision of derivatives products and market infrastructures 

as well as to the sound implementation of the agreed-upon approaches. Our aim is 

to promote both financial stability and fair competitive conditions to the fullest extent possible. 

Infrastructure Issues 

The Dodd-Frank Act addressed both the infrastructure of the derivatives markets 

and the regulation and supervision of its dealers and major participants. Central 

counterparties are given an expanded role in the clearing and settling of swap and 

security-based swap (hereafter referred to as ‘‘swap’’) transactions, and the Board 

believes benefits can flow from this reform. Since 2005, Federal Reserve staff members have worked with market participants to strengthen the infrastructure for OTC 

derivatives, including developing and broadening the use of central clearing mechanisms and trade repositories. Market participants have already established central 

counterparties that provide clearing services for some OTC interest rate, energy, 

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

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

Both central counterparties and trade repositories also support regulatory oversight 

and policymaking by providing more-comprehensive data on the derivatives markets. The Board is committed to continuing to work with other authorities, both in 

the United States and abroad, to ensure that a largely consistent international approach is taken to central counterparties and trade repositories and that their riskreducing benefits are realized. 

Title VIII of the act complements the role of central clearing in title VII through 

heightened supervisory oversight of systemically important financial market utiliVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
48 

1 Board of Governors of the Federal Reserve System (2011), ‘‘Federal Reserve Seeks Comment 

on Proposed Rule Related to Supervision of Designated Financial Market Utilities’’, press release, March 30, www.federalreserve.gov/newsevents/press/other/20110330a.htm. 

ties, including systemically important facilities that clear swaps. This heightened 

oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks throughout the 

financial markets. The Financial Stability Oversight Council is responsible for designating utilities as systemically important. Through its role on the council, the Board 

helped develop the designation process that was released for comment in March. 

Separately, the Board is also seeking comment on proposed risk-management standards that would apply to those designated utilities supervised by the Board under 

title VIII. 1 As part of title VIII, the Board was given new authority to provide designated utilities with access to Reserve Bank accounts, payment services, and emergency collateralized liquidity in unusual and exigent circumstances. We are carefully considering ways to implement this authority in a manner that protects taxpayers and limits any rise in moral hazard. 

Supervisory Issues 

Although central counterparties will provide an additional tool for managing 

counterparty credit risk, enhancements to the risk-management policies and procedures for individual market participants will continue to be a high priority for supervisors. As the reforms outlined in the act are implemented, the most active firms 

in bilateral OTC markets likely will become active clearing members of central 

counterparties. As such, the quality of risk management at these firms importantly 

affects the ability of the central counterparty to manage its risks effectively and to 

deliver risk-reducing benefits to the markets. 

Capital and margin requirements are central to the prudential regulation of financial institutions active in derivatives markets as well as to the internal riskmanagement processes of such firms. Title VII requires that the CFTC, the SEC, 

and prudential regulators adopt capital and margin requirements for the noncleared 

swap activity of swap dealers and major swap participants. The Board, the Office 

of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the 

Federal Housing Finance Agency, and the Farm Credit Administration are responsible for adopting capital and margin requirements for swap dealers and major swap 

participants that are banks or other prudentially regulated entities. The commissions are responsible for adopting capital and margin requirements for swap dealers 

and major swap participants that are not supervised by a prudential regulator. The 

prudential regulators and the commissions are consulting in developing the rules, 

and all agencies must, to the maximum extent practicable, adopt comparable standards. 

Earlier today, the Board and the other prudential regulators released for public 

comment a proposed rule on capital and margin requirements. Our proposal will be 

open for public comment for 60 days, and we look forward to receiving the public’s 

comments. 

For capital, our proposal relies on the existing regulatory capital requirements, 

which already specifically address the unique risks of derivatives transactions. Beyond the current requirements, the Board and the other U.S. banking agencies 

played an active role in developing the recent Basel III enhancements to capital requirements agreed to by the Basel Committee in December 2010. Basel III will, 

among other things, strengthen the prudential framework for OTC derivatives by 

increasing OTC derivatives’ risk-based capital and leverage requirements and by requiring banking firms to hold an additional buffer of high-quality, liquid assets to 

address potential liquidity needs resulting from their derivatives portfolios. 

Our proposal for margin imposes initial and variation margin requirements on the 

noncleared swaps held by swap dealers or major swap participants that have a prudential regulator. For swaps with a nonfinancial end user counterparty, the proposed rule would not specify a minimum margin requirement. Rather, it would 

allow a banking organization that is a dealer or major participant to establish a 

threshold, based on a credit exposure limit that is approved and monitored as part 

of the credit approval process, below which the end user would not have to post 

margin. For swaps with other counterparties, the proposal would cap the allowable 

threshold for unsecured credit exposure on noncleared swaps. In addition, the proposal would only apply a margin requirement to contracts entered into after the new 

requirement becomes effective. 

A much discussed part of the act is the requirement that banks push portions of 

their swap activity into affiliates or face restrictions on their access to the discount 

window or deposit insurance. Under the push-out provisions, banking organizations 

49 

with deposit insurance or access to the Federal Reserve’s discount window will have 

to reorganize some of their derivatives activity, pushing certain types of swaps out 

of subsidiary banks and into distinct legal entities that will require their own capitalization and separate documentation of trades with existing customers. The act 

permits domestic banks to continue to engage in derivatives activities that have 

been a traditional focus of banks, including hedging activities and dealing in interest rate swaps, currency swaps, certain cleared credit default swaps, and other 

swaps that reference assets that banks are eligible to hold. However, because of the 

specific language contained in the act, this exemption for traditional bank derivatives activities does not apply to U.S. branches of foreign banking firms that by law 

have access to the Federal Reserve’s discount window. A possibly unintended effect 

of the act’s push-out provision may be to require some foreign firms to reorganize 

their existing U.S. derivatives activities to a greater extent than U.S. firms. Proposed rules to implement this section are still under development by the banking 

agencies. 

Conclusion 

As the implementation process for the act continues, the challenge facing the 

Board is to enhance supervision, oversight, and prudential standards of major derivatives market participants in a manner that promotes more-effective risk management and reduces systemic risk, yet retain the significant benefits of derivatives 

to the businesses and investors who use them to manage financial market risks. The 

Board is working diligently to achieve these goals. 

PREPARED STATEMENT OF MARY J. MILLER 

ASSISTANT SECRETARY FOR FINANCIAL MARKETS, DEPARTMENT OF THE TREASURY

APRIL 12, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to testify today about Treasury’s role in implementing the 

derivatives provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 

As you know, the President signed the Dodd-Frank Act into law almost 9 months 

ago. The Act established a framework for the country to build a stronger, safer, and 

more competitive financial system. It creates safeguards to protect consumers and 

investors, end taxpayer bailouts, and improve the transparency, efficiency, and liquidity of U.S. markets. The Dodd-Frank Act’s derivatives provisions are an important part of that framework. 

During the 9 months since the Dodd-Frank Act became law, the Treasury Department, other parts of the Administration, and independent regulatory agencies have 

been working diligently to build out the framework according to the directions provided by the statute. As we implement the Dodd-Frank Act, we have focused on advancing the best interests of consumers, investors, and taxpayers while also preserving the best attributes of and improving upon a financial system that encourages investment and promotes growth. 

As other Treasury officials have previously testified before this Committee, several broad principles guide our efforts: 

1. We are moving as quickly as we can to carry out the intent of Congress and 

meet the deadlines that the Dodd-Frank Act established, but we are also moving carefully to make sure that as we implement the Act, we get it right. 

2. We are bringing full transparency to the process so that as many stakeholders 

as possible have a seat at the table, so that the American people know who 

is at that table, so that proposed rules and even advance notices of proposed 

rulemakings and requests for comments are published, and so that anyone who 

wants to comment can do so. 

3. We are creating a more coordinated regulatory process. We will eliminate gaps 

that allowed risks to grow unchecked and permitted a race to the bottom in 

certain areas. The Financial Stability Oversight Council (FSOC) is playing a 

key role in these efforts by bringing together the financial regulatory agencies 

to help develop consistent and comparable regulations and supervisory regimes 

across different agencies. 

4. We are building a level playing field that treats market participants equally, 

whether they are banks or nonbanks, and whether they are domestic or foreign 

institutions. We are setting high standards in the United States and working 

50 

1 7 U.S.C. 1a(47)(E)(i). 

2 7 U.S.C. 1a(25). 

3 7 U.S.C. 1a(24). 

diligently with our international counterparts to encourage them to set similar 

standards. 

5. We are crafting rules of the road that will provide U.S. investors and institutions the confidence, the certainty, and the incentives they need to invest capital, develop innovative products and services, and compete globally. 

6. Finally, we are committed to keeping Congress fully informed of our progress 

on a regular basis. 

Just as these guiding principles apply broadly to Dodd-Frank Act implementation 

efforts, they also apply to implementation of the Dodd-Frank Act’s derivatives provisions in particular. 

Our partners at the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Board of Governors of the Federal 

Reserve System (Federal Reserve Board), all of whom are represented here today, 

have been and will continue to be instrumental in achieving the goals of the DoddFrank Act. As you will hear from Chairman Gensler, Chairman Schapiro and Governor Tarullo, their agencies’ roles in implementing the Act’s derivatives provisions 

are particularly important. 

While Treasury has a more limited role than the CFTC, SEC, and Federal Reserve Board in building Dodd-Frank’s new derivatives regulatory framework, the 

Secretary of the Treasury (Secretary) does have certain specific statutory responsibilities under the Dodd-Frank Act and has other responsibilities in his capacity 

as the Chairman of the FSOC. 

Starting with the specific responsibilities under the Dodd-Frank Act, Congress 

gave the Secretary the authority to determine whether foreign exchange (FX) swaps 

and forwards should be exempted from the definition of ‘‘swap’’ in the Commodity 

Exchange Act (CEA) (7 U.S.C. ch. 1). Foreign exchange swaps and forwards generally are subject to the requirements of the CEA. For these instruments, the most 

significant requirements under the regulatory regime enacted by the Dodd-Frank 

Act would be central clearing and exchange trading requirements for foreign exchange swaps and forwards, unless the Secretary determines that they ‘‘(I) should 

not be regulated as swaps under [the CEA]; and (II) are not structured to evade [the 

Dodd-Frank Act] in violation of any rules promulgated by the [CFTC]’’ pursuant to 

the Dodd-Frank Act. 1

The statute limits the scope of a determination to foreign exchange swaps and forwards and does not allow the Secretary to exempt other foreign exchange derivatives, such as foreign exchange options, currency swaps, and nondeliverable forwards. These other foreign exchange derivatives do not satisfy the narrow definition 

of a ‘‘foreign exchange swap’’ or ‘‘foreign exchange forward’’ and, therefore, may not 

be exempted. 

Under the CEA as amended by the Dodd-Frank Act, and for purposes of the Secretary’s determination, an FX swap is defined as ‘‘a transaction that solely involves—(A) an exchange of 2 different currencies on a specific date at a fixed rate 

that is agreed upon on the inception of the contract covering the exchange’’ and ‘‘(B) 

a reverse exchange of [those two currencies] at a later date and at a fixed rate that 

is agreed upon on the inception of the contract covering the exchange.’’ 2 Likewise, 

the CEA as amended narrowly defines an FX forward as ‘‘a transaction that solely 

involves the exchange of 2 different currencies on a specific future date at a fixed 

rate agreed upon on the inception of the contract covering the exchange.’’ 3

In determining whether to exempt foreign exchange swaps and forwards, the Secretary must consider the following five statutory factors set forth by the Dodd-Frank 

Act: 

1. Whether the required trading and clearing of foreign exchange swaps and foreign exchange forwards would create systemic risk, lower transparency, or 

threaten the financial stability of the United States; 

2. Whether foreign exchange swaps and foreign exchange forwards are already 

subject to a regulatory scheme that is materially comparable to that established by the CEA for other classes of swaps; 

3. The extent to which bank regulators of participants in the foreign exchange 

market provide adequate supervision, including capital and margin requirements; 

4. The extent of adequate payment and settlement systems; and 

51 

4 7 U.S.C. 1b(a). 

5 7 U.S.C. 1b(b). 

5. The use of a potential exemption of foreign exchange swaps and foreign exchange forwards to evade otherwise applicable regulatory requirements. 4

If the Secretary determines that foreign exchange swaps or forwards should be 

exempted from the CEA’s definition of ‘‘swap,’’ Treasury must provide a written determination to Congress that contains: (1) ‘‘an explanation of why [FX] swaps and 

[FX] forwards are qualitatively different from other classes of swaps in a way that 

would make the [FX] swaps and [FX] forwards ill-suited for regulation as swaps;’’ 

and (2) ‘‘an identification of the objective differences of [FX] swaps and [FX] forwards with respect to standard swaps that warrant an exempted status.’’ 5

Consistent with Treasury’s commitment to an open and transparent process, on 

October 28, 2010, we published a Notice and Request for Comments (Notice) in the 

Federal Register to solicit public comment on a wide range of issues relating to 

whether foreign exchange swaps and foreign exchange forwards should be exempt 

from the definition of the term ‘‘swap’’ under the CEA. We received approximately 

thirty comments in response to the Notice, and Treasury staff has also conducted 

its own, independent analysis of the issue, including extensive discussions with a 

range of regulators, end users, dealers, and other interested parties. 

We know that this is an issue that market participants and other stakeholders 

are interested in, and we recognize that the Committee is also closely following this 

issue. Like other areas of Dodd-Frank implementation and consistent with the guiding principles identified above, this is an area where we want to move expeditiously. 

Regardless of the decision the Secretary pursues, market participants need to know 

what the regulatory regime will look like and to be able to plan and prepare for 

that regime. But it is also critical that we take enough time to be confident that 

we are making the right decision for the safety and soundness of the markets. 

In addition to his specific duties under the Dodd-Frank Act, the Secretary also 

has more general responsibilities with respect to the Act’s derivatives provisions in 

his capacity as Chairman of the FSOC. In March, the FSOC held its fourth meeting 

and approved the publication of a Notice of Proposed Rulemaking (NPRM) regarding 

the FSOC’s designation of financial market utilities (FMUs) as systemically important. 

FMUs exist in many financial markets to support and facilitate the transfer, 

clearing, and settlement of financial transactions, and they form a critical part of 

the Nation’s financial market infrastructure. FMUs’ functions and interconnectedness with many parts of the market can help manage and reduce risk, but if they 

are poorly operated could also concentrate risk. Title VIII of systemic risks they 

might create if not properly managed and supervised. To address the potential for 

such risks, the Act seeks to enhance the regulation and supervision of systemically 

important FMUs to promote robust risk management and safety and soundness. 

The FSOC published an advance notice of proposed rulemaking regarding the criteria for designating systemically important FMUs on December 21, 2010. After receiving, reviewing, and analyzing comments received in response to the advance notice and performing additional work, at its March meeting the FSOC approved the 

publication of the NPRM. The NPRM was published in the Federal Register on 

March 28, 2011, and the comment period will be open for 60 days for any interested 

party to submit comments on the proposed rule. 

Title VIII of the Dodd-Frank Act also gives the FSOC the responsibility of designating systemically important payment, clearing, and settlement (PCS) activities 

that occur at financial institutions other than FMUs. These PCS activities could 

occur between financial institutions transacting with each other or between a financial institution and one of its customers. The FSOC’s member agencies and staff 

have started examining this issue as well, and the FSOC will proceed in the coming 

months with the necessary rulemaking to establish the criteria and procedures for 

the FSOC’s designation of PCS activities as systemically important. 

One final area I would like to touch on is the importance of the comparability of 

international standards that will apply to the financial regulatory framework in 

general, including derivatives regulation. The United States will set high standards 

and take the steps that are necessary for the safety and soundness of our financial 

system. But today’s financial system is highly interconnected, mobile, and global. It 

is important that we pursue as level an international playing field as possible not 

only to protect the competiveness of U.S. financial markets and institutions but also 

to ensure that the critically important reforms we implement here cannot be evaded 

or rendered ineffective by lax standards elsewhere. 

52 

With respect to the international derivatives regulatory framework, significant 

globally coordinated work has already occurred, but more remains to be done. Treasury and our international counterparts are focused on making certain that critical 

over-the-counter derivative market infrastructure is subject to appropriate oversight. A key element of our current discussions is ensuring that we have cooperative 

oversight frameworks in place to address the information needs of supervisors in 

different jurisdictions. 

We will continue to work at home and with our international counterparts to 

build a regulatory framework for derivatives that will help our financial system become safer and sounder and a sound platform on which we can build strong financial markets that will fuel the Nation’s economic growth. 

PREPARED STATEMENT OF THOMAS C. DEAS, JR. 

VICE PRESIDENT AND TREASURER, FMC CORPORATION

APRIL 12, 2011 

Good afternoon, I am Tom Deas, Vice President and Treasurer of FMC Corporation and also President of the National Association of Corporate Treasurers (NACT), 

an organization of treasury professionals from several hundred of the largest public 

and private companies in the country. FMC and NACT are also part of the Coalition 

for Derivatives End Users (the ‘‘Coalition’’). Our Coalition represents thousands of 

companies across the United States that employ derivatives to manage basic business risks they face every day. Thank you very much for giving me the opportunity 

to speak with you today about derivatives regulation. 

FMC Corporation was founded almost 130 years ago to provide spray equipment 

to farmers. Today in addition to making agricultural chemicals farmers apply to protect their crops, our 5,000 employees have worked hard to make FMC a leading 

manufacturer and marketer of a whole range of agricultural, specialty and industrial chemicals. FMC has achieved this longevity by continually responding to our 

customers’ needs with the right chemistry delivered at the right price. This year 

marks our 80th anniversary of listing on the New York Stock Exchange. In 1931 

FMC sought access to the U.S. equity market as the largest and most available pool 

of capital to support our growing business. Today in 2011 the most responsive financial market in the world is the over-the-counter (OTC) derivatives market. I had the 

valuable experience of negotiating and executing some of the very first derivatives— 

currency swaps—going back to 1984. I have seen the market grow from its inception 

in the mid-1980s to its current size by adapting and responding to market participants’ needs. The customization available in the OTC derivatives market is key to 

FMC’s and other end users’ ability to hedge business risks in a cost-effective way. 

The standardized contracts available on existing and proposed derivatives exchanges will not provide this customized match to our underlying business exposures. 

We support this Committee’s efforts to redress the problems with derivatives we 

experienced during the financial crisis in 2008. I want to assure you that FMC and 

other end users were not and are not engaging in risky speculative derivatives 

transactions from which some of that turmoil arose. We are very concerned by the 

assertion several regulators have made that the Act’s requirement for swap dealers 

to post margin should also be extended to end users. This would require us to hold 

aside scarce cash and immediately available credit to meet margin calls and would 

be a significant new economic burden. At the time the Dodd-Frank Act was passed, 

end users understood we would be exempt from having to post cash margin. I want 

to emphasize that FMC and other end users employ OTC derivatives solely to manage underlying business risks. We are offsetting risks—not creating new ones. 

Please allow me to illustrate our use of derivatives with specific examples. FMC 

is the world’s largest producer of natural soda ash, the principal input in glass manufacturing, and is one of the largest employers in the State of Wyoming. We are 

also developing innovative new environmental applications that scrub sulfur compounds from flue gases of factories and power plants. We can mine and refine soda 

ash products in southwestern Wyoming, ship them to South Asia, and deliver them 

at a lower cost and with higher quality than competing Chinese producers. Energy 

is a significant cost element in producing soda ash and FMC protects against unpredictable fluctuations in future energy costs with OTC derivatives to hedge natural 

gas prices. These derivatives are done with several banks, all of which are also supporting FMC through their provision of almost $1 billion of credit. Our banks do 

not require FMC to post cash margin to secure mark-to-market fluctuations in the 

value of derivatives, but instead price the overall transaction to take this risk into 

53 

account. This structure gives us certainty so that we never have to post cash margin 

while the derivative is outstanding. However, if we are required by the regulators 

to post margin, we will have to hold aside cash and readily available credit to meet 

those margin calls. Depending on the extent of price movements, margin might have 

to be posted within the trading day as well as at the close of trading. Because failure to meet a margin call would be like bouncing a check, and would constitute a 

default, our corporate treasury would act very conservatively in holding cash or immediately available funds under our bank lines of credit to assure we could meet 

any future margin call in a timely fashion and with a comfortable cushion. 

Adopting more conservative cash management practices might sound like an appropriate response in the wake of the financial crisis. However, end users did not 

cause the financial crisis. End users do not contribute to systemic risk because their 

use of derivatives constitutes prudent, risk mitigating hedging of their underlying 

business. Forcing end users to put up cash for fluctuating derivatives valuations 

means less funding available to grow their businesses and expand employment. The 

reality treasurers face is that the money to margin derivatives has to come from 

somewhere and inevitably less funding will be available operate their businesses. 

FMC and other members of the Business Roundtable estimated that BRT-member 

companies would have to hold aside on average $269 million of cash or immediately 

available bank credit to meet margin calls. In our world of finite limits and financial 

constraints, this is a direct dollar-for-dollar subtraction from funds that we would 

otherwise use to expand our plants, build inventory to support higher sales, undertake research and development activities, and ultimately sustain and grow jobs. In 

fact, the study extrapolated the effects across the S&P 500, of which FMC is also 

a member, to predict the consequent loss of 100,000 to 120,000 jobs. The effect on 

the many thousands of end users beyond the S&P 500 would be proportionately 

greater. We would also have to make a considerable investment in information systems that would replicate much of the technology in a bank’s trading room for 

marking to market and settling derivatives transactions. 

Let me give you a direct example of why our banks have agreed that cash margin 

is not necessary for FMC’s derivatives trades. Because we are always hedging an 

underlying business risk, if a current valuation of a derivative is underwater, then 

the risk we are hedging must be in the money, resulting in a net neutral position. 

To illustrate, FMC sells agricultural chemicals to farmers who need them at planting time, but want to defer payment until harvest time. FMC agrees with the farmer that he can pay in bushels of soybeans when he harvests his crop. FMC then 

enters into a customized derivative with one of our banks that exactly matches the 

amount and timing of the future delivery of soybeans. As the price of soybeans fluctuates, the valuation of the derivative changes by an equal and opposite amount in 

relation to the bushels of soybeans. This results in no net gain or loss when the derivative and the underlying exposure are valued together at any point in the future. 

We benefit from not having unpredictable demands on our liquidity. For this balanced structure, we agree to a small markup payable at maturity of the soybean 

derivative transaction I’ve just described. This is far cheaper in both financial and 

administrative cost than if we had to keep idle cash or immediately available credit 

to meet cash margin postings and undertake significant information systems investments. Customized OTC derivatives allow us to expand sales and provide added 

value to our customers, while reducing our risk. 

By forcing end users to post cash margin, the regulators will take the balanced 

structure I’ve just described and impose a new risk. Treasurers will have new and 

unpredictable demands on their liquidity. Swap dealers are market makers who 

take open positions with derivatives and we agree central clearing and margining 

is appropriate for them. However, since end users are balanced, with derivatives exactly offsetting underlying business risks, forcing them into the swap dealers’ margin rules adds the considerable risk for end users of having to fund frequent cash 

margin payments. This will introduce an imbalance and new risks onto transactions 

that are matched and will settle with offsetting cash payments at maturity. 

Let me take a moment to summarize some of our principal concerns with the implementation of derivatives regulation: 

• First, we are concerned that the regulators will impose margin on end user 

trades, diverting billions of dollars from productive investment and employment 

into an idle regulatory levy. 

• Second, even if the final regulations clearly exempt end users from margin requirements, we still have the risk that the regulators will require swap dealers 

to hold excessive capital in reserve against uncleared over-the-counter derivatives—with the cost passed on to end users as they manage their business risks. 

We believe that swap dealers’ capital requirements should be appropriate to the 

54 

1Tradeweb operates the dealer-to-customer and odd-lot platforms through its registered 

broker-dealer, Tradeweb LLC, which is also registered as an alternative trading system (ATS) 

under Regulation ATS promulgated by the SEC under the Securities Exchange Act of 1934. 

Tradeweb operates its inter-dealer platform through its subsidiary, Hilliard Farber & Co., Inc., 

which is also a registered broker-dealer and operates Dealerweb as an ATS. In Europe, 

Tradeweb offers its institutional dealer-to-customer platform through Tradeweb Europe Limited, 

which is authorized and regulated by the U.K. Financial Services Authority as an investment 

firm with permission to operate as a Multilateral Trading Facility. In addition, Tradeweb Europe Limited has registered branch offices in Hong Kong, Singapore, and Japan and holds an 

exemption from registration in Australia. 

actual loss experience of the specific type of derivative. The unintended consequence of punitive capital requirements could be for some end users to cease 

hedging risks and for others to use foreign markets. 

• Finally, we are concerned that regulators will make customized derivatives prohibitively expensive through margin and increased capital requirements, with 

the effect of forcing us into standardized derivatives from common trading facilities that will not provide the exact match we seek with our underlying business 

exposures. It is the customization available with OTC derivatives that is so valuable to us and makes the derivatives effective in hedging our exposures. 

The cumulative effect of these regulations could mean that U.S.-based manufacturers with substantial exports could no longer economically hedge their foreign exchange risk with derivatives. As a result they could be forced to move production 

offshore to match their costs directly with the currencies of their customers. I urge 

you to inquire into this looming problem that could increase the credit spreads for 

OTC derivatives by a factor of five or more. 

I know many people who suffered through the financial turmoil of 2008 are tempted to label all derivatives as risky bets that should be curtailed. However, I hope 

these examples of prudent use of derivatives by my company and other end users 

who form the backbone of our country’s economy have demonstrated the wisdom of 

the end user exemptions that we believe to have been the legislative intent. 

Chairman Gensler and other regulators have been very forthcoming and open in 

soliciting input from us. We appreciate being involved, but we have only a few 

weeks until the deadline for finalizing rules. The end user exemption we thought 

was clear is still uncertain and only a very few of the 105 rules required by July 

15 have been published. I urge you to extend the statutory date by which rules must 

be promulgated until the remaining uncertainties can be clarified and we can be assured the rules will operate effectively when taken together. 

Thank you for your time. I would be happy to respond to any questions you may 

have. 

PREPARED STATEMENT OF LEE OLESKY 

CHIEF EXECUTIVE OFFICER, TRADEWEB MARKETS LLC 

APRIL 12, 2011 

Tradeweb Markets LLC (Tradeweb) appreciates the opportunity to provide testimony to the Senate Committee on Banking, Housing, and Urban Affairs (the ‘‘Committee’’) with respect to the regulatory framework for and implementation of Title 

VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘DoddFrank Act’’ or the ‘‘Act’’) under the proposed regulations from the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission 

(‘‘SEC’’, together with the CFTC, the ‘‘Commissions’’). 

I. Background on Tradeweb 

Tradeweb is a leading global provider of electronic trading platforms and related 

data services for the over-the-counter fixed income and derivatives marketplaces. 

Tradeweb operates three separate electronic trading platforms: (i) a global electronic 

multidealer to institutional customer platform through which institutional investors 

access market information, request bids and offers, and effect transactions with, 

dealers that are active market makers in fixed income securities and derivatives, 

(ii) an interdealer platform, called Dealerweb, for U.S. Government bonds and mortgage securities, and (iii) a platform for retail-sized fixed income securities. 1

Founded as a multidealer online marketplace for U.S. Treasury securities in 1997, 

Tradeweb has been a pioneer in providing market data, electronic trading and trade 

processing in OTC marketplaces for over 10 years, and has offered electronic trading 

in OTC derivatives on its institutional dealer-to-customer platform since 2005. Active in 20 global fixed income, money market and derivatives markets, with an averVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
55 

age daily trading volume of more than $250 billion, Tradeweb’s leading institutional 

dealer-to-customer platform enables 2,000 institutional buy-side clients to access liquidity from more than 40 sell-side liquidity providers by putting the liquidity providers in real-time competition for client business in a fully disclosed electronic auction process. These buy-side clients comprise the majority of the world’s leading 

asset managers, pension funds, and insurance companies, as well as most of the 

major central banks. 

Since we began trading interest rate swaps in 2005, the notional amount of inter- est rate derivatives traded on Tradeweb has exceeded $6.5 trillion from more than 

75,000 trades. Tradeweb has spent the last 5 years building on its derivatives 

functionality to enhance real-time execution, provide greater price transparency and 

reduce operational risk. Today, the Tradeweb system provides its institutional clients with the ability to (i) view live, real-time IRS (in six currencies, including U.S., 

Euro, Sterling, Yen), and Credit Default Swap Indices (CDX and iTraxx) prices from 

swap dealers throughout the day; (ii) participate in live, competitive auctions with 

multiple dealers at the same time, and execute an array of trade types (e.g., 

outrights, spread trades, or rates switches); and (iii) automate their entire workflow 

with integration to Tradeweb so that trades can be processed in real-time from 

Tradeweb to customers’ middle and back offices, to third-party affirmation services 

like Markitwire and DTCC Deriv/SERV, and to all the major derivatives clearing 

organizations. Indeed, in November 2010, Tradeweb served as the execution facility 

for the first fully electronic multidealer-to-customer interest rate swap trade to be 

cleared in the U.S., and in February 2011, Tradeweb completed the first fully electronic multidealer-to-customer credit default swap trade to be executed and cleared 

in the U.S. Tradeweb’s existing technology maintains a permanent audit trail of the 

millisecond-by-millisecond details of each trade negotiation and all completed transactions, and allows parties (and will allow SDRs and DCOs) to receive trade details 

and access post-trade affirmation and clearing venues. With such tools and 

functionality in place, Tradeweb is providing the OTC marketplace with a front-end 

swap execution facility. 

As additional background, Tradeweb was established in 1997 with financial backing from four global banks that were active in, and interested in expanding and fostering innovation in, fixed income (U.S. Government bond) trading. After 7 years of 

growth and expansion into 15 markets globally, in 2004, Tradeweb’s bank-owners 

(which had grown from four to eight over that time) sold Tradeweb to The Thomson 

Corporation, which wholly owned it until January 2008. Although the original bankowners continued to be a resource for Tradeweb from 2004 to 2008, The Thomson 

Corporation recognized that bank ownership was an important catalyst of 

Tradeweb’s development and sold through a series of transactions a strategic interest in Tradeweb to a consortium comprised of ten global bank owners. Today, 

Tradeweb is majority owned by Thomson Reuters Corporation (successor to The 

Thomson Corporation) and minority stakes are held by the bank consortium and 

Tradeweb management. Accordingly, Tradeweb was launched by market participants and has benefited from their investment of capital, market expertise and efforts to develop and foster more transparent and efficient markets. With the support 

of its ownership and its board comprised of market and nonmarket participants, 

Tradeweb has, since its inception, brought transparency and efficiency to the OTC 

fixed income and derivatives marketplace. 

II. Summary 

Since 1998, Tradeweb has been operating a regulated electronic marketplace for 

the OTC fixed income marketplace and has played an important role in providing 

greater transparency and improving the efficiency of the trading of fixed income securities and derivatives. Indeed, Tradeweb has been at the forefront of creating electronic trading solutions which support price transparency and reduce systemic risk, 

the objectives of Title VII of the Dodd-Frank Act. Given that it has the benefit of 

offering electronic trading solutions to the buy-side and sell-side, Tradeweb believes 

that it can provide the Committee with a unique and valuable perspective on the 

regulatory framework for and the implementation of Title VII. 

At the outset, Tradeweb is very supportive of the Dodd-Frank Act and its stated 

goals. We believe that increased price transparency and operational efficiency will 

lead to a reduction in systemic risk in connection with the trading of derivatives. 

However, it is important for this Committee, Congress as a whole, and the regulators to understand and give due consideration to the needs of market participants 

in promulgating rules for and implementing Title VII. The aim must be to achieve 

the goals of the Act without materially disrupting the market and the liquidity it 

provides to end users who use derivatives to manage their varying risk profiles. 

Market participants need confidence to participate in these markets and if careful 

56 

2The term ‘‘swap execution facility’’ has been defined in the Dodd-Frank Act as a trading system or platform in which multiple participants have the ability to execute or trade swaps by 

accepting bids and offers made by multiple participants in the facility or system, through any 

means of interstate commerce, including any trading facility, that: (A) facilitates the execution 

of swaps between persons; and (B) is not a designated contract market. The Dodd-Frank Act 

amends Section 1a of the Commodities Exchange Act with a new paragraph (50, and Section 

761(a)(6) of the Dodd-Frank Act amends Section 3(a) of the Securities Exchange Act of 1934 by 

adding a new paragraph (77) (defining a ‘‘security-based swap execution facility’’). We refer to 

both as a SEF in this submission. 

consideration is not given to what the rules say and how they will ultimately be 

implemented, we fear that this confidence could be materially shaken. 

As part of the Dodd-Frank Act, Congress created a new type of registered entity— 

known as a swap execution facility or ‘‘SEF.’’ Congress expressly created SEFs to 

promote the trading of swaps on regulated markets, and provide a broader level of 

price transparency for end users of swaps. While the definition of a SEF has been 

the subject of much debate and speculation, the plain language of the Dodd-Frank 

Act requires the Commissions to recognize the distinction between SEF’s on the one 

hand and designated contract markets (DCMs) or exchanges on the other. There 

was a recognition by Congress that alternatives to traditional DCMs and exchanges 

were necessary, particularly in light of the current working market structure and 

manner in which OTC derivatives trade. We applaud the direction of the regulation, 

but want to ensure that the Commissions adopt rules that are clear and allow for 

flexibility in the manner of execution for market participants. 2 This will give the 

end users choices, confidence and liquidity, and will do so in a regulated framework 

that promotes the trading of swaps, in an efficient and transparent manner on regulated markets. 

To that end, the rules relating to Title VII must be flexible enough so as not to 

deter the trading of swaps on regulated platforms. By ensuring that the rules retain 

sufficient flexibility to allow end users to elect where and how they transact business, the Commissions will provide for the most competitive execution of trades and 

encourage the greatest liquidity in the market. Accordingly, the rules should not unduly limit the choices of execution methods available for market participants to 

manage their risks efficiently and effectively, or overly prescribe the manner in 

which market participants can choose to interact with each other to manage such 

risks (e.g., requiring a Request for Quote (RFQ) to be transmitted to a minimum 

of five market participants). If the rules regarding how market participants must 

interact with each other from a trading perspective and accessing liquidity are arbitrary and artificially prescriptive, and thus not flexible enough to accommodate the 

varying methods of execution, market participants simply will not participate and 

will seek alternative, less efficient markets to manage their risk. We certainly do 

not believe that is the ultimate goal of Title VII. 

Further, the Dodd-Frank Act clearly contemplates that a SEF should have broad, 

reasonable discretion to establish how it implements the required regulatory framework. Overly prescriptive rules on the registration and administration of SEFs and 

their compliance with the Core Principles could place an unreasonable burden on 

existing swaps trading platforms prior to the effective date of the final rules and 

may also discourage new entrants into the swaps market. Congress and the Commissions should thoughtfully implement the rules to provide electronic swaps trading platforms with the flexibility required by the Dodd-Frank Act. 

Similarly, arbitrary or artificially prescriptive ownership limits or governance requirements will deter investment of capital in new or existing platforms. A careful 

balance needs to be reached between safeguarding the system and encouraging private enterprise, which will allow end users access to choose among robust trading 

venues and clearing organizations. To be clear, we favor having an independent 

voice on the Board of registered entities, but the rules should not go so far as to 

make that the predominant voice—one that creates a conflict of interest on the opposite extreme. 

Because of the overlapping nature of the proposed rules from the CFTC and SEC 

on each aspect of Title VII—including SEFs—we believe it is imperative that the 

Commissions cooperate in developing final rules, which should be aligned to the 

greatest extent possible. Bifurcated rulemaking with respect to the swaps market 

will result in confusion and lack of confidence in the marketplace and could potentially drive participants away from the market altogether. It is also critically important that there is a consistent approach between regulators globally as overly rigid 

regulation in one jurisdiction will materially impact how other regulators promulgate rules in an effort to maintain a harmonized approach to overseeing the derivatives markets. The potential result is a movement of the market outside the U.S., 

and that would likewise be an unfortunate unintended consequence. 

57 

Finally, there has been a great deal of discussion recently about how best to implement Title VII and the currently proposed rules. There is no doubt that an overly 

hasty or ill thought-out timetable for implementation could directly impact the 

health of the derivatives markets by disenfranchising the interconnected members 

of this complex ecosystem, and implementing these regulations in one ‘‘big bang’’ is 

unrealistic. We believe the marketplace needs greater certainty in terms of how and 

when these regulations will be implemented, and we encourage Congress and the 

Commissions to seek public comment on these issues. 

Tradeweb is supportive of the goals to reform the derivatives markets and indeed 

we provide the very solutions the regulation seeks to achieve, but we are concerned 

that the Commissions may overreach in their interpretation and implementation of 

Dodd-Frank, and in doing so create unintended consequences for end users and the 

marketplace as a whole. 

III. Background on the OTC Rates and Credit Derivatives Marketplace 

There are generally two institutional marketplaces for over-the-counter (OTC) 

credit and rates derivatives: the dealer-to-customer market (institutional) and the 

interdealer market (wholesale). In the institutional market, certain dealers act as 

market makers and buy and sell derivatives with their institutional customers (e.g., 

asset managers, corporations, pension funds, etc.) on a fully disclosed and principal 

basis. In the institutional market, the provision of liquidity is essential for corporations, municipalities and Government organizations (i.e., end users), which have numerous different asset and liability profiles to manage. The need for customized risk 

management solutions has led to a market that relies on flexibility—so end users 

can adequately hedge interest rate exposure—and liquidity providers, who have the 

ability to absorb the varied risk profiles of end users by trading standard and customized derivatives. These market makers then often look to the wholesale market—the market wherein dealers trade derivatives with one another—to obtain liquidity or offset risk as a result of transactions effected in the institutional market 

or simply to hedge the risk in their portfolios. 

In the wholesale or inter-dealer market, brokers (IDBs) act as intermediaries 

working to facilitate transactions between dealers. There is no centralized exchange 

(i.e., derivatives are traded over-the-counter), and as a result, dealers look to IDBs 

to obtain information and liquidity while at the same time preserving anonymity in 

their trades. Currently, in the United States, these trades are primarily accomplished bilaterally through voice brokering. By providing a service through which 

the largest and most active dealers can trade anonymously, IDBs prevent other 

dealers from discerning a particular dealer’s trading strategies, which in turn (i) reduces the costs associated with the market knowing a particular dealer is looking 

to buy or sell a certain quantity of derivatives, (ii) allows the dealer to buy or sell 

derivatives in varying sizes, providing stability to the marketplace, and (iii) enhances liquidity in the marketplace. 

Both the wholesale and institutional derivatives markets trade primarily through 

bilateral voice trading, with less than 5 percent of the institutional business trading 

electronically. In these markets, trades are often booked manually into back office 

systems and trades are confirmed manually (by fax or other writing), and some (but 

not all) derivatives trades are cleared. 

With the implementation of the Dodd-Frank Act, we expect that most of the interest rate and credit derivatives markets will be subject to mandatory clearing, and 

therefore be traded on a regulated swap market. Accordingly, with increased electronic trading, the credit and rates derivatives markets will be much more transparent (with increased pretrade price transparency) and efficient, and systemic risk 

will be greatly reduced as the regulated swaps markets will have direct links to designated clearing organizations (DCOs) and swap data repositories (SDRs). 

In light of the foregoing and with the forthcoming business conduct standards, we 

believe the trading mandate was not intended to be and does not need to be artificially and arbitrarily prescriptive to achieve the goals of the Dodd-Frank Act. Indeed, to do so, would undermine these goals. For example, by mandating a minimum of five liquidity providers from which a market participant can seek prices 

would likely reduce liquidity and effectively reduce the ability for end users to adequately manage their risk. In short, regulated (i) swap market trading (without regard to trading model but with the appropriate transparency and regulatory oversight), (ii) clearing and (iii) reporting is what will accomplish the policy goals without hurting liquidity and disrupting the market. It is critical that the Commissions 

do not propose rules that artificially and unnecessarily hurt the market and undermine the goals of the Dodd-Frank Act. 

58 

IV. Key Considerations for SEF Rulemaking 

SEFs 

As noted above, it is imperative that the Commissions adopt rules that are clear 

and allow for flexibility in the manner of execution for market participants. This 

will give the market choices, confidence and liquidity, and will do so in a regulated 

framework that promotes the trading of swaps, in an efficient and transparent manner. 

Consistent with the goals of the Dodd-Frank Act, for institutional users, a SEF 

should (i) provide pretrade price transparency through any appropriate mechanism 

that allows for screen-based quotes that provide an adequate snapshot of the market 

(e.g., through streaming prices for standardized transactions and competitive real 

time quotes for larger or more customized transactions), (ii) incorporate a facility 

through which multiple participants can trade with each other (i.e., must have competition among liquidity providers), (iii) have objective standards for participation 

that maintain the structure of liquidity providers (like swap dealers) providing liquidity to liquidity takers (institutional buy-side clients), (iv) have the ability to adhere to the core principles that are determined to be applicable to SEFs, (v) provide 

access to a broad range of participants in the OTC derivatives market, allowing 

such participants to have access to trades with a broad range of dealers and a broad 

range of DCOs; (vi) allow for equal and fair access to all the DCOs and allow market 

participants the choice of DCO on a per trade basis, and (vii) have direct 

connectivity to all the SDRs. 

In order to register and operate as a SEF, the ‘‘trading system or platform’’ must 

comply with the enumerated Core Principles in the Dodd-Frank Act applicable to 

SEFs. Regulators have the authority to determine the manner in which a SEF complies with the statutory core principles, and there is discretion for the Commissions 

to retain distinct regulatory characteristics for SEFs versus DCMs. It is critically 

important for the Commissions to apply the principles with flexibility given the 

market structure in which swaps are traded. Accordingly, regulators should interpret core principles in a way in which SEF’s can actually comply with them. While 

many of the SEF Core Principles are broad, principle-based concepts—which make 

sense given the potential for different types of SEFs and trading models—some of 

the Core Principles are potentially problematic for SEFs that do not operate a central limit order book or clearing. 

Ownership and Governance 

As noted above, Tradeweb was launched by market participants, and has benefited from their investment of capital, market expertise, and efforts to foster the development of more transparent and efficient markets. With the help of its board, 

comprised of market and nonmarket participants, Tradeweb has since its inception 

brought transparency and efficiency to the fixed income and derivatives marketplace. 

The success story of Tradeweb may not have been possible if overly prescriptive 

governance and ownership limits had been imposed at the time. It was highly unlikely that under those circumstances, any market participants would have made an 

investment. Moreover, beyond the initial seed capital, the banks’ participation also 

allowed Tradeweb to continue to invest in its infrastructure and evolve with the 

market—thus building the robust and scalable architecture that has allowed it to 

expand to 20 markets, survive 9/11 (Tradeweb’s U.S. office was in the North Tower 

of the World Trade Center), and develop connectivity with over 2,000 institutions 

globally. Under the proposed rules of the CFTC and the SEC, ownership and independent director limits will be imposed on the different registered entities that will 

provide the technological infrastructure to the swaps market—from trading to clearing. Tradeweb believes that independent directors are a very good idea, in terms of 

bringing an independent perspective to the governing board, but their duties must 

be consistent with other board members. However, artificial caps on ownership or 

excessive minimum voting requirements for independent directors on the board 

(such as 51 percent of the voting power) go too far. As a practical matter, ownership 

limits will impair registered entities such as trading platforms and clearing organizations, from raising capital, and overly expansive independent director requirements will likewise hurt investment because investors will lack a sufficient say in 

how their investment will be governed. Moreover, Dodd-Frank provides other, more 

direct, ways in which to mitigate conflicts of interest, and employing each of these 

tools in a reasonable fashion will, in the aggregate, address the potential conflicts 

of interest without negatively impacting investment of capital and innovation in the 

marketplace. 

59 

For these reasons, we urge legislators and regulators to consider a more reasoned 

approach to mitigating conflicts of interest. 

Implementation 

Because of its technological experience and expertise, Tradeweb will be in a position to implement whatever trading rules are imposed by the CFTC and SEC for 

SEFs shortly after registration. However, as we note above, the implementation of 

Title VII of the Dodd-Frank Act will require cooperation between regulators (both 

domestically and abroad) in their rulemaking and implementation plan, as well as 

the cooperation and investment of market participants. It is critical therefore that 

in the first instance, the rulemaking is flexible but clear, and that each facet is implementation is thought through—because a lack of confidence in implementation 

will result in a lack of confidence in the marketplace, the result of which would be 

a marketplace which would not best serve the interests of the end user. We believe 

the marketplace needs greater certainty in terms of how and when these regulations 

will be implemented, and we encourage Congress and the Commissions to seek public comment on these issues. 

In sum, while we support the goals of the Dodd-Frank Act and believe increased 

regulatory oversight is good for the derivatives market, we want to emphasize that 

flexibility in trading models for execution platforms are critically important to maintain market structure so end users can manage their risks in a flexible manner. If 

you have any questions concerning our comments, please feel free to contact us. We 

welcome the opportunity to discuss these issues further with the Committee and 

their Members. 

PREPARED STATEMENT OF TERRENCE A. DUFFY 

EXECUTIVE CHAIRMAN, CME GROUP INC. 

APRIL 12, 2011 

Chairman Johnson, Ranking Member Shelby, Members of the Committee, thank 

you for the opportunity to testify on the implementation of Title VII of the DoddFrank Wall Street Reform and Consumer Protection Act (P.L. 111-203, July 21, 

2010) (DFA). I am Terry Duffy, Executive Chairman of CME Group (‘‘CME Group’’ 

or ‘‘CME’’), which is the world’s largest and most diverse derivatives marketplace. 

CME Group includes four separate exchanges—Chicago Mercantile Exchange Inc., 

the Board of Trade of the City of Chicago, Inc., the New York Mercantile Exchange, 

Inc., and the Commodity Exchange, Inc. (together ‘‘CME Group Exchanges’’). The 

CME Group Exchanges offer the widest range of benchmark products available 

across all major asset classes, including futures and options based on interest rates, 

equity indexes, foreign exchange, energy, metals, agricultural commodities, and alternative investment products. CME also includes CME Clearing, a derivatives 

clearing organization and one of the largest central counterparty clearing services 

in the world; it provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter (OTC) derivatives transactions through CME 

Clearing and CME ClearPort®. The CME Group Exchanges serve the hedging, risk management and trading 

needs of our global customer base by facilitating transactions through the CME 

Globex® electronic trading platform, our open outcry trading facilities in New York 

and Chicago, as well as through privately negotiated transactions executed in compliance with the applicable Exchange rules and cleared by CME’s clearinghouse. In 

addition, CME Group distributes real-time pricing and volume data through a global 

distribution network of approximately 500 directly connected vendor firms serving 

approximately 400,000 price display subscribers and hundreds of thousands of additional order entry system users. CME’s proven high reliability, high availability 

platform coupled with robust administrative systems represent vast expertise and 

performance in managing market center data offerings. 

The financial crisis focused well-warranted attention on the lack of regulation of 

OTC financial markets. We learned a number of important lessons and Congress 

crafted legislation that, we hope, reduces the likelihood of a repetition of that disaster. However, it is important to emphasize that regulated futures markets and futures clearinghouses operated flawlessly. Futures markets performed all of their essential functions without interruption and, despite failures of significant financial 

firms, our clearinghouse experienced no default and no customers on the futures 

side lost their collateral or were unable to immediately transfer positions and continue managing risk. Dodd-Frank was adopted to impose a new regulatory structure 

on a previously opaque and unregulated market—the OTC swaps market. It was not 

intended to reregulate the robustly regulated futures markets. 

60 

For example, while Congress granted the Commission the authority to adopt rules 

respecting core principles, it did not direct it to eliminate principles-based regulation. Yet the Commission has proposed specific requirements for multiple Core Principles—almost all Core Principles in the case of designated contract markets 

(DCMs)—and effectively eviscerate the principle-based regime that has fostered success in CFTC-regulated entities for the past decade. 

The Commission’s almost complete reversion to a prescriptive regulatory approach 

converts its role from an oversight agency, responsible for assuring self regulatory 

organizations comply with sound principles, to a frontline decision maker that imposes its business judgments on the operational aspects of derivatives trading and 

clearing. This reinstitution of rule-based regulation will require a substantial increase in the Commission’s staff and budget and impose indeterminable costs on the 

industry and the end users of derivatives. Yet there is no evidence that this will 

be beneficial to the public or to the functioning of the markets. In keeping with the 

President’s Executive Order to reduce unnecessary regulatory cost, the CFTC should 

be required to reconsider each of its proposals with the goal of performing those 

functions that are mandated by DFA. 

Further, the principles-based regime of the CFMA has facilitated tremendous innovation and allowed U.S. exchanges to compete effectively on a global playing field. 

Principles-based regulation of futures exchanges and clearinghouses permitted U.S. 

exchanges to regain their competitive position in the global market. Without unnecessary, costly and burdensome regulatory review, U.S. futures exchanges have been 

able to keep pace with rapidly changing technology and market needs by introducing new products, new processes and new methods by certifying compliance with 

the CEA. Indeed, U.S. futures exchanges have operated more efficiently, more economically and with fewer complaints under this system than at any time in their 

history. The transition to an inflexible regime threatens to stifle growth and innovation in U.S. exchanges and thereby drive market participants overseas. As further 

discussed below, this will certainly impact the relevant job markets in the United 

States. 

We support the overarching goals of DFA to reduce systemic risk through central 

clearing and exchange trading of derivatives, to increase data transparency and 

price discovery, and to prevent fraud and market manipulation. Unfortunately, DFA 

left many important issues to be resolved by regulators with little or ambiguous direction and set unnecessarily tight deadlines on rulemakings by the agencies 

charged with implementation of the Act. In response to the aggressive schedule imposed by DFA, the Commodity Futures Trading Commission (‘‘CFTC’’ or ‘‘Commission’’) has proposed hundreds of pages of new or expanded regulations. 

In our view, many of the Commission’s proposals are inconsistent with DFA, not 

required by DFA, and/or impose burdens on the industry that require an increase 

in CFTC staff and expenditures that could never be justified if an adequate costbenefit analysis had been performed. I will discuss below the Commission’s failure 

to comply with the Congressionally mandated cost-benefit process, the need to sequence Dodd-Frank rulemaking appropriately, and the potential negative impact on 

U.S. markets of regulatory proposals. 

A. Lack of Consideration of Costs of Regulatory Proposals 

The Commission’s rulemaking has been skewed by its failure to follow the plain 

language of Section 15 of the Commodity Exchange Act (CEA), as amended by DFA, 

which requires the Commission to consider the costs and benefits of its action before 

it promulgates a regulation. In addition to weighing the traditional direct costs and 

benefits, Section 15 directs the Commission to include in its evaluation of the benefits of a proposed regulation the following intangibles: ‘‘protection of market participants and the public,’’ ‘‘the efficiency, competitiveness, and financial integrity of futures markets,’’ ‘‘price discovery,’’ ‘‘considerations of sound risk management practices,’’ and ‘‘other public interest considerations.’’ The Commission has construed 

this grant of permission to consider intangibles as a license to ignore the real costs. 

The explicit cost-benefit analysis included in the more than 30 rulemakings to 

date and the Commission’s testimony in a number of congressional hearings indicate 

that those responsible for drafting the rule proposals are operating under the mistaken interpretation that Section 15(a) of the CEA excuses the Commission from 

performing any analysis of the direct, financial costs and benefits of the proposed 

regulation. Instead, the Commission contends that Congress permitted it to justify 

its rule making based entirely on speculation about unquantifiable benefits to some 

segment of the market. The drafters of the proposed rules have consistently ignored 

the Commission’s obligation to fully analyze the costs imposed on third parties and 

on the agency by its regulations. 

61 

Commissioner Sommers forcefully called this failure to the Commission’s attention at the CFTC’s February 24, 2011, Meeting on the Thirteenth Series of Proposed 

Rulemakings under the Dodd-Frank Act. 

Before I address the specific proposals, I would like to talk about an issue 

that has become an increasing concern of mine—that is, our failure to conduct a thorough and meaningful cost-benefit analysis when we issue a proposed rule. The proposals we are voting on today, and the proposals we 

have voted on over the last several months, contain very short, boilerplate 

‘‘Cost-Benefit Analysis’’ sections. The ‘‘Cost-Benefit Analysis’’ section of each 

proposal states that we have not attempted to quantify the cost of the proposal because Section 15(a) of the Commodity Exchange Act does not require the Commission to quantify the cost. Moreover, the ‘‘Cost Benefit 

Analysis’’ section of each proposal points out that all the Commission must 

do is ‘‘consider’’ the costs and benefits, and that we need not determine 

whether the benefits outweigh the costs. 

Commissioner Sommers reiterated her concern with the lack of cost-benefit analysis performed by the Commission in her March, 30, 2011, testimony before the 

Subcommittee on Oversight and Investigations of the House Committee on Financial Services. Commissioner Sommers noted that ‘‘the Commission typically does not 

perform a robust cost-benefit analysis at either the proposed rule stage or the final 

rule stage’’ and noted that ‘‘while we do ask for comment from the public on the 

costs and benefits at the proposal stage, we rarely, if ever, attempt to quantify the 

costs before finalizing a rule.’’ 

B. Sequencing of Rulemakings Under Dodd-Frank 

Chairman Gensler has recently disclosed his plan for the sequencing of final 

rulemakings under DFA. He has divided the rulemakings into three categories: 

early, middle, and late. We agree that sequencing of the rules is critical to meaningful public comment and effective implementation of the rules to implement DFA. 

Many of the rulemakings required by DFA are interrelated. That is, DFA requires 

many intertwined rulemakings with varying deadlines. Market participants, including CME cannot fully understand the implications or costs of a proposed rule when 

that proposed rule is reliant on another rule that is not yet in its final form. As 

a result, interested parties are unable to comment on the proposed rules in a meaningful way, because they cannot know the full effect. 

We agree with many, but not all aspects of the Chairman’s proposed sequencing 

agenda and have recently proposed an alternative sequencing agenda to the Commissioners. We recommend that in Phase 1 (early), the Commission focus on rules 

that are necessary to bring the previously unregulated swaps market into the sound 

regulatory framework that exists for futures markets. This set of major rulemakings 

represents the largest amount of change for the industry and cannot be satisfactorily addressed in a timely manner if key elements of the regulatory framework 

for swaps clearing are not determined until the middle or late stages of the rulemaking process. Further, the regulatory framework for reducing systemic risk in 

OTC derivatives was the central focus of DFA and therefore should have the highest 

priority. 

We suggest that Phase II (middle) deal with exchange-trading requirements for 

swaps, including the definition of and requirements for swap trading facilities, business conduct standards for swap dealers and requirements for swap data repositories. While we support efforts to increase transparency in swaps markets, we believe these rulemakings are less critical in time priority than the clearing mandate 

and related clearing rules that will reduce systemic risk. 

Finally, we recommend that the Commission leave those rulemakings that deal 

with DCMs and position limits for Phase III (late). As I mention throughout my testimony, the exchange-traded derivatives market operated flawlessly during the financial crisis, and the proposed rules affecting DCMs and position limits, which as 

discussed below, often represent an overstepping of the Commission’s authority 

under DFA, represent incremental changes to an already robust regulatory scheme. 

With respect to the phasing in of the mandatory clearing rules for swaps, some 

have suggested that the clearing requirement first be applied to dealer-to-dealer 

swaps and then later applied to dealer-to-customer swaps. CME Group strongly disagrees with this approach insofar as it may limit clearing competition and customer 

choice and because, more importantly, it will disadvantage customers who are preparing for central counterparty clearing of swaps but are unable to complete their 

preparations due to the uncertainty associated with the lack of final rules. Sell-side 

and buy-side participants may elect to support or prefer different clearing solutions 

depending on how they are owned and operated, the membership requirements assoVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00065 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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1 Commissioner Dunn stated: ‘‘Lastly, I would like to speak briefly about the budget crisis the 

CFTC is facing. The CFTC is currently operating on a continuing resolution with funds insufficient to implement and enforce the Dodd-Frank Act. My fear at the beginning of this process 

was that due to our lack of funds the CFTC would be forced to move from a principles based 

regulatory regime to a more prescriptive regime. If our budget woes continue, my fear is that 

the CFTC may simply become a restrictive regulator. In essence, we will need to say ‘No’ a lot 

more. No to new products. No to new applications. No to anything we do not believe in good 

faith that we have the resources to manage. Such a restrictive regime may be detrimental to 

ciated with each clearinghouse, and the risk management and default management 

features associated with each clearing solution. Different clearinghouses have already adopted differing approaches to these features, enhancing competition and the 

proliferation of different business models. Sequencing dealer-to-dealer clearing prior 

to dealer-to-customer clearing lacks any rational justification and simply limits the 

availability of competing clearing models, potentially limiting competition, which 

Congress expressly provided for in DFA. 

The theory behind phasing in dealer-to-dealer swaps first is that dealers will be 

prepared to begin clearing swaps before buy-side participants are likewise prepared. 

This rationale, however, is not based in fact. An overwhelming number of buy-side 

participants are already clearing or ready to clear or will be ready to clear in the 

near future. Ten buy-side firms are already clearing at CME Group. Another 30 are 

testing with us and have informed us that they are planning to be prepared to clear 

no later than July 15. Another 80 buy-side firms are in the pipeline to clear with 

us and would like to be ready to clear voluntarily approximately 3–6 months before 

mandated to do so. Also, UBS recently conducted a comprehensive study (March 10, 

2011) of OTC derivatives market participants to gauge the readiness on the buyside for this transition. Their study found that buy-side firms are increasingly prepared to clear OTC derivatives, reporting that 73 percent of firms are already clearing or preparing to clear, 71 percent expect to begin clearing within 12 months, and 

82 percent expect that the majority of their OTC businesses will be cleared within 

2 years. Claims that buy-side participants are not ready to clear are simply false 

and will disadvantage buy-side firms that wish to reduce bilateral clearing risks by 

adopting central counterparty clearing as soon as possible. 

We believe that the most efficient way to implement the clearing mandate is to 

phase in the mandate on a product-class by product-class basis. Once the CFTC defines ‘‘class,’’ it can mandate that large classes of instruments, such as 10-year interest rate swaps, be cleared regardless of the counterparties to the trade. This approach will (i) preserve customer choice in clearing, (ii) bring the largest volume of 

swaps into clearinghouses as soon as possible, and (iii) allocate the Commission’s 

limited resources in an efficient manner. CME Group’s letter to Chairman Gensler, 

which discusses our position on both sequencing of rulemaking and sequencing of 

implementation of the clearing mandate in greater detail, is attached for your reference as Exhibit A. 

The Commission should avoid creating an unlevel playing field among large swap 

market participants—both in terms of freedom to choose among competing clearing 

offerings and in terms of their ability to reduce bilateral credit risks in a timely 

fashion. Congress wisely recognized that major swap participants that are not swap 

dealers can also pose systemic risks to the marketplace; hence the Commission 

should sequence rules applying to swap dealers and major swap participants at the 

same time. 

This Congress can mitigate some of the problems that have plagued the CFTC 

rulemaking process by extending the rulemaking schedule so that professionals, including exchanges, clearinghouses, dealers, market makers, and end users can have 

their views heard and so that the CFTC will have a realistic opportunity to assess 

those views and measure the real costs imposed by its new regulations. Otherwise, 

the unintended adverse consequences of those ambiguities and the rush to regulation will impair the innovative, effective risk management that regulated exchanges 

have provided through the recent financial crisis and stifle the intended effects of 

financial reform, including the clearing of OTC transactions. 

C. Impact of Regulatory Proposals on U.S. Markets 

Several Commissioners clearly recognize the potential unintended consequences 

and the potential detrimental effects of a prescriptive, rather than principles-based, 

regime upon the markets. Commissioner Dunn, for example, expressed concern that 

if the CFTC’s ‘‘budget woes continue, [his] fear is that the CFTC may simply become 

a restrictive regulator. In essence, [it] will need to say ‘No’ a lot more . . . No to 

anything [it does] not believe in good faith that [it has] the resources to manage’’ 

and that ‘‘such a restrictive regime may be detrimental to innovation and competition.’’ 1 Commissioner O’Malia has likewise expressed concern regarding the effect 

63 

innovation and competition, but it would allow us to fulfill our duties under the law, with the 

resources we have available.’’ Commissioner Michael V. Dunn, Opening Statement, Public Meeting on Proposed Rules Under Dodd-Frank Act (January 13, 2011) http://www.cftc.gov/PressRoom/SpeechesTestimony/dunnstatement011311.html. 2 In Facing the Consequences: ‘‘Too Costly to Clear,’’ Commissioner O’Malia stated: ‘‘I have 

serious concerns about the cost of clearing. I believe everyone recognizes that the Dodd-Frank 

Act mandates the clearing of swaps, and that as a result, we are concentrating market risk in 

clearinghouses to mitigate risk in other parts of the financial system. I said this back in October, and unfortunately, I have not been proven wrong yet. Our challenge in implementing these 

new clearing rules is in not making it ‘too costly to clear.’ Regardless of what the new market 

structures ultimately look like, hedging commercial risk and operating in general will become 

more expensive as costs increase across the board, from trading and clearing, to compliance and 

reporting.’’ 

‘‘In the short time I have been involved in this rulemaking process, I have seen a distinct 

but consistent pattern. There seems to be a strong correlation between risk reduction and cash. 

Any time the clearing rulemaking team discusses increasing risk reduction, it is followed by a 

conversation regarding the cost of compliance and how much more cash is required.’’ 

‘‘For example, there are several changes to our existing rules that will contribute to increased 

costs, including more stringent standards for those clearinghouses deemed to be systemically 

significant. The Commission staff has also recommended establishing a new margining regime 

for the swaps market that is different from the futures market model because it requires individual segregation of customer collateral. I am told this will increase costs to the customer and 

create moral hazard by reducing the incentive of futures commission merchants to appropriately 

identify and manage customer risk. In the spirit of the Executive Order, we must ask ourselves: 

Are we creating an environment that makes it too costly to clear and puts risk management 

out of reach?’’ Commissioner Scott D. O’Malia, Derivatives Reform: Preparing for Change, Title 

VII of the Dodd-Frank Act: 732 Pages and Counting, Keynote Address (January 25, 2011) 

http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-3.html. 

of proposed regulations on the markets. More specifically, the Commissioner has expressed concern that new regulation could make it ‘‘too costly to clear.’’ He noted 

that there are several ‘‘changes to [the] existing rules that will contribute to increased costs.’’ Such cost increases have the effect of ‘‘reducing the incentive of futures commission merchants to appropriately identify and manage customer risk. In 

the spirit of the Executive Order, we must ask ourselves: Are we creating an environment that makes it too costly to clear and puts risk management out of reach?’’ 2

Additionally, concern has been expressed regarding unduly stringent regulation 

driving major customers overseas; indeed, we have already seen this beginning to 

happen with only the threat of regulation. For example, Commissioner Sommers has 

noted that she was troubled by the lack of analysis of swap markets and of whether 

the proposal would ‘‘cause price discovery in the commodity to shift to trading on 

foreign boards of trade,’’ and that ‘‘driving business overseas remains a long standing concern.’’ 

The CFTC’s apparent decision to impose a multitude of prescriptive rules on both 

DCMs and swap execution facilities (SEFs) may have a detrimental effect on employment in the United States. The principles-based regulation of futures markets 

had a transformative effect on U.S. futures markets over the past decade. Since the 

Commodity Futures Modernization Act of 2000 (CFMA), which converted the CEA 

from a rules-based to principles-based regime, the futures markets have experienced 

unparalleled growth and innovation and have been able to regain and maintain a 

competitive position in the global market. The principles-based regime has allowed 

U.S. futures exchanges to keep pace with rapidly changing technology and market 

needs by introducing new products, processes, and methods of compliance and avoiding stifling regulatory review. The adoption by the CFTC of a prescriptive regime 

will stifle this innovation, make U.S. futures markets less attractive to traders, and 

in the end can only result in the loss of jobs as the markets lose their ability to 

compete. 

Most notably, the newly prescriptive regime, as well as other rules proposed by 

the Commission, are not in harmony with international regulators. This creates an 

incentive for market participants to move their business to international exchanges 

where they may be subject to less prescriptive regimes, threatening negative consequences for U.S. exchanges. While the Commission has been working to induce 

international regulators to be equally prescriptive, that effort seems to be failing as 

other jurisdictions are alert to the value of snapping up the business that the Commission will drive off shore. The threat of prescriptive position limits and restrictions on hedging in the U.S. are already driving business overseas or into unregulated markets. Additionally, broad, undefined prohibitions on so-called ‘‘disruptive’’ 

trading practices and trading strategies will drive liquidity providers from the U.S. 

markets and impair hedging and price discovery. The CFTC should be careful not 

to adopt restrictions that tilt the competitive playing field in favor of overseas marVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00067 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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3 75 Fed. Reg. 75162 (proposed Dec. 2, 2010) (to be codified at 17 C.F.R. pt. 190). 

4See, Reg. 1.20(a). 

kets. Such a tilt will result in both a loss of jobs in the U.S. and less cost-efficient 

hedging for persons in business in the U.S. 

Conclusion 

Attached to my testimony are just a few examples where the Commission has proposed rules inconsistent with DFA or that impose unjustified costs and burdens on 

both the industry and the Commission. As previously noted, CME Group has great 

concern about the number of unnecessary and overly burdensome rule proposals 

aimed at the regulated futures markets. The goal of Dodd-Frank was to bring transparency, safety, and soundness to the over-the-counter market, not reregulate those 

markets which have operated transparently and without default. However, given 

the CFTC has determined to issue numerous rules above and beyond what is statutorily required by DFA, we ask this Congress to extend the rulemaking schedule 

under DFA to allow time for industry professionals of various viewpoints to fully 

express their views and concerns to the Commission and for the Commission to have 

a realistic opportunity to assess and respond to those views and to realistically assess the costs and burdens imposed by the new regulations. To this end, we urge 

the Congress to ensure that the Commission performs a proper cost-benefit analysis, 

taking into account real financial costs to market participants, before the proposal 

or implementation of rules promulgated under DFA. The imposition of unnecessary 

costs and restrictions on market participants can only result in the stifling of 

growth of the U.S. futures industry, send market participants to overseas exchanges, and in the end, result in harm to the U.S. economy and loss of American 

jobs. We urge the Congress to ensure that implementation of DFA is consistent with 

the Congressional directives in the Act and does not unnecessarily harm hedging 

and risk transfer markets that U.S. companies depend upon to reduce business risks 

and increase economic growth. 

APPENDIX 

CONCERNS REGARDING SPECIFIC RULEMAKINGS

We are concerned that many of the Commission’s proposed rulemakings go beyond 

the specific mandates of DFA, and are not legitimately grounded in evidence and 

economic theory. I will now address, in turn, several proposed rules issued by the 

Commission that illustrate these problems. 

1. Advance Notice of Proposed Rulemaking on Protection of Cleared Swaps 

Customers Before and After Commodities Broker Bankruptcies3

In its Advanced Notice of Proposed Rulemaking (ANPR) regarding segregation of 

customer funds, the Commission notes that it is considering imposing an ‘‘individual 

segregation’’ model for customer funds belonging to swaps customers. Such a model 

would impose unnecessary costs on derivatives clearing organizations (DCOs) and 

customers alike. As noted in the ANPR, DCOs have long followed a model (the 

‘‘baseline model’’) for segregation of collateral posted by customers to secure contracts cleared by a DCO whereby the collateral of multiple futures customers of a 

futures commission merchant (FCM) is held together in an omnibus account. If the 

FCM defaults to the DCO because of the failure of a customer to meet its obligations 

to the FCM, the DCO is permitted (but not required), in accordance with the DCO’s 

rules and CFTC regulations, to use the collateral of the FCM’s other futures customers in the omnibus account to satisfy the FCM’s net customer futures obligation 

to the DCO. Under the baseline model, customer collateral is kept separate from the 

property of FCMs and may be used exclusively to ‘‘purchase, margin, guarantee, secure, transfer, adjust or settle trades, contracts or commodity option transactions of 

commodity or option customers.’’ 4 A DCO may not use customer collateral to satisfy 

obligations coming out of an FCM’s proprietary account. 

In its ANPR, the Commission suggests the possibility of applying a different customer segregation model to collateral posted by swaps customers, proposing three 

separate models, each of which requires some form of ‘‘individual segregation’’ for 

customer cleared-swap accounts. Each of these models would severely limit the 

availability of other customer funds to a DCO to cure a default by an FCM based 

on the failure of a customer to meet its obligations to the DCO. The imposition of 

any of these alternative models first, is outside of the Commission’s authority under 

DFA and second, will result in massive and unnecessary costs to DCOs as well as 

to customers—the very individuals such models are allegedly proposed to protect. 

65 

5 76 Fed. Reg. 4752 (proposed Jan. 26, 2011) (to be codified at 17 C.F.R. pts. 1, 150–151). 

6My December 15, 2010, testimony before the Subcommittee On General Farm Commodities 

and Risk Management of the House Committee on Agriculture includes a more complete legal 

analysis of the DFA requirements. 

CME Group recognizes that effective protection of customer funds is, without a 

doubt, critical to participation in the futures and swaps markets. This fact does not, 

however, call for a new segregation regime. The baseline model has performed this 

function admirably over the years, with no futures customers suffering a loss as a 

result of an FCM’s bankruptcy or default. There is no reason to believe it will not 

operate as well in the swaps market. DFA did nothing to change this segregation 

regime as applied to futures, and a focus of Dodd-Frank is to bring the OTC swaps 

market into a regulatory scheme similar to that which allowed the futures markets 

to function flawlessly throughout the financial crisis. To this end, it is nonsensical 

that Congress would intend to require a different scheme of segregation of customer 

funds and as a result, a different margining and default model than that currently 

used in the futures markets. Imposing such a conflicting model would complicate 

the function of DCOs intending to clear both futures and swaps. Indeed, the statutory language adopted in Section 724 of DFA does nothing to compel such a result. 

The imposition of a different customer segregation system could undermine the 

intent behind DFA by imposing significantly higher costs on customers, clearing 

members, and DCOs intending to clear swaps and injecting moral hazard into a system at the customer and FCM levels. A change from the baseline model would interfere with marketplace and capital efficiency as DCOs may be required to increase 

security deposits from clearing members. That is, depending on the exact methodology employed, DCOs may be forced to ask for more capital from clearing members. 

Based on CME Group’s initial assessments, these increases in capital requirements 

would be substantial. For example, CME Group’s guarantee fund would need to double in size. Aside from these monetary costs, adoption of a segregation model would 

create moral hazard concerns at the FCM level. That is, the use of the new proposed 

models could create a disincentive for an FCM to offer the highest level of risk managements to its customers if the oversight and management of individual customer 

risk was shifted to the clearinghouse and continue to carry the amount of excess 

capital they do today. 

Imposition of the suggested systems could increase costs and decrease participation in the CFTC-regulated cleared-swaps market because customers may be unable 

or unwilling to satisfy resultant substantially increased margin requirements. FCMs 

would face a variety of increased indirect costs, such as staffing costs, new systems 

and compliance and legal costs and direct costs such as banking and custodial fees. 

FCMs would likely, in turn, pass these costs on to customers. Additionally, smaller 

FCMs may be forced out of business, larger FCMs may not have incentive to stay 

in business, and firms otherwise qualified to act as FCMs may be unwilling to do 

so due to the risk and cost imposed upon the FCM model by individualized segregation. This could lead to a larger concentration of customer exposures at fewer FCMs, 

further increases to margin and guarantee fund requirements, and further increased 

costs to customers. All of these consequences would lead to decreased participation 

in U.S. futures and swaps exchanges and result in loss of jobs in the United States. 

2. Proposed Rulemaking on Position Limits5

A prime example of a refusal to regulate in strict conformance with DFA, is the 

Commission’s proposal to impose broad, fixed position limits for all physically delivered commodities. The Commission’s proposed position limit regulations ignore the 

clear Congressional directives, which DFA added to Section 4a of the CEA, to set 

position limits ‘‘as the Commission finds are necessary to diminish, eliminate, or 

prevent’’ ‘‘sudden or unreasonable fluctuations or unwarranted changes in the price 

of’’ a commodity. 6 Without any basis to make this finding, the Commission instead 

justified its position limit proposal as follows: 

The Commission is not required to find that an undue burden on interstate 

commerce resulting from excessive speculation exists or is likely to occur in 

the future in order to impose position limits. Nor is the Commission required to make an affirmative finding that position limits are necessary to 

prevent sudden or unreasonable fluctuations or unwarranted changes in 

prices or otherwise necessary for market protection. Rather, the Commission may impose position limits prophylactically, based on its reasonable 

judgment that such limits are necessary for the purpose of ‘‘diminishing, 

eliminating, or preventing’’ such burdens on interstate commerce that the 

Congress has found result from excessive speculation. 76 Federal Register 

66 

4752 at 4754 (January 26, 2011), Position Limits for Derivatives. (Emphasis 

supplied.) 

At the December 15, 2010, hearing of the General Farm Commodities and Risk 

Management Subcommittee of the House Agriculture Committee on the subject of 

the implementation of DFA’s provisions respecting position limits, there was strong 

bipartisan agreement among the subcommittee members with the sentiments expressed by Representative Moran: 

Despite what some believe is a mandate for the commission to set position 

limits within a definite period of time, the Dodd-Frank legislation actually 

qualifies CFTC’s position-limit authority. Section 737 of the Dodd-Frank act 

amends the Commodity Exchange Act so that Section 4A–A2A states, ‘‘The 

commission shall, by rule, establish limits on the amount of positions as appropriate.’’ The act then states, ‘‘In subparagraph B, for exempt commodities, the limit required under subparagraph A shall be established within 

180 days after the date of enactment of this paragraph.’’ When subparagraphs A and B are read in conjunction, the act states that when position 

limits are required under subparagraph A, the commission shall set the 

limits within 180 days under paragraph B. Subparagraph A says the position-limit rule should be only prescribed when appropriate. 

Therefore, the 180-day timetable is only triggered if position limits are appropriate. In regard to the word ‘‘appropriate,’’ the commission has three 

distinct problems. First, the commission has never made an affirmative 

finding that position limits are appropriate to curtail excessive speculation. 

In fact, to date, the only reports issued by the commission or its staff failed 

to identify a connection between market trends and excessive speculation. 

This is not to say that there is no connection, but it does say the commission does not have enough information to draw an affirmative conclusion. 

The second and third issues relating to the appropriateness of position limits are regulated to adequacy of information about OTC markets. On December 8, 2010, the commission published a proposed rule on swap data 

record keeping and reporting requirements. This proposed rule is open to 

comment until February 7, 2011, and the rule is not expected to be final 

and effective until summer at the earliest. Furthermore, the commission 

has yet to issue a proposed rulemaking about swap data repositories. Until 

a swap data repository is set up and running, it is difficult to see how it 

would be appropriate for the commission to set position limits. 

CME is not opposed to position limits and other means to prevent market congestion; we employ limits in most of our physically delivered contracts. However, we 

use limits and accountability levels, as contemplated by the Congressionally approved Core Principles for DCMs, to mitigate potential congestion during delivery 

periods and to help us identify and respond in advance of any threat to manipulate 

our markets. CME Group believes that the core purpose that should govern Federal 

and exchange-set position limits, to the extent such limits are necessary and appropriate should be to reduce the threat of price manipulation and other disruptions 

to the integrity of prices. We agree that such activity destroys public confidence in 

the integrity of our markets and harms the acknowledged public interest in legitimate price discovery and we have the greatest incentive and best information to 

prevent such misconduct. 

It is important not to lose sight of the real economic cost of imposing unnecessary 

and unwarranted position limits. For the last 150 years, modern day futures markets have served as the most efficient and transparent means to discover prices and 

manage exposure to price fluctuations. Regulated futures exchanges operate centralized, transparent markets to facilitate price discovery by permitting the best informed and most interested parties to express their opinions by buying and selling 

for future delivery. Such markets are a vital part of a smooth functioning economy. 

Futures exchanges allow producers, processors and agribusiness to transfer and reduce risks through bona fide hedging and risk management strategies. This risk 

transfer means producers can plant more crops. Commercial participants can ship 

more goods. Risk transfer only works because speculators are prepared to provide 

liquidity and to accept the price risk that others do not. Futures exchanges and 

speculators have been a force to reduce price volatility and mitigate risk. Overly restrictive position limits adversely impact legitimate trading and impair the ability 

of producers to hedge. They may also drive certain classes of speculators into physical markets and consequently distort the physical supply chain and prices. 

Similarly troubling is the fact that the CFTC’s proposed rules in this and other 

areas affecting market participants are not in harmony with international reguVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00070 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
67 

7 75 Fed. Reg. 667277 (proposed Nov. 2, 2010) (to be codified at 17 C.F.R. pts. 1, 150, 151). 

8See, 75 Fed. Reg. 80747 (proposed Dec. 22, 2010) (to be codified at 17 C.F.R. pts. 1, 16, 38). 

lators. International regulators, such as the EU, are far from adopting such a prescriptive approach with respect to position limits. Ultimately, this could create an 

incentive for market participants to move their business to international exchanges 

negatively impacting the global leadership of the U.S. financial market. Furthermore, exporting the price discovery process to overseas exchanges will likely result 

in both a loss of jobs in the U.S. and less cost-efficient hedging for persons in business in the U.S. As an example, consider the two major price discovery indexes in 

crude oil: West Texas Intermediate, which trades on NYMEX, and Brent Oil, which 

trades overseas. If the Commission places heavy restrictions in areas such as position limits on traders in the U.S., traders in crude oil, and with them the price discovery process, are likely to move to overseas markets. 

3. Proposed Rulemaking on Mandatory Swaps Clearing Review Process7

Another example of a rule proposal that could produce consequences counter to 

the fundamental purposes of DFA is the Commission’s proposed rule relating to the 

process for review of swaps for mandatory clearing. The proposed regulation treats 

an application by a DCO to list a particular swap for clearing as obliging that DCO 

to perform due diligence and analysis for the Commission respecting a broad swath 

of swaps, as to which the DCO has no information and no interest in clearing. In 

effect, a DCO that wishes to list a new swap would be saddled with the obligation 

to collect and analyze massive amounts of information to enable the Commission to 

determine whether the swap that is the subject of the application and any other 

swap that is within the same ‘‘group, category, type, or class’’ should be subject to 

the mandatory clearing requirement. 

This proposed regulation is one among several proposals that impose costs and 

obligations whose effect and impact are contrary to the purposes of Title VII of DFA. 

The costs in terms of time and effort to secure and present the information required 

by the proposed regulation would be a significant disincentive to DCOs to voluntarily undertake to clear a ‘‘new’’ swap. The Commission lacks authority to transfer 

the obligations that the statute imposes on it to a DCO. The proposed regulation 

eliminates the possibility of a simple, speedy decision on whether a particular swap 

transaction can be cleared—a decision that the DFA surely intended should be made 

quickly in the interests of customers who seek the benefits of clearing—and forces 

a DCO to participate in an unwieldy, unstructured, and time-consuming process to 

determine whether mandatory clearing is required. Regulation Section 39.5(b)(5) 

starkly illustrates this outcome. No application is deemed complete until all of the 

information that the Commission needs to make the mandatory clearing decision 

has been received. Completion is determined in the sole discretion of the Commission. Only then does the 90-day period begin to run. This process to enable an exchange to list a swap for clearing is clearly contrary to the purposes of DFA. 

4. Conversion From Principles-Based to Rules-Based Regulation8

Some of the CFTC’s rule proposals are explained by the ambiguities created during the rush to push DFA to a final vote. For example, Congress preserved and expanded the scheme of principles-based regulation by expanding the list of core principles and granting self regulatory organizations ‘‘reasonable discretion in establishing the manner in which the [self regulatory organization] complies with the 

core principles.’’ Congress granted the Commission the authority to adopt rules respecting core principles, but did not direct it to eliminate the principles-based regulation, which was the foundation of the CFMA. In accordance with CFMA, the 

CFTC set forth ‘‘[g]uidance on, and Acceptable Practices in, Compliance with Core 

Principles’’ that operated as safe harbors for compliance. This approach has proven 

effective and efficient in terms of appropriately allocating responsibilities between 

regulated DCMs and DCOs and the CFTC. 

We recognize that the changes instituted by DFA give the Commission discretion, 

where necessary, to step back from this principles-based regime. Congress amended 

the CEA to state that boards of trade ‘‘shall have reasonable discretion in establishing the manner in which they comply with the core principles, unless otherwise 

determined by the Commission by rule or regulation. See, e.g., DFA §735(b), amending Section 5(d)(1)(B) of the CEA. But the language clearly assumes that the principles-based regime will remain in effect except in limited circumstances in which 

more specific rules addressing compliance with a core principle are necessary. The 

Commission has used this change in language, however, to propose specific requirements for multiple Core Principles—almost all Core Principles in the case of 

68 

DCMs—and effectively eviscerate the principle-based regime that has fostered success in CFTC-regulated entities for the past decade. 

The Commission’s almost complete reversion to a prescriptive regulatory approach 

converts its role from an oversight agency, responsible for assuring self regulatory 

organizations comply with sound principles, to a frontline decision maker that imposes its business judgments on the operational aspects of derivatives trading and 

clearing. This reinstitution of rule-based regulation will require a substantial increase in the Commission’s staff and budget and impose indeterminable costs on the 

industry and the end users of derivatives. Yet there is no evidence that this will 

be beneficial to the public or to the functioning of the markets. In keeping with the 

President’s Executive Order to reduce unnecessary regulatory cost, the CFTC should 

be required to reconsider each of its proposals with the goal of performing those 

functions that are mandated by DFA. 

Further, the principles-based regime of the CFMA has facilitated tremendous innovation and allowed U.S. exchanges to compete effectively on a global playing field. 

Principles-based regulation of futures exchanges and clearinghouses permitted U.S. 

exchanges to regain their competitive position in the global market. Without unnecessary, costly and burdensome regulatory review, U.S. futures exchanges have been 

able to keep pace with rapidly changing technology and market needs by introducing new products, new processes and new methods by certifying compliance with 

the CEA. Indeed, U.S. futures exchanges have operated more efficiently, more economically and with fewer complaints under this system than at any time in their 

history. The transition to an inflexible regime threatens to stifle growth and innovation in U.S. exchanges and thereby drive market participants overseas. This, I noted 

earlier, will certainly impact the relevant job markets in the United States. 

(a) Proposed Rulemaking Under Core Principle 9 for DCMs 

A specific example of the Commission’s unnecessary and problematic departure 

from the principles-based regime is its proposed rule under Core Principle 9 for 

DCMs—Execution of Transactions, which states that a DCM ‘‘shall provide a competitive, open and efficient market and mechanism for executing transactions that 

protects the price discovery process of trading in the centralized market’’ but that 

‘‘the rules of a board of trade may authorize . . . (i) transfer trades or office trades; 

(ii) an exchange of (I) futures in connection with a cash commodity transaction; (II) 

futures for cash commodities; or (III) futures for swaps; or (iii) a futures commission 

merchant, acting as principal or agent, to enter into or confirm the execution of a 

contract for the purchase or sale of a commodity for future delivery if that contract 

is reported, recorded, or cleared in accordance with the rules of the contract market 

or [DCO].’’ 

Proposed Rule 38.502(a) would require that 85 percent or greater of the total volume of any contract listed on a DCM be traded on the DCM’s centralized market, 

as calculated over a 12 month period. The Commission asserts that this is necessary 

because ‘‘the price discovery function of trading in the centralized market’’ must be 

protected. 75 Fed. Reg. at 80588. However, Congress gave no indication in DFA that 

it considered setting an arbitrary limit as an appropriate means to regulate under 

the Core Principles. Indeed, in other portions of DFA, where Congress thought that 

a numerical limit could be necessary, it stated so. For example, in Section 726 addressing rulemaking on Conflicts of Interest, Congress specifically stated that rules 

‘‘may include numerical limits on the control of, or the voting rights’’ of certain specified entities in DCOs, DCMs, or SEFs. 

The Commission justifies the 85 percent requirement only with its observations 

as to percentages of various contracts traded on various exchanges. It provides no 

support evidencing that the requirement will provide or is necessary to provide a 

‘‘competitive, open, and efficient market and mechanism for executing transactions 

that protects the price discovery process of trading in the centralized market of the 

board of trade,’’ as is required under Core Principle 9. Further, Core Principle 9, 

as noted above, expressly permits DCMs to authorize off-exchange transactions including for exchanges to related positions pursuant to their rules. 

The imposition of the proposed 85 percent exchange trading requirement will have 

extremely negative effects on the industry. It would significantly deter the development of new products by exchanges like CME. This is because new products generally initially gain trading momentum in off-exchange transactions. Indeed, it takes 

years for new products to reach the 85 percent exchange trading requirement proposed by the Commission. For example, one suite of very popular and very liquid 

foreign exchange products developed and offered by CME would not have met the 

85 percent requirement for 4 years after it was initially offered. The suite of products’ on-exchange trading continued to increase over 10 years, and it now trades 

69 

9More specifically, the product traded 32 percent off-exchange when it was first offered in 

2000, 31 percent off exchange in 2001, 25 percent in 2002, 20 percent in 2003, finally within 

the 85 percent requirement at 13 percent off-exchange in 2004, 10 percent in 2005, 7 percent 

in 2006, 5 percent in 2007, 3 percent in 2008, and 2 percent in 2009 and 2010. 10 75 Fed. Reg. 67282 (proposed Nov. 2, 2010) (to be codified at 17 C.F.R. pt. 40) 

only 2 percent off exchange. Under the proposed rule, CME would have had to delist 

this suite of products. 9

Imposition of an 85 percent exchange trading requirement would also have adverse effects on market participants. If instruments that are most often traded offexchange are forced onto the centralized market, customers will lose cross-margin 

efficiencies that they currently enjoy and will be forced to post additional cash or 

assets as margin. For example, customers who currently hold open positions on 

CME Clearport® will be required to post a total of approximately $3.9 billion in 

margin (at the clearing firm level, across all clearing firms). 

(b) Proposed Comparable Fee Structures under Core Principle 2 for DCMs 

In the case of certain proposed fee restrictions to be placed on DCMs, the Commission not only retreats needlessly from principles-based regulation but also greatly 

exceeds its authority under DFA. DCM Core Principle 2, which appears in DFA Section 735, states, in part, that a DCM ‘‘shall establish, monitor, and enforce compliance with rules of the contract market including . . . access requirements.’’ Under 

this Core Principle, the Commission has proposed rule 38.151, which states that a 

DCM ‘‘must provide its members, market participants and independent software 

vendors with impartial access to its market and services including . . . comparable 

fee structures for members, market participants and independent software vendors 

receiving equal access to, or services from, the [DCM].’’ 

The CFTC’s attempt to regulate DCM member, market participant and independent software vendor fees is unsupportable. The CFTC is expressly authorized 

by statute to charge reasonable fees to recoup the costs of services it provides. 7 

U.S.C. 16a(c). The Commission may not bootstrap that authority to set or limit the 

fees charged by DCMs or to impose an industry-wide fee cap that has the effect of 

a tax. See Federal Power Commission v. New England Power Co., 415 U.S. 345, 349 

(1974) (‘‘[W]hole industries are not in the category of those who may be assessed 

[regulatory service fees], the thrust of the Act reaching only specific charges for specific services to specific individuals or companies.’’). In any event, the CFTC’s overreaching is not supported by DFA. Nowhere in the CEA is the CFTC authorized to 

set or limit fees a DCM may charge. To the extent the CFTC believes its authority 

to oversee impartial access to trading platforms may provide a basis for its assertion 

of authority, that attempt to read new and significant powers into the CEA should 

be rejected. 

5. Provisions Common to Registered Entities10

The CFMA streamlined the procedures for listing new products and amending 

rules that did not impact the economic interests of persons holding open contracts. 

These changes recognized that the previous system required the generation of substantial unnecessary paperwork by exchanges and by the CFTC’s staff. It slowed innovation without a demonstrable public benefit. 

Under current rules, before a product is self-certified or a new rule or rule amendment is proposed, DCMs and DCOs conduct a due diligence review to support their 

conclusion that the product or rule complies with the Act and Core Principles. The 

underlying rationale for the self-certification process which has been retained in 

DFA, is that registered entities that list new products have a self-interest in making 

sure that the new products meet applicable legal standards. Breach of this certification requirement potentially subjects the DCM or DCO to regulatory liability. In 

addition, in some circumstances, a DCM or DCO may be subject to litigation or 

other commercial remedies for listing a new product, and the avoidance of these 

costs and burdens is sufficient incentive for DCMs and DCOs to remain compliant 

with the Act. 

Self-certification has been in effect for 10 years and nothing has occurred to suggest that this concept is flawed or that registered entities have employed this power 

recklessly or abusively. During 2010, CME launched 438 new products and submitted 342 rules or rule amendments to the Commission. There was no legitimate 

complaint respecting the self-certification process during this time. Put simply, the 

existing process has worked, and there is no reason for the Commission to impose 

additional burdens, which are not required by DFA, to impair that process. 

Section 745 of DFA merely states, in relevant part, that ‘‘a registered entity may 

elect to list for trading or accept for clearing any new contract, or other instrument, 

70 

11 75 Fed. Reg. at 67290. 12 75 Fed. Reg. 63732 (proposed October 18, 2010) (to be codified at 17 C.F.R. pts. 1, 37, 38, 

39, 40). 

or may elect to approve or implement any new rule or rule amendment, by providing 

to the Commission a written certification that the new contract or instrument or 

clearing of the new contract or instrument, new rule, or rule amendment complies 

with this Act (including regulations under this Act).’’ DFA does not direct the Commission to require the submission of all documents supporting the certification nor 

to require a review of the legal implications of the product or rule with regard to 

laws other than DFA. Essentially, it requires exactly what was required prior to the 

passage of DFA—a certification that the product, rule or rule amendment complies 

with the CEA. Nonetheless, the Commission has taken it upon itself to impose these 

additional and burdensome submission requirements upon registered entities. 

The new requirements proposed by the CFTC will require exchanges to prematurely disclose new product innovations and consequently enable foreign competitors to introduce those innovations while the exchange awaits CFTC approval. This, 

again, inhibits the ability of U.S. exchanges to compete, drives market participants 

overseas and impairs job growth in the United States. Moreover, given the volume 

of filings required by the Notice of proposed rulemaking, the Commission will require significant increases in staffing and other resources. Alternatively, the result 

will be that these filings will not be reviewed in a timely manner, further 

disadvantaging U.S. exchanges. Again, we would suggest that the Commission’s limited resources should be better aligned with the implementation of the goals of DFA 

rather than ‘‘correcting’’ a well-functioning and efficient process. 

First, the proposed rules require a registered entity to submit ‘‘all documentation’’ 

relied upon to determine whether a new product, rule or rule amendment complies 

with applicable Core Principles. This requirement is so vague as to create uncertainty as to what is actually required to be filed. More importantly, this requirement 

imposes an additional burden on both registered entities, which must compile and 

produce all such documentation, and the Commission, which must review it. It is 

clear that the benefits, if any, of this requirement are significantly outweighed by 

the costs imposed both on the marketplace and the Commission. 

Second, the proposed rules require registered entities to examine potential legal 

issues associated with the listing of products and include representations related to 

these issues in their submissions. Specifically, a registered entity must provide a 

certification that it has undertaken a due diligence review of the legal conditions, 

including conditions that relate to contractual and intellectual property rights. The 

imposition of such a legal due diligence standard is clearly outside the scope of DFA 

and is unnecessarily vague and impractical, if not impossible, to comply with in any 

meaningful manner. An entity, such as CME, involved in product creation and design is always cognizant that material intellectual property issues may arise. This 

requirement would force registered entities to undertake extensive intellectual property analysis, including patent, copyright, and trademark searches in order to satisfy the regulatory mandates, with no assurances that any intellectual property 

claim is discoverable through that process at a particular point in time. Again, this 

would greatly increase the cost and timing of listing products without providing any 

corresponding benefit to the marketplace. Indeed, the Commission itself admits in 

its NOPR that these proposed rules will increase the overall information collection 

burden on registered entities by approximately 8,300 hours per year. 11

Further, these rules steer the Commission closer to the product and rule approval 

process currently employed by the SEC, which is routinely criticized and about 

which those regulated by the SEC complained at the CFTC–SEC harmonization 

hearings. Indeed, William J. Brodsky of the Chicago Board of Options Exchange testified that the SEC’s approval process ‘‘inhibits innovation in the securities markets’’ 

and urged the adoption of the CFTC’s certification process. 

6. Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding Mitigation of 

Conflicts of Interest12

The Commission’s proposed rules regarding the mitigation of conflicts of interest 

in DCOs, DCMs, and SEFs (Regulated Entities) also exceed its rulemaking authority under DFA and impose constraints on governance that are unrelated to the purposes of DFA or the CEA. The Commission purports to act pursuant to Section 726 

of DFA but ignores the clear boundaries of its authority under that section, which 

it cites to justify taking control of every aspect of the governance of those Regulated 

Entities. Section 726 conditions the Commission’s right to adopt rules mitigating 

conflicts of interest to circumstances where the Commission has made a finding that 

71 

13 75 Fed.Reg. 67657-62 (proposed Nov. 3, 2010) (to be codified at 17 C.F.R. pt. 180). 

the rule is ‘‘necessary and appropriate’’ to ‘‘improve the governance of, or to mitigate 

systemic risk, promote competition, or mitigate conflicts of interest in connection 

with a swap dealer or major swap participant’s conduct of business with, a [Regulated Entity] that clears or posts swaps or makes swaps available for trading and 

in which such swap dealer or major swap participant has a material debt or equity 

investment.’’ (Emphasis added.) The ‘‘necessary and appropriate’’ requirement constrains the Commission to enact rules that are narrowly tailored to minimize their 

burden on the industry. The Commission failed to make the required determination 

that the proposed regulations were ‘‘necessary and proper’’ and, unsurprisingly, the 

proposed rules are not narrowly tailored but rather overbroad, outside of the authority granted to it by DFA and extraordinarily burdensome. 

The Commission proposed governance rules and ownership limitations that affect 

all Regulated Entities, including those in which no swap dealer has a material debt 

or equity investment and those that do not even trade or clear swaps. Moreover, 

the governance rules proposed have nothing to do with conflicts of interest, as that 

term is understood in the context of corporate governance. Instead, the Commission 

has created a concept of ‘‘structural conflicts,’’ which has no recognized meaning outside of the Commission’s own declarations and is unrelated to ‘‘conflict of interest’’ 

as used in the CEA. The Commission proposed rules to regulate the ownership of 

voting interests in Regulated Entities by any member of those Regulated Entities, 

including members whose interests are unrelated or even contrary to the interests 

of the defined ‘‘enumerated entities.’’ In addition, the Commission is attempting to 

impose membership condition requirements for a broad range of committees that are 

unrelated to the decision making to which Section 726 was directed. 

The Commission’s proposed rules are most notably overbroad and burdensome in 

that they address not only ownership issues but the internal structure of public corporations governed by State law and listing requirements of SEC regulated national 

securities exchanges. More specifically, the proposed regulations set requirements 

for the composition of corporate boards, require Regulated Entities to have certain 

internal committees of specified compositions and even propose a new definition for 

a ‘‘public director.’’ Such rules in no way relate to the conflict of interest Congress 

sought to address through Section 726. Moreover, these proposed rules improperly 

intrude into an area of traditional State sovereignty. It is well-established that matters of internal corporate governance are regulated by the States, specifically the 

state of incorporation. Regulators may not enact rules that intrude into traditional 

areas of State sovereignty unless Federal law compels such an intrusion. Here, Section 726 provides no such authorization. 

Perhaps most importantly, the proposed structural governance requirements cannot be ‘‘necessary and appropriate,’’ as required by DFA, because applicable State 

law renders them completely unnecessary. State law imposes fiduciary duties on directors of corporations that mandate that they act in the best interests of the corporation and its shareholders—not in their own best interests or the best interests 

of other entities with whom they may have a relationship. As such, regardless of 

how a board or committee is composed, the members must act in the best interest 

of the exchange or clearinghouse. The Commission’s concerns—that members, enumerated entities, or other individuals not meeting its definition of ‘‘public director’’ 

will act in their own interests—and its proposed structural requirements are wholly 

unnecessary and impose additional costs on the industry—not to mention additional 

enforcement costs—completely needlessly. 

7. Prohibition on Market Manipulation13

The Commission’s proposed rules on Market Manipulation, although arguably 

within the authority granted by DFA, are also problematic because they are extremely vague. The Commission has proposed two rules related to market manipulation: Rule 180.1, modeled after SEC Rule 10b-5 and intended as a broad, catch-all 

provision for fraudulent conduct; and Rule 180.2, which mirrors new CEA Section 

6(c)(3) and is aimed at prohibiting price manipulation. See 75 Fed. Reg. at 67658. 

Clearly, there is a shared interest among market participants, exchanges and regulators in having market and regulatory infrastructures that promote fair, transparent and efficient markets and that mitigate exposure to risks that threaten the 

integrity and stability of the market. In that context, however, market participants 

also desire clarity with respect to the rules and fairness and consistency with regard 

to their enforcement. 

As to its proposed Rule 180.1, the Commission relies on SEC precedent to provide 

further clarity with respect to its interpretation and notes that it intends to implement the rule to reflect its ‘‘distinct regulatory mission.’’ However, the Commission 

72 

14 75 Fed. Reg. 67301 (proposed November 2, 2010) (to be codified at 17 C.F.R. pt. 1). 15 76 Fed. Reg. 14943 (proposed March 18, 2011). 16 76 Fed. Reg. 14946 (proposed March 18, 2011). 

fails to explain how the rule and precedent will be adapted to reflect the differences 

between futures and securities markets. See 75 Fed. Reg. at 67658-60. For example, 

the Commission does not provide clarity as to if and to what extent it intends to 

apply insider trading precedent to futures markets. Making this concept applicable 

to futures markets would fundamentally change the nature of the market, not to 

mention all but halting participation by hedgers, yet the Commission does not even 

address this issue. Rule 180.1 is further unclear as to what standard of scienter the 

Commission intends to adopt for liability under the rule. Rule 180.2 is comparably 

vague, providing, for example, no guidance as to what sort of behavior is ‘‘intended 

to interfere with the legitimate forces of supply and demand’’ and how the Commission intends to determine whether a price has been affected by illegitimate factors. 

These proposed rules, like many others, have clearly been proposed in haste and 

fail to provide market participants with sufficient notice of whether contemplated 

trading practices run afoul of them. Indeed, we believe the proposed rules are so 

unclear as to be subject to constitutional challenge. That is, due process precludes 

the Government from penalizing a private party for violating a rule without first 

providing adequate notice that conduct is forbidden by the rule. In the area of market manipulation especially, impermissible conduct must be clearly defined lest the 

rules chill legitimate market participation and undermine the hedging and price discovery functions of the market by threatening sanctions for what otherwise would 

be considered completely legal activity. That is, if market participants do not know 

the rules of the road in advance and lack confidence that the disciplinary regime 

will operate fairly and rationally, market participation will be chilled because there 

is a significant risk that legitimate trading practices will be arbitrarily construed, 

post hoc, as unlawful. These potential market participants will either use a different 

method to manage risk or go to overseas exchanges, stifling the growth of U.S. futures markets and affecting related job markets. 

8. Antidisruptive Practices Authority Contained in DFA14

Rules regarding Disruptive Trade Practices (DFA Section 747) run the risk of 

being similarly vague and resulting in chilling market participation. The CFTC has 

recently issued a Proposed Interpretive Order which provides guidance regarding 

the three statutory disruptive practices set for in DFA Section 747. 15 CME Group 

applauds the Commission’s decision to clarify the standards for liability under the 

enumerated disruptive practices and supports the Commission’s decision to refrain 

from setting forth any additional ‘‘disruptive practices’’ beyond those listed in the 

statute. We believe, however, that in several respects, the proposed interpretations 

still do not give market participants enough notice as to what practices are illegal 

and also may interfere with their ability to trade effectively. 

For example, the Commission interprets section 4c(a)(5)(A), Violating Bids and Offers, ‘‘as prohibiting any person from buying a contract at a price that is higher than 

the lowest available offer price and/or selling a contract at a price that is lower than 

the highest available bid price’’ regardless of intent. 16 However, certain existing 

platforms allow trading based on considerations other than price. Without an intent 

requirement, these platforms do not ‘‘fit’’ under the regulations, and presumably will 

be driven out of business. Similarly, market participants desiring to legitimately 

trade on bases other than price will presumably be driven to overseas markets. 

Further, the Commission states that section 4c(a)(5)(B), Orderly Execution of 

Transactions During the Closing Period, applies only where a participant ‘‘demonstrates intentional or reckless disregard for the orderly execution of transactions 

during the closing period.’’ However, the Commission goes on to state that ‘‘market 

participants should assess market conditions and consider how their trading practices and conduct affect the orderly execution of transactions during the closing period.’’ In so stating, the Commission seems to impose an affirmative obligation on 

market participants to consider these factors before executing any trade. This, first, 

directly conflicts with the scienter requirements also set forth by the Commission 

and thus interferes with the ability of market participants to determine exactly 

what conduct may give rise to liability. Second, such an affirmative obligation will 

interfere with the ability of market participants to make advantageous trades, especially in the context of a fast-moving, electronic trading platform. The end result of 

both these issues is that, if the Interpretive Order goes into effect as written, market participation will be chilled, participants will move to overseas markets and jobs 

will be lost in the U.S. futures industry. 

73 

1LCH.Clearnet Ltd. is regulated by, inter alia, the Financial Services Authority of the United 

Kingdom and by the Commodity Futures Trading Commission (as a ‘‘Derivatives Clearing Organization’’) of the United States. 2LCH.Clearnet SA is regulated as a Credit Institution and Clearing House by a regulatory 

college consisting of, amongst others, the market regulators and central banks from the jurisdictions of: France, Netherlands, Belgium, and Portugal. It is also regulated as a Recognized Overseas Clearing House by the U.K. Financial Services Authority. 

Section 747 of DFA, which authorizes the Commission to promulgate additional 

rules if they are reasonably necessary to prohibit trading practices that are ‘‘disruptive of fair and equitable trading,’’ is exceedingly vague as written and does not provide market participants with adequate notice as to whether contemplated conduct 

is forbidden. If the Interpretive Order does not clearly define ‘‘disruptive trade practices,’’ it will discourage legitimate participation in the market and the hedging and 

price discovery functions of the market will be chilled due to uncertainty among participants as to whether their contemplated conduct is acceptable. 

9. Effects on OTC Swap Contracts 

DFA’s overhaul of the regulatory framework for swaps creates uncertainty about 

the status and validity of existing and new swap contracts. Today, under provisions 

enacted in 2000, swaps are excluded or exempt from the CEA under Sections 2(d), 

2(g), and 2(h) of the CEA. These provisions allow parties to enter into swap transactions without worrying about whether the swaps are illegal futures contracts 

under CEA Section 4(a). DFA repeals those exclusions and exemptions effective July 

16, 2011. At this time, it is unclear what if any action the CFTC plans to take or 

legally could take to allow both swaps entered into on or before July 16, and those 

swaps entered into after July 16 from being challenged as illegal futures contracts. 

To address this concern, Congress and the CFTC should consider some combination 

of deferral of the effective dates of the repeal of Sections 2(d), 2(g), and 2(h), exercise 

of CFTC exemptive power under Section 4(c), or other appropriate action. Otherwise 

swap markets may be hit by a wave of legal uncertainty which the statutory exclusions and exemptions were designed in 2000 to prevent. This uncertainty may, 

again, chill participation in the swap market and impair the ability of market participants, including hedgers, to manage their risks. 

PREPARED STATEMENT OF IAN AXE 

CHIEF EXECUTIVE, LCH.CLEARNET GROUP LIMITED

APRIL 12, 2011 

Chairman Johnson, Ranking Member Shelby, Members of the Committee, my 

name is Ian Axe and I am Chief Executive of LCH.Clearnet Group Ltd (the 

‘‘Group’’). On behalf of the Group, I would like to thank the Committee for asking 

me here today. 

LCH.Clearnet is the world’s leading independent clearinghouse group. Formed out 

of the merger of the London Clearing House Ltd and Clearnet SA, we continue to 

operate two clearinghouses, LCH.Clearnet Limited 1 in London and LCH.Clearnet 

SA 2 in Paris. Additionally we have a fast-growing presence in the U.S. to support 

our rapidly expanding U.S. swaps activity. We opened a New York office in late 

2009 and staff numbers have since grown quickly. Our New York head count has 

already doubled in the year to date. 

We are a user-owned, user-governed organization, being 83 percent owned by our 

clearing members, and 17 percent owned by exchanges such as the NYSE Euronext 

group. We have been clearing commodities for 120 years, and LCH.Clearnet Limited 

has been registered with and regulated by the Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization (DCO) since 2001. We serve 

major international exchanges and trading platforms, as well as a range of over-thecounter (‘‘OTC’’ or ‘‘swaps’’) markets and we clear a broad range of asset classes, 

including cash equities, exchange-traded derivatives, energy, freight, interest rate 

swaps, and euro- and British pound-denominated bonds and repos. 

OTC Clearing Expertise 

LCH.Clearnet Limited pioneered the development of OTC clearing in 1999 with 

our SwapClear and RepoClear services, respectively the market-leaders in global interest rate swap and European repo clearing. In addition, our London arm clears 

a range of OTC freight, energy, and commodity products, while LCH.Clearnet SA 

clears European OTC index-based credit default swaps and repo products. 

74 

3 ‘‘Deciphering the 2007–08 Liquidity and Credit Crunch’’, Markus K. Brunnermeier, Princeton University, Journal of Economic Perspectives, May 2008: http://www.newyorkfed.org/research/conference/2008/rmm/Brunnermeier.pdf. 

‘‘New Developments in Clearing and Settlement Arrangements for OTC Derivatives’’, Committee on Payment and Settlement Systems, BIS, Basel; March 2007. Link: http://www.bis.org/ 

publ/cpss77.htm. 

LCH.Clearnet Limited currently clears over 50 percent of the global interest rate swap market. This represents trades with a total notional principal of over $276 trillion in 14 currencies with tenors out to as far as 50 years. Last year SwapClear 

cleared over 120,000 trades involving U.S. counterparties with a notional value in 

excess of $64 trillion. Of the total swaps portfolio cleared, approximately $91 trillion 

is in U.S. dollars. 

We recently extended this capability to include a Futures Commission Merchant 

(FCM) clearing service for U.S. end user clients. We currently have 12 FCMs offering such services, and have since successfully cleared our first trades under the 

FCM structure. 

We are working closely with market participants to expand our service in the U.S. 

and have set up formal working groups with FCMs and buyside firms. Our Buyside 

Advisory Committee meets monthly to discuss the development of the service. It 

comprises representatives from a number of large U.S. firms, including Citadel, 

BlackRock, the D.E. Shaw Group, the Federal Home Loan Banks, and Freddie Mac 

amongst others. 

SwapClear is the largest swaps clearing service globally and is widely recognized 

as a major contributor to financial stability. 3 This important capability was put to 

the test during the collapse of Lehman Brothers. LCH.Clearnet Limited was required to default-manage Lehman Brothers’ cleared portfolio of 66,000 interest rate 

swap trades across five major currencies, with a notional value in excess of $9 trillion. Together with SwapClear clearing members, who are contractually obligated 

to participate in the default management process and to bid in the ensuing auctions, 

LCH.Clearnet Limited successfully neutralized and sold off the entire swap portfolio. 

The management of the default involved: 

• At default (Monday, 15 September 2008) SwapClear clearing members seconded 

their experienced traders to work alongside LCH.Clearnet Limited’s risk management team to execute hedges and to neutralize the market risk on the defaulter’s portfolio. All participants adhered to strict confidentiality rules. 

• Over the ensuing days, LCH.Clearnet Limited’s risk position was constantly reviewed and recalibrated, and additional hedges were executed by the default 

management group in response to the changing portfolio and volatile market. 

• From Wednesday, September 24 to Friday, October 3, competitive auctions of 

the five hedged currency portfolios were successfully completed and the group 

transferred all 66,000 trades to the successful bidders, all of whom were surviving SwapClear clearing members. 

The success of the default management process was largely due to the strong commitment and contractual relationship between the SwapClear clearing members and 

LCH.Clearnet Limited. The process was wholly reliant on SwapClear clearing members’ dedicated resources, including key and experienced front office, risk, and operations personnel who worked closely alongside the clearinghouse, in our offices. 

LCH.Clearnet Limited used only 35 percent of Lehman Brothers’ margin in man- aging the default and returned the remaining funds, in excess of $850 million, to 

their administrators. No LCH.Clearnet Limited counterparties incurred any loss as 

a result of the default, and the clearing services operated by the Group continued 

to function in full, with no disruption to member firms or clients, before, during or 

after the Lehman Brothers’ default. The Group thereby fulfilled its commitment to 

its members, clients and the wider financial system by ensuring market integrity 

and providing much-needed stability at a critical juncture. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

The Group supported the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’) because of the new law’s provisions in Title VII designed to reduce risk and increase transparency in the OTC derivatives market 

through mandated clearing. 

The Group strongly supports the policy goals underpinned by the Dodd-Frank Act, 

and believes that this important piece of legislation will do much to improve stability in the marketplace and much reduce the risk of the taxpayer funding further 

bailouts. 

75 

In particular we welcome both stronger risk management and heightened financial standards for clearinghouses; a greater level of supervision for clearinghouses; 

mandatory clearing obligations and trade reporting requirements. 

We have been following the U.S. rulemaking process closely, and applaud both the 

Commodity Futures Trading Commission (CFTC) and the Securities and Exchange 

Commission (SEC) for the thoughtfulness and openness with which they have approached these important matters. We have been invited to participate in the Agencies’ roundtables; have attended their open meetings; responded to their proposed 

rulemakings and met with their Commissioners. 

At the same time we are directly involved in the legislative proposals in Europe 

and are closely following the development of the European Markets and Infrastructure Regulation (EMIR). The EMIR proposal, which governs clearinghouses and 

trade repositories, was put forward by the European Commission in September, and 

is now working its way through the European Parliament and Council. 

We believe it is of paramount importance that the legislation and detailed rules 

emerging from the U.S. and EU, as well as the timetables for implementation and 

adherence, are as closely aligned as possible. This harmonization should ensure 

that: there is no opportunity for regulatory arbitrage; capital is able to flow freely 

and that economic recovery is not constrained. 

Clearinghouses such as our own are global operations, supporting global markets. 

Divergences in risk standards for clearinghouses amongst key jurisdictions such as 

the U.S. and EU will likely lead to the balkanization of clearing; such an outcome 

would result in a significant increase in the amount of capital tied up in clearing 

and be prejudicial for the economy, for jobs and for the recovery. 

While we have generally supported the rules promulgated by the CFTC and SEC 

and commend their efforts to remain in close dialogue with supervisors in the EU, 

we have been concerned by the emergence of some notable differences in their proposals to those under consideration in Europe. 

Our three greatest areas of concern in this regard include the differences between 

the U.S. and Europe in rules governing: (1) the Mitigation of Conflicts of Interest; 

(2) Risk Management Requirements; and (3) Protection of Cleared Swaps. 

Requirements Regarding the Mitigation of Conflicts of Interest 

Sections 726(a) and 765 of the Dodd-Frank Act empower the CFTC and SEC to 

adopt rules mitigating conflicts of interest with respect to any DCO or Clearing 

Agency that clears swaps or security-based swaps. These rules may include numerical limits on the control of, or the voting rights with respect to, such a DCO or 

Clearing Agency by a specified market participant (Enumerated Entity). 

LCH.Clearnet has long recognized that there are potential conflicts of interest in 

clearinghouses. Although LCH.Clearnet’s substantial OTC derivatives clearing book 

plainly evidences the contrary, it is entirely possible that clearinghouse shareholders who deal in OTC derivatives may have an interest in seeing that the clearinghouse does not clear the instruments in which they deal. Equally, exchanges may 

have an interest in ensuring that a clearinghouse in which they are shareholders 

does not clear instruments traded on competing exchanges, execution facilities or in 

the OTC market. End users shareholders may meanwhile have an interest in ensuring that a clearinghouse keeps margin requirements and other associated costs artificially low. 

In recognition of the potential conflicts, LCH.Clearnet’s corporate charter prohibits any individual shareholder from exercising votes representing more than five 

percent of the shares in issue, even if a shareholder actually holds a number of 

shares amounting to more than 5 percent of the total number of shares in issue. 

This measure has effectively ensured that neither a single shareholder nor a small 

group of shareholders—whatever their origin or collective interests—has been able 

to dominate management of LCH.Clearnet’s clearinghouses and determine their 

policies, such as which asset classes will be cleared. 

At the same time, the direct involvement of market participants in our clearinghouses has facilitated innovation. Their expertise has directly contributed to our 

ability to develop complex and technically challenging services such as those we 

offer to the OTC marketplace. For this reason, we would caution that any regulation 

that limits the aggregate involvement of Enumerated Entities in clearinghouses 

might risk limiting innovation in OTC clearing, as well as stifling competition and 

increasing the cost of business in the U.S. 

During passage of the Dodd-Frank Act, Congress correctly rejected the imposition 

of aggregate ownership and voting caps on clearinghouses. We have therefore been 

76 

4 RIN 3038 AD01, ‘‘Requirements for Derivatives Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest’’. RIN 

3235-AK7, ‘‘Ownership Limitations and Governance Requirements for Security-Based Swap 

Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with respect to Security-Based Swaps Under Regulation MC’’. 5 CFTC Proposed Rule 39.25(a), 75 Fed.Reg. 63732, 63750 (October 18, 2010). There is a similar provision contained in SEC Proposed Rule 17Ad-25, 76 Fed.Reg. 14472, 14539 (March 16, 

2011). 6The provisions of the TFEU relating to free movement of capital provide that ‘‘all restrictions on the movement of capital between Member States and between Member States and third 

countries shall be prohibited.’’ The EU’s Supreme Court (the European Court of Justice, ‘‘ECJ’’) 

has consistently found that, for these purposes, capital movements include ‘‘direct investment 

in the form of participation in an undertaking by way of shareholding or the acquisition of securities on the capital market . . . and . . . the possibility of participating effectively in the management of a company or in its control.’’ 

The free movement of capital and freedom of establishment are fundamental tenets of the 

TFEU, and any exceptions to these rules would needs therefore to be justified by overarching 

public policy requirements. Moreover, the TFEU sets out that ‘‘only the Council, acting in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament, adopt measures which constitute a step backwards in Union law as regards 

the liberalization of the movement of capital to or from third countries.’’ Accordingly, such an 

amendment would require unanimity amongst Member States. 7 RIN 3038-AC98 Risk Management Requirements for Derivatives Clearing Organizations, 21 

January 2011. 

RIN 3235-AL13 Clearing Agency Standards for Operation and Governance, 3 March 2011. 

concerned to see proposals emerge from the Agencies 4 that would re-introduce such 

caps. Any such aggregate restriction on clearinghouse ownership or governance 

would, in our view, lead to increased cost, with no commensurate benefits. Rather, 

we believe that individual limitations on voting rights such as those already in place 

at LCH.Clearnet, coupled with the obligations to minimize and resolve conflicts of 

interest that clearinghouses will be subject to, 5 should be sufficient to allay concerns about corporate governance within clearinghouses. 

Minimizing jurisdictional differences in rules such as those mitigating conflicts in 

clearinghouses will be key to keeping costs low and to reducing implementation 

challenges. In this regard we would respectfully observe that in Europe, where we 

have been closely tracking EMIR’s progress through the legislature, there have been 

no proposals to attempt to limit clearinghouse ownership or voting rights by groups 

of entities—either from the European Commission, the European Parliament, or the 

European Council. Indeed, the restrictions on the ownership of shares or voting interests of the type proposed by the Agencies would likely be deemed contrary to the 

fundamental freedoms set out in the primary EU Treaty (the Treaty on the Functioning of the European Union, ‘‘TFEU’’), in particular, those protecting the freedom 

of establishment and the free movement of capital. 6

Risk Management Requirements 

LCH.Clearnet acknowledges and endorses the Dodd-Frank requirement that 

clearinghouses permit ‘‘fair and open access.’’ 

The Group employs open and transparent membership eligibility criteria for each 

market that it clears. The criteria are approved by both our clearinghouses. Risk 

Committees and Boards of Directors, all of which are chaired by independent directors, and the criteria are subject to subsequent regulatory approval. We are committed to exploring all the ways in which we can expand our membership, whilst 

maintaining the highest standards of risk management and ensuring the safe and 

sound operation of our clearinghouses. 

We have been concerned by the Agencies’ proposed membership requirements for 

clearinghouses offering OTC clearing services. 7 The Agencies propose to enforce the 

separation of participation in clearinghouses from risk underwriting and default 

management responsibilities. 

We have seen no such requirements in the European Commission’s EMIR Proposal, nor during its subsequent passage through the European Parliament and European Council. 

In our view, the SEC’s and CFTC’s proposed requirements for access to clearinghouses, whilst founded on important policy considerations, risk watering down our 

well-tested and proven default management processes, upon which the integrity of 

our clearinghouses depend. 

Absent clear default management rules that ensure the protection of surviving 

members, clearinghouses such at our own would face significant technical challenges 

that would put at risk our ability to extend and develop our OTC clearing services. 

As such, the proposed rules would seem to run contrary both to the Agencies’ intent 

and to their statutory and prudential responsibilities. 

77 

8 Committee on Payment and Settlement Systems, Technical Committee of the International 

Organization of Securities Commissions (CPSS–IOSCO). 9Principles for Financial Market Infrastructures CPSS–IOSCO Consultative Report, March 

2011 (p. 64). 10http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=31986&SearchText= 11 RIN 3038-AC98 Risk Management Requirements for Derivatives Clearing Organizations, 

21 January 2011. 

In undertaking to clear certain swaps products, particularly those that are longdated and less liquid than exchange-traded futures, a clearinghouse needs to rely 

on clearing member participation in the event of a default. We firmly believe that 

access criteria for OTC clearing members must be proportionate to the risk each 

member introduces into the system and should be contingent on default management and risk underwriting participation, such that the integrity of the clearinghouse is fully protected and there is no cost to or impact on other members, their 

customers or the wider financial system. 

CPSS–IOSCO, 8 the global organization of securities and futures regulators, has 

recently endorsed this view. The March 2011 report by CPSS–IOSCO on Financial 

Market Infrastructures stipulates: 

An OTC derivatives CCP may need to consider requiring participants to 

agree in advance to bid on the defaulting participant’s portfolio and, should 

the auction fail, accept an allocation of the portfolio. A CCP that employs 

such procedures should carefully consider, where possible, the risk profile 

and portfolio of the receiving participant before allocating positions so as to 

minimize additional risk for the surviving participant. 9

In the interests of harmonization, we would also draw the Committee’s attention 

to the submission made by the U.K.’s Financial Services Authority 10 to the CFTC 

on this matter. The letter stated: 

Risk management standards for CCPs must be anchored in the characteristics of the products being cleared, and the FSA recognizes that different 

product types may require different clearing models. This can extend to 

participant eligibility in models where the clearing members are required 

to perform specific actions to assist in a member default, for example Interest Rate Swap clearing models that include an obligation to bid for, or be 

allocated, portfolios from the defaulting clearing member. 

SwapClear clearing members must be able to demonstrate that they can support 

a swaps book from a front office, risk, technology, and operations perspective. We 

rely on surviving clearing members: to be able to hedge a defaulting member’s 

swaps portfolio; to provide liquidity for such hedging; to bid on hedged portfolios; 

and, if necessary, to accept a forced allocation of swaps. 

LCH.Clearnet regularly tests and confirms that its clearing members maintain 

such a capability. This model was the basis upon which we successfully managed 

the Lehman Brothers default. 

Upon reviewing the Agencies’ proposed rules for access, we have asked ourselves 

whether the proposals would improve or reduce our ability to manage a large member or client default, and have concluded that such proposals still need work to ensure they would not be detrimental to our ability to do so. 

Our SwapClear membership is expanding continually, and now includes 50 direct 

clearing members from North America, Europe, and Asia. In addition, we recently 

extended this capability to include an FCM clearing service for U.S. end users, and 

have since successfully cleared our first trades under the FCM structure. Firms that 

do not meet our direct membership criteria, or do not wish to commit to the risk 

underwriting and default management responsibilities, are thus able to access the 

clearinghouse under the full protections of the well-proven FCM structure. 

We are open to keeping our SwapClear admission criteria under constant review 

and to materially modifying the current entry requirements for members. Provided 

that potential members prove they have the required risk underwriting and default 

management capabilities and commit to full participation in both, we will welcome 

their entry. 

Futurization of Swaps 

The Group has a number of concerns regarding the apparent ‘‘futurization’’ of 

Swaps in the provisions set out by the CFTC in its Risk Management Requirements 

Rules for DCOs 11 and other proposed rulemakings. 

78 

12 RIN 3038–AD99 Protection of Cleared Swaps Customers Before and after Commodity 

Broker Bankruptcies, 2 December 2010. 13http://ec.europa.eu/internallmarket/financial-markets/docs/derivatives/ 

20100915lproposallen.pdf, Article 37. 14Option (1) Full Physical Segregation; Option (2) Legal Segregation with Commingling; Option (3) Moving Customers to the Back of the Waterfall; Option (4) Baseline Model. 15http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27157&SearchText= 

Among other requirements, the CFTC proposes that DCOs use a margining methodology that is ill-suited and inefficient for swaps clearing. Again there has been no 

evidence of such requirements in Europe. 

In this regard we would respectfully point to the recent report from CPSS– 

IOSCO. This explicitly recognizes that swaps have unique characteristics, which 

may require clearinghouses to employ different risk management methods than they 

would for futures or cash instruments. 

The CPSS–IOSCO report said: 

In addition to typical risk-management tools used by CCPs in listed markets, CCPs in OTC derivatives markets may employ other risk-management 

processes designed for the unique risks of the cleared OTC derivatives product. Participant requirements, margin requirements, financial resources 

and default procedures are particular areas where a CCP may need to consider additional tools tailored for OTC derivatives markets. 

Protection of Cleared Swaps 

The CFTC recently sought comment 12 through an Advanced Notice of Proposed 

Rulemaking (ANPR) on the most appropriate customer protection regime for cleared 

swaps. In our view the introduction of a customer protection model that insulates 

clients from such fellow-customer risk would best uphold one of the key aims of the 

Act—that of protecting consumers. It would also ensure that the protections and 

safeguards afforded to the U.S. client base are at least as strong as those that will 

be offered to customers in Europe, as required under EMIR. 13

In the ANPR consultation the CFTC asked respondents which of four client protection models would be most appropriate for customers clearing swaps. 14 As 

LCH.Clearnet stated in its response to the ANPR, 15 we believe that customers 

should above all be able to preserve the collateral protections they are offered in 

the bilateral uncleared swaps environment. 

Under current bilateral swaps market practice, some clients are able to negotiate 

for individual segregation of collateral that they post as margins. The collateral 

posted by clients that have made such arrangements, although subject to other 

risks, is not subject to the risk of the default of other market participants that have 

entered into transactions with their swaps counterparts. These clients—many of 

them pension funds, long-term savings institutions, Government and related fiscal 

authorities and other real money investors—believe it is inappropriate that they 

should be subject to an additional risk (that of fellow-customers) when clearing their 

swaps positions. 

At the specific request of customers in Europe, LCH.Clearnet has developed a client clearing model that protects nondefaulting clients from the risks of defaulting 

clients. We believe that this client-clearing model is closely aligned to one of the 

models proposed by the Commission in its ANPR, Option 2, or ‘‘Legal Segregation 

With Commingling.’’ 

This model improves on the protections afforded in the bilateral swaps marketplace, by enabling the clearinghouse to offer clients portability of swaps margin-related collateral and market risk positions in the event of a clearing member’s default. It is structured so as to enable the clearinghouse to identify and cover the 

risks associated with an individual customer’s portfolio as if the clearinghouse were 

required to take on its management in isolation, as could happen in the event of 

a member default. This construct also enables the clearinghouse to monitor client 

profiles individually and to maximize the likelihood of the transfer of such clients’ 

risks and positions in the event of their clearing member(s) defaulting. 

Having implemented the above outlined model in Europe, the Group is confident 

that it gives rise to no further costs than the CFTC’s other proposed models, either 

at the clearinghouse or at the clearing member level. 

Further, LCH.Clearnet can confirm that the implementation of this clearing 

model has not changed the structure of resources that protect the clearinghouse following a default; it has not required an increase in margin collateral levels, nor has 

it caused the clearinghouse to raise clearing member contributions to the default 

fund. 

79 

LCH.Clearnet looks forward to extending its existing SwapClear client clearing 

service to U.S. end users under the well-proven FCM structure. At the same time, 

we believe that the important client protection mechanisms outlined above and described the CFTC in its ANPR under ‘‘Option 2, Legal Segregation with Comingling’’ 

would best preserve the interests of the investors and other clients clearing swaps 

through FCMs. The introduction of such client-level protections would also, we believe, ensure closer harmonization with those protections afforded in Europe. 

Conclusion 

As stated at the start of this testimony, LCH.Clearnet is supportive of the goals 

of the Dodd-Frank Act. We also believe that the CFTC and SEC have approached 

the rulemaking process with care and thoroughness, and commend the Commissioners and staff for their hard work. 

We applaud the Agencies for their engagement with the industry and with authorities in the EU and further afield. Nonetheless, we do believe that it would be 

helpful to reconcile the differences between the U.S. and EU proposals, particularly 

with regard to: mitigation of conflicts of interest; risk management requirements; 

and the protection of cleared swaps, all of which we have outlined in this testimony. 

We would respectfully urge the Committee to ensure that the final rules promulgated by the Agencies are aligned as closely as possible with those being finalized 

in the EU. Such a commonality of approach should reduce the cost of business, the 

tendency for regulatory arbitrage and the likelihood of flight of capital. 

LCH.Clearnet looks forward to fulfilling its role in support of this important statutory initiative and to growing our U.S. operations so that more U.S. end users can 

benefit from the risk mitigation provided through our clearing services. 

In closing, LCH.Clearnet would like to thank the Committee for inviting us to discuss the new derivatives regulatory framework. We appreciate the opportunity and 

the Committee’s interest in our concerns. 

PREPARED STATEMENT OF JENNIFER PAQUETTE 

CHIEF INVESTMENT OFFICER, COLORADO PUBLIC EMPLOYEES’ RETIREMENT

ASSOCIATION

APRIL 12, 2011 

Thank you, Chairman Johnson and Ranking Member Shelby, for holding this 

hearing on the derivatives regulatory framework. As investors that utilize derivatives, we have a keen interest and I appreciate the opportunity to testify. 

Before I begin, it might be helpful to provide some background on my investment 

experience and the organization I represent. I have worked for large investment 

managers and broker dealers in research, portfolio management, and institutional 

sales capacities. For the last 8 years, I have served as the Chief Investment Officer 

of the Colorado Public Employees’ Retirement Association (COPERA). My remarks 

will include a brief overview of COPERA, our interest in the derivatives market and 

concerns we have regarding the Commodity Futures Trading Commission (CFTC) 

proposed rulemaking on Business Conduct Standards for Swap Dealers and Major 

Swap participants with Counterparties, RIN 3038-AD25. 

COPERA and Derivatives 

COPERA invests $39 billion in assets on behalf of almost half-a-million former 

and current employees of Colorado State government, public schools, universities, 

colleges, cities, and many units of local government. We manage this diversified, institutional portfolio with a long-term investment horizon which spans many decades. 

Investments include global stocks, bonds, real estate, alternatives, timber, and commodities and we use derivatives in a number of asset categories. 

We employ derivatives in a number of ways. Global stock managers will use currency forwards to mitigate currency risk. Stock index futures are used to gain timely exposure to markets in support of our strategic objectives and to reduce risk. 

Total return swaps are utilized by bond managers to gain exposure to specific indexes and to enhance diversification. 

For example, a bond manager may enter into a total return swap. In such a swap, 

COPERA would agree to pay a cash rate plus a spread in exchange for receiving 

the total return of a bond index for a specific time period. During that period, collateral would be posted as the value of the swap changes with the market. For a reasonable cost, COPERA would benefit from the diversification of a broad index without incurring the transaction costs of purchasing all the underlying index securities. 

A swap of this nature can help control risk in addition to enhancing the expression 

of our portfolio strategy. 

80 

While derivatives investments are modest in size compared to our overall market 

value, they are very helpful tools which we have used in our portfolio management 

process for many years. Current rule making is extensive and happening at a rapid 

pace. While I will share a few general comments before concluding, I would like to 

focus my testimony on proposed CFTC regulations on business conduct standards 

for swap dealers and major swap participants with counterparties. 

Business Conduct Standards 

CFTC proposals include public pension plans as a Special Entity. We are concerned that the proposed business conduct standards as they apply to a Special Entity could adversely affect pension plans like ourselves. In order for a Special Entity 

to enter into a swap, the swap dealer would need to have a reasonable basis to believe that the Special Entity has a representative that meets certain requirements. 

The objective may be to protect vulnerable or gullible parties in the swap market. 

While this may be well intentioned, it would create significant issues. 

We are concerned that there is a conflict of interest for one of the parties to a 

transaction also being responsible for determining who is qualified to represent the 

other side of a transaction. Should a Special Entity be deemed to not have a qualifying representative, the swap dealer would need to have this determination reviewed by its Chief Compliance Officer. This appears to address concern that a Special Entity could be deemed unqualified in error but the assessment still remains 

with the Swap Dealer’s organization. I am also concerned that this determination 

will not happen quickly enough in the context of trades that are sometimes done 

in a matter of hours. Finally, giving swap dealers veto ability may impair negotiations regarding transactions. 

While it is difficult to know how this rule would work in practice, we are concerned that our pension plan could be a less desirable market participant due to 

potentially higher compliance costs and potential liability. We may be left to deal 

with less desirable counterparties, if we could find any at all to do business with. 

In an effort to provide a constructive approach to the concerns raised, a number 

of public plans, representing $720 billion in assets under management, submitted 

a comment letter on February 18, 2011, to the Commodity Futures Trading Commission. I have attached the letter as an appendix for your consideration. In brief, 

the alternative approach would provide another supplemental way to meet the independent representative requirement. The Special Entity, or its advisor, would be 

able to voluntarily elect to undergo a certification process which would involve passage of a proficiency exam developed by the CFTC or by another organization as 

deemed appropriate. 

Public plans have resources and expertise to manage their institutional assets. 

COPERA’s team of investment professionals manage complex portfolios internally 

and oversee external investment managers. Like many of our peers, our investment 

staffs include those that have earned professional designations, are well educated 

and have many years of experience in the markets. We are knowledgeable about 

using derivatives to hedge certain investments and mitigate risk. We believe some 

modifications to the proposed rule as discussed in the letter would be beneficial to 

the retirement security of our members. 

Closing Remark 

We value the efforts of this Committee, regulatory entities and others involved in 

this comprehensive approach to improving derivatives regulation. These efforts to 

reduce risk and promote a healthy financial system are valuable and essential. Inviting and considering public comment on rule making, in addition to adequately 

resourcing and providing oversight to those charged with these important responsibilities, is in our collective best interests. On behalf of Colorado PERA, I thank 

you very much for the opportunity to speak with you today. 

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EXHIBIT A 

82 

83 

84 

85 

86 

87 

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RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM MARY L. SCHAPIRO 

Q.1. How will market data provided through swap data repositories 

be used to inform your rulemaking about appropriate block trade 

rules and reporting requirements? 

A.1. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY L. SCHAPIRO 

Q.1. Numerous public commenters have expressed their concerns 

that there may be conflicting regulations related to similar products. For example, the proposed block trade regulation is different 

for CFTC-regulated swaps and SEC-regulated securities-based 

swaps. The CFTC proposal included tests to determine block 

trades, while the SEC proposal asks for public comment on what 

the definition of a block trade should be. How will you reconcile 

these differences? Should similar products, such as index and single-name CDS, be treated differently? 

A.1. Response not provided. 

Q.2. At the hearing, you noted that some differences between the 

two Commissions’ rules may be appropriate given differences in the 

nature of the products that you regulate. If the SEC and CFTC 

were merged, as some have recommended, would product differences necessitate two different regulatory frameworks for swap 

execution facilities? 

A.2. Response not provided. 

Q.3. How is your agency leveraging human and information technology resources from other domestic regulators? How is your agency leveraging human and technology resources from oversees regulators? How is your agency leveraging existing private industry 

technologies? 

A.3. Response not provided. 

Q.4. A frequently stated concern is that the rulemaking process 

has been very haphazard and uncoordinated. Market participants 

feel limited in their ability to comment on particular rules without 

understanding the bigger picture. Would it make sense for the Securities and Exchange Commission and the Commodity Futures 

Trading Commission to jointly propose and put out for public comment a plan for reproposing and adopting rules? 

A.4. Response not provided. 

Q.5. Chairman Schapiro’s testimony stated that ‘‘As we move toward adoption the objective of consistent and comparable requirements will continue to guide our efforts [to coordinate with the 

CFTC and other regulators].’’ Given the fact that so many of the 

SEC’s proposed rules differ substantially from the CFTC’s proposed 

rules on the same issue, please explain how you will accomplish 

this objective? Will harmonization require one or both of your agencies tor repropose certain rules? 

A.5. Response not provided. 

89 

Q.6. Does the Commission need additional statutory authority in 

order to allow market participants to continue to legally engage in 

swap transactions pending exemption of final rules? 

A.6. Response not provided. 

Q.7. Chairman Schapiro, you have been asked previously whether 

you think that you need more time to adopt derivatives rules. Neither you nor Chairman Gensler has clearly requested more time, 

but both of you have indicated that you will not be able to comply 

with the statute’s July rulemaking deadline. Why don’t you simply 

ask Congress for more time? Would extending the rulemaking 

deadline allow for easier coordination with the Europeans, who are 

not attempting to hold themselves to the same timeline? 

A.7. Response not provided. 

Q.8. How does your agency define the term ‘‘clearing’’ with respect 

to swaps (or security-based swaps)? Which activities are encompassed within that definition? 

A.8. Response not provided. 

Q.9. Swap data repositories and security-based swap data repositories may not share information with regulators other than their 

primary regulator unless they obtain an indemnification agreement. Please describe how this provision would work in practice. 

Are there any issues that would impede the implementation of this 

provision? 

A.9. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM MARY L. SCHAPIRO 

Q.1. On April 12, the banking regulators released their proposal on 

‘‘Margin and Capital Requirements for Covered Swap Entities.’’ 

The proposal requires dealer banks and significant counterparties 

to post two way initial margin and to hold that margin at third 

party custodian banks. This margin would be limited to immediately available cash funds and high-quality, highly liquid U.S. 

Government and agency obligations. Re-hypothecation of such 

amounts would be prohibited. What are the costs associated with 

tying up margin in segregated accounts at custodian banks? Have 

you quantified the impact this requirement will have on liquidity? 

A.1. Response not provided. 

Q.2. The margin and capital requirements proposal takes a riskbased approach by distinguishing between four separate types of 

derivatives counterparties. The proposal extends the definition of 

financial end user to include any government of any foreign country or any political subdivision, agency, or instrumentality thereof 

in the world. How would margin and capital requirements apply to 

the dealings of the foreign subsidiary of a U.S. financial institution 

that enters into a swap? What about a U.S. financial institution 

that enters into a swap with a foreign government? Would the foreign subsidiary of a U.S. institution that enters into a swap with 

a foreign government be required to post margin in U.S. Treasuries? 

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A.2. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM GARY GENSLER 

Q.1. How will market data provided through swap data repositories 

be used to inform your rulemaking about appropriate block trade 

rules and reporting requirements? 

A.1. On December 7, 2010, the Commission proposed regulations 

relating to the Real-time Reporting of Swap Transaction Data. 

Under the proposed rule, swap data repositories would use a twopronged formula to calculate the appropriate minimum block trade 

sizes for certain categories of swaps. Minimum block trade sizes 

would be reevaluated on an annual basis based on swap transaction data received over the previous year. Those swaps that have 

a notional size above the minimum notional or principal amount 

determined by a swap data repository would be subject to a time 

delay in reporting. The Commission has received public comments 

on the proposed rule and will move forward to consider a final rule 

after staff has had the opportunity to summarize them for consideration and after Commissioners are able to discuss them and provide feedback to staff. 

Q.2. Will the margin rules proposed this morning (April 12, 2011) 

at the FDIC on behalf of the prudential regulators and at the 

CFTC require commercial end users to post margin directly to 

swap dealers beyond what would ordinarily be required by current 

swap dealer practices of mitigating counterparty exposure? If so, 

what role will the prudential regulators and the CFTC play in both 

establishing and supervising these credit thresholds going forward? 

Additionally, how do the prudential regulators and the CFTC define noncash collateral that could be used to satisfy end user margin requirements? 

A.2. To ensure the financial integrity of swap dealers and securitybased swap dealers, Congress directed that prudential regulators, 

the SEC, and the CFTC to establish capital and margin requirements. The CFTC’s proposed rule would not require margin for 

uncleared swaps to be paid or collected on transactions involving 

nonfinancial end users hedging or mitigating commercial risk. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM GARY GENSLER 

Q.1. How does your agency define the term ‘‘clearing’’ with respect 

to swaps (or security-based swaps)? Which activities are encompassed within that definition? 

A.1. The Dodd-Frank Wall Street Reform and Consumer Protection 

Act defines the term ‘‘cleared swap’’ to mean any swap that is, directly or indirectly, submitted to and cleared by a derivatives clearing organization (DCO) registered with the Commodity Futures 

Trading Commission (CFTC). Under the Commodity Exchange Act, 

a DCO enables each party to the agreement, contract, or transaction to substitute the credit of the DCO for the credit of the parties. The DCO also mutualizes or transfers credit risk among DCO 

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participants by providing, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, or transactions. 

Q.2. Swap data repositories and security-based swap data repositories may not share information with regulators other than their 

primary regulator unless they obtain an indemnification agreement. Please describe how this provision would work in practice. 

Are there any issues that would impede the implementation of this 

provision? 

A.2. Under the provision, domestic and foreign authorities, in certain circumstances, would be required to provide written agreements to indemnify SEC and CFTC-registered trade repositories, 

as well as the SEC and CFTC, for certain litigation expenses as a 

condition to obtaining data directly from the trade repository regarding swaps and security-based swaps. Regulators in foreign jurisdictions have raised concerns regarding the potential effect of 

the provision. However, I believe that the indemnification provision 

need not apply in the case of a trade repository registered with the 

CFTC that is also registered in a foreign jurisdiction and the foreign regulator, acting within the scope of its jurisdiction, seeks information directly from the trade repository. Under the CFTC’s 

proposed rules regarding trade repositories’ duties and core principles, foreign regulators would not be subject to the indemnification and notice requirements if they obtain information that is in 

the possession of the CFTC. 

Q.3. Numerous public commenters have expressed their concerns 

that there may be conflicting regulations related to similar products. For example, the proposed block trade regulation is different 

for CFTC-regulated swaps and SEC-regulated securities-based 

swaps. The CFTC proposal included tests to determine block 

trades, while the SEC proposal asks for public comment on what 

the definition of a block trade should be. How will you reconcile 

these differences? Should similar products, such as index and single-name CDS, be treated differently? 

A.3. Section 712(a)(7) of the Dodd-Frank Act recognized the differences between CFTC- and SEC-regulated products and entities. 

It provides that, in adopting rules, the CFTC and SEC shall treat 

functionally or economically similar products or entities in a similar manner, but are not required to treat them in an identical manner. The Commissions work toward consistency in the agencies’ respective rules to the extent possible through our close consultation 

and coordination since the enactment of the Dodd-Frank Act. This 

close coordination has benefited the rulemaking process and will 

strengthen the markets for both swaps and security-based swaps. 

Q.4. At the hearing, you noted that some differences between the 

two Commissions’ rules may be appropriate given differences in the 

nature of the products that you regulate. If the SEC and CFTC 

were merged, as some have recommended, would product differences necessitate two different regulatory frameworks for swap 

execution facilities? 

A.4. The CFTC’s proposed SEF rule will provide all market participants with the ability to execute or trade with other market parVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00095 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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ticipants. It will afford market participants with the ability to 

make firm bids or offers to all other market participants. It also 

will allow them to make indications of interest—or what is often 

referred to as ‘‘indicative quotes’’—to other participants. Furthermore, it will allow participants to request quotes from other market 

participants. These methods will provide hedgers, investors, and 

Main Street businesses both the flexibility to execute and trade by 

a number of methods, but also the benefits of transparency and 

more market competition. The proposed rule’s approach is designed 

to implement Congress’ mandates for transparency and competition 

where multiple market participants can communicate with one another and gain the benefit of a competitive and transparent price 

discovery process. 

The proposal also allows participants to issue requests for 

quotes, whereby they would reach out to a minimum number of 

other market participants for quotes. It also allows that, for block 

transactions, swap transactions involving nonfinancial end users, 

swaps that are not ‘‘made available for trading’’ and bilateral transactions, market participants can get the benefits of the swap execution facilities’ greater transparency or, if they wish, would still be 

allowed to execute by voice or other means of trading. 

In the futures world, the law and historical precedent is that all 

transactions are conducted on exchanges, yet in the swaps world, 

many contracts are transacted bilaterally. While the CFTC will 

continue to coordinate with the SEC to harmonize approaches, the 

CFTC also will consider matters associated with regulatory arbitrage between futures and swaps. The Commission has received 

public comments on its SEF rule and will move forward to consider 

a final rule only after staff has had the opportunity to summarize 

them for consideration and after Commissioners are able to discuss 

them and provide feedback to staff. 

Q.5. How is your agency leveraging human and information technology resources from other domestic regulators? How is your agency leveraging human and technology resources from oversees regulators? How is your agency leveraging existing private industry 

technologies? 

A.5. The Commission and other regulators have been working 

closely with the Office of Financial Research (OFR) to help develop 

a strategy for managing initial data required by the OFR to monitor and study systemic risk in the U.S. financial markets. The 

CFTC also has coordinated with the OFR in the development of a 

universal Legal Entity Identification standard that is consistent 

with the Commission’s and the SEC’s rulemakings. Through the Financial Stability Oversight Council (FSOC), the CFTC is providing 

both data and expertise relating to a variety of systemic risks, how 

those risks can spread through the financial system and the economy, and potential ways to mitigate those risks. Commission staff 

also coordinates with Treasury and other Council member agencies 

on each of the studies and proposed rules issued by the FSOC. 

The Commission has memorandums of understanding with foreign regulators that relate to sharing of information. The Commission leverages private industry technologies through its work with 

self-regulatory organizations. With regard to specific upcoming 

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technology needs, the agency has solicited the input of industry experts through individual meetings and staff roundtable meetings. 

In addition, the Commission’s Technology Advisory Committee 

chaired by Commissioner Scott O’Malia includes members from industry and provides valuable assistance to the Commission. 

To leverage existing private industry technologies, CFTC makes 

extensive use of Commercial Off-the-shelf products. The eLaw 

(automated law office support for enforcement activities), automated trade surveillance, and financial risk management programs 

all rely primarily on such products. The Commission also uses tools 

and services used by Self Regulatory Organizations (SROs) and the 

National Futures Association (NFA) for financial reporting and examinations. 

The Commission also uses products and services of other agencies whenever practical. For example the Department of Transportation provides services for financial management and the Department of Agriculture services payroll processing. 

Q.6. A frequently stated concern is that the rulemaking process 

has been very haphazard and uncoordinated. Market participants 

feel limited in their ability to comment on particular rules without 

understanding the bigger picture. Would it make sense for the Securities and Exchange Commission and the Commodity Futures 

Trading Commission to jointly propose and put out for public comment a plan for reproposing and adopting rules? 

A.6. To address these issues, the Commission reopened most of its 

comment periods that had closed and extended some existing comment periods so that the public could provide comments in the context of the entire mosaic of proposed rules. That extended comment 

period closed on June 3, 2011. In addition, on May 2 and 3, CFTC 

and SEC staff held roundtable sessions to obtain public input with 

regard to implementation dates of the various rulemakings. Prior 

to the roundtable, on April 29, CFTC staff released a document 

that set forth concepts that the Commission may consider with regard to the effective dates of final rules for swaps under the DoddFrank Act. The Commission has also accepted written comments on 

that subject. 

Q.7. Chairman Schapiro’s testimony stated that ‘‘As we move toward adoption the objective of consistent and comparable requirements will continue to guide our efforts [to coordinate with the 

CFTC and other regulators].’’ Given the fact that so many of the 

SEC’s proposed rules differ substantially from the CFTC’s proposed 

rules on the same issue, please explain how you will accomplish 

this objective? Will harmonization require one or both of your agencies tor repropose certain rules? 

A.7. Section 712(a)(7) of the Dodd-Frank Act recognizes the differences between CFTC- and SEC-regulated products and entities. 

It provides that, in adopting rules, the CFTC and SEC shall treat 

functionally or economically similar products or entities in a similar manner, but are not required to treat them in an identical manner. The Commissions work towards consistency in the agencies’ 

respective rules to the extent possible through close consultation 

and coordination since the enactment of the Dodd-Frank Act. This 

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close coordination has benefited the rulemaking process and will 

strengthen the markets for both swaps and security-based swaps. 

In approaching any final rule, the Commission will be guided by 

an examination of whether the connection between the proposed 

rule and the final rule is sufficient for the final rule to be considered a logical outgrowth of the proposed rule. 

Q.8. Does the Commission need additional statutory authority in 

order to allow market participants to continue to legally engage in 

swap transactions pending exemption of final rules? 

A.8. On July 14, 2011, the CFTC issued an order that would provide relief until December 31, 2011, or when the definitional 

rulemakings become effective, whichever is sooner, from certain 

provisions that would otherwise apply to swaps or swap dealers on 

July 16. This includes provisions that do not directly rely on a rule 

to be promulgated, but do refer to terms that must be further defined by the CFTC and SEC, such as ‘‘swap’’ and ‘‘swap dealer.’’ 

The order also would provide relief through no later than December 31, 2011, from certain CEA requirements that may result from 

the repeal, effective on July 16, 2011, of some of sections 2(d), 2(e), 

2(g), 2(h), and 5d. 

Q.9. The Department of Justice (DOJ) recently submitted a letter 

(DOJ letter) on a proposed CFTC rule regarding ownership limitations and governance requirements for designated clearing organizations (DCOs), designated contract markets and swap execution 

facilities. Were there any relevant communications, written or oral, 

between the CFTC and DOJ’s Antitrust Division prior to submission of the DOJ letter? If so, please explain. Please include a list 

all DOJ and CFTC individuals involved in those communications 

and a description of the nature of those communications. Please explain who initiated those communications, whether anyone from 

the CFTC or from the White House requested or directed anyone 

in the DOJ to send the letter; and whether anyone from the CFTC 

or from the White House reviewed and/or edited the letter before 

it was submitted. 

A.9. The Commission received the comments of the Department of 

Justice on December 28, 2010. Prior to that submission, staff from 

the Antitrust Division advised CFTC staff of the desire to discuss 

topics relating to competition in derivatives trading. Those topics 

implicated the work of 16 of the CFTC’s rulemaking teams. While 

these initial communications to schedule discussions occurred prior 

to DOJ’s comment submission, substantive discussions between 

CFTC and DOJ staff took place in a meeting on January 14, 2011. 

Q.10. Swap customers have the choice to transact in the jurisdiction offering the most attractive environment, in terms of price, 

ease of settlement, legal and regulatory certainty, among other factors. Explain how you are coordinating with foreign regulators to 

ensure there is a set of harmonized rules among well-regulated 

markets. Are you concerned that swap transactions will migrate to 

markets that operate under a more favorable regulatory environment? If that happens, what are the threats to the financial stability of the United States? 

95 

A.10. The Commission is actively consulting and coordinating with 

international regulators to promote robust and consistent standards and avoid conflicting requirements in swaps oversight. The 

Commission participates in numerous international working groups 

regarding swaps, including the International Organization of Securities Commissions Task Force on OTC Derivatives, which the 

CFTC cochairs. Our discussions have focused on clearing and trading requirements, clearinghouses more generally and swaps data 

reporting issues, among other topics. 

As we do with domestic regulators, the CFTC shares many of our 

memos, term sheets and draft work product with international regulators. We have been consulting directly and sharing documentation with the European Commission, the European Central Bank, 

the U.K. Financial Services Authority, the new European Securities and Markets Authority, the Japanese Financial Services Authority and regulators in Canada, France, Germany, and Switzerland. Two weeks ago, I met with Michel Barnier, the European 

Commissioner for Internal Market and Services, to discuss ensuring consistency in swaps market regulation. 

Both the CFTC and European Union are moving forward on addressing the key objectives the G-20 set forth in September 2009, 

including clearing through central counterparties, trading on exchanges or electronic trading platforms, record keeping, reporting, 

and higher capital requirements for noncleared swaps. 

Through consultation, regulators are working to bring consistency to oversight of the swaps markets. In September of last year, 

the European Commission (EC) released its swaps proposal. The 

European Council and the European Parliament are now considering the proposal. Similar to the Dodd-Frank Act, the European 

Commission proposal covers the entire product suite, including interest rate swaps, currency swaps, commodity swaps, equity swaps, 

and credit default swaps. It is important that all standardized 

swaps—including exchange-traded swaps—are subject to mandatory central clearing. The proposal includes requirements for central clearing of swaps, robust oversight of central counterparties, 

and reporting of all swaps to a trade repository. 

The EC also is considering revisions to its existing Markets in Financial Instruments Directive (MiFID), which includes a trade execution requirement, the creation of a report with aggregate data on 

the markets similar to the CFTC’s Commitments of Traders reports, and accountability levels or position limits on various commodity markets. 

Q.11. The CFTC recently proposed position limits that will impose 

additional costs on OTC derivative market participants. However a 

recent joint report by the U.K. Financial Services Authority and 

HM Treasury warns ‘‘The U.K. Authorities would urge caution in 

the application of any specific position limit power, and the expectation that these regulatory tools might achieve the objective of reduced price volatility, or manipulation, as there appears to be no 

conclusive evidence that this may be the case.’’ In other words, position limit regulation imposes real costs, with little or no benefit. 

What analysis has the CFTC done to examine the impact of position limits on liquidity? What are the results of that analysis? How 

can the CFTC justify imposing position limits on OTC derivative 

96 

market participants when a proper cost-benefit analysis could show 

that the costs do not justify the benefits? If the United States is 

the only jurisdiction to adopt aggressive position limits, will OTC 

derivatives transactions simply migrate oversees? 

A.11. In its proposed rulemaking, the CFTC considered the proposal’s impact on liquidity. In addition, the Commission sought 

public comment specifically with regard to expected effects on liquidity. The Commission will thoroughly and carefully review submitted public comments before proceeding to consider final rules. 

The Dodd-Frank Act mandates that the CFTC set aggregate position limits for certain physical commodity derivatives across the derivatives markets. The Act broadened the CFTC’s position limits 

authority to include aggregate position limits on certain swaps and 

certain linked contracts traded on foreign boards of trade in addition to U.S. futures and options on futures. Congress also narrowed 

the exemptions traditionally available from position limits by modifying the definition of bona fide hedge transaction. 

Position limits have served since the Commodity Exchange Act 

passed in 1936 as a tool to curb or prevent excessive speculation 

that may burden interstate commerce. When the CFTC set position 

limits in the past, the agency sought to ensure that the markets 

were made up of a broad group of market participants with a diversity of views. Integrity is enhanced when participation is broad and 

the market is not overly concentrated. 

The CFTC strives to include well-developed considerations of 

costs and benefits in each of its proposed rulemakings. Relevant 

considerations are presented not only in the cost-benefit analysis 

section of the CFTC’s rulemaking releases, but additionally are discussed throughout the release in compliance with the Administrative Procedure Act, which requires the CFTC to set forth the legal, 

factual, and policy bases for its rulemakings. With the proposed 

rule on position limits, the Commission sought public comment regarding costs and benefits. As part of the process, the Commission 

has received more than 12,000 comments, including comments from 

market participants, public interest groups, and individuals. The 

Commission will review these comments thoroughly and will respond to them in developing a final rule. 

Q.12. Chairman Gensler, in a recent speech, your colleague Commissioner Sommers noted that the proposals issued by the CFTC 

thus far ‘‘contain cursory, boilerplate cost-benefit analysis sections 

in which [you] have not attempted to quantify the costs.’’ Are your 

fellow Commissioner’s comments valid? If not, why not? As Chairman of the CFTC, do you believe that it is important for the other 

Commissioners to have confidence in the integrity of the CFTC’s 

rulemaking process? If so, what steps can you take to ensure that 

the CFTC’s cost-benefit analysis is improved and satisfies all of the 

CFTC’s Commissioners? 

A.12. The CFTC strives to include well-developed considerations of 

costs and benefits in each of its proposed rulemakings. Relevant 

considerations are presented not only in the cost-benefit analysis 

section of the CFTC’s rulemaking releases, but additionally are discussed throughout the release in compliance with the AdministraVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00100 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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tive Procedure Act, which requires the CFTC to set forth the legal, 

factual, and policy bases for its rulemakings. 

In addition, Commissioners and staff have met extensively with 

market participants and other interested members of the public to 

hear, consider and address their concerns in each rulemaking. 

CFTC staff hosted a number of public roundtables so that rules 

could be proposed in line with industry practices and address compliance costs consistent with the obligations of the CFTC to promote market integrity, reduce risk and increase transparency as directed in Title VII of the Dodd-Frank Act. Information from each 

of these meetings—including full transcripts of the roundtables— 

is available on the CFTC’s Web site and has been factored into 

each applicable rulemaking. 

With each proposed rule, the Commission has sought public comment regarding costs and benefits. 

Q.13. Chairman Gensler, you were actively engaged in the legislative drafting process. The Dodd-Frank Act contains aggressive rulemaking deadlines. Knowing what you do now, do you wish that you 

had advocated for more reasonable deadlines? 

A.13. The Dodd-Frank Act had a deadline of 360 days after enactment for completion of the bulk of our rulemakings—July 16, 2011. 

Both the Dodd-Frank Act and the Commodity Exchange Act (CEA) 

give the CFTC the flexibility and authority to address the issues 

relating to the effective dates of Title VII. We have coordinated 

closely with the SEC on these issues. On July 14, the CFTC granted temporary relief from certain provisions that would otherwise 

apply to swaps or swap dealers on July 16. This order enables the 

Commission to continue its progress in finalizing rules. 

Q.14. The CFTC proposed changes to Rule 4.5, which could have 

meaningful implications for registered investment companies. 

These changes were not required by Dodd-Frank. Why is the CFTC 

contemplating a broad reach into the regulation of registered investment companies, which are already heavily regulated by the 

SEC? 

A.14. The CFTC and the SEC proposed a joint rule to require reporting by investment advisers to private funds that are also registered as commodity pool operators or commodity trading advisors 

with the CFTC. The joint proposed rule would require private fund 

investment advisers with assets under management totaling more 

than $150 million to provide the SEC with financial and other 

trading information. Private fund investment advisers with assets 

under management totaling more than $1 billion would be subject 

to heightened reporting requirements. Separately, the CFTC proposed a rule that would bring similar reporting to CPOs and CTAs 

with assets under management greater than $150 million that are 

not otherwise jointly regulated. This is to ensure that similar entities in the asset management arena are regulated consistently. The 

CFTC proposed rule would repeal certain exemptions issued under 

Part 4 of the Commission’s regulations so the Commission will 

have a more complete picture of the activity of operators of and advisors to pooled investment vehicles in the commodities marketplace. The Commission is reviewing the comments received on the 

98 

proposal. In addition, Commission staff has held discussions with 

SEC staff and plans to hold a public roundtable discussion. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM GARY GENSLER 

Q.1. In March, a Stanford Professor published a study noting that 

index positions and managed-money spread positions had the largest impact on futures prices. Specifically, the study noted that ‘‘increased in flows into index funds . . . predict higher subsequent futures prices.’’ What is the CFTC doing (or has it done) to examine 

this issue? What implications does this issue have on price? Are 

index and hedge funds having an increasing impact on commodity 

market dynamics? If so, how? 

A.1. The Commission obtains comprehensive data on futures markets participants through its large trader reporting system. The 

Commission’s rule on large swap trader reporting, will add to that 

data. Large trader data is collected for surveillance and regulatory 

purposes. In addition, to enhance market transparency, the Commission publishes reports with the data in aggregated form and 

subdivided by trader type. It is clear that the derivatives markets 

have changed significantly. The markets have become much more 

electronically traded. Instead of being traded in the pits, more than 

80 percent of futures and options on futures were traded electronically in 2010. In addition, the makeup of the market has changed. 

In contrast with the early days of the CFTC, swap dealers now 

comprise a significant portion of the markets. Also, investors today 

treat commodities as an asset class for passive index investment. 

Based on published CFTC data, financial actors, such as swap dealers, managed money accounts, and other noncommercial reportable 

traders, make up a significant majority of many of the futures markets. 

For example, market data as of June 28, 2011, shows that only 

about 13 percent of gross long positions and about 19 percent of 

gross short positions in the WTI crude oil market were held by producers, merchants, processors, and users of the commodity. Similarly, only about 10 percent of gross long positions and about 39 

percent of gross short positions in the Chicago Board of Trade 

wheat market were held by producers, merchants, processors, and 

users of the commodity. Finally, based upon CFTC data, the vast 

majority of trading volume in key futures markets—up to 80 percent in many markets—is day trading or trading in calendar 

spreads. Thus, only a modest proportion of average daily trading 

volume results in reportable traders changing their net long or net 

short futures positions for the day. This means that only about 20 

percent or less of the trading is done by traders who bring a longerterm perspective to the market on the price of the commodity. The 

Commission recently published on its Web site historical data on 

directional position changes to enhance market transparency. 

Q.2. Recently, the Los Angeles Times reported that more and more 

Americans are engaging in foreign currency trading, encouraged by 

the advertising of the two largest U.S. brokers, FXCM Inc and 

Gain Capital Holdings, Inc., and they ‘‘are losing money in spectacular fashion.’’ Gain and FXCM recently reported that U.S. cusVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00102 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
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tomers amounted to approximately $777 billion and $667 billion in 

annual trading volume respectively. The LA Times article also 

noted that between 72 percent and 79 percent of these customers 

lost money each quarter last year. Are you concerned about this 

emerging trend? What is the CFTC doing to regulate this area? 

What additional regulation is needed? 

A.2. On September 10, 2010, the CFTC published final rules to provide for the regulation of off-exchange retail foreign currency transactions. The rules implement provisions of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provided the 

CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign 

exchange (forex) transactions. These rules of the road are to help 

protect the American public in the largest area of retail fraud that 

the CFTC oversees. All CFTC registrants involved in soliciting and 

selling retail forex contracts to consumers now have to comply with 

rules to protect the investing public. 

The final forex rules put in place requirements for, among other 

things, registration, disclosure, record keeping, financial reporting, 

minimum capital, and other business conduct and operational 

standards. Specifically, the regulations require the registration of 

counterparties offering retail foreign currency contracts as either 

futures commission merchants (FCMs) or retail foreign exchange 

dealers (RFEDs), a new category of registrant. Persons who solicit 

orders, exercise discretionary trading authority, or operate pools 

with respect to retail forex also will be required to register, either 

as introducing brokers, commodity trading advisors, commodity 

pool operators (as appropriate), or as associated persons of such entities. 

The rules include financial requirements designed to ensure the 

financial integrity of firms engaging in retail forex transactions and 

robust customer protections. For example, FCMs and RFEDs are 

required to maintain net capital of $20 million plus 5 percent of the 

amount, if any, by which liabilities to retail forex customers exceed 

$10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries are required to distribute forex-specific risk disclosure statements to customers and 

comply with comprehensive record keeping and reporting requirements. 

The disclosures identified in the referenced news stories were 

due to CFTC rule requirements. 

Q.3. Do you have a concern that commodities prices—both oil and 

food—are increasingly being affected by forces outside of normal 

supply and demand fundamentals? Is true price discovery being affected by trading instruments and traders, rather than by market 

fundamentals? 

A.3. At its core, the mission of the CFTC is to ensure the integrity 

and transparency of derivatives markets so that hedgers and investors may use them with confidence. Though the CFTC is not a 

price-setting agency, rising prices for basic commodities—energy in 

100 

particular—highlight the importance of having effective market 

oversight that ensures integrity and transparency. 

A specific critical reform of the Dodd-Frank Act relates to position limits. Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive 

speculation that may burden interstate commerce. The Dodd-Frank 

Act directs the Commission to establish position limits for both futures and swaps in a very specific manner. It directs the Commission to establish speculative position limits for futures contracts for 

agricultural commodities and exempt commodities (including crude 

oil, gasoline, and other energy commodities), and to concurrently 

establish limits on swaps that are economically equivalent to those 

futures contracts. It also requires the Commission to establish aggregate limits across the futures and swaps markets. The Commission published a proposed rule to implement these statutory directives and received over 12,000 comments from the public. The Commission is evaluating the comments received before proceeding to 

a final rulemaking. It is essential to complete the task of implementing the aggregate position limits regime, which were congressionally mandated to guard against the burdens of excessive speculation and foster orderly markets. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM GARY GENSLER 

Q.1. In the past you have said that you are working to reach 

‘‘agreement’’ with international regulators on reform of the swaps 

market because reform cannot be accomplished alone. What form 

will those agreements take? How will they be enforced? And what 

steps will you take if international regulatory bodies set standards 

that differ greatly from those in the United States? 

A.1. As we work to implement the derivatives reforms in the DoddFrank Act, we are actively coordinating with international regulators to promote robust and consistent standards and avoid conflicting requirements in swaps oversight. The Commission participates in numerous international working groups regarding swaps, 

including the International Organization of Securities Commissions 

Task Force on OTC Derivatives, which the CFTC cochairs with the 

Securities and Exchange Commission (SEC). The CFTC, SEC, European Commission, and European Securities Market Authority are 

coordinating through a technical working group. 

The Dodd-Frank Act recognizes that the swaps market is global 

and interconnected. It gives the CFTC the flexibility to recognize 

foreign regulatory frameworks that are comprehensive and comparable to U.S. oversight of the swaps markets in certain areas. In 

addition, we have a long history of recognition regarding foreign 

participants that are comparably regulated by a home country regulator. The CFTC enters into arrangements with international 

counterparts for access to information and cooperative oversight. 

The Commission has signed memoranda of understanding with regulators in Europe, North America, and Asia. 

Q.2. In many sections of the statute such as real time reporting, 

position limits, and Swap Execution Facilities (SEFs) the CFTC is 

required to assess the impact on liquidity of its proposals. I have 

101 

not seen in the relevant notices of proposed rulemakings, any significant discussion of the impact on liquidity. Has the CFTC reviewed how its real time reporting, SEF and position limit proposals will affect market liquidity? If so, what are the results of 

that review? If not, why not? 

A.2. In its proposed rulemakings, the CFTC considered how the 

rule proposals might affect liquidity in the swap markets through 

discussions with market participants, domestic and international 

regulators, and other interested parties. The CFTC addressed those 

issues in the rulemakings. In addition, the Commission has sought 

public comment specifically with regard to expected effects on liquidity. The Commission will thoroughly and carefully review submitted public comments before proceeding to consider final rules. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM DANIEL K. TARULLO 

Q.1. Will the margin rules proposed this morning (April 12, 2011) 

at the FDIC on behalf of the prudential regulators and at the 

CFTC require commercial end users to post margin directly to 

swap dealers beyond what would ordinarily be required by current 

swap dealer practices of mitigating counterparty exposure? If so, 

what role will the prudential regulators and the CFTC play in both 

establishing and supervising these credit thresholds going forward? 

Additionally, how do the prudential regulators and the CFTC define noncash collateral that could be used to satisfy end user margin requirements? 

A.1. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM DANIEL K. TARULLO 

Q.1. How can the Federal Reserve assure us that clearinghouses 

that are designated to be systemically important financial market 

utilities and have access to Federal Reserve discount and borrowing privileges do not undertake unsafe and unsound business 

practices because of the interplay between profit pressures and aggressive regulatory mandates? 

A.1. Response not provided. 

Q.2. A recent letter from the American Benefits Council and the 

Committee on Investment of Employee Benefit Assets raised questions about the process by which the Federal Reserve Bank of New 

York has been working with swap dealers to develop commitments 

with respect to trading, confirmation, clearing, and reporting of 

swap transactions. Decisions made in these negotiations will affect 

dealers’ counterparties, such as Main Street corporations, pension 

funds, and hedge funds. What is the Federal Reserve Bank of New 

York doing to take into account the perspective of nondealer market participants? How are these negotiations being coordinated 

with SEC and CFTC rulemaking? 

A.2. Response not provided. 

Q.3. On April 12, 2011, the Federal Reserve and other prudential 

regulators proposed rules to establish minimum capital and margin 

102 

requirements for prudentially regulated swap market participants. 

Do you believe that Congress intended to exempt end users from 

margin requirements? What are the differences between the Fed’s 

margin rules and the other prudential regulators’ margin rules? 

For each difference, please explain why they differ. 

A.3. Response not provided. 

Q.4. Why did the Fed specify prescriptive margin calculation models that isolate swap risk rather than considering a prudentially 

regulated swap market participants’ entire credit relationship with 

end users? Please explain how the Fed determined the key assumptions on margin calculations, including the determinations of the 

number of standard deviations, the time period over which it is applied, and the data that is used as inputs. 

A.4. Response not provided. 

Q.5. Please explain how the proposed margin rules provide incremental credit exposure-reducing benefits, beyond existing or other 

forthcoming prudential regulatory requirements including the 

Basel III standards. 

A.5. Response not provided. 

Q.6. How does your agency define the term ‘‘clearing’’ with respect 

to swaps (or security-based swaps)? Which activities are encompassed within that definition? 

A.6. Response not provided. 

Q.7. Swap data repositories and security-based swap data repositories may not share information with regulators other than their 

primary regulator unless they obtain an indemnification agreement. Please describe how this provision would work in practice. 

Are there any issues that would impede the implementation of this 

provision? 

A.7. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM DANIEL K. TARULLO 

Q.1. Title VII of the Dodd-Frank Act, largely overseen by the SEC 

and CFTC, will require firms to keep additional capital for overthe-counter trades, so that they will be able to pay up, if the trade 

moves against them. At the same time, the Volcker Rule, which is 

overseen by banking regulators, as well as the SEC and CFTC, also 

imposes capital requirements. These provisions require regulators 

to impose additional capital charges for any proprietary trading by 

the nonbank financial companies supervised by the board [((a)(2)) 

and ((f)(4))], and explicitly authorizes regulators to impose additional capital charges on banking entities, for even permitted activities such as market-making. [((d)(3))] And, of course, the Treasury Department and banking regulators are working with their 

international counterparts to effectively implement new Basel requirements on capital. What work is the Federal Reserve doing, 

whether independently or in coordination with the Department of 

the Treasury, the prudential regulators, the SEC, or CFTC, to help 

enhance the capital requirements for trading positions, as directed 

by not just the derivatives title, but also the Volcker Rule? 

103 

1 Using the date on which the U.S. dollars were extended to the foreign central bank in exchange for the receipt of foreign currency net of maturities. See, http:/// 

www.federalreserve.gov/newsevents/reformlswaplines.htm. 

A.1. Response not provided. 

Q.2. Recently, the Federal Reserve, after conducting stress tests, 

allowed some banks to increase dividends or buy back shares. 

JPMorgan, for example, not only announced an increase in its dividends, but also announced that it would buy back as much as $15 

billion in stock. As part of the Federal Reserve’s most recent stress 

tests, how did the Federal Reserve take into account all potential 

liabilities that may arise in light of all the issues (alleged violations 

of State real property laws, securities laws, Federal tax laws, and 

others) raised as a result of faulty foreclosure procedures, the socalled robo-signing issues? That is, by allowing several firms to pay 

higher dividends and/or buy back stock, is the Federal Reserve certifying that these robo-signing issues do not present a material risk 

to the banks? 

A.2. Response not provided. 

Q.3. The Federal Open Market Committee (FOMC) authorized temporary dollar liquidity swap arrangements with 14 foreign central 

banks between December 12, 2007, and October 29, 2008. The arrangements expired on February 1, 2010. Federal Reserve data reflects that during October and November 2008, the Federal Reserve 

extended over $550 billion in swap lines to foreign banks. 1 What 

specific factors were considered by the Federal Reserve in taking 

this action? What other options were considered? Was intervention 

considered effective? Why or why not? 

A.3. Response not provided. 

Q.4. The Federal Reserve extended swap arrangements with 14 

central banks; however, it published data on its swap lines with 10 

foreign banks. Were the other 4 banks involved in the Federal Reserves’ swap lines? 

A.4. Response not provided. 

Q.5. In May 2010, the FOMC authorized additional swap lines with 

five central banks through August 1, 2011. According to Federal 

Reserve data, only the European Central Bank participated 

(through the end of the data period provided—October 2010). What 

facts and circumstances necessitated this intervention? Why did 

other banks (Bank of Canada, the Bank of England, the Bank of 

Japan, and the Swiss National Bank) not participate? 

A.5. Response not provided. 

Q.6. Do any swap facilities remain operational? If so, please provide additional data regarding to whom swap lines were extended 

and the amounts extended. If they are no longer operational, please 

provide the same requested data. 

A.6. Response not provided. 

Q.7. The Federal Reserve extended $3.221 billion to Banco de Mexico from April 23, 2009, to January 12, 2010. (The $3.221 billion 

was provided in three separate arrangements, each of which maVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00107 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
104 

tured in 88 days and was immediately renewed.) What facts and 

circumstances necessitated this intervention? 

A.7. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM DANIEL K. TARULLO 

Q.1. On April 12, the banking regulators released their proposal on 

‘‘Margin and Capital Requirements for Covered Swap Entities.’’ 

The proposal requires dealer banks and significant counterparties 

to post two way initial margin and to hold that margin at third 

party custodian banks. This margin would be limited to immediately available cash funds and high-quality, highly liquid U.S. 

Government and agency obligations. Re-hypothecation of such 

amounts would be prohibited. What are the costs associated with 

tying up margin in segregated accounts at custodian banks? Have 

you quantified the impact this requirement will have on liquidity? 

A.1. Response not provided. 

Q.2. The margin and capital requirements proposal takes a riskbased approach by distinguishing between four separate types of 

derivatives counterparties. The proposal extends the definition of 

financial end user to include any government of any foreign country or any political subdivision, agency, or instrumentality thereof 

in the world. How would margin and capital requirements apply to 

the dealings of the foreign subsidiary of a U.S. financial institution 

that enters into a swap? What about a U.S. financial institution 

that enters into a swap with a foreign government? Would the foreign subsidiary of a U.S. institution that enters into a swap with 

a foreign government be required to post margin in U.S. Treasuries? 

A.2. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY J. MILLER 

Q.1. How does your agency define the term ‘‘clearing’’ with respect 

to swaps (or security-based swaps)? Which activities are encompassed within that definition? 

A.1. The Department of the Treasury does not define the term 

‘‘clearing’’ in any regulations. The Commodity Exchange Act, as 

modified by the Dodd-Frank Wall Street Reform and Consumer 

Protection Act, defines the term ‘‘derivatives clearing organization’’ 

as a clearinghouse, clearing association, clearing corporation, or 

similar entity, facility, system, or organization that, (i) substitutes/ 

novates the credit of the derivatives clearing organization for the 

credit of the parties to the transaction; (ii) arranges/provides for 

settlement/netting of obligations on a multilateral basis; or (iii) provides clearing services/arrangements that mutualize or transfer 

credit risk among participants. 

The term ‘‘clearing’’ with respect to swaps (or security-based 

swaps) generally is understood to encompass the set of activities 

and processes that occur between the execution of a contract between counterparties and final settlement in order to ensure perVerDate Nov 24 2008 15:22 Nov 21, 2011 Jkt 048080 PO 00000 Frm 00108 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\04-12 BUILDING THE NEW DERIVATIVES REGULATORY FRAMEWO
105 

formance on the contract. Typical ‘‘clearing’’ activities or services 

provided by a clearinghouse or central counterparty include reduction of counterparty credit exposures, netting of offsetting bilateral 

positions, daily mark-to-market and collateralization (margin), and 

mutualization of the risk of loss. 

Q.2. Swap data repositories and security-based swap data repositories may not share information with regulators other than their 

primary regulator unless they obtain an indemnification agreement. Please describe how this provision would work in practice. 

Are there any issues that would impede the implementation of this 

provision? 

A.2. The Dodd-Frank Wall Street Reform and Consumer Protection 

Act requires Swap Data Repositories (SDRs) and Security-Based 

Swap Data Repositories (SB–SDRs), upon request, and after notifying its primary regulator, to make data available to certain other 

domestic and foreign regulators. The Act further requires regulators requesting data to execute a written confidentiality and indemnification agreement with the SDR or SB–SDR prior to receiving any data. The CFTC and the SEC have proposed rules for 

SDRs and SB–SDRs, respectively, that require such confidentiality 

and indemnification agreements (see 75 FR 80808 [December 23, 

2010] and 75 FR 77306 [December 10, 2010], respectively). Both 

agencies acknowledge in their proposed rules that certain domestic 

and foreign regulators may have difficulty—or even be legally prohibited—from agreeing to indemnify third parties and that the indemnification provision could ‘‘chill’’ requests for information or 

otherwise inhibit certain regulators from fulfilling their mandates. 

Both agencies have requested comment on the required confidentiality and indemnification agreements and are evaluating feedback. 

Q.3. Secretary Geithner made the case before the Senate Committee on Agriculture in December of 2009 that foreign exchange 

swaps should not be treated the same as all other swaps. He explained that foreign exchange markets are different than other derivatives markets and already are subject to an elaborate regulatory framework. He cautioned, ‘‘These markets have actually 

worked quite well . . . we have got a basic obligation to do no 

harm, to make sure as we reform we do not make things worse, 

and our judgment is that because of the protections that already 

exist in these foreign exchange markets and because they are different from derivatives, have different risks, require different solutions, we will have to have a slightly different approach.’’ Please 

elaborate on Secretary Geithner’s statement and the importance of 

regulating foreign exchange swaps in a manner that takes into account their unique characteristics and their existing regulatory 

framework. 

A.3. Treasury issued a Notice of Proposed Determination (copy enclosed) that was published in the Federal Register on May 5, 2011, 

to exempt foreign exchange swaps and forwards from the Commodity Exchange Act’s (CEA) definition of swap. The reasons for 

the proposed determination are explained in the Notice. 

106 

Q.4. One of the concerns that the Investment Company Institute 

raised about the CFTC’s proposed amendments to Rule 4.5 is that 

not knowing whether foreign exchange swaps and forwards will be 

included in the definition of ‘‘swap’’ affects their ability to analyze 

the effects that the changes to Rule 4.5 will have. Have you discussed this issue with the CFTC? More generally, are you concerned that Treasury’s failure to act with respect to foreign exchange swaps and forwards impedes the ability of market participants to determine whether and how to comment on rules and to 

plan for compliance with Dodd-Frank? 

A.4. As noted, Treasury issued a Notice of Proposed Determination 

on May 5, 2011 to exempt foreign exchange swaps and forwards 

from the definition of a swap under the CEA. 

Q.5. At the hearing, I asked you whether Treasury would be conducting any studies with respect to the effects of derivatives regulation on job creation. Your answer was unclear. Please clarify your 

answer. 

A.5. Treasury has not conducted any such studies and is not in the 

process of conducting any study on the effects of derivatives regulation on job creation. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM MARY J. MILLER 

Q.1. Which financial institutions are most active with respect to 

foreign exchange swaps and foreign exchange forwards? Which of 

these financial institutions have received emergency Government 

infusions (TARP funds, capital, etc.)? What portion of the Government-provided funds were related to activities unrelated to foreign 

exchange swaps and foreign exchange forwards? How do you know? 

A.1. As noted in Treasury’s May 5, 2011, Notice of Proposed Determination, banks are the key players in the foreign exchange swaps 

and forwards market. Although a number of banks received emergency assistance during the financial crisis, we are not aware of 

any institutions that received such assistance due to their foreign 

exchange swaps or forwards activities. 

Q.2. According to an analysis by Better Markets, the Federal Re- serve provided $2.9 trillion to stabilize foreign exchange markets in 

October 2008. Please describe your understanding of the facts and 

circumstances that led to this infusion and whether it is reasonably 

possible that such a condition may reoccur. 

A.2. The Federal Reserve made large amounts of dollars available 

to other central banks in the fall of 2008 because of the global demand for dollars related to short-term funding needs during the financial crisis. Some confusion has arisen among nonmarket participants because these forms of Federal Reserve assistance to central 

banks were called foreign exchange swap lines. Despite the similar 

sounding name, the Federal Reserve swap lines were in fact quite 

distinct from the foreign exchange swaps and forwards market. The 

steps that are being taken to implement the Dodd-Frank Wall 

Street Reform and Consumer Protection Act are designed to improve the safety and soundness of the financial system and to prevent the recurrence of the need for such assistance. 

107 

Q.3. Please describe in which ways the market for foreign exchange 

swaps and foreign exchange forwards is different from other derivatives markets. 

A.3. The enclosed May 5, 2011, Notice of Proposed Determination 

sets forth the reasons Treasury believes the market for foreign exchange swaps and forwards is different from other derivatives markets. 

108 

109 

110 

111 

112 

113 

114 

115 

116 

117 

Q.4. There has been an increase in litigation against banks related 

to foreign currency trading activities. Pension funds and State attorneys general allege that certain banks executed trades at one 

price, but charged a higher price to the funds. Whistleblowers have 

also come forward alleging improper practices related to foreign 

currency trading by banks. An October 2009 report by Russell Investments noted that there is ‘‘no regulator charged with defending 

the rights and interests of clients when converting currency.’’ What 

work has Treasury done to monitor and investigate allegations of 

improper practices regarding currency trading? What is the current 

state of the regulatory framework that addresses this area? What 

options, if any, has the Department explored for enhancing transparency? What, if any, legislation might be required in this area 

to better protect clients from improper practices in this area? 

A.4. The Treasury Department does not comment on pending litigation and investigations. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (DFA) further strengthens the oversight and transparency of 

all foreign currency derivatives markets, including foreign exchange swaps and forwards. It subjects participants in the derivatives markets to heightened business conduct standards and provides the CFTC and banking regulators with additional oversight 

of market participants and with strong anti-evasion powers to ensure that they do not structure products or take other steps to 

evade the Commodity Exchange Act’s requirements. The DFA’s 

trade reporting requirements will significantly enhance the transparency and oversight of derivatives markets, including for foreign 

currency derivatives. 

Q.5. Title VII of the Dodd-Frank Act, largely overseen by the SEC 

and CFTC, will require firms to keep additional capital for overthe-counter trades, so that they will be able to pay up, if the trade 

moves against them. At the same time, the Volcker Rule, which is 

overseen by banking regulators, as well as the SEC and CFTC, also 

imposes capital requirements. These provisions require regulators 

to impose additional capital charges for any proprietary trading by 

the nonbank financial companies supervised by the board [((a)(2)) 

and ((f)(4))], and explicitly authorizes regulators to impose additional capital charges on banking entities, for even permitted activities such as market-making. [((d)(3))] And, of course, the Treasury Department and the banking regulators are working with their 

international counterparts to effectively implement new Basel requirements on capital. What work is the Treasury Department 

doing, whether independently or in coordination with the prudential regulators, the SEC, or CFTC, to help enhance the capital requirements for trading positions, as directed by not just the derivatives title, but also by the Volcker Rule? 

A.5. Although the Treasury Department is not directly responsible 

for writing the regulations to implement either the derivatives provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Volcker Rule, we are working closely with the 

agencies responsible for issuing the regulations to implement the 

Volcker Rule to coordinate the rulemakings so that they are as consistent and comparable as possible across supervisory jurisdictions. 

118 

Q.6. Historically OTC derivatives have been taxed under the conventional realization method of accounting for stock, bonds, and 

other securities, while exchange traded funds have been subject to 

Section 1256 of the Internal Revenue Code, which generally requires that contracts within its scope be marked-to-market on an 

annual basis, and provides that gains or losses are considered capital gains/losses with 60 percent long-term and 40 percent short 

term. Section 1601 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 1256 of the IRC. On December 7, 2010, the Treasury/IRS business plan provided for the development of ‘‘guidance on the application of [Section] 1256 to certain 

derivatives contracts.’’ What tax issues is the Department considering with respect to derivatives contracts? When does the Department expect that it will issue guidance in this area? If the Secretary of the Treasury exempted foreign exchange swaps and forwards from the definition of ‘‘swap’’ under the Commodity Exchange Act, would the definition under Section 1256 of the IRC, as 

amended by Dodd-Frank, remain applicable? 

A.6. Section 1256 of the Internal Revenue Code generally requires 

that ‘‘section 1256 contracts’’ be marked-to-market annually. A section 1256 contract is a regulated futures contract, a foreign currency contract, a dealer securities futures contract, or certain options listed on a qualified board or exchange (QBE). Gain or loss 

from a foreign currency contract is generally treated as ordinary income and subject to tax at regular income tax rates; a regulated 

futures contract, dealer securities futures contract, and a listed option generates 60 percent long-term and 40 percent short-term capital gain or loss, assuming the contract is a capital asset in the 

hands of the taxpayer. 

In recent years, an increasing number of contracts have been 

moving to QBEs and/or centralized clearinghouses, raising the 

question as to whether such contracts are section 1256 contracts. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

added section 1256(b)(2) to the Internal Revenue Code, which generally limits the scope of section 1256 to those contracts that have 

historically been section 1256 contracts. Thus, section 1256(b)(2) 

specifies that over-the-counter swaps and similar financial instruments are not section 1256 contracts. The exemption of foreign exchange swaps and forwards from the Commodity Exchange Act 

does not affect the section 1256 tax analysis. 

Guidance under section 1256 is on the 2010–2011 Priority Guidance Plan published by the Treasury Department and the IRS. 

That guidance will address issues related to the Dodd-Frank Wall 

Street Reform and Consumer Protection Act amendment to section 

1256, including the scope of section 1256(b)(2). The section 1256 

guidance project is expected to be published this summer. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM MARY J. MILLER 

Q.1. On April 12, the banking regulators released their proposal on 

‘‘Margin and Capital Requirements for Covered Swap Entities.’’ 

The proposal requires dealer banks and significant counterparties 

to post two way initial margin and to hold that margin at third 

119 

party custodian banks. This margin would be limited to immediately available cash funds and high-quality, highly liquid U.S. 

Government and agency obligations. Re-hypothecation of such 

amounts would be prohibited. What are the costs associated with 

tying up margin in segregated accounts at custodian banks? Have 

you quantified the impact this requirement will have on liquidity? 

A.1. As you note, the banking regulators released a notice of proposed rulemaking on ‘‘Margin and Capital Requirements for Covered Swap Entities’’ on April 12. Those proposed rules are currently open for public comment. Among the questions on which the 

banking regulators have solicited comments is what costs the proposed rules would impose and what impact they would have on liquidity. Comments are due by June 24, 2011. These are clearly important questions, and we look forward to reviewing the comments 

the banking regulators receive in response to these and the many 

other questions they have asked. 

Q.2. The margin and capital requirements proposal takes a riskbased approach by distinguishing between four separate types of 

derivatives counterparties. The proposal extends the definition of 

financial end user to include any government of any foreign country or any political subdivision, agency, or instrumentality thereof 

in the world. How would margin and capital requirements apply to 

the dealings of the foreign subsidiary of a U.S. financial institution 

that enters into a swap? What about a U.S. financial institution 

that enters into a swap with a foreign government? Would the foreign subsidiary of a U.S. institution that enters into a swap with 

a foreign government be required to post margin in U.S. Treasuries? 

A.2. As noted in response to the prior question, the banking regulators released a notice of proposed rulemaking on ‘‘Margin and 

Capital Requirements for Covered Swap Entities’’ on April 12 and 

have requested comments from the public by June 24, 2011. The 

proposed rules also have specifically solicited comment on whether 

the proposed rules appropriately limit the margin rules consistent 

with the territorial scope of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, and how the rules could affect the 

structure, management, and competitiveness of U.S. entities.