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THE IMPACT OF DODD-FRANK ON CUSTOMERS, 

CREDIT, AND JOB CREATORS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 10, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–143 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 10, 2012 ..................................................................................................... 1 

Appendix: 

July 10, 2012 ..................................................................................................... 53 

WITNESSES 

TUESDAY, JULY 10, 2012 

Bentsen, Hon. Kenneth E., Jr., Executive Vice President, Public Policy and 

Advocacy, the Securities Industry and Financial Markets Association 

(SIFMA) ................................................................................................................ 8 

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

Chairman, the National Association of Corporate Treasurers, on behalf 

of the U.S. Chamber of Commerce ..................................................................... 10 

Deutsch, Tom, Executive Director, the American Securitization Forum (ASF) . 12 

Kelleher, Dennis M., President and Chief Executive Officer, Better Markets, 

Inc. ......................................................................................................................... 14 

Lemke, Thomas P., General Counsel and Executive Vice President, Legg 

Mason & Co., LLC, on behalf of the Investment Company Institute (ICI) ..... 15 

Simpson, Anne, Senior Portfolio Manager, Investments, and Director, Corporate Goverance, the California Public Employees’ Retirement System 

(CalPERS) ............................................................................................................. 17 

Vanderslice, Paul, President, the Commercial Real Estate (CRE) Finance 

Council (CREFC) .................................................................................................. 20 

APPENDIX 

Prepared statements: 

Bentsen, Hon. Kenneth E. Jr. ......................................................................... 54 

Deas, Thomas C., Jr. ........................................................................................ 70 

Deutsch, Tom .................................................................................................... 82 

Kelleher, Dennis M. .......................................................................................... 102 

Lemke, Thomas P. ............................................................................................ 120 

Simpson, Anne, ................................................................................................. 151 

Vanderslice, Paul .............................................................................................. 168 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

New York Times article by Azam Ahmed entitled, ‘‘After MF Global, 

Another Brokerage Firm Collapses With $200 Million Missing,’’ dated 

July 9, 2012 ................................................................................................... 184 

Reuters article by Carrick Mollenkamp entitled, ‘‘RPT-INSIGHT-Fed 

knew of Libor issue in 2007–08, proposed reforms,’’ dated July 10, 

2012 ................................................................................................................ 187 

Schweikert, Hon. David: 

Written statement of the Bond Dealers of America (BDA) ........................... 189 

Written statement of the Mortgage Bankers Association (MBA) ................. 192 

(1) 

THE IMPACT OF DODD-FRANK 

ON CUSTOMERS, CREDIT, 

AND JOB CREATORS 

Tuesday, July 10, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Manzullo, Biggert, Hensarling, Neugebauer, Pearce, Posey, 

Fitzpatrick, Hayworth, Hurt, Stivers, Dold; Waters, Sherman, 

Hinojosa, Lynch, Maloney, Moore, Himes, and Green. 

Ex officio present: Representative Bachus. 

Chairman GARRETT. Good morning, everyone. Today’s hearing of 

the Subcommittee on Capital Markets and Government Sponsored 

Enterprises is called to order. Today’s hearing is entitled, ‘‘The Impact of Dodd-Frank on Customers, Credit, and Job Creators.’’ I 

thank the witnesses on the panel for being with us this morning. 

But before we get to the panel, we will begin with opening statements. I yield myself 3 minutes. 

It has been 2 years since the passage of the 2,300-page DoddFrank Act. And since that time, the economy is stagnant, the unemployment rate is above 8 percent, wages are declining, and credit, unless it is being supplied by the government, is frozen. 

I not only believe that these things are interrelated, I believe 

that the passage of Dodd-Frank is actually one of the main reasons 

that there has been such a tepid economic growth over the last several years. 

We have some charts that are going to be up on the screen, and 

here they come right now. If you look at these charts, you can see 

that GDP growth was at 4 percent in the three quarters preceding 

the passage of Dodd-Frank, and the quarter after the legislation 

was signed into law, GDP did what? It dropped, and it dropped 

continuously until it was almost negative. And it has continued to 

stay around 2 percent. 

If you look up at the next chart, this chart examines the impact 

on house prices. Prior to the passage of Dodd-Frank, house prices 

were basically beginning to normalize and maybe even rebound, as 

you see. But in the 2 years after Dodd-Frank, what happened? We 

2 

have unfortunately seen home values go back on their downward 

slide once again, all due to Dodd-Frank. 

And finally, let us examine the manufacturing sector in our third 

chart. As the chart indicates, manufacturing production was also, 

just like the other two, regaining momentum in early 2010. Then, 

Dodd-Frank came along. It was signed into law, and average production was almost cut in half. 

The reason that these impacts have been so severe is beyond the 

breadth and scope of this legislation. It literally makes wholesale 

changes in every facet of our financial markets, whether that is 

banking, mortgage lending, securities, trading, risk managing, or 

others. 

Each one of the titles of Dodd-Frank taken individually could 

have been a multi-Congress undertaking and should have been 

given much more thought than it was. Unfortunately, as you all 

know, Dodd-Frank was rushed through the process with really extreme partisanship. And the derivatives title and Volcker pieces 

were literally added in the dead of night, in the back room of the 

Senate Dirksen Building, as many of you recall. No one knew exactly how the pieces of the bill would work, or in this case not work 

together cumulatively. There was absolutely no consideration given 

to the possible combined costs that all these cumulative changes 

would have. 

Let me just give you an example in regards to the cost of credit. 

When the CFTC is finalizing its margin rules for interest rate 

swap, is it considering what new servicing requirements that the 

FTC is considering, adding to the risk retention requirements? In 

turn, when the FTC is considering these new servicing requirements, are they thinking about the CFPB, including a rebuttable 

presumption to the Qualified Mortgage (QM) definition? And likewise, when the CFPB is making their decisions, are they contemplating the possible impact of the Fed finalizing a Volcker Rule 

that could significantly curtail market making? 

All four of these actions alone will have an impact on the cost 

of credit in this country for consumers. It is important that we 

identify these costs individually and have rules that effectively balance the costs with the benefits provided. 

What is not being discussed or identified is what is the combined 

impact all of these rules and other rules will ultimately have on 

the cost of credit for borrowers in the country. When taken individually, the cost might be tolerable. But when taken all together, cumulatively, it will prove extremely onerous. 

So the purpose of today’s hearing is to highlight the economic impact and the cost of these rules for businesses, consumers, and the 

economy, not viewed through the single vacuum of each regulator 

writing their own rule, but viewed through a more comprehensive 

and holistic manner. And I am afraid that the results we will find 

will not be pretty. 

This is one of the weakest economic recoveries that this country 

has ever experienced, especially given the depth of the recession. 

Unfortunately, Dodd-Frank and its over 400 rules are one of the 

main reasons that I am afraid it will be a lasting legacy of the legislation. 

3 

And with that, I yield back, and I look to the chairman of the 

full Financial Services Committee, who is recognized for 3 minutes. 

Welcome, Chairman Bachus. 

Chairman BACHUS. Thank you, Chairman Garrett. Thank you for 

convening this hearing, which will be the first of about seven hearings this month on Dodd-Frank and its effect on job creation and 

the economy and our financial institutions and consumers. 

Dodd-Frank was enacted in response to the financial crisis of 

2008. The law was not intended to hinder the ability of American 

businesses to utilize the capital markets or to unduly hamper the 

ability of consumers and businesses to obtain credit, create jobs, 

mitigate risk, and thrive. 

Yet 2 years after its passage, many argue that Dodd-Frank is 

having precisely these negative effects. Main Street businesses are 

now facing a constriction of both capital and credit. The derivative 

rules, the Volcker Rule, and a host of other Dodd-Frank rules are 

putting enormous pressure on corporate balance sheets at a time 

when economic conditions are already putting increased demands 

on the time and resources of job creators and entrepreneurs. 

This committee has tried to mitigate some of the potential negative impacts of Dodd-Frank by moving bipartisan legislation such 

as H.R. 2682, a bill that would ensure that regulators do not force 

derivative end-users to post margin, which would divert capital 

away from job creation. 

Unfortunately, the Senate has failed to act on this important bill, 

and some regulators continue to interpret Dodd-Frank’s Title VII 

as a grant of new authority to impose costly margin requirements 

on end-users. 

Similarly, an overly restrictive Volcker Rule has also had a negative impact on Main Street businesses by creating borrowing costs 

for consumers and companies, both large and small, by increasing 

borrowing costs. 

If businesses find it harder to borrow, it will be harder for them 

to make capital investments and create jobs. If consumers have 

less access to credit, it will be harder for them to care for their 

families. And if the value of the assets held by savers and investors 

declines, people will find it harder to save for a new home, for college or for retirement. 

Our witnesses today will be able to shed more light on the cumulative effect these rules are having on our capital markets, and our 

economy. And I thank them for being here. 

Chairman Garrett, again, thank you for holding this hearing. I 

look forward to the discussion. 

Chairman GARRETT. Mr. Lynch is recognized for 3 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

First of all, I want to thank the witnesses for coming before this 

committee and helping us with our work. 

Today’s hearing is somewhat benignly titled, ‘‘The Impact of 

Dodd-Frank on Customers, Credit, and Job Creators.’’ But the implication is that the financial reform is somehow damaging the financial system. 

Normally, there is a certain lag time between an attempt at regulation and an assessment. But in this case, we haven’t even gotVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
4 

ten through the existing financial crisis and we are already planting the seeds for the next one. That is what is happening here. 

My friends, and I mean ‘‘my friends’’ on the other side of the 

aisle want to do away with any reform that we put in place because of this colossal historical financial debacle that we have gone 

through beginning in 2008. 

It appears my colleagues on the other side of the aisle have come 

down with a case of collective and sudden amnesia, forgetting that 

our financial industry is struggling because of a loss of integrity, 

the loss of trust because of the last financial crisis, the one we are 

still struggling with, because of the recklessness on Wall Street, 

the exact behavior that Dodd-Frank is intended to stop. 

Whatever unintended effect Dodd-Frank may have on job creators, it pales in comparison to the havoc Wall Street wreaked on 

our economy during the financial crisis. Let me recount that according to the Treasury Department, the financial crisis that we 

are trying to deal with here cost Americans $19.2 trillion in household wealth—$19.2 trillion. 

Better Markets, whose representative is here today to testify, believes even this staggeringly high number is too low to accurately 

account for the cost of the crisis. They note that we lost $2.6 trillion in unrealized potential GDP growth since the crisis. We have 

12.5 million unemployed Americans not contributing to the economy and not putting away savings for their retirement. 

Americans have lost an enormous amount of household wealth, 

including $7 trillion in home values, $11 trillion in investments in 

the stock market, and $3.4 trillion in retirement savings, not to 

mention the billions of dollars the government has spent to prop 

up the same banks that caused all of this damage in the first place. 

I want to note that I voted against TARP. 

These enormous losses which are the result of the crisis, by the 

kind of reckless behavior on Wall Street that the Dodd-Frank law 

is intended to prevent, have had a much greater negative effect on 

customer credit and job creation than anything in Dodd-Frank 

itself. I am happy to join my colleagues in addressing any unintended consequences in the financial reform bill. It is not perfect. 

I understand that. 

But let us not forget what we are trying to prevent here: another 

catastrophic financial crisis that has cost the American people 

many trillions of dollars. The potential costs of a regulatory framework riddled with loopholes are far greater than those associated 

with a safe, stable financial system. 

I thank the gentleman for his courtesy, and his indulgence, and 

I yield back my time. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from California, Mr. Royce, for 1 minute. 

Mr. ROYCE. Yes, if I could point out, one can support financial 

reform without supporting Dodd-Frank. The problem we have with 

Dodd-Frank is that it did not solve too-big-to-fail; it compounded it. 

The banking sector is even more concentrated than it was a few 

years ago. 

You have a smaller and smaller number of organizations holding 

the majority of the assets in that sector. That is partly a result of 

the way this was done. It didn’t consolidate a fragmented reguVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
5 

latory structure. Other than eliminating the OTS, we still have an 

alphabet soup of regulatory organizations overseeing markets with 

a large amount of overlap. 

And despite what was said at the time of its passage, it did not 

increase investment in entrepreneurship or foster robust growth in 

the economy. It did exactly the opposite. 

So today’s hearing will hopefully shed some light on what it has 

done, namely increase uncertainty throughout the economy; increase the cost of credit for consumers and businesses; and most 

importantly, made it easier for smaller firms to fall prey to larger 

ones gobbling up their competition because of the lower cost of 

credit now for the largest firms due to the way in which DoddFrank sent that message to the market that they were too-big-tofail. 

I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

The gentlelady from New York is recognized for 3 minutes. 

Mrs. MALONEY. First of all, I would like to welcome my former 

colleague and very good friend, Ken Bentsen. It is very good to see 

you and all of the panelists today. I look forward to hearing your 

remarks. 

And I would say that to even think about repealing Dodd-Frank 

is the height of irresponsibility. You have to remember why it was 

implemented in the first place. We put in financial reform because 

we were on the brink of another Great Depression. There was a 

run on the banks. There was a run on the money markets. And it 

was not until this Congress came in with the leadership of Nancy 

Pelosi and others that we stop-gapped and saved from falling off 

a cliff that would have been an even worse situation to respond to. 

Dodd-Frank brought in huge swathes of the market that were 

unregulated and regulated them. I don’t think anyone in America 

wants to go back to the subprime crisis or to a time when banks 

were failing, and we had a number of banks that have failed. And 

I know in some cases, there were forced marriages or mergers just 

to save the FDIC deposit insurance of American working families. 

So Dodd-Frank came in and helped stabilize the markets. And I 

would say that markets run more on trust than on capital, and if 

people feel that there aren’t rules of the game and transparency— 

I am not saying that we shouldn’t make adjustments and refine it 

as we go forward in ways that reflect the challenges of the markets 

and the 21st Century, but I believe we will look back on DoddFrank as we did the great reforms after the Great Depression. 

After the Great Depression, Congress implemented GlassSteagall, the FDIC-insured accounts, the SEC. And it gave us 60 

years of unparalleled economic prosperity in our great country. I 

believe that many of the reforms—granted, nothing is perfect and 

that is why we are here to hear from the panelists today on ways 

they feel they might make the regulation better, but I don’t know 

anyone in my district who wants to go back to a totally unregulated, huge swathe, no transparency, huge areas not even on exchanges that led to really the worst economic crisis in my lifetime 

and one I hope I never see again. 

So my time is up. I look forward to hearing the remarks of the 

panelists today. 

6 

Chairman GARRETT. The gentlelady yields back. 

Mr. Fitzpatrick is recognized for 1 minute. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I, too, look forward to this hearing because strengthening our 

Nation’s economy and getting Americans back to work remains our 

number one priority. And being able to raise capital, hedge risks, 

and obtain credit are necessary activities in order for businesses to 

grow and for businesses to create jobs and hire again. 

It is important for us to continue our oversight of Dodd-Frank 

and to examine regulations because if businesses find it harder to 

borrow, it will be harder for them to make investments, to expand, 

and to hire workers. Moreover, if consumers find it difficult to access credit, or the value of their assets declines, it will make it 

harder for them to save and will put further strain on families trying to live within already strapped family budgets. 

Today’s hearing will shed further light on the unintended consequences that Dodd-Frank is having on America’s job creators and 

consumers. Next week marks the 2-year anniversary since this legislation imposed some 400 new rules on our financial system. Certainly, the financial industry deserves scrutiny after the meltdown 

of 2008. However, we must take care to make our capital markets 

not only safer, but to make them stronger and ensure that those 

far from Wall Street do not pay the price for those who are truly 

responsible for the financial crisis that did occur. 

So I look forward to the hearing, Mr. Chairman, and I yield back. 

Chairman GARRETT. And the gentleman yields back. 

Mr. Hurt is recognized for 1 minute. 

Mr. HURT. Mr. Chairman, I thank you for holding today’s hearing on the effects of the Dodd-Frank Act on consumers, investors, 

and job creators. 

As we approach the 2-year anniversary of Dodd-Frank, regulators are still working through the more than 400 new rules and 

directives, with insufficient concern or understanding of the cumulative impact of these regulations on our economy. It is critical that 

this committee continue to scrutinize the effects that these regulations will have on consumers, small businesses, community banks, 

credit unions, and other financial institutions. 

As I travel across Virginia’s 5th District, I am constantly reminded by my constituents that Dodd-Frank has caused negative 

effects on job creation and will lead to less access to credit for consumers, higher costs for capital for small businesses, and piles of 

Federal regulations to work through. 

As our Nation struggles through high unemployment and minimal economic growth, it is increasingly apparent that many of the 

regulations prescribed by Dodd-Frank will continue to act as a hindrance to our job creators and America’s economic recovery. 

I would like to thank the distinguished guests and witnesses for 

appearing before the subcommittee today, and I look forward to 

their testimony. 

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

time. 

Chairman GARRETT. Mr. Dold now for, I guess, the last word on 

this, 1 minute. 

7 

Mr. DOLD. Thank you. I thank the chairman, and I thank you 

for holding this hearing. 

And I want to thank our witnesses for taking the time to join us 

today. 

To promote good public policy, Congress must regularly review 

and revise existing laws and regulations. This process should include thorough and objective cost-benefit reviews of both intended 

and unintended consequences in light of historical evidence and 

new information. 

This is particularly true with bills like Dodd-Frank, which in addition to containing over 2,000 legislative pages, requires many 

thousands of additional pages of implementing regulations, some of 

which are internally inconsistent, ineffective, unworkable or counterproductive. 

I am encouraged by this committee’s bipartisan work to address 

some of these issues. For example, with H.R. 4235, Ms. Moore and 

I are working together on a bipartisan basis to correct some of 

these problematic Dodd-Frank provisions. 

But we must continue to accelerate these bipartisan efforts. We 

must ensure that we understand the impact of the proposed regulations as a whole. We must ensure that the proposed or existing 

rules do not negatively affect risk management, market liquidity, 

credit costs, and credit access. 

Most importantly, we must ensure that unintended consequences 

do not ultimately limit small business expansion, job creation, and 

economic growth. 

I look forward to the testimony, and I yield back, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

And seeing no other opening statements, I now turn to the panel, 

and I welcome all seven members of today’s panel. I very much appreciate the testimony that you are about to present. And I know 

that some of you have been with us before, and others have not. 

For those who have not, and even for those who have been here 

before, just a reminder that you will be yielded 5 minutes for your 

remarks, and your full written statements will be made a part of 

the record. 

And also just for your edification, in front of you of course is the 

timing light—red, yellow, and green—to give you an indication as 

to your time. When it turns red, your time is up, and since we do 

have a fairly large panel here—also just as a note, and I make this 

note not just to this panel, but to other panels who may come and 

other people who may be in the room, and so we are not casting 

dispersions on any one particular individual, association, or otherwise. 

But the rule of the committee is that statements should be presented to the committee 48 hours prior to the testimony, and of 

course we know we are coming in through a holiday weekend and 

what have you coming into this, but just in general, that is what 

the rule is, and so we would like to try to get back to that so members and staff of the committee will have the opportunity to review 

it in some detail. 

With that said, Mr. Bentsen, you are recognized for 5 minutes, 

and once again, welcome to the committee. 

You are recognized for 5 minutes. 

8 

Thank you. 

STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., 

EXECUTIVE VICE PRESIDENT, PUBLIC POLICY AND ADVOCACY, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. BENTSEN. Chairman Garrett, Ranking Member Waters, and 

members of the subcommittee, thank you for the opportunity to 

share SIFMA’s views. 

There is much in the Dodd-Frank Act that SIFMA’s members 

supported, such as the establishment of a systemic risk regulator, 

the Orderly Liquidation Authority, and a uniform standard of care 

for retail brokers and advisers. 

Properly crafted, these provisions can appropriately increase supervision to mitigate systemic risk, improve coordination among 

regulators, eliminate too-big-to-fail, and improve protections in confidence for individual investors. 

However, other provisions, if not properly crafted, and not in coordination with foreign regulators, could have negative consequences to the detriment to businesses, governments, individuals, 

and institutional investors who rely on deep and liquid U.S. capital 

markets. 

We believe that Congress’ goal in adopting the statutory Volcker 

Rule was to focus banking entities on providing liquidity to customers and to prohibit excessive risk-taking. 

The rules as proposed defines congressionally-permitted activities 

far too narrowly through an artificial distinction between permitted 

activities and prohibited proprietary trading based on a negative 

presumption using hard coded metrics on a transaction by transaction basis that is unworkable, and will cause market makers to 

pull back, to the detriment of U.S. capital markets. 

In the corporate bonds commission by SIFMA, Oliver Wyman found that liquidity losses could cost investors between $90 billion 

and $315 billion in mark-to-market losses, corporate issuers between $12 billion and $43 billion a year in borrowing cost, and investors between $1 billion and $4 billion per year in transaction 

cost that is a level and depth of liquidity decreases. 

Further, Stanford University Professor Darrell Duffie noted in a 

paper commissioned by SIFMA that the direct and indirect effects 

would increase trading cost for investors, reduce the resiliency of 

markets, reduce the quality of information revealed through security crisis, and increase the interest expense in capital rates and 

costs for corporations, individuals, and others. 

Buy side market participants, commercial businesses, foreign 

regulators, and central banks have commented that the proposal 

would significantly harm financial markets, pointing to the negative impacts of decreased liquidity, higher cost for issuers, and reduced returns on investments. 

They further commented that other market participants are unlikely to be able to fill the critical market-making role played by 

banking entities, indeed the rule would apply to 17 of the 21 primary dealers in the United States. 

SIFMA believes that the premium capture reserve account contained in the proposed risk retention rules will have negative conVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
9 

sequences for the securitization markets. Both our buy side and 

sell side members believe that the requirements proposed will 

present obstacles to the structure in securitizations, including residential mortgage securitizations. 

As Moody’s Analytics’ special report stated, as a result of the way 

the premium capture rule is stated, the mortgage rate impact on 

borrowers would be significant on the order of an increase of 1 to 

4 percentage points, depending on the parameters of the mortgages 

being originated, and discount rates applied. 

The consequences of the rule as written could significantly impede the return of private securitization markets and permanently 

cement the government’s role in housing finance. 

We are supportive of many of the goals of Title VII derivatives 

regulation as with all regulation concerns focus on making sure 

that requirements are workable, and that the benefits outweigh the 

cost. Those costs after all are borne by market participants who 

may find it more difficult and expensive to hedge risk. 

We have also urged regulators to avoid unintended consequences 

and market impacts by carefully sequencing and phasing in implementation of rules by category, type of participant, asset class, and 

products within asset classes. 

A particular concern is coordination. Regulators have spoken of 

cooperation both at home and globally, but we see very little real 

evidence of actual coordination. 

An example of lack of coordination is the cross border application 

of Title VII rulemaking. The recently proposed guidance is complex, 

expansive in scope, and highly prescriptive. A particular concern is 

to propose substituted compliance, which theoretically should allow 

market participants operating in other well-regulated markets to 

rely on their home or host country regulation. 

This substituted compliance process will be very different than 

the mutual recognition model, and will require the CFTC to individually review and approve the rules of foreign nations. 

Further, we believe the CFTC’s cross border application approach 

is flawed and that the Commission chose not to do so in the form 

of guidance as opposed to rule and apparently without sufficient coordination with the SEC. SIFMA supported the inclusion of single 

counterparty credit limits because our members had been using internal models for many years to measure and control such exposures. SIFMA, however, does not support the Federal Reserve’s 

proposal in its current form because it exceeds congressional intent, 

and it would needlessly reduce liquidity in the financial system. 

The new method is a crude measure that overstates exposures 

under any reasonable calculation methodology by a significant multiple. The effect of the new methodology for measuring credit exposure will be a reduction in market liquidity that may have a significant effect on markets more broadly. 

In conclusion, the United States has taken a more comprehensive 

approach than any other country to address regulatory reform. Although some countries have taken steps to address components of 

topics covered by Dodd-Frank, no country has adopted restrictions 

comparable to the Volcker Rule or adopted legislation or regulators 

having the scope of Dodd-Frank. 

10 

There can be no question that the subsequent regulation has 

competitive consequences. It is essential that U.S. regulatory agencies, in proposing regulations, consider and analyze both the individual aspects and combined impact of proposed rules that may 

place U.S. financial markets at an unwarranted competitive disadvantage compared to those countries that have not implemented 

a comparable approach. 

Thank you. 

[The prepared statement of Mr. Bentsen can be found on page 54 

of the appendix.] 

Chairman GARRETT. And I thank you, very much. 

Mr. Deas, welcome to the panel. You are recognized for 5 minutes. 

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

TREASURER, FMC CORPORATION, AND CHAIRMAN, THE NATIONAL ASSOCIATION OF CORPORATE TREASURERS, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE 

Mr. DEAS. Good morning, Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee. 

I am Tom Deas, vice president and treasurer of FMC Corporation, and the chairman of the National Association of Corporate 

Treasurers. Thank you for the opportunity to speak with you this 

morning, also on behalf of the U.S. Chamber of Commerce about 

the effects of Dodd-Frank on customers, credit, and job creators. 

The drafters and implementors of the Act and other initiatives, 

such as proposed money market fund regulations, have focused 

mainly on the financial services industry. However, as the regulations roll out, we in Main Street businesses are concerned about 

our continued ability to protect day-to-day business risks with 

structured and cost-effective derivatives, to manage business cash 

flows with continued access to diversified short-term investment alternatives, and to raise capital to build new factories, conduct 

R&D, expand inventories, and ultimately to sustain and grow jobs. 

I would like to outline our concerns about derivatives regulations, the Volcker Rule, and money market fund regulations. 

On my company’s use of derivatives, I can tell you that FMC 

Corporation is a proud American company founded almost 130 

years ago. Today, our 5,000 employees work hard to keep FMC a 

leading manufacturer and marketer of a whole range of agricultural, specialty, and industrial chemicals. Along with many other 

U.S. manufacturers and agricultural producers, FMC uses over-thecounter derivatives to hedge business risks in a cost-effective way. 

We use derivatives to manage the risk of foreign exchange rate 

movements, changes in interest rates, and global energy and commodity prices. Our banks did not require FMC to post cash margin 

to secure periodic fluctuations in the value of our derivatives. 

This structure gives us certainty so that we never have to post 

a fluctuating daily cash margin while the derivatives are outstanding. However, regulators have now proposed that we will have 

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

We still can’t calculate exactly how much cash margin we would 

have to set aside, but FMC and other members of the Business 

11 

Roundtable estimated that on average, a 3 percent initial margin 

would amount to $269 million per company. 

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. In our world of finite limits and financial constraints, posting a fluctuating cash margin would be a direct, dollar-for-dollar subtraction from funds that we would otherwise invest in our business. 

I want to assure you that FMC and other end-users employ OTC 

derivatives to offset risks, not create new ones. 

I thank the members for your bipartisan efforts to address margining and the inter-affiliate issues through legislative action. 

On the Volcker Rule, proposed regulations coordinated among 

five agencies have left its application confused, particularly as to 

the critical distinction between exempt market-making activities 

and prohibited proprietary trading. FMC’s most recent bond issue 

in November, $300 million of 10-year notes was underwritten by a 

syndicate of our banks. As underwriters of our bonds, these firms 

take on the responsibility to hold or swap them if necessary to 

make an orderly market for our issue as it is launched. However, 

the Volcker Rule could significantly constrain this function through 

an ill-defined line in the regulation blurring what constitutes 

banned proprietary trading. 

We estimate the added cost of this regulatory uncertainty on our 

bond issue would have been $15 million. We are concerned that the 

ambiguity could produce an opposite result from what we all hope 

to achieve through undue burdens on the U.S. capital markets 

where investors and issuers have come together with an efficiency 

up until now unparalleled to the world and to the benefit of American businesses. 

Other impending financial regulations affect money market 

funds. This $2.6 trillion financial-market segment not only provides 

an alternative for investors who would otherwise be limited to bank 

deposits, but also supports Main Street companies’ financing of 

working capital needs through purchases of our commercial paper. 

In 2010, the SEC, with our support, implemented a significant 

strengthening of liquidity requirements. However, another round of 

regulations would impose redemption restrictions, float the net 

asset value, and impose significantly higher capital requirements 

on fund sponsors. If the SEC formally proposes these new rules, 

many treasurers would begin immediate withdrawals from money 

market funds. We fear the cumulative effect of the proposed 

changes will eliminate this investing and financing alternative for 

Main Street companies and make us wholly dependent on banks, 

concentrating risk in a sector where over the past 40 years, there 

have been 2,800 failures costing taxpayers $188 billion. 

In summary, we are concerned about the lack of a clear end-user 

margin exemption and other restrictions on derivatives such as the 

inter-affiliate issues, and the application of an overly complex 

Volcker Rule, combined with regulations that could severely limit 

our access to money market funds. These could burden American 

companies, limiting growth, harming international competitiveness 

and ultimately hampering our ability to sustain and grow AmerVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
12 

ican jobs. Thank you for the opportunity to testify today on these 

important issues. 

[The prepared statement of Mr. Deas can be found on page 70 

of the appendix.] 

Chairman GARRETT. Thank you, Mr. Deas. 

Welcome, Mr. Deutsch. 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, THE 

AMERICAN SECURITIZATION FORUM (ASF) 

Mr. DEUTSCH. Chairman Garrett, Ranking Member Waters, and 

distinguished members of the subcommittee, my name is Tom 

Deutsch and I thank you for the opportunity to testify here today 

on behalf of the 330 member institutions of the American 

Securitization Forum. The securitization markets currently supply 

well over $1 trillion annually in Main Street credit to the economy 

each year for, among other things, consumers to buy houses, motorcycles, and cars, and for their own education, for farmers to buy 

tractors and other equipment, and for businesses to expand both 

their franchise as well as their physical plant. 

In effect, securitization is a delivery company that delivers these 

trillions of dollars from long-term savers such as mutual funds, 

pension funds, and insurance companies into direct consumer and 

credit loans to America. In my oral statement today, I would like 

to focus on some of the key macro challenges facing the private 

securitization markets in the face of the current regulatory 

headwinds. In my written statement, you can find links to the 

thousands of pages of comment letters that we alone have submitted to assist U.S. and international regulators. 

As an outgrowth of the financial crisis, many have focused on 

securitization as an ailing patient that needs heavy doses of regulatory medication to recuperate. ASF has strongly agreed that some 

treatment has been necessary to make appropriate and tailored reforms to the securitization market. 

First, through ASF Project RESTART, we have spent considerable effort ramping up transparency for investors and better aligning incentives between issuers and investors through various 

standardized market practices. 

Second, we have supported appropriate and tailored regulatory 

reform for risk retention, rating agency reform, conflicts of interest, 

and regulatory capital standards that would yield beneficial effects 

to the markets and the broader economy. But we have passed the 

point where heavy prescriptions of various regulatory medications 

have healing effects. Instead, we strongly urge policymakers to examine closely the aggregate and interactive effect of the myriad of 

treatments being administered, as they are becoming poisonous by 

being aggregated and injected in various doses, the interactive effects of which have not been thoroughly thought through. In effect, 

the poison to the market has become the dosage. 

So in my testimony, I will briefly summarize seven manifestations of this aggregate effect on the markets. First, straightforward 

products like auto- and equipment-backed securitizations whose 

performance was strong across-the-board through the financial crisis, are now facing extraordinarily complex challenges that were 

not designed or intended for those markets. 

13 

Second, unintended interactions of various rules will continue to 

be discovered for years to come, which is causing immense cost in 

reworking various current structures as well as eliminating products all together. 

Third, market participants are not investing and building business platforms. Rather, they are putting their skeletal platforms in 

the deep freeze, particularly for residential mortgages, because of 

the tremendous uncertainty of the outcome of proposed rules that 

could very well make those business lines loss centers. 

This makes the Administration’s and Congress’ desire to bring 

private capital back into mortgage securitizations more difficult 

and more protracted. For the mortgage market, the complete absence of policy direction in Dodd-Frank for Fannie Mae and 

Freddie Mac, which currently lost the American taxpayer nearly 

$200 billion, has also kept private industry left to question when 

or if less than 95 percent of mortgages originated in America will 

actually not be guaranteed by the U.S. taxpayer. 

Fourth, some rules like the Premium Capture Cash Reserve Account or PCCRA are so lethal to the RMBS and CMBS markets, 

that those markets are predicted to become relegated to history 

books for many institutions if that rule were to be put in place as 

proposed. The potential impact of such a rule on borrowers would 

be substantial with interest rates rising up to 1 percent to 4 percent, depending on the various structures. And rate locks would effectively be eliminated. 

Fifth, nonbanks and banks are being subject to further disparate 

rules causing competitive advantages and disadvantages to develop 

that will inevitably cause exiting of business lines based on regulation, rather than market efficiency. 

Sixth, although policy initiatives continue to evolve on a country 

by country basis, the global issuance and purchase of securitization 

is forced to comply with new and different standards in each country and each jurisdiction. 

And finally, seventh, many of the rules in Dodd-Frank, such as 

the Volcker Rule, were not intended to affect the securitization 

markets. But in fact, those rules have become the biggest sources 

of concern for key segments of the market such as the $300 billion 

asset-backed commercial paper market. 

When all of these rulemakings are finalized, they will inevitably 

result in increased costs for securitization and lending markets, 

which will be passed on to consumers and borrowers in the form 

of higher borrowing rates. Moreover, many of these markets may 

ultimately or finally disappear, leaving some consumers and business without access to credit at all. These are not outcomes that 

will help the U.S. economy or the unemployment rate decline. ASF 

greatly appreciates the opportunity to appear today, and I thank 

you for your time. 

[The prepared statement of Mr. Deutsch can be found on page 82 

of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Kelleher, you are recognized for 5 minutes. 

14 

STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, BETTER MARKETS, INC. 

Mr. KELLEHER. Good morning, Chairman Garrett, Ranking Member Waters, and members of the subcommittee. Thank you for the 

invitation to Better Markets to testify today. I am the president 

and CEO of Better Markets, which is a nonprofit, nonpartisan organization that promotes the public interest in the domestic and 

global financial markets. It advocates for transparency, oversight, 

and accountability with a goal of a stronger, safer financial system 

that is less prone to crisis and failure, thereby eliminating or minimizing the need for more taxpayer funded bailouts. I have detailed 

my background and what Better Markets does in my written testimony and it is also available on our Web site. I won’t repeat it 

here. 

Let me begin my summary of my testimony by stating a fact: 

Wall Street is not a job creator. Wall Street is a job killer of historic proportion. As we sit here today, our country and tens of millions of good, hardworking Americans are suffering through the 

worst economy since the Great Depression of the 1930’s. That is a 

direct result of the Wall Street-created financial collapse of 2008, 

which was the worst financial crisis since the stock market crash 

of 1929. 

As we sit here today, I am sorry, tonight, many of our neighbors 

will sit at their dinner table, look at their children, and worry 

about their future: 21 million Americans today can’t find full-time 

work; 11 million Americans are paying mortgages higher than the 

value of their homes; 5 million Americans have had to move out 

of their homes due to foreclosures, and millions more are packing 

up as we speak today; and the American family’s net worth has 

plummeted almost 40 percent in 3 years, wiping out almost 2 decades of hard work and prosperity. None of this happened because 

of the Dodd-Frank financial reform law passed 2 years ago. None 

of this happened because of the rules meant to implement the financial reform law, almost none of which have even been put in 

place yet. None of this happened because regulators who are the 

Wall Street policeman are trying to make Wall Street follow the 

law like everyone else in this country. 

That economic disaster happened as a result of Wall Street and 

the financial industry being deregulated in the 1990s and virtually 

unregulated starting in 2000. This unleashed a recklessness that 

took just 7 years to cause the biggest financial collapse since 1929 

and almost caused a second Great Depression. Wall Street was able 

to do that because it and its allies changed or eliminated the laws, 

rules, and regulations put in place during the Great Depression of 

the 1930s, which protected the American people from Wall Street 

and the financial industry. After that, our country did not have a 

financial or economic crisis on that scale for more than 70 years. 

And remember, even with the unprecedented degree of government 

regulation of Wall Street and the U.S. capital markets for 70 years, 

our country prospered. We built the largest, most broad-based middle class in the history of the world. 

Wall Street, our financial industry, our nonfinancial businesses, 

and our economy all thrived for 70 years. Deregulation of the only 

industry in the country that threatens our financial system and enVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
15 

tire economy changed all that. Financial predators were let loose. 

Doing anything and everything to make as much money as fast as 

possible became the Wall Street business model. And as the 

JPMorgan London Whale bet of April and Barclay’s rate rigging 

scandal of today shows, little has changed. 

That is why the Dodd-Frank financial reform law is more properly understood as the Wall Street re-regulation law. It is designed 

and intended to prevent Wall Street and the too-big-to-fail banks 

from causing another financial collapse and economic crisis. Nothing in that law could ever cause the damage to jobs, our economy, 

our financial system, and our country that Wall Street did when 

it caused the financial collapse and worst economy since the Great 

Depression. 

Unfortunately, Wall Street and its allies are engaged in a campaign that attempts to deflect the public debate away from that crisis, away from Wall Street’s role in that crisis, away from the cost 

of that crisis that they put on the American people and to the new 

financial reform law, to the industry’s alleged burdens and to the 

rules being put in place to prevent another crisis. 

As detailed in my written testimony, for more than 100 years the 

industry has complained nonstop about regulation. But history 

proves again and again that these complaints are without merit. 

The industry has always adapted and that industry and our country have prospered. In closing, the important anniversary isn’t the 

2 years since the passage of the financial reform law meant to protect the American people; it is the almost 4 years since Wall Street 

created the crisis and inflicted this economic wreckage on every 

corner of our country. How long before we stop worrying about 

Wall Street’s profits and start worrying about taxpayer pockets and 

Main Street families? 

Thank you. 

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

102 of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Lemke, you are recognized for 5 minutes, and welcome to the 

panel. 

STATEMENT OF THOMAS P. LEMKE, GENERAL COUNSEL AND 

EXECUTIVE VICE PRESIDENT, LEGG MASON & CO., LLC, ON 

BEHALF OF THE INVESTMENT COMPANY INSTITUTE (ICI) 

Mr. LEMKE. Good morning, Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee. I am Thomas Lemke, 

general counsel of Legg Mason & Co. We are a Baltimore-based 

global asset management firm that manages more than $630 billion in mutual funds and other assets for our clients. I very much 

appreciate the opportunity today to testify on behalf of the Investment Company Institute on the impact of Dodd-Frank. 

ICI is a national association of mutual funds and other SEC-registered investment companies. The members of ICI help more than 

90 million investors seeking to achieve their financial goals. 

It is important to note that Dodd-Frank is not directed at SECregistered mutual funds. These funds were not a cause of the financial crisis. However, Dodd-Frank is very broad and very techVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
16 

nical in its scope, and in a number of areas it raises important implications for mutual funds. 

Our written statement addresses these matters in detail. In some 

cases, we believe the impact of certain provisions on mutual funds 

and their investors was not intended by Congress. In other cases, 

we believe that new regulations designed to achieve Dodd-Frank’s 

protections should be implemented in a manner that minimizes 

market disruptions and strikes the right balance between cost and 

benefits. 

I would briefly like to highlight four issues of particular concern 

to ICI and its members. 

First, is the Volcker Rule. Congress’ clear purpose in this area 

was to limit proprietary trading by banks and to prohibit banks 

from sponsoring or investing in unregistered hedge fund and private equity funds. Mutual funds and other SEC-registered funds 

were not the rule’s target. Under the proposed rule to implement 

Volcker, however, some SEC-registered funds could be treated the 

same as hedge funds or private equity funds, thus barring banks 

from owning or sponsoring these funds. Virtually all non-U.S. retail 

funds would get similar treatment. That is not what Congress intended, and we believe the proposed rule should be amended to explicitly exclude all these funds from treatment as covered funds or 

banking entities. 

We are also concerned that the Volcker proposal could sharply 

reduce market liquidity by preventing banks from exercising their 

historic role as market makers. For mutual funds and their investors, less liquidity means higher spreads, higher trading costs, and 

diminished returns. 

In comments to regulators, ICI has offered recommendations designed to avoid an adverse effect on market liquidity and address 

other problems with the Volcker proposal. We and many other commenters believe that significant changes are necessary. As a result, 

we have called upon regulators to issue a new proposal for public 

comment before adopting any final rule. 

Our second concern is the Financial Stability Oversight Council 

(FSOC) and its authority to designate Systemically Important 

Nonbank Financial Institutions (SIFIs). These provisions in DoddFrank did not target SEC-registered funds. Indeed, Dodd-Frank includes criteria and other language suggesting that these funds are 

not what Congress had in mind. 

FSOC and its Office of Financial Research are conducting an 

analysis of asset managers to see if these companies pose any 

threats to financial stability. We believe this study should be subject to formal public comment. ICI also believes the FSOC will conclude at the very least that SIFI designation would not be a proper 

tool to address any such risks. 

Third is the regulation of derivatives and asset-based securities. 

These instruments play an important role for many institutional 

investors, including registered funds. 

Funds use swaps, futures, and other derivatives to manage risk, 

improve returns, and gain liquidity. ICI has supported reforms that 

would increase transparency and reduce counterparty risks in 

these markets, though we still have a number of specific concerns 

with the regulatory proposals. 

17 

Broadly speaking, we urge the SEC and the CFTC to work together, and with their global counterparts, to ensure that new regulations achieve the protections sought by Dodd-Frank in a coordinated and cost-effective manner while minimizing market disruptions. 

Fourth and finally, we could not discuss the impact of DoddFrank without raising what we believe is a troubling example of a 

regulator using Dodd-Frank as a pretext to expand its authority 

through unjustified regulation. 

In February, the CFTC vastly extended its reach over SEC-registered funds, and only SEC-registered funds, by sharply curtailing 

their ability to rely on a rule that has long exempted otherwise regulated entities from CFTC registration. The CFTC claims to have 

acted on these amendments under the ‘‘more robust mandate’’ it received under Dodd-Frank, but its actions were neither required nor 

even contemplated by Dodd-Frank. 

The result of the CFTC’s action is that SEC-registered funds will 

be subject to unnecessary and redundant regulation, the cost of 

which will be borne by funds and their shareholders. 

ICI and the U.S. Chamber of Commerce have challenged the 

CFTC’s Rule 4.5 amendments in Federal court. If our case does not 

succeed, not only will SEC-registered funds and their shareholders 

suffer the consequences of this ill-advised rule, but the CFTC will 

face a host of new registrants and further demands on its limited 

resources at a time when the agency itself says that its workload 

under Dodd-Frank ‘‘creates risks in its critical oversight roles.’’ 

We believe this prospect should be of serious concern to Congress. 

Mr. Chairman and members of the subcommittee, our written 

statement contains additional detail on these and other matters, 

and I will be happy to answer any questions you may have. Thank 

you. 

[The prepared statement of Mr. Lemke can be found on page 120 

of the appendix.] 

Chairman GARRETT. And we thank you. 

Ms. Simpson, welcome, and you are recognized for 5 minutes. 

STATEMENT OF ANNE SIMPSON, SENIOR PORTFOLIO MANAGER, INVESTMENTS, AND DIRECTOR, CORPORATE 

GOVERANCE, THE CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM (CALPERS) 

Ms. SIMPSON. Thank you. Good morning, Chairman Garrett, 

Ranking Member Waters, and distinguished members of the subcommittee. My name is Anne Simpson. I am the senior portfolio 

manager for investments and director of corporate governance at 

CalPERS, the California Public Employees Retirement System. 

I would like to share our views this morning on the positive impact of Dodd-Frank and to address the unfinished business. Also, 

to highlight the importance of completing the task of ensuring 

what we think of as smart regulations. This is in order to protect 

investors like us, but also to protect the markets upon which we 

and also the wider public relies. 

CalPERS is the largest public pension fund in the United States, with more than $230 billion in global assets, and we are share 

18 

owners in more than 9,000 companies. We pay out over $14 billion 

annually in retirement benefits to more than 1.6 million public employees, retirees, and their families. 

This is not only an important source of daily income for our 

members; it also provides a positive economic multiplier to the local 

economy. 

CalPERS fundamentally relies upon the safety and soundness of 

the financial markets. For every dollar that we pay in benefits to 

our members, 66 cents are generated by investment returns. We 

are a long-term investor with liabilities that are measured in decades. We need stability in the capital markets and sustainable economic growth to meet those liabilities now and in the future. 

We fully understand the virtuous circle between savings, investment, financial markets, and economic growth. 

The financial crisis hit us hard: $70 billion was wiped from 

CalPERS’ portfolio. We simply cannot afford another crisis. This is 

why CalPERS is concerned with ensuring that financial markets 

are regulated in a way which: is coordinated and complete; is fully 

transparent; protects investors from conflicts of interest; fosters responsible behavior by market actors; and furthermore, does not 

prevent investors from taking advantage of new opportunities and 

innovation. 

For us, these are the hallmarks of smart regulation. But a critical element is to ensure that regulation is proportionate. For 

CalPERS, we weigh the additional costs that are required and the 

balance with the protection that they provide to our fund. 

To those who question whether we can afford to invest in smart 

regulation, we reply, ‘‘How can we afford not to?’’ The impact of the 

financial crisis is still around us, and we cannot be complacent 

about risks ahead and before us. 

Those arguing that we cannot afford the cost of regulation are in 

danger of being penny wise and pound foolish. We see smart regulation as an investment in the safety and soundness of financial 

markets which generate the vast bulk of the returns to our fund. 

Smart regulation is an investment in the effective functioning of 

capital markets, which is critical not just to investors like 

CalPERS, but to the recovery of the wider economy. 

CalPERS believes that Dodd-Frank establishes an effective 

framework for promoting that safety and soundness of capital markets and providing investors the protections and the rights to ensure those markets function well. However, unless effectively implemented, the promise of Dodd-Frank will remain largely 

unfulfilled. 

Let me turn briefly to the critical elements of that unfinished 

business, which we regard as vital to delivering on that promise. 

Derivatives: CalPERS fully supports regulation of the trading of 

derivatives, which we use extensively in our own portfolio. The legislation will bring oversight and transparency, and a key part is 

ensuring that most swaps are exchange traded or centrally cleared. 

We are pleased the CFTC has adopted thoughtful rules to implement the business conduct standards, but there is more to be done. 

We will be glad to continue to engage with the regulators to get 

those rules in the right place. 

19 

The Volcker Rule: We fully support the objectives of the so-called 

Volcker Rule and would like to incorporate by reference the attached comment letter previously submitted by CalPERS to the relevant agencies. The principle here is simple: to ensure that banks 

do not rely upon the window as a backstop for proprietary trading 

or other risky activity. We realize there is more work to be done 

to ensure clarity. 

Alignment of interest: We want to ensure alignment of interest 

between those making decisions in the financial market and the 

providers of the long-term capital that they are deploying. But 

alignment means sharing not just rewards, but risks, and over the 

long term. 

For that reason, we support the risk retention proposals which 

would require those who issue asset-backed securities to retain at 

least a 5 percent piece of the credit risk of any asset. 

As a purchaser of asset-backed securities, CalPERS wants to see 

that its own long-term economic interest in these securities is 

aligned with those originating the securitizations and underlying 

debt obligations. 

Credit ratings: CalPERS supports reform of the industry. These 

entities played a troubling role in the financial crisis. They provided many securitized products with investment grade ratings, 

even though underlying debt instruments pose serious risks of default. 

In response, Dodd-Frank included some important provisions intended to include transparency and accountability, and we have 

more detail in our written testimony. We are hopeful the SEC will 

act swiftly to issue final rules and also to withdraw the no-action 

letter that allows credit rating agencies to avoid liability for false 

ratings in securities filings. 

Shareowner rights: Effective regulation also relies upon market 

participants playing their proper role. For that reason, shareowner 

rights, both to information and the ability to follow through and 

take action, are vital. Investor protection starts with shareholder 

rights. We see it as self-help. 

A good example is the new rule known as ‘‘say on pay.’’ We are 

pleased the SEC adopted final rules on executive compensation last 

year, and we have just completed our second proxy season under 

these rules. We see a positive impact. Dialogue with companies has 

improved and many companies are making sensible reforms in response to shareowner concerns. There are some additional rules to 

complete the set, and we look forward to their promulgation by the 

SEC. 

Finally, regulation— 

Chairman GARRETT. You are 1 minute and 40 seconds over, so— 

Ms. SIMPSON. Oh, I apologize. 

We would like to ensure that funding is secure and adequate. 

There is work to be done. We are willing to continue with our engagement with regulators. Difficult as the work is, it must be put 

on track. 

Thank you. 

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

151 of the appendix.] 

Chairman GARRETT. Thank you, and I appreciate that. 

20 

And finally, Mr. Vanderslice, you are recognized for 5 minutes. 

STATEMENT OF PAUL VANDERSLICE, PRESIDENT, THE 

COMMERCIAL REAL ESTATE FINANCE COUNCIL (CREFC) 

Mr. VANDERSLICE. Chairman Garrett, Ranking Member Waters, 

and members of the subcommittee, my name is Paul Vanderslice. 

I am a managing director at Citigroup Global Markets where I 

have worked for the last 28 years. 

I am here today in my capacity as president of the Commercial 

Real Estate Finance Council, also known as the CREFC. CREFC 

is the collective voice of the $3.5 trillion commercial real estate finance industry. Its members are portfolio lenders such as banks 

and insurance, commercial mortgage-backed securities lenders, 

issuers and investors, as well as a variety of firms that service 

these lenders and investors. 

We appreciate the opportunity to share our views on the impact 

of the Dodd-Frank regulations on credit availability for commercial 

real estate. CREFC recognizes the importance of many aspects of 

Dodd-Frank, including risk retention, better disclosure, and increased transparency. 

However, we are concerned that some of the proposed regulations 

go beyond congressional intent, and when analyzed in the aggregate have a combined effect that hinders credit and outweighs the 

benefits intended for investors and borrowers. 

Therefore, CREFC believes it is imperative that regulators abide 

by Executive Order 13563 which requires that regulators take into 

account the overall costs of the regulations, adopt regulations 

where the benefits justify the costs, and ensure regulations impose 

the least burden on society. We appreciate the subcommittee taking 

the opportunity to exercise its oversight over this issue. The U.S. commercial real estate market is funded by $3.5 trillion in commercial mortgages and has approximately $1.5 trillion in equity. Approximately $2 trillion of commercial mortgage debt is 

scheduled to mature in the next 5 years, almost $400 billion per 

year. 

Traditional portfolio lenders simply lack the capacity to fulfill the 

aggregate CRE financing need. This is so even after you account 

for additional borrower equity, new valuations, and tighter loan-tovalue ratios. Therefore, the refinancing gap could be in excess of 

$100 billion per year over the next 5 years and likely much larger. 

This shortfall is between what portfolio lenders can provide and 

what is necessary to refinance existing debt and fund those commercial real estate loans necessary for economic growth. 

Over the last 2 decades, CMBS has provided this gap funding, 

much of it in non-CBD markets. Bloomfield, Michigan, and 

Paramus, New Jersey, would be examples of these non-CBD markets. 

That said, the CMBS industry is in the midst of a fragile recovery. There is only $30 billion to $35 billion of projected issuance 

this year; 2012 will only be 18 percent of the 2006 volume of $200 

billion, and 15 percent of the 2007 peak volume of $230 billion. We 

have not seen issuance this low since 1997. 

A few lenders in 2011, because of the volatility, left the market, 

shuttered their entire CMBS businesses. And they did not believe 

21 

in the growth of the market. There are more loan rollovers than 

new CMBS issues. So the market is actually losing size and may 

begin to lose its relevance over time. This is partially due to the 

headwinds facing the United States’ weak economic growth forecast, as well as the intensifying European crisis. 

However, the market also faces the pending implementation of 

the Dodd-Frank regulations and their combined effects. While the 

former cannot be controlled, the latter can be—as an example, the 

premium capture cash reserve account, also known as PCCRA, included in the proposed risk retention regulations, but not contemplated by the Dodd-Frank Act itself, 

In a survey of CMBS loan originators and issuers, 92 percent of 

the respondents said that the imposition of PCCRA would decrease 

loan origination volume from current levels. Almost 62 percent of 

those respondents said that the volume decreases would be more 

than 50 percent. 

Some indicated reductions would be as much as 90 percent to 

100 percent. All respondents indicated that the cost of loans to borrowers would increase; 92 percent said the cost increase would be 

50 basis points or more; 46 percent indicated the cost increase 

would be more like 100 basis points. As an example, on a $10 million loan request, the loan would 

work today at a 5 percent rate. If the loan were 6 percent, the supportable debt would only be $9 million. Extrapolate this to the $100 

billion refinancing gap that I had mentioned before, and that would 

be a $10 billion per year shortfall. Therefore, this rule would constrain credit minimum to the tune of $10 billion a year over the 

next 5 years. 

Furthermore, in a separate survey of the CREFC board of governors, 78 percent of our board and 73 percent of our investmentgrade investors that the PCCRA is purportedly designed to protect 

believe that PCCRA implementation would hinder CMBS. This is 

just one example from the 17 regulations that would affect CMBS. 

We believe PCCRA: one, is outside of the congressional intent of 

risk retention; two, would limit CRE lending when it is needed 

most; and three, would materially raise the cost of debt, which 

would hurt the non-CBD markets the most, and that is the very 

market that CMBS has historically served. 

This is why we are urging Congress to ensure regulators follow 

the congressional intent and Administration policy through Executive Order 13563. Without a strong return of CMBS, local businesses will be denied access to essential liquidity. 

Thank you, and I look forward to your questions. 

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

168 of the appendix.] 

Chairman GARRETT. I very much appreciate your testimony as 

well. 

And so, again, to the entire panel, I appreciate your coming here 

and your testimony. You all indicated that you welcome any questions, and so we have some. And I will recognize myself for 5 minutes. 

Mr. Kelleher, I listened to Ms. Simpson, who indicated that she 

saw some benefits to, and she listed them, with regard to current 

law, Dodd-Frank, but she also saw some need for changes or reVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
22 

form or what have you in certain areas, and you went through 

some of those areas. 

But in listening to your testimony, Mr. Kelleher, it seems as 

though you are presenting us with an either-or situation, or a false 

choice situation. That is to say, either we have Dodd-Frank as it 

is and as it is being implemented by the regulators, or we have no 

regulation whatsoever. 

But I don’t think there is anyone from either side of the aisle 

who has ever suggested that we have no regulation. I know it came 

as a surprise a week or so ago to Ranking Member Frank when we 

indicated that we on this side of the aisle actually put forth a proposal for regulation prior to Dodd-Frank being presented. So there 

are alternatives to it. 

Is it your position that the bill as written and as being implemented is without flaw, does not need change, that we should not 

be relying upon any empirical data, as Mr. Vanderslice and others 

here have indicated? 

Mr. KELLEHER. Thank you for your question. 

Chairman GARRETT. Sure. 

Mr. KELLEHER. Nothing that comes out of a democratic process, 

I believe, is flawless. That is the nature of a democratic process. 

There are compromises that have to be made. 

The other important part of the democratic process that produced 

the Dodd-Frank law is that it was open to the public and it was 

considered for about 2 years before it was passed. In fairness, the 

industry had vast and multiple opportunities to participate and 

they have vast and multiple opportunities to participate in the 

rulemaking process. 

But instead of listening to what people say when they say they 

are for financial reform, let us look at what they do. Who is supporting funding for the regulators? Who is burying the regulators 

with paper? Who is saying, ‘‘We are for financial reform,’’ and yet 

criticizing it. So you are right— 

Chairman GARRETT. So, reclaiming my time— 

Mr. KELLEHER. —that is a theoretical possibility, but— 

Chairman GARRETT. Right. Reclaiming my time, who is burying 

with paper, I guess, is one of the questions that we are asking 

here, is who is burying them with paper, in the sense that maybe 

there is just so much that we are asking the regulators to do that 

they can’t find the proverbial needle in the haystack, and then 

what are the actual outcomes of that? 

Mr. Deutsch, in your testimony, you referenced a study by Mark 

Zandi. And I believe you said—correct me if I am wrong—that in 

his study, the impact of all this, of the implementation of the regulations would raise mortgage costs for me and you, the average person, by between 100 and 400 basis points, which means one to four 

points, basically. Right? Is that what the Zandi report said? 

Mr. DEUTSCH. The only technical clarification is that is just one 

aspect of Dodd-Frank, is the premium capture reserve account by 

itself— 

Chairman GARRETT. We have asked the regulators who are inundated with all this: Is there anything that refutes the Zandi report? 

We haven’t gotten an answer from them. Have you seen anything 

that refutes the Zandi report on this? 

23 

Mr. DEUTSCH. Everything we have seen and every canvassing we 

have done with our members supports the analysis that mortgage 

rates would increase substantially anywhere from one to four— 

Chairman GARRETT. Okay, I appreciate that. All we go by is 

what we ask the regulator—not all, but what we go by. And they 

are not giving us anything to refute that. 

Now, Mr. Vanderslice, you raised an interesting point, and I 

have heard this before as far as on the commercial sector as far as 

opposed to, I am thinking about the residential area. And I have 

heard this before is that the market has shrunk and that there is 

how many trillions of refinance rollover? 

Mr. VANDERSLICE. In total debt, including CMBS, about $400 billion per year over the next 5 years. 

Chairman GARRETT. And without the securitization market coming back in, we can’t throw this all back on to the banks. They 

can’t pick it up. 

Mr. VANDERSLICE. Just as an example, the life insurance industry last year put out a record number of dollars, which was about 

$45 billion. So that was a record year for them. 

Chairman GARRETT. Okay. 

Mr. VANDERSLICE. So our point in this is that you need everybody. You need portfolio lenders. You need securitizers. But there 

is such a large number of rollovers coming that without a functioning SMBS market, the impending rollovers are adding up every 

day. The market today is relatively small. 

Chairman GARRETT. So this is one where the issue of Ms. Simpson’s comment, penny wise or pound foolish on this situation—we 

want to be penny wise, but the implication of it is that if we don’t 

get it right, what you are telling us is that you could see a dramatic downturn in the commercial marketplace. 

And that would do what to the economy, what to jobs, and the 

rest? 

Mr. VANDERSLICE. Yes, commercial real estate is a very large 

part of the economy. Without building owners, they don’t have the 

ability to attract tenants, they can’t do tenant improvement— 

Chairman GARRETT. And since my time is over, can we simply 

address this issue by making sure that the rule of Dodd-Frank applies to the area where it is intended to apply, and in this area it 

was not intended to apply— 

Mr. VANDERSLICE. That is correct. PCCRA is a late addition and 

it is the one big impediment. CREFC again, recognizes the important of many of the aspects of Dodd-Frank, including risk retention, increased disclosure, transparency—PCCRA is a major, major 

bump in the road. 

Chairman GARRETT. I think I understand you on that. Great. 

Thank you, everyone. 

The gentlelady from California, Ms. Waters, is recognized for 5 

minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank all of our presenters here today. I have listened very carefully to all of the testimony. And first, I want to say to Mr. 

Kelleher that I appreciate your defining what took place with the 

economic crisis that was created in this country basically initiated 

24 

by Wall Street and all that was going on. And I appreciate your 

passion as you describe the crisis. 

As we all know, the fallout from that crisis continues. As I travel 

throughout this country, with these boarded-up neighborhoods, and 

these foreclosures, and families who have been literally put at 

great risk because of all of this, what you describe is absolutely 

true. 

And I think no one on this panel can disagree with what you described as the economic crisis that put this country at great risk. 

Having said that, Dodd-Frank was a tremendous effort to try and 

deal with this crisis that was created. 

And Dodd-Frank was modified, some of the ideals in Dodd-Frank 

were eliminated during the conference committee. Everybody tried 

to do something about strengthening our regulation and oversight 

without destroying the markets that so many people are here to 

talk about have been negatively impacted. 

Having said that, in the 2 years since Dodd-Frank passed, we 

have seen the robo-signing of foreclosure documents, the implosion 

of MF Global, the losses of the London Whale, the bungling of the 

Facebook initial public offering, the LIBOR manipulation scandal, 

and we learned just yesterday about another case of missing customer funds at a futures brokerage. And this is to name just a few 

of the many episodes. 

So, this continues. Some of us have tried very hard to understand what is being said about the risk to the market that supposedly are created by Dodd-Frank. To that end, I, against my better judgment, supported the Republicans JOBS program where we 

made it easier for companies to raise capital, these IPOs. 

I supported crowdfunding, in an effort to support the small 

banks. And of course, I supported rolling back some of the protections for investors in all of this in an attempt to try and send a 

signal that we are cooperating in whatever way we can to do modifications and innovations because we think that perhaps there is 

some room to compromise. 

However, what we see is a continued effort to undermine DoddFrank, whether it is defunding the regulators, repealing the Orderly Liquidation Authority, repealing the risk retention, delaying 

derivatives regulations for 2 years, repealing the liability for credit 

rating agencies, prohibiting the SEC regulation of international 

swaps, and on and on and on. 

We continue to get complaints about how harmful it is going to 

be to have transparency with the derivatives and on and on and 

on. Having said that, Mr. Deas, you represent the Chamber, and 

I guess you are also vice president and treasurer of the FMC Corporation, et cetera. Okay, so the Chamber has a lot of influences 

and power here. What is it you want us to do? Would you like us 

to get rid of Dodd-Frank? Do you have some better ideas about how 

to protect the investors and the customers? What is it you want 

this Congress to do? 

Mr. DEAS. Thank you for that question, Ranking Member Waters. 

As I described in my testimony, I work for a leading manufacturing company, a 130-year-old American company, and we, like 

25 

you, are very concerned about the disruptions that occurred in the 

financial markets in 2008. 

However, the regulations as they are being implemented are affecting Main Street companies, end-users, for instance of derivatives like FMC, and other members of the National Association of 

Corporate Treasurers, and yet we comprise less than 10 percent of 

the over-the-counter derivatives trading that goes on, and we were 

not engaged in the systemically risky activities that some of those 

who caused this problem were. 

Main Street companies weren’t writing naked credit default 

swaps. We were using derivatives to hedge future purchases of natural gas used in manufacturing, exposures to changes in interest 

rates, hedging foreign exchange rates on our exports, and other activities like that. 

What we have said is that the effect of these regulations is now 

coming to Main Street businesses and you yourself supported the 

legislation to clarify the margining exemption for end-user companies from having to post that margin, which would be a direct subtraction from funds that we could otherwise invest in our business. 

And I believe you, yourself, also supported the bill to correct the 

inter-affiliate issue where derivative transactions between companies within the same group are being regulated as though they are 

between two banks. 

So, I thank you for those efforts, and that is what we want, an 

exemption for end-user companies from the broad sweep of these 

regulations that we believe will be to the detriment of American 

business and job creation. 

Ms. WATERS. Thank you very much. 

So, I suppose what you are saying to me is that you do recognize 

that there are companies that were reckless and who put this country at risk and we should have tougher regulations and DoddFrank does do some of that? 

Is that what you agree to? 

Mr. SCHWEIKERT [presiding]. You are way over time, so— 

Ms. WATERS. Okay. 

Mr. SCHWEIKERT. I will give you time for a quick response, and 

then I need to go on to my chairman, because I don’t want to make 

my chairman mad. 

Mr. DEAS. I agree there were problems in 2008, but the concern 

for these problems as they affect American business and Market 

Street companies like ours is that the cure is worse than the problem, from our perspective. 

Mr. SCHWEIKERT. Okay, with that, thank you, Ranking Member 

Waters. 

Chairman Bachus? 

Chairman BACHUS. Thank you, and you didn’t make me mad. 

Ms. Waters and Mr. Kelleher have given me a headache, but other 

than that, I think I am okay. 

Mr. Kelleher, listening to your opening statement, and reading it 

last night, it kind of was deja vu, because you were in Senate leadership when we were considering Dodd-Frank and we were sort of 

having some of the same debates that we are having now. And I 

noticed that you, I think, continued to paint all of Wall Street as 

the cause of the greatest depression since—I think it was a depresVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
26 

sion, probably still is a recession—but Mr. Deas said that 90 percent of Dodd-Frank affects Main Street, the operation of every community bank and credit union in the country. But, let us consider— 

and I know this Mr. Garrett, we were kind of having the same 

thought when you said that the regulators were buried in paper. 

The three of us agree on that. They are struggling to write rules. 

It is just a daunting path. But I would submit to you that, that 

paper is a result of Dodd-Frank. That is why it is there. 

And I think you have to admit that even before Dodd-Frank, they 

weren’t enforcing the rules that they had. Now, Ms. Waters has 

mentioned MF Global. She mentioned, I think it is PFGBest, which 

failed yesterday. She mentioned LIBOR. None of that is due to 

Dodd-Frank. That is just pure, out and out accounting fraud. That 

is segregation of customer funds. 

For 70 years, we have had rules against that. The most basic 

rule in finance is you segregate funds, you don’t mix funds or do 

what PFGBest did, representing that they had $200 million in an 

account, and they only had $5 million. Now how in the world did 

the CFPB miss that? How in the world did that go over? It is like 

Madoff claiming all this money was there. 

You mentioned subprime lending and securitization. In 2005, I 

proposed legislation on subprime lending, and I wrote the ranking 

member and said, ‘‘We need to move a bill.’’ And actually, I think 

he agreed to 90 percent, but then litigation attorneys objected to 

some of what we wanted to put in as far as a safe harbor. 

I know you were a litigation attorney. I think the Senate leadership said that was a nonstarter. But we did pass a subprime lending bill before Dodd-Frank, and I think at least everyone said that 

would stop most of that. I want to introduce on the LIBOR issue, 

Ms. Waters—this is an article in Reuters I think from this morning 

or last night. The regulators, since 2007, knew there were problems 

with LIBOR. In fact, Barclay’s came to them in 2008 and said, ‘‘We 

think other institutions are misrepresenting their costs.’’ 

And it is affecting our ability to operate. The Fed actually suggested reforms in 2008. Secretary Geithner—he is now the Secretary of the Treasury, as we all know, but he was the head of the 

New York Fed at that time—actually scheduled a meeting in 2008 

and it said the purpose was fixing LIBOR. But no one ever—they 

knew there was a problem. People came to them and said there 

was a problem. They didn’t do anything about it. MF Global, now 

I don’t know how in the world people can equate stealing $300 million worth of clients’ money, customer money, with JPMorgan 

Chase, a hedging operation that lost their own money. 

Isn’t there a difference in our right to hedge our own money and 

lose money? And investment banking is inherently risky. All 

JPMorgan did was took a risk and they lost on that risk. But even 

if you go back the last 2 years and you take all their hedging operations, they made $40-something billion just in the last 2 years. So 

suddenly, they lose $2 billion, and somebody jumps up and equates 

that to misconduct? 

Mr. LYNCH. Will the gentleman yield? 

Chairman BACHUS. I will not, but let me—surely— 

Mr. LYNCH. It is not $2 billion. It is not $2 billion anymore. 

Chairman BACHUS. Well, $7 billion. Let us say $7 billion. 

27 

You are still 30— 

Mr. LYNCH. Let us say $9 billion. We had the guy in last week. 

Chairman BACHUS. The gentleman is not in order. This idea that 

you are going to go in and micromanage every company and say 

that every investment they make has to make money is a fool’s errand. There are investments made every day. Loans are made 

every day that aren’t going to be paid back. But surely, we can all 

agree that stealing customers’ money or depositors’ money, for example, MF Global—surely everybody on this committee thinks that 

is a worse situation than JPMorgan. And we have had three or four 

hearings on JPMorgan, and we had one on MF Global. And here you have a company that misrepresents and said $200 

million worth of customer money was in a bank account and there 

was only $5 million. Now I submit to you that we would better enforce the good old accounting rules, fraud, criminal conduct. But 

they hadn’t even shown that they can invest when someone comes 

to the Fed and says we have a problem, that people are misrepresenting things, or it it takes them 4 or 5 years to even discover 

there is a problem, when they were told about the problem? 

People went to the SEC and complained about Madoff for years. 

And let me close by saying that you say—and this argument we 

had back, I remember the same argument when we passed DoddFrank. You all argued against a cost-benefit analysis. And I will 

give you this, you are consistent. You say today that imposing our 

burdens on cost-benefit analysis is a tactic without merit. So asking 

what the cost is as opposed to the benefit, you actually believe is 

without merit? Do you really believe that? 

Mr. KELLEHER. As stated in my testimony, it spells out how costbenefit analysis can be done right, consistent with the statute and 

how it is being used by those to defeat financial reform. And that 

is the distinction. That is a misquote of my testimony— 

Chairman BACHUS. You just think that our motive is wrong— 

Mr. KELLEHER. No, it is not that. It is how you go about it and 

what goal one is trying to accomplish. We spell that out quite clearly. We have also spelled it out in opposition to the ICI, the Chamber, and SIFMA in the litigation. But if I might also say— 

Chairman BACHUS. Well, you all voted— 

Mr. KELLEHER. I did not— 

Chairman BACHUS. You all opposed cost-benefit— 

Mr. KELLEHER. I did not equate MF Global with JPMorgan. 

Chairman BACHUS. Okay. 

Mr. KELLEHER. MF Global is not systemically significant. 

JPMorgan is backed up by the U.S. taxpayers and the Federal safety net. And everybody who cares about taxpayers better care about 

JPMorgan, and— 

Chairman BACHUS. No client, no customer, no depositor, no taxpayer is threatened by JPMorgan— 

Mr. KELLEHER. That is not true. 

Mr. SCHWEIKERT. Gentlemen? 

Mr. KELLEHER. Can I just very quickly respond— 

Mr. SCHWEIKERT. No. No. 

Mr. KELLEHER. —to a couple of points— 

Mr. SCHWEIKERT. —no— 

Mr. KELLEHER. One of which is why the regulators didn’t— 

28 

Mr. SCHWEIKERT. Sir? 

Why don’t the regulators enforce the rules they have? 

Mr. KELLEHER. —defunded. 

Ms. WATERS. Unanimous consent, please, Mr. Chairman, to allow 

the gentleman to respond? 

Mr. SCHWEIKERT. Actually, no. I am going to be the one to object. 

Because I have been trying to be very kind to both sides here, particularly— 

Chairman BACHUS. And Ms. Waters let me say this, we could go 

on for 2 hours— 

Mr. SCHWEIKERT. No, I understand. 

Chairman BACHUS. —and I don’t think we are ever going to 

agree. 

Mr. SCHWEIKERT. No. 

Ms. WATERS. Regular order, Mr. Chairman, regular order. 

Mr. SCHWEIKERT. Yes, Mr. Chairman, did you have a document 

you wanted to put into— 

Chairman BACHUS. Yes, I want to introduce this report in Reuters that our regulators knew about this LIBOR— 

Ms. WATERS. Regular order? Mr. Chairman, regular order? 

Mr. SCHWEIKERT. Mr. Chairman, without objection, it is so ordered. 

Chairman BACHUS. Yes, and that MF Global— 

Ms. WATERS. Regular order, Mr. Chairman? Regular order? 

Chairman BACHUS. —and that the regulators were on the scene 

for 5 years and never discovered it. 

Mr. SCHWEIKERT. Thank you. It is so ordered. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairman Schweikert, and Ranking 

Member Waters. As we approach the 2-year anniversary of the 

passing of the Dodd-Frank Act, my colleagues on the other side of 

the aisle are continually holding these hearings, not on proposed 

legislation, but to attack the Act and to make a political point. 

Meanwhile, new cracks in Wall Street are revealing just how important it is for Congress to fund the regulators at appropriate levels and to encourage them to propose and finalize the remaining 

rules under the Act. 

In the last year, we have seen high-profile Wall Street players 

being convicted of insider trading. JPMorgan experienced an incredible loss of an amount up to $9 billion as a result of exotic credit default swaps. And most recently, we have learned of the involvement of Barclay’s and other banks in the LIBOR rate-fixing 

scandal. Just last month, JPMorgan’s CEO Mr. Dimon testified before this committee, and in a response to my question about a need 

to re-evaluate Wall Street’s culture, he told us that there are people you can trust on Wall Street and not to paint every firm with 

the same brush. 

I wish he would have talked about the opportunities for culture 

change in an organization in response to crisis. As a former businessman, I can tell you that I understand that this is management 

101. In comparison, many analysts are pointing to the culture at 

Barclay’s and other global investment banks overall as a systemic 

culprit in the LIBOR fixing scandal. And yet, here we are discussing how Dodd-Frank is hurting our investment banks. If anyVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
29 

thing, the recent events on Wall Street and in London should encourage us to press ahead with finalizing the rules under the DoddFrank Act. 

Just like any large and important bill in our Nation’s history, 

this Act too shall be fine-tuned and refined over time. And I have 

no problem with hearing about these tweaks and other legitimate 

issues. However, simply attacking Dodd-Frank as a whole without 

discussing new legislation comes across as overtly political and 

completely unproductive. That being said, I will ask my direct 

question to Ms. Simpson. Title VII of the Act will place reforms to 

bring transparency, accountability, and strong stability to the OTC 

derivatives marketplace. Do you agree that the changes in Title VII 

will bring about this transparency, accountability, and stability 

that I am talking about? 

Ms. SIMPSON. Thank you, sir. Yes, we support the regulation of 

derivatives, and I should also say that CalPERS as an investor, 

makes extensive use of these instruments. In the letter which is attached to our testimony, we do explain that the principle of regulating derivatives is extremely important. But we accept as a player in the market, a market actor, that there will be some additional 

costs. For us, those costs are an investment in safety and soundness and we think that there is overall going to be systemic benefit 

to us as an investor. So we applaud the intent of Title VII and we 

also realize that we must not let the perfect be the enemy of the 

good, and that wrangling over the detail and delaying implementation is simply not a good strategy. 

We want regulators and market participants to get around the 

table, roll up their sleeves, and make sure that these rules are put 

on the books. There are some imperfections, but that is in the nature of making legislation, as in the making of sausage, as someone 

once said. But we do need to get these rules on the books. We 

mustn’t delay, it is far too important tor the beneficiaries for whom 

we invest. Thank you. 

Mr. HINOJOSA. Mr. Kelleher, I also appreciate your passion in 

your testimony. You remind me of former Senator Kennedy. 

Tell me, what can Congress do to get all the banks, so that we 

don’t have things like today’s New York Times—or yesterday, Monday, the July 9th New York Times which says that big banks face 

the fallout from the global investigation into interest rate manipulation? American and British lawmakers are scrutinizing regulators who failed to take action that might have prevented years 

of illegal activity. 

Mr. KELLEHER. Thank you for the question, and thank you for 

the compliment. I appreciate it. 

One of the most important things that can be done very quickly 

by the United States Congress is to fund the regulators adequately. 

Wall Street often—and it is too broad, it doesn’t apply to everybody—is a high-crime area. Deregulation took all the cops off the 

beat. You added the responsibilities to the regulators. The regulators are the Wall Street policemen. You added massive responsibilities— 

Mr. HINOJOSA. Time is running out on us, and I agree with you. 

Did you know that we need 1,200 people working in that Bureau, 

and we only have 800? 

30 

Mr. KELLEHER. Yes, and they have no IT. It is an unfair fight. 

And the Street is constantly overwhelming them, knowing that 

they don’t have the personnel, the resources or the technology to 

compete. It is an unfair fight. 

People who say they are for financial reform are not for financial 

reform if they do not vote for big increases for these regulators. 

They are voting for Wall Street profits, not taxpayer pockets. 

Mr. HINOJOSA. I agree with you 100 percent. 

And I yield back. 

Mr. SCHWEIKERT. Thank you. 

Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Deutsch, I have been kind of watching the securitization 

markets a little bit since the 2008 period, and it appears that, for 

example, in the automobiles and credit cards and some of those 

areas, the securitization market has in many cases returned to pre2008 levels. 

The area where we are still seeing a huge amount of vacancy in 

private activity is obviously in the residential market area. 

Just to kind of set the framework here, is there a qualified automobile loan provision anywhere? 

Mr. DEUTSCH. In the risk retention proposals, there is a qualified 

auto loan exemption that would require at least a 20 percent downpayment to buy a car. I am not aware of anybody who puts a 20 

percent downpayment on a car. It is precisely the type of concern 

we have of a risk retention rule designed for mortgages that is 

being applied to autos, but in fact, it doesn’t really apply to autos. 

Mr. NEUGEBAUER. But basically these markets that I am talking 

about don’t have all the onerous provisions that have been talked 

about for the residential market. So would you attribute the fact 

there is a lack of private activity to the fact that there is just a 

huge amount of uncertainty about market participants coming back 

into that? 

Mr. DEUTSCH. Yes, there are willing investors and willing issuers 

engaging in the auto market, $50 billion to $60 billion a year in 

transactions, to which Dodd-Frank rules don’t currently apply. And 

I think the investors feel that they have appropriate protections to 

be able to purchase those securities and yield good returns. 

Mr. NEUGEBAUER. One of the things that a lot of people talked 

about, and I think you brought up, or somebody brought up, is that 

the taxpayers have about $200 billion invested in Freddie and 

Fannie. And so the discussion has been, what do you replace 

Freddie and Fannie with? And obviously many of us think you replace it with private market activity. 

If there were not all of these uncertainties out there today, dealing with risk retention and Qualified Residential Mortgages and all 

of the things that are out there, do you believe that there would 

be more private market activity in the residential market area? 

Mr. DEUTSCH. I would say there would be an increase in private 

market activity, but without resolving Fannie and Freddie, sort of 

the big outstanding question, it is extremely difficult for private 

market participants to compete against an underpriced government 

guarantee. 

31 

Mr. NEUGEBAUER. It is because basically the risk premium that 

the private market wants versus these mortgages has been sanitized by the American taxpayers. It is hard for them to compete. 

If that playing field was leveled, if Freddie and Fannie, for example, were required to charge a higher guarantee fee, where then the 

marketplace can say, ‘‘I think I would rather keep that return because I have looked at the integrity of those mortgages, rather than 

paying a 50, 70 basis point premium or giving up that much return.’’ 

Mr. DEUTSCH. Yes, I think there is no question that private market capital would return back to the mortgage sector. Rates would 

be higher, but that is I think the appropriate balance between risk 

and return in lending out money for people to take out mortgages. 

Mr. NEUGEBAUER. It turns out we weren’t pricing those mortgages at Freddie and Fannie appropriately anyway, because obviously the risk premium they were using turned out not to be— 

Mr. DEUTSCH. I think it is approximately $200 billion underpricing of the risk premium currently to the U.S. taxpayer. 

Mr. NEUGEBAUER. Right. 

Mr. Bentsen, I know that your folks have looked at some of the 

securitization issues. What do you think is the bigger inhibitant? 

Mr. BENTSEN. I agree with Mr. Deutsch in much of what he said. 

I think that for starters, the premium capture cash reserve is 

something that Congress, we believe, never intended in the original 

legislation. And as I said, both from our sell side and our buy side 

members, who don’t always agree, both feel that this really takes 

the legs out from under the ability to really restart the 

securitization market, and in particular as it relates to the residential mortgage bond market. 

So for starters, we think that provision really ought to be greatly 

amended or taken out in order to make sure that we can attract 

private capital back into the securitization market. 

Mr. NEUGEBAUER. Yes. I think I was a little perplexed, too, that 

we decided to use a premium from Freddie and Fannie to finance 

other activities rather than trying to use that to make the American taxpayers at least get some of their— 

Thank you, Mr. Chairman. I yield back. 

Mr. SCHWEIKERT. Thank you, Mr. Neugebauer. 

Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman. I appreciate it. 

Mr. Kelleher, you were interrupted. You had an exchange going 

with the full committee chairman. There was an analysis going on, 

a comparison going on between yourself and the full committee 

chairman about the difference between MF Global, which actually 

stole—well, took client money to fill a hole that it had and some 

losses it was generating. 

And the comparison was being made with Jamie Dimon and 

JPMorgan Chase where they simply—they were here a couple of 

weeks ago and we were asking them about their $2 billion loss, 

which was staggering at the time. And interestingly enough, my 

last question to Mr. Dimon was, there is word on the street that 

this loss could go to $5 billion. 

32 

And the full committee chairman refused me the opportunity to 

get an answer. He said my time had expired and he excused Mr. 

Dimon from answering that question. 

And now we understand it could go as high as $9 billion. And 

you were talking about—you were trying to address the risk that 

the JPMorgan Chase instance presented, and I would like to give 

you some time to explain the danger there to the American taxpayer. 

Mr. KELLEHER. Thank you, Congressman Lynch. 

There is no similarity between what happened at MF Global and 

JPMorgan Chase. In fact, MF Global should be the model for the 

future, which is to say, it is a company that made wild bets, it 

shouldn’t have done it, it failed, it is in bankruptcy, it lost its 

money and people lost their jobs with no systemic risk at all. 

That will never happen if JPMorgan fails. If JPMorgan fails, it 

is going to be a systemic event that will be saved by the U.S. taxpayer. It has a balance sheet of $2.35 trillion. It has 270,000 employees across the world, thousands of legal entities, 550 subsidiaries, and on and on. 

And it is backed, therefore, by the U.S. taxpayer. It gets massive 

subsidies, both on the FDIC side and the Fed side. So the U.S. taxpayer is underpinning JPMorgan Chase and the rest of the too-bigto-fail banks. 

What JPMorgan Chase did in the so-called London Whale splash 

is it is reported to have bet over $100 billion in exotic, illiquid, complex derivatives, intending to make a lot of money. It didn’t make 

a lot of money; it is losing money. And it is locked into those investments and can’t get out. 

It is a classic example of what banks backed up by the U.S. taxpayer should not be doing. It is also a classic example of what they 

did before the crisis, where they lost tons and tons of money. 

And the chairman mentioned, by the way, why should we care? 

That operation has made $40 billion or $50 billion over time. We 

should care because they are claiming falsely that it is hedging. 

Hedging doesn’t make money. Hedging should have offsetting gains 

and losses. That is not what they are doing. They are doing proprietary trading under the guise of hedging, which is what everybody 

here was worried about when the Volcker Rule was put into place 

to stop proprietary trading, which contributed significantly to the 

crisis and the need for taxpayer bailouts in 2008. 

Mr. LYNCH. Very good. 

I do see the comparison here. I remember I was on this committee back in 2007–2008 when this whole crisis evolved, and I remember one of the first events that we had, we had the failure of 

the Bear Stearns funds, but I remember distinctly the impact on 

Merrill Lynch. And at the time the CEO, whose name was Stanley 

O’Neal, and he came out and he did a press conference and he was 

reporting $2 billion in losses, $2.3 billion, something like that, $2.3 

billion in losses of Merrill Lynch. 

But he reassured people that this was well under control. But 

then 6 days later, he had to come out again, and he said, ‘‘Actually, 

our losses are $7.3 billion.’’ And, embarrassingly, he again said, 

‘‘We have things under control.’’ And then, about 2 weeks after 

33 

that, he had to come back and say, ‘‘We actually lost $11 billion.’’ 

At that point, he was fired. 

Now, the problem there is because these structured products are 

so complex he didn’t know what they lost. These folks who were 

supposed to be the smartest, it was so opaque, and so complex that 

they didn’t know what they lost. 

And that is what Dodd-Frank is trying to get at with our transparency requirements, with the reporting requirements, to allow 

folks like Ms. Simpson over at CalPERS to know what those pension funds are investing in, to know what the counterparty exposure is, to have some transparency, to make sure that people have 

skin in the game and that there is retained capital there to address 

some losses if they do occur. 

And so it doesn’t have to be this way, where you folks defend the 

banks and anything they want to do, and then folks try to shackle, 

I guess, legitimate business practice. I think there is an opportunity here to actually protect the taxpayer. 

Ms. Simpson, could you just use the last 45 seconds here to talk 

about the special danger to, I think, vulnerable parties, especially 

vulnerable parties like pension funds, if we were to go back to the 

way things were before Dodd-Frank? 

Mr. SCHWEIKERT. Ms. Simpson, I will ask you to go quickly, and 

pull the microphone close. 

Ms. SIMPSON. Yes, thank you. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Ms. SIMPSON. We simply cannot afford another crisis. In the 

worst dark days of the most recent crisis, CalPERS was $70 billion 

down. Now, we have grown our way back to close to where we 

were, but it is simply not achievable to earn rates of return that 

would plug that gap. So these reforms for us are absolutely system 

critical to long-term sustainability. 

Mr. LYNCH. Thank you very much. I yield back. 

And I thank the gentleman for his indulgence. 

Mr. SCHWEIKERT. Thank you, Mr. Lynch. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I know that the study by Mark Zandi of Moody Analytics has already been brought up and discussed, but I would like to dig a little deeper into this matter. I, myself, have not seen the study. I do 

know Mr. Zandi is a frequently cited economist, particularly by my 

colleagues on the other side of the aisle. 

Mr. Bentsen and Mr. Deutsch, I think you both alluded to this 

study, so I assume perhaps you have looked into it more deeply. 

But as I understand it, and I guess, Mr. Deutsch, I am reading 

from your testimony, that the premium capture cash reserve account that the rules promulgated under Dodd-Frank, that according to Mark Zandi, this could increase mortgage interest rates 1 to 

4 percentage points; 100 to 400 basis points. 

The last time I looked, I believe 30-year fixed-rate mortgages are 

going for roughly 3.75 percent. So is it a fair assessment to say 

that Dodd-Frank has the potential to double mortgage interest 

rates by the premium capture cash reserve account alone? 

Mr. Deutsch? 

34 

Mr. DEUTSCH. I guess my response is that just one provision of 

Dodd-Frank could double the interest rate. If you add all the provisions relative to Dodd-Frank, it would be well more than that. 

Mr. HENSARLING. Staggering. Have you seen any other studies? 

And so, again, this is just one provision of Dodd-Frank, cumulative 

impact. 

I believe also you mentioned in your testimony about the Qualified Mortgage; that due to a subjective standard that will be promulgated by the CBPB, which frankly puts the capital ‘‘S’’ in subjectivity, as we all know. But you cite, I believe, another study that 

says that the lawsuits arising from that could cost anywhere from 

$70,000 to $100,000. 

Have you calculated what that provision alone could do to interest rates? Do you know the answer to that? 

Mr. DEUTSCH. I think a lot of our members have tried to calculate just how much the costs would be. And they have all come 

to the conclusion that it just will be too prohibitively high to be 

able to engage in any mortgage lending even close to the line of 

what a nonqualified mortgage is. So they simply will not be able 

to originate mortgages even close to that line of what a Qualified 

Mortgage would be. 

Mr. HENSARLING. Mr. Bentsen, again, you cited the Zandi study 

as well. Could you elaborate on its findings for your organization? 

Mr. BENTSEN. I agree with Mr. Deutsch that just the premium 

recapture provision alone changes the economics so significantly 

that it could have an impact like Zandi and his colleague found in 

the Moody’s study. And so to his point, that is just one provision. 

And I think it comes down the points that I made earlier, it is 

important how these rules are written and how they are implemented. It is important to consider the costs associated with how 

the rules are proposed. It may seem like mountains of paper, but 

that is known as the Administrative Procedures Act, and that is 

the whole process which Congress established long ago to comment 

as rules are written. 

That is why, like the Zandi study; like the Oliver Wyman study 

as it relates to corporate bond issuance and the impact that the 

Volcker Rule as proposed could have; like the Federal Reserve’s 

proposal for single counterparty credit limits and the impact that 

could have—we have to look at then in the totality and what the 

costs will be to the cost of capital and the cost of credit. And beyond any reasonable doubt, that will have an impact on economic 

activity. 

Mr. HENSARLING. Mr. Deutsch, on page six of your testimony, 

you state that the ABS market briefly ground to a halt in December of 2010 because of investor concerns over the Orderly Liquidation Authority, and only resumed due to a near-term patch in the 

form of an FDIC General Counsel’s letter. These types of risk will 

be priced into the asset-backed security market, resulting in higher 

costs for consumers and businesses. 

Could you elaborate, please? 

Mr. DEUTSCH. Yes, the Orderly Liquidation Authority created a 

provision that allows the FDIC effectively to step in for nonbank 

financial companies. When asset-backed securities are issued, the 

35 

auto companies create and hold title effectively to the car loan and 

they will sell off the asset-backed securities. 

Investors began to realize, and it took them 6 months to actually 

figure out the complex weave of the Dodd-Frank regulation, that in 

fact under the Orderly Liquidation Authority, the FDIC may be 

able to come in and take the underlying notes to the auto 

securitization, in effect, eliminating the securitization part of the 

securitization, which would leave an investor unprotected. 

Ultimately, the FDIC had to step in and patch that, to say, ‘‘No, 

no, we won’t take that in.’’ But Dodd-Frank, on its very face, did 

allow that, and ultimately the ABS markets, much like under the 

436(g) scenario in July of 2010, had to shut down for a brief period 

of time until the FDIC resolved that. 

Mr. HENSARLING. I see my time has expired. 

Mr. Chairman, 2,000 pages and so little time. Thank you. 

Mr. SCHWEIKERT. Thank you. 

Mr. Sherman? 

Mr. SHERMAN. Thank you. 

I don’t know who to address this question to, but perhaps the 

worst day in Congress I have had, and for many others, is when 

the big banks came to us and said, ‘‘If you don’t bail us out, we 

are going to take the whole economy down with us.’’ 

One argument there is, is maybe no one bank should be big 

enough to take the whole economy down. Another argument is 

maybe we should have higher capital requirements. The third approach is maybe we should just ignore the problem until it comes 

up again. 

Assuming we want to create a circumstance where, at least as 

long as I serve in Congress, which some would argue will only be 

a few months, but others might think longer, that we are not going 

to have a situation where a bank is able to call the Treasury and 

claim they are going to take the whole economy down with them, 

unless we bail them out. 

Mr. Bentsen, you have handled tougher questions before in our 

time together. I don’t know if you have a comment or whether anybody else does. 

Mr. BENTSEN. Mr. Sherman, I guess I would make a couple of 

comments. Dodd-Frank did establish in Title I and Title II provisions that really address the first two points that you make, and 

in terms of establishing a systemic risk regulator statutorily over 

large and even not-so-large bank holding companies, and then establishing the authority to impose bank-like prudential standards 

on designated nonbank entities. 

In addition— 

Mr. SHERMAN. So if those powers are actually used, you think 

that insulates us? 

Mr. BENTSEN. They are used by law for bank holding companies 

with more than $50 billion in assets. But if I may, Mr. Sherman, 

it is a very important point. The law also established the Orderly 

Liquidation Authority to wind down failing systemic entities. We 

supported that. We think that is a good thing to mitigate systemic 

risk. 

36 

And importantly, the Act precludes—it repealed a provision 

under the Federal Reserve Act that precludes the Federal Reserve, 

the government, from stepping in to bail out any failing institution. 

And the last thing I would make very clear is that we can’t ignore Basel 2.5 and Basel III, the international capital accords of 

which the United States is a party to and which firms both in the 

United States and non-U.S. firms operating in the United States 

have raised tremendous amounts of capital, high-quality capital, 

far greater than where they were before in meeting the Basel III 

requirements which haven’t even taken effect yet. 

Mr. SHERMAN. I am sure the shareholders of JPMorgan are 

happy that the institution was well-capitalized, and I thank you for 

that answer. Dodd-Frank has certainly done a lot to insulate us, 

but the amount of that insulation will depend in large part on how 

assertive the regulators are in using the enormous power that we 

have given them. 

Mr. Vanderslice, I have heard from banks in my district that the 

regulators get anxious about local and regional bank exposure to 

any kind of commercial property. Do you have a perspective on 

this? 

Mr. VANDERSLICE. I do. And again, I am here speaking on behalf 

of CREFC, not my employer. But as far as the bank exposure to 

commercial real estate, I think Basel III, which is another topic 

that has not been brought up, basically now applies to the smaller 

community banks as well. So the increased capital, considerations 

that those banks will have to have in place again kind of constrains 

the amount of money that would at least go into commercial real 

estate. 

You really have two issues. You have a legacy issue on the balance sheets of a lot of banks and regional banks, small lenders. 

And also, you have the wave of maturities coming up. So you take 

those two things into account. 

And, we think any type of regulation should be supportive of, 

kind of see that picture of loans coming due, as well as increased 

capital considerations, and kind of take the whole picture into account. 

Mr. SHERMAN. Do you find that banks are under pressure not to 

simply renew loans—you know these are mostly 5-year loans when 

they come due when of course foreclosing on the property exposes 

the bank to perhaps even more risk? 

Mr. VANDERSLICE. Most of what I am involved in is CMBS, which 

is effectively where the loans are sold into a trust, there is a third 

party servicer that is brought in. So those servicers, when a loan 

reaches its maturity, they go through a series of scenarios whether 

it is in the best interest of the trust that they service to extend or 

to foreclose or a lot of times, it is a middle ground where there is 

a partial discounted pay off as it is called, and then a restructured 

loan. 

So there are a variety of different exits, as it is called. So there 

is no one solution that fits all. 

Mr. SHERMAN. Thank you. 

Mr. SCHWEIKERT. Thank you. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

37 

I have a question for Mr. Lemke regarding money market funds, 

and of course, any member of the panel is welcome to respond, as 

well. 

It has been widely reported that the SEC is contemplating new 

regulations for money market funds, and there are several members who have expressed concerns about new regulations when only 

recently new reforms were implemented. 

So I was wondering if you could comment on those reforms, and 

specifically how you think reforms are working out? 

Mr. LEMKE. Absolutely, and the industry agrees very much that 

these reforms that were adopted in 2010 need to be given an opportunity to work. 

During last year when we had difficulties in Europe, the reforms 

actually worked very well. We had no major issues with money 

market funds, and we believe those reforms were more than adequate to deal with the issues that came up with money market 

funds during the crisis. 

In particular, the proposals that the SEC is reportedly talking 

about while we always support solid regulation in our industry, 

these regulation can’t destroy the fundamental structure of a 

money market fund. And what we have been hearing from our clients, both in the institutional world and in the retail world, is they 

are not in favor of floating NAV funds, which is one of the options 

that is being proposed. 

And the second option being talked about is redemption fees and 

capital hold backs, both of which will be unwieldy and make the 

product unworkable. So we are hoping the SEC comes out with proposals that maintain the integrity of the product that is so popular 

with many investors and also is a great source of funding for so 

many sources within the country. 

Mr. KELLEHER. If I may add, we should remember though that 

during the fall of 2008, one of the biggest outlays of the U.S. taxpayers and the government to stop the financial crisis from actually leading to a collapse of the financial system and a second great 

depression, was the guarantee that the U.S. Government did to put 

the full faith and credit of the U.S. Government behind the $3.8 

trillion money market fund at the time. 

It was, I believe, the single largest U.S. Government guarantee 

of a private activity in the history of the country. So I am not disagreeing with Mr. Lemke; I am just saying that it is overwhelmingly important that we get the rules right. Because contagion and 

the domino effect run right through the money market funds. 

It is fast money, and it moves fast. If we don’t build the protections around that right, the U.S. taxpayer is going to be on the 

hook again. 

Mr. LEMKE. But it is also important, Dennis, to note that there 

were no claims made under that protection, and in fact the government made $1.2 million of premiums from the industry. 

Mr. KELLEHER. The government actually did not make $1.2 million on a risk-adjusted basis. 

Mr. LEMKE. —the question for— 

Mr. KELLEHER. There were no claims because the guarantee 

wasn’t there. 

38 

Mr. FITZPATRICK. Reclaimining my time, Ms. Simpson, do you 

think that banks will impose Volcker Rule compliance costs? Will 

that ultimately be borne by customers? Who is going to bear the 

brunt and the cost of compliance of the Volcker Rule? 

Ms. SIMPSON. Thank you. 

The cost will ultimately be borne by shareholders. The important 

calculation here is about risk adjusted returns. And I think that 

the industry is going to be restructured by these rules, but it is 

going to be restructured for the safety and soundness of the market, which is why we support this. 

It is no good to any of this if we can run up high returns, running very high risks. So it is quite true and we have set this out 

in our accompanying letter on the Volcker Rule, that we anticipate 

that there will be an impact on liquidity, there will be an impact 

on profitability, but actually these are false returns if they are not 

underpinned by proper risk management and Volcker is actually 

going to help with that. 

There is no return without risk, but we need to have risks properly managed. 

Mr. FITZPATRICK. Ms. Simpson, are you familiar with Senator 

Franken’s credit rating agency reform proposal, in the Senate? 

Ms. SIMPSON. Is this regarding the issue of pays model being rethought? 

Mr. FITZPATRICK. It is the Rolodex—the next credit rating agency 

that comes up would be assigned to do credit reviews of structured 

products. 

Ms. SIMPSON. Yes. 

Mr. FITZPATRICK. Does CalPERS support the Franken Amendment? 

Ms. SIMPSON. No, we do think the issue of pays model needs to 

be revisited because there is an inherent conflict of interest there, 

but we do think to have the Rolodex model isn’t actually going to 

solve the problem. 

We want the reforms that have been promised to be put on the 

books. We think that is going to be very helpful, but there is something more flawed in the business model that needs to be addressed. So we would like an opportunity to get around the table 

with the industry and the regulators and try to solve that problem. 

Mr. FITZPATRICK. Okay. I yield back, Mr. Chairman, thank you. 

Mr. SCHWEIKERT. Thank you, Mr. Fitzpatrick. 

Ms. Moore? 

Ms. MOORE. Thank you so much, Mr. Chairman. 

I would like to start out with Mr. Lemke and sort of follow up 

on what Representative Fitzpatrick was discussing to say I am 

very concerned about the floating NAV and so I want to start out 

by asking you sir, if the SEC and the FDIC and the Fed were concerned—if they were to promulgate rules that included the floating 

net asset values, and of course I think that would mean this money 

would flow out of those particular investments. 

Where do you think those funds would go? Do you think that 

they would go into less regulated or overseas instruments or vehicles? 

And if the industry is so opposed to the floating NAV, how do we 

address the concerns of the SEC and the Fed—I believe that Mr. 

39 

Kelleher mentioned that we had full backing of the FDIC, and that 

is what stabilized the market at that time. 

So, how do we address the concerns of the SEC and the Fed? 

Mr. LEMKE. We continue to believe that the 2010 amendments 

that the SEC put in place have already addressed the concerns 

with money market funds. Again, we had a highly extraordinary 

market crisis, a temporary fix was put in place—and we should 

point out that money market funds were one of the first financial 

institutions that suffered during the crisis because they invest in 

such short-term paper. 

They are much like a canary in a coal mine, the signal to the 

general market that problems were coming. We think that those 

issues have been addressed and—bring back the other issue with 

the SEC is that perhaps they are talking to different people, but 

what we are hearing from retail and institutional investors is they 

do not favor a floating NAV. 

It is highly complicated, it is going to make their lives far more 

difficult, and as we already know, money will leave money market 

funds and that is going to reduce opportunities for investors to get 

returns, but it is also going to reduce the market for corporations 

and State and local governments that need funding on a short-term 

basis to be able to operate their activities. 

Ms. MOORE. So, what is your suggestion? 

Mr. LEMKE. For? 

Ms. MOORE. You believe it has already been done? 

Mr. LEMKE. Yes, we do. 

Ms. MOORE. And we just need more time to demonstrate that? 

Mr. LEMKE. Yes, and the experience so far has been very positive 

that these reforms have worked. 

Ms. MOORE. Mr. Kelleher, I see you are dying to respond to this 

question as well. 

Mr. KELLEHER. One can’t fairly say that the reforms since 2010 

have worked. We haven’t had a crisis. We haven’t had a run. And 

frankly, even today, what used to be the implicit guarantee behind 

the too-big-to-fail banks is now explicit. 

The U.S. Government is not going to allow a too-big-to-fail bank 

to fail today. It is why they get a funding advantage, a credit rating boost, and why they can compete unfairly against all the other 

banks and all the other institutions in the country. 

So, saying that the rules have worked well is to say nothing. The 

only time that we will know if the rules work is if we have another 

crisis, and believe me, we don’t want one. 

But we need rules that work in a crisis when there is a real run. 

Mr. Lemke is exactly right, and spells out the problem well. Let me 

quote him, ‘‘investing the money market funds in short-term paper, 

it is like the canary in the coal mine.’’ He is right. It is the first 

money to run. And that is why we have to get that right, because 

that is almost like the light on the fuse, the end of which is the 

explosion and the collapse of the financial system. 

Ms. MOORE. Thank you, Mr. Kelleher. I reclaim my time. 

You mentioned earlier in your testimony that you didn’t think 

that Dodd-Frank was perfect, although we definitely need some 

kind of re-regulation. 

40 

What unintended consequences if any do you see in Dodd-Frank 

that we need to address? What areas of our work do we need to 

revisit? 

Mr. KELLEHER. I think the regulators would disagree with you 

that Better Markets thinks Dodd-Frank was perfect, because we 

filed 100 comment letters and had dozens of meetings about how 

to change Dodd-Frank and implement the rules in a way that is 

faithful to the law. 

It is not perfect. It is not the law I would have written. So we 

haven’t taken that position and no one would take that position. It 

is a product of democracy and it has pluses and minuses, but overall, it can work if people of good faith implement it. 

The Volcker Rule needs to be changed in some way so that it is 

clear and more faithful to the statute. The statute got it right, better in some ways than the Rule, but the Volcker Rule has to focus 

on compensation and focus on making sure the permitted activities 

of market making and hedging actually do those activities and 

don’t become a vehicle for disguised prop-trading. There are a 

whole variety of things in the derivatives area and in the too-bigto-fail area including putting in place the prudential standards 

under Section 165 at the Fed, including the Orderly Liquidation 

Authority and living wills. 

All of which we have recommended changes that be made in the 

rulemaking process. Because while there has been discussion earlier about the Orderly Liquidation Authority of the FDIC, that is 

at the end. It is as important to get the front-end regulation from 

the Fed and the Treasury to make sure that the living wills are 

in place and that these too-big-to-fail institutions can be taken 

down in an orderly fashion, which they cannot be today because we 

don’t even have international agreements yet. 

So if you look at Lehman, Lehman would happen today just like 

it did in 2008. And if the government doesn’t step in, then 

JPMorgan Chase, Goldman Sachs, Morgan Stanley and all the 

other too-big-to-fail banks would be bankrupt, as they would have 

been in 2008 but for the trillions of dollars the U.S. Government 

and U.S. taxpayers put behind them. 

So I think there are a lot of things that can be improved, and 

we have been arguing to improve them. 

Ms. MOORE. Thank you. I yield back, Mr. Chairman. 

Mr. SCHWEIKERT. Thank you, Ms. Moore. 

Mr. Royce? 

Mr. ROYCE. Thank you. 

Mr. Kelleher, just going through some of the observations you 

made earlier about the side effects of Dodd-Frank in terms of the 

impact it does have on the larger institutions crowding out their 

smaller competitors, I think that this is one of the reasons why 

some of us have a problem with a strategy that ended with now 

several years after the crisis we now have 5 of the largest banks 

holding 52 percent of all U.S. banking industry assets, right? 

That is up sizably over the last couple of years, and that means 

exactly what you implied there, that the FDIC is right when they 

say that there is this huge basis point advantage, lower cost of 

lending, that goes to these large institutions. Why? Because, you 

are right, it is explicit now. 

41 

And there are those economists who said all along that the problem in the system was that we were not requiring enough capital, 

and when we hit a storm or when the Fed got the interest rates 

wrong and created a bubble because we ran negative real interest 

rates for 4 years running, or all of the other errors that were made, 

arguably, in this whole scheme, that we would hit the skids and 

if these institutions weren’t well-capitalized enough they wouldn’t 

survive. 

The GSEs—and I know we have talked about this—were leveraged 100–1. The investment banks were allowed to leverage 30–1. 

It should have been 10–1. 

So the question I really have for you is, to think that those regulators who so blatantly failed the last time around are going to be 

so prescient that they are going to be able to see this thing coming, 

that is not the way things work in financial calamity. That is why 

we require adequate capital, or should have. That is why, going forward, we should be requiring adequate capital. 

Because you presume that you can do something that I am not 

sure human beings can really do. Right? 

Mr. KELLEHER. No. 

Mr. ROYCE. And I just throw that question out for you. 

Mr. KELLEHER. Thank you. There is much that we agree on, but 

the one thing that is very important is that we learned, history 

teaches us after the Great Depression that there is no silver bullet 

for policing the financial industry. What you have to have is layers 

of protection. 

And history also teaches us that while capital is a convenient 

mechanism, it almost always fails, because it is risk-adjusted capital, it is easy to be gamed based on the assets and things, but it 

is a key, key— 

Mr. ROYCE. No, no, no, but if you do the leverage ratio, and if 

regulators can do one thing—and let us hope we can do that—manage to keep abreast of where that ratio is. That is where we were 

so far off the mark, right, 100–1 at the GSEs, 30–1 for the investment banks, and that is with knowledge, that is with the regulators knowing that was the situation. 

If we are going to assume that you have special powers— 

Mr. KELLEHER. No— 

Mr. ROYCE. —shouldn’t we at least assume that you would be 

able to get to the bottom of a leverage ratio and enforce it? How 

do we do that? Because my concern is that all the other folderol 

that we have enacted has allowed the larger institutions now going 

forward because of that lower cost of borrowing to gobble up their 

smaller competitors and thereby to overleverage again. 

In other words, I am not sure we are out of the thicket. And I 

think to get back to the solution at hand, I would like to have you 

sort of just revisit this. I remember I was involved in the markup 

and I remember your engagement, too, on the Senate side. I just 

think we should rethink some of these premises. Do you know what 

I mean? 

Mr. KELLEHER. Look, everything can be rethought and looked at 

again to make sure it works by people in good faith who believe 

fundamentally in financial reform, but I would say that there are 

too-big-to-fail banks which compete unfairly because of public subVerDate Nov 24 2008 11:16 Feb 28, 2013 Jkt 076114 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\76114.TXT TERRI
42 

sidies and support that preexisted Dodd-Frank. And Dodd-Frank 

didn’t create it and Dodd-Frank didn’t even make it worse. The financial crisis did. 

But what is most important— 

Mr. ROYCE. No, but making it explicit did. I think you would concur— 

Mr. KELLEHER. The U.S. Government did that, not Dodd-Frank. 

But more importantly, the point is, you are right. I don’t presume anybody is prescient or fully capable. We need layers of protection—capital is one part of it, but multiple other layers are absolutely essential to protect the American taxpayer, our financial system and our economy from this ever happening to them again. 

Mr. ROYCE. Right. But remember one other thing: The largest institutions are now best positioned to absorb those regulatory costs, 

which—and my worry is with their competition, right? I am worried about the other financial institutions, the banks, the community banks. 

Mr. KELLEHER. We want fair competition, too. 

Mr. ROYCE. See? And so, we have now layered on all of those 

costs that have so disadvantaged the competition, thus in some 

ways compounding the problem. That is why I would like to get us 

to see this from a different paradigm. 

Mr. KELLEHER. 90 percent of Dodd-Frank is focused on systemically significant institutions, maybe even more— 

Mr. ROYCE. But not in terms of regulatory cost. 

Mr. KELLEHER. Ultimately, it is really focused on systemically 

significant firms. So I think nobody has a bigger interest in reining 

in Wall Street than the other 99 percent of the banks. There are 

7,500 banks in the United States. Only 20 have assets more than 

$20 billion—$50 billion. Those 7,500 banks have a huge interest in 

reining in Wall Street to eliminate that unfair competition and subsidy. I agree with that. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman GARRETT. Thank you, Mr. Royce. 

Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing. And if I may, Mr. Chairman, we have a witness who is 

from Houston who represented us in Congress, and I want to thank 

him for being here and thank you for the rich history that your 

family has in making Texas a better State and the country a better 

place. That, of course, is Mr. Bentsen. 

And I also thank you for your balanced approach. You have indicated that there are some things in Dodd-Frank that you have supported, but you do have some concerns with the Volcker Rule, and 

I share some of your concerns and look forward to working with 

you to see if we can come to some bipartisan solutions. 

Mr. Deutsch, how are you today? 

Mr. DEUTSCH. Doing great. Thank you, sir. 

Mr. GREEN. How many times have you appeared before the committee? This is just a matter of curiosity. 

Mr. DEUTSCH. I think we are in the range of 12 or 13 times. 

Mr. GREEN. You and I know each other fairly well. Welcome 

back. 

Mr. DEUTSCH. It is always great to answer questions from you. 

43 

Mr. GREEN. Thank you very much. 

Mr. Deas, I think that you have, with your candor—and I appreciate candor—brought us to what I see as a crucial question. You 

have indicated that the cure is worse than the problem that we 

had. That was your comments as it relates to Dodd-Frank. I will 

give you a chance to amend. Do you agree with that statement, 

that the cure is worse than the problem? 

Mr. DEAS. No, sir, I said that—what I meant to say— 

Mr. GREEN. All right. 

Mr. DEAS. —what I believe I said was that the cure as it was 

applied to end-users and Main Street companies is worse than the 

disease. 

Mr. GREEN. So is it fair to say—thank you for the clarification— 

that you do not support the repeal of Dodd-Frank? 

Mr. DEAS. We have been working within the— 

Mr. GREEN. I am going to have to do something now. I hate to 

do this to you, but let me just ask you this, and I will extend this 

to everyone on the panel. Because I think that there is some confusion as to where people stand on this question of Dodd-Frank, and 

let us just go on the record, and let us understand that we have 

made prior statements and this is a time to be consistent with our 

prior statements. 

So if you are of the opinion that we should repeal Dodd-Frank, 

kindly extend a hand into the air. If you are of the opinion we 

should repeal it. All right, I take it from the absence of hands, and 

I would like the record to reflect, that there is no one on the panel 

who desires to repeal Dodd-Frank. 

And that is a good thing, because, quite candidly, I think that 

it can be amended, it can be tweaked. 

Is there anyone who believes that any legislation of this magnitude has ever been developed that didn’t have to be amended? If 

so, raise your hand. So we are in agreement, Dodd-Frank is very 

much like any major legislation, you have it and then you have to 

work with it to tweak it and make it better. 

But I do want to go to Mr. Kelleher, and I hope I pronounced it 

correctly. If I did not, you will have the opportunity to correct me. 

But you were talking about what I am going to call the baby in the 

bathwater test. There are people who will say that there is a baby 

in the bathwater, but then they throw out everything, the baby and 

the bathwater. 

Recognizing that there is a baby in the bathwater, and then 

throwing out the baby, I am not sure that your actions are comporting with what you say. And this is what you brought up, sir. 

So I would like for you to continue your comments about people 

saying one thing and doing another as it relates to Dodd-Frank. 

Mr. KELLEHER. I think the most important marker of whether or 

not people who claim they are for financial reform, people who 

claim that they want to protect the American taxpayer, the economy and the financial system, the marker is, are they voting for 

funding for the regulators or not? 

The regulators are so grossly underfunded, they don’t have the 

manpower, personnel or IT capability, just technology, to keep up 

with the industry. 

44 

So if people believe in financial reform, we need to put the cops 

back on the Wall Street beat, we need to make it a fair fight so 

that they have the ability to pass intelligent, robust, capable, proper rules that implement financial reform and regulate Wall Street 

in a smart way. 

That is what has to be done. Right now, they are just being pummeled. They are being criticized. They are being abused nonstop. 

And so anybody who says they are for financial reform but does 

not loudly, publicly, and often demand increased funding for the 

regulators, the CFTC and the SEC, then don’t believe them when 

they say they are for financial reform. You cannot be for financial 

reform and not be for funding the regulators and putting the cops 

back on the beat. That is all there is to it. It is an either-or. Either 

you are going to protect Wall Street’s profits or you are going to 

protect taxpayer pockets. That is the choice. 

Mr. GREEN. Thank you. 

And, Mr. Chairman, I yield back. 

Mr. SCHWEIKERT. Thank you, Mr. Green. Mr. Stivers? 

Mr. STIVERS. Thank you, Mr. Chairman. Welcome to the committee everybody. And I am going to focus on probably the Volcker 

Rule. Maybe a little bit about money markets. A couple of my colleagues have talked about that. And then if I have time, I will ask 

some questions about risk retention. But I would like to start with 

the Volcker Rule and I would like to start with Mr. Bentsen. Can 

you tell me, you talked about the Wyman Study earlier and how 

it will affect capital markets. Can you talk about how the Volcker 

Rule might impact U.S. jobs and job creation? 

Mr. BENTSEN. The Wyman Study found that in the case of corporate bond issuance—as I mentioned, the cost associated with 

that would have a net negative effect on corporate earnings. And 

so one could extrapolate from that obviously if you have a net negative effect on corporate earnings, that is going to impact capital investment or investment in plant and equipment and ultimately 

jobs by corporations. I think that the bigger question, or the bigger 

issue with Volcker is that it doesn’t have to be that way. Now very 

clearly SIFMA was not supportive of Volcker when it was being 

considered. We were very upfront about that. 

It is the law of the land. But we believe the regulators have misinterpreted what Congress wrote in the statute and have actually 

come up with a proposed rule that is contrary to the statute, will 

impede traditional market-making activity and raise the cost of 

capital for—as virtually every commentator or certainly 90 percent 

of the commentators from buy side to sell side, to issuers, to foreign 

central banks, will raise the cost of capital which will have a negative economic impact. 

Mr. STIVERS. And obviously, there will be some cost associated 

with that which could affect American jobs. Do you think anything 

in the Volcker Rule could encourage American companies to relocate jobs overseas? Or incentivize investors or firms to move operations to foreign jurisdictions? 

Mr. BENTSEN. I think the best way I could answer that, Congressman, would be that if it has, as we believe—if the Rule proceeded as proposed, we believe it would have a very negative impact on U.S. financial markets. U.S. financial markets have been 

45 

losing share of business in equities and the corporate bond market 

over time. Some of that is just a natural progression as other markets grow and develop. But I don’t think we want to hasten that 

decline that would have an impact on U.S. corporations, small businesses and the like to access our capital markets. 

Mr. STIVERS. Thanks. And other than this transaction-based approach, you actually suggested in your testimony that there is a 

better approach as opposed to looking at every individual transaction, maybe looking at the entire picture of what a firm is going 

as opposed to getting them concerned about every transaction. Do 

you want to talk any more about that? 

Mr. BENTSEN. Absolutely. We think that there are a number of 

things that the regulators—and we suggested a number of things 

that the regulators could do and again we are not alone in this. 

The buy side has weighed in on this in addition to the sell side. 

We think first of all you need to reverse the negative presumption. 

Second of all, you need to move away from hard coated metrics and 

instead have supervisors work with the firms that they examine 

and allowing those firms to develop their own set of metrics and 

come up with their own compliance programs, similar to what is 

done in the anti money laundering program. 

And most of all, that the Rule recognized what Congress recognized in saying that customer focused business fits within the market making exemption and allows that to move forward. And so we 

think that nothing we have proposed takes away the authority of 

the examiner or the regulators to step in and tell a firm, we don’t 

like what you are doing. But it does it in a way that we think 

doesn’t impede the ability of firms to meet their market making 

commitment, provide liquidity to the markets as Congress explicitly provided for in the statute. 

Mr. STIVERS. Thank you. And Mr. Deas, can you talk about the 

impact of the Volcker Rule on Main Street? Your testimony talked 

about what it would do and what it would cost companies on Main 

Street in additional cost of credit. But what does that mean to jobs? 

And what does that mean to American competitiveness? 

Mr. DEAS. The example I used, that on our most recent bond issue of $300 million, we estimate the cost over the life of the issue 

would be an additional $15 million of financing costs. And that is 

$15 million that my company wouldn’t have to invest in expanding 

plant and ultimately growing jobs. That effect would be replicated 

across the entire productive economy. 

Mr. STIVERS. And to Mr. Green’s point, do you think that the— 

to Mr. Bentsen’s point, do you believe the Volcker Rule could be 

fixed as well? 

Mr. DEAS. I believe that inherently the Volcker Rule requires intent be proven or disproved. And in other words, from the eyes of 

one regulator, and there are five regulators who are charged with 

implementing this, a transaction may be proprietary trading, 

whereas from the financial market participant it might be market 

making, which they thought was exempt. And if that cannot be 

cleared up, then they will stay away from it at a higher cost to 

American business. 

Chairman GARRETT. Thank you, Mr. Stivers. 

Mr. STIVERS. I yield back the balance of my nonexistent time. 

46 

[laughter]. 

Mr. SCHWEIKERT. Mr. Manzullo? 

Mr. MANZULLO. Thank you. The problem I still have with DoddFrank is at the time of the collapse, there were Federal regulations 

and laws in effect that if had been properly implemented, could 

have avoided the entire crash. Let me just give you an example. 

The Fed has had the authority since 1994 to govern bank holding 

companies, documentation and underwriting standards for mortgages that they issue. If the Fed had been properly doing its job, 

it would not have allowed the 1As and the subprimes and the socalled cheater loans to take place. 

It wasn’t until October 1, 2009, that the Fed required written 

proof of a mortgage applicant’s earnings. Come on. That was so 

basic. And Ken, you were here in 2000 when we had the first GSE 

reform bill. It didn’t go anywhere. In 2005, we had the second one, 

along with the Royce Amendment which would have really tightened up the underwriting standards. Of course everybody was 

fighting. Oh you can’t stop the building boom, et cetera, et cetera. 

But we can talk all we want about the Volcker Rule, about this and 

about that and we need to get back to, at least in my opinion the 

reason for the collapse of the economy was in the residential home 

market. 

But no one seems to talk about the fact that we are looking at 

new rules and new regulations and yet there were laws in effect 

at the time that could have stopped this. Now granted, 75 percent 

of the mortgages were private label. In fact during the height of all 

of this, 25 percent were GSEs. Does anybody agree with me on this 

statement? Want to comment on it? Which I find interesting. Because people very seldom want to talk about what really caused the 

economic collapse. And I have gone through the testimony here. 

Unfortunately, I didn’t have the opportunity to sit in on all the 

testimony going on. But maybe it is because I have been on this 

committee since 1994, that I have had the opportunity to sort of 

take a historical view as what could have happened. It was hell 

around here. When people like myself and Ed Royce were taking 

a look at something come down in the future, we couldn’t put our 

finger on it, but we could smell that something was going wrong 

and something dramatically would happen when people who could 

not even make the first monthly payment on their homes were allowed to purchase homes. 

The Federal Government had the authority to intervene and stop 

that practice. Why didn’t the Federal Government intervene at that 

time? Anybody who is in favor of Dodd-Frank and more legislation 

should be able to answer that question. Or at least comment on it. 

Do I have no takers on it? 

Mr. KELLEHER. It depends on what you are saying. I think it is 

certainly the case, sir that there were plenty of rules on the books 

that were not enforced, or were poorly enforced. But I think you 

will agree, because you were here, that in 1999 Gramm-Leach-Bliley took many laws off the books. In 2000, the Commodity Futures 

Modernization Act prohibited regulation of the derivatives markets. 

In 2001, there was a famous picture that reflected the attitude at 

the time where the two top banking regulators and the two top 

47 

banking lobbyists had a chainsaw cutting through regulations saying they weren’t going to be enforced. 

And in 2004, I think it was the OCC that sued to stop States 

from enforcing predatory lending, the point that you just made. So 

one of the problem is—and I may be wrong, it may not have been 

the OCC, maybe one of the other Federal regulators, I don’t remember. But there were States like North Carolina and others who 

saw what was happening on the street level as you often do when 

you go home to your districts. You are actually close to the street 

and you know what is happening, particularly in the neighborhoods, residential markets. And what they saw was unleashed 

predatory behavior in the mortgage markets. Exactly what you just 

said. 

No money down, and get 110 percent of your loan. So the State 

attorneys general started to enforce their predatory lending laws. 

A Federal regulator went to court to preempt them from doing that 

saying that it was Federal power and then they didn’t do it. So you 

are absolutely right that there were some laws in place that could 

have stopped this, including, importantly, State laws that the Fed 

stopped from being enforced. But it is also the case that many laws 

were repealed, overtaken, and changed both statutorily from here— 

Mr. MANZULLO. I understand, but the reason I brought that up— 

I am not being critical of anybody here on the panel because everybody has made some really good statements—is the fact that 

maybe I am wrong and maybe I look at it through a different lens, 

but there had to be a trigger cause. 

There had to be a trigger. And to me, it was the residential market. And even with the repeal, in Gramm-Leach-Bliley, of different 

regulations, et cetera, there never was a repeal of the authority 

that the Fed had all along in order to regulate the documents and 

the underwriting standards. 

And I make that statement based upon the fact that you could 

have the best drafted bill in the world that Congressman Bentsen 

would agree that doesn’t—the Volcker Rule, for example, doesn’t go 

transaction by transaction, but it is just a broad generic view. And 

still, if the people in charge of the agencies are not with it and are 

not monitoring Wall Street, it still won’t do any good. 

Mr. SCHWEIKERT. Mr. Manzullo, I can’t imagine you ever being 

wrong. 

[laughter]. 

And now to one of those moments that I am going to yield myself 

5 minutes here. And almost every potential question has, sort of, 

been randomly thrown out, but there is something that I have, sort 

of, a fixation on that I would love to solicit the panel. I am going 

to start with you, Mr. Deutsch. 

Presently, if you look at our mortgage markets, our residential 

mortgage markets, it is a government market now. I see numbers 

97, 96, 98 percent of all home loans now are Fannie, Freddie, 

Ginnie, FHA. And we have worked very hard both in my office and 

on this committee in the discussions on the mechanics, what do we 

have to do to start to rebuild a private-label market again, something that will be stable, good visibility—the appropriate visibility 

so we never have the problems in the future? 

48 

And we meet with different players up and down the food chain, 

from the folks in the TBA side all the way down to the 

securitization, to the servicing. And we get this pushback constantly, saying, ‘‘Well, there is this one piece of Dodd-Frank we are 

worried about.’’ And often that worry is it is a rule that hasn’t actually been promulgated yet, but we are worried about it. 

Mr. Deutsch, you and I have had this conversation at least a couple dozen times as we have been, sort of, systematically trying to 

figure out how you rebuild a private securitization market. 

What do you see in Dodd-Frank right now that are the biggest 

barriers to move from functionally a socialized mortgage market we 

have today to something that would have some competition in it? 

Mr. DEUTSCH. First, I would start with what is not in DoddFrank, which is there is no reform of Fannie and Freddie. That is 

a big outstanding question, and if you are a market participant, 

you want to know what that is. And right now, they are issuing 

$1.2 trillion of mortgage-backed securities a year. That is a huge 

part of the market that you just don’t know where it is going to 

go; how is that reform going to fall? 

Second, the Premium Capture Cash Reserve Account. I think if 

we could beat that horse any harder, we would. Unfortunately, we 

can’t beat it any harder. It is a regulatory abomination, in terms 

of being able to create CMBS and RMBS in the future. 

Third, the Qualified Mortgage definition: If it comes out that is 

very vague, as to what is or is not a Qualified Mortgage, any originator and then ultimately any investor who would buy into a mortgage-backed security is going to say, if there is anything even close, 

I don’t want that loan, which means credit is going to get cut off 

more and more to the borrowers who most need it. 

So those are a couple of the quick areas. I think within DoddFrank there are substantial questions outstanding for the RMBS 

market. And until many of those are answered, if you are running 

a business, if you are running a firm, why would you want to put 

money to create a platform when, a year from now or 2 years from 

now or 3 years from now, the regulators may say, sorry, that is not 

going to be a platform that can work? 

Mr. SCHWEIKERT. Mr. Vanderslice, almost the same question, 

maybe more on the CMBS: What is out there in Dodd-Frank that 

is scaring the expansion, the growth and the reforms within the 

private-label markets? 

Mr. VANDERSLICE. I think it was said best before; I think the 

term was ‘‘regulatory abomination,’’ with respect to PCCRA. There 

are plenty of things in Dodd-Frank that work for the commercial 

real estate market. I think we have been very clear about that at 

CREFC—risk retention, better disclosure, increased transparency. 

And, there are a lot of things that are very positive. PCCRA is 

the stumbling block that we are wrestling with right now. 

Mr. SCHWEIKERT. Okay. And, sort of, the open-ended side of the 

question is if you are like I am where you believe, whether it be 

perception or rules that are to come that we are creating more and 

more of a concentration of trillion-plus dollars a year of a government-insured mortgage market, in many ways we are creating 

massive risk at that level. 

49 

Congressman, from what you pick up out there, what would you 

be doing right now to start reviving the private-label market? And 

what Dodd-Frank obstacles do I have within that? 

Mr. BENTSEN. I think Mr. Deutsch hit a lot of the important 

points. I think there is a lot of uncertainty because we don’t know 

what the final rules are going to be with respect to QM and QRM, 

what the final risk retention will look like, whether or not there 

will be a premium recapture. 

So in order to make an investment and—on a business model, 

you don’t know what the rules of the road are going to be. 

And then on top of that, we have now Basel 2.5 and Basel III 

coming in, so if you are subject to those rules, then, in addition, 

you are going to have to—you are still trying to figure out what 

your capital requirements are going to be, in addition to risk retention. 

So I think all of that uncertainty, not to mention, as well, as Mr. 

Deutsch mentioned, what exactly is going to happen with respect 

to the GSEs going forward, is that has to be resolved. 

Mr. SCHWEIKERT. And we have had the conversation with probably half of this panel that also fear that running parallel what 

happens to the GSEs, what is within Dodd-Frank that is an impairment in creating a private-label market. 

And I am already over my time. I recognize my friend from New 

Mexico, Mr. Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Since I was feeling the, as you are talking through your statement and as I am reading it, the desire for predictability, and I understand that the points have been well-made, though, that I am 

not sure that the path forward is to more regulations. MF Global 

had the CFTC and the SEC both sitting in the room there, right 

at the time they are making the decision to use the customer’s segregate funds in an illegal way and nobody said a word, and now 

they can’t find, whatever, or they couldn’t find the money for a couple of months afterwards. 

JPMorgan had 57 regulators sitting in the rooms with them as 

they were going through their—and so with I understand the desire for predictability, but as you talked about the sustainable economic growth, I don’t know any country or any company even in 

the world that has that. Those sustainable economic growth models 

of the really regulated utilities of the past led to markets that— 

well, you see what happened in the telecommunications market 

when it deregulated. 

I grew up with the old black phone, it was just one, and then you 

didn’t even have an extension cord. And that product market just 

exploded once the regulations were pulled away, and that is what 

regulations do—they give certainty, but they also take away the innovations and the future. And so, I don’t know. 

What actuarial assumptions does your plan have to keep it, sort 

of, in balance? 

Ms. SIMPSON. Thank you. It is a very good point about regulation. This is not a question of quantity; it is about quality. In our 

remarks, we really put an emphasis that regulation is one piece 

and it must be smart regulation. It must ensure that the market 

players play their role. And among the market players are of 

50 

course share-earners like CalPERS. We want the information and 

we also want the rights so that we can act as responsible earners. 

Mr. PEARCE. Sure, I understand that. 

Ms. SIMPSON. That is important. The— 

Mr. PEARCE. What actuarial assumptions— 

Ms. SIMPSON. The actuarial assumption that we have the discount rate is 7.5 percent. 

Mr. PEARCE. 7.5 percent. 

Ms. SIMPSON. That is— 

Mr. PEARCE. What if you fall 0.25 percent short? How much does 

that affect your payout? 

Let us say you get 7.5 percent. Do you have that figure? 

Ms. SIMPSON. I am sorry, I don’t, and we would be glad to come 

back to you, but the impact— 

Mr. PEARCE. I am guessing that it is going to penalize your funds 

something in the neighborhood of $15 billion per 0.25 percent. And 

that is what we are all facing is that we are in a highly competitive 

world. 

What kind of a payout do your beneficiaries receive? 

In other words, they get blank percent of their active-duty pay? 

What— 

Ms. SIMPSON. That is correct. The average pension paid to our members is $2,000 a month. 

Mr. PEARCE. No, what percent? 

Ms. SIMPSON. It is 0.5 percent per year, per year of service. But 

the formula varies among the 1,000 employers that we invest for. 

CalPERS is a complex structure, but we would be glad to come 

back to you with the details. 

I worked in the investment office, not the actuarial or the benefits office, so I apologize. 

Mr. PEARCE. Going back to your testimony, on page five, you 

really, kind of, log in on the CDS things, and you talk about the 

collateralized debt obligations and those market failures. And you, 

sort of, lead to the concept that more regualtions would be better. 

And I would tell you that there are a couple of guys sitting in 

a garage apartment in Berkeley, written up in the big short here. 

They had $110,000 and they figured out that these things can’t be 

real, and they bet against it, and with $110,000, they made $80 

million because they were betting against the CDOs and CDSs and 

whatever. 

Your retirement fund had $232 billion. This is what your risk 

managers are supposed to do. And for you to come to us and you 

want us to give more regulations, then I am thinking about the 57 

regulators sitting in there watching while JPMorgan does what 

they do, and now they are saying, well, if we just had more, it 

would be okay. 

And I am sorry. I just don’t think that predictability is going to 

be out there. 

Do your beneficiaries vote on the pay levels of high executives? 

Ms. SIMPSON. At CalPERS? 

Mr. PEARCE. Yes. 

Ms. SIMPSON. Our staff? No, the— 

Mr. PEARCE. See, you are asking on page 10 for you to be able 

to vote on corporate compensation, but you don’t offer it inside. 

51 

That is very problematic. If it weren’t such a big problem, you 

would be doing it yourself anyway, but there is just—I understand, 

I really—we all wish there was more predictability and more certainty, but life is going to be very uncertain, you can see the worldwide chaos that is developing in the financial markets. Thank you 

Mr. Chairman, I appreciate your indulgence. 

Mr. SCHWEIKERT. Thank you, Mr. Pearce, and we only have 

about 3 minutes. 

Ms. SIMPSON. Our request is the transparency for information 

that enables us to price risk. Risk is where return has been in the 

balance in a proper way. Our salaries are extremely modest. They 

are set by State government and they are all on our Web site. So 

I do invite you to— 

Mr. SCHWEIKERT. All right. Thank you, Ms. Simpson, but we only 

have about 3 minutes left on the Floor vote so let me, without objection, ask for unanimous consent to put 2 items into the record: 

a statement from the Mortgage Bankers Association; and a statement from the Bond Dealers of America 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the record will remain open for 30 days for 

Members to submit written questions to these witnesses and to 

place their responses in the record. 

Thank you for your participation today. This hearing is adjourned. 

[Whereupon, at 12:50 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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Testimony of Kenneth E. Bentsen, Jr. 

Executive Vice President for Public Policy and Advocacy 

Securities Industry and Financial Markets Association 

Before the Subcommittee on Capital Markets and Government Sponsored Enterprises 

Committee on Financial Services, U.S. House of Representatives 

July 10,2012 

Chairman Garrett, Ranking Member Waters, members of the Subcommittee, my name is Ken 

Bentsen and I am the executive vice president for public policy and advocacy at the Securities 

Industry and Financial Markets Association (Sifma) 1. Thank you for the opportunity to share our 

views regarding the Dodd-Frank Act today. 

The Dodd-Frank Act is the most expansive financial regulatory law in more than seventy years. 

In addition to amending the multitude of prior statutes, the Act contains a tremendous amount of 

new law, resulting in at least 150 rulemakings affecting every aspect of financial services. There 

is much in the Act that SIFMA's members supported such as the establishment of a systemic risk 

regulator, the Financial Stability Oversight Counsel (FSOC), the new Orderly Liquidation 

Authority designed to resolve failing systemically identified firms, and the authorization of a 

uniform standard of care for brokers and advisors providing personalized investment advice. We 

believe that properly crafted through the rule making process, these provisions as well as others 

can appropriately increase supervision to mitigate systemic risk, improve coordination among 

regulators, eliminate too big to fail, and improve protections and confidence for individual 

investors. However, other provisions, if not properly crafted both domestically and in 

coordination with regulators around the world, could have far reaching negative consequences to 

the detriment of the businesses, governments, non-profits, and individual and institutional 

investors who rely upon deep and liquid U.S. capital markets. 

In response to the Committee's request I will limit my written remarks to implementation of the 

Volcker Rule, Credit Risk Retention, Title VII, and Section l65(e) Single Counterparty Credit 

Limits. 

1 SIFMA brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to 

support a strong financial industry, investor opportunity. capital fonnation,job creation and economic growth, while building 

trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional 

member of the Global Financial Markets Association. For more information. visit wv..-w.sifma.org 

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1. The Volcker Rule 

We believe that Congress' goal in adopting the statutory Volcker Rule was to focus banking 

entities on providing liquidity to customers and to prohibit excessive risk taking beyond that 

required for customer activity. The rule (the "Proposal"), as proposed by the Federal Reserve, 

Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency 

(OCC), the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange 

Commission ( SEC) (the "Agencies") however, defines Congressionally permitted activities far 

too narrowly and subjects banking entities to a conceptually difficult and operationally expensive 

set of requirements, the costs of which cannot be justified based on their benefits. Specifically, 

these requirements may paralyze effective market making, which is far from the statute's intent. 

In addition, as an unintended and deleterious side effect, the Proposal will severely limit banking 

entities' abilities to hedge their own risk, thereby increasing rather than decreasing the risk to 

banking entities and the financial system. 

Our Key Conceptual Concerns with the Proposal's Approach: 

Artificial Distinction Between Permitted Activities and Proprietary Trading. The Proposal 

attempts to draw a bright dividing line between the permitted activities and prohibited short-term 

proprietary trading. We believe that drawing such a line is not only unnecessary and impractical, 

but also is inconsistent with the structure of the statutory Volcker Rule. Congress allowed the 

permitted activities regardless of the fact that they are short-term proprietary trading. Therefore, 

the Agencies' attempt to define the permitted activities as distinct from proprietary activities is 

inconsistent with congressional intent and doomed to failure. It results in an overly narrow 

interpretation of the permitted activities that constrains the beneficial effects those activities have 

for corporate issuers and investors that rely on the capital markets. 

Negative Presumptions and Reliance on Hard-Coded Criteria. The Agencies' focus on 

prohibited behavior, at the cost of overly restricting permitted activities, is expressed in the 

negative presumptions that penneate the Proposal. Throughout the Proposal, the Agencies 

assume that activities are prohibited unless proven otherwise. We believe that this negative 

presumption is inconsistent with explicit congressional intent to allow useful principal activity. 

We believe it is also inconsistent with the historical approach that the Agencies have taken in 

supervising banking entities, which would have formed Congress' expectation of how the 

Volcker Rule would be implemented. We believe that the numerous letters to the Agencies from 

members of Congress and from the Financial Services Committee hearing on the Proposal both 

indicate Congress' surprise and concern at the path the Agencies have taken. 

The negative presumption manifests itself most clearly in the Agencies' reliance on hard-coded 

criteria to define the permitted activities, under which the failure to meet any single criterion 

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disqualifies the trading unit from engaging in the permitted activity. Such an approach shoehorns 

all permitted activity into one or a few archetypes, rather than reflecting the numerous ways 

market participants engage in beneficial activities that Congress meant to protect. Even more 

unfortunately, the archetype chosen by the regulators does not represent the majority of the 

markets, but rather is reflective ofa small portion of transactions in one type ofliquid market. 

For example, the heavy reliance on bid-ask spreads, and the presumption that revenues that 

deviate from bid-ask spreads are indicative of prohibited proprietary trading, are at odds with the 

fact that few markets have a readily determinable bid-ask spread that is quantifiable or that could 

sustain a market-making business. As a result, in order to rebalance the proprietary trading 

proscription with the permitted activities, we believe that the hard-coded criteria should be 

removed from the rule and, subject to our specific recommendations and, to the extent relevant, 

incorporated into the final Volcker Rule regulations as guidance. 

In addition, revenue sources differ significantly by asset class. In markets where trades are large 

and less frequent, such as the market for customized securitized products, appreciation of the 

price of a covered financial position may be a major (or the predominant) contributor to revenues, 

since one position moving up or down significantly may have a marked impact on the profit and 

loss of the trading unit. Requiring that the activity generate revenues primarily from fees, 

commission, bid-ask spread, etc. places a limit on the extent to which the sources of income can 

differ by asset class. 

Transaction-by-Transaction Approach. We believe that the Proposal's transaction-bytransaction approach to principal trading is symptomatic ofthe focus on proscribing proprietary 

trading and is inconsistent with the intent of a statute that broadly speaks of permitted "activities." 

We believe that an analysis that seeks to characterize specific transactions as either market 

making, hedging, underwriting or another type of permitted or prohibited activity does not 

accord with the way in which modern trading units operate, which generally view individual 

positions as a bundle of characteristics that contribute to their complete portfolio. We believe 

that analyzing permitted activities on a transaction-by-transaction basis will not only be 

unsuccessful but will also, in the process, harm legitimate activity in financial markets. 

Overly Specific and Prescriptive Compliance Regime. Finally, we believe that the Proposal's 

compliance regime is overly specific, prescriptive and impractical. We believe this arises from 

trying to develop a scheme that identifies each and every possible instance of prohibited 

proprietary trading in an otherwise permitted activity. We believe the effect, instead, will be to 

make some activities so impractical for banking entities that they can no longer be cost-justified. 

For example, the strict dichotomy in the Proposal between customer trades and non-customer 

trades would seem to require banking entities to tag each and every trade as to whether the 

counterparty qualifies as a customer at that particular time for that particular trade. We believe 

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that, instead, the Agencies should institute a principles-based framework that provides banking 

entities the discretion and flexibility to customize compliance programs tailored to the actual 

structure and activities of their organizations. The Agencies should permit banking entities to 

leverage existing compliance regimes, including the use of existing board-level governance 

protocols. 

Potential Costs of the Proposal. The potential costs to the financial markets, investors and 

corporate issuers from incorrectly implementing the Volcker Rule, in a manner consistent with 

the Proposal, are enormous. For example, in a study commissioned by SIFMA, the Oliver 

Wyman financial consulting firm estimated the impact on issuers and investors of a loss of 

liquidity possibly resulting from the Proposal. 

Oliver Wyman found that liquidity losses could cost investors between $90 billion and $315 

billion in mark-to-market losses on the value of their existing holdings; cost corporate issuers 

between $12 billion and $43 billion per year in borrowing costs; and cost investors between $1 

billion and $4 billion per year in transaction costs as the level and depth of liquidity decreases. 2 

Further, Stanford University professor Darrell Duffie noted in a paper commissioned by SIFMA 

that the "direct and indirect effects" of the Proposal "would increase trading costs for investors, 

reduce the resiliency of markets, reduce the quality of information revealed through security 

prices, and increase the interest expense and capital raising costs of corporations, individuals, 

and others," explaining that "[t]hese outcomes would lead to somewhat lower expected 

economic growth" that would have "potential adverse consequences for systemic risk"J 

Many commenters, including customers, buy-side market participants, industrial and 

manufacturing businesses, treasurers of public companies and foreign regulators, central banks 

and sovereign issuers--constituencies with different goals and interests-have agreed that the 

Proposal would significantly harm financial markets. They point to the negative impacts of 

decreased liquidity, higher costs for issuers, reduced returns on investments, and increased risk to 

corporations wishing to hedge their commercial activities. Commenters from each of these 

groups have made the case that other market participants are unlikely to be able to fill the critical 

role played by the customer-oriented principal activities of banking entities. 

We agree with AlIianceBernstein that "the inability to confidently engage in market making 

activities on a principal basis under the Proposal, along with the onerous recordkeeping and 

compliance burdens required will have a material and detrimental impact on the ability of 

covered banking entities to engage in market making activity [and] will dramatically reduce 

2 Oliver Wyman, The Va/eker Rule Restrictions on Proprietary Trading: implications for IHarket 

Liquidity (Feb. 2012) ("Oliver Wyman 2012 Study"). 

1 Darrell Duffie, Stanford University, Market 

Making Under the Proposed Voleker Rule (Jan. 16,2012) ("Duffie Analysis") 

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market liquidity, increase costs and in some cases impact the ability of market participants to 

meet their legally required obligations to investors and other stakeholders.,,4 

We do not think these consequences were the Agencies' intention. We believe that the Agencies, 

like Congress, wish to allow banking entities to provide corporations and investors liquidity in 

financial instruments by intermediating between market participants over time and in size-the 

essential function of market makers. 

Our Suggestion for Reorienting the Proposal 

We believe that the Proposal can be reoriented to avoid much of this negative impact and bring it 

closer (0 congressional intent regarding the statutory Volcker Rule. Rather than seeking to 

scrutinize every transaction in search of possible prohibited proprietary trading, the Proposal 

should protect the ability of banking entities to engage in the critical financial intermediation 

explicitly permitted by Congress. We agree that Congress intended, and the Agencies should 

require, banking entities to eliminate pure proprietary trading businesses. However, banking 

entities should be allowed to engage in customer-focused principal trading under the statutorily 

permitted activities. 

To foster customer-oriented business, the Agencies' hard-coded criteria should be recast as 

guidance that helps banking entities to differentiate client-focused business from other business. 

We believe a business should be viewed as customer-focused, and therefore engaged in market 

making, if it is oriented to meeting customer demand throughout market cycles. The Agencies' 

guidance should explicitly recognize that maintaining a customer focus not only requires a 

commitment to buy from and sell to customers, but also requires obtaining positions in 

anticipation of customer flow and trading in the interdealer market in order to validate liquidity, 

volatility, pricing, and other market trends. 

This guidance would be incorporated in policies and procedures by the banking entities with risk 

limits and controls monitored by the Agencies through examinations. Certain quantitative 

metrics, measured at a level within the organization that permits activities to be viewed as a 

whole, may help highlight certain activities that could be discussed with examiners and in the 

context of horizontal reviews. As suggested in the Proposal, however, metrics should not be used 

as a bright-line trigger for remedial action. Some metrics may be more relevant than others, 

depending upon the particular asset class, activity, particular market, and unique characteristics 

of each banking entity. Over time, based on discussions with examiners, the banking entities and 

4 Letter from AllianceBemstein L.P. to the Agencies (Nov. 16,2011). See also Duffie Analysis at 3 

(noting that "the Agencies' proposed implementation of the Volcker Rule would reduce the quality and capacity 

of market making services that banks provide to U.S. investors" and that "investors and issuers of securities 

would find it more costly to borrow, raise capital, invest, hedge risks, and obtain liquidity for their existing 

positions',); Oliver Wyman 2012 Study at 2 (conduding that the Proposal "'could significantly impair liquidity 

provided by market makers"), 

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examiners would determine the usefulness and relevance of individual metrics. We believe this 

reorientation would ensure that covered banking entities avoid prohibited speculative activity 

while preserving deep and liquid financial markets. 

2. Credit Risk Retention - Premium Capture Provisions 

In the securitization markets, SIFMA has long held a view that anyone proposal should not be 

viewed on its own. Mortgage lending, for example, is a sequence of many connected and 

interdependent events - from appraisals and loan origination, to secondary market funding, to 

servicing, securitization, and trading. Many parties are involved, from consumers to lenders, 

lawyers to rating agencies, appraisers and accountants, and in many ways most importantly, 

mortgage investors. It all must work together, and it all exists in a world where multiple 

regulations impact various aspects of each step. Retention is but one issue; one must also 

consider how retention interacts with accounting standards (consolidation standards), capital 

rules (e.g., Basel 2.5 and Basel III) and lending laws (e.g., the definition of the "Qualified 

Mortgage," which is intimately connected to the Qualified Residential Mortgage (QRM», among 

others. Our testimony will focus on retention, and in particular, one aspect of the Agencies' 

Proposing Release. 

On April 29, 2011, the Department of the Treasury, OCC, Federal Reserve, FDIC, SEC, Federal 

Housing Finance Agency (FHFA), and the Department of Housing and Urban Development 

(HUD) jointly proposed rules ("the "Proposing Release") to implement the requirements of 

section 941 (b) of the Dodd-Frank Act regarding credit risk retention.s SIFMA has been on the 

record in support ofthe general principles that underlie risk retention since before the rule 

became the law. The proposed rules would implement a risk retention regime, define the 

contours of a so-called Qualified Residential Mortgage, and implement other qualified asset tests. 

My comments here will focus on one aspect of the proposal that we believe must be amended 

due to its destructive nature the so-called Premium Capture Cash Reserve Account provisions 

(PCCRA). 

This premium capture requirement likely will deter sponsors from structuring securitizations 

with premium or interest-only tranches, or other structures that monetize excess spread up-front. 

Both our buy- and sell-side members are strongly concerned that the requirement for a premium 

capture cash reserve account as presently configured presents a serious obstacle to structuring 

securitizations, including residential mortgage securitizations, by taking away a legitimate source 

, SIFMA has submitted four comment letters on the Proposing Release. See: April 21, 2011 letter on Par Value 

(http://w\vw.sifma.org/issuesiitcm.aspx?id=24954), June 10, 2011 letter on behalf of sponsor and issuer members 

(http://www.sifma.orglissues/itcm,aspx?id-25925), June 10, 2011 letter on behalf of investor members 

(http://www.sifma.orgiissuesiitem.aspx?id-25926),and a January 20, 20121etler on PCCRA 

(http://W\\'\,,,,sifma,org/issues/item.aspx?id=8589937126). 

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of funds to enable sponsors to recoup costs and generate a reasonable return. We believe that the 

reserve account as proposed will undennine any hopes of reviving the private market for those 

securities. 

Moreover, this premium capture cash reserve account is not required by the Act. This concern 

was expressed in an August 1,2011 letter from House Financial Services Chainnan Spencer 

Bachus and Representative Scott Garrett to the heads of the federal regulatory agencies 

implementing the PCCRA that stated: "Specifically, the proposal contains a requirement never 

discussed during the deliberations on what became the Dodd-Frank Act that securitizers set aside 

the premium from sales of securities in so-called premium capture cash reserve accounts 

(PCCRAs) .... Cutting off or greatly reducing this vital source of capital through the operation of 

a provision that Congress never considered (or even contemplated) is bad policy and an 

inappropriate exercise of regulatory authority." 

Operation of the PCCRA Provision 

The PCCRA provisions are likely to significantly impair the ability of private capital to assist in 

reducing the role of the government sponsored enterprises (GSEs) in mortgage finance. The 

effect of these provisions could negatively impact the economics of many securitizations to the 

extent that they would not be possible. As it is structured, PCCRA would eliminate or materially 

eliminate all profitability from a transaction. It would also drive the amount of risk retained by 

the sponsor to levels well beyond those envisioned by the law. This is bad for lenders and issuers, 

as it removes securitization as a funding option. This is bad for investors, who need new 

mortgage products to invest in. And most importantly, it is bad for consumers, as the PCCRA 

provisions stand to reduce the ability of private funds to finance mortgage lending and will likely 

reduce the features that customers are able to obtain with their mortgages, such as rolling closing 

costs into the loan amount. 

Here is how PCCRA is defined: The proposed rules provide that in addition to the amount of 

credit risk that a sponsor is already required to retain under the other provisions of the proposed 

rules (e.g., 5 percent), a sponsor must establish and fund a premium capture cash reserve account 

in an amount equal to any amount by which (1) the gross proceeds, net of closing costs paid by 

the sponsor(s) or issuing entity to unaffiliated parties, received from the sale of asset-backed 

securities (ABS) interests in the issuing entity to persons other than the retaining sponsor exceed; 

(2) 95 percent of the par value of all ABS interests in the issuing entity issued as part of the 

securitization transaction or 100 percent of the par value of all ABS interests in the issuing entity 

issued as part of the securitization transaction (depending on the specific fonn of retention 

chosen). 

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In a simplified example6

: A pool of loans has a par value of $1 00 and the proceeds from the 

securitization of those loans is $ 104. Under premium capture, the $4 above the par value of the 

loans is held back. This is in addition to the $5 of required risk retention, meaning that the 

overall level of risk retained is 8.7 percent (9/104) rather than the prescribed 5 percent (5/1 00). If 

the profit motive is taken off the table, what is the incentive to issue securitizations? 

This requirement is so onerous that, as stated in the Proposing Release, "few, if any, 

securitizations would be structured to monetize excess spread at closing and, thus, require the 

establishment ofa premium capture cash reserve account.,,7 We agree. Left unstated in the 

Proposing Release, however, is what a securitization sponsor that holds premium assets is to do, 

other than to "structure their securitization transactions in a manner that does not monetize 

excess spread at closing"S - or find an alternative to securitization. 

Based upon communications with certain of the Agencies and our review of the Proposing 

Release, we believe that the Agencies intend that in a securitization of a premium pool, the 

sponsor would artificially increase the par value of the residual interest by the amount of the 

premium - thus avoiding the funding of a cash reserve account equal to the amount of the 

premium, but forcing the sponsor to retain (or try to find a buyer for) a residual interest having a 

par value representing the premium. It is also possible that in some cases the sponsor could 

increase the value of other ABS interests in addition to the residual, although it is not clear how 

this would work in practice. We fail to see why the credit risk retention rules should force a 

sponsor to artificially adjust the values of securitization interest, or compel sponsors to structure 

transactions in certain ways. The law requires the retention of 5 percent of the risk of a 

transaction, and that is what the implementation rules should use as a target. Regulations should 

not add completely new and unconsidered structures to the law when all market participants have 

expressed concern over the viability of the market under such a structure. Once again, the 

sponsor would be economically disadvantaged for purposes that appear to be outside the scope of 

congressional intent. 

The economic result of this approach would be so severe that, if it were implemented through the 

risk retention rules, many sponsors would avoid securitization. The premium capture provisions 

appear to be based on a view that all excess spread belongs in the residual interest, and that to 

allocate any excess interest cash nows in another way inappropriately devalues the residual 

interest. We believe that this is a misconception. 

6 Please note that the exact meaning of the tenn "par value", as used in the Proposing Release is unclear. This complicates the 

analysis ofPCCRA and many other provisions of the rulemaking. See SIFMA June 10, 20 J 1 letter on behalf of sponsor and 

issuer members at 15, and SfFMA April 21. 2011 letter on this specific issue of the definition of par value. 

7 Proposing Release. 76 Fed. Reg. 24090 at 24113. , !d. 

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Accounting and Capital Implications of PCCRA will Further Weaken the Ability of Private 

Capital to Fund Mortgage Lending 

We also note, as mentioned in the first paragraph of this section, that the PCCRA provisions will 

interact with other regulations and rules - most importantly accounting rules. We believe that the 

requirement for a fully subordinated premium capture cash reserve account in addition to the 

amount of credit risk required to be retained under the proposed rules could prevent sponsors 

from achieving sale treatment for assets transferred to securitization vehicles in transactions that 

otherwise would qualify for sale treatment under U.S. accounting rules. This would drive 

increases in capital requirements and would further weaken the incentive to securitize as well as 

further weaken the ability of securitization to fund mortgage credit origination. 

A securitizer's determination of the financial accounting and reporting to accord a securitization 

transaction can be a complex exercise, requiring an analysis of the application of both 

consolidation and sales accounting standards, in that order. A securitizer must determine whether 

it is required to consolidate the special purpose (securitization) entity to which the assets were 

transferred, by applying the relevant guidance in the FASB's Accounting Standards Codification 

CASC") Topic 810, Consolidation. If the securitizer must consolidate the securitization entity, 

the transferred assets will continue to be reported in the securitizer's financial statements and 

continue to attract capital requirements for that institution. 

In those cases in which a sponsor retains 5 percent of the ABS interests and is obligated to fund a 

subordinated cash reserve account in the amount of any premium capture, the effect of the 

premium reserve account is akin to imposing an incremental, de facto horizontal risk retention on 

the securitizer. Thus, the securitizer's obligation to fund losses under the premium capture 

arrangement, alone or in combination with other retained interests, would likely require the 

securitizer to consolidate the securitization entity. 

An extended discussion of the potential consequences stemming from a securitizer's 

consolidation of a securitization entity - in contrast to the transaction achieving off-balance 

sheet/sales accounting treatment with respect to the transferred assets is beyond the scope of 

this testimony. However, suffice it to say that ongoing "on-balance sheet" reporting of 

securitized assets may, importantly for a regulated financial institution, require the entity to 

maintain more regulatory capital to support the on-balance sheet assets. This will further limit 

the ability of private capital to fund mortgage lending and reduce the availability of credit to 

consumers. 

Consequences of PCCRA for Consumers 

Unless withdrawn, the premium capture provisions would likely discourage many securitization 

transactions, unnecessarily change some lenders' origination practices, and increase the cost of 

some consumer loans. 

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The premium capture provisions would have the harshest impact on residential and commercial 

mortgage securitization markets. The commercial market has recently begun to recover, but the 

residential mortgage securitization market, outside of the GSEs, has yet to show much life. The 

premium capture provisions could severely damage the recovery of commercial markets and 

inhibit any recovery in residential securitization markets. 

The premium capture rules do not appear to consider the costs of origination or otherwise 

account for a securitizer's cost basis in the pool assets. All that matters under the premium 

capture provisions as proposed is whether gross proceeds, or deemed gross proceeds, exceed the 

requisite percentage of par value. The fact that a securitizer may have paid a premium for the 

pool assets does not appear to excuse the securitizer from being obligated to subordinate the 

premium, either in a cash reserve account or in the residual interest. Tn such circumstances, there 

may be very little market for premium loans. 

Lenders could react to the premium capture provisions by changing origination practices to avoid 

above-market rates and instead charge borrowers higher points and fees. Mortgage lenders could 

be reluctant to grant rate locks to prospective borrowers due to the risk that market rates move 

lower and the lender is left with a premium loan that is expensive to securitize. 

It is not clear to us whether the premium capture provisions are intended, in whole or in part, to 

indirectly limit certain lending practices. If such is the case, we suggest that these matters are 

more appropriately handled directly in regulation of consumer lending. 

The Agencies should Withdraw PCCRA and Re-propose the Risk Retention Rules 

We note that our PCCRA concerns were echoed in a Special Report9 authored by Mark Zandi 

and Christian deRitis of Moody's Analytics that stated: "As a result of the way the premium 

capture rule is stated, the mortgage rate impact to borrowers would be significant- on the order 

of an increase of I to 4 percentage points depending on the parameters of the mortgages being 

originated and the discount rates applied ... Y ct the consequences ofthe rule as written could 

significantly impede the return of private securitization markets and permanently cement the 

government's role in housing finance." 

We urge the Agencies to take the time needed to carefully reevaluate the proposed rules, perform 

a risklbenefit analysis of the rules and their potential effects, and repUblish the rules in proposed 

form in order to provide a fair and reasonable opportunity for public comment. In doing so, the 

premium capture provisions should be withdrawn; they appear to be related more to limiting 

profitability and indirectly regulating lending practices than to risk retention. The provisions 

9 Moody's Analytics, Special Report - A Clarification on Risk Retention, September 22, 2010, pages 2-3. 

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would also impose an undue economic burden on securitizations, potentially further limiting 

access to credit for many borrowers. 

3. Title VII - Derivatives Regulation 

We are supportive of the goals of Title VII derivatives regulation, namely improving oversight of 

over-the-counter (OTC) derivatives markets and reducing systemic risk. In fact many aspects of 

swap market regulation, such as greater transaction reporting and central clearing were well 

underway before the Dodd-Frank Act was passed into law. As with all regulation, our concerns 

focus on making sure that requirements are workable, and that the benefits as measured by how 

well such rules accomplish their stated purposes - outweigh the costs. Those costs, after all, are 

borne by market participants (financial and commercial entities) who may find it more difficult 

and expensive to access credit or other financial resources, such as hedging, that are vital to risk 

management functions. 

We have outlined our concerns through written comments on rules pertaining to many aspects of 

Title VII rulemaking. 10 In particular, we believe rigorous cost benefit analysis is not only 

necessary in determining whether a particular rule is on balance beneficial; it is also crucial in 

evaluating alternative approaches to accomplishing regulatory goals. We have also urged 

regulators to take care to avoid unintended costs and market impacts by carefully sequencing and 

phasing in the implementation of rules by category. type of participant, asset class and products 

within asset classes. The idea that such fundamental building blocks of a new market structure, 

such as, but not limited to: the establishment of, and reporting to, swap data repositories; the 

establishment of central counterparties and determinations of mandatory clearing requirements; 

the establishment of swap execution facilities (SEFs) and mandatory trading requirements; the 

registration of swap dealers and major swap participants; real time reporting; internal and 

external business conduct requirements; and capital and margin requirements can all be 

implemented at virtually the same time, and without benefit of gaining crucial insights as each 

block is put into place, is highly unrealistic at best and reckless at worst. 

But that is not the end of the story; regulators have spoken of cooperation both at home and 

globally in OTC derivatives rulemaking, but we see very little real evidence of actual 

coordination. Except for the two definition rule sets, where there exists a statutory requirement to 

conduct joint rulemaking, there is scant evidence that there will be harmonized rules for swaps 

and securities-based swaps, even though there are business Jines in which the line between the 

two products is an arbitrary distinction such as "narrow-based" vs. "broad-based" indexes. These 

products only differ because one is based on nine or fewer underlying reference assets and the 

other ten or more; they are traded by the same person or group whose counterparties are also the 

!O http://w~vw.sifma.org/issueslregulatorywrefonn/otc-derivatives/activityl 

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same, and yet they will likely have to comply with different business conduct requirements and 

execute on different types of SEFs. For example, the SEC states in its proposed rules for SEF 

core principles that the regulatory approaches taken by the SEC and CFTC may differ due to 

"differences between the markets and products that the [SEC] and CFTC currently regulate." As 

noted above, many market participants will engage in both swaps and security-based swaps and 

thereby will be subject to both regulatory regimes. Requiring such market participants to execute 

similar types of transactions in dissimilar ways on separate trading platforms will add significant 

administrative and compliance costs and risks, generating unnecessary confusion to no one's 

benefit. II Both agencies should be particularly careful in their approach towards SEF rules, and 

rules related to central trading and clearing, such as block trade size thresholds, as a robust and 

flexible environment is crucial to developing liquid swap markets. 

The CFTC and SEC should also continue to evaluate the impact of amendments to Rules 

4.5/4.13 and how Registered Investment Companies that must now register as Commodity Pools 

will be subject to redundant, and in some areas conflicting, SEC and CFTC requirements. The 

lack of consistency between the two regimes will have a number of adverse consequences, 

including increased costs for investors and unnecessary, and potentially confusing, forms of 

disclosure and reporting to investors. 

Another area where lack of coordination is likely to have costly consequences is the cross border 

application of Title VI! rulemaking. If improperly drawn, as the initial reading of the recently 

proposed CFTC guidance appears to be, extraterritorial application of U.S. regulations could 

create two sets of rules for swap regulation and could isolate the U.S. swap market from the 

global market, of which it is currently a major part. If transacting with a U.S. entity (financial 

intermediary, financial end user and commercial end user alike) puts non-U.S. entities at risk of 

becoming subject to U.S. regulation globally, it is clear that such non-U.S. entities will not 

transact with U.S. entities, denying U.S. firms access to those global markets. This will raise the 

cost of hedging, for example, and if the cost is prohibitive, will lead U.S. firms to decide not to 

hedge. 

The recently proposed CFTC cross border guidance is complex, expansive in scope, and highly 

prescriptive. At this time we are not at all sure that the terms of so-called substituted compliance 

-which theoretically should allow market participants in other well regulated markets to rely on 

their home market regulation actually would work in practice. 

This "substituted compliance" process will be different than the "mutual recognition" model and 

would require the CFTC individually review the rules of foreign nations. We are concerned 

generally by determinations of cross border equivalence that are not outcomes based, and are 

11 SIFMA AMG letter to SEC on registration and regulation of security~based swap execution facilities, April 4, 2011. 

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Invested ill America 

used instead as a tool to export regulations from one jurisdiction to another. As we have noted in 

previous comment letters, if a host country regulator were to extend certain regulations to the 

global entity, the entity would be subject to overlapping and potentially inconsistent regulation. 

In such an event, the non-U.S. entity may decide that the easiest way to comply with each 

jurisdiction's requirements is to register separate entities in many more jurisdictions than it 

otherwise would. This fragmentation of global firms could lead to inefficient results. With 

respect to capital, for example, it would remove the benefits of netting, collateral management 

and centralized risk management, which are key components of systemic risk mitigation. 12 

Further, we believe the CFTC's cross border application approach is flawed in that the 

Commission chose to do so in the form of guidance as opposed to a rule, and apparently, without 

sufficient coordination with the SEC. By failing to put forth a rule, the CFTC avoided 

conducting any cost benefit analysis and formal comment by affected parties. We believe a more 

holistic, rules-based approach, as we understand the SEC is likely to do after all of the Title VII 

rules have been proposed, is a more prudent approach. 

We have long supported a more genuinely cooperative and harmonized approach to cross border 

rulemaking, such as mutual recognition or global standard setting. We believe these are more 

appropriate tools for developing a coherent regulatory structure, providing regulators and the 

regulated with substantial efficiencies while avoiding placing unnecessary burdens on markets, 

creating barriers to market entry, distorting competition or encouraging regulatory arbitrage. 

4. Section 165(e) Single Counterparty Credit Limits 

STFMA supported the inclusion ofa single counterparty credit limit in Section 165 of the DoddFrank Act because our members have been using internal models for many years to measure and 

control such exposures. SIFMA, however, does not support the Federal Reserve Board's 

proposal (the "FRB proposal") in its current form because the proposal would needlessly reduce 

liquidity in the financial system and dampen economic activity. The FRB proposal would result 

in the need for extraordinary adjustments of relationships among market participants that are 

unnecessary, unwise, potentially destabilizing and, in certain instances, unsupported by the 

statute or congressional intent. 

Dodd-Frank instructed the Federal Reserve to promulgate regulations prohibiting covered 

companies from having a credit exposure to any unaffiliated company in excess of 25 percent of 

the covered company's capital stock and surplus. "Capital stock and surplus" is calculated by 

adding the covered company's total regulatory capital to its excess loan loss reserves. The Act 

defines credit exposure to an unaffiliated company as: 

12 SIFMA letter to the Agencies on the extraterritorial application of Title VII regulations, February 3, 2011. 

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Invested in America 

• All repos, reverse repos, securities borrowing, and lending transactions with the 

company; 

• All guarantees, acceptances, or lettcrs of credit issued on behalf of the company; 

• All purchases of or investments in securities issued by the company; 

• Counterparty credit exposure to the company in connection with a derivative transaction; 

and 

• Other similar transactions that the Federal Reserve designates by regulation. 

The Federal Reserve has proposed a two tiered rule to implement Section 165(e): 

• Tier 1: No covered company may have an aggregate net credit exposure to any single 

unaffiliated counterparty in excess of25 percent of the covered company's capital stock 

and surplus. 

• Tier 2: No covered company with $500 billion or more in assets (major covered 

company) may have an aggregate net credit exposure in excess of 10 percent to any other 

major covered company or to any foreign banking organization with $500 billion or more 

in assets. SIFMA believes the Federal Reserve did not make a case for this part of the 

FRB proposal. 

This proposal requires large banking organizations to use new methodologies for measuring 

credit exposures that ignore their current approved internal methodologies. The new method is a 

crude measure that overstates exposures under any reasonable calculation methodology by a 

significant multiple. The effect of the new methodology for measuring credit exposure will be a 

reduction in market liquidity that may have a significant effect on markets more broadly. 

In particular, it would: 

force banking organizations away from CCPs; 

discriminate against foreign government debt; 

• deny the benefits of double default protection; 

limit the use of collateral posted against certain credit transactions; and 

• not allow firms to fully net some exposures. 

Central Counter-Parties (CCPs) 

The Dodd-Frank Act contains numerous provisions that encourage firms to use CCPs, to 

improve transparency and increase the oversight of the swaps market. The FRB proposal, 

however, requires firms to limit their exposures to CCPs like all other counterparties to the same 

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Invested ill America 

25 percent cap. Because of the limited number of CCPs and the high barriers to establishing a 

CCP that would meet regulatory requirements, a firm might hit the cap with respect to all 

available CCPs. This may lead firms to create more customized swaps that may be cleared 

bilaterally, avoiding CCPs altogether. This creates a perverse incentive for banking organizations 

not to use CCPs for their derivative transactions. This runs against the policy in Title VlI to 

improve transparency and the use of CCPs. 

Non-US Government Bonds 

When a firm holds foreign sovereign debt, including as collateral, the firm must count it as an 

exposure to the foreign government. This discriminates against other government debt in favor of 

US Treasury bonds as collateral. This will certainly impact the liquidity of foreign debt markets. 

Additionally, these limits will most affect US firms doing business overseas, where they must 

frequently use the local non-US government debt as collateral for transactions. 

Double Default (Substitution) 

If a firm purchases credit protection from a third-party with a direct counterparty, the firm must 

count these as credit exposures to the third-party protection provider, and not the direct 

counterparty. This ignores the double default protection that such protection provides. "Double 

default protection" simply means that's it is less likely that both the third-party and the covered 

firm or the direct counterparty would default at the same time. The FRB proposal ignores the 

widely recognized benefits of double default protection and results in a significant overstatement 

of exposure that is concentrated in the protection providers. Because there are relatively few 

providers with the infrastructure and capital that market participants expect, the effect of this 

requirement may be to limit the availability of these important credit risk management products. 

The rule should give banks credit for the double default protections that third-party credit 

protection provides. 

Collateral 

The rule does not give a firm credit for the full value of all collateral posted against a derivative 

transaction. This is an inaccurate measurement of a firm's real credit exposure, and the rule 

should give greater credit for the vital risk-managingfunction that collateral provides. 

Netting 

The FRB proposal does not allow firms to fully net, or off-set, their derivative positions with 

counterparties. This results in an inaccurate measurement of a firm's real credit exposure, and the 

rule should provide for a fit/ler recognition of netting. 

Alternatives 

SIFMA, along with The Clearing House, the American Bankers Association, The Financial 

Services Roundtable and the Financial Services Forum suggested several alternative ways the 

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ImJested ill America 

Federal Reserve could implement the single counterparty credit limit required in the Dodd-Frank 

Act. First, the Federal Reserve could amend its proposal to fix the problems as noted above: 

exempting high quality non-U.S. sovereigns, individuals, CCPs, and allowing netting, the use of 

the full value of collateral and double default protection. A second alternative would be to allow 

firms to use a "stressed" version of the internal models they currently use to measure such risk. 

Thirdly, the Federal Reserve could use a supervisory stress approach which would require a 

covered company to use a replacement cost, calculate in accordance with regulatory capital rules 

for derivative transactions under specific stress scenarios specified by the Federal Reserve. 

The full potential combined impact of financial services regulatory reforms, including the FRB 

proposal, Basel III (both capital and liquidity), Title II of Dodd-Frank, proposed margin 

requirements for swaps (Section 731 of Dodd-Frank) and the Volcker Rule (and related 

regulations currently under consideration by U.S. regulators has not yet been comprehensively 

analyzed and, to our knowledge, no one in the regulatory or academic communities has asserted 

that it has. The reality is that the cumulative effects of the FRB proposal and other rulemakings 

and reforms, which are often individually complex and when considered together amount to an 

incredibly complex mosaic, are almost certain to have unintended consequences and potential 

economic costs, and are likely in some cases to create the potential for actually increasing instead 

of decreasing systemic risks. 

Conclusion 

The United States has taken a more comprehensive approach than any other country to address 

regulatory reform. Although some countries have taken steps to address components of topics 

covered by Dodd-Frank, no country has adopted restrictions comparable to the V olcker Rule or 

adopted legislation or regulations having the scope of Dodd-Frank. There can be no question but 

that substantive regulation has competitive consequences. It is essential that U.S. regulatory 

agencies, in proposing regulations, consider and analyze both the individual aspects and 

combined impact of proposed rules that may place U.S. financial markets at an unwarranted 

competitive disadvantage compared to those countries that have not implemented a comparable 

approach. We urge U.S. regulators to consider and address the interplay among reforms in the 

context of considering individual reforms. Further, regulators should undertake substantial costbenefit analysis to determine what affect such rules may have on the competitiveness of U.S. 

financial markets and the impact on the users of those markets. 

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76114.017

100 Years Standing Up for American Enterprise 

U.S. CHAMBER OF COMMERCE 

Statement 

of the 

U.S. Chamber 

of Commerce 

ON: ''The Impact of Dodd-Frank on Customers, Credit, and Job Creators" 

TO: House Subcommittee on Capital Markets and Government Sponsored 

Enterprises, Committee on Financial Services 

DATE: July 10, 2012 

The Chamber's mission is to advance human progress through an economic, 

political and social system based 011 individual fi:eedom. 

incentive, initiati\-c, opportunity and responsibility. 
71 


76114.018

- 2- FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

WlNw.fmc.com 

Good morning Chairman Garrett, Ranking Member Waters, and members of the 

subcommittee. I am Thomas C. Deas, Jr., Vice President and Treasurer of FMC Corporation 

and Chairman of the National Association of Corporate Treasurers, an organization of 

treasury professionals from several hundred of the largest public and private companies in 

the country. 

Thank you for the opportunity to testify on behalf of the U.S. Chamber of Commerce at 

today's hearing: "The Impact of Dodd-Frank on Customers, Credit, and Job Creators. N 

This is a timely hearing and a unique opportunity to discuss the impact of the DoddFrank Act on the ability of companies like mine to access the financial markets to fuel 

business expansion, job creation, and economic growth. 

We very much appreciate the opportunity to address some of the issues arising from the 

unintended consequences of the Dodd-Frank Act. While we have sought to inform the 

regulators of our concerns, and believe they continue to seek ways to address our 

issues, we appreciate that as with any complicated piece of legislation continued 

Congressional oversight is necessary if we are to avoid economic consequences no one 

could foresee. This is particularly the case for end-users like FMC that were not the 

subject of the Act, but now find ourselves significantly affected by its implementation. 

While the drafters and implementers of the Dodd-Frank Act and other initiatives such as 

proposed money market fund regulations have focused on the financial services 

industry, the impacts are being felt by Main Street businesses as well. Uncertainties 

about aspects of the law we thought were clear, like the derivatives end-user exemption 

from margining and central clearing, harm the ability of companies to manage and 

mitigate risk. The implementation of the Volcker Rule can imperil our ability to raise 

funds from the debt and equity markets. Also, potential money market regulations 

could harm our ability to manage business cash flow and fund short-term borrowings in 

the commercial paper market. 

The effect of all these new rules would be to increase the demands on the capital of 

American businesses, such as to fund derivatives margin accounts or money market 

fund hold-backs, while at the same time making it more difficult and expensive to raise 

that capital. Regulatory uncertainty and complexity can be as concerning for the 

economy as the underlying risks the regulations are meant to address. 

We are concerned that as we enter a period of increasing financial stress as evidenced 

by the continuing European sovereign debt crisis and what seem to be slowing global 

economic indicators, the tools and markets on which we have relied will no longer be as 

-FMC 
72 


76114.019

3- FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299,6000 phone 

215,299,5998 fax 

www.fmc.com 

accessible to us. The prudent reaction to these uncertainties is to hold back in reserve 

financial resources that would otherwise be used to grow our businesses. 

let me take a few minutes to give a more in-depth focus of the effects of the DoddFrank Act and money market fund regulations on Main Street companies. 

Derivatives 

Along with many other U.s. manufacturers and agricultural producers, FMC also uses 

over-the-counter ("OTC") derivatives to hedge business risks in a cost-effective way. We 

are very concerned that several of the proposed derivatives regulations could hamper 

our use of this important tool and adversely affect our global competitiveness. I had the 

valuable experience of negotiating and executing some of the very first OTC derivatives 

- currency swaps - back in 1984. The OTC derivatives market has grown from its 

inception at that time to its current size by offering end-users a degree of customization 

not available in exchange-traded derivatives. FMC and other end-users enter into OTC 

derivatives customized to match the amount, timing, and where necessary, the 

currency, of their underlying business exposures. By matching derivatives to our 

business exposures, we create an effective economic hedge. The value of the derivative 

moves in an equal, but opposite, way in relation to the value of the underlying risk we 

are hedging. let me give you a specific example of how proposed derivatives regulation 

could hamper my company's ability to compete against foreign producers. 

FMC competes very effectively against foreign companies in several markets for our 

crop protection chemicals. For example in Brazil, we have leading positions in sugar 

cane and cotton, developed with significant product and technical support from our u.s. 

operations. To enhance FMC's product offering to Brazilian soybean farmers and 

profitably grow our business there, we offer to sell our agricultural chemicals for use at 

planting time in exchange for an agreed quantity of soybeans at harvest time. We can 

do this because we simultaneously enter into a custom OTC derivative that offsets the 

amount and timing of the future delivery of soybeans by our customers. In a developing 

economy like Brazil, farmers do not have FMC's degree of access to the worldwide 

financial markets. We provide our products to Brazilian farmers on terms that insulate 

them from the risk of changes in future commodity prices and foreign exchange 

movements in the price of the Brazilian real against the U.S. dollar. In the Brazilian 

soybean market, we compete against international producers based in Germany, 

Switzerland, and Australia, as well as local Brazilian companies. Because of significant 

differences in the way derivatives regulations are being implemented in Europe and 

elsewhere outside the United States, FMC and other u.s. companies could be put at a 

-FMC 
73 


76114.020

-4 FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

competitive disadvantage. On July 7'h, the G-20 international committees coordinating 

derivatives regulation published their recommendation that non-financial end-users 

that are not systemically important be exempted from mandatory margining and central 

clearing. If the u.s. regulations remain out of step with those of our international 

trading partners, American businesses will be hurt. 

Competitive Consequences of End-User Margining 

At the time of passage of the Dodd-Frank Act, we understood from the legislative 

language as well as from letters and colloquies by the principal drafters, that end-users 

would be exempted from any requirement to post cash margin. However, rules 

proposed last year would give the prudential regulators the authority to impose a 

framework with many complicated parameters, each of which is subject to future 

adjustment, which could result in many end-users - regardless of their size - having to 

post cash margin for their derivatives transactions. This proposal and the uncertainties 

it creates represent real challenges to making business decisions about the future. The 

European Union regulators have generally exempted non-financial end-users from 

mandatory margining. They have accepted the argument that end-users, whose 

derivatives activity comprises less than 10 percent of the total OTC derivatives market, 

are not significantly contributing to systemic risk and should be exempt from regulations 

designed for swap dealers. 

At this point, U.s. end-users stili do not know with certainty what their future cash 

margin requirements will be. The U.S. regulators have taken a pair of offsetting 

transactions that match completely, and settle with offsetting cash payments at 

maturity, as does FMC's soybean sale and hedge, and created a new and unwelcome 

uncertainty - that of funding a daily fluctuating cash margin call. While this may be 

appropriate for swap dealers making a market in derivatives or those using derivatives 

for speculative purposes, its application to end-users hedging underlying business 

exposures creates an imbalance that is economically burdensome to end-users. 

Cost of End-User Margining 

FMC's derivatives are executed with several banks, all of which are also supporting our 

company through their provision of credit lines. None of these banks require FMC to 

post any form of collateral to secure their credit support. Our banks also do not require 

FMC to post cash margin as collateral to secure mark-to-market fluctuations in the value 

of derivatives. Instead they price the overall transactions to take this risk into 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. 
74 


76114.021

- 5- FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

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 meaningfully to systemic risk 

because our use of derivatives constitutes prudent, risk mitigating hedging of underlying 

business transactions. Forcing end-users to put up cash for fluctuating derivatives 

valuations means less funding is available to grow our 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 to operate and grow 

our 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 a 3 percent initial margin requirement. Though the rule 

proposed by regulators is not specific as to the precise amount of collateral, in our world 

of finite limits and financial constraints, any cash margin requirements represent 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. 

We have heard that the regulators may propose that purely internal trades, for example 

between a parent company and a wholly owned subsidiary, should be subject to the 

whole range of real-time reporting, margining, clearing, and other requirements 

applicable to swap dealers. Since these inter-affiliate trades, entered into in many cases 

for internal accounting and cost-allocation purposes, do not present any systemic risk, 

they should be exempt. FMC and many other Main Street companies would have to 

transfer risk management activities using derivatives, currently conducted effiCiently at 

~MC 
75 


76114.022

-6 FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

corporate headquarters, into each subsidiary, once the required information systems 

are developed, tested and made operational. This could make derivatives-based risk 

management more difficult and prohibitively more expensive. 

Summary of Derivatives End-Users' Concerns 

Let me take a moment to summarize some of our principal concerns with the 

implementation of derivatives regulation: 

• First, we are concerned that the regulations have imposed an uncertain 

framework for cash margin on end-user trades, potentially 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 actual loss experience of the specific type of derivative. The unintended 

consequence of excessive 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. 

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. 

I will note that in general those charged with the responsibility of drafting derivatives 

regulations have been very forthcoming and open in soliciting input from end-users; 

however, the end-user exemption we thought was clear is now uncertain and several 

important rules have not been finalized. We support legislation to create a true 

exemption from margin requirements that would apply to all end-users. The 

consequences of getting derivatives regulation wrong will be borne by American 

business and ultimately our fellow citizens. 

..Me 
76 


76114.023

- 7-

Volcker Rule 

FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215299.6000 phone 

215.299.5998 fax 

www-fmc.com 

The broadness and ambiguity surrounding provisions of the Volcker Rule-a regulation 

spread out over five agencies dealing with practices the regulators have stated that they 

themselves don't fully understand is likely to have a chilling effect on those activities 

that are at the heart of capital-raising activities for American companies. A 

misapplication of the Volcker Rule can harm u.s. competitiveness, capital efficiency, and 

financial stability. 

Main Street companies like FMC rely on financial institutions for access to the capital 

markets and to mitigate financial risks. u.S. businesses use the debt and equity markets 

to fund their long-term capital needs. While the market-making and underwriting 

exceptions to the Volcker Rule attempt to recognize this fact, the inability to define 

these practices gives us concern about the ability of regulators to enforce the Volcker 

Rule. Additionally, a potential regulatory scrutiny on a trade-by-trade basis could make 

financial institutions reluctant to engage in permissible activities, harming the ability of 

companies to raise capital. 

Impaired market liquidity and reduced access to credit 

We are concerned the Volcker Rule could impair the ability of banks to function as 

market makers. FMC's most recent bond issue, $300 million of senior notes due in 

2022, was underwritten by a syndicate made up of banks that also support us through 

their commitment of $1.5 billion of credit lines. As underwriters of our bond issue, 

these firms take on the responsibility to hold our bonds in inventory if necessary to 

make an orderly market for the issue as it is launched. However, the Volcker Rule could 

significantly constrain this function by dictating how financial institutions should 

manage their holdings of our bonds. The Volcker Rule also could constrain underwriting 

activities if the retention of bonds in a bank's portfolio is determined to constitute 

proprietary trading. 

A conservative application of the Volcker Rule could force financial institutions either to 

raise their fees for these activities, or to become risk adverse and not engage in them at 

all. This could reduce the flow of capital to Main Street companies, while diminishing 

liquidity in our capital markets. If financial institutions can no longer hold inventory or 

are unwilling to do so it will be more difficult for FMC to raise capital. 

With reduced market liquidity, transaction spreads widen, risks increase, and price 

changes become more volatile. To compensate for these new risks, investors will 

demand higher rates. We have estimated that on FMC's most recent bond issue, the 

-FMC 
77 


76114.024

- 8- FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

additional cost over its ten-year life could amount to $15 million - a direct subtraction 

from funds we would otherwise be able to invest for growth. 

Restricted trading in proper and allowable businesses 

The originally proposed Volcker Rule is inherently complicated and forces regulators to 

define the intent of a trade. At the worst extreme, financial institutions could be 

required to prove the intent of each trade. This cannot be done in any reliable or 

consistent way. One entity's proprietary trade is another entity's market-making 

activity. Proprietary trading defies a symmetrical definition. 

The complexity of the Volcker Rule will force financial institutions to adopt the most 

conservative interpretation of the rule and the least favorable intent of any trade. With 

the burden of proof on the banks, the compliance costs could become prohibitive. The 

net result will likely be the elimination of otherwise acceptable market-making activities. 

This could result in banks exiting or scaling back such routine activities as selling our 

commercial paper, providing cash management sweep accounts and multi-currency 

trade finance. These are services treasurers view as critical tools to execute sound 

financial management. 

Competitive disadvantage for u.s. businesses and financial institutions 

The United States' major trading partners have rejected U.S. requests that they adopt 

analogs to the Volcker rule. This puts American bUSinesses, like FMC, and U.S. financial 

institutions at a disadvantage. By eliminating a core revenue stream from U.S. banks, 

the Volcker Rule would effectively reduce the ability for u.s. banks to compete and 

grow. Additionally, in order to avoid the territorial jurisdiction of the Volcker Rule, 

foreign financial firms may retreat from the U.S., further depriving American businesses 

of capital and degrading the ability of U.S. regulators to oversee and regulate financial 

activity. 

Finally, most companies will still have financial risks that need to be managed. U.S. 

business could be forced to turn increasingly to foreign banks in overseas markets. This 

could have the unintended consequence of simultaneously weakening U.S. banks while 

strengthening foreign banks. 

Increased compliance costs for Main Street businesses 

The reach of the Volcker Rule can extend to non-financial businesses, although they 

present no meaningful systemic risk. For example, many manufacturing companies 

offer financing services to their customers. They may own a commercial or consumer 

finance subsidiary or have a credit card company. These businesses will incur increased 

cf:MC 
78 


76114.025

-9 - FMC Corporation 

1735 Marn.et Street 

Philadelphia, PA 19103 

2152996000 phone 

215.299,5998 fax 

www.fmc.com 

costs and higher compliance burdens. Some will pass these costs on to their customers. 

Others will simply discontinue the financial or card services. In any event, the result is 

higher-cost credit for those willing to pay and less credit for most small businesses and 

consumers. 

Many U.s. companies also engage in activity overseas through joint-ventures. These 

joint-ventures provide unique trading opportunities for American companies to create 

jobs at home and generate positive returns for their investors. Any member of a jointventure that has a Volcker compliance program will force the entire jOint venture to 

have a Volcker compliance program. Therefore, American companies could be viewed 

as a less reliable partner for these types of business activities. 

We at FMC are celebrating our eighty-first year of listing on the New York Stock 

Exchange. When we came to the exchange in 1931 it was to access the largest and most 

liquid source of equity capital in the world. We have benefited from over a thousandfold increase in our equity market capitalization since then. We have also utilized the 

U.S. public debt markets where investors and borrowers have come together with an 

efficiency unparalleled in the world. We ask your help in assuring these markets remain 

viable to support continued growth of Main Street companies like ours. 

Money Market Funds 

Other critical financial regulations being proposed in parallel with the Dodd-Frank Act 

affect money market funds, which are under scrutiny for designation as being 

systemically risky by the Financial Stability Oversight Council. These funds playa critical 

role in the U.S. economy because they work well to serve the investment and shortterm funding needs of businesses across America. Corporate treasurers rely on money 

market funds to manage cash efficiently and affordably. Cash balances for companies 

fluctuate on a daily, weekly, monthly or other periodiC basis, and depending on the 

nature of the business, some companies' cash levels can swing widely - from hundreds 

of dollars to hundreds of millions of dollars. A corporate treasurer's job is to ensure that 

there is sufficient liquidity to meet working capital needs, and money market funds are 

the most liquid, flexible and efficient way to manage short-term investments. They are 

also an important source of short-term funding through their purchases of companies' 

commercial paper. 

Money Market Funds as an Investment 

There are many reasons why money market funds are an attractive investment choice 

for businesses. For companies with cash surpluses, money market funds offer a stable 
79 


76114.026

-10 - FMC Corporation 

1735 Market Street 

PhHadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

wwwJmc.com 

$1.00 price per share that allows for ease of accounting for frequent investments and 

redemptions. They also offer market rates of return for cash that may sit idle, earning 

no interest in a commercial bank account. Moreover, investments in money market 

funds can be made and redeemed on a daily basis without fees or penalties, providing 

the liquidity needed to manage fluctuating working capital needs. 

These funds also offer a diversified and expertly managed short-term investment 

vehicle. This allows companies to invest in one fund while diversifying exposure to a 

number of underlying investments. Additionally, money market funds perform a credit 

analysis of their underlying assets and report this in a transparent way that facilitates 

our own credit analysis of the fund. Corporate treasurers are professional stewards of 

our companies' cash and we take our responsibility seriously. Money market funds 

allow significant cash inflows and outflows to be managed efficiently and effectively 

with the risk spread across a diversified portfolio. 

Money Market Funds as a Financing Source 

Money market funds also represent a major source of funding to the corporate 

commercial paper market in the U.S., purchasing approximately 40% of all outstanding 

commercial paper. In April 2012, we estimate that U.S. money market funds held 

approximately $380 billion in commercial paper. This source of financing is vital to 

companies across America as commercial paper is an easy, affordable way to obtain 

short-term financing. Without money market funds, the commercial paper market 

would be substantially less liquid, forcing companies to turn to more expensive means 

of financing. Higher financing costs will create a drag on business expansion and job 

creation. 

For example, a typical commercial paper issuer can fund its day-to-day working capital 

needs through flexible borrowings of maturities matched to the exact number of days 

they require. The least expensive bank borrowings are less flexible by being limited to 

maturities of one, two, three, six or twelve months. Bank borrowings with flexibility to 

be repaid daily, like commercial paper, are only available at significantly higher primebased interest rates. 

2010 Changes to Rule 2a-7 

Before discussing possible further changes in the regulation of money market funds, it is 

important to emphasize that significant changes have already been implemented. Just 

two years ago, the U.s. Securities and Exchange Commission made enhancements to 

money market fund regulation through major revisions to its Rule 2a-7. These changes 

strengthened money market funds through more stringent liquidity requirements. 

af"MC 
80 


76114.027

-11- FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

Funds are now required to meet a daily liquidity requirement such that 10 percent of 

the assets turn into cash in one day and 30 percent within one week. This large liquidity 

buffer makes it unlikely that large redemption requests-even at the rate seen in the 

2008 financial crisis-would force a fund to sell assets at a loss prior to their maturity. 

Despite the fact that the 2010 reforms have just been implemented, advocates of 

further regulation have focused much attention on three significant structural changes 

to money market funds-redemption restrictions, a floating NAV, and a mandatory 

capital buffer. As discussed below, we believe each of these would have a significant 

negative impact on the ongoing viability of these funds, and also adversely affect the 

corporate commercial paper market. 

Redemption Restrictions 

We are concerned about the SEC's potential implementation of redemption hold-backs 

or other restrictions on our ability to access cash invested in money market funds. 

Some of our NACT member treasurers are already making plans to withdraw funds from 

money market accounts to have full access to their funds and avoid the complexities of 

monitoring simultaneous hold-back positions on multiple transfers into and out of 

money market funds. The more diversification we seek through spreading investments 

across multiple money market funds, the more we proliferate pockets of cash in 

multiple hold-back accounts. The counter to this would be to concentrate investments, 

producing the opposite result the regulators are trying to achieve. 

If corporate treasurers have less efficient access to their cash investments, they would 

be forced to fund working capital needs through higher drawings on their credit facilities 

or issuing additional commercial paper, incurring additional costs. 

Floating Net Asset Value 

Treasurers are also concerned by the proposal to establish floating net asset values 

(NAVs) for money market funds. Most treasury workstations built for managing 

corporate cash do not have accounting systems in place to track NAVs on each transfer 

into and out of money market funds. They would also have to be modified to track 

short-term capital gains and losses for income tax purposes. Treasury workstations 

would need to be upgraded to accommodate these changes, and that investment would 

significantly lag behind the timing of implementing floating NAVs. As a result, corporate 

treasurers would likely withdraw money market fund investments until the systems 

issue is solved. We fear that these and other withdrawals will cause many money 

market funds to wind down significantly limiting this $2.6 trillion investment alternative. 
81 


76114.028

-12 - FMC Corporation 

1735 Market Street 

Philadelphia, PA 19103 

215.299.6000 phone 

215.299.5998 fax 

www.fmc.com 

In addition, many companies have investment policies precluding them from investing in 

variable-rate instruments. We believe the cost-benefit trade-offs for the proposed 

change to a floating NAV are not justified. 

Capital Buffer 

One other proposal that the Securities and Exchange Commission has publicly discussed 

is the implementation of some type of capital buffer in an attempt to protect against 

losses. A capital buffer would have to be funded by contributions from the fund's 

sponsor. With the Federal Reserve continuing to target very low interest rates, many 

funds would be forced to cease operations, leaving fewer choices for investors. 

Additionally, some costs may be passed on to investors. If the capital buffer is built up 

over time by allocating some of the fund's yield to the buffer, it would take too long to 

build the necessary buffer to protect against losses. Similarly, the creation of a 

subordinated class of shares to provide the buffer would require additional returns to 

be paid to those shareholders, and in our near-zero interest rate environment, this 

could eliminate any remaining returns for investors. We fear increasing fees or reducing 

yields would be likely to deter many investors, including corporate treasurers, from 

investing in money market funds. 

The cumulative effect of the proposed changes will drive money market fund investors 

to bank deposits, concentrating risk in a sector where over the past 40 years there have 

been 2,800 failures costing taxpayers $188 billion. 

Conclusion 

Thank you again for the opportunity to testify today on these important issues. We are 

very concerned that the lack of a clear end-user exemption from posting cash margin for 

derivatives, the application of an overly complex Volcker Rule, combined with 

regulations that could destroy money market funds will result in burdens on Main Street 

companies that will limit their growth and harm their international competitiveness. 

We can and should take the time to get this right, because if we don't, American 

businesses, economic growth and job creation will suffer as a result. 

I would be happy to respond to any questions you may have. 

cmFMC 
82 


76114.029

American 

~SfCU5RmZAlloN = FORUM" 

Statement of: 

Tom Deutsch 

Executive Director 

American Securitization Forum 

Testimony before the: 

House Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Public Hearing on: 

The Impact of Dodd-Frank on Customers, Credit, and Job Creators 

July 10,2012 

One Wond Rnancial Center, 30th Floor. New York, NY 10281 • 212.412.7100 

Columbia Center. 1152 15th Street, N.W., Suite 100. Washington, D.C, 20005-1706.202.400.3600 

www.americansecuritization.com 
83 


76114.030

ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 1 

TABLE OF CONTENTS 

L INTRODUCTION AND EXECUTIVE SUMMARY ......................................................................... 2 

a. THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT OF 

2010 (DODD-FRANK) ................................................................................................. 4 

II. THE STATE OF THE SECURITIZATION MARKET .................................................................... 7 

III. RISK RETENTION ................................................................................................................... 8 

a. PREMIUM CAPTURE ................................................................................................... 8 

h. FAILURE TO INCORPORATE MARKET PRACTICES ...................................................... 8 

c. COMPETING REGIMES ................................................................................................ 9 

d. THE QRM DEFINITION AND LEVELING THE Pu YING FIELD .................................... 9 

IV. QM AND ABILITY-TO-REPAY ................................................................................................ 9 

V. ROLE OF THE GSEs GOING FORWARD ............................................................................... 10 

a. CURRENT GSE MARKET INEFFICIENCIES AND A POTENTIAL SINGLE SECURITY .... 11 

VI. ORDERLY LIQUIDATION AUTHORITy .................................................................................. 11 

VII. RATING AGENCY REFORM ................................................................................................... 13 

a. FRANKEN AMENDMENT STUDY & RULE 1 7G-5 ........................................................ 13 

h. THE REPEAL OF RULE 436(G) ................................................................................. 13 

VIII. VOLCKER, CONFLICTS OF INTEREST, DERIVATIVES .......................................................... 14 

a. VOLCKER RULE ........................................................................................................ 14 

h. CONFLICTS OF INTEREST IN SECURlTIZATlON ......................................................... 14 

c. REGULATION OF DERIVATIVES ................................................................................ 14 

IX. CAPiTAL ................................................................................................................................ 15 

a. SECTION 939A ......................................................................................................... 15 

h. BASEL 2.5, III .......................................................................................................... 16 

X. CONCLUSION ........................................................................................................................ 17 

EXHIBIT A 
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76114.031

ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 2 

I. Introdnction and Executive Summary 

Chairman Garrett, Ranking Member Waters, and distinguished Members of the 

Subcommittee, I thank you for this opportunity to testify here before you today on behalf of the 

330 member institutions of the American Securitization Forum. l 

In the testimony that follows, we address in detail the key regulatory initiatives arising 

out of Dodd-Frank and other legislative and regulatory initiatives that the entire scope of ASF's 

membership has been focused on, while simultaneously operating to extend credit to consumers 

and businesses. For each of these initiatives, we provide Internet hyperlinks to the thousands of 

pages of comment letters that we have submitted to help U.S. and international regulators avoid 

negative impacts to the credit markets resulting from unintended consequences of the myriad of 

rulemaking proposals. 

But before we address the detailed issues, we focus first on some of the key macro 

challenges facing the private securitization markets. These markets currently supply hundreds of 

billions of dollars in Main Street credit to the economy each year for, among other things: 

consumers to buy houses, cars, motorcycles and college educations; farmers to buy tractors and 

equipment; and businesses to expand their franchises and physical plants. These securitization 

markets effectively ship mass quantities of long-term saved capital from pension funds, mutual 

funds, insurance companies and banks into individually tailored loans to Main Street consumers 

and businesses. Given the historical shift worldwide of savings patterns, the banking sector 

simply cannot supply enough capital directly to credit seekers. Instead, securitization in its 

simplest form links up savers with everyday Americans looking to borrow. 

As an outgrowth of the financial crisis though, many have focused on securitization as an 

ailing patient that needs heavy doses of regulatory medication to recuperate. ASF has strongly 

agreed that some treatment has been necessary to make appropriate and tailored reforms. First, 

through ASF's Project RESTART2

, we have spent considerable effort ramping up transparency 

for investors by developing model templates for loan and grouped-level standardized disclosure 

for various asset classes and also to better aligning incentives between issuers and investors by 

developing model repurchase provisions and representations and warranties. Second, we have 

supported appropriate regulations for risk retention, rating agency reform, conflicts of interest 

and regulatory capital standards that would yield beneficial effects on the markets and the 

broader economy. 

1 The American Securitization Forum is a broad-based professional forum through which participants in the U.S. 

securitization market advocate their common interests on important legal, regulatory and market practice issues. 

ASF members include over 330 firms, including issuers_ investors, servicers, financial intermediaries, rating 

agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in 

securitization transactions. ASF also provides information, education and training on a range of securitization 

market issues and topics through industry conferences, seminars and similar initiatives. For more information about 

ASF, its members and activities, please go to www.americansccuritization.com. 

2 Additional details and the key deliverables of ASF Project RESTART may be found on our website at 

www.americansecuritization.comfrestart. 
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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 3 

But we have passed the point where heavy prescnptlons of various regulatory 

medications have healing effects. Instead, we strongly urge policy makers to examine closely 

the aggregate and interactive effect of the myriad of 'treatments' being administered/ as they are 

becoming poisonous by being injected in aggregated doses, the interactive effects of which have 

not been thought through. In effect, the poison to the market is in the dosage. While DoddFrank may have endeavored to improve the asset-backed securitization process, the layers upon 

layers of regulation promulgated thereunder will, in the aggregate, result in substantial cost that 

will ultimately impede securitization and increase the cost of credit for consumers and businesses 

alike. 

The manifestations of these aggregate and interactive effects are as follows: 

I. Straight-forward products like auto and equipment-backed securitizations, whose 

performance was strong across the board through the entirety of the financial crisis, are 

now facing extraordinary compliance challenges with a complex web of expansive policy 

initiatives; 

2. Unintended interactions of various rules will continue to be discovered for years, which is 

causing immense costs in reworking various structures or eliminating products all 

together. The markets would accept these changes if they were constructive and thoughtthrough, but this is occurring without coordination among the rules or analysis of 

potential interplay; 

3. Market participants aren't investing in building platforms. Rather, they're putting their 

skeletal platforms in the deep freeze, particularly for RMBS, because of the tremendous 

uncertainty of the outcome of proposed rules that could very well make those business 

lines loss centers. As a result, significant brain drain out of private-label RMBS 

specialists continues to occur, making the Administration's4 and Congress'S desire to 

bring private capital back into mortgage securitizations more difficult and more 

protracted. For the mortgage market, the complete absence of direction for Fannie Mae 

and Freddie Mac has also kept private industry left to question when or if less than 95%6 

of mortgages will be securitized without effectively a 100% taxpayer guarantee behind it; 

4. Some rules like the premium capture cash reserve account are so lethal to the RMBS and 

CMBS markets that those markets are predicted to become relegated to history books for 

all of those other than a few niche players serving extremely limited segments of the 

market, if that rulc were to be put into place as proposed. The potential impact of such a 

rule on borrowers would be substantial, with interest rates having to rise multiple 

percentage points and rate locks effectively being prevented. 

5. Non-banks and banks are being subjected to further disparate rules causing competitive 

advantages and disadvantages to develop that will inevitably cause exiting of business 

lines based on regulation, rather than on market efficiency or capability; 

3 Please see Exhibit A for a macro overview of the myriad of key initiatives with which the securitization markets 

are grappling. 

4 See http://portal.hud.govihudportal/documents!huddoc?id=housingfinmarketreform.pdf, February 2011. 

S See http://www.gpo.gov/fdsys/pkgIBILLS-112hr3644ih/pdJ7BILLS-112hr3644ih.pdf and 

http://www.corker.senate.gov/public/?a=Files. Serve&File id= 3207 ad 19-86b6-4444-b4 36-eO 16483b67fb. 

6 See http://www.standardandpoors.com!spf/ratings/Positive Housing Newsn} 6 12.pdf at p. 4. 
86 


76114.033

ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 4 

6. Although policy initiatives continue to evolve on a country by country basis, the global 

issuance and purchase of securitizations are forced to comply with new and different 

standards in each jurisdiction. For example, risk retention standards in Europe require 

the investor in ABS to police compliance, whereas in the U.S. the issuer is expected to be 

the compliance monitor with the forthcoming rules; and 

7. Many of the rules in Dodd-Frank, such as the Volcker Rule, were not intended to alter the 

securitization markets, but, in fact, have become the biggest sources of concerns for key 

segments of the market such as ABCP because of overbroad rules and an absence of 

appropriate exemptions. 

a. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 201 0 

(Dodd-Frank) 

The reforms set forth in Dodd-Frank are vast, impacting all corners of the financial 

markets, including retail banking, derivatives, hedge funds, mortgage origination, insurance, 

capital requirements and securitization, among others. Additionally, there were numerous 

provisions targeted specifically at securitization, including risk retention requirements, conflicts 

of interest prohibitions, due diligence standards, and disclosure and reporting requirements. As it 

turns out, however, there are numerous other provisions throughout Dodd-Frank that, whether 

intended or not, will have a substantial impact on securitization. 

Various regulatory agencies have been tasked with implementing the required 

rulemakings, but very few of them have actually been completed. A recent report indicates that, 

as of July 2, 2012, 78.9% of rulemakings with a specified deadline had missed their deadline, 

and only 29.9% of rule makings are complete with final rules.7 

When the rulemakings are ultimately finalized, they will inevitably result in increased 

cost for the securitization and lending markets, which will be passed on to consumers and 

businesses in the form of higher borrowing rates. Alternatively, certain parts of the market may 

disappear entirely, leaving some consumers and businesses without effective access to affordable 

credit. The rulemakings targeting the mortgage market are a great example of how costs will be 

aggregated through layers of regulation on both origination and secondary market activities. We 

review each in tum below. 

Dodd-Frank sought to regulate the origination of mortgage loans by requiring lenders to 

make a determination that borrowers have a reasonable ability to repay the loans and imposing 

substantial liability on lenders and investors for loans that do not comply. It is this risk of 

liability that threatens the functioning of the secondary market, which provides the capital 

necessary to fund mortgages nationwide. Congress recognized this risk, and included the 

concept of a "qualified mortgage" to promote certainty in the secondary market. A qualified 

mortgage would be deemed to meet the ability-to-repay requirement, provide a safe harbor from 

liability for both lenders and investors, and generally promote sound lending. Unfortunately, the 

CFPB appears to be seriously considering employing a subjective standard for determining what 

constitutes a qualified mortgage and a rebuttable presumption of compliance that will result in 

7 See http://www.davispolkcom/fileslPublication/8bc2b I c4-c800-45b 1-8324-

03 81454 f6ceblPresentationlPublicationAttachmentlb9462d4e-Obe9-4eee-9829· 

0455bca61 e9a1July20 12 Dodd.Frank.Progress.Rcport.pdf. 
87 


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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

PageS 

frivolous lawsuits, costing anywhere from $70,000 to $100,000 to defend.8 The very real cost 

associated with this liability risk will cause investors and other secondary market participants to 

require a premium in order to invest in mortgages, resulting in higher borrowing rates. In 

addition, many low and moderate income borrowers, indeed the very segment the law intend to 

protect, will likely be denied access to credit altogether because the resulting risk premium will 

make mortgages prohibitively expensive for this segment of borrowers. 

Dodd-Frank also sought to regulate the capital markets for mortgages, requiring that 

securitizers hold 5% of the credit risk of each loan securitized. The risk retention rules enacted 

by Congress will prove to be costly for consumers, but the concept will not be prohibitive if 

implemented properly. However, the regulators implementing the rules went beyond the 

mandate in Dodd-Frank and proposed a "premium capture cash reserve account" (PCCRA) that 

would effectively eliminate incentives to securitize by (i) locking up returns and origination 

expenses in an account for the life of the securitization, (ii) assuring the accounting consolidation 

of the securitization onto the balance sheet of the securitizer, and (iii) interfering with an 

originator's ability to offer borrowers rate locks. In the aggregate, these effects would have a 

substantial impact on borrowers. In fact, Mark Zandi of Moody's Analytics has estimated that 

mortgage rates would increase by I to 4 percentage points if the rule is implemented as 

proposed.9 Combine that amount with costs associated with the ability-to-repay requirement and 

onerous capital charges nearing 100% of a horizontal risk retention, and the rate originators 

would have to charge borrowers again becomes prohibitively high. 

Congress provided relief from the risk retention requirements for high quality assets 

called "qualified residential mortgages" (QRMs). However, the QRM definition proposed by the 

regulators is very tight, and most mortgage loans originated would not meet the definition. In 

fact, only 19.8% of conventional GSE loans originated from 1997 thought 2009 would have met 

the QRM standards. 1O Even in 2009, during which time credit was very tight, only 30.5% of 

loans would have been QRMs.11 Note further that the size of the QRM market will be limited by 

regulation to, at most, the size of the "qualified mortgage" market, which may itself be narrow 

depending on final rules put out by the CFPB. What this means is that the bulk of the mortgage 

market may not meet QRM requirements and that most borrowers would be subject to higher 

rates due to the premium capture rule. Furthermore, we are concerned that the very conservative 

terms of the proposed QRM definition, taken together with the risk retention requirements, will 

provide a significant and undue competitive advantage to the GSEs, which are exempt from the 

risk retention requirements. This will have the effect of further entrenching the GSEs in the 

market when many in Congress, as well as the Administration, are calling for more private 

capital and less government subsidy. 

But this discussion focuses on only two of the mortgage rules arising exclusively out of 

Dodd-Frank. Each day it seems a new policy maker has a new rule or government program that 

can 'fix' the housing market. But these proposals give rise to thoroughly misguided ideas like 

using eminent domain to unconstitutionally seize current, underwater mortgages without 

8 "The Coming Crisis in Credit Availability," Amherst Mortgage Insight, June 4, 2012, at p. 9. 

9 See http://www.economv.com/mark-zandi/documents/2011-09-21-Zandi-A-Clarification-on-Risk.pdfat p. 2. 

10 See http://www.fhfa.gov/webfiles/20686JQRM FINAL ALL.pdfat p. S. 

11 Id. alp. 6. 
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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 6 

providing just compensation that securitization trust owners would be entitled to. Why would 

new private capital want to invest in products that ultimately can be seized by government fiat all 

in the name of a purported public purpose? 

Consumer and business lending is also impacted by all of the impending regulation, most 

of which was intended for the RMBS market. Unlike private RMBS, the securitization market 

for consumer and business assets, such as auto and equipment loans, is currently wellfunctioning, with some asset classes enjoying issuance at almost pre-crisis levels. Keep in mind, 

many of these asset classes had absolutely nothing to do with creating the crisis, and performed 

exactly as intended during the crisis. However, we are concerned that many of the pending 

rulemakings could eventually derail the recent success by imposing unnecessary costs that will 

be passed on to consumers and businesses. What follows is a laundry list of other proposed 

regulations that we believe could have an impact on the securitization market: 

The regulators indicated that the proposed risk retention rules for credit card ABS 

and asset-backed commercial paper (ABCP) were intended to track current 

market practices. However, the proposed rules failed to achieve that result and 

would cause billions of dollars to flee this critical short-term funding market. 

The regulators proposed qualifying auto and commercial loan exemptions from 

risk retention that fail to embrace traditional loan underwriting practices, and will 

not be employed by market participants. 

• The Vo1cker Rule is aimed at preventing proprietary trading, but the regulators 

have proposed rules that would prevent many traditional securitization activities 

even though Dodd-Frank specifically required that the Vo1cker Rule not "restrict 

the ability of a [bank] to sell or securitize loans." 

• The SEC has proposed public style disclosures for asset classes that traditionally 

issue ABS in the private placement market. Such a requirement could put a 

stranglehold on many non-traditional asset sectors that employ securitization as an 

efficient funding mechanism, such as franchise businesses like Domino's Pizza 

and Sonic restaurants, and small to medium-sized companies funding timeshares, 

railcars, containers, cell towers and film receivables. 

• Some regulations have yet to be proposed, but are potentially so impactful that 

they have already caused significant concern in the market. For example, DoddFrank granted the FDIC authority to orderly liquidate certain nonbank financial 

companies, some of which use securitization to fund auto and equipment loans, 

among other assets. The orderly liquidation authority (OLA) may be used to 

change or add to the insolvency laws that currently apply to these types of 

securitizations, potentially exposing investors to insolvency risks that have not 

existed before. The ABS market briefly grounded to a halt in December 2010 

because of investor concerns around OLA, and only resumed due to a near term 

patch in the form of an FDIC general counsel's letter. These types of risks will be 

priced into the ABS, resulting in higher costs for consumers and businesses. 

• Finally, special attention should be given to the risk-based and liquidity capital 

rules that are being enacted in the United States over the next several years. Each 

of these rulemakings will have a very real impact on the consumer economy, as 

they will determine the amount of capital a bank needs to hold against specific 
89 


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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 7 

investments, including investments in securities that are backed by consumer and 

business assets such as auto loans, credit cards and equipment loans, If these 

rules are not appropriately calibrated, consumers and businesses alike will be 

impacted by the resulting costs, 

While each of the rulemakings mentioned in this testimony is significant in its own right, 

the aggregate effect of all will have profound impacts on the consumer economy, We ask that 

regulators and Congress work alongside the industry to produce workable and effective rules that 

do not inhibit securitization or make it prohibitively more expensive, as either result will 

inevitably be felt by main street consumers and businesses. As demonstrated from the statistics 

below, our sputtering economy can ill-afford to keep the securitization market on the sidelines. 

II. The State of the Securitization Market 

Different segments of the asset-backed securities CABS") markets have recovered at 

varying levels since the end of the recent recession, as noted by the Board of Governors of the 

Federal Reserve System ("FRB") in its October 2010 report on risk retention. I2 Although auto 

loan and lease ABS rebounded to $59.4 billion in issuance in 2011, this level remains down from 

the $79.7 billion in issuance in 2006. 13 Another area of strong performance has been in 

equipment ABS, where issuance in 20 II moved up to $8.6 billion, surpassing the $8.4 billion of 

2006 issuance.I4 These asset classes, however, remain exceptions. Between 2006 and 2011, 

credit card ABS issuance dropped 77.1% from $72.5 billion to $16.4 billion,Is in large part due 

to banking regulators linking capital requirements directly to accounting consolidation standards 

under FAS 166 and 167. During those same four years, student loan issuance has fallen nearly 

73.4% from $65.7 billion to $17.5 billion.I6 By comparison, on the residential mortgage-backed 

security CRMBS") side, only $22.2 billion of private-label RMBS were issued in 20 II, down 

96.9% from the $723.3 billion issued in 2006.1 In addition to the overall reduction of issuance 

in the RMBS market, we further note that 98% of RMBS were federally-backed in 2011, as 

compared with only 56% in 2006 when private credit accounted for a much larger share of 

RMBS issuance.I8 

Simply put, the absence of a properly functioning securitization market, and the funding 

and liquidity this market has historically provided, adversely impacts consumers, businesses, 

financial markets and the broader economy. The recovery and restoration of confidence in 

securitization is therefore a necessary ingredient for economic growth to resume, and for that 

growth to continue on a sustained basis into the future. 

12 Board of Governors of the Federal Reserve System, "Report to the Congress on Risk Retention" (Oct. 2010), p. 2, 

available at http://federalreserve.goviboarddocs/mtcongress/securitizationiriskretention.pdf. 

13 Data are from Asset Backed Alert; see also the ASF presentation to the Financial Stability Board of April 10, 

2012, available at http://www.americansecurilization.comluploadedFiles/ ASF FSB Presentation 4-IO-12.pdf. 

14 Id. 

ISld. 

I6ld. 

17 ld. 

18 Id. 
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July 10,2012 

Page 8 

III. Risk Retention 

ASF continues to support better alignment of incentives of issuers and originators with 

investors of ABS and we believe these incentives should encourage the application of sound 

underwriting standards. Despite the appreciable efforts of the FRB, Department of Housing and 

Urban Development, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, 

Office of the Comptroller of the Currency, and Securitics and Exchange Commission 

(collectively, the "Risk Retention Regulators"), significant work still needs to be done to evolve 

the proposed risk retention regulations into workable solutions. Outlined below are a few key 

issues with respect to risk retention. 19 

a. Premium Capture 

ASF strongly opposes the proposed premium capture rule. as it exceeds the mandate and 

legislative intent of Dodd-Frank by adding on to the 5% risk retention requirement the entire 

value of ABS issued in a securitization over par--effectively nullifying the securitizer's entire 

retum on the transaction. The premium capture rule also does not take into account the cost of 

origination of loans, including out-of-pocket costs such as appraisals, title insurance. and 

overhead, and interferes with an originator's ability to use interest rate hedges and thus offer rate 

locks to borrowers. The rule as drafted will have pervasive effects on securitization and 

borrowers. including virtually assuring the accounting consolidation of the securitization onto the 

balance sheet of the securitizer regardless of the risk retention form employed. For financial 

institutions with regulatory capital requirements, consolidation effectively takes securitization off 

of the table as a viable funding mechanism. 

Most disturbing, however, is that the premium capture rule as currently proposed 

eliminates virtually all incentives to securitize for institutions other than those that securitize 

purely for financing. Institutions with other sources of funding will move away from 

securitization altogether, resulting in a constriction of credit and an increased cost of capital. We 

view the premium capture rule as the most dangerous proposed rule in that it would effectively 

sideline banks from engaging in RMBS and CMBS in the future. 

h. Failure to Incorporate Market Practices 

The commentary in the risk retention proposing release specifically indicates that the 

proposed risk retention regulations for asset-backed commercial paper (" ABCP") and credit card 

ABS are meant to track current market practices. However, there are numerous parts of the 

proposed regulations that are, in fact, not at all consistent and would cause detrimental effects on 

those markets. Through our comment letter process, ASF has identified these inconsistencies 

and recommended specific regulatory changes to resolve them?O 

19 For more exhaustive coverage of our views on the proposed risk retention regulations) see our Risk Retention 

Comment Letter, available at 

http://www.americansecuritization.com/uploadedFiles/ ASF Risk Retention Comment Letter.pdf. 

20 See, e.g., 

http://wv..W.arnericansecuritization.comluploadedFiies/ ASP ABCP Risk Retention Follow Up 2 23 12.pdf. 
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Page 9 

c, Competing Regimes 

It is important to highlight that securitization transactions in Europe are subject to their 

own risk retention requirements set forth in the European Union's CRD Article 122a,21 The 

structure of the European risk retention regime is fundamentally different than the U,S, rules, 

While the U.S. rules apply to issuers of ABS, the European rules apply to European Economic 

Area credit institutions that invest in ABS. Ultimately, this could have the peculiar result of 

application of both risk retention regimes, which is further confused by the regulations' differing 

requirements. Harmonization among the two sets of rules will be critical to a functioning and 

efficient securitization market that is not weighed down by duplicative requirements and 

unnecessary costs. 

d, The QRM Definition and Leveling the Playing Field 

An exemption is provided from the risk retention requirement for high quality assets 

called "qualified residential mortgages" ("QRMs"). As currently contemplated, only the highest 

quality mortgage loans will qualify as QRMs and therefore QRMs will comprise only a small 

percentage of the mortgage market. The Risk Retention Regulators' proposing release indicates 

that approximately 19.79% of all loans purchased or securitized by the government sponsored 

enterprises ("GSEs") during the period of 1997-2009, and approximately 30.52% of loans in 

2009 alone, would have met the QRM criteria. 

We note again that the proposed risk retention regulations provide a complete exemption 

from the risk retention requirements (including an exemption from the requirement to establish a 

premium capture cash reserve account) for RMBS guaranteed by the GSEs for so long as the 

GSEs operate under the conservatorship or receivership of the Federal Housing Finance Agency 

("FHF A"). We are concerned that the very conservative terms of the proposed QRM definition, 

taken together with the risk retention requirements, will provide a significant and undue 

competitive advantage to the GSEs over private market participants. In our view, the best way to 

level the playing field and avoid increasing the role of the GSEs in the residential mortgage 

market is to reduce the impact of the risk retention requirements on private market participants. 

This could be accomplished in a variety of ways. We urge the Risk Retention Regulators to 

consider adjusting the criteria for QRMs, such that the vast majority of loans to prime borrowers 

will qualify as QRMs. Furthermore, reconciling the QRM criteria with the GSE requirements 

would enable private market participants to compete on equal terms with the GSEs for most of 

the prime mortgage market. If the QRM definition ultimately is a narrower definition than what 

qualifies as a conforming loan for the GSEs, because of the GSE exemption from risk retention, 

the private markets will be so price disadvantaged that every non-QRM loan that is GSE eligible 

will continue to flow to the GSEs, unless or until they are radically restructured. 

IV, OM and Ability-to-Repay 

The "qualified mortgage" ("QM"), to be defined by the Bureau of Consumer Financial 

Protection ("CFPB"), is related to the QRM, in that the QRM's standards can be no broader than 

21 See CRD Directive 2006/481EC, p. 78, available at 

http://eur-lex.europa.euILex Uri ServiLe x U riServ .do ?uri~CONSLEG :2006L0048:20 I 00330: EN :PDF. 
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Page 10 

the QM's standards. This means that the size of the QRM market will be limited to, at most, the 

size of the QM market. The QM comes by statute from Sections 1411 and 1412 of the DoddFrank Act, which establish a new ability-to-repay requirement for certain residential mortgage 

loans and establish that a QM shall be deemed to meet this requirement. 

Under the ability-to-repay requirement, a lender may not make a covered mortgage loan 

unless the lender makcs a reasonable and good faith determination, based on verified and 

documented information, that the borrower will have a reasonable ability to repay the loan. 

While the proposed ability-to-repay requirement applies to lenders, the legal consequences of 

noncompliance essentially rest with the secondary market, as Section 1413 of Dodd-Frank 

imputes liability on investors and other assignees of mortgage loans that do not meet the 

requirement. Because the requirement is subjective, investors will not be able to make brightline judgments as to whether a loan complies, making it difficult to invest in loans that are 

measured solely by that standard.22 

Dodd-Frank provides that with respect to any residential mortgage loan, a lender, and any 

investor assignee of that loan, may presume that the loan has met the ability-to-repay 

requirement if the loan is a QM. However, there are aspects of the QM definition proposed by 

the FRB that will make it difficult or even impossible to determine whether the loan qualifies, 

especially in the case of investor assignees, which are far removed from the origination process. 

The final regulation must be clear and objective. Additionally, the CFPB is determining whether 

the protection afforded by a QM should be a "safe harbor" or a "rebuttable presumption." These 

two options would provide starkly different levels of protection for investors in QMs. If 

investors are not appropriately insulated from liability through a true safe harbor, they will need 

a significant risk premium to offset the potential liability. Such a premium will undoubtedly be 

passed on to borrowers in the form of higher interest rates. Our comment letter to the CFPB 

provides additional detail on the subject.23 

V, Role of the GSEs Going Forward 

Dodd-Frank did not address the question of what to do with Fannie Mae and Freddie Mac 

(the "GSEs") on a going forward basis, and that debate lingers on. Ultimately, Congress and the 

Administration must address this issue head-on, but until that time comes, which many 

commentators believe may be years or even a decade away, there is potential for meaningful 

change in the ncar term to fix certain inefficiencies that exist in the agency market. 

"The regulation of "high cost" loans under the Home Ownership Equity Protection Act ("HOEPA"), including the 

availability of significant enhanced damages for HOEPA violations and assignee liability, led to the ultimate demise 

of the market for HOEPA loans, with many investors, including both Fannie Mae and Freddie Mac, refusing to 

purchase them. If non-QM loans suffer the same fate as HOEPA loans, credit availability would ultimately be 

constrained for many borrowers (with the amount of impacted borrowers being dependent upon the size of the QM 

market). 

23 See http://www.americansecuritization.comluploadedFiles/ ASF Comments on OM NPR 7 22 II.pdf. 
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ASP HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page II 

a. Current GSE Market Inefficiencies and a Potential Single Securi~y 

On February 21, 2012, FHFA released its Strategic Plan24 that proposes to build a new 

infrastructure for Fannie Mae and Freddie Mac, including the development of a single 

securitization platform that would "allow for a single mortgage-backed security." ASF believes 

that secondary mortgage market participants must play an integral role in the implementation of 

any such security and began holding member meetings to discuss its implications. On July 2, 

2012, in response to the Strategic Plan, ASF produced a White Paper outlining the various views 

of our members on the creation of a single agency security.25 The White Paper does not address 

broader legislative GSE reform, but instead, the deficiencies in the plumbing of the current GSE 

finance system that can be acted upon in the near-term. 

Despite unlimited support by thc U.S. government for both GSEs, securities issued by 

Freddie Mac trade at a substantial discount to comparable securities issued by Fannie Mae. 

Freddie Mac traditionally has made up for this discount by providing loan sellers a lower 

guarantee fee or other concessions. For example, Freddie Mac often will offer a "market 

adjustment payment" to lenders to normalize the pricing differential. Because these incentives 

decrease revenue to Freddie Mac relative to Fannie Mac, they effectively act as a further 

government subsidy under the conservatorship. Moving to a single security should minimize, 

and potentially even eliminate, this differential and save the U.S. taxpayers the very real losses 

associated with this discount. A single security, whether originally issued by Fannie or Freddie, 

must be fungible, or of equal value in the market. In order to accomplish this, perceptions about 

and differences between operations at Fannie and Freddie must be eliminated as described in the 

White Paper. Implemented correctly, a single agency security could benefit all participants in 

the mortgage market, including borrowers, originators, investors and the taxpayer. It is critical, 

however, that policymakers take into account industry perspectives on the development of this 

security. 

VI. Orderly Liquidation Authority 

In enacting the orderly liquidation authority of Title II of Dodd-Frank ("OLA"), Congress 

intended to create a new statutory regime for the orderly liquidation of "Covered Financial 

Companies", as designated by the Financial Stability Oversight Council ("FSOC"). However, 

several sources, including the Dodd-Frank Act itself, suggest that Congress also intended for the 

resulting statutory regime to operate in such a way as to minimize the likelihood of different 

results to creditors of such potential Covered Financial Companies from those results arising 

under the Bankruptcy Code. If a creditor faces the possibility of two different insolvency 

regimes, it will have to structure transactions to comply with both. Doing so will raise 

transaction costs and ultimately raise the costs and lower the availability of credit. Additionally, 

two specific issues have emerged since Dodd-Frank was enacted. 

The first issue relates to an interpretation of OLA that would give the Federal Deposit 

Insurance Corporation ("FDIC"), as receiver for a Covered Financial Company, broader powers 

24 See "A Strategic Plan for Enterprise Conservatorships," February 21, 2012 (the "Strategic Plan"), at 

http://www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFlNAL.pdf, which was incorporated into 

PHFA's broader "Strategic Plan: Fiscal Years 2013-2017'" on May 14,2012. 

"See http://www.amerieansecuritization.com/uploadedFiles/ASF Single Agency Security White Paper 2012.pdf 
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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page 12 

to avoid certain previously perfected security interests than a trustee (a "Bankruptcy Trustee") 

under the Bankruptcy Code would have upon a Chapter 7 liquidation of the same Covered 

Financial Company. To eliminate the ambiguity in a manner consistent with the legislative 

intent, ASF suggested in a December 13, 2010 letter to the FDIC that these "preference 

provisions" would benefit from additional rulemaking by the FDIC.26 The FDIC has since 

issued a General Counsel's Lettcr to ASF,27 a Notice of Proposed Rulcmaking,28 to which ASF 

responded with further comments,29 and, in July of last year, a Final Rule30 to rectify the 

ambiguity around thc priorities and claims process under OLA. 

The second issue relates to various "repudiation" concerns, including (i) whether a 

transfer of property by the Covered Financial Company or a covered subsidiary thereof would 

constitute an absolute sale or a secured borrowing and (ii) whether the separate existencc of 

another person or entity would be respected and its assets and liabilities not substantively 

consolidated with the assets and liabilities of the Covered Financial Company or of any covered 

subsidiary thereof. 

The resolution of this concern, as elaborated in a separate ASF letter to the FDIC,3l is to 

hannonize FDIC rules implementin¥ OLA "with the insolvency laws that would otherwisc apply 

to a covered financial company."} In response to ASF's letter, the FDIC issued a General 

Counsel's Letter33 in January 2011 clarifying that its repudiation power under OLA would be 

exercised consistent with the Bankruptcy Code or other applicable insolvency laws, including 

bankruptcy- and State-law principles governing legal isolation, on an interim basis unti I 90 days 

after the FDIC Board of Directors adopts a regulation to fonnally address the matter, an action 

that the FDIC Board has not yet taken. We anticipate significant market attention to any future 

rulemaking in this area. 

26 See "ASF FDIC Request re OLA," American Securitization Forum (December 13, 2010), available at 

http://asf.informz.netlASF/datalimages/emailattachments/advocacv/asf orderly liquidation letter to the fdic 12 I 

L!JW1l!.f. 

27 See http://www.americansecuritization.comiuploadedFiles/FDICGeneralCounselLetterreOLA -12-29-10 .pdf. 

2& See NPR at http://cdockel.access.gpo.gov/2011/pdf/2011-6705.pdf. 

zq See hllp:llwww.americansecuritization.comiuploadedFilesl ASF OLA Transfers Letter FINAL 5 23 I I.pdf. 

30 See hllp:llwww.gpo.gov/fdsys/pkglFR-201 1-07-1 5/pdfl20 I I-I 7397.pdf. 

" ASF's letter requested that (aJ the FDIC as receiver for a covered financial company shall not, in the exercise of 

its statutory authority to disaffirm or repudiate contracts, reclaim, recover, or re-characterize as property of the 

covered financial company or the receivership financial assets transferred by the covered financial company, 

provided that such transfer satisfies the conditions for a legal true sale as applied in the law defining property of the 

estate under the Bankruptcy Code, and (b) the Act does not itself contain any provision which would mandate a 

different approach or analysis regarding the factors or circumstances under which the separate existence of one or 

more legal entities would properly be disregarded than the existing approach or analysis under the Bankruptcy Code. 

See hllp:llwww.americansecuritization.com/uploadedFiles/ASF Orderly Liquidation Letter I 14 II.pdf. 

32 See Section 209 of Dodd-Frank. 

33 See hllp:llwww.americansecuritization.com/uploadedFiles/GC Leiter to ASP 14 2011.pdf. 
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ASF HFSC Capital Markets Subcommittee Testimony 

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Page J3 

Vll, Rating Agency Reform 

a. Franken Amendment Study & Rule 17g-5 

On May 10, 2011. the Securities and Exchange Commission ("SEC") published a request 

for comment relating to the study the SEC is required to undertake pursuant to Dodd-Frank 

Section 939F (the "Franken Amendment") addressing, among other things, the feasibility of 

establishing a system in which a public or private utility or a self-regulatory organization assigns 

nationally recognized statistical rating organizations ("NRSROs") to determine credit ratings of 

structured finance products. Because of the structure of Section 939F, the SEC is required to 

implement thc assignment system unless the SEC "determines an altemative system would better 

serve the public interest and the protection of investors." 

As we elaborated in our comments to the SEC in September 2011/4 we believe that any 

proposal to establish such a system would be detrimental to the securitization market in a number 

of ways. Such a system is premised on the assumption that all "qualified" NRSROs are created 

equal with respect to rating a particular asset class. However, intemal investor guidelines restrict 

the securities in which they can invest based on the NRSRO that provides the rating and issuers 

may struggle to market securities that have a rating from a non-approved NRSRO. The Franken 

Amendment would also cause potential conflicts of interest and moral hazard given that the 

govemment would create the initial assignment board. Furthermore, the alleged purpose of 

Section 939F is to examine and eliminate the perceived conflicts associated with the "issuer-pay" 

ratings model. The SEC has already attempted to address this conflict with its amended Rule 

17g-5, which requires issuers to post information provided to hired NRSROs so that non-hired 

NRSROs can produce unsolicited ratings. While modifications to Rule 17g-5 are necessary to 

adequately alleviate any perceived conflicts in rating structured finance products, we believe it is 

a far better altemative to the counterproductive approach suggested by the Franken Amendment. 

b. The Repeal of Rule 436(g) 

Upon the effective date of Dodd-Frank in the summer of 2010, Rule 436(g) under the 

Securities Act was repealed, which caused the complete shutdown of the U.S. public 

securitization market. Rule 436(g) had excluded NRSROs from being treated as "experts" when 

their ratings were included in a registration statement under the Securitics Act. Repealing Rule 

436(g) required NRSROs to consent to the inclusion of their rating in a prospectus, which 

attached liability to the institution. ASF immediately began discussions with SEC staff to help 

alleviate the problem. The market paralysis was partially miti~ated through the grant of 

temporary no-action relief by the staff of the SEC on July 22, 2010. 5 The no-action letter relief 

was then extended indefinitely on November 23,2010.36 ASF applauds the SEC's decision to 

issue the no-action letters but believes a permanent, comprehensive solution is needed to ensure 

the long-term viability of the U.S. public securitization markets. Given the implications of Rule 

34 See our comment letter for more information on assigned credit ratings and a modified Rule 17g-5, available at 

http://www.americansecuritization.com/uploadedFilcs/ASF Letter to SEC regarding Franken Amendment (9-

.!Hl1lliif. 

35 See http://v,ww.americansecuritization.com/uploadedFiles/SEC NAt. July2010.pdf. 

36 See http://sec.gov/divisions/corpfinlcf-noactionI2010/ford072210-1120.htm. 
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ASF HFSC Capital Markets Subcommittee Testimony 

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Page 14 

436(g) outlined above, ASF believes that proposed solutions may include amending Regulation 

AB to pennancntly eliminate the requirement to include ratings in the prospectus or enacting 

legislation to repeal the repeal of Rule 436(g).37 

VIII. Volcker, Conflicts of Interest, Derivatives 

a. Volcker Rule 

The VoJcker Rule, despite its breadth as written, is intended to address concerns that have 

nothing to do with the securitization markets: specifically, the concern that banking entities may 

be exposed to undue risks through proprietary trading and the sponsorship and ownership of 

hedge funds and private equity funds. However, many securitization vehicles potentially are 

brought within scope of the proposed regulations simply because they share the same exemptions 

from the Investment Company Act as traditional hedge funds and private equity funds. In fact, 

Section 13(g)(2) of the Volcker Rule specifically required that the Volcker Rule not "restrict the 

ability of a [bank] to sell or securitize loans." 

Anything short of an exclusion for securitization entities from the definition of covered 

fund will limit the securitization market in a manner prohibited by Section J3(g)(2) of the 

Volcker Rule. Accordingly, we believe it is appropriate for the regulators charged with 

finalizing the VoJcker Rule to provide for a broad carve out for entities that act as depositors and 

issuers in securitization transactions in the final Volcker Rule regulations. 

b. Conflicts of Interest in Securitization 

Section 621 of Dodd-Frank seeks to address conflicts of interest in securitization and 

generally provides that an underwriter or sponsor (or any affiliate or subsidiary) of an ABS shall 

not, for one year after closing, engage in any transaction that would result in any material 

conflict of interest with respect to any investor. While this general statutory mandate is included 

in Dodd-Frank and in the proposed rules issued by the SEC, there is significant legislative intent 

that makes clear this provision was meant to eliminate incentives for market participants to 

intentionally design ABS to fail. While ASF has expressed its full support of the intent behind 

the legislation. we remain deeply concerned that overly broad rules could have serious 

unintended consequences on the secondary market. Any rules implemented by the SEC must be 

crafted so as to prohibit the situations that result in such material conflicts of interest without 

causing unnecessary adverse impacts on traditional securitization activities. 

c. Regulation of Derivatives 

On April 12,2011, two long-awaited proposed rules on margin and capital requirements 

for non-cleared swaps were issued, the first jointly by five federal agencies and the second by the 

Commodity Futures Trading Commission ("CFTC"). In addition, there are numerous other 

related proposals that may affect securitization, including (i) the SEC's end-user exception to the 

mandatory clearing of security-based swaps and swap participant definitions, (ii) the CFTC's 

swap participant definitions and the end-user exception and (iii) business conduct standards for 

37 See our support for the "Asset-Backed Market Stabilization Act" which seeks to reinstate Rule 436(g), available 

at http://www.amcricansecuritization.comluploadedFilesIASF Letter Supporting HR 1539 and HR 940.pdf. 
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July 10,2012 

Page 15 

"swap dealers" and "major swap participants" relating to ERISA plans. ASF has submitted 

comment letters on all of these proposals.38 ASF believes that structured finance participants 

should not, standing alone, be considered to be included in any of these new rulemakings and 

that, in particular, the mandatory clearing, margin and capital requirements should not apply to 

swaps entered into by structured finance participants. 

Applying any of these requirements may render many structured financings uneconomic 

as the special purpose vehicle ("SPV") would be required to post cash and liquid securities 

which it does not have. The source of repayment for structured financings is generally the cash 

flow from the assets or receivables which is generated over time. Applying clearing, margin and 

capital requirements would affect the cash flow analysis for a structured financing and cause 

adverse effects on the functioning of this market, including ultimately resulting in a reduction in 

the available amount of loans or other financing for the assets underlying the structured 

financing. 

IX. Capital 

a. Section 939A 

Section 939A of Dodd-Frank requires that the federal regulators remove any reference to 

or reliance on credit ratings from federal regulations and substitute appropriate standards of 

creditworthiness in their place. Therefore, it has been necessary in light of Section 939A for the 

bank regulators to propose and adopt changes to the capital rules that use alternatives to ratings 

as the methods for determining such capital charges. As a result, our advocacy in this area has 

been devoted to ensuring that the resulting capital requirements (i) assess capital charges that are 

appropriate for the risks of securitization positions held by banks, and (ii) can be reasonably 

determined by banks based on the information available to banks that invest in ASS. 

Since the adoption of Dodd-Frank, the uncertainty associated with complying with new 

and different capital requirements has made many U.S. banks more reluctant to invest in 

potential securitizations. This has substantially decreased the liquidity of the securitization 

market, impacting both the availability and cost of the sources of consumer and business credit 

that would otherwise have been financed through securitizations. More clarity now exists with 

respect to these issues since last month the bank regulators adopted final rules for detennining 

the capital required for asset-backed securities held in a bank's trading book and proposed 

regulations for determining the capital of ABS held in a bank's banking book. These regulations 

rely on the use of supervisory formulas for determining the capital of securitization positions in 

38 See "ASF Margin and Capital Requirements for Covered Swap Entities Letter" (July 11,2011) at 

http://www.americansecuritization.com/uploadedfiles/asfswapmarginletter2011 07ll.pdf; "A SF Derivatives EndUser Exception Comment Letter to SEC." (February 4,2011), at 

http://asf.informz.net/ASF/datalimages/emailattachments/advocacy/asf letter to sec re end-user exception.pdf; 

see "A SF Derivatives Comment Letter to SEC," (February 14,2011), at 

http://asf.informz.netiASF/datalimagesiemailattachments/advocacv/asf letter to sec re derivatives-2-14-II.Ddf; 

see "A SF Derivatives Comment Letter to CFIC," (February 22, 2011), at 

http://www.americanseeuritization.comiuploadedFiles/2 22 II ASF CFTC letter re Derivatives.pdf; and see 

"ASF Title VII Business Conduct Standards Letter," (February 22, 2011), at 

b!!~ww.americansecuritization.com/uploadedFiles/2 22 II ASF eftc comment letter re business conduct st 

andards.pdf. 
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Page 16 

lieu of ratings. We have appreciated the willingness of the bank regulators to work with our 

members to address some of the most significant issues associated with these formulas and their 

inputs and we believe that the regulators have attempted to address many of these issues in the 

final market risk regulations and in the proposed banking book regulations. Without these 

changes, required capital would have been severely overstated for many senior securitization 

positions and understated for certain riskier, junior securitization positions, improperly providing 

incentives to banks to invest in the latter. 

While ASF members have been very supportive of removing the "government seal of 

approval" of ratings from regulations, the replacement should at minimum be better than ratings. 

Even with these changes, however, two things have become clear with respect to the 

implementation of section 939A. First, the complexity within the system for determining capital 

has drastically increased the cost and manpower necessary to calculate that capital. Second, it 

remains very unclear whether this dramatic increase in cost and complexity will actually lead to 

stronger capital levels throughout the financial system. 

h. Basel 2.5, III 

The global response to recent financial crises has targeted regulatory capital and liquidity 

standards as well. We support initiatives both here and abroad to ensure that all banking 

institutions maintain robust capital and liquidity buffers to guard against systemic and 

idiosyncratic shocks. We also applaud regulatory authorities who have been thoughtfully 

wrestling with the extraordinarily challenging policy and implementation issues that these 

initiatives have presented. 

Here again, however, businesses and consumers alike are experiencing more costly and 

less available credit because policymakers opted for a hasty shotgun approach over more 

targeted and coherent measures. For example, the Basel III liquidity framework published in 

December 2010 would require banking institutions to prefund all or part of their short-term 

obligations (including unfunded commitments) with unencumbered, high-quality liquid assets. 

This means that, if the highest-quality bank in the United States were to provide a $500 million 

committed liquidity facility to the highest-quality corporation, the bank would need to acquire 

and set aside in advance at least $500 million of unencumbered cash or government securities to 

guard against even the most improbable risk of that facility being drawn within the next 30 days. 

Another example is Section 171 of the Dodd-Frank Act, which establishes "generally applicable 

risk-based capital requirements" as a floor for all U.S. banking institutions. Because the United 

States and the rest of the 020 have long endorsed a regulatory capital framework that imposes a 

separate set of standards on internationally active institutions, the second-order effect of Section 

171 is that larger U.S. institutions will be forced to adhere to and monitor compliance with two 

different regulatory capital regimes in parallel. Yet another example is the incongruity between 

accounting standards that were fundamentally revised in 2009 to discount exposure to risk and 

U.S. risk-based capital standards that continue to rely on them. This has not only resulted in 

duplicative capital being held against the same loan to a business or consumer, with associated 

adverse effects on the cost and availability of that loan, but the door has also been opened to 

increased regulatory arbitrage and misdirected economic incentives. 
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ASF HFSC Capital Markets Subcommittee Testimony 

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Page 17 

X. Conclusion 

In this testimony, we have endeavored to give a brief snapshot of key initiatives under 

Dodd-Frank that will create significant challenges for securitization to deliver low-cost credit 

availability to consumers and businesses nationwide, But Dodd-Frank is not being implemented 

in a vacuum, That is, these businesses have to continue to operate and function while also 

attempting to implement these massive regulatory changes, Additionally, other policy initiatives 

not mentioned in this testimony (due to length concerns) are also being undertaken and create 

substantial compliance challenges, These other initiatives should also be considered in this 

context. They include: 

The SEC's Regulation AB II Proposals; 

• The SEC's ANPR and Concept Release on the Investment Company Act; 

• The FDIC's NPR on Assessments and Large Bank Pricing; 

• The FDIC's Securitization Safe Harbor; 

• The FRB's NPR on Enhanced Prudential Standards and Early Remediation Requirements 

for Covered Companies (Reg YY); 

• The CFPB's RFI on Private Education Loans; 

• The FHFA's Alternative Servicing Compensation Proposals; and39 

• Numerous International Proposals. 

ASF greatly appreciates the invitation to appear before this Subcommittee to share our 

views related to these current issues. I look forward to answering any questions the 

Subcommittee may have. 

Thank you. 

39 See ASF's comment letters in response to these rulemakings, at 

http://www.amcricansecuritization.comluploadedFiles/ASFRegABIICommentLetter8.2.1 O. pdf, 

!J.t!p :llwww.americansecuritization.com/uploadedFilesl ASFRegA B IIABCPCommentLetter8 .2.1 O.pdf, 

http://www.americansecuritization.comluploadedFiles/ASF Reg AB II Waterfall Comment Letter 8.3 J.lO.pdf, 

http://asf.informz.net/ ASF Idatalimages/emailattachments/advocacy/asf reg ab ii auto abs comment letter 8.3 J.l 

Q,p4f, http://www.americansecuritization.comluploadedFiles/ ASF Comment Letter on SEC Reg AB II ReProposal I 0-4-ll.pdf, http://www.americansecuritization.comluploadedFiles/ ASF Equipment ABS Letter (11-2-

.Ll.1lli!f, http://www.americansecuritization.comluploadedFiles/ASF Rule 33-7 Comment Letter I I 7 Il.pdf, 

http://www.americansecuritization.comluploadedFiles/ ASF 3(c)(5)(C) Comment Letter II 7 II.pdf, 

http://www.americansecuritization.com!uploadedFiles! Associations Response to Revised HigherRisk Asset Definitions 120529.pdf, http://www.americansecuritization.com/uploadedFiles/ ASF-FDlC-l'JPRResponse-Letter-7 .1.1 O.pdf, 

http://www.americansecuritization.com/uploadedFiles/ ASF Comment Letter on Reg YY NPR 4 29 12.pdf, 

http://www.americansecuritization.comluploadedFiles/ ASF Letter to CFPB re Private Education Lending 1 17 

.l1.,p<:!f, and http://www.americansecuritization.com/uploadedFilesI ASF AItelJl!!!ive Servicing Comp Letter (12-

~. 
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ASF HFSC Capital Markets Subcommittee Testimony 

July 10,2012 

Page A-I 

Exhibit A 

76114.048

O-F Tit/e 11- Uncertainty about covered financial companies 

and subsidiaries and remarkably broad rufemaking and 

receivership powers aifor'ded to FDIC (FDIC 76 FR 41627) 

O-F Sec. 941 and Risk Retention - Disincentives to fund through private-label securitization because of uneconomic 

premium capture, conservative QRM definition, forced accounting consolidation.. liberal GSE exemption, uneven 

notional servicing standards, deviations from market practice, and narrow carve-outs (/A NPR 76 FR 24090) 

Money Market Reform - Focus 

on ultrasafe assets (deposits 

and sovereigns) and ultrashort 

maturities (SEC 75 FR 10060) 

Basel Iff Capital1250% risk weight for 

low-rated 

securitization 

exposures forces 

higher bank capital 

(IA_FR_) 

FDIC Securitization Safe Harbor - Threat to 

traditionallegal+isolation standards unless onerous 

and unr'elated conditions ore met (FDIC 75 FR 60287) 

TILA & CFPB Actions - Ability-to-Repay and 

Qualified Mortgage requirements pass costs to 

households and have potential to strangle 

credit (FRB NPR 76 FR 27390 et 01) 

FAS 166 and 167 - Misdirected incentives 

because financial-components approach 

abandoned and consolidation based on power 

rather than risks and rewards (fA 75 FR 4636) 

Basel III and D-F Sec. 171 - Misdirected 

incentives If all banks (regardless of size and 

foreign exposure) are not subject to the most 

advanced generally applicable risk-based 

capital requirements (/A 76 FR 37620) 

Basel 1/1 NSFR -

Unequal treatment 

for MBS and ABS with 

stable value and 

liquidity (fA _ FR_) 

Bose/III LeRDrawdown rates 

lack any credit 

conversion factors 

based on actual 

it 

Base/I/! Leverage Ratio -

Inclusion of off-balancesheet commitments results in 

duplicative capital because 

of the LCR (fA _ FR_) 

Basel Iff LCR-Stressed threenotch downgrade ignores rating's 

starting point (lA _ FR_) 

Base/III Capitai- Securitization gains 

excruded from CET 1 (/A _ FR_) 

Base/If! LCR Closed 

banking and financial 

systems ignored in cash 

outffow run-off rates 

and assumed cash 

inflow (IA_ FR_) 

D-F Sec, 731, 761, 763, and 764 - Ambiguity for 

SPVs and structured-finance swaps in definitions, 

treatment 

forSPVs in 

drawdown 

rates for 

credit and 

liquidity 

facilities (fA 

_FR_) 

distinction between 

securitization and 

secured funding in cash 

outflow (No NPR Yet) 

Basel //I LCR - Skewed incentives 

because Level 2 assets exclude 

highest-quality MBS and ABS but 

include covered bonds (lA _ FR_) 

D·F Sec. 942 and Regulation AS 11 

- Costly burdens associated with 

eligibility standards, shelf 

registration, disclosure, reporting, 

and privately issued structuredfinance products (SEC NPR 75 FR 

23328 and 76 FR 47948) 

Reform;of 

Fannie Mae and 

Freddie Mac 

Base/III LCR - Uncertain 

clearing provisions, end-user exceptions, and 

margin/capital requirements for non-cleared 

swaps (/A NPR 7S FR 80174, SECNPR 75 FR82490, 

SEC NPR 7S FR 79992, CFTC NPR 75 FR 80747, fA 

NPR 76 FR 27564, CFTCNPR 76 FR 23732, and 

D-F Sec. 939A - Misdirected incentives if ratings alternatives 

do not capture actual risk based on observed performance 

(Basel III (fA _ FR _) and MMF (SEC NPR 76 FR 12896}) 

Material Conflicts of 

Interest with Investors 

(SEC 76 FR 60320) 

Basel2.S - Ambiguously broad 

definition of resecuritization 

position (IA NPR 76 FR 1890) 

O-F Sec. 331 -Increase in DIF 

assessments for larger banks,· 

incentives to issue fang-term 

unsecured debt; disincentives to 

hold bank unsecured debt (FDIC 

76 FR 10672) 

D-F Sec. 939F - System for 

Assigning NRSROs to Rate 

Structured-Finance Products 

(SEC RFC 76 FR 28265) 

American 

___ FORUM® CFTC NPR 75 FR 80638) © 2012 American SeCUritization Forum, Inc. All Rights Reserved. 

D-F Sec. 6

Rule Re

Sec. 3(c.)(

Issuers (f

6

In

O-F Sec. 9

Limited Su

Post-Issuan

(SEC 76 
102 


76114.049

Dennis M. Kelleher 

President and CEO 

Better Markets, Inc. 

Testimony on "The Impact of Dodd-Frank on Customers, Credit, and Job Creators" 

The Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

July 10, 2012 

Good morning Mr. Chairman Garrett, Ranking Member Waters and members of the 

subcommittee. Thank you for the invitation to Better Markets to testify today. 

Better Markets is a nonprofit, nonpartisan organization that promotes the public 

interest in the domestic and global capital and commodity markets. It advocates for 

transparency, oversight and accountability with the goal of a stronger, safer financial system 

that is less prone to crisis and failure, thereby, eliminating or minimizing the need for more 

taxpayer funded bailouts. Better Markets has filed almost 100 comment letters in the U.S. 

rulemaking process related to implementing the financial reform law and has had dozens of 

meetings with regulators. Our website, www.bettermarkets.com. includes information on 

these and the many other activities of Better Markets. 

My name is Dennis Kelleher and I am the President and CEO of Better Markets. Prior to 

that, I was a senior staffer in the Senate. Prior to the Senate, I was a litigation partner at 

Skadden, Arps, Slate, Meagher & Flom, where I specialized in securities and financial markets 

in the U.S. and Europe. Prior to obtaining degrees at Brandeis University and Harvard Law 

School, I enlisted in the U.S. Air Force while in high school and served four years active duty as 

a crash-rescue firefighter. I grew up in central Massachusetts. 

INTRODUCTION 

Customers, credit and credit markets, job creators, businesses, investors and 

consumers - all of Main Street and much of America, for that matter - have been devastated 

by a terrible economy that is a direct the result of the financial collapse and economic crisis 

that began in 2007, reached a peak in 2008-2009 and continues to this day. Indeed, it was the 

worst financial collapse since the Stock Market Crash of 1929 and it is the worst economy 

since the Great Depression of the 1930s. 

While many played a role in the recent collapse and crisis, Wall Street is at the top of 

the list of those responsible because it caused that collapse and crisis by the reckless and 

irresponsible creation and distribution of toxic and often worthless securities, among their 

many other actions. 

Unfortunately, Wall Street, many of the major financial industry participants, and their 

trade groups and other allies deny or minimize their role in the financial collapse and the 

economic crisis. Moreover, they are trying to obscure and conceal the cost of the collapse and 

crisis. Perhaps most importantly, they are also engaged in a comprehensive misinformation 

campaign that attempts to refocus the public debate away from the crisis and Wall Street's 

role in creating it to the new financial reform law and the rules being put in place to prevent 

another crisis and protect the American people, taxpayers, Treasury and economy. 

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Thus, before the "impact" of the Dodd-Frank financial reform law-more properly 

understood as the Wall Street re-regulation law - on customers, credit and job creators can 

be properly considered, a thorough discussion of the Wall Street-created financial collapse 

and economic crisis that gave rise to that law must come first. After all, it would be impossible 

to evaluate the impact of a law without the context and an understanding of why the law 

exists, what the law was intended to do and how it was designed to do it. 

Wall Street was able to cause the collapse and crisis largely because it used its 

economic power to gain political, academic, media and other power that enabled it to tear 

down the many laws, rules and regulations put in place during the Great Depression of the 

1930s to protect the American people from Wall Street's recklessness and greed. It must be 

remembered that, after those laws, rules and regulations were put in place, our country did 

not have a financial or economic crisis on that scale for more than 70 years. 

It must also be remembered that, even with all those many laws, rules and regulations 

- a truly unprecedented degree of government regulation of Wall Street and the u.s. capital 

markets - our country prospered; we built the largest and most broad-based middle class in 

the history of the world; and Wall Street, our financial industry, our nonfinancial businesses 

and our economy all thrived. 

By 2000, virtually all of those protections were torn down and Wall Street was not just 

de-regulated, but almost entirely un-regulated. The results are clear: after 70 years of 

regulation that protected the American people, our financial system and our economy, it took 

just 7 years for Wall Street's unregulated investment, trading and other activities to cause 

what almost became a second Great Depression. 

Those actions by Wall Street required the u.s. government to spend, lend, guarantee, 

pledge, assume, or otherwise use trillions of dollars to save Wall Street from itself and to 

prevent the crisis from becoming even worse. While they may deny it, every single major 

bank and all of the other too big to fail financial institutions would have collapsed into 

bankruptcy but for the actions of the u.S. government and the taxpayer dollars used to bail 

them out and put them back on the road to profitability. Thus, JPMorgan Chase, Goldman 

Sachs, Morgan Stanley, Merrill Lynch, Bank of America, AIG, Citigroup and the others are only 

in business today because they were all bailed out by the u.S. government and the American 

taxpayer. 

But, those bailouts were only part of the costs of that crisis. The economic wreckage 

caused by Wall Street's actions has touched every corner of our country: high and persistent 

unemployment and under-employment, historically high foreclosures and underwater 

homeowners, slow-to-no economic growth, business failures, untold wealth destruction, 

widespread and growing poverty, and so many other costs continue to mount, including, 

increasingly, a loss of belief in the American Dream. 

Just one measure of these costs reveals how deep and overwhelming the crisis has 

been and continues to be on our country: the Federal Reserve Board recently released a study 

that shows that the net worth of the median family declined 38.8% in just three years. 

from 2007-2010. wiping out more than $7 trillion in wealth - almost two decades of 

prosperity -that was due entirely to the financial crisis. 

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This financial and economic calamity has proved yet again that, other than war, 

nothing devastates a country more than the economic ruin that follows a financial crisis such 

as the one that began in 2007. (Better Markets tracks the cost of the crisis on its website: 

www.bettermarkets.com.) 

The Dodd-Frank financial reform law was passed to prevent that from ever happening 

again. It was necessary to protect the American people, taxpayers and Treasury from Wall 

Street and to eliminate or minimize the need for any future bailouts. The law is designed to do 

that largely by re-regulating Wall Street and systemically significant institutions and activities. 

After all, the financial crisis and the costs it created arose due to the de-regulation and nonregulation of Wall Street. In stark contrast, the country prospered after Wall Street was 

comprehensively regulated for the 70 or so years after the Great Depression. 

Any attempted genuine evaluation of the impact of the Dodd-Frank financial reform 

and Wall Street re-regulation law, or parts of it, must take these facts into account. 

And, of course, any attempt to really understand the financial reform law and its 

impact would require considering the law as a whole and not just picking a couple of discrete 

parts, taken out of context, and discussing them as if they were either representative of the 

entire law or somehow could be properly understood as isolated standalone provisions. Thus, 

while this hearing seeks specific comment only on derivatives regulation, the Volcker rule, 

risk retention, and single counterparty credit limits, understanding how these provisions 

relate to the entirely of financial reform and how they relate to preventing another financial 

collapse and economic crisis are essential to evaluating them or their impact. 

My testimony will, therefore, first review the financial collapse and economic crisis, the 

deregulation of the financial industry and what it has cost and continues to cost the American 

people. Then I will discuss the re-regulation of the financial industry and the need to shift 

costs from society back to the industry so that incentives and costs are properly aligned to 

reduce reckless behavior and the need for bailouts. Unsurprisingly, this re-regulation has 

caused industry to complain about its costs, but history proves that such complaints have 

little merit and that the industry and the country can thrive when Wall Street is properly 

regulated. Industry's latest attack on financial reform is an attempt to impose a burdensome 

cost benefit analysis on every rule, but that tactic is also without merit. Lastly, I will discuss 

the specific rules the hearing will focus on. 

Financial reform was necessitated by the largest financial and economic collapse since 

the Stock Market Crash of1929 and the Great Depression of the 19305. and it was 

enacted to prevent a second Great Depression 

As the aftershocks of the Lehman Brothers bankruptcy shook the world in September 

of 2008, the U.S. and global financial system seized up and nearly collapsed. Only massive, 

multi-trillion dollar interventions by the U.S. government and international institutions 

prevented that calamity in the fall of 2008 and the spring of 2009. Making matters worse, as 

the financial system was unraveling, the u.s. and global economies were also grinding to a 

halt That too required multi-trillion dollar governmental actions to prevent a second Great 

Depression. 

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The wave of bailouts, buyouts, and other rescue efforts that were undertaken to 

support the nation's leading financial institutions revealed the depth of the unfolding crisis. In 

the days and weeks after the Lehman bankruptcy, the U.S. government nationalized Fannie 

Mae and Freddie Mac, and then effectively nationalized AIG and Citigroup through bailouts 

totaling hundreds of billions of dollars. To prevent their inevitable bankruptcies, investment 

banks Goldman Sachs and Morgan Stanley were allowed to quickly convert into bank holding 

companies, thereby receiving full access to the federal safety net. Bank of America acquired 

investment bank Merrill Lynch, and Wells Fargo acquired Wachovia (derailing Citigroup's 

attempt to buy Wachovia only days before). The nation's largest savings and loan association, 

Washington Mutual, failed, was seized by regulators, and was ultimately sold to ]PMorgan 

Chase at a bargain basement price (similar to the bargain price ]PMorgan paid for Bear 

Stearns in March 200S). 

Throughout this time, the U.S. government was creating innumerable rescue programs 

to prevent any financial institution or sector of the financial industry (including the $3.S 

trillion money market fund industry) from collapsing. The much ballyhooed $700 billion 

TARP program was but one of the countless emergency measures adopted during this time. 1 

And, it must be remembered that the U.S. government also assisted foreign banks and 

financial institutions throughout the world, not just those in the U.S. The pace and scale of 

deteriorating events was unprecedented, as the contagion from the liquidity and solvency 

crises spread rapidly to every corner of the financial system and the globe. 

But even those unprecedented actions, programs, and interventions -- representing 

trillions of dollars -- were not sufficient to stop the multiple crises from spiraling out of 

control, as almost every financial indicator continued to deteriorate and to do so at an 

accelerating pace into 2009. Indeed, as late as February 2009, more than five months after 

the Lehman bankruptcy. the financial systems and economies of the U.S. and the global 

community were still declining rapidly, with no bottom in sight. Policymakers were facing a 

very dark and dangerous abyss and the possibility of a second Great Depression was a 

very real and increasingly likely prospect. 

In response, the U.S. government took additional unprecedented actions. For example, 

on February 23,2009, it announced that the full faith and credit of the United States would 

stand behind the entire financial system. which was thus effectively nationalized. as set 

forth in this dramatic policy statement: 

1 It what appears to be yet another attempt to minimize and understate the depth and cost of the crisis. some talk 

misleadingly as if TARP was the only government rescue program and some even claim that TARP will make 

money. That is not accurate. TARP is currently projected to cost at least $60 billion. However, even if all the 

money TARP lent was paid back, that doesn't mean it would have "made" money. The silly claim that has been 

made by people who know better is that ifTARP (or anyone of the other bailout programs) take in one penny 

more than it lent (or the other programs spent, pledged, guaranteed or otherwise used), then it made money. 

That is simply misleading propaganda. The only proper way to evaluate any of these programs is what any 

return was or should have been on a risk adjusted basis. By that measure, not only have none of the 

government bailouts "made" money; they have all cost taxpayers and the government hundreds of billions if not 

trillions of dollars (above and beyond all the other costs). 

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A strong, resilient financial system is necessary to facilitate a broad and 

sustainable economic recovery. The U.S. government stands firmly behind the 

banking system during this period of financial strain to ensure it will be able to 

perform its key function of providing credit to households and businesses. The 

government will ensure that banks have the capital and liquidity they need to 

provide the credit necessary to restore economic growth. Moreover, we 

reiterate our determination to preserve the viability of systemically important 

financial institutions so that they are able to meet their commitments. 

Joint Statement by the Treasury, FDIC, OCC, OTS, and the Federal Reserve (Feb. 23, 2009) (full 

statement available at 

http://www.federalreserve.gov/newsevents(press/bcreg/20090223a.htm ). 

That historic step was followed by others, and trillions of additional government 

dollars were spent,lent, pledged, guaranteed, or otherwise used in an all-out effort to prevent 

a second Great Depression. We now know that those actions somehow worked, that the 

financial system did not entirely collapse, and that a second Great Depression was avoided. 

Having lost 54 percent of its value since its October 9, 2007 high, we also now know -- with 

the benefit of hindsight -- that the stock market hit its lowest point on March 9, 2009 and that 

the precipitous and uncontrolled decline of the financial markets and the economy stopped 

sometime in the March-April 2009 period. 

However, and most important, even to this day no one knows exactly why or how 

complete disaster was averted. No one knows which policy, program, intervention, action, or 

expenditure -- or what combination or order of those measures -- arrested the downward 

spiral. 

Nevertheless, the need to prevent such a calamity from ever happening again is 

overwhelmingly and indisputably clear: Not only did the financial collapse and economic 

crisis cost many trillions of dollars, it also caused vast, unquantifiable, and still-ongoing 

human suffering, from skyrocketing unemployment, millions of home foreclosures, 

widespread poverty, and enormous wealth destruction, to foregone retirements, obliterated 

college funds, and, for many, the lost American Dream. This proved yet again that, other than 

war, nothing devastates a country more than the economic ruin that follows a financial crisis 

such as the one that began in 2008. 

That is why comprehensive financial reform and the re-regulation of Wall Street was 

essential. The Dodd-Frank law is intended to protect the American people, taxpayers, and the 

U.S. Treasury from ever again having to suffer through and pay for another financial collapse 

and economic crisis. Above all, it is intended to prevent a second Great Depression from 

afflicting the United States. That dire outcome was avoided, but just barely and through a 

measure of good luck. The American people may not be so fortunate next time and, most 

importantly, they should not have to depend on luck. They should have the benefit of laws, 

reforms, rules, and regulations to protect them, and they should be able to count on their 

elected representatives and regulators to fulfill their duties and ensure that those safeguards 

are put in place. 

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That is what Dodd-Frank financial reform law is all about and how its impact should be 

evaluated. 

The benefits of avoiding another financial crisis are enormous. totaling trillions of 

dollars. measured not just in terms of the current crisis but also in light of a potentiallv 

worse financial disaster that may befall our country if reform is not fully implemented 

It cannot be legitimately denied that the value of a stronger and more comprehensive 

regulatory system is huge. It includes the benefits of sparing our economy and our society the 

devastating consequences that another financial collapse and economic crisis would bring in 

the form of both monetary losses and human suffering. 

A reasonable starting point for determining the cost of a future crisis is the cost of the 

recent financial collapse and ongoing economic crisis. The impact of that crisis is staggering. 

Better Markets has a detailed analysis of the costs of the crisis on its website 

(www.bettermarkets.com), but here are some snapshots of the financial devastation it 

caused: 

• Gross domestic product ("GDP") has fallen dramatically and it is not expected to 

return to normal levels until at least 2018. At that time, the cumulative shortfall in 

GDP relative to potential GDP is expected to reach $5.7 trillion. 

The unemployment rate skyrocketed to 10.1 percent in October of 2009, 

representing 15.4 million workers, many of whom have become members of the 

permanently unemployed. 

• Government expenditures, including corporate bailouts, special lending facilities, 

unemployment benefits, and the economic stimulus package are well in excess of a 

trillion dollars. The value of the government's total commitment of support, 

provided through some 50 separate programs, is estimated at $23.7 trillion. 

The national debt will increase by $8 trillion as of 2018 as a result of the crisis, due 

to the combined effects of government expenditures and reduced revenues. 

• The stock market fell by more than 50 percent in just 18 months, from October 

2007 until March of 2009, representing $11 trillion in evaporated wealth. 

• From 2007 to 2010 median family income fell 7.7 percent, from $49,600 to 

$45,800, and median family net worth fell 38.8 percent, which totals more than $7 

trillion, "erasing almost two decades of accumulated prosperity." 

• Home values have declined 33 percent since the crisis began, representing $7 

trillion in lost value. 

• Over 11 million homeowners own homes worth less than their mortgages, or 

about 22.8 percent of all residential properties with a mortgage. 

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A total of at least 3.6 million homes-and by some accounts 5 million-have been 

lost to foreclosure since the crisis began, with millions of additional foreclosures to 

come. 

• The number of families falling below the poverty line has climbed steadily since 

2007, rising from 12.5 to 15.1 percent, representing over 46 million individuals 

deemed poor. 

The human anguish caused by the crisis has been enormous and incalculable, 

encompassing all of the psychological and physical health effects that come with 

unemployment, poverty, homelessness, delayed retirements, abandoned college 

educations, increased crime rates, and lost health care. 

• Maybe worst of all, the faith of the American people in The American Dream, where 

the U.S. is the land of opportunity, everyone gets a fair shot, and the next generation 

will have it better than the last, is dropping at an alarming rate, which could 

undermine the spirit of our country. 

It is impossible at this point to quantify all of the consequences of the still-unfolding 

economic crisis. Moreover, the actual costs of another crisis are almost certain to be far 

greater than what we have witnessed since 2007. This is attributable to the fact that our fiscal 

and monetary capacities to institute remedial measures and to absorb the costs of a future 

crisis have now become so depleted. With the annual budget deficit now exceeding 1.2 trillion 

dollars, the Treasury will have far fewer fiscal tools at its disposal with which to manage 

another financial crisis. This vulnerability will persist for years to come, until something 

approximating a full recovery has been achieved, and no one is expecting that for a very long 

time. 

From 2007 to 2010, the U.S. government responded to the financial and economic 

crisis by implementing trillions of dollars in emergency measures to prevent a precipitous 

slide into a second Great Depression. To create a more lasting safeguard against another 

financial crisis, the comprehensive reforms in the Dodd-Frank law were passed. Those 

reforms promise an enormous collective benefit -- avoiding the costs of what would likely be 

a second Great Depression -- but only if they are implemented on a collective basis. 

Therefore, as legislators evaluate the law, as regulators promulgate rules under the law, and 

as courts review those rules, they must consider the entire set of reforms enacted and the 

benefits that those reforms can provide as a single, coherent collection. If the cohesive 

framework envisioned in the financial reform and Wall Street re-regulation law is not 

understood and evaluated this way, then the public, the markets, and the economy as a whole 

will once again be vulnerable to another financial catastrophe. 

Effective financial reform that protects the American people requires the re-regulation 

of the financial industry and that will result in shifting costs back to the industry from 

society where it was shifted when the industry was de-regulated 

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Over a three-year period beginning in 2007 and culminating in the passage of the 

financial reform and Wall Street re-regulation law on July 21, 2010, the U.S. government 

witnessed the financial and economic destruction caused by the crisis, implemented 

emergency measures to contain it, and then made the judgment that comprehensive reforms 

were essential to protect investors, taxpayers, the Treasury, the financial system, and the 

economy from another financial crisis. That will necessarily result in the industry assuming 

their proper regulatory costs and burdens, which are necessary to prevent those costs from 

being shifted to taxpayers and society. Those burdens include initial and ongoing compliance 

costs as well as the elimination of extremely profitable lines of business. 

Those consequences were well known, but nevertheless intentionally imposed to reregulate the recently de-regulated financial industry, thus closing regulatory gaps and 

strengthening existing requirements for the benefit of investors, the public, and the entire 

economy. 

The financial industry was very significantly regulated after the Stock Market Crash of 

1929 and during the Great Depression. Those regulations protected the public, investors, 

taxpayers, the financial system, and the economy for seven decades. It was no accident that 

they prevented a repeat of the Crash of 1929 and the Great Depression for more than 70 

years. However, those regulatory protections were removed, primarily during the 1990s, 

reaching a peak in 1999 with the passage of the Gramm-Leach-Bliley Act of 1999 and in 2000 

with the passage of the Commodities Futures Modernization Act. 

Thus after seventy years of regulation, it took just seven years of de-regulation for the 

financial industry to engage in the high risk trading and reckless investments that nearly 

collapsed the financial system and almost ushered in a second Great Depression. While the 

costs are still being counted and incurred, the U.S. government had to spend, lend, pledge, 

guarantee, insure, or otherwise use trillions of dollars to prevent the full collapse of the 

financial system and halt the economic crisis. 

The primary motivations in passing the Dodd-Frank financial reform and Wall Street 

re-regulation law were to prevent such a financial collapse and economic crisis from ever 

happening again, and to avoid a second Great Depression. In many respects, the reforms in 

the Dodd-Frank law re-regulate the financial industry as it had been regulated beginning in 

the 19305. This re-imposition of regulation also means shifting the substantial costs of 

risky behavior and predatory practices from the public back onto the industry-or, as 

economists would say, forcing the industry to assume the costs of the externalities that they 

imposed on society when they were deregulated. 

Thus, the Dodd-Frank financial reform law and the regulations promulgated 

thereunder must necessarily (1) prohibit some activities, including fraudulent transactions 

and those based upon conflicts of interest; (2) curtail other behaviors, including excessive 

speculation; (3) force the reallocation of funds to other uses, such as capital and margin; and 

(4) increase transparency and competition through pre- and post-trade reporting, thus 

reducing profit margins. 

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Further illustrating this approach, the Dodd-Frank law imposes a broad set of 

regulatory reforms on bank holding companies and nonbank financial institutions, with the 

focus on systemically important institutions. They will pay necessary compliance costs from 

new requirements relating to registration, reporting, recordkeeping, public disclosures, risk 

committees, examinations, fees, and capital and leverage requirements, among other 

enhanced supervisory prudential standards. Key provisions of the statute will also eliminate 

some immensely profitable trading activities. Most notable is the "Volcker Rule," which 

prohibits insured depository institutions, bank holding companies, and certain nonbank 

companies from almost all proprietary trading and all but de minimis investment in hedge 

funds. These bans on highly profitable activities will effectively eliminate billions of dollars in 

annual revenue for the largest banks. But, they are necessary to protect the American people, 

taxpayers and Treasury from Wall Street. 

Given that the ongoing costs of the last financial collapse and economic crisis have 

exceeded trillions of dollars, the enormous collective benefits of the financial reform and Wall 

Street re-regulation law far exceed the costs and lost profits that industry will have to absorb 

as the price for protecting the American people, taxpayers, Treasury and economy. 

Industry always complains about the alleged costs and disruption of regulation. but 

history proves that they are without merit 

Critics argue that the costs of the Dodd-Frank financial reform and Wall Street reregulation law are or will be excessive and that they will cripple the financial industry and 

even stifle economic recovery from the financial crisis. However, using the past 100 years as a 

guide, there is no basis for the claim that the essential reforms, even on the scale required by 

the Dodd-Frank financial reform law, will produce these consequences. 

Since the emergence of financial market regulation, the financial services industry has 

argued that new regulatory requirements will have a devastating impact by imposing 

unbearable compliance costs. Yet Wall Street has always absorbed the cost of those new 

regulations and has consistently remained one of the most profitable sectors in our economy. 

For example, a century ago, when securities regulation first emerged at the state level, Wall 

Street railed against it as an "unwarranted" and "revolutionary" attack upon legitimate 

business that would cause nothing but harm. However, in the years following this early 

appearance of financial regulation, banks and their profits grew handsomely. 

Subsequently, when the federal securities laws were adopted in the midst of the Great 

Depression, Wall Street staunchly opposed them, claiming that they would slow economic 

recovery by impeding the capital formation process and discouraging the issuance of new 

securities - virtually identical arguments that industry is making today. However, in the years 

after the enactment of the federal securities laws, the nation's securities markets flourished 

and became what has often been described as the envy of the world. The same pattern has 

been repeated with each new effort to strengthen financial regulation, including deposit 

insurance, the Glass-Steagall Act, mutual fund reform, and the national market initiatives of 

the mid-1970s. 

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The lesson to be learned from this history is that when faced with new regulations, 

members of the regulated industry routinely argue that the costs and burdens are too heavybut then they invariably adapt and thrive. Opponents of reform under the Dodd-Frank law 

are following this familiar pattern, and their attempts to minimize regulation by invoking the 

costs and burdens must be similarly discounted. 

Equally unfounded is the claim heard from opponents of regulatory reform that 

regulation is stifling overall economic growth and preventing a robust recovery from the 

financial crisis. This claim is unsupported, often just repeated as a self-evident proposition. In 

fact, the slow pace of economic recovery is not attributable to regulation but instead to 

rampant unemployment and lack of consumer demand following the worst financial crisis 

since the Great Depression. We need more financial regulation, not less, to ensure that the 

economy recovers and that we never again experience such a profound and long lasting 

financial disaster. 

"Economists who have studied the matter say that there is little evidence that 

regulations cause massive job loss in the economy, and that rolling them back would not lead 

to a boom in job creation." In fact, the Bureau of Labor Statistics continuously surveys the 

private sector to understand the reasons for layoffs. Data for 2010 shows that only 0.2 

percent of the people who lost their jobs in layoffs were let go because of government 

regulation. By comparison, 30 percent were let go because of a drop in business demand. 

In survey after survey, business owners consistently say that their reluctance to hire 

employees and expand production arises from uncertainty about consumer demand for 

products and services, not concern over regulation. One policy analyst recently canvassed 

numerous sources on the impact of financial regulation, ranging from the Bureau of Labor 

Statistics, the Wall Street Journal. the McClatchy Newspapers, and business trade data. The 

surveys and data collected from these organizations debunk the myth that either existing 

regulation or uncertainty about future regulation over financial services is responsible for the 

current economic stagnation. For example, a Wall Street Journal survey of business 

economists found that "[tJhe main reason U.S. companies are reluctant to step up hiring is 

scant demand, rather than uncertainty over government policies." 

Even as additional and essential regulations are being adopted, corporate America is 

actually faring well. Regulation is clearly not interfering with corporate profits, cash reserves, 

or executive compensation. Corporate profits are at record levels, representing over 10 

percent of Gross Domestic Product ("GDP") after tax, and executive compensation has nearly 

regained its pre-recession levels, with a reported remarkable 2 7 percent increase in median 

pay in 2010. That level of compensation remained steady and even increased somewhat in 

2011, with the top 100 CEOs receiving a total of $2.1 billion in compensation. 

The stagnant consumer demand holding back economic growth was a direct result of 

the financial collapse and economic crisis, which were a direct result of too little regulation. 

In the years leading up to the crisis, huge sectors of our financial markets (such as swaps) 

were completely unregulated, and other sectors (such as mortgage-backed securities) were 

poorly regulated. 

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The resulting costs of the crisis are enormous and lasting. As set forth in summary 

fashion above and in detail on our website (www.bettermarkets.com), they include 

unemployment totaling 12.5 million Americans, a massive drop in GOP, a huge decline in 

home values, and decimated retirement accounts. These costs, inflicted by the financial 

collapse caused by Wall Street, are what brought our economy to a standstill, not excessive 

regulation. Regulated, transparent markets with less fraud and reckless conduct will restore 

confidence in our markets and banks. That will in turn help economic growth and confidence. 

Moreover, industry's claims that financial reform will reduce market liquidity, capital 

formation and credit availability, and thereby hamper economic growth and job creation, 

simply disregard the fact that the financial crisis did more damage to those concerns than any 

rule or reform possibly could. In September 2008, there was no market liquidity, capital 

formation or credit availability and, since then, there has been little economic growth and 

even less job creation. That is due to the Wall Street created financial collapse and economic 

crisis. The financial reform and Wall Street re-regulation law was passed and is designed to 

prevent that from ever happening again. 

The latest attack on financial reform and re-regulating Wall Street is the claim that no 

rule passed to implement the law protecting the American people can cost industry too 

much. which ignores how much Wall Street has cost America 

Having failed to prevent the passage of a comprehensive financial reform law, the 

financial industry is redoubling its efforts to make sure the law is never implemented as 

intended. What that means is that they are trying to prevent the protection of the American 

people, taxpayer, Treasury and economy from suffering again as a result of their unregulated 

conduct. 

Their latest weapon to kill or weaken financial reform is to claim that every rule and 

regulation passed to implement the Dodd-Frank financial reform and Wall Street reregulation law must be subjected to exhaustive "cost-benefit analysis," which is a seductively 

innocent sounding phrase. Indeed, it is an activity that on its face seems sensible and 

appealing. After all, asseSSing and weighing the costs and benefits of taking an action appears 

on the surface to be reasonable. However, in the context of regulation generally and financial 

regulation in particular, that thinking is simply wrong and it will likely kill financial reform, as 

Wall Street has intended all along. 

Moreover, it is a ridiculous argument: the very industry that caused the financial 

collapse, economic crisis and trillions of dollars in costs -- many that continue to this day--

now claims that it cannot be re-regulated to prevent it from causing yet another crisis if the 

costs it must bear are too great. That would be irrational. The American people, taxpayer, 

Treasury and economy have to be protected from Wall Street; Wall Street doesn't have to be 

protected from regulation. In fact, Wall Street must be re-regulated because when it is 

deregulated and unregulated it causes financial collapse, economic crisis and trillions of 

dollars in costs - all of which the American taxpayers have to pay. 

Nonetheless, the industry is making this argument in the regulatory process and in 

lawsuits filed to prevent Wall Street from being re-regulated. For example, the Securities 

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Industry and Financial Markets Association (SIFMA) and the International Swaps and 

Derivatives Association (ISDA) have sued the CFTC over what is referred to as its "position 

limits" rule claiming, among other things, that the CFTC did not conduct the proper cost 

benefit analysis. Better Markets filed a brief opposing that argument and detailing why it is 

without merit. 

More recently, the Chamber of Commerce and the Investment Company Institute (ICI) 

have sued the CFTC over re-establishing a registration requirement for investment companies 

acting as commodity pool operators. Better Markets also filed a brief in this case detailing 

why industry's claims are without merit. 2 

In addition, Better Markets has just completed a report that it will be issuing next week 

entitled "Setting the Record Straight on Cost Benefit Analysis and Financial Reform at the 

SEC." The Report comprehensively reviews these cost benefit claims and demonstrates that 

these arguments are without merit and must be rejected. 

As part of the comprehensive financial reform and Wall Street re-regulation law, 

derivatives regulation, the Volcker rule, risk retention, and single counterparty credit 

limits are essential to protecting the American taxpayer from again having to bail out 

the financial industry 

The hearing seeks to focus on only four parts of the comprehensive financial reform 

and Wall Street re-regulation law: derivatives regulation, the Volcker rule, risk retention, and 

single counterparty credit limits. Each is an integral part of re-regulating Wall Street and 

protecting Main Street. Each needs to be strong and clear if the American people are to be 

protected. 

Derivatives Regulation 

First, no one can deny that the unregulated and nontransparent derivatives markets, 

conducted almost entirely over the counter, were a central cause of the financial collapse and 

economic crisis that begin in the U.S. in 2007. As the ongoing Eurozone crisis shows, allowing 

major financial institutions to engage in derivatives activities of unknown amounts -- with 

unseen risks, often even to the institutions themselves as well as the regulators and the public 

-- can cause the entire financial system to collapse. As Warren Buffett has aptly noted, 

derivatives are "financial weapons of mass destruction." 

They must be regulated and transparent. They must be moved from the dark over the 

counter markets to exchanges, ideally, or to clearing houses and execution facilities, at a 

minimum. Collateral and margin must be required and counterparty concentration must be 

2 See Brief of Better Markets, Inc. as Amicus Curiae in Support of Defendant Commodity Futures Trading 

Commission, Inv. Co. Institute v. CFTC, No. 1:12-cv-00612 (BAH) (D.D.C. 2012) (filed June 29, 2012), available at 

http' I Ibettermarkets.com Isites Ide fault lfi les IlCI%20v. %2 OCFTC%2 0-

%20Amicus%20BriefD6200fD620Better%20Markets%20June%2025 %202012.pdf: Corrected Brief of Better 

Markets, Inc. as Amicus Curiae in Support of Defendant Commodity Futures Trading Commission, Int'l Swaps and 

Derivatives Ass'n v. CFTC, No, ll-cv-2146 (RLW) (D.D.C. 2011) (filed May 1, 2012), available at 

http://bettermarkets.com Isites I default lfiles IAmicus%2 0 B rief%2 OCFTC%20 4-30-12.pdf. 

12 
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limited, and trade reporting must convey meaningful information in real time. In addition, 

the product and entity definitions for "swaps" and "dealers" that trigger these new regulatory 

requirements must be broad and without loopholes. Further, rules implementing business 

conduct standards must be strong so that conflicts of interest and other abuses that destroy 

the integrity of the marketplace - and kill investor confidence in the markets -- are limited to 

the maximum possible extent. Better Markets has commented on all facets of this new 

regulatory structure in an effort to balance the onslaught of industry pressure aimed at 

weakening these protections. 

These reforms are going to cost money, but, contrary to self-interested claims, they will 

not cost more money than the current system. Currently, these costs are hidden, embedded 

or shifted to society. The costs of risky, unregulated derivatives trading became apparent to 

everyone in the Fall of 2008, but those costs were shifted to society rather than born by 

financial market participants. The financial reform and Wall Street re-regulation law shifts 

those costs back to the market participants, which is where they belong and which will reduce 

risky conduct and, thereby, reduce the risk of crises and bailouts. 

The new requirements relating to margin in swap transactions perfectly illustrate the 

need to reallocate the costs of regulation -- and the ability to do so without stifling the market. 

Many financial firms fought against this new approach. They claimed forcing derivatives to 

trade in the light of day on open exchanges would increase costs for commercial end users 

who rely on derivatives to manage their risks. What they didn't mention is that the 

supposedly "new" costs that end users would face from margin requirements (a transparent 

risk-management tool that Congress rightly determined should become the new norm) had 

really existed all along, but had simply always been embedded in the spreads they paid in the 

dark markets where end users had no way to determine what they were being charged or the 

ability to comparison shop regarding price or features. 

For example, a business that uses an interest rate swap to trade a fixed rate for a 

floating rate might now have to put up initial margin of, say, 5% of the total value of the swap. 

This is to ensure that there is at least some cash on hand to cover losses in case interest rates 

move sharply against them. Previously, they may not have had to pay this 5% margin charge. 

But you can guarantee they would have paid it elsewhere, embedded in the overall price of the 

swap, or in the spreads that the market offered them. In the past, the derivatives desk at a 

large dealer would simply have guesstimated the credit risk posed by a firm, and calculated a 

buffer that they would then add to the price of the swap.3 This would be invisible to the end 

user, and also to regulators, but it was there nevertheless. Indeed, any trader who tried to 

avoid this step would have been fired on the spot. The problem was, this cost was entirely 

opaque, and there was no obligation on the part of the dealer to actually set the extra cash 

3 See Better Markets Comment Letter "End User Exception to Mandatory Clearing of Swaps", February 22, 2011, 

available at 

http:((comments.cftc.gov (Pu bl icComments IViewComment.aspx?id= 2 7992&5ea rchText-better%2 Omarkets 

13 
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aside as a risk management buffer. Instead, it would just be treated as regular income and 

either used for other trading, or to pay bonuses.4 

The new regime requires this hidden cost to be made explicit, and for the cash to be set 

aside as a genuine buffer against losses. This has been confusing to some end-users, largely 

because some in the financial industry have misleadingly characterized this as a completely 

new cost. The analyses presented to end-users by self-interested derivatives dealers not only 

ignored the previously embedded costs, but also assumed that all derivatives would now be 

subject to a uniformly high level of initial margin, with no netting. Thus, from a set of false 

assertions, they arrived at the entirely misleading conclusion that mandatory clearing would 

be costly to end users, when in fact it is quite the opposite. By bringing trading out into the 

open and requiring proper risk management, mandatory clearing greatly reduces the risk of 

another financial crisis.s The benefit of that reduced risk is, of course, enormous. 

Moreover, transparency will enable end users to determine what they are being 

charged and for what. This will enable comparison shopping and, almost certainly, engender 

competition among providers. Of course, the big dealer banks that currently control the 

opaque over the counter markets do not want such transparency or competition. 

Dodd-Frank did recognize that there are some situations in which it might be 

advantageous for a commercial firm, such as a manufacturer, to trade a derivative offexchange. Consequently, the law carved out a very narrow exemption from the clearing 

mandate. The exemption applies only to purely non-financial firms, and only when they are 

hedging purely non-financial risk. It tasked the eFTe with implementing this with an 

appropriately narrow scope. 

Thus, in the vast majority of cases, derivatives will now have to be traded on exchangelike venues, with proper risk-management systems.6 The risk of a future financial crisis will 

be greatly lessened and transparency will be increased. 

The Volcker Rule 

Second, the Volcker Rule prohibiting most proprietary trading and all but de minimis 

investments in hedge funds by banks that benefit from the federal financial safety net or are 

otherwise systemically significant is an essential reform. It effectively applies to only the 

biggest too big to fail banks because they are really the only ones that engage in any 

substantial proprietary trading or hedge fund investments. Moreover, while some continue to 

4 See Better Markets Comment Letter General Regulations and Derivatives Clearing Organizations, February 11, 

2011, available at http://comments.cftc goy/PublicComments/viewComment.aspx?id-27682&SearchText;, see 

also Mello, A and Parsons, J., "Margins, Liquidity and the Cost of Hedging", May 2012, available at 

www.web.mit.edu/ceepr/www/publicationslworkingpapers/2012-0OS.pdf. 

5 See 8etter Markets Comment Letter "Trading Documentation and Margining Requirements under Section 4s of 

the CEA", November 4.2011, available at 

http:// camments.cftc.gav IPublicCamments /ViewComment.aspx?id;49931&5ea rchText;better%2Qmarkets. 

6 See Better Markets Camment Letter "Care Principles and Other Requirements for Swap Execution Facilities," 

March 8, 2011, avaUable at 

http:// camments.cftc.gov IPublicComments /Vi eWCommentaspx?id;312 38&5ea rch T ext;betterOm2 Omarkets. 

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Proprietary trading is fundamentally no more than wild speculating by making huge 

leveraged bets with the banks' money for the purpose of hitting the jackpot and getting an 

enormous bonus windfall. Thus, this type of very high risk trading offers vast and fast wealth 

to those working for these too big to fail institutions. However, if those bets go wrong, as they 

did in 2007 and 2008, they can lose massive amounts of money very quickly and drag down 

an entire bank, which then has to be bailed out so it doesn't take down the entire financial 

system. 

However, the law also carefully carves out certain permitted, socially desirable 

activities such as market making and risk-mitigating hedging. To avoid the big banks from 

disguising improper proprietary trading as a permitted activity (which they are highly 

incentivized to do given the gigantic bonus potential), the permitted activities are carefully 

defined. For example, permissible market making must be "designed not to exceed the 

reasonably expected near term demands of clients, customers, or counterparties." The 

permitted activity of "risk-mitigating hedging" is also very carefully defined in the statute. 

Most of the industry's so-called concerns and objections to these definitions appear to be no 

more than attempts to create loopholes in the definitions of permitted activities so that they 

can continue their high-risk, but lucrative proprietary trading. 

Reinforcing the ban on proprietary trading and ensuring that the permitted activities 

don't become such loopholes, the Volcker Rule also prohibits, among other things, any 

"transaction, class of transactions or activity ... if the transaction, class of transactions or 

activity ... would result, directly or indirectly, in a material exposure by the banking entity to 

high-risk assets or high-risk trading strategies .... " 

Thus, the recently reported trading by JP Morgan Chase's Chief Investment Office (CIO) 

in London (the so-called "London whale") almost certainly would have violated the letter and 

not just the spirit of the law and proposed Volcker Rule. First, given enormous net gains 

(reportedly 25% of the bank's net income for 2010) and losses (now reported to be 

approaching $9 billion) reported, this trading activity cannot properly be described as 

"hedging." And, given the swings in net profits and losses, it cannot properly be characterized 

as "risk-mitigating hedging," which is the definition of the permitted activity. Moreover, it 

has been widely reported that JP Morgan's CEO personally transformed the CIO from a lowrisk hedging operation into a "profit seeking" operation; real "risk-mitigating hedging" does 

not generate net profits, which is what the CEO reportedly structured and staffed the CIO 

operations to create. (While losses and profits may be generated, they should be largely 

offsetting, resulting in little net profit or loss.) 
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Moreover, the JP Morgan CIa's trading certainly involved "high-risk assets" and "highrisk trading strategies," which are also expressly prohibited by the law. This is proved not 

only by the net profits and losses generated, but also by the fact that the cIa had to wager vast 

amounts of money to create those profits and losses, reportedly involving hundreds of billions 

of dollars. The CIa had, by the CEO's admissions, more than $350 billion under its control and 

much of that was apparently bet by the "London Whale" seeking to make a big splash and get a 

huge bonus, if not other rewards. Proving the high-risk nature of these assets and trading 

strategies, they apparently involved relatively illiquid securities because the bank couldn't 

exit the investments in any reasonable period of time to minimize its losses. 

As if all that wasn't enough to demonstrate beyond a doubt that JP Morgan's trading 

violated the law and rule, it is also the case - as the CEO himself has admitted - that those very 

high risks were unknown to the bank, the bank's CEO, eFO and other executive, risk and 

operational management.s The narrow permitted activity of "risk-mitigating hedging" cannot, 

by definition, occur by accident, which is why the proposed rule has detailed procedures to 

establish that such hedging is in fact risk mitigating and in fact bone fide (although, as set 

forth in Better Markets February 13, 2012 comment letter, those procedures need to be 

strengthened). 

Thus, the incentives to engage in this high risk behavior are enormous and must be 

addressed directly, which Better Markets did in its comment letters by focusing on 

compensation. Moreover, we addressed with specificity the industry's complaints regarding 

their claim that the rule will reduce their ability to act as market makers for corporate bonds, 

i.e., the alleged liquidity concerns. In this regard, it is noteworthy that the industry did not 

provide information or data on their own purported inventories to show (rather than merely 

claim) how the proposed rule would impact liquidity. 

They do rely on a paper by the consulting firm of Oliver Wyman. Given that the paper 

was purchased by SIFMA on behalf of the industry, it is no surprise that it agrees with SIFMA's 

and the industry's position on the Volcker Rule. Like their arguments, however, the paper is 

deeply flawed. Better Markets addressed these flaws in its comment letters (specifically in the 

April 16, 2012 and June 19, 2012 comment letters), but I will briefly address the primary flaw 

here: Oliver Wyman, without explanations or basis (and contrary to basic economics), 

assumed that there would be no new entrants into the business of market making if the 

biggest too big to fail banks stopped making markets as a result of the Volcker Rule (which 

itself is a highly dubious assumption because market making is an expressly permitted 

activity). 

Specifically, the Oliver Wyman paper stated that "[wJe do not directly analyze a wide 

range of potential knock-on effects, including ... [tJhe potential replacement of some 

proportion of intermediation currently provided by Volcker-affected dealers by dealers not so 

affected." As set forth in our comments letters of February 13, 2012, April 30, 2012 and June 

8 Moreover, JP Morgan's CEO also, without detail or explanation, claimed that the London Whale trade "morphed" 

into something he "couldn't defend." Hard to conclude that statement is anything other than an attempt to 

mislead because a trade or trades - as he well knows .- do not "morph." They are not living organisms. People 

structure trades, put trades on, take them off, change them and are supposed to authorize, supervise and monitor 

them. Someone or group of people did all of that, even ifit wasn't with the knowledge or consent of the CEO, CFO 

or others. 

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19,2012 (referenced and cited above), there is, however, a great deal of historical and 

contemporary evidence that entry is the normal market response to profit opportunities like 

this, including recently in the corporate bond markets. 

This should come as no surprise to anyone. After all, the big dealer banks are not 

nonprofit organizations and do not make markets for free. They do it to make money and 

because there is money to be made. If they don't make that money, other market participants 

will move into the business to reap the profits. 

Frankly, most of the industry's other objections simply don't stand up under the most 

minimal scrutiny either. For example, they claim that it is almost impossible to distinguish 

between proprietary trading and market making or hedging. This is simply silly. Such 

activities have been going on for decades if not centuries or more and there has not been any 

evidence of widespread confusion over those activities ........... until the Volcker rule banned 

proprietary trading. 

Wall Street has some of the highest paid people in the world and many claim that they 

are the smartest people in the world, but all of a sudden they can't tell the difference between 

different activities? These are self-interested complaints that seek to get the law and the rules 

re-written in a way that would allow the biggest banks to continue their wildly lucrative 

proprietary trading by a different name. While that would increase Wall Street's profits, it 

would yet again risk a raid on taxpayer's pockets and must not be allowed. 

Risk Retention 

Third, dealing with risk and risk retention are some of the most important aspects of 

the new financial reform law. 

Poor regulation of asset securitization played an important role in the financial crisis. 

Sophisticated financial institutions created hundreds of billions in high-risk assets which they 

sold to others, who ultimately took the losses on them. They sold subprime residential 

mortgage-backed securities and collateralized debt obligations - often highly rated - that 

were in fact toxic financial time bombs that waiting to explode. 

Wall Street firms created and sold these dubious assets in such great quantity largely 

because they were able to offload the losses to the buyers. For example, there was no 

requirement that sponsors of asset-backed securitization vehicles retain significant 

ownership interests. The economic incentives were perverse, and the results were disastrous. 

Section 941 of the Dodd-Frank Act addresses this problem. It requires that sponsors of 

asset-backed securities retain a 5 percent ownership interest in the securities it creates and 

sells. This more closely aligns the interests of the sponsors and investors, much as mortgage 

down payments align the interests of home buyers and mortgage lenders. 

To make sure that sponsors cannot use financial engineering (often misleadingly 

referred to as "innovation") to escape the risk retention requirement, the rules implementing 

Section 941 place an operational restriction on asset securitizers. If they issue "interest-only" 

or "premium" bonds as part of the securitization, the proceeds from these bonds must be 

placed into a "premium capture cash reserve account" for the life of the securitization. The 

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premium capture account would be used to cover losses on the underlying assets before any 

other interest or account in the issuing entity. 

The reason for this is simple. Interest-only and premium bonds are used by sponsors 

to realize expected future profits from the securitization vehicle -- the so-called "excessspread" between the coupon payments on securities issued and the interest payments on the 

underlying collateral-- up front. These bonds can therefore be used to reduce or eliminate the 

risk retention requirement. But putting revenues from these bonds into an account that 

would be in a first loss position would negate that possibility. 

Those who object to the premium capture account are in essence objecting to the risk 

retention requirement. And if securitized assets can only be issued if sponsors retain none of 

the risk, then there is good reason to believe that many of the worst practices that brought on 

the last crisis will continue and likely create another crisis and require yet more taxpayer 

bailouts. 

Interconnectedness 

Fourth, the interconnectedness of systemically significant institutions and activities 

enabled and facilitated the rapid spread of the financial collapse in 2007 to 2009 (so called 

"contagion" or "domino effect"). This risk has to be eliminated or minimized if there is any 

chance of containing future financial crises and taxpayer bailouts. Section 165( e) of the DoddFrank financial reform law -- which limits the credit exposure among the biggest banks -- is 

one of the ways that the contagion risk of interconnectedness is addressed. 

The proposed Fed rule limits net exposures to a single counterparty to 10% of the 

bank's capital and surplus for holding companies with more than $500 billion in assets. This 

is an essential attempt to limit direct interconnectedness between the biggest, systemically 

significant banks where the risks of contagion are greatest. Higher levels of exposure - which 

would increase the systemic harm of single Lehman or Bear Stearns-like failure are 

inconsistent with a stable financial system. 

While the proposed rule is a good start, it needs to be strengthened, as we set forth in 

our comment letter of April 30 to the Fed, accessible here: 

http://www.federalreserve.gov ISECRS/2012 IMay/20120501lR-1438/R1438043012107250511116121698 l.pdf. Better Markets advocated that single 

counterparty exposure limits be made more effective by limiting permissible netting for 

collateral, guarantees and hedges, and by looking through legal form to determine actual 

exposures to counterparties. In no event should the proposed rule be weakened as some in 

the industry are advocating. 

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J ""1 INVESTMENT ~ . COMPANY 

,<;\; INSTITUTE 

STATEMENT OF 

THOMAS P. LEMKE 

GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT 

LEGG MASON & CO., LLC 

ON BEHALF OF THE 

INVESTMENT COMPANY INSTITUTE 

BEFORE THE 

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ON 

"THE IMPACT OF DODD-FRANK ON CUSTOMERS, CREDIT, AND JOB CREATORS" 

JULY 10,2012 
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76114.068

EXECUTIVE SUMMARY 

• Operating under a remarkably comprehensive regulatory framework, mutual funds and other 

registered investment companies ("registered funds") help over 90 million shareholders to achieve 

their financial goals. Congress did not direct the Dodd-F rank Wall Street Reform and Consumer 

Protection Act ("Dodd-Frank Act") at these funds, because they were not a cause of the financial 

crisis. Nonetheless, the statute and rules implementing it will have important implications for all 

market participants, including registered funds and their advisers. 

• Certain provisions of the Dodd-Frank Act are intended to ptomote bank safety and soundness and 

financial stability, but care must be taken to ensure that their implementation does not have 

unintended adverse consequences-for registered funds and their shareholders, the financial 

markets, or the broader economy. 

o Volcker Rule. The regulatory proposal to implement the Voleker Rule reaches much 

farther than Congress intended, inappropriately capturing some U.S. registered funds and 

virtually all non-U.S. retail funds. Any final rule should expressly exclude these funds from 

the definitions of "covered fund" and "banking entity." The proposal also could impair the 

financial markets and limit investment opportunities for registered funds and their 

shareholders. ICI has provided recommendations for addressing these concerns in its 

comments to regulators. 

o Designation ofSystemicaIly Important Nonbank Financial Companies ("SIFls"). It is 

important that the Financial Stability Oversight Council ("FSOC") act deliberatively in 

exercising its authority to designate nonbank SIFIs for heightened regulation and 

consolidated supervision by the Federal Reserve Board. SIFI designation is neither 

warranted nor appropriate for registered funds or their advisers because, among other 

things, they do not present the risks such designation is intended to address. While I CI 

welcomes the study of asset management companies the Office of Financial Research is 

undertaking on behalf of the FSOC, we feel strongly that: (I) it would be premature to 

evaluate such companies under the existing SIFI deSignation framework before completion 

of this analysis; and (2) the FSOC should publish the study (and any future material 

changes to its SIFI deSignation guidance) for public comment. 

o Enhanced Prudential Standards for Nonbank SIFIs and Large Bank Holding 

Companies. The Federal Reserve Board's proposal to implement enhanced prudential 

standards under Section 165 of the Dodd-Frank Act is premature as applied to nonbank 

SIFls, because the FSOC has not yet designated any such SIFIs. Without knowing which 

entities will be designated, the Federal Reserve Board cannot comply with its statutory 

obligations regarding nonbank SIFls. The Federal Reserve Board therefore should exclude 

nonbank SIFls and separately propose a process for prescribing the enhanced standards that 

will be applied to them. 
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o Unlimited Insurance for Noninterest-Bearing Transaction Accounts. In the DoddFrank Act, Congress granted circumscribed authority for the FDIC to provide unlimited 

deposit insurance only to specified accounts and only for a two-year period. Congress 

should reject calls to extend this program beyond its statutory expiration date, because the 

program has the potential to dislocate markets and increase systemic risk in times of market 

stress by creating an unlimited taxpayer-supported backstop for non interest-bearing 

transaction accounts. 

• In addition to the Volcker Rule, Dodd-Frank Act provisions on asset-backed securities ("ABS") and 

derivatives have implications for registered funds as investors in the financial markets. 

o Asset-Backed Securities. As investors in ABS, registered funds have a strong interest in 

ABS markets that function fairly and in the interests of investors. 

Risk Retention. ICI generally supports the goal of the joint regulatory proposal to 

implement the credit risk retention requirements imposed by the Dodd-Frank Act. 

We believe that the proposed standards for risk retention may not be appropriate 

or necessary for certain classes of ABS in which registered funds invest-in 

particular, notes issued by asset-backed commercial paper programs and securities 

issued by municipal tender option bond programs. 

Prohibition Against ABS Conflict ofInterests. ICI also supports the rule the 

Securities and Exchange Commission ("SEC") has proposed to implement the 

prohibition under the Dodd-Frank Act against material conflicts of interest in 

connection with certain securitizations. The SEC should clarify, however, that the 

proposed rule excludes actions taken in connection wi th investing in an ABS by a 

registered fund that is an affiliate of an entity that structures or distributes an ABS. 

In addition, the proposed rule's exception for liquidity commitments should not be 

viewed as inconsistent with the restrictions under the regulatory proposal to 

implement the Volcker Rule. 

o Derivatives. Registered funds are participants in the derivatives markets and use these 

instruments in a variety of ways. Accordingly, ICI and its members have encouraged reform 

efforts in the derivatives markets. 

Implementation of Title VII. It is crucial for implementation of the new 

regulatory framework for derivatives to follow a sequential, deliberative and 

coordinated process to minimize unforeseen and unintended consequences for 

market participants, customers and the derivatives markets, including disruptions 

to the markets and risk mitigation strategies. Specifically, the implementation 

periods should: (1) afford adequate time for the SEC and the Commodity Futures 

Trading Commission ("CFTC") to gather additional market data to inform future 

rulemaking; (2) allow market participants to build market infrastructures, modify 

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business operations, complete testing, and perform outreach and education of 

customers; and (3) phase in rule requirements by type of market participant and 

asset class. 

The Status of Non-Deliverable Foreign Exchange Forwards. Under the DoddFrank Act, foreign exchange ("FX") swaps and forwards are considered swaps unless 

the Secretary of the Treasury makes a written determination that either or both 

should not be regulated as swaps. The Treasury has issued a proposed 

determination that would exempt FX swaps and forwards from the definition of 

swap, but would not include non-deliverahle FX forwards ("NDFs") within the 

exemption. ICI has consistently supported Treasury's proposed exemption ofFX 

swaps and forwards, and strongly believes that the exemption should extend to 

NDFs, which are functionally and economically identical to FX forwards. 

Treasury, in coordination with the CFTC or, if necessary, Congress, should clarifY 

that FX forwards include both deliverable FX forwards and NDFs. 

The Process for Making a Swap «Available to Trade." Late last year, the CFTC, 

pursuant to the Dodd-Frank Act, proposed a process to establish which swaps will 

be subject to mandatory trading, or will be made "available to trade" on a designated 

contract market ("DCM") or swap execution facility ("SEF") for purposes of the 

Commodiry Exchange Act. The CFTC's proposed process would grant the DCMs 

and SEFs a significant role in making these determinations. To address the 

incentives a DCM or SEF may have to require that a swap be subject to mandatory 

trading, even in the absence of a liquid trading market for the swap, the CFTC 

should require DCMs and SEFs to consider objective standards or thresholds as 

part of the make "available to trade" determination process, and should make 

consideration of each standard/threshold mandatory. 

The Determination of Block Trades, Pursuant to the Dodd-Frank Act, both the 

SEC and CFTC have issued proposals relating to block trades. Market 

transparency is a key element to ensuring the integrity and qualiry of the swaps 

markets, but that must be balanced against adequately protecting information 

regarding a registered fund's block trades. It is critical that the SEC and CFTC 

adopt block thresholds that account for the liquidiry in each unique category of 

swaps, calculate the thresholds regularly, and establish thresholds that are low 

enough to encourage the use of block trades. 

• We wish to make the Subcommittee aware of an agency's troubling use of the Dodd-Frank Act as a 

pretext for expanding its authority through unjustified regulation. 

o For almost thirty years, the CFTC has provided a uniform exclusion through its Rule 4.5 

from regulations applicable to commodity pool operators for entities already subject to 

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another regulatory scheme. Invoking its supposed "more robust mandate" to "manage 

systemic risk" under Dodd-Frank, the CFTC has sharply curtailed this exclusion, but only 

for registered funds and not for other entities covered by the rule. 

o In actuality, the CFTC's amendments to Rule 4.5 were neither required nor even 

contemplated by the Dodd-Frank Act. The additional regulation that amended Rule 4.5 

will impose on registered funds is redundant of the comprehensive regulation to which 

registered funds and their advisers are already subject by the SEC. The CFTC has not 

justified the need for these additional regulatory burdens, nor the significant costs they will 

impose on registered funds and their shareholders. Nor has the agency adequately 

explained how registered fund shareholders, which already enjoy comprehensive 

protections under the federal securities laws, will benefit from this additional, redundant 

layer of regulation. 

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I. INTRODUCTION 

My name is Thomas Lemke. I am General Counsel and Executive Vice President ofLegg 

Mason & Co., LLC. We are a Baltimore-based global asset management firm that manages more than 

$630 billion in mutual funds and other assets for our clients. 

I am pleased to appear before the Subcommittee today on behalf of the Investment Company 

Institute nCI") to discuss the impact of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act ("Dodd-Frank Act") on customers, credit, and job creators. ICI is the national 

association ofV.S. investment companies, including mutual funds, closed-end funds, exchange-traded 

funds ("ETFs"), and unit investment trusts ("VITs'').! ICI seeks to encourage adherence to high ethical 

standards, promote public understanding, and otherwise advance the interests of registered funds, their 

shareholders, directors, and advisers. As ofJuly 2012, members ofICI manage total assets of$12.9 

trillion. 

Over 90 million shareholders depend on registered funds in seeking to achieve their most 

important financial goals, such as saving for college, purchasing a home, or providing for a secure 

retirement. Registered funds and their advisers operate under a remarkably comprehensive framework 

of regulation, including the Investment Company Act of 1940 ("Investment Company Act"). That 

framework has been enhanced over the years by Congress and the Securities and Exchange Commission 

("SEC"), the primary mutual fund regulator. Its major features-strict limits on leverage, daily markto-market valuation, exceptional transparency, and strong governance, among others-again proved 

their worth to investors through the financial turmoil of recent years. 

Enacted in response to that turmoil, the Dodd-Frank Act is very broad and complex and 

touches nearly every part of the financial services industry. It is not directed at registered funds, because 

they were not a cause of the financial crisis. Nonetheless, in a number of areas the statute and rules 

implementing it will have important implications for all participants in the financial markets, including 

registered funds and their advisers. 

As we approach the second anniversary of the Dodd-Frank Act, regularors have made 

Significant progress with implementation efforts. But there is still much to do and important questions 

remain unanswered. During the implementation process, ICI and its members have been closely 

following regulatory developments and providing extensive comments. The registered fund industry 

has a unique perspective on our regulatory system, because our funds are both issuers of securities and 

investors in domestic and international financial markets. Our efforrs are focused on, among other 

things, ensuring that the regulations implementing the Dodd-Frank Act do not have harmful or 

unintended consequences for registered funds and their shareholders-or for the financial markets or 

the broader economy-and that any regulations strike the right balance between costs and benefits. 

l For ease of reference, this testimony refers to all types ofU .S. registered investment companies-including mutual funds, 

dosed~end funds, ETFs, and UITs-as "registered funds," unless the context requin:s otherwise. 
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76114.073

Below, we highlight areas of continuing focus for ICI and its members, First, we discuss certain 

provisions of the Dodd-Frank Act intended to promote bank safety and soundness and financial 

stability, but whose implementation may have adverse consequences for registered funds, their advisers, 

and fund investors (Section II). Second, we discuss implementation of the Dodd-Frank Act provisions 

on asset-backed securities and derivatives, which will affect registered funds as investors in the markets 

(Section III). Finally, we discuss a clear example of regulatory overreach in which the Dodd-Frank Act 

is used as a pretext for the agency's rulemaking (Section IV). 

II. UNINTENDED EFFECTS FROM RULES DESIGNED TO PROMOTE FINANCIAL 

STABILITY 

The Dodd-Frank Act contains various provisions aimed at enhancing the safety and soundness 

of banks and identifying and mitigating potential risks to financial stability. ICI concuts with these 

broad goals, as a more resilient financial system will benefit all market participants. But building this 

more resilient system is challenging and complex, and care must be taken to avoid unintended negative 

consequences. That is why ICI, like other market participants, believes that how these Dodd-Frank 

provisions are implemented is of urmost significance. 

Below, we discuss OUt specific concerns regarding regulatoty efforts to implement the "Volcker 

Rule," and to designate and regulate systemically important nonbank financial instirutions. We also 

explain our strongly held view that Congress should not extend further Dodd-Frank's grant of 

temporary unlimited deposit insurance for noninterest-bearing transaction accounts. 

A. Concerns with the Proposal to Implement the Volcker Rnle 

L U.S. Registered Funds 

Congress enacted the "Volcker Rule» provision of the Dodd-Frank Act (Section 619) in order 

to restrict banks from using their own resources to trade for purposes unrelated to serving clients and to 

address perCeived conflicts of interest in certain bank transactions. The Volcker Rule was not directed 

at registered funds. Unfortunately, the proposal to implement the Volcker Rule ("Proposed Rule")' 

nonetheless raises a number of concerns for the U.S. registered fund industry. 

If adopted in its original form, the Proposed Rule would reach much farther than it seems 

Congress intended. For example, the Proposed Rule could treat many registered funds as hedge 

2. See Prohibitions and Restrictions on Proprietary T fading and Certain Interests In, and Relationships With, Hedge Funds 

and Private Equity Funds, 76 Fed. Reg. 68846 (November 7, 2011), issued by the Office of the Comptroller of the 

Currency, Board of Governors of the Federal Reserve System ("'Federal Reserve"), Federal Deposit Insurance Corporation 

("FDIC), and SEC The Commodity Fututes Trading Commission ("CFTC") was not a patty to the Proposed Rule; 

instead, it issued a separate yet substantively similar proposal to implement the Volcker Rule. See Prohibitions and 

Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Covered Funds, 77 

Fed. Reg. 8332 (Febtuary 14,2012). Below, we refer to the foregoing regulators collectively as the "Agencies." 

2 
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funds-a result that contradicts the plain language that Congress passed. The Proposed Rule also could 

restrict banks from playing their hisroric role as market makers buying and selling securities-despite 

the fact that Congress speciflcally designated "market making-related activity" as a "permitted activity" 

for banks under the Volcker Rule. Ifbanks cannot provide these services, particularly in the less liquid 

fixed income and derivatives markets and the less liquid portions of the equity markets, registered funds 

and other investors likely would face wider bid-ask spreads, higher transaction COStS, and diminished 

returns. The Proposed Rule also could greatly impair the U.S. financial markets by imposing stringent 

restrictions that go well beyond what is necessary to effectuate Congress' intent in enacting the Voleker 

Rule, potentially hurting our broader economy and impacting job creation and investments in U.S. 

businesses overall. Finally, the Proposed Rule, as issued, could limit investment opportunities for 

registered funds and their shareholders. 

IC's comment letter on the Proposed Rule described these concerns in detaiL3 Below, we 

highlight our main concerns and provide recommendations for addressing them. Given the significant 

changes we believe are necessary to address our concerns and those of other commenters, I CI 

recommended in its comment letter, and still strongly urges, that the Agencies issue a revised proposal 

for comment before adopting any tInal rule. 

a. Organization, Sponsorship and Normal Activities of Registered Funds 

• The Rule Expressly Should Exclude All Registered Funds ([om the Definition oCCovered 

Fund': Under the Dodd-Frank Act, a banking entiry is prohibited from having an 

ownership interest in, or acting as sponsor to, a hedge fund, private equity fund, or "similar 

fund" as the Agencies determine by rule-collectively defined in the Proposed Rule as 

"covered funds." However, the Proposed Rule would include within "covered fund" any 

investment vehicle that is considered a "commodity pool" under Section !arlO) of the 

Commodity Exchange Act, thereby greatly expanding the reach of the Volcker Rule, even 

to the extent of sweeping in a number of registered funds. ICI believes that treating any 

registered fund as "similar" to a hedge fund or private equity fund for purposes of the 

Volcker Rule is contrary to Congressional intent and, frankly, common sense. Providing an 

express exclusion for registered funds from the definition of "covered fund" would avoid 

this unintended result. 

• The Rule Erpressly Should Exclude All Registered Funds trom the Definition o[''Banking 

Entity". The Proposed Rule suggests that a registered fund generally would not be 

considered a subsidiary or affiliate of the banking emiry that sponsors or advises it . 

.'I See Letter from Paul Schott Stevens, President & CEO, Investment Company Institute, to Ms. Elizabeth M. Murphy, 

Secretary, SEC, rt aL, dated February 13, 2012 ("lCI Volcker Comment Lerrer"), available at 

http://www.ici.org/pdf/25909.pdf See abo Statement of the Investment Company Institute for Hearing on «Examining 

the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation," Subcommittee on Capital Markets and 

Government Sponsored Enterprises, Committee on Financial Services, United States House of Representatives (January 18, 

2012), available at httpJlfinanciaIscrviccs.house.gov/Ul'loadedFilcs/HHRG-I I2-BA-WState ICI-20ll0! IS.pdf. 

3 
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Without an express exclusion in the rule text, however, it is possible that some registered 

funds could nevertheless inadvertently become subject to all of the prohibitions and 

restrictions in the Volcker Rule-a result not intended by Congress. For example, during 

the period following the launch of a new registered fund by a bank-affiliated sponsor, when 

all or nearly all of the fund's shares are owned by that sponsor (the" seeding process" for a 

new fund), the registered fund could be considered an affiliate of the banking entity and, 

thus, subject to the Volcker Rule in its own right. Providing an express exclusion for 

registered funds from the definition of "banking entity" would avoid this unintended result 

without thwarting in any way the policy goals of the Volcker Rule. 

• The Rule Should Not Limit the Abili~v of Banking Entities to Serve as Authorized 

Participantsfor Registered Exchange-Traded Funds and Conduct Related Activities. The 

proprietary trading provisions of the Proposed Rule call into question whether banking 

entities could continue to serve as Authorized Participants ("APs") for ETFs registered 

under the Investment Company Act and conduct related activities. ETFs are similar to 

mutual funds (the most common type of registered fund) except that they list their shares 

on a securities exchange, thereby allowing retail and institutional investors to buy and sell 

shares throughout the trading day at market prices. Increasingly popular with investors, 

ETF s use a different process for offering their shares. APs alone transact in shares directly 

with ETFs, in large amounts (typically involving 50,000 to 100,000 ETF shares) based not 

on market prices but on the ETF's daily net asset value. AP transactions with an ETF are a 

unique and controlled form of arbitrage trading that, in the view of the SEC, is a critical 

component of maintaining efficient pricing in the ETF marketplace and protecting ETF 

investors. Some APs also may engage in traditional market making activities in the ETFs 

with which they participate. The Agencies should revise the Proposed Rule to ensure that 

APs can continue ro fulfill these important roles. 

b. Impact on the Financial Markets 

• Liquid and Efficient Markets are Importantfor Registered Funds. Banking entities are key 

participants in providing liquidity in the financial markets, promoting the orderly 

functioning of the markets as well as the commitment of capital when needed by investors 

to facilitate trading. The Proposed Rule has the potential to decrease market liquidity, 

particularly for the fixed-income and derivatives markets, and the less liquid portions of the 

equities markets. A reduction of liquidity would have serious implications for registered 

funds, leading to wider bid-ask spreads, increased market fragmentation, and ultimately the 

potential for higher costs for fund shareholders. 

• The Complexi(y oj: and Difficulties o/Complying witl;, the Proposed Rule Threaten Market 

Liquidity and MayAdverse~v Impact Registered Funds. Much of the concern surrounding 

the effect of the Proposed Rule on market liquidity arises from the complexity of the 

Proposed Rule and its exemptions from the proprietary trading prohibition. ICI supports 

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76114.076

suggestions to recast what appear to be rigid criteria defining permitted activities under the 

Proposed Rule as guidance that could be incorporated into banking entities' policies and 

ptocedures. 

o The Presumption o/Prohibited Activity is Unwarranted. The Proposed Rule 

generally presumes that a banking entity's short-term principal trading activity is 

prohibited proprietary trading. This presumption of ptohibited activity prejudices 

the analysis of a banking entity's trading activity from the outset. Moreover, the 

process to rebut the Proposed Rule's presumption would be extremely complex and 

onerous. 

o The Conditions o/the Proposed Exemptions Do Not Rf{flect the Operation of the 

Financial Markets. The Proposed Rule appears tailored primarily for the 

traditional trading of equities on an agency-based "last sale" model, which differs 

substantially from how fixed income and other markets operate. It does not reflect 

that, in the majority of the financial markets, market makers provide liquidity by 

acting as principal. It does not take into account the need to provide flexibility and 

discretion to market makers to enter inro transactions to build inventory. 

o The Conditions o/the Proposed Exemption/Or Market Making-RelatedActivities are 

Impractical. The conditions under the market making-related activities exemption 

are extremely complex and we believe will be so difficult to comply with as to be 

effectively unworkable in a number of financial markets and for a significant 

number of financial instruments. 

o The Risk-Mitigating HedgjngExemption Must be Flexible. The conditions provided 

under the proposed risk-mitigating hedging exemption create uncertainty as to 

whether a specific hedge would fulfill the requirements of the exemption. The 

exemption should be made flexible enough to allow banking entities appropriately 

to manage all possible risks and to facilitate hedging against overall portfolio risk; it 

should not be a transaction-by-transaction analysis. 

o The Proposed Government Obligations Exemption Should be Expanded to Cover All 

Municipal Securities and Foreign Sovereign Obligations. The proposed exemption 

for trading in certain government obligations does not extend to transactions in 

obligations of an agency or instrumentality of any State or political subdivision. I CI 

recommends that the exemption be expanded to include all municipal securities, 

which would be consistent with the current definition of municipal securities 

under the Securities Exchange Act of 1934 ("Exchange Act"). The Proposed Rule 

also should be expanded to provide an exemption for foreign sovereign obligations; 

such an exemption is consistent with Congressional intent to limit the 

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76114.077

• 

extraterritorial reach of the Volcket Rule and with the purposes of the Volcker 

Rule . 

='-"""-""=='4J-'=",-"""'''''''''''-'======-"''''"''''-''"'''''=''4,-"""",-"-,,,,. The Agencies' 

proposed implementation of the proprietary trading prohibition could have negative 

implications for capital formation. Banking entities also may find it difficult to remain in 

the market making business, which could lead to less regulated and less transparent 

financial institutions performing these activities. The over-broad restrictions of the 

Proposed Rule, which go well beyond what is necessary to effectuate Congress' intent in 

enacting the Volcker Rule, could hurt our broader economy, impacting job creation and 

investments in U.S. businesses overall. 

c. Limiting Investment Opportunities for Registered Funds and Their Shareholders 

• The Foreign TradingExemption Should Be Revised to Avoid Adverse Efficts on U.S. 

Registered Funds' Investments in Certain Foreign Securities. Although Congress intended 

that trading outside of the United States be a "permitted activity" under the Volcker Rule, 

the Proposed Rule narrowly defines which transactions would be considered to take place 

outside of the United States-and, in so doing, departs from an existing and wellunderstood U.S. securities regulation (Regulation S under the Securities Act of 1933) that 

governs whether an offering takes place outside of the United States. Many registered 

funds invest in securities, such as sovereign debt securities denominated in foreign currency, 

for which the primary and most liquid market is outside of the United States. These 

transactions often involve non-U.S. banking entities as counterparties. The narrow 

exemption in the Proposed Rule for trading outside of the United States may well cause 

some non-U.S. banking entities to avoid engaging in transactions with persons acting on 

behalf of U.S. registered funds, even when those transactions would comport fully with 

Regulation S. As a result, U.S. registered funds' access to non-U.S. counterparties could 

decrease significantly, and liquidity in some markets could be reduced. Revising the 

Proposed Rule to conform to the existing approach under Regulation S would avoid these 

highly undesirable results. 

• The Rule Should Exempt Asset-Backed Commercial Paper and Municipal Tender Option 

Bond Programs. The Proposed Rule would impair two particular types of securitization 

activities that are part of traditional banking activities-notes issued by asset-backed 

commercial paper ("ABCP") programs and securities issued pursuant to municipal tender 

option bond ('TOB") programs." This would have significant negative implications for 

issuers of these financing vehicles and their investors, many of which are registered funds. 

There is no indicarion, however, that Congress intended to include ABCP or municipal 

4 ABCP programs and municipal TOB programs are discussed further in Section lIlA, infra. 

6 
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76114.078

TOB programs within the scope of the Voleker Rule; rather, Congress specifically sought to 

avoid interfering with longstanding, traditional banking activities. The provision of credit 

to companies to finance receivables through ABCP, as well as to issuers of municipal 

securities to finance their activities through TOBs, are both areas of traditional banking 

activity that should be distinguished from the types of financial activities that Congress 

sought to restrict under the Voleker Rule. WithoutliquidABCP and TOB markets, credit 

funding for corporations and municipalities would be unduly and unnecessarily 

constrained. It is therefore important that the Proposed Rule be rcvised to exempt ABCP 

and municipal TOB programs. 

2. Non-U.s. Retail Funds 

The Proposed Rule raises similar and additional concerns for funds that are publicly offered and 

substantively regulated outside of the United States ("non-U.S. retail funds).' Without substantial 

changes, the Proposed Rule would unduly impede the ability of both U.S. and non-U.S. entities to 

organize and sponsor, and operate non-U.S. retail funds and harm certain financial markets, market 

participants, and financial instruments. 

a. Organization, Sponsorship and Normal Activities orNon-US. Retail Fund< 

• The Rule Expressly Should Exclude All Non-US. Retail Fundsfi'om the D",finitions if 

"Covered Fund" and "BankingEntity". It seems clear that Congress did not intend for the 

Voleker Rule to target non-U.S. counterparts to U.S. registered funds. Yet, under the 

Proposed Rule as drafted, non-U.S. retail funds are inappropriately encompassed by the 

definitions of "covered fund" and, in some circumstances, "banking entity," and could face 

serious and dramatically disruptive effects on their organization and operation. In fact, if 

the Proposed Rule is not revised, the Voleker Rule will be applied more restrictively outside 

of the United States than within it-an odd result in itself, and surely not one Congress 

intended. Overall, many of the difficulties and problems posed for non-U.S. retail funds 

could be addressed by excluding non-U.S. retail funds from the definitions of "covered 

fund" and "banking entity." Such an approach would not compromise Congress' intent 

with respect to hedge funds and private equity funds and is in keeping with Congress' 

intent to limit the extraterritorial impact of the Volcker Rule6 

5 See Letter from Dan Waters, Managing Director, IC! Global ("ICIG"), to Ms. Elizabeth M. Murphy, Secretary, SEC, et al .. 

dated February 13, 2012. ICIG, our global affiliate, is the global association of regulated funds publicly offered to investors 

in leading jurisdictions worldwide. IeIG seeks to advance the common interests and promote public understanding of 

global investment funds, theif managers, and investors. h1cmbers ofIelG manage total assets in excess of US $1 trillion. 

(, In its comment letter, IeIG recommended several other changes to limit the disruption caused by the Proposed Rule 

should the Agencies choose not to exclude non-U.S. retail funds from "covered fund" and "banking entity." 

7 
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76114.079

b. Impact on the Financial Markets 

• The Proposed Rule Should Utilize Regulation S to Delineate Qjfihore Securities Transactions. 

Without revision, the Proposed Rule will result in less liquidity and smaller and/or more 

fragmented markets for many securities. Certain transactions may be incredibly complex 

and difficult to accomplish in a sensible and cost-efficient manner. Because the foreign 

trading exemption is focused on offshore securities transactions, we believe that the 

Proposed Rule should be revised to follow the approach of Regulation 5, which has been the 

global standard for defining the line between the u.s. and non-U.S. securities markets for 

more than 20 years. 

• The Rule Should Not Limit the Ability of Banking Entities to Serve as Authorized 

Participants lOr Non- U.S. Retail Exchange-Traded Funds and Conduct Related Activities. 

The Proposed Rule should be amended to assure that the ability of banking entities to serve 

as APs for non-U.S. retail funds is not prohibited or constrained. This could be achieved by 

explicitly designating non-U.S. retail ETF trading activity by banking entity APs as a 

permitted "markct making" activity and excluding non-U.S. retail ETFs from the definition 

of a covered fund. In addition, if non-U.S. retail funds are not excluded from the definition 

of "covered fund," the Proposed Rule would need to be revised to accommodate the 

purchase of non-U.S. retail ETFs by APs that are banking entities. Many of the most active 

APs in the non-U.S. ETF market arc banking entities. 

• Liquid and Efficient Mdrkets Are Impoytantftr Non-U.S. Retail Funds. Similar to the 

concerns expressed above, non-U.S. retail funds are apptehensive about the effects the 

Proposed Rule will have on the liquidity of the markets, both in the United States, where 

many of these funds trade, and abroad (particularly with respect to obligations offoreign 

governments and international and multinational development banks). We believe that 

failure to amend the Proposed Rule to address these concerns would severely harm funds 

and their investors. 

B. Designation ofSystemicaIly Important Nonbank Financial Companies 

In testimony for the Subcommittee's June 2011 hearing on oversight of the mutual fund 

industry, ICI discussed its views on systemic risk regulation? We emphasized why it is important that 

the Financial Stability Oversight Council ("FSOC") act deliberatively in exercising its authority under 

the Dodd-Frank Act to designate systemically important nonbank financial companies ("SIFIs") for 

7 See Testimony of Paul Schott Stevens, President and CEO, Investment Company Institute, before the Subcommittee on 

Capital Markets and Government Sponsored Enterprises, Committee on Financial Services, United States House of 

Representatives, on "OverSight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence" 

Oune 24, 2011) ("ICIJune 2011 Testimony"), available at 

http://financialscrviccs.house.gov/Uploadcdfilcs/06241]stevens.pdf,at 40. 

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heightened prudential regulation and consolidated supervision by the Federal Reserve. We also 

expressed our strongly held view that SIFI designation is neither warranted nor appropriate for 

registered funds or their advisers because, among other things, they do not present the risks that such 

designation is in tended to address. 

We conveyed these same views to the FSOC as it worked to develop a rule to govern the SIFI 

designation process.8 When it adopted a final rule and associated guidance earlier this year, the FSOC 

indicated that it and the Office of Financial Research ("OFR") are continuing to analyze what threats 

to financial stability-if any-arise from asset management companies and whether such threats can be 

mitigated by SIFI regulation or are better addressed through other regulatory measurcs9 ICI welcomes 

this further analysis. It suggests the FSOC recognizes that the risk profile of asset management 

companies differs from that of banks and of other nonbank financial companies and, moreover, that it 

is committed to exercising its SIFI designation authority in a careful and thoughtful manner to achieve 

its intended goals. ICI believes this review will lead the FSOC to conclude, at the very least, that SIFI 

designation would not be an appropriate regulatory tool for addressing risks, if any, that registered 

funds or their advisers might raise regarding financial stability. 

ICI feels strongly that it would be premature for the FSOC to evaluate asset management 

companies under its existing SIFI designation framework before its further analysis has been completed. 

We also believe that, to further inform its views, the FSOC should publish for comment the study the 

OFR is undertaking. Openness and transparency are critical throughout this process, especially for new 

governmental bodies such as the OFR. Finally, if the FSOC determines to issue additional guidance 

regarding asset management companies (or to make other material changes to the guidance already 

issued), it should provide the public with notice and the opporrunity to comment before finalizing any 

such guidance.'o We support similar recommendations recently made by a bipartisan group of 

members of Congress, including Representatives John Carney and Nan Hayworth, in a letter to 

Treasury Secretary (and FSOC Chairman) Timothy Geithner." All of these recommended procedural 

R See Letters from Paul Schott Stevens, President & CEO, Investment Company Institute, to the Financial Stability 

OverSight Council, dated Nov. 5. 2010. Feb. 25. 2011, and December 20. 2011, available at 

http://w,,~v.ici.org/pdfl24696.pdf. http://www.ici.org/l'dfl24994.pdf, and http://www.ici.org/pdf/25729.pdf, 

respectively. 

') FSOC, Authority to Require Supervision and RegulAtion o/Certain lVonbank Financial Companies, 77 Fed, Reg. 21637 

(April I!. 2012) ("SIFI Designation Adopting Release"), at 21644. 

lCl See Letter from Paul Schott Stevens, President & CEO. [nvestment Company Institute, to the Financial Stability 

Oversight Council, dated December 20. 20 11, supra n. 8. The FSOC has only indicated that it ma.y prOVide an opportunity 

for public comment. as it deems appropriate. SIFI Designation Adopting Release. supra note 9, 77 Fed. Reg. at 21647. 

l! See Letter from Members of Congress John Carney, Nan Hayworth, Gary Peters, Gary Miller, Gwen Moore,John 

Campbell, Michael Capuano, David Schweikert, Brad Sherman, Donald ManzuI!o. and Gregory Meeks, to The Honorable 

Timothy Geithcr. Chairman, FSOC, dated June 15.2012. 

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76114.081

steps are consistent with and would help demonstrate the FSOC's stated "commit[ment] to fostering 

transparency with respect to the Designation Process."l2 

C. Enhanced Prudential Standards for Nonbank SIFIs and Large Bank Holding Companies 

To date, FSOC has designated no nonbank organization as a SIF!. In January of this year, 

however, the Federal Reserve issued a proposal under Sections 165 and 166 of the Dodd-Frank Act 

outlining the enhanced prudential standards that would apply both to any entity so designated and to 

bank holding companies with at least $50 billion in total consolidated assets ("large BHCs).13 ICI's 

comment letter on the proposal discussed the following two areas of concern with the Federal Reserve's 

approach." 

1. The Section 1651166 Proposal Ignores Statutory Obligations 

First, it is premature for the Federal Reserve to apply this proposal to nonbank SIFIs. Without 

knowing which entities will be subject ro enhanced prudential standards, the Federal Reserve cannot 

comply with its staturory obligation to take into account differences among nonbank SIFIs and large 

BHCs based on specified considerations. is It is therefore not surprising that the overall approach of the 

proposal is to apply the "same set" of enhanced prudential standards to all nonbank SIFIs and large 

BHCs. This apptoach is inconsistent, however, with what the statute requires. Moreover, applying a 

bank-oriented regulatory framework to all covered companies, as the proposal does, disregards 

Congressional recognition that for putposes of prescribing enhanced prudential standards under 

Section 165, one size does not fit aiL i6 

The danger in this approach is illustrated by the proposed risk-based capital and leverage 

requirements. Section J65(b)(I)(A)(i) provides that the Federal Reserve, in consultation with the 

FSOC, may determine that risk-based capital requirements and leverage limits arc inappropriate for a 

particular company because of the company's activities or structure. In such a case, Congress has 

J2 FSOC, Authority to Require Supervision and Regulation o(Certain Nonbank Financial Companies, 76 Fed. Reg. 64264, 

64267 (October 18,2011.) 

11 Board of Governors of the Federal Reserve System, Enhanced Prudential Standards and Early Remediation Requirements 

for Covered Companies, 77 Fed. Reg. 594 (jan. 5, 2012) ("Section 1651166 Proposal"). 

14 See Letter from Karrie McMillan, General Counsel, Investment Company Instimte, to Ms. Jennifer J.Johnson, Secretary, 

Board of Governors of the Federal Reserve System, dated April 30, 2012, available at http)/",",v.ici.org/pdfI261IH.pdf. 

15 The considerations are: (I) the factors described in subsections (a) and (b) of Section 113 ofthe Dodd·Frank Act; 

(2) whether the company owns an insured depository institution; (3) nonfinancial activities and affiliations of the company; 

and (4) any other risk-related factors that the Federal Resen'c determines appropriate. 

16 See, e.g., Section 165(b)(3) of the Dodd·Frank Act (requiring, among other things, that the Federal Reserve adapt the 

prudential standards in light of a company's predominant line of business, including assets under management or other 

activities for which particular standards may not be appropriate). 

10 
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directed that the Fedetal Reserve must apply "other standards that result in similarly stringent risk 

controls." But the proposal makes no mention of the possibility that for some companies, risk-based 

capital requirements and leverage limits may not apply in the same way or even at all. To the contrary, 

the proposal would apply the specified requirements to any nonbank covered company" as ifit were a 

bank holding company."l7 

It goes without saying that applying enhanced prudential standards that are inappropriate or 

unworkable will not futther the policy goals underlying Section 165. Capital requirements arc a good 

example because, while they are a tool of proven value for banks and broker-dealers, they simply do not 

make sense in all contexts, including in the case of registered funds and their advisers. 18 

For these reasons, ICI recommends that the Federal Reserve exclude nonbank SIFIs from its 

rulemaking at this time. Instead, the Federal Reserve should propose, in a separate rulemaking, a 

process for prescribing the enhanced standards that will be applied to nonbank SIFIs, taking into 

account the characteristics and risks of those entities so designated. 

2. Proposed Single Counterparty Credit Limits Should Not Treat Registered Funds as 

"Subsidiaries" of Covered Company Sponsors/Advisers 

Second, ICI is concerned about the possible application of the single counrerparty credit limits 

proposed by the Federal Reserve. Section 165(e) of the Dodd-Frank Act directs the Federal Reserve to 

establish single-counterparty credit limits for large BHCs and nonbank SIFIs (referred to collectively in 

the proposal as "covered companies") to limit the risks that the failure of any individual firm could pose 

to a covered company. Under the proposal, the aggregate net credit exposure of a covered company and 

all of its "subsidiaries" to any unaffiliated counterparty and its subsidiaries may not exceed 25 percent of 

the covered company's capital stock and surplus (reduced to 10 percent if a covered company and its 

counrerparty are both either a bank holding company with $500 billion or more of total consolidated 

assets or a nonbank SIFI of any size). 

The term "subsidiary," as defined in the proposal, generally would not include a registered fund 

that is sponsored or advised by a covered company, and thus the credit exposure of a registered fund to a 

counterparty would not be aggregated with the credit exposure of the fund's sponsor or adviser to the 

same counterparty. I CI believes this is the appropriate outcome because it is well settled under Federal 

and State law that registered funds are independent legal entities from their sponsors/advisers. 

In its release discussing the proposal, however, the Federal Reserve asked whether this outcome 

may be at odds with the suppOrt that some money market funds received from their sponsors during 

the financial crisis. The Federal Reserve requested comment on whether a money market fund or other 

17 See proposed § 252.13(b)(I) and (b)(3). 

IS See, e.g., Letter from Scott C. Goebel, Senior Vice President and General Counsel, FMR Co., to Financial Stability 

Oversight Council. dated Dec. 19.2011. 

11 
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registered fund or investment vehicle should be included as part of its sponsoring covered company for 

purposes of this rule." 

ICI strongly disagrees with any suggestion that the proposed single counterparty credit limits be 

applied to a registered fund sponsored or advised by a covered company. As our comment letter to the 

Federal Reserve explained, treating registered funds in this manner would not further the purpose of 

the proposed credit limits, and would unnecessarily disrupt the operations of the registered funds while 

creating potential conflicts of interest between those funds and their covered company sponsor! adviser. 

Moreover, such treatment could create the inaccurate perception that support from a registered fund's 

adviser or sponsor is likely-a result directly contrary ro the Federal Reserve's objective. 

D. Unlimited Insurance for Noninterest-Bearing Transaction Accounts 

Section 343 of the Dodd-Frank Act requires the FDIC to provide unlimited insurance for 

"non interest-bearing transaction accounts" for two years starting December 31,20 10.20 This provision 

is intended to give depositors of insured depository institutions, most notably corporations and other 

institutional investors, additional assurance that their balances in non interest-bearing transaction 

accounts will be safe as the financial crisis wanesY As with any program that insures customer funds, 

however, the insurance coverage authorized by Section 343 poses potential costs to taxpayers and raises 

the risk of dislocations elsewhere in the financial system. Presumably in recognition of these potential 

costs and risks, Congress granted circumscribed authOrity, requiring the FDIC to provide unlimited 

insurance for only specified accounts, and for only a two-year period. 

We understand that some are calling for Congress to extend this unlimited insurance program 

beyond its statutory expiration date." ICI strongly opposes any such extension. We view the program 

as having the potential to dislocate markets and increase systemic risk in times of market stress by 

creating an unlimited taxpayer-supported backstop for these transaction accounts. 23 

19 See Section 1651166 Proposal..;upra note 13.77 Fed Reg. at 614-15 (Question 24). 

;,l) Section 343 proVides for the "prospective repeal" of the unlimited insurance requirement effective January 1, 2013. 

2J Section 343 is similar to, but also differs in certain key respects from, the Transaction Account Guarantee Program 

("TAGP") the FDIC firsr adopted in Oerober 2008. Originally set to expire on December 31, 2009. the TAGP was 

extended through June 30. 2010 and subsequently through December 31. 2010. See FDIC, DepOSit lnsurance RegulatiOns; 

Unlimited Coverage for Noninterest-bearing Transaction Account.;, 75 Fed. Reg. 60341 (Sept. 30, 2010), at 60342. 

22 See, e.g., Joe Adler, Banker, Banks Add to Calls for Extending TAG, American Banker, June 26, 2012, available ar 

http://www.amcricanbankcr.com!issues 1177 123 /hankcrs-banks-transaction-accouIlt-guarantcc-cxtension-1050448-

l.html. 

B See Letter from Karric McMillan, General Counsel. Investment Company Institute. to Robert E. Feldman, Executive 

Secretary, Federal Deposit Insurance Corporation (October 10,2010), available at 

Imp:llwww.fdic.gov/regulations/laws/federaIl2010/IOc48AD37p.PDF (commenting on FDIC proposal to implement 

Section 343). 

12 
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To understand ICI's concerns, it is helpful first to understand the economic role of deposit 

insurance and how deposit insurance can influence the actions of banks and depositors, as well as 

investors in the broader markets. Banks have limited ability to liquidate assets quickly to meet large, 

unexpected withdrawals. Deposit insurance reduces rhe probability of bank runs by eliminating the 

potential advantage enjoyed by those depositors who are first to withdraw their money from a bank. 

Greater stability of bank deposits ptovides greater stability in the credit creation process and the overall 

cconolny. 

Despite its demonstrated benefits, however, deposit insurance also entails risks for the financial 

system. For example, insurance reduces the incentives for insured depositors to monitor the 

creditworthiness of banks, which in rum creates a moral hazard that can encourage banks to take 

additional risks, knowing that depositors will not withdraw their deposits if the bank's financial 

condition deteriorates." In addition, deposit insurance can cause other systemic risks for financial 

markets by increasing the propensity for investors to sell off assets-such as stocks, bonds, mutual fund 

shares, and other securities-and move the proceeds into insured deposits. As the FDIC has previously 

observed, this behavior can produce or exacerbate broader market dislocations during periods of 

financial stress." 

Indeed, recent experience suggests that such activity would worsen any future financial crisis 

and reduce credit available to businesses, state and local governments, and other borrowers. Depository 

institutions would be unlikely, and in many cases unable, to buy the assets investors were selling. 

Instead of risking a recurrence, every effort should be made to avoid such a series of events. 

Historically, the risks posed by deposit insurance programs have been mitigated by capping the 

amount of a depositor's account that is insured (currently $250,000).26 In the case of the insurance 

See, e.g., fDIC, The Deposit Insurance Funds, Options Paper (Aug. 2000), available at 

http://wv.,, ... ·.fdic.gov IdcpOSit/iosurancc/initiativc!optionpaper,html ("2000 Options Paper") (recognizing that "deposit 

insurance can create moral hazard and increase the risk and cost of failure if deposit insurance premiums do not fully 

compensate the FDIC for increases in risk posed by particular banks and thrifts. By assuming the risk of loss that would 

otherwise be borne by depositors, depOSit insurance eliminates any incentive for depositors who are fully insured to monitor 

bank or thrift risk, thus reducing what is known as 'dcposiror discipline.' Management can therefore take greater risks 

without increasing the depository institution's cost of funds."). 

25 See id, ("There is also the possibility of a large shift of household assets into insured deposit accounts in the event of 

financial market volatility. There is currently more than $11 trillion outstanding in U.S. equity holdings {including mutual 

fund shares} alone. In a protracted bear market, some of these funds could be transferred to insured deposits. "). See alw Alan 

S. Blinder and R. Glenn Hubbard, Bidnket Deposit Insurance is a Bad Idea, WSJ Asia, Oct. 16,2008 (arguing that 100% 

federal depOSit insurance would pull funds out of other assets, including money market funds and other money market 

instruments, as well as out of other countries, as occurred when depOSits flowed from Britain to Ireland after Ireland 

instituted a deposit guarantee). 

16 See 2000 Options Paper, supra notc 24 ("The coverage limit represents a balance between the goals of deposit insurance, 

on the one hand. and the need to limit moral hazard and the risk to taxpayers and the jnsurancc funds. on the othcr."). 

13 
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authorized by Section 343 of the Dodd-Frank Act, the statutory limits on the types of accounts covered 

and the December 31, 2012 termination date should serve to reduce the possible negative effects of the 

program. With the stability of the U.S. financial system at stake, the importance of these limits cannot 

be overemphasized. 27 Congress therefore should resist any efforts to vitiate them. 

III. OTHER ISSUES AFFECTING REGISTERED FUNDS AS INVESTORS IN THE 

MARKETS 

As discussed above, the regulatory proposal to implement the Volcker Rule raises significant 

concerns for registered funds and their shareholders, including concerns for funds as investors in the 

financial markets. As institutional investors that invest nearly $13 trillion on behalf of over 90 million 

shareholders, registered funds have a strong interest in regulations that affect the functioning of the 

financial markets. lCI re!,'1llarly provides inpur on behalf of its members on a variety of matters relevant 

to registered funds' participation in the financial markets." The discussion below focuses on certain 

implications of the Dodd-Frank Act for registered funds' investments in the asset-backed securities 

(" ABS") market and the derivatives markets. 

A. Asset-Backed Securities 

The Dodd-Frank Act includes numerous provisions relating to ABS disclosure, reporring, risk 

retention, and conflicts of interest that were intended to address issues that arose during the financial 

crisis.29 As investors in ABS, registered funds have a strong interest in ABS markets that function fairly 

and in the interests of investors.3D 

27 leI pointed to similar concerns and risks associated with any potential unlimited federal guarantee of assets invested in 

money market mutual funds, notably the risk of exacerbating the financial crisis by drawing large sums of depOSits away from 

banks. See Investment Company Institute, Report of the Money Market Working Group, March 17,2009 ("MMWG 

Report"), at 64-65. As noted in the MMWG Report, these risks arc not theoretical. As a result, during the development in 

September 2008 of the Treasury Department's Money lvfarket Fund Guarantee Program, leI was a strong proponent of 

limiting the coverage and duration of that program. 

28 See, e.g., Appendix to Testimony of Kevin Cronin, Global Head of Equity Trading. Invesco, on Behalf of the Investment 

Company Institute, before the Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on 

Financial Services, U.s. House of Representatives, on "Market Structure: Ensuring Orderly, Efficient, Innovative and 

Competitive Markets for Issuers and Investors" (Tune 20, 2012) (listing key leI comments and statements on market 

structure issues), available at http://financialscrviccs.house.gov !UploadedFiles!HHRG~ 112~BA 16~ \X!State-KCronin20120620.pd£ 

29 See, e.g.) Subtitle D of the Dodd-Frank Act, "Improvements to the Asset~Backed Securitization Process" (Sections 941~ 

946). 

,0 Registered funds also have an interest in strong disclosure and reporting standards for ABS, and we have, in the past. 

supported the SEC's efforts to improve disclosure and reporting for ABS. See, e.g.) Letter from Karrie McMillan, General 

Counsel, lCI, to Elizabeth M. Murphy, Secretary, SEC, dated October 4, 2011. available at 

httpJlwww.ici.org/pdf/25532.pdf;Letterfrom Karrje McMillan, General Counsel, leI, to Elizaberh M. Murphy, 

Secretary, SEC, dated November 1 S, 2010, available at http://www.ici.org/pdf124712.pdf; Letter from Karrie McMillan, 

14 
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1. Risk Retention 

In March 20 11, six federal regulators (the "Regulators") jointly issued a proposal to implement 

the credit risk retention requirements imposed by the Dodd-Ftank Act.3l The proposal generally 

requires an ABS sponsor to retain not less than five percent of the credit risk of any asset that the 

sponsor, through the issuance of the ABS, transfers, sells, or conveys to a third party. ICI supports the 

goal of the proposal, as registered funds have a strong interest in ensuring that securitizers of ABS act 

consistently with the interests of invesrors. We arc concerned, however, that the proposed standards 

for risk retention may not be appropriate or necessary for certain classes of ABS in which registered 

funds invest." Specifically, we do not believe that the proposed requirements sufficiently reflect 

differences among certain classes of ABS or market practice for those particular securities.'! This is 

particularly so with respect to notes issued by ABCP programs and securities issued by municipal TOB 

programs. 

The proposal includes a risk retention option specifically designed for ABCP programs that 

meet certain conditions. ABCP programs are short-term, senior-secured investment vehicles that issue 

instruments in the money markets. They are used by a wide variety of corporations-such as banks, 

finance companics, and broker-dealers-to obtain low-cost financing for a diverse range of financial 

receivables. ABCP programs are referred to as "asset-backed" because the entities that issue the ABCP 

own, or have security interests in, multiple pools of various types of financial assets. Most existing 

ABCP programs could not meet the proposed rule's conditions, however. ICI recommends, in lieu of 

the ABCP risk retention option, that the Regulators exclude or exempt from the proposal's risk 

retention requirements those bank-sponsored ABCP programs that meet strict criteria ICI suggested in 

its comment letter to the Regulators.34 These criteria reflect an alignment of interests between the ABS 

G<neral Counsel. ICI. to Elizabeth M. Murphy, Secretary, SEC, dated August 2, 2010, available at 

http,ilw,nv.ici.org/pdfi24465.pdf. 

'I Credit Risk Retention, 76 Fed. Reg. 24090 (Aptil29, 2011). Section 941 of the Dodd·Frank Act, which mandates risk 

retention requirements, added Section 15G to the Exchange Act, 

12 Letter from Karrie McMillan, General Counsel, ICI, to Elizabeth M. Murphy. Secretary, SEC; Ms. Jennifer J. Johnson, 

Secretary, Board of Governors of the Federal Reserve System; Mr. Alfred M. Pollard, General Counsel, Federal Housing 

Finance Agency; Office of the Comptroller of the Currency; Mr. Robert E, Feldman, Executive Secretary, Federal Deposit 

Insurance Corporation; Regulations Division, Office of General Counsel, Department of Housing and Urban 

Development. dated July 29. 2011 ("Risk Retention Comment Letter"), available at http.;{www.ici.org{pdf/25368.pdf. 

3~ The legislative history for Section lSG of the Exchange Act states that "a 'one size fits all' approach to risk retention may 

adversely affect certain securitization markets . .. . Accordingly, the bill requires that the initial joint rulemaking include 

separate components addressing individual asset classes -- home mortgages, commercial mortgages, commercial loans, auto 

loans, and any other asset class that the regulators deem appropriate. The Committee expects that these regulations will 

recognize differences in the assets securitized, in existing risk management practices, and in the structure of asset-backed 

securities, and that regulators will make appropriate adjustments to the amount of risk retention required." S. Rep. No. I] 1* 

176, at 130 (2010). . 

Risk Retention Comment Letter, supra note 32. 

IS 
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sponsor and investor, making it unnecessary to impose further risk retention requirements on such 

bank-sponsored ABCP programs. 

The proposal is silent regarding municipal TOB programs_ A municipal TOB program is 

created by a sponsor bank that deposits one or more high-quality municipal bonds into a trust which 

issues two classes of tax-exempt securities: a short-term security that is supported by a liquidity facility 

and an inverse floating rate security. Tax-exempt money market funds are the principal holders of the 

short-term securities. ICI has requested clarification from the Regularors that TOBs are not within the 

scope of the proposal or, alternatively, that they be exempted from its requirements." TOBs are 

distinguishable from traditional ABS and do not raise the concerns the risk retention requirements 

were intended ro address. Applying the proposed risk retention requirements ro TOBs would not be in 

the public interest. Furthermore, the structural characteristics ofTOB programs would make it 

difficult for their sponsors ro satisfy the proposed risk retention requirements. IfTOB sponsors were 

forced ro restructure their programs significantly to comply with the proposed rules' requirements, the 

increase in the cost ofTOB program sponsorship could adversely affect the state and local governments 

that indirecrly receive funding through these programs. 

2. 

Last September, the SEC proposed a rule that would implement the prohibition under the 

Dodd-Frank Act against material conflicts of interest in connection with certain securitizations.36 ICI 

generally supports the proposed rule, as it would serve to protect investors in ABS against certain 

conflicts of interest that may be raised by the activities of securitization participants.3

? At the same 

time, we are concerned that registered funds could fall within the proposed rule's scope because they 

may be affiliates of entities that structure or distribute ABS. Actions taken by a registered fund in 

connection with investing in ABS, through its investment adviser acting in a fiduciary capacity, do not 

raise the conflicts of interest the proposed rule seeks to address. The SEC should clarify that the 

proposed rule excludes such activities. 

The proposed rule includes an exception for commitments to provide Iiquidiry for an ABS, 

including those liqUidity commitments provided by securitization participants in connection with 

notes issued by ABCP programs, which we support." Certain restrictions under the regulatory 

proposal to implement the Volcker Rule (discussed in Section II above) could be interpreted, however, 

3S Ed. 

'6 Prohibition against Conflicts o[Intercst in Certain Securitizations. 76 Fed. Reg. 60320 (September 28, 2011). Proposed 

Rule 127B under the Securities Act of 1933 would implement the prohibition under Section 621 of the Dodd-Frank Act. 

'7 See Lettet from Karrie McMillan, Genetal Counsel, lCI, to Elizabeth M. Murphy, Secretary, SEC, dated February 13, 

2012, available at http://www.ici.org!pdf!25907.pdf. 

~~ ABCP has unique characteristics that distinguish it from typical ABS, including liqUidity facilities for the benefit of 

investors that often arc provided by the sponsoring bank or one of its affiliates. 

16 
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ro prohibit such liquidity atrangements for bank-sponsored or advised programs, which would threaten 

the viability of such programs.'9 Such a result would be inconsistent with Congressional intent in 

enacting the exception for liquidity commitments, an exception set forth in the Dodd-Frank Act itself. 

Morever, such a prohibition is not necessary to address the contlict of interest concerns against which 

the Volcker Rule was designed to protect. 

B. Derivatives and Title VII of the Dodd-Frank Act 

The implementation of the Dodd-Frank Act will dramatically change the derivatives markets, 

establishing a new regulatory framework for the swaps markets and their participants.'o Registered 

funds are participants in these markets, and they use swaps and other derivatives in a variety of ways to 

manage their portfolios. For example, registered funds use derivatives to hedge positions; equitize cash 

that a fund cannot immediately invest in direct equity holdings; manage the fund's cash positions more 

generally; adjust the duration of the fund's portfolio; manage bond positions in general; or manage the 

fund's portfolio in accordance with the investment objectives stated in its prospectus. Relative to 

comparable cash securities, derivatives' potential benefits include the ability to: 

• Hedge exposure to a market, sector, security, or other target exposure; 

• Gain or reduce exposure to a market, sector, security, or other target exposure more quickly, 

1I10re precisely, andlor with lower transaction costs and portfolio disruption; 

• In some cases, utilize a more liquid alternative ro traditional cash securities; and 

• Gain access to markets in which transacting in cash securities is difficult, costly, or not possible. 

Accordingly, ICI and its members have encouraged reform efforts in the derivatives markets.'! 

During the hearings that led to the Dodd-F rank Act, for example, I CI specifically supported measures 

that would increase transparency and reduce counterparty risk of certain over-the-counter derivatives." 

We, therefore, have urged the CFTC and the SEC to promulgate regulations in a manner that provides 

the protections sought by the Dodd-Frank Act while minimizing disruptions to the markets, market 

participants, and customers. In this regard, four issues are of particular concern to us: the 

~9 leI Volcker Comment Lerter, supra note 3, at 39. 

,it) Throughout this section of the testimony, we will use the term "swaps" to refer to both swaps and security-based swaps, 

unless the context requires otherwise. 

,<1 See, e.g., leI June 20 11 Testimony, supra note 7. Testimony of Karrie McMillan, General Counsel, Investment Company 

Institute, before the Subcommittee on General Farm Commodities and Risk Management Committee on Agriculture. 

United States House of Representatives, on "Implementing Dodd-Frank: A Review of the CFTC's Rulemaking Process" 

(April 13, 2011) ("lCI April 2011 T estimony"), available at http:Uv;ww.ici.orglpdflII cftc rule4.5 exclude.pdf. 

q

2 Testimony of Paul Schott Stevens, President and CEO, Investment Company Institute, Before the u.s. House of 

Representatives Committee on Financial Services on "Industry Perspectives on the Ohama Administration's Financial 

Regulatory Reform Proposals" (July 17. 2009). available at 

http://w\\ .. w.ici.org/govaffairs!tcstimol1v/09 reg reform jul tnJny. 

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implementation process for the final swaps rules; the status of non-deliverable foreign exchange 

forwards; the process for making a swap "available to trade;" and the determination of block trades. 

1. Implementation of Title VII 

The process of finalizing and implementing the rulemakings under Title VII of the DoddFrank Act must ensure that the new rules are tailored appropriately, work in tandem with one another, 

and strike the right balance between costs and benefits. I CI appreciates the extraordinary efforts the 

SEC and CFTC (together, the "Commissions") have made in the very difficult task of developing rules 

to address the complexities of the swaps markets while avoiding unintended adverse consequences. To 

ensurc that the final regulatory framework "gets it right," however, it is crucial that the Commissions 

sustain a transparent and open rulemaklng process, phase in the effective and compliance dates of the 

final rules in a logical manner, provide adequate time for market participants to transition to the new 

rules, and harmonize and coordinate with domestic and international regulators, as appropriate. 

Implementation of the new regulatory framework must follow a sequential, deliberative and 

coordinated process to minimize unforeseen and unintended consequences for market participants, 

customers and the derivatives markets, including disruptions to the markets and risk mitigation 

strategies43 Specifically, the implementation periods should: 

• Afford adequate time for the Commissions to gather additional market data to inform future 

rulemaking; 

• Allow market participants to build market infrastructures, modifY business operations, 

complete testing, and perform outreach and education of customers; and 

• Phase in rule requirements by type of market participants and asset class. 

Market participants are struggling with the implications of the new rules on their activities in these 

markets, and are hampered in developing compliance strategies by the need to wait for action from 

other market participants. Phasing in the rules will provide market participants with essential time to 

identifY the cumulative impact of the rule changes, build upon the actions of other market participants, 

and manage the cumulative costs of the rule changes. 

ql See Letter from Karrie McMillan, General Counsel, Investment Company Institute, to David A. Stawick, Secretary, 

CfTC, dated November 4, 20 II ('November 20 II Implementation Letter"), available at 

http://ww.v.ici.org/pdf/25619.pdf;LetterfromKarrieMcMillan.GeneraICounsel.InvestmentCompanyInstitute.to 

Elizabeth M. Murphy. Secretary. SEC, and David A. Stawick, Secretary, CFTC, dated June 10. 201 I ("June 2011 

Implementation Letter"), available at http://Vv·ww.ici.org/pdfI25276.pdf;andLetterfrom American Bankers Ass'n, ABA 

Securities Ass'n, The Clearing House Ass'n, L.L.C., Financial Services Forum. Financial Services Roundtable, Institute of 

International Bankers. International Swaps and Derivatives Ass'l1, Investment Company Institute, Managed Funds Ass' n 

and Securities Industry and hnancial Markets Ass'n to Elizabeth M. Murphy, Secretary, SEC, and David A. Stawick, 

Secretary, CFTC, dated December 6, 2010, available at httpjlwww.ici.org/pdf/24780.pdf 

18 
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ICI commends the Commissions for recognizing the importance of phasing in the rules in each 

of their proposals that address the sequencing of the compliance dates of the final swaps rules adopted 

under Tide VII." We arc concerned, however, that the CFTC's proposed schedules for phasing in 

compliance with the swaps rules significantly underestimate the time needed for the swap market to 

transition to the new framework. They also underestimate the time needed for the transition to take 

place in an orderly manner that docs not disadvantage certain market participants and minimizes 

disruption to the marketplace.45 In order to ensure a smooth, efficient, and effective transformation of 

the swaps markets, we believe the Commissions should provide a transition period of 18 to 24 months 

following adoption of final rules. The SEC's recent statement on the anticipated sequencing of the 

compliance dates for the Title VII rules on security-based ("SB") swaps explains the general order in 

which SB swap market participants might prepare for compliance with the final rules and discusses the 

sequencing of the rules in relation to one another. 46 ICI is in the process of evaluating this proposal, 

and expects to comment on it shortly. In addition to the comments we will have on the proposal itself, 

we believe it will be essential for the Commissions to harmonize and coordinate their approaches with 

one another. Similarly, to address the global nature of the derivatives markets, the Commissions' rules 

should be finalized only atter harmonizing requirements and principles with those rules being adopted 

by foreign regulators." Where harmonization is not possible, coordination should be undertaken. 

2. The Status of Non-Deliverable Foreign Exchangs; Forwards 

Under the Dodd-Frank Act, foreign exchange ("FX") swaps and forwards are considered swaps 

unless the Secretary of the Treasury makes a written determination that either or both should not be 

regulated as swaps.48 In May 2011, the Treasury issued a proposed determination, which to date has 

44 See Statement qf General Policy on the Sequencing of the Compliance DateJjor Final Rules Applicable to Se[urity~Ba5ed Swaps 

Adopted Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection 

Act, 77 Fed. Reg. 35625 Uune 14,2012) ("Proposed SEC Implementation Statement"); Swap Transaction Compliance and 

Implementation Schedule: Trading Documentation and A1argining Requirements under Section 4J of the CEA, 75 Fed. Reg. 

78176 (September 20, 2011); andSwilp TranJ{zction Compliance and Implementation Schedule: Clearing tmd Trade 

Execution Requirements under Section 2(h) o{the ("'EA, 75 Fed. Reg. 58186 (September 20, 2011) . 

.. S See November 2011 Implementation Letter, supra note 43. 

~6 Proposed SEC Implementation Statement, supra note 44, 

·,7 We note that the CFTC recently proposed interpretive guidance on the cross-border application of Tide VII. See CrossBorder Applicdtion of Certain Swaps Provisions o/the Commodity Exchange Act, available at 

http:// www.cftc.gov/ucm/groups/public/@ncwsroom! documcnts/filc/fedcralrcgistcr062912.pdC The SEC has indicated 

that it win issue similar guidance in connection with SB swap transactions. Proposed SEC Implementation Statement, supra 

note 44. at 35631. 

48 Section la(47)(E) of the Commodity Exchange Act, as amended by the Dodd-Frank Act. These products, however, 

would remain subject to certain rcporting requirements, and anti-fraud and business conduct standards under the 

Commodity Exchange Act. 

19 
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not been finalized, that would exempt FX swaps and forwards from rhe definition of swap." The 

Treasury's proposed determination would not include non-deliverable FX forwards ("NDFs") within 

the exemption. ICI has consistently supported Treasury's proposed exemption ofFX swaps and 

forwards, and strongly believes that it should extend to NDFs50 

An FX forward is a transaction to exchange two currencies at a future date at an exchange rate 

that is agreed upon at the time of entering inro the transactionSl An NDF is cash settled in just one 

currency and does not involve the exchange of underlying currencies. NDFs are used by market 

participants instead of FX forwards when a particular currency cannot be physicaUy delivered because 

of currency controls or local law restrictions. NDFs are fill1crionally and economically identical to 

deliverable FX forwards. They do not pose greater risk to market participants or the financial system." 

Whether the FX forward is deliverable or non-deliverable is not relevant to the market participant's 

investment decision. For these reasons, we recommend that Treasury, in coordination with the CFTC, 

or, if necessary, Congress, clarifY that FX forwards include both deliverable FX forwards and NDFs. 

Failure to do so would result in operational difficulties for market participants when assessing their 

swaps activity for purposes of certain CFTC rules, could allow for potential arbitrage between the two 

rypes ofFX forwards, and would increase fragmentation in the currency markets because NDFs would 

be subject to clearing and trading requirements, while FX forwards would not. 

3. The Process for Making a Swap "Available to Trade" 

Late last year, the CFTC, pursuant to the Dodd-Frank Act, proposed a process to establish 

which swaps will be subject to mandatory trading, or will be made "available to trade" on a designated 

contract market ("DCM") or swap execution facility ("SEF"), for purposes of the Commodity 

Exchange Act. 53 The CFTC's proposed process would grant the DCMs and SEFs themselves a 

significant role in making these determinations. In ICIs' view, the proposed process clearly would not 

'19 See Determination of Foreign Exchange SWilpJ and Foreign Exchange Forw,1,rds under the Commodity Exchange Act, 76 Fed. 

Reg. 25774 (May 5. 2011). 

50 See Letter from Karrie McMillan, General Counsel, Investment Company Institute. and Cecelia Calaby, Executive 

Director and General Counsel, ABA Securities Association, to Ms. Elizabeth M. Murphy, Secretary, Securities and 

Exchange Commission, and Mr. David A. Stawick, Secretary, Commodity Futures Trading Commission, dated July 22, 

2011, available at http://w\vw-icLorg/pdf!25354.pdf;LetterfromKarrie McMillan, General Counsel, Investment 

Company Institute, to Mary]. Miller, Assistant Secretary for Financial Markets, United States Department of the Treasury, 

dated June 6, 201 1, available at http://www.ici.org/pdf/25254.pdf; Letter from Karrie McMillan, General Counsel, 

Investment Company Institute, to Mary J. Miller, Assistant Secretary for Hnancial Markets, United States Department of 

the Treasury, dated November 29, 2010, available at http://W\v\vjci.org/pdf!24751.pdt~ 

51 Sec Section la(24) of the Commodity Exchange Act, as amended by the Dodd-Frank Act. 

52 See letters cited in note 50, supra. 

').1 Proces5jor a DeSignated Contract Market or SWllP Execution facility To Jvlake a Swap Availab!e To Trade, 76 Fed. Reg. 

77728. (December 14.2011). 

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provide the CFTC with a role sufficient to curb the financial incentives DCMs and SEFs will have ro 

mandate prematurely the trading of swaps on their platforms." If swaps are made "available ro trade" 

prematurely, market participants would be required ro trade that those swaps over a DCM or SEF, even 

in the absence of a liquid trading market for the swap. ICI believes strongly that only those swaps that 

are the most liquid should be subject to mandarory execution. 

To address the incentives a DCM or SEF may have to make a swap" available to trade» 

prematurely, ICI recommends that the CFTC require DCMs and SEFs to consider objective standards 

or thresholds as part of the make "available to trade" ("MAT") determination process, and that 

consideration of each standard/threshold be mandatory. We note that the SEC, which is subject to a 

similar requirement with respect to SB swaps, also has recognized that SEFs face a conflict of interest 

with respect to such determinations. 55 Accordingly, the SEC has stated that the MAT determination 

should be made "pursuant to objective measures established by the [SEC], rather than by one or a group 

of [security-based SEFsj."56 We support the SEC's approach to MAT determinations and recommend 

that the CFTC make its approach more consistent with that of the SEC. 

4. The Determination of Block Trades 

Pursuant to the Dodd-Frank Act, both the SEC and CFTC have issued proposals, and the 

CFTC has adopted rules, that would require, upon execution, reporting of swap transaction data to a 

registered swap data repository ("SDR"). The SDR would make certain of the swap data publicly 

available in real time. Market transparency is a key element to ensuring the integrity and quality of 

these markets,57 but that must be balanced against the need to adequately protect information regarding 

a registered fund's block trades. 

54 See Letter from Karrle McMillan. General Counsel, Investment Company Institute, to David A Stawick, Secretary, 

Commodity Futures Trading Commission, dated February 13, 2012, available at Imp: i /www.ici.orgipdfl25910.pdf. 

55 The Dodd-Frank Act added an analogous prOvision to the Exchange Act applicable to transactions in SB swaps executed 

on an exchange or on an SB SEE See Section 3C(h)(2) of the Exchange Act. 

"Registration and Regui4tiou of Security-Based Swap Execution Facilities, 76 Fed. Reg. 10948, 10970 (February 28, 201 1); see 

also Proposed SEC Implementation Statement, supra note 44, at 35641. 

57 As part of its recommendations to the Commissions regarding the sequence for implementation of the new swaps 

regulatory framework, leI has recommended that the Commissions begin by finalizing and implementing rules requiring 

reporting of swap transaction data to the regulators. Initially, reporting should be limited to non-public, regulatory 

reporting to gather data to inform, for example, block trading rules without Significantly disrupting the swaps market and 

market participants' trading strategies by impacting liqUidity. leI believes that the information gathered through this 

process will assist the Commissions in better understanding the structure and operations of the swaps markets and adopting 

appropriately tailored and effective rules. Further, only after such analysis can the Commissions accurately determine the 

effect of public dissemination of certain of the swap transaction data. See June 2011 Implementation Letter and November 

2011 Implementation Lener, su.pra note 43. 

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Block trades are large transactions that are negotiated off an exchange's trading facility, and 

then posted on the trading facility. In the swaps markets, they enable rcgistered funds, on behalf of 

their shareholders, to transact in large amounts with minimal disruption to the swaps market. Block 

trades also reduce the possibility that registered funds would be subject to the higher trading costs 

associated with large (non-block) transactions, costs that would be borne by funds and their 

shareholders. As explained below, flexible and anonymous block trading is essential given the swaps 

market's comparative lack of depth and liquidity. 

After a block trade has been executed, one or more of the counterparties will seek to reduce risk 

by hedging its exposure, usually by transacting on an exchange. Knowledge of a block trade therefore 

signals to other market participants that there is the potential for subsequent trading activity." This 

signaling can negatively affect the market and registered fund shareholders by significantly skewing 

pricing if the market does not have sufficient time to digest the block order. In addition, opportunistic 

market participants may piece together information about a registered fund's holdings or trading 

strategy, leading to front running of the fund's trades, which adversely impacts the price of the swap and 

the underlying security to the detriment offund shareholders. 

Failute adequately to protect registered funds' block trading strategies could compromise funds' 

sensitive trading data, enabling market participants to identify funds and their trading strategy to the 

detriment of funds, their shareholders and the liquidity of the market in which those trades occur. In 

response to a significant number of comments (including those onCI), the CFTC recently reproposed 

rules specifying the procedures for determining block trade sizes. 59 While ICI appreciates that the 

CFTC intended the reproposal to provide a more tailored approach than its original proposal, ICI 

remains deeply concerned that the proposed swap categories are too broad, grouping together swaps 

with vastly different liquidity profiles, and that the CFTC has proposed a calculation for determining 

minimum block trade size that would result in too high a threshold for block trades:o The SEC has yet 

to propose specific block trade thresholds, and has tequested comment on various methods of 

establishing block trade thresholds, as well as other issues related to block trades'l We recommend that 

the Commissions coordinate their proposals to the extent possible. 

S8 In post-transaction analysis of block trades, our members rcport being able to sec that the market tracked theif 

movements. 

\9 Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades, 77 Fed. 

Reg. 15460 (Mar. 15,2012). 

6(1 See Letter from Karric McMillan, General Counsel, Investment Company lnstitutc, to David A. Stawick, Secretary, 

CFTC. dated May 14.2012, available at Imp:/lwww.ici.org/pdfl26158.pdf The 67-percent notional amount calculation 

proposed by the CFTC for determining minimum block trade size would result in approximately 94 percent of trades being 

reported in real-time. We believe this calculation would set the minimum block thresholds too high, given the lack of depth 

and liquidity in the swaps markets, which could cause disruptions in these markets. 

61 Proposed SEC Implementation Statement, supra note 44. 

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The best way to identify the appropriate thresholds for block trades in the swaps market is to 

account for the liquidity in each unique category of swaps.62 The risks, trading and liquidity associated 

with a particular swap differ for each individual swap category within an asset class based on type, tcrm 

and underlying security. The Commissions should reflect these granular bur significant differences by 

creating narrow buckets to which the threshold formulas would apply!3 These thresholds should be 

calculated reh'1llarly (e.g., quarterly or, at a minimum, semi-annually) to ensure that they arc 

appropriately tracking liquidity in the swap categories.6' 

In addition. the thresholds must be low enough to encourage the use of block trades. Setting 

the thresholds too high could cause significant market disruption and harm to registered fund 

shareholders by eliminating the usc of block trades in these markets and the associated benefits 

provided by such trades!5 Therefore. the Commissions should err on the side of caution by setting the 

thresholds low initially to collect data to enable them to evaluate the thresholds and the appropriate 

delays for data dissemination. 

IV. CFTC RULE 4.5 

While all of the issues discussed above are mandated by, or otherwise stem directly from, the 

Dodd-Frank Act, the CFTCs Rule 4.5 is an example of an agency using the Dodd-Frank Act as a 

pretext for an expansion of its authority through unjustified regulations. 

Since its initial adoption almost thirty years ago. CFTC Rule 4.5 under the Commodity 

Exchange Act rule had provided a uniform exclusion from CFTC regulation as a commodity pool 

operator ("CPO") for entities that are already subject to another regulatory scheme. Among these 

entities are registered funds. which are comprehensively regulated by the SEC under all four of the 

major federal securities laws. On February 8. 2012. the CFTC adopted amendments to Rule 4.5.66 The 

62 Under the proposed CFTC thresholds, many transactions that should be treated as block trades would not qualify as such. 

63 We acknowledge that the CFTC has attempted to do this to a greater extent in its reproposal; however, the proposed 

categories appear to continue to group together swaps of a wide range ofliquidities. We recommend that the CfTC analyze 

the data it will receive from SDRs to provide morc granular categories within the interest rate and credit default swap asset 

classes to more accurately reHect liquidity and to determine whether further refinements are necessary for the FX and other 

commodity asset classes. We also disagree with the CFTC's proposal not to treat any trades in equity swaps as block trades, 

and believe the CFTC should propose an appropriate minimum block size for such equity swaps. 

I>q We therefore believe the CFTC's proposal to set minimum block sizes annually would be too infrequent and that the 

thresholds must be calculated more regularly to reflect changes in the market. 

(,5 As noted above, we arc concerned that the CFTC's proposed 67-percent notional amount calculation would result in too 

high a threshold for block trades. We instead recommend that the CFTC adopt the 50~pcrcent notional amount 

calculation that was suggested by the CFTC as an alternative approach and to phase-in this standard over a period of time 

for very illiqUid categories of swaps. See supra note 60 and accompanying text. 

66 See Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed. Reg. 11252, 11253 

(Feb. 24. 2012); correction notice publishedat77 Fed. Reg. 17328 (Mar. 26, 2012) ("Rule 4.5 Adopting Release"). 

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CFTC's amendments sharply curtail the Rule 4.5 exclusion, but only for registered funds and not for 

other entities covered by the rule. 

Undet amended Rule 4.5, any registered fund that engages in more than a de minimis level of 

investment in commodity futures, commodity options or swaps or that does not satisfY the rule's 

restrictions on marketing will not qualifY for the exclusion. In that case, the registered fund's 

investment adviser will have to become registered with the CFTC as a CPO, in addition to being 

registered with the SEC. And the tegistered fund and its adviser will become subject to the CFTC's 

separate regime of disclosure, reporting, and recordkeeping, as well as to regulation and oversight by the 

National Fututes Association ("NFA"). 

This additional regulation is altogether unnecessary and redundant of the comprehensive 

regulation to which tegistered funds and their advisers are already subject by the SEC. The CFTC has 

neither justified rhe need for rhese additional regularory burdens, nor the significant costs the rule will 

impose on registered funds-costs that ultimately will be borne by their shareholders. Nor has the 

agency adequately explained how registered fund shareholders, which already enjoy comprehensive 

protections under the federal securities laws, will benefit from this additional, redundant layer of 

regulation. 

The CFTC attempts to justifY its action by pointing to the 2008 financial crisis and passage of 

the Dodd-Frank Act, saying that the statute gives it a "more robust mandate" to "manage systemic risk" 

in the derivatives markets.67 In fact, the amendments to Rule 4.5 were neither required nor even 

contemplated by the Dodd-Frank Act.6

' We agree with the observations made by CFTC 

Commissioner Jill Sommers, whose dissent in this rulemakingcriticized the agency's rationalization as 

unpersuasive: 

... Congress was aware of the existing exclusions and exemptions for CPOs when it passed 

Dodd-Frank and did not direct the Commission to narrow their scope or require reporting for 

systemic risk purposes. The Commission justifies the new rules as a response to the financial 

crisis of 2007 and 2008 and the passage of Dodd-F rank, yet there is no evidence to suggest that 

inadequate regulation of commodity pools was a contributing Cause of the crisis, or that 

subjecting entities to a dual registration scheme will somehow prevent a similar crisis in the 

future.""9 

67 Commodity Futures Trading Commission, Cross~Motion for Summary Judgment, Opposition to Plaintiffs' Motion for 

Summary Judgment, and .Motion to Dismiss in Parr at 12, Investment Company Institute, et al. v. CFTC, Case No. l: 12+cv00612 (D.D.C.June 18,2012) (quoting Rule 4.5 Adopting Release, supra note 66, at 11275). 

('s The CFTC also has described the amendments as being "consistent with the tenor of the provisions of the Dodd-Frank 

Act," despite nothing in the statute even remotely alluding to the need for CFTC overSight of registered funds. Rule 4.1 

Adopting Release, supra note 66. 

69 See Commissioner JiH E. Sommers, Dissenting Statement, Commodity Pool Operators and Commodity Trading Advisors: 

Amendments to Compliance Obligation .. (February 9, 2012), available at 

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Similar cautions were raised prior to the CFTCs adoption of the amendments. In particular, 

Chairman Jack Kingston repeatedly expressed his concern to CFTC Chairman Gensler that the thenproposed Rule 4.5 amendments were not mandated by the Dodd-Frank Act, and urged that the 

rulemaking be delayed until major rulemakings required by Dodd-Frank were completed?O Indeed, the 

CFTC in this rulemaking disregarded the plain recommendations of members of this Congress that it 

focus on its actual Dodd-Frank mandate.71 

Also troubling is the fact that the CFTC failed to perform even the most rudimentary costbenefit analysis. Last year, Chairmen Kingston and Conaway alerted the CFTC to their concerns that 

costs associated with the proposed changes to Rule 4.5 "will likely result in higher costs for many of our 

constituents that have invested their savings in investment plans that have exposure to the futures 

markets."72 And as recently as January of this year-one month before the CFTC s vote to approve the 

amendments-the two Chairmen stated that they "remain opposed to the promulgation of this rule 

without a thorough cost-benefit analysis because the proposed rule has the potential to create 

duplicative, unnecessary regulations."" These concerns were not heeded, and the CFTC adopted the 

amendments to the rule with only a cursory analysis that failed to meaningfully assess the rule's impact. 

Commissioner Sommers observed in her dissent that the CFTCs cost-benefit analysis of the rule was 

"sorely lacking. "74 

Perhaps most regrettable, in ICI's view, is the fact that the CFTC failed to address the 

significant concerns raised, and specific recommendations offered, by the public through consideration 

of this rulemaking. ICI and our members made every efforr to advocate for a more sensible outcome. 

http://www.cftc.gov/PressRoom/SpccchcsT c5timouy Isommcr<;sratcmem020912a ("Sommers Dissenting Statement") 

(emphasis added). 

7(} See Letter from Chairman Jack Kingston, Subcommittee on Agriculture, Rural Development, Food and Drug 

Administration, and Related Agencies, Committee on Appropriations, U.S. House ofRepresematives, and Chairman K. 

Michael Conaway, Subcommittee on General Farm Commodities and Risk Management, U.s. House ofReprcsenrativcs. 

to the Honorable Gary Gensler, Chairman, CfTC dated January 30, 2012 ("2012 Kingston and Conaway Letter"); Letter 

from Chairman Jack Kingston, Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and 

Related Agencies, Committee on Appropriations, U.S. House of Representatives, Chairman K. Michael Conaway, 

Subcommittee on General Farm Commodities and Risk Management, U.s. House of Representatives, and Congressman 

Bill Owens, U.S. House of Representatives, to the Honorable Gary Gensler, Chairman, CFTC, dated October 3, 2011 

("2011 Kingston, Conaway, and Owens Letter"). 

71 See Letter from frank D. Lucas, Chairman, Committee on Agriculture, and K. Michael Conaway, Chairman, 

Subcommittee on General Farm Commodities and Risk Management, to the Honorable Gary Gensler, Chairman, U.S. 

Commodity Futures Trading Commission, dated July 14, 2011 ("In light of the volume of rules that are reqUired by Title 

VII, it is prudent to prioritize the time and resources of your staff We recommend that you promulgate rules that are 

reqUired bel')fe moving to rules that are not explicitly required by Dodd-Frank." (going on to describe Rule 4.5)). 

72 2011 Kinston. Conaway, and Owens Letter, supra note 70. 

73 2012 Kingston and Conaway Letter, .fupra note 70. 

Sommers Dissenting Statement, supra note 69. 

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ICI filed three detailed comment letters; met with CFTC commissionets and staff; participated in the 

CFTC staffs public roundtable; and testified on Capitol Hill about this ruiemaking7S Twelve of Out 

member firms also filed comments. 

ICI strives to work cooperatively within the administrative process to help regulators craft rules 

that are effective, efficient, and equitable. Unfortunately, we could not reach that outcome in this 

instance, and Out mission-to advance the interests of registered funds, their shareholders, directors, 

and advisers-led us to conclude that our only recoutse was to challenge the CFTC's action in court. 

Accordingly, we joined with the U.S. Chamber of Commerce in April to file a legal challenge to the 

adoption of the Rule 4.5 amendments.76 The briefing in the litigation is almost complete, and we are 

hopeful that a decision will be issued by the court sometime this fall. 

If Out challenge is unsuccessful and the amendments to Rule 4.5 are upheld in court, it is 

important for this Subcommittee to be aware of the considerable long-term implications this 

rulemaking will have, not only for registered funds and their shareholders, but for the CFTC. A host of 

new registrants will increase the agency's workload, and regulatory oversight of these new registrants 

will place further demands on the CFTC's limited resources, at a time when the agency acknowledges 

that it cannot mect new responsibilities under the Dodd-Frank Act.77 In fact, the CFTC's recent 

performance plan states that the redeployment of resources necessary to address "the surge of DoddFrank registrations and reviews ... creates risks in its critical oversight roles."78 The Rule 4.5 amendments 

likewise will strain the resources of the NFA, which serves as the frontline regulator for CPOs. 

V. CONCLUSION 

I appreciate the opportunity to share these views with the Subcommittee. ICI looks forward to 

working with Congress and regulators on these and other issues as implementation of the Dodd-Frank 

Act continues. 

75 See Letters from Karrie McMillan. General Counsel.ICI. to David A. Stawick, Secretary, CFTC, dated October 18,2010, 

April 12. 2011 and July 28, 2011. available at httpollwww.ici.orglpdf/24625.pdf. 

httpJ/www.ici.orgipdflll cftc rule4.5 exclude.pdf, and httpJlwww.ici.ocglpdf/12 com Itr cife rdtble.pdf. 

respectively; leI April2011 Testimony, supra oote41. 

"Sec Complaint. Investment Company Institute, etal. v. CFTC, Case No. 1:12-cv·00612 (D.D.C. Apr. 17.2012). 

77 See Testimony of the Honorable Gary Gensler. Chairman, Commodity Futures T fading Commission, Before the U.S. 

Senate Appropriations Subcommittee on Financial Services and General Government (March 21, 2012) (stating that 

"effectively overseeing these markets depends on adequate funding for the agency's expanded mission."). 

7B Commodity Futures T fading Commission, President 5- Budget and Performance Plan, Fiscal Year 2013, Prepared for the 

Committee on AppropriatiOns (February 2012) (emphasis added). 

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Testimony of 

Anne Simpson 

Senior Portfolio Manager, Investments 

Director of Corporate Governance 

California Public Employees' Retirement System 

before the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

July 10, 2012 

The Impact of Dodd-Frank on Customers, Credit, and Job Creators 
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Chairman Garrett, Ranking Member Waters, and Members of the Committee: 

Good morning. I am Anne Simpson, Senior Portfolio Manager, Investments and Director of 

Corporate Governance at the California Public Employees' Retirement System (CaIPERS). 

am pleased to appear before you today on behalf of CalPERS and share our views on the 

positive impact Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is 

having on US capital markets.' I also want to address the "unfinished business" of Dodd-Frank, 

to highlight the importance of completing the task of ensuring smart regulation to protect 

investors and protect the markets upon which we and the wider public rely. 

My testimony includes a brief overview of CaiPERS, including how we benefit from effective 

financial markets regulation and the role that shareowner rights and corporate governance play 

in building investor confidence. My testimony also includes a discussion of our views on those 

key provisions of the Dodd-Frank we believe will significantly enhance investor protections, 

improve corporate governance and strengthen the U.S. financial system to the benefit of longterm investors like CalPERS and the thousands of retirees and employees that are the 

beneficiaries of our fund. 

Some Background on CalPERS 

CalPERS is the largest public pension fund in the United States with approximately $232 billion 

in global assets and equity holdings in over 9,000 companies. CalPERS pays out over $14 

billion annually in retirement benefits to more than 1.6 million public employees, retirees, their 

families and beneficiaries. This is not only an important source of daily income for those 

, Unless otherwise noted, all section citations refer to Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111-203 [hereinafter Dodd-Frank] 

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individuals; it also provides a positive economic multiplier to the local economy.2 We fully 

understand the virtuous circle between savings, investment and economic growth. That is at the 

heart of the CalPERS agenda. 

As a Significant institutional investor with a long-term investment time horizon, CalPERS 

fundamentally relies upon the integrity and efficiency of the capital markets. For every dollar that 

we pay in benefits to our members, 66 cents are generated by investment returns. The financial 

crisis hit us hard. $70 billion were wiped from CalPERS assets. We simply cannot afford another 

assault on our fund. We rely upon the safety and soundness of capital markets, and more 

broadly, sustainable economic growth, to provide the long temn returns that allow us to meet our 

liabilities. However, there is still much to be done to bring about smart regulation, which is why 

we suppor! the efforts of the Systemic Risk Council. The SRC is a joint project by the CFA 

Institute and the Pew Charitable Trusts established to urge regulators to effectively monitor and 

regulate risk to our financial system and chaired by former FDIC chair Sheila Bair. 

"As evidenced by the 2008 crisis and even recent headlines, we need a more effective and 

efficient early-warning system to detect issues that jeopardize the functioning of US financial 

markets before they disrupt credit flows to the real economy," Bair said in announcing the 

creation of the SRC. "And two of the most critical tasks are how to impose greater market 

discipline on excess risk taking and effectively end the doctrine of 'too big to fail'." 

2 See "The Economic Impacts of CalPERS Pension Payments in 2010", Dr. Robert Fountain, Regional 

Economic Consultants, (July 2011). ("Every California County benefits from CalPERS retirement 

payments. In larger urban counties impact is greatest on the total dollar amount of gross regional product. 

In smaller, rural counties the percentage increase in the gross regional product is greatest. CalPERS 

payments have a positive impact on jobs throughout the state and in 17 counties they supported more 

than one percent of the total jobs in their communities,") 

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In our view, smart regulation should be structured as follows: 

First, regulation needs to be complete and coordinated. Innovation in financial markets has led 

to the development of new financial instruments and pools. Regulation needs to keep pace with 

financial innovation and the attendant risks in order to be relevant (Derivatives are an example 

of that innovation, but it is innovation outside the reach of regulation.) 

Second, regulation needs to allow market players to exercise their proper role and 

responsibilities. Capitalism was designed to allow the providers of finance a market role in 

allocating investment, and then holding boards accountable for their stewardship of those funds. 

This is why shareowner rights are vital to the functioning of markets, including the ability of 

investors to propose candidates to boards of directors (known in short as 'proxy access') and to 

remove directors who fail. 

Third, regulation needs to ensure transparency, so that markets can play their vital role in 

pricing risk. Timely, relevant and reliable information is the currency of risk management Those 

agencies which have a role in channeling that information need to be fit for that purpose. (Credit 

ratings agencies were found wanting in this regard.) 

Fourth, regulation needs to address conflicts of interest and perverse incentives which can 

undenmine the market's ability to allocate capital effectively. (Short term, riSk-free compensation 

for executives has fuelled poor decision taking, as one of example of this). 

Fifth, regulation needs to ensure it does not prevent institutional investors from financing 

legitimate strategies, and taking advantage of new opportunities. Regulation is not there to 

prevent risk taking, it is there to ensure that risks are disclosed, and can be managed. 

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Finally, regulation needs to be proportionate, For CaIPERS, we balance the additional costs that 

are required with the potential for financial ruin, To those who question whether we can afford to 

invest in smart regulation, we reply, how can we afford not to? The financial crisis dealt a 

crippling blow to many investors, and the underlying sub-prime mortgage scandal has triggered 

widespread loss for ordinary people throughout the country. The devastating impact on the real 

economy is still with us, and recovery is still frail. The costs of regulation need to be weighed 

against this loss, 

We see smart regulation as an investment in safety and soundness of financial markets which 

generate the vast bulk of the returns to our fund, Smart regulation is an investment in the 

effective functioning of capital markets, which is critical not just to our fund, but to the recovery 

of the wider economy. 

CaIPERS' Investment Strategy - The Impact of Dodd-Frank 

CalPERS believes that Dodd-Frank, as enacted, will establish an effective framework for 

promoting the safety and soundness of capital markets and providing institutional investors the 

protections and rights to ensure markets function, However, unless effectively implemented, the 

promise of Dodd-Frank will remain largely unfulfilled, Below we highlight the critical elements of 

"unfinished business" which we regard as vital to delivering on that promise, 

Derivatives Regulation 

CalPERS strongly supports the goal of regulating the trading of derivatives to ensure risks are 

disclosed, and conflicts of interest are addressed, CalPERS believes that pension plans and 

their beneficiaries will benefit greatly from the oversight and transparency the legislation would 

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bring to the derivatives market. The Investors' Working Group' succinctly explained the 

problems with unregulated swaps markets. The blue-ribbon panel lead by former SEC 

Chairmen Bill Donaldson and Arthur levitt was direct: 

It is widely acknowledged that OTC derivatives contracts, and particularly CDS, 

played a significant role in the current financial crisis. For December 2008, the Bank 

for International Settlements reported a notional amount outstanding of $592 

trillion and a gross market value outstanding of $34 trillion for global OTC 

derivatives. This enormous financial market was exempted from virtually all federal 

oversight and regulation by the Commodity Futures Modernization Act of 2000 

(CFMA). 

Although OTC derivatives have been justified as vehicles for managing financial risk, 

they have also spread and multiplied risk throughout the economy in the current 

criSiS, causing great financial harm. Warren Buffett has dubbed them "financial 

weapons of mass destruction." Problems plaguing the market include lack of 

transparency and price discovery, excessive leverage, rampant speculation and lack 

of adequate prudential controls.' 

Dodd-Frank sought to address many of these issues by helping ensure that most swaps are 

exchange-traded and/or centrally cleared. 5 It also raised by the bar for swaps dealers 

transacting with special entities such as CalPERS by establishing business conduct standards. 

We are pleased that the CFTC has adopted thoughtful rules to implement the business conduct 

standards, but worry that many other implementing regulations remain incomplete. These 

include key definitions, from which many other requirements stem, rules on position limits, 

clearing, reporting and extraterritoriality. With regard to the latter, the CFTC recently proposed 

a rule relating to extraterritorial applications of swaps regulation. While we are still reviewing the 

3 Established in 2008, the Investors' Working Group was an independent, nonpartisan commission 

sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market 

Integrity to recommend ways to improve the regulation of U.S. financial markets. 

'Investors' Working Group, U.S. Financial Regulatory Reform, The Investors' Perspective pp 10-11 (July 

2009), 

http://www.cii.org/UserFiles/file/resource%20center/investment%20issues/lnvestors'%20Working%20Gro 

up%20Report%20fJuly%202009).pdf [hereinafter IWG Report] 

5 See Dodd-Frank, Section 701 et seq. 

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proposal, as a global investor, we hope the agency's final rule closes any and all offshore 

loopholes. 

The Volcker Rule 

We strongly support the objectives of Section 619, the so-called Volcker Rule, and would like to 

incorporate by reference the attached comment letter previously submitted to the Office of the 

Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation 

and Securities and Exchange Commission. 

The recent trading losses by JP Morgan Chase illustrate the importance of ensuring that 

regulators impose careful constraints on proprietary trading by federally insured financial 

institutions. Although the firm's CEO has asserted that "no client, customer or taxpayer money 

was impacted by this incident," there is no doubt that clients, customers and taxpayers were 

exposed to excessive risks due to speculative proprietary trading. That the losses were borne 

by shareowners does not detract this crucial point, nor does it diminish the need to effectively 

implement the Volcker Rule. 

We are hopeful the federal agencies will act swiftly to issue final rules in these areas and expect 

the rules to positively impact investor protections and capital formation. 

Alignment of Interest 

Rational individuals tend to act in their own economic interest.. For that reason, it is vital that 

incentives are aligned when those individuals taking risks as taking them with other peoples' 

money. We regard it as a vital part of fiduciary oversight to ensure that interests are aligned 

between executives in companies, and the providers of long term capital, such as CaIPERS. 

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That alignment needs to reflect potential rewards, but also the downside risk. We observed the 

impact of misaligned incentives in painful detail during the recent financial crisis when lenders 

re-packaged risky debt obligations such as accounts receivable or subprime mortgages as high 

quality asset-backed securities. In essence, these companies would make bad loans, resell 

them (as securitized products) and shift the risk of default to someone else. By separating the 

debt origination and default risk, orginators had little economic incentive to scrutinize anyone's 

credit worthiness. 

Section 941 changed this by imposing new "risk retention" obligations upon those who issue 

asset-back securities and require them to retain at least a five percent of the credit risk of any 

asset. However, these provisions have not yet been implemented. Federal financial regulators 

issued a proposed rule in March 2011, but have failed to finalize the risk retention rules. As a 

purchaser of asset-back securities, CalPERS has a compelling interest to see that it's long-term 

economic interest in the securities are aligned with those originating the securitizations and 

underlying debt obligations. 

We are hopeful that financial regulators will act swiftly to issue final rules in these areas and 

expect the rules to positively impact investor protections and capital formation. 

Credit Rating Agencies 

Credit rating agencies played a major role in the recent financial crisis. They provided many 

securitized products with investment-grade ratings, even though underlying debt instruments 

posed serious risks of default. The agencies used outdated modeling to help assign a rating 

and were highly motivated (by the issuer-pays model) to provide their clients the ratings they 

sought. Moreover, the regulatory exemption from Section 11 liability (found in Securities Act 

Rule 436(g») effectively exempted the firms from third-party liability. In sum, problems with the 

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asset-backed securities markets would not have been as glaring had credit rating agencies 

properly scrutinized the securities they were rating and not provided these products with ratings 

that suggested they were of high quality and low risk. 

In response, Dodd-Frank included some important provisions intended to improve transparency 

and accountability of credit rating agencies. These include: 

Strengthening regulatory oversight through creation of a new Office of Credit 

Ratings within the SEC responsible for both inspections and rule making (§932). 

Strengthening internal control requirements to ensure rating agency compliance 

with their own ratings poliCies, procedures, and methodologies (§932); 

• Adopting new rules to reduce the influence of conflicts of interest on ratings 

decisions (§932, §939H); 

• Enhancing transparency for ratings, induding the assumptions underlying those 

ratings and the methodologies on which they are based, in order to better enable 

investors to determine whether and how to use those ratings (§932); 

• Adopting of universal ratings symbols (§938); 

Increasing accountability for rating agencies, holding them legally accountable for 

knowing or reckless misconduct (§933) and removing their special protection from 

expert liability when ratings are used in a prospectus (§939G); and 

• Reducing regulatory reliance on ratings through elimination of references to ratings 

in financial system rules and laws (§939A). 

We were pleased to learn that the SEC recently appointed a director of the Office of Credit 

Ratings and anticipate the Office will conduct efficient and effective reviews of the agencies and 

we look forward to analyzing the Office's final inspection reports. We believe objective 

performance reviews of credit rating agencies will improve credit analysis and transparency. 

The SEC has also finalized rules that removed references to credit ratings for issuers using 

"short form" registration and proposed a series of other rules in spring 2011. However, the SEC 

has yet to finalize any of those other rules. In addition, through two no-action letters, the SEC 

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provided relief for issuers who were unable to obtain a credit ratings after the agencies' refused 

to allow their ratings to be included in securities filings. 

We are hopeful the SEC will act swiftly to issue final rules in this area and withdraw the noaction letter that allows credit rating agencies to avoid legal liability for false ratings in securities 

filings. Once completed, we expect these rules to positively impact investor protections and 

capital formation. 

Shareowner Rights -Investor Protection 

It is widely acknowledged that the 2008 financial meltdown represented a massive failure of 

oversight.s Too many CEOs pursued excessively risky strategies or investments that 

bankrupted their companies or weakened them financially for years to come. 7 Boards of 

directors were often complacent, failing to challenge or rein in reckless senior executives who 

threw caution to the winds And too many boards approved executive compensation plans that 

rewarded excessive risk takingg 

S See Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report xviii (Jan. 2011), 

http://www.gpoaccess.gov/fciclfcic.pdf ("We conclude dramatic failures of corporate governance and risk 

management at many systemically important financial institutions were a key cause of this crisis" ) 

~hereinafter FCIC Report. IWG Report, supra note 1, at 22. 

IWG Report, supra note 1, at 22. 

8 See Staff of S. Permanent Subcomm. on Investigations, Wall Street and the Financial Crisis: Anatomy 

ofa Financial Collapse 185-86 (APr. 13,2011), 

http://hsgac.senate.gov/public/ files/Financial Crisis/FinancialCrisisRepart.pdf (providing eVidence that 

board oversight of Washington Mutual, Inc., including oversight of enterprise risk management, was "'less 

than satisfactory'"); IWG Report, supra note 1, at 22. 

9FCIC Report, supra note 1, at xix ("Compensation systems-designed in an environment of cheap 

money, intense competition, and light regulation-too often rewarded the quick deal, the short-term 

gain-without proper consideration of long-term consequences); see also Deputy Secretary of the 

Treasury Neal Wolin, Remarks to the Council of Institutional Investors 4 (Apr. 12, 2010), 

http://www.ustreas.gov/presslreleases/tg636.htm (noting that ""irresponsible pay practices. led so 

many firms to act against the interests of their shareholders"); IWG Report supra note 1, at 22. 

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Accountability is critical to motivating people to do a better job in any organization or activity. 10 

An effective board of directors can help every business understand and control its risks, thereby 

encouraging safety and stability in our financial system and reducing the pressure on regulators, 

who, even if adequately funded, will be unlikely to find and correct every problem." 

Unfortunately, long-standing inadequacies in investor protection have limited shareowners' 

ability to hold boards accountable. '2 

Fortunately, the Dodd-Frank contains a number of reforms that when fully implemented and 

effectively enforced will provide long-term investors like CalPERS with better tools, including 

better information, to hold directors more accountable going forward's These included 

provisions that: 

Provide for a shareholder vote on executive compensation (§951); 

Enhance disclosure requirements about role of, and conflicts involving, 

compensation consultants. Also requires the SEC to direct that exchanges adopt 

listing standards that include certain enhanced independence requirements for 

members of issuers' compensation committees and to establish competitive neutral 

independence factors for all who are retained to advise compensation committees 

(§9S2); 

Include additional disclosure requirements involving executive compensation 

including pay-for-performance and the ratio between the CEO's total compensation 

and the median total compensation for all the other company employees (§953); 

• Require that the SEC direct the exchanges to prohibit the listing of securities and 

issuers that have not developed and implemented compensation claw-back policies 

(§9S4); 

• Impose disclosure requirements involving Whether directors and employees are 

permitted to hedge any decrease in market value of the company's stock (§9SS); 

10 Press Release, supra note 5, at 2. 

"Id. 

12 IWG Report, supra note 1, at 22 ('shareowners currently have few ways to hold directors' feet to the 

fire"). 

13 S. Comm. On Banking, Housing, & Urban Affairs, Rep. On The Restoring American Financial Stability 

Act 30 (Mar. 22, 2010), http://banking.senate.gov/public/ fileslRAFSAPostedCommitteeReport.pdf 

(Noting that the Senate version of Dodd-Frank contained provisions designed to give investors "more 

. protection" and shareholders "a greater voice in corporate governance") [hereinafter S. Rep.]. 
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• Clarify the authority of the SEC to issues rules allowing for meaningful proxy access 

for board of director nominations (§971); and 

Require disclosure by issuers on board chair and chief executive officer (§972). 

We are pleased the SEC adopted final rules executive compensation in January 2011'4 and we 

just completed our first proxy season under these rules. We see a positive impact. Dialogue with 

companies has improved - and companies are making sensible reforms in response to 

shareowner concerns. 

Last month, the SEC issued final rules on listing standards for compensation committees. In 

September, 2010, the SEC issued final rules providing meaningful proxy access,'S however 

those rules were overturned by the DC Circuit Court due to an inadequate cost-benefit analysis. 

In March 2011, the SEC issued proposed rules relating to audit committee independence but 

has yet to finalize the rules. The SEC has not issued rule proposals on any of the remaining 

corporate governance provisions. We note that the Investor Advisory Committee has now been 

formed, and await the appointment of the Investor Advocate in the near term. 

We are hopeful the SEC will act swiftly to issue final rules in these areas and expect the rules to 

positively impact investor protections and capital formation. . 

Regulatory Agency Funding 

The SEC and CFTC play vital roles in fostering capital formation and protecting investors in 

financial markets. CalPERS has long recognized that for the SEC and CFTC to achieve their 

stated objectives, they must be well-managed, well-staffed and that means they must be well14 Shareholder Approval of Executive Compensation and Golden Parachute Compensation, 76 Fed. Reg. 

6010 (final rule Apr. 4, 2011) htlp:/Iwww.gpo.gov/fdsyslpkgIFR-2011-02-02/pdfI2011-1971.pdf 

1S Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56,668 (final rule Sept. 16. 2010), 

htlp:/lwww.gpo.gov/fdsvslpkgIFR-2010-09-16/pdff201 0-22218. pdf 

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funded. Rules without enforcement are little better than useless. In 2001, CalPERS testified in 

support of legislation that would put SEC staff salaries on par with other financial regulators and 

was pleased that pay-parity provisions were enacted into law that year. More recently, we 

called for lawmakers to provide the SEC and CFTC with stable, independent funding. Although 

no such mechanisms were included in Dodd-Frank, it remains imperative that the SEC and 

CFTC be given sufficient resources to effectively police the U.S. capital and futures markets. 

We believe the SEC and CFTC's FY2013 funding requests reflects the importance of their 

traditional core responsibility, as well as the new authority granted it in Dodd-Frank, and we 

urge you to support their funding requests. 

Thank you, Mr. Chairman for inviting me to participate at this hearing. I look forward to the 

opportunity to respond to any questions. 

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California Public Employees' Retirement System 

Inveetment OffIce 

P.O. Box 2749 

Sacramento, CA 95812·2749 

TTY: (916) 795-3240 

(916) 795-3400 phone' (916) 795-2842 fax 

www.calpera.ca.goY 

February 13, 2012 

John Walsh, Acting Comptroller 

Office of the Comptroller of the Currency 

Independence Square 

250 E Street, SW 

Washington, DC 20219 

Robert E. Feldman, Executive Secretary 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Washington, DC 20429 

Jennifer J. Johnson, Secretary 

Federal Reserve System 

20th and C Streets, NW 

Washington, DC 20551 

Elizabeth M. Murphy, Secretary 

Securities and Exchange Commission 

100 F Street, SE 

Washington, DC 20549 

RE: PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY TRADING AND CERTAIN 

INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE FUNDS AND PRIVATE EQUITY 

FUNDS 

Dear ladies and Gentlemen: 

I am writing on behalf of the California Public Employees' Retirement System (CaIPERS). the 

largest public pension fund in the United States, with approximately $234 billion in global assets 

and equity holdings in approximately 11,000 publicly traded companies. CalPERS provides 

retirement benefits to more than 1.6 mUlion public workers, retirees, and their families and 

beneficiaries. 

CalPERS strongly supports the efforts by the Office of the Comptroller of the Currency, Federal 

Reserve System, Federal Deposit Insurance Corporation and Securities and Exchange 

Commission (the "Agencies") to implement Section 619 of the Dodd-Frank Wall Street Reform 

and Consumer Protections Act (Dodd-Frank), commonly referred to as the ·VoIcker Rule." The 

present system of bank regulation allows too much downside risk in the financial system, and 

we applaud the Agencies' efforts to minimize that risk. 

The Voicker Rule will help reduce the risks brokerage operations pose to their financial holding 

companies and, if effectively implemented, will help mitigate the risks SIFl's (SystemIcally 

Important Financial Institutions) pose to the overall fmaneial system. Accordingly, we support 

the rule's intent to ensure that a bank's trading activity is consistent with underwriting and 

market making related activities and not prohibited proprietary trading. 

With this in mind, we would like to offer the following observations on the proposed rules by the 

Agencies. ' 
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February 13, 2012 

Page 2 

• Implementation of the Volcker rule will increase the cost of transacting and reduce 

liquidity to all markets (e.g., equity, fixed income, derivative) where SIFI's conduct 

proprietary trading. Thus, we acknowledge that the systemic protections afforded by the 

Volcker Rule come at price. Specifically to the debt markets, it will impose higher 

transaction costs and cause spreads to rise. Thus, our portfolio values will be reduced 

due to the higher spread or yield investors demand to compensate for the higher 

transaction costs. In addition, when we do transact in our portfolios, the cost will be 

higher. Since our portfolio tumover rate is relatively low, the expected rise in annual 

transaction costs is an acceptable cost for reducing risk in the financial system. 

However, institutions with higher turnover, like hedge funds, mutual funds or other high 

volume traders, are likely to be more negatively impacted by Ihe increased transaction 

costs. 

• We believe that a decline in bank proprietary trading will increase the volatility of the 

corporate bond market. especially during times of economic weakness or periods where 

risk taking declines. However, corporate bond portfolio managers have experienced 

many different periods when markets have been Hliquld:1997 - Asian Crisis, 1998 - Long 

Term Capital, 2000 - Tech Bubble Crash, 2001-2002 Corporate Malfeasance, and 2009 

Recession/Financial Crisis. We believe, post the implementation of the Volcker rule,that 

the market will adapt Portfolio managers will increase their use of CDS to reduce 

economic risk to specific bond positions as the liquidation process of cash bonds takes 

more lime. We also believe that alternative market matching networks will be developed 

to match and cross sellers with buyers. The Agencies should seek to increase the 

disclosure of trade data in TRACE by increasing the universe of securities covered and 

to include greater disclosure on size of trades. This will provide investors with more 

transparency on price discovery during periods when markets are illiquid. The Agencies 

should plan in advance to measure and monitor how the implementation of the Volcker 

rule impacts the markets and whether unintended risks develop as transaction volume 

moves to alternative markets, counterparties or pools of liquidity. 

• The Agencies' common framework, applied to all covered financial institutions, should 

communicate the acceptable level of position limits, P&L, inventory turnover, customer 

facing trades and portfolio risk limits based on specific market size, volatirlty and 

correlation of risks. This will ensure that the implementation of the rules is consistently 

applied across all SIFls and a priority is established for deviations from the rules and 

enforcement. 

• We believe that a daUy trade level and backward assessment of what constitutes market 

making versus proprietary trading may be impractical and impose onerous reporting 

requirements on both banks and regulators. 

• As asset managers, not unlike market makers, we manage the daily mark to market risk 

and correlation of positions and know how a position's size and weight can impact 

results. Our experience in this area suggests that regulators consider a softer stance on 

inventory accumulation that is held for a short time period (1-5 days) if it is "right sized" 
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Februmy 13, 2012 

Page 3 

relative to a bank's capital, volatility and potential investor demand. At the same time, we 

would suggest that regulators use a vintaging methodology that would create 

disincentives for market makers to hold positions beyond a short term period, by 

imposing increasingly higher capital requirements on aged inventory and identified 

portfolio risks. We think this less stringent implementation may help ease the impact on 

investor liquidity needs during all market environments. 

• Treasury futures should be treated in a consistent manner as US treasury debt and be 

exempt from proprietary trading rules. Treasury futures have a return profile similar to 

cash treasuries and are used by many market participants and primary dealers as 

hedging instruments. We would also advocate allowing inventory in dollar denominated 

Sovereign bonds for short time periods, subject to vintaging rules that require increased 

capital based on the age of a position, as described above. 

• For the Volcker Rule to work effectively, it should be implemented globally. Without 

multilateral agreements with regulators in other countries, establishing Volcker type 

restrictions on US financial market making institutions may put them at a competitive 

disadvantage. Simply imposing a ban on proprietary trading by US financial institutions, 

without comparable restrictions in the global marketplace, would reduce systemic risk to 

the US fJnaOcial system but would likely result in increased counterparty risk for 

investors that execute trades with off shore counterparties that provide better liqUidity. 

• Dodd Frank and the Volcker Rule represent the most significant reregulation of the 

banking industry since GlaSS-Steagall. With the implementation of these rules, the SEC 

should also promulgate enhanced and expanded financial reporting requirements for 

SIFl's, at both the holding company and significant operating company levels. SIFl's are 

complex financial institutions that have and will continue to require signifICant invested 

capital from the debt markets. During the last financial crisis, management teams were 

reluctant to provide increased detail and segmentation of risks to investors, arguing that 

disclosure Informs competitors of important trade secrets. SEC disclosure directives 

should be broad in the scope of risks covered (interest rates, credit,liquidity, geographiC, 

product, concentration, etc.) and provide quantitative (not qualitative) measures of risk 

with standardized computation methods to ensure comparability across time and 

institutions. Lastly, debt holders should be seeking greater transparency from SIFl's due 

to the powers given to the FDIC, In the Dodd-Frank Bill, to carry out an orderly 

liquidations of SIFl's, in a manner that maximizes the value of the institution's assets and 

ensures that creditors and shareholders bear any loss without putting the financial 

system at risk. 

• Finally, most financial institutions fail due to the write down of poor quaftty assets that 

are the result of poor underwriting decisions. In the prior crisis, many SIFI's were not 

under stress because of proprietary trading losses of their market making function, but 

because of the retention of poor quality assets after underwriting securities and 

unsuccessfully distributing that risk. Many SIR's underwrote and retained risk in Sub 

Prime mortgages, COO tranches, and the High Yield debt of LBO issuers that needed to 
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February 13. 2012 

Page 4 

be written down. Thus. we suggest the Agencies consider whether they have sufficient 

provisions to reduce the risk posed by this very common revenue generating activity that 

poses heightened financial risk at the top of economic cycles. 

Thank you for considering our comments. If you have any questions, please do not hesitate to 

contact me at (916) 795-2062. 

Sincerely, 

J UILLOT 

Chief Operating Investment OffIcer 

CalPERS 

Cc: Joe Dear. Chief Investment Officer - CalPERS 

Curtis Ishii. Senior Investment Officer - CalPERS 

Eric Baggesen. Senior Investment Officer - CalPERS 

Anne Simpson. Senior Portfolio Manager - CalPERS 

Lou Zahorak, Portfolio Manager - CalPERS 
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~ L~t ~in8nce LounciL '~ 

TESTIMONY OF PAUL VANDERSLICE ON BEHALF OF 

THE COMMERCIAL REAL ESTATE FINANCE COUNCIL 

BEFORE THE 

UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES 

HEARING ON TilE IMPACT 

OF DODD-FRANK ON CUSTOMERS, CREDIT AND JOB CREATORS 

July 10,2012 

The Commercial Real Estate ("CRE") Finance Council is grateful to Chairman Garrett 

and the Members of the Subcommittee for holding this hearing to examine the imfact of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") on credit 

availability. 

The CRE Finance Council is the collective voice of the entire $3.1 trillion commercial 

real estate finance market, including portfolio, multifamily, and Commercial Mortgage-Backed 

Securities ("CMBS") lenders; issuers of CMBS; loan and bond investors, such as insurance 

companies, pension funds, and money managers; servicers; rating agencies; accounting firms; 

law firms; and other service providers. Our principal missions include setting market standards, 

facilitating market information, and providing education at all levels, including securitization, 

which has been a crucial and necessary tool for growth and success in commercial real estate 

finance. Because our membership consists of all constituencies across the entire CRE finance 

market, the CRE Finance Council has been able to develop comprehensive responses to policy 

questions that promote increased market efficiency and investor confidence. 

We appreciate the opportunity to share our views on the impact of Dodd-Frank 

regulations on credit availability in the CMBS component of the securitization markets. As 

explained in more detail below, the cumulative impact of the regulations implementing the 

Dodd-Frank Act poses a serious threat to sustaining the nation's overall economic recovery. It is 

critical that the agencies charged with implementing the Dodd-Frank Act coordinate their 

rulemakings and consider the cumulative impact of the numerous regulations on credit 

availability in the CRE finance market before promulgating final rules. We are not suggesting 

that this consideration should impede issuance of final rules. Indeed, the tremendous uncertainty 

1 Pub. L. No. 111-203. 

CRE Finance Council 900 7th St. NW Suite 820, Washington, DC 20001 

Tel: 202.448.0850 Fax: 202.448.0865 www.crefc.org 

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created by the multitude of required financial regulatory changes serves as a direct, independent 

impediment to private lending and investing, as the markets attempt to anticipate the impact 

these developments may have on the availability of commercial real estate credit, capital and 

liquidity. 

Executive Summary 

• The commercial real estate market in the United States is funded by $3.1 trillion in 

commercial mortgages and has approximately $1.5 trillion in equity. 

• Approximately $2 trillion of the commercial mortgage debt is scheduled to mature over 

the next five years. 

Traditional portfolio lenders - primarily banks and life insurance companies - are 

projected to be capable of funding less than $200 billion per year of this demand, and 

they simply lack the balance sheet capacity to completely satisfy the aggregate CRE 

financing need. This fact leads to a natural funding gap between the credit portfolio 

lenders can provide and the credit necessary to refinance existing debt and to fund new 

commercial loans that are essential to economic recovery and growth. 

• For the last two decades, CMBS has filled the CRE funding gap between what these 

traditional portfolio lenders can supply and the needs of CRE borrower demand. Some 

traditional portfolio lenders also rely on the availability of CMBS as an exit strategy and 

the majority of portfolio loans therefore are structured to be eligible for securitization. 

• The CMBS industry is in the midst of a very fragile recovery. Currently, there is 

approximately $600 billion in outstanding CMBS, with only between $30-35 billion in 

new issuance projected for 2012. While we are recovering, the industry has not seen 

issuance this low since 1997. There is growing concern that the size of the CMBS 

market will soon be insufficient to support the vast infrastructure necessary to sustain a 

viable CMBS market. 

o This insufficiency could be particularly problematic for the secondary markets -

or, better said, the businesses in the small and midsized towns across America that 

CMBS traditionally funds. 

• As the market attempts to recover, CMBS also confronts a series of exogenous 

headwinds that include, among others, weak growth in the U.S economy and the 

intensifying sovereign crisis in Europe. 

• That said, the complex and overlapping sets of Dodd-Frank and other, related financial 

sector regulations are a controllable component of these headwinds. 

• The CRE Finance Council fully supports many aspects of Dodd-Frank, including risk 

retention, better disclosure and more transparency. 

CRE Finance Council 900 7th St NW Suite 820. \N~"hi"('j!rln 

2024480850 Fax: 2024480865 

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o In fact, the SEC pointed to the CRE Finance Council CMBS disclosure 

package as a model for the entire ABS industry, and we are working as an 

industry to continue to perfect this transparency model. 

• However, we are concerned that each individual regulation may be going beyond 

Congressional intent and, when these regulations are aggregated, the combined effect will 

curtail credit further than you intended. 

• As an example, the Premium Capture Cash Reserve Accounts CPCCRA") included in 

the proposed risk-retention regulations, but not contemplated in the Dodd-Frank Act 

itself, are intended to bolster the retention regime. However, they will do so (if they do 

so at all) at the expense of borrowers in terms of restricted credit availability and 

increased borrowing costs. Investors also would be affected, as they will not have 

sufficient CMBS product to provide the risk diversification and yield needed to meet, for 

example, life insurance and pension benefit payment obligations. 

o According to a recent survey of the CRE Finance Council Board, 78% of 

the respondents - and 73% of the Investment Grade Investor respondents 

the PCCRA is purportedly designed to protect - believed that 

implementation of the PCCRA requirement would hinder CMBS. 

o In addition, in a separate survey, 92% of issuer respondents said that 

imposition of the PCCRA would decrease loan origination volume from 

current levels. Almost 62% of those respondents said that volume 

decreases would be more than 50%. Some indicated reductions would be 

as high as 90-\ 00%. 

o All respondents indicated that the cost of liquidity to borrowers would 

increase - over 92% said the cost increase would be 50 basis points or 

more; 46% indicated that the cost increase would be more than 100 basis 

points. 

• The Basel III proposed capital credit rules also will function to decrease credit 

availability, espeeially from smaller banks, and increase the cost of that credit to 

borrowers. 

• The regulators arc required to ensure that the benefits of any proposed regulations are 

fully justified by the cumulative costs they will impose. We recognize the fine line that 

regulators must walk between the need to safeguard the markets and allow healthy 

liquidity to flow. Ultimately, the question is, "What is the appropriate level and extent of 

regulation?" 

• The Board of Governors of the Federal Reserve Report also recognizes the importance of 

considering thc totality of the regulatory changes before promulgating final rules. It 

eRE Finance Council 900 7th S! NW Suite 820, \hb~hil,rltr", 

Tel 202.448.0850 Fax 2024480865 

- 3 -
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noted recently that retention requirements could, in combination with other regulatory 

initiatives, significantly impede the availability of financing. 

• Therefore, we urge Congress to use its oversight authority to ensure that the regulators 

are following both Congressional intent and Administrative Policy by fully evaluating the 

potential costs and benefits before adopting final securitization-related rules. 

• It also is imperative that the regulators get the rules done; they just need to be done right. 

Discussion 

Industry Background 

Commercial real estate is a multi-trillion dollar component of the American economy. 

Commercial real estate provides the space where we work, shop, live. meet and recreate. 

Specifically, commercial real estate comprises the apartments, manufactured housing, office 

buildings, strip malls, grocery stores, and other retail establishments where goods are sold and 

food purchased; the small business spaces on main street; the industrial complexes that produce 

steel, build cars, and create jobs; the hospitals where doctors tend to the sick; and the hotels 

where relatives, vacationers, and business executives stay. 

The commercial real estate market in the United States is still emerging from a period in 

which it faced serious duress brought on by the severe economic downturn, and significant 

hurdles remain to recovery. Prior to the onset of the economic crisis, CMBS was the source of 

approximately half of all CRE lending, providing approximately $240 billion in capital to the 

CRE finance market in 2007 alone. In addition, many portfolio lenders also rely on the 

availability of securitization to provide a safety valve exit strategy, and it has been estimated that 

in 2007, for example, as many as 80% of all loans were securitization eligible. After 

plummeting to a mere $2 billion in 2009 at the height of the crisis, the CMBS market began to 

see signs of life in 2010 with $12.3 billion in issuance; issuance of approximately $30 billion in 

2011; and issuance of $18 billion in 2012 (to date). The total CMBS issuance for 2012 is 

expected to be between $30-35 billion. 

Tn the next five years, however, approximately $2 trillion in outstanding commercial 

mortgages - including $600 billion in CMBS loans - will mature, many of which are smaller 

properties located in secondary markets where traditional portfolio lending often is not available. 

Borrower demand to refinance those obligations will be at an all-time high. 2 Last year alone, for 

example, approximately $700 billion in commercial mortgages matured but there was capital 

available to refinance only $200 of the $700 billion in loans. Bank portfolio lending provided 

$80 billion of the $200 billion in financing; life insurance company portfolio lending provided 

another $50 billion; Government Sponsored Enterprises (GSEs) provided another $40 billion, 

almost exclusively to finance multi-family housing projects; and the $33 billion balance was 

2 The Dodd-Frank NPR: Implications for CMBS, April 12,2011, Morgan Stanley at I. 

CRE Finance Council 900 7th St NW Suite 820. 

202.448.0850 Fax 202448.0865 

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supplied by CMBS. For the $500 billion of mortgages where capital was unavailable for 

refinance, those loans were either extended, foreclosed or borrowers were required to input 

additional equity into the underlying property. 

Portfolio lenders - primarily banks and life insurance companies - simply lack the 

balance sheet capacity to satisfy total CRE borrower demand. This will be even truer due to the 

new constraints on their portfolio lending capacity that will be imposed by the new Basel III 

capital requirements. Going forward, the maturity-related refinancing alone will average about 

$250-300 billion per year, and the portfolio lenders and the GSEs can only fund slightly more 

than one-half of that burden. The rest of the overall financing load (including both refinancing 

and new lending demand) has been filled over the course of the last two decades by CMBS, 

which utilizes sophisticated institutional investors - pension funds, mutual funds, and 

endowments, among others who bring their own capital and expertise to the table and fuel 

lending. CMBS lending is especially critical for small businesses as the average CMBS 

securitized loan is $8 million and, as of July 2010, there were more than 40,000 CMBS loans that 

were less than $10 million. 

One of the overarching questions we are facing at this juncture is whether CMBS will be 

able to continue to help satisfy the impending capital needs posed by the refinancing obligations 

that are coming due. Without CMBS, there simply is not enough balance sheet capacity 

available through traditional portfolio lenders, such as banks and life insurers, to satisfy these 

demands. And without a securitization exit strategy, there also would be less credit available 

from portfolio lenders and the cost of that credit also would increase. 

It is for thcse reasons that Treasury Secretary Geithner noted more than three years ago 

that "no financial recovery plan will be successful unless it helps restart securitization markets 

for sound loans made to businesses - large and small.") Similarly, then-Comptroller of the 

Currency John C. Dugan noted that, "riJf we do not appropriately calibrate and coordinate our 

actions, rather than reviving a healthy securitization market, we risk perpetuating its decline 

with significant and long-lasting effects on credit availability.,,4 

3 Remarks by Treasury Secretary Timothy Gcithner Introducing the Financial Stability Plan (Feb. 

10,2009) available at http://www.uslreas.gov/press/releases/tgI8.htm. 

4 Remarks by John C. Dugan, Comptroller ofthe Currency, before the American Securitization 

Forum (Feb. 2, 2010), at 2 (available at 

http://www.crefc.org/uploadFiles/CMSA Site Home/Government Relations/CMBS Issues/TALF Treas 

ury PlanslDuganRemarksatASF201.pdf.). 

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The Outlook for the CMBS Industry 

The CMBS market is in the early stages of what we hope will be a robust recovery. But, 

make no mistake; the recovery is in a very fragile and challenged state today. There are over $2 

trillion in commercial loans across America that must be refinanced by 2017. At an issuance rate 

of about $30 billion per year and with an overall market of under $600 billion of outstanding 

CMBS issuances, the CMBS industry is struggling (0 both heal and maintain itself. 

The overall size of the CMBS market is shrinking as the rate of legacy loans maturing 

and rolling off the books is greater than the rate of new issuance. At this rate, the size of the 

CMBS market eventually will lose the critical mass necessary to continue to be a viable market. 

This would deal a blow to CRE liquidity as issuance of new CMBS will face a serious headwind 

of there being no viable secondary market for investors to trade and exit their positions. 

A new issuance market of approximately $30 billion a year is not nearly large enough to 

provide the capacity for pending CRE mortgage maturities that must be refinanced. In a survey 

of CREFC Board of Governors, 76% of respondents noted that the annual level of CMBS 

issuance required to provide healthy liquidity levels to the CRE marketplace would be between 

$50-100 billion. 22% said it should be over $ J 00 billion. Whether one considers this a selfserving industry viewpoint or not, the fact underpinning it is that the status quo is not an 

acceptable business model. Investment capital will flow to where it will get its best risk-adjusted 

return. 

In addition, it is a costly enterprise to establish and maintain a CMBS secuntIzation 

platfonn. It is a personnel intensive business that requires capable and experienced finance 

professionals. There must be sufficient volume in the industry to house and pay the teams of 

originators, analysts, traders, brokers and other specialists and intcnnediaries required to run an 

efficient CMBS platfonn. A $30 billion per year rate of issuance is simply insufficient and is 

stressing the industry's financial ability to maintain that requisite infrastructure. If firms 

determine that their CMBS platfonns are not viable and profitable enough, they will reduce or 

close them. In fact, many analysts predict that the CMBS market will be too costly to maintain if 

the secondary market falls below $300 billion. Once this capacity leaves the system, it will take 

a long time to bring it back. 

The CMBS marketplace faces many headwinds on its road to recovery. The sovereign 

crisis in Europe affects credit and economic confidence around the globe. In the United States, 

we face stubbornly high unemployment and low job growth. Consumer confidence is weak. 

The business sector is cautious about capital expenditures as it nervously assesses the uncertainty 

in the public and private sectors. Investment of all types seems to be on hold for 2012 as we 

await the outcome of the presidential election and what Congress and the President will do 

regarding the numerous fiscal policy imperatives that lie ahead. "Taxmaggedon", budget 

sequestering, raising the debt ceiling, the deficit, and the federal government's credit rating all 

loom ominously on the horizon. 

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The Dodd-Frank CMBS Statutory Framework & Market Reforms 

Against this backdrop, Congress adopted a credit risk retention and transparency 

framework for asset-backed securities in Dodd-Frank. It is essential to highlight at the outset 

that The CRE Finance Council supports that Dodd-Frank statutory framework and advocated for 

the inclusion of the risk retention requirements in that framework. We believe the Dodd-Frank 

legislation out I ines how an effective risk retention construct and enhanced transparency can be 

achieved, and provides the appropriate flexibility to do so for both regulators and market 

participants. 

The CRE finance industry also has taken its own direct steps to strengthen the CMBS 

market and to foster investor confidence through the completion of "market standards" in the 

areas of representations and warranties; underwriting principles; and initial disclosures. Scores 

of members of The CRE Finance Council across all of the CMBS constituencies worked 

diligently on these market refonns for more than a year. 

Those market reforms built on a CMBS transparency regime anchored by The CRE 

Finance Council's trademarked disclosure packages that already had been the universally 

acknowledged leader in asset-backed securities market transparency. Specifically, our Investor 

Reporting PackageTM for ongoing transparency and our Annex A TM for initial CMBS issuances 

are the disclosure packages demanded by investors and required to be used under every CMBS 

contract. The SEC recognized CREFC's IRP in its proposed Reg AB II changes as a model 

disclosure for other ABS classes. But the industry has not rested on its laurels. We are 

continuously updating our disclosure product to remain the market leader, and we have recently 

begun to develop a robust set of servicer disclosures that will be added to the IRP in reaction to 

investor demands for more loan work-out process transparency. 

Cumulatively, The Regulatory Regime Should PreserveAnd Not Unduly Restrict - Access To Affordable Credit 

Dodd-Frank requires the agencies to issue an array of implementing rules and the 

agencies have issued a series of proposed rules in accordance with these requirements. We agree 

with the overarching Dodd-Frank objective that these rules should enhance investor ability to 

invest with the confidence that the investment markets are fair, transparent and safe. Safe 

markets, however, do not mean riskless markets, as all investment carries some amount of risk. 

But, investors should have confidence that, with adequate transparency, proper retention, and the 

ability to conduct their own requisite due diligence, they can fairly, reasonably and reliably 

assess the risk factors underlying any CMBS investment opportunity. 

The question is, "What is the appropriate level and extent of regulation?" Not enough and 

investor safety and confidence can be compromised. Too much and industry capacity is 

diminished with no real marginal increase in benefit to investors. Larger businesses and high 

profile properties in the country's major urban centers will continue to enjoy ready access to 

CRE portfolio financing. But smaller businesses and businesses in the secondary markets that 

are the core of our national economy - main street America cities and towns like those listed 

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below - will not have adequate access to the financing that is their lifeline without a viable 

CMBS market: 

Paramus in New Jersey's 5th Congressional District, where CMBS 

financed a $9 million industrial facility whose principal tenant, Topcon 

America, is a leading provider of laser-based ophthalmic equipment; 

• Inglewood in California's 35th Congressional district, where CMBS 

financed a local grocery store, as well as an $8 million industrial loan 

which houses a variety of local manufacturers and distributors; 

• Tempe in Arizona's 5

th Congressional District, where CMBS financed 

almost 20 different multifamily projects, which provided housing to over 

5,000 families; 

• Granada Hills in California's 27th Congressional District, where CMBS 

financed the Granada Hills Town Center which provides grocery, 

pharmacy and hardware stores for the community of 450,000; and 

• Naperville in lllinois' 13th Congressional District, where CMBS provided 

$16 million to finance an assisted living facility. 

The investors that provide the capital for these borrowers do not benefit from regulation 

if it erodes their CMBS returns to the point where CMBS is no longer competitive with their 

other investment options. As the Board of Governors of the Federal Reserve aptly noted, the 

agencies implementing the Dodd-Frank securitization credit retention requirements must "ensure 

that the regulations promote the purposes of the Act without unnecessarily reducing the supply of 

credit:·5 Federal Reserve Board Governor Tarullo also separately has highlighted the 

importance of implementing retention "in order to properly align the interests of originators, 

securitizers, and investors without unduly restricting the availability of credit or threatening the 

safety and soundness of financial institutions.,,6 

The Proposed Regulations' Potential Threat to eRE Credit Availability 

The proposed rules especially when considered cumulatively pose a threat to the 

continued recovery and on-going viability of CMBS and the credit it supplies. Each rule, in and 

of itself, may have its own justifiable merit and its compliance requirements may not seem 

5 Board of Governors of the Federal Reserve System, Report to Congress on Risk Retention 

(October 2010), at 3 (available at http://federalerserve.gov/boarddocs/rtpcongress/ 

securitizationiriskretention.pdD. 

6 Daniel Tarullo, Federal Reserve Governor, Statement Before The House Committee on 

Financial Services (Oct. 26, 2009). 

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unduly burdensome. However, the multitude of proposed Dodd-Frank-related rules, including 

risk retention, will have a significant impact both individually and when considered as a 

package - on credit availability in the CRE market. 

As the International Monetary Fund has cautioned, the proposed retention rules and 

"effects induced by interaction with other regulations will require careful consideration.,,7 

Unfortunately, the agencies generally have failed to consider the impact of individual rules on 

credit availability, and they have made no effort whatsoever to evaluate the cumulative impact of 

all of the proposed rules. The following examples underscore the importance of agency 

coordination and study of the cumulative impact of regulations on credit availability before 

finalizing the proposed rules. 

The PCCRA: The Premium Capture Cash Reserve Account rule proposal would require 

securitizers to retain all revenue from excess spread (which is virtually all revenue) for the life of 

the transaction in a separate account for the life of the security and to hold this account in a firstloss position even ahead of (and subordinate to) the B-piece investor retained interest unless 5% 

of the fair market value of the issuance is retained in accordance with the credit retention 

requirements. Such a mechanism will inhibit an issuer's ability to pay operating expenses, 

transaction expenses, and realize profits from the securitization until, typically, 10 years from the 

date of a securitization, assuming there were no losses on the portfolio. 

Furthermore, this premium not only reflects profits, but also is used to recoup the costs 

associated with the origination platform used for the securitization process. Essentially, issuers 

would take a loss on every CMBS securitization if they are required to establish a PCCRA. 

Finally, the PCCRA would also fully expose current CMBS issuers to changes in interest rates. 

In a simple example, if $1 00 in loans has a 5% origination interest rate, but the market rates drop 

to 4% at securitization, a I % premium is charged on the certificates to reflect this change. 

Unfortunately, the PCCRA, as written, would capture this premium. 

Alternatively, if rates rose from 5% to 6% from origination to issuance, the certificates 

would be required to have a 1 % discount to sell. The securitizer would then absorb the loss. In 

short, the PCCRA fundamentally alters the economics of the securitization by creating a timing 

mismatch: it exposes the issuer to all the downside risk/losses associated with their interest rate 

exposure while requiring the issuer to wait until all the mortgages mature to recognize any profit 

for taking that risk. Without either a profit motive or the ability to recoup the origination costs, it 

would be unlikely that many CMBS issuers would continue to securitize at the same volumes if 

at all. 

It is understandable, therefore, that many in our industry have significant concerns about 

the PCCRA having an adverse impact on the viability of the CMBS market by reducing credit 

7 International Monetary Fund, "Restarting Securitization Markets: Policy Proposals and Pitfalls," 

Chapter 2, Global Financial Stability Report: Navigating the Financial Challenges Ahead (October 2009), 

at 109 ("Conclusions and Policy Recommendations" section) available at 

http://www.imf.org/extemallpubs/ftJgfsr/2009/02/pdf/text.pdf. 

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availability and increasing the cost of borrowing. In response to a recent survey of the CRE 

Finance Council Board, for example, 43 of the 55 respondents (or 78.2%) believe that imposition 

of the PCCRA requirement will hinder CMBS and the other 12 respondents were equally divided 

between believing the requirement would help CMBS and being undecided. The 15 InvestmentGrade Investor Board Member responses are similar, as II of those respondents (or 73.3%) 

believe that imposition of the PCCRA requirement will hinder CMBS; only one Investment 

Grade Investor responded that they believed it would be helpful; and the remaining three 

respondents were undecided. 

In addition, in a separate survey, over 92% of issuer respondents said that imposition of 

the PCCRA would decrease loan origination volume from current levels. Almost 62% of those 

respondents said that volume decreases would be more than 50%. Some indicated reductions 

would be as high as 90%-100%. All of the respondents indicated that the cost of liquidity to 

borrowers would increase 92% said the cost increase would be 50 basis points or more and 

54% indicated that the cost increase would be 100 basis points or more. 

In line with these views, Mark Zandi, Chief Economist of Moody's Analytics, concluded 

that the PCCRA requirement would significantly increasc the cost of credit for borrowers "on the 

order of an increase of I to 4 percentage points depending on the parameters of the mortgages 

being originated and the discount rates applied."s Bank of America estimated that "the actual 

rate increase to borrowers as a result of the PCCRA would be approximately 2 to 5%.,,9 

Deutsche Bank concluded that implementing the PCCRA would conservatively cost $8 billion 

and would indirectly cost hundreds of billions in the lost opportunity cost of missed deal 

opportunities. 1O Given these estimates, it is not surprising that the risk retention rules in Europe 

do not include the PCCRA or anything else like it, and implementing the PCCRA provisions thus 

also would be inconsistent with the goal of harmonizing our regulatory rules with international 

requirements. 

Members of Congress also have expressed concern with the PCCRA proposal. Chairman 

Garrett wrote a joint letter with Chairman Bachus of the Committee on Financial Services to the 

agencies expressing concern that the PCCRA "would greatly reduce or perhaps even eliminate 

the securitization market for many asset classes, thereby reducing a vital source of capital that 

businesses of all types need.,,11 They urged the agencies to conduct a cost-benefit analysis to 

determine the effect of the PCCRA before finalizing the risk retention rule. 

8 Christian deRitis, Director, and Mark Zandi, Chief Economist, Moody's Analytics, Special 

Report: A Clarification on Risk Retention (Sept. 20, 2011). 

9 Response of Bank of America, Credit Risk Retention Proposed Rule, Appx. B at v n.98 (July 

13, 20J 1), available at http://www.fdic.govlregulationsllq)l>1s/federaIl20lJlIlc84ad74.JJ2E. 

10 Harris Trifon, Research Analyst of Deutsche Bank Securities Inc., CMBS CRE Debt Research: 

How to "Fix" the Proposed Risk Retention Rules for CMBS (Apr. 12, 20 11). 

II Letter from Committee Chainnan Spencer Bachus and Subcommittee Chairman Garrett (Mar. 

26,2012). 

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Last month, a bipartisan letter from 12 senators reiterated the concern that the PCCRA 

"would negatively impact capital formation," stated that the PCCRA "goes well beyond 

Congressional intent" in Dodd-Frank, and therefore urged the agencies to reconsider inclusion of 

PCCRA in the final rule. 12 Similarly, for these reasons, more than 20 separate trade 

organizations representing many different types of constituencies - borrowers and lenders and 

investors in different asset classes - jointly signed a letter in 20 I 0 urging careful consideration of 

the entirety of the reforms to ensure that there is no disruption or shrinkage of the securitization 

markets. 13 

Finally, in a recent IOSCO report, it was noted that out of 16 countries that have 

implemented risk retention, none of them have a PCCRA or other comparable concept to the 

proposed U.S. rules. 14 Inclusion of the requirement therefore also is in conflict with the 

Administration's goal to harmonize international regulations. 

Third-party Risk RetentionlB-Piece Transferability. The CRE Finance Council 

appreciates that the regulators have sought to develop risk retention regulations that are tailored 

to the unique characteristics of the CRE finance market and to offer some flexibility in certain 

respects. The proposed Dodd-Frank credit risk retention rules recognize, for example, that 

CMBS bond issuances typically include a tirst-Ioss, non-investment grade bond component and 

the rules expressly permit these "B-piece investors" to bear the mandated retention obligation 

provided that they conduct their own extensive due diligence. The B-piece investor due 

diligence usually includes site visits to every property in the loan pool, a full review of all 

transaction documents and independent third-party reports, and essentially re-underwriting every 

loan in the proposed pool. That re-underwriting includes a tenant analysis, borrower analysis, 

cash-flow modeling, and competitive property and demographic analyses along with other 

financial and statistical reviews. 

The proposed rule would, however, prohibit a B-piece investor from selling its B-piece 

investments if they are bearing the retention obligation, which will reduce the incentive for Bpiece investors to invest in CMBS. No other investor is subject to this type of buy-and-hold 

mandate, and B-piece investors (and their owners) may balk at making an investment that they 

then will be unable to sell or transfer. In light of the proposed limitation on B-piece 

transferability and the risk retention rules, Morgan Stanley has concluded that "it is unlikely that 

the two provisions can be met simultaneously in a way that is economically viable" because both 

proposals reduce the market value ofCMBSI5 

!2 Bipartisan Letter from 12 Senators (June 19,2012). 

13 A copy ofthe March 25, 2010 letter is attached. 

14 Global Developments in Securitization Regulation, International Organization of Securities 

Commissions, June 2012, at 16. 

15 The Dodd-Frank NPR: Implications for CMBS, April 12, 201l,Morgan Stanley at 1. 

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Basel III Rules: The Basel III proposed rules will further reduce credit for capital 

invested in securitized investments relative to whole loans. The proposal to implement the Basel 

international capital standards would assign a 150% risk weight to "high-volatility commercial 

real estate" exposure, which increases the current risk weight of 100% for CRE exposures.1 6 

Furthermore, a recent study pointed out that the largest banks will better be able to adjust to the 

increased capital required by Basel III. Smaller and mid-sized banks will be more constrained 

due to the differences in the size of their balance sheets. 17 While we are still studying the impact 

of the Basel III rules on the CRE market, the proposed rule could further limit credit for CRE 

investments, especially from smaller banks. The question remains will the cost of increased 

capital standards not only create an unlevel playing field among large and small institutions, but 

also not allow commercial liquidity to flow responsibly? 

Conflicts of Interest: Another proposed rule would prohibit "material conflicts of 

interest" in securitizations. The proposed rule does not, however, define "material," and the SEC 

plans to rely on interpretive guidance in the future to determine whether activities are consistent 

with the rules. Market participants face greater uncertainty in determining whether their 

activities could be viewed as violating the regulation. The proposed rule could have unintended 

consequences for securitization, which could impact the availability of credit at a time when 

credit markets are constrained. Indeed, the SEC recognized that its proposed conflict of interest 

rules "might have unintended effects, such as potentially limiting investment opportunities for 

investors if a securitization participant refrains from structuring and selling ABS in reaction to 

this proposal." 18 

Volcker Rule: In implementing the so-called "Volcker Rule," which is codified in 

Section 619 of Dodd-Frank and is intended to bar banking institutions from engaging in 

proprietary trading activities for their own accounts, the agencies have proposed a broad 

definition of "Covered Fund." This broad definition would sweep in certain types of 

securitization issuers and activities even though securitization and securitization "market 

making" activities are specifically exempt from the scope of the rule under the statute. 19 failure 

to appropriately limit the "Covered Fund" definition could create a host of functional diffkulties 

16 Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market 

Discipline and Disclosure Requirements, Notice of Proposed Rulemaking (June 7, 2012). 

17 Financials: CRE Funding Shift: EU Shakes, US Selectively Takes, May 25, 2012, Morgan 

Stanley at 15. 

18 Proposed Rule; Prohibition Against Conflicts of Interest in Certain Securitizations, Release No. 

34-65355; File No. S7-38-ll, 76 Fed. Reg. 60320, 60330 (Sept. 28,2011). 

19 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships 

With, Hedge Funds and Private Equity Funds, Notice of Proposed Rulemaking, 76 Fed. Reg. 68846 (Nov. 

7,2011). 

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for banks and affected nonbank financial companies that have engaged in sound and longestablished interactions with these securitization entities. This conflicts with the rule of 

construction in Dodd-Frank that directs that the Volcker Rule should not be construed to limit or 

restrict lawful securitizations sponsored or participated in by banks and regulated nonbank 

financial entities. 

While we have pointed out concerns with five regulations that will affect liquidity in the 

CMBS space, there are 12 more regulations with cost-benefit concerns to take into account when 

looking at the cumulative effect, including; but not limited to: the SEC's proposed changes to 

Regulation AB; the FDIC's final "Safe Harbor" rule; the "Franken Amendment" requirements 

related to credit ratings for structured products; the SEC's rule 17g-5 credit rating transparency; 

and the SEC's rule J 7g-7 for reporting repurchases. 

The combined impact of these proposed rules on the industry is further compounded by 

recent securitization accounting changes (known as Financial Accounting Standard (F AS) 166 

and 167). The new regulatory capital guidelines and accounting changes could significantly 

limit the capacity and the overall amount of capital that can be directed toward such lending and 

investing at the same time when the securitization markets are attempting to recover from a 

historic decline and regulators are drafting new rules intended to govern the industry. 

Evaluating & Understanding the Cumulative Effect of Proposed 

Regulations on the eRE Market is Both Essential & Required 

Before promulgating final rules, it is critical that the agencies charged with implementing 

the Dodd-Frank Act coordinate their rulemakings and consider the cumulative impact of the 

numerous regulations on credit availability in the CRE finance market. This cumulative impact 

analysis is important to help Congress and the regulators understand the total impact of the 

regulations on the CRE market. 

The cumulative cost effect of these regulations will determine whether financing 

companies decide to grow, shrink or leave the commercial lending business altogether. And, as 

explained in detail above, the regulations under Dodd-Frank are likely to negatively impact credit 

availability by restricting the overall amount of capital that is available through the securitization 

finance markets and by making the CMBS capital that is available more expensive to access. 

The proposed rules impose additional costs on and will - in some cases - disincentivize issuers 

and investors and disrupt the efficient execution of capital structures that securitization provides. 

As Morgan Stanley put it in a recent report, the cumulative impact of the proposed 

regulations has the potential to cause a "dramatic decline in the amount of financing available to 

the commercial real estate sector, especially for small to medium-sized properties. This, of 

course would increase the cost of borrowing and almost surely push cap rates up as well.,,20 A 

more recent Morgan Stanley report reiterated that if the risk retention rules are implemented as 

20 The Dodd-Frank NPR: Implications for CMBS, April 12, 2011, Morgan Stanley at 1. 

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proposed, "CMBS is severely marginalized giving rise to a potentially very large US CRE 

financing gap," which would "mean much more expensive financing and further pressure on 

commercial real estate prices as weI 1.,,2 I 

If not properly constructed, the Dodd-Frank related rules could potentially result in a 

significantly smaller secondary market, less credit availability, and increased cost of capital for 

CMBS borrowers. Small borrowers - those that are not concentrated in the major urban areas 

and that need loans in the sub-$10 million space - would be the primary victims of these 

developments. And these borrowers - or would-be borrowers - reside in every Congressional 

district and arc a driving economic force nationwide. Moreover, if the CMBS market is so 

overburdened by regulation that the very viability of that market is threatened, this also may 

constrict the availability of portfolio loans because, as discussed above, portfolio lenders rely on 

access to the CMBS market as a safety-valve exit strategy. 

The Board of Governors of the Federal Reserve Report has previously recognized the 

importance of considering the totality of the regulatory changes before promulgating tinal rules: 

[R]ulemakings in other areas could affect securitization in a manner 

that should be considered in the design of credit risk retention 

requirements. Retention requirements that would, if imposed in 

isolation, have modest effects on the provision of credit through 

securitization channels could, in combination with other regulatory 

initiatives, significantly impede the availability offinancing.22 

Federal law requires just this type of assessment. President Obama's Executive Order 

J 3563, for example, expressly requires that, "to the extent permitted by law, each agency must, 

among other things: 

"(I) propose or adopt a regulation only upon a reasoned 

determination that its benefits justify its costs, (2) tailor its 

regulations to impose the least burden on society, taking into 

account, among other things, and to the extent practicable, the cost 

of cumulative regulations; (3) select, in choosing among alternative 

regulatory approaches, those approaches that maximize net benefits; 

(4) to the extent feasible, specify performance objectives, rather than 

specifying the behavior or manner of compliance that regulated 

21 Morgan Stanley Blue Paper, Financials: eRE Funding Shift, at 9 (May 25,2012). 

22 Board of Governors ofthe Federal Reserve System, Report to Congress on Risk Retention 

(October 2010), at 84 (available at http://federalerserve.gov/boarddocs/rtpcongress/ 

securitizationiriskretention.pdD· 

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entities must adopt; and (5) identify and assess available alternatives 

to direct regulation[.]"23 

The Courts also have noted the "unique obligation" of the SEC "to consider the effect of a new 

rule upon efficiency, competition, and capital formation, and its failure to apprise itself - and 

hence the public and the Congress of the economic consequences of a proposed regulation 

makes" the very issuance of that rule impermissible.24 

Needless to say, the stakes are high with the impact on credit availability weighing in the 

balance. As required by the Executive Order, Congress should insist that the agencies 

coordinate their rulemaking efforts to minimize the potential negative impact on credit 

availability in the CRE market. They also should be required to factor the cost to credit into final 

regulations and to report their analysis to Congress. This analysis would help Congress and 

regulators understand the burden of the Dodd-Frank related regulations as currently proposed, as 

well as their impact on the CRE market. 

The Financial Stability Oversight Council would be well suited to conduct a study 

analyzing the cumulative impact of Dodd-Frank regulations on the availability of credit in the 

CRE market. The CRE Finance Council is prepared and willing to work with regulators to help 

them understand and assess the impact of their proposed rules. 

It is critical to note that we are not suggesting that this consideration should impede 

issuance of final rules. Indeed, the uncertainty related to regulatory changes and their interaction 

with accounting rules itself is now a significant, independent impediment to the expanded private 

lending and investing that is critical to a CRE and therefore broader economic - recovery. 

Some paralysis is developing in the investor, issuer and servicer communities as they struggle to 

attempt to understand what the final regulatory framework will look like and how it will affect 

their interests. The rules do need to get done. 

Conclnsion 

Today, the CMBS market is showing some positive signs that it is slowly moving toward 

recovery, but, with $2 trillion in commercial mortgage loans maturing in the next few years, it is 

critically important that regulations under Dodd-Frank be implemented in way that does not 

severely constrict or shut down the securitization markets. For it is the small businesses, 

factories, multifamily housing units, offices, hotels and nursing homes in your home districts 

where restrictions to CMBS lending will be felt most severely. 

23 Federal Register, Volume 76, Number 14, Friday, January 21, 2011, at 3821. Although this rule 

technically does not apply to the independent agencies, it does apply with full force to the oce which is 

one of the joint rulemakers here and to the Department of Treasury whose Secretary is charged under 

Dodd-Frank with chairing the credit risk retention joint rulemaking proceedings. 

24 Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) (internal quotations and 

citations omitted). 

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The impact of the many Dodd-Frank regulations on credit availability and the cost of 

credit are interconnected and mutually compounding. Therefore, CREFC believes it is 

imperative that the regulators do what they should do and what they are required to do by law -

take into account the cost of cumulative regulations, adopt regulations where the benefits justify 

the costs, and ensure regulations impose the least burden on society. It also is imperative that the 

regulators get the rules done right. 

We look forward to continuing to work with Congress and the regulators to ensure a 

regulatory framework that supports a sound and vibrant securitization market, which is critical to 

the U.S. economy. 

CRE Finance Council 900 7th Sf. NW Suite 820, \{,I~oh"'N'r.n 

Tel 202.448.0850 202.448.0865 

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After MF Global, Another Brokerage Finn Collapses With $200 Milli... http;//dealbooknytimes.com'2012J07i09/after-mf-g!obal-another-brok .. 

10f4 

(;b, ~t1lJtlotI<l!Jimt8 

DealB%k 

JULY 9, 2012, 8:38 PM 

After MF Global, Another Brokerage Firm Collapses With 

$200 Million Missing 

By AZAM AHMED 

After the failure of the futures brokerage firm MF Global left customers 

missing more than $1 billion, regulators promised to tighten rules, 

enhance oversight and crack down on wayward firms. 

But months later, regulators are scrambling to deal with the collapse of 

another brokerage firm. 

After discovering accounting irregularities, regulators on Monday 

essentially shut down PFGBest, a prominent player in the small world 

of futures trading. 

Now, banks accounts v{ith customer funds appear to be short more than 

$200 million, regulators said. On Monday morning, according to a 

statement to clients, the brokerage firm's chairman and chief executive, 

Russell R. Wasendorf Sr., tried to commit suicide. 

While regulators are still trying to piece together what happened, the 

National Futures Association said the bank statements from U.S. Bank, 

where the money was held, might have been fabrieated. The 

discrepancies date baek a couple of years. In February 2010, an aeeount 

that purported to have some $218 million, in reality eontainedjust $10 

million. 

The loss of customer capital-- just months after the bankruptcy of MF 

Global -- eould have major implications for regulators. Authorities 

reeently conducted reviews of brokerage firms in the wake of the MF 

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Global scandal, and found nothing alarming. 

"How on earth can a regulated entity can just make up the bank 

statements for three years?" asked James Koutoulas, the head of the 

Commodities Customer Coalition, a group of customers still fighting for 

the return of their missing money following the collapse of MF Global. 

"I don't even know what to say - I'm so shocked that you can forge bank 

statement for years, and the regulator wouldn't just check the account 

balance at the bank directly." 

The futures group did not immediately respond to requests for 

comment. 

Mr. Koutoulas, a hedge fund manager, said his firm held less than $3 

million ~ith PFGBest. Regulators said Monday that no one would be 

allowed to withdraw their money from the firm for the time being. 

"How do you trust the financial industry," asked a bewildered Mr. 

Koutoulas. 

The specifics of the firm's downfall remain hazy. Regulators said that 

on June 29 the firm indicated that it had about $400 million in 

customer money. Of that, about $225 million was located at U.S. Bank. 

On Monday, the association received information that Mr. Wasendorf 

"may have falsified bank records." The regulator called U.S. Bank and 

discovered the firm only had about $5 million on deposit. 

In the futures industry, customer money is not insured, meaning that if 

the cash is not recovered clients will have little recourse. Regulators 

have proposed a number of fixes, including setting up an insurance 

fund to guarantee the money. 

"We continue to witness circumstances which make a futures insurance 

fund a needed option," said Bart Chilton, a commissioner at the 

Commodity Futures Trading Commission. "Such a fund is critically 

important. Futures customers should be protected like banking and 

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security customers are protected." 

PFGBest is one of a handful of futures firms, which essentially line up 

buyers and sellers of futures contracts for commodities. The firm was 

wholly owned by Mr. Wasendorf. While not the size of MF Global, 

which held more than $5 billion in customer cash before its collapse, 

PFGBest was a major player in the tight-knit world of Chicago brokers. 

But the industry has been under fire in recent years. Commissions have 

flattened, as new entrants and online trading take a bite out of business. 

Even the interest typically earned for simply holding customer money 

has been close to zero, amid the low-rate environment in the United 

States. 

It was that weak business outlook that prompted the head of MF Global 

to pursue risky strategies, in an effort to bolster profit and pay for the 

company's transformation into an investment bank. But the bets that 

Jon S. Corzine made as leader of MF Global were too risky, the market 

lost confidence and the firm went under. As it collapsed, the firm 

misused customer money in an effort to stay afloat, leaving farmers, 

traders and others missing more than $1 billion. 

On Monday, Mr. Wasendorf, the head of PFGBest, was discovered in his 

car outside his company's Iowa headquarters, according to local press 

reports. He was flown to University of Iowa Hospitals and Clinics in 

critical condition. 

In addition to his financial firm, Mr. Wasendorf founded several 

publications during his career, including SFO - Stocks, Futures and 

Options, the Official Advocate for Personal Investors, according to a 

biography on the firm's Web site. He also serves on the FCM Advisory 

Committee of the National Futures Association. 

PFGBest has previously faced scrutiny. In February of this year, 

PFGBest was fined $700,000 for failing to detect a Ponzi scheme 

perpetrated by a Minnesota man who used the firm as a broker. 

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» Print 

non-commercial use only. To order presentation-ready copies for distribution to colleagues, 

tool at the top of any article or visit: WNW.reutersreprlnts.com. 

RPT-INSIGHT-Fed knew of Libor issue in 2007-

08, proposed reforms 

5:24pm 1ST 

,. Questions over whether Fed did enough over Libor concerns 

'" May have known as early as August 2007 about flaws 

• Geilhner calendar included "Fixing lIBOR" meeting in 2008 

* Fed says got anecdota! 8arc!ays reports of Libor problems 

'" Fed says shared suggestions for reform with UK authorities 

By Carrick Mollenkamp 

July 10 (Reuters) The Federal Reserve Bank of New York may have known as early as Augusl2007 that the setting of 

globa! benchmark interest rates was flawed. Following an inquiry with British banking group 8arclays PIc in the spring of 

2008, It shared proposals for reform of the system with British authorities. 

The role of the Fed is likely to raise questions about whether it and other authorities took enough action to address 

concerns they had about the way libor rates were set, or whether their struggle to keep the banking system afloat through 

the financial crisis meant the issue took a backseat. 

A New York Fed spokesperson said in a statement that "in the context of our market monitoring following the onset of the 

financial crisis in late 2007, involving thousands of calls and emaHs with market participants over a period of many months, 

we received occasional anecdotal reports from 8arclays of problems with libor. 

"In the Spring of 2008, following the failure of Bear Stearns and shortly before Ihe first media report on the subject, we 

made further inquiry of Barclays as to how Ubor submissions were being conducted. We subsequently shared our analysis 

and suggestions for reform of Liborwith the relevant authorities in the UK" 

The Fed statement did not provide the precise timing of the communication with the British authorities. Bear Stearns 

collapsed In early March 2008 and was then acquired by JPMorgan. 

Barclays lasl month agreed to pay $453 million to British and U.S. authorities to settle allegalions that it manipulated Ubor, 

a series of rates set daily by a group of international banks in London across various currencies 

The rates are an Integral part of the world financial system and have an impact on borrowing costs for many people and 

companies as they are used to price some $550 trimon in loans, securities and derivatives. 

By manipulating Ubor, banks eQuid have made profits or avoided losses by wagering on the direction of interest rates. 

During the enormous liquidity problems in the financial crisis they could, by reporting lower than actual borrowing costs, 

have signaled that they were In better financial health than they really were. 

So far, the scandal has been more of a British affair, prompting the resignation of Barclays top three executives, 

condemnation from the Bntish government amid a public outcry. and questIons about the lack of oversight from British 

regulators. 

The Bank of England's Deputy Governor Paul Tucker on Monday even had to deny suggestions that government ministers 

had pressured him to encourage banks to manipulate Libor. 

But the deepening investigation by regulators in Britain, the United States, and other countries is expected to uncover 

problems well beyond Barclays and British banks. 

More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase & Co, 

Deutsche Bank, HSBC Holdings Pic, UBS and Royal Bank of Scolland .. 

JAWBONING 

Regulators, including the New York Fed, had a responsibility "to force greater integrity and cooperation," and it had clearly 

reviewed the situation and had the resources to investigate, said Andrew Verstein, an associate research scholar at Yale 

University, who has written about Ubor. "Obviously they conSidered this to be within their orbit" 

Many of the requests for improper Libor submissions came from traders in New York. 

As one of the world's mosl powerful regulators, the New York Fed has the power to "jawbone" banks to force them to make 

tough decisions, said Oliver Ireland, former associate general counsel at the Federal Reserve in Washington and now a 

lawyer at Washington law firm Morrison & Foerster. 

Still, he said by the autumn of 2008, the New York Fed's focus was locked on Ihe impact of the meltdown of lehman 

Brothers and AIG as it sought to prevent a g!obal economic disaster. 

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Business News - Indian Stock Market, Stock Market News, Business & Finance, Market «< Page 2 of 3 

Barclays said in documents released last Tuesday that it first contacted Fed officials to discuss Ubor on Aug. 28, 2007, at 

a time when credit problems arising from the U.S, housing bust were beginning to mount. It communicated with the Fed 

twice that day. 

Between then and October 2008, it communicated another 10 times with the U.S central bank about Libor submissions, 

including Libor-related problems during the financial crisis, according to the documents. 

In its document listing those meetings as well as ones with British authorities, Barclays said: 'We believe that this 

chronology shows clearly that our people repeatedly raised with regulators concerns arising from the impact of the credit 

crisis on UBOR setting over an extended period," 

As a bank doing business in the United States, Barc!ays U.S. operations would have come under the Fed's purview. This 

would have been even more the case after it acquired the investment banking and trading operations of the bankrupt 

Lehman Brothers in September 2008 

Officials with the New York Fed talked to authorities in Britain about problems with the calculation of Ubor and also heard 

from market participants about whether an alternative could be found for Libor, people familiar with the situation said. 

In early 2008, questions about whether Ubor reflected banks' true borrowing costs became more public. The Bank for 

International Settlements published a paper raising the issue in March of that year, and an April 16 story in the Wall Street 

Journal cast doubts on whether banks were reporting accurate rates. Barc!ays said it met with Fed officials tvvice in MarchApril 2008 to discuss Libor. 

"FIXING UBOR" 

According to the calendar of then New York Fed President, Timothy Geithner, who is now U.S. Treasury Secretary, it even 

held a "Fixing UBOR" meeting between 2:30-300 pm on April 28, 2008. At least eight senior Fed staffers were invited. 

It is unclear precisely what was discussed at this meeting or who attended. Among those invited, along with Geithner, was 

William Dudley, who was then head of the Markets Group at the New York Fed and who succeeded Geithner as its 

president in January 2009. Also invited was James McAndrews, a Fed economist who published a report three months 

later that questioned whether libor was manipulated. 

"A problem of focusing on the Ubor is that the banks in the Libor panel are suspected to under-report the borrowing costs 

during the period of recent credit crunch," said that report in July 2008 that examined Whether a government liquidity facility 

was helping ease pressure in the interbank lending market. 

When asked for comment, McAndrews directed questions to a New York Fed spokeswoman. Dudley could not be 

immediately reached for comment 

To be sure, the Fed's reports have sometimes been inconclusive. One from last month ~ only shortly before the Barclays 

settlement was announced ~ found that "while misreporting by Ubor-pane! banks would cause Ubor to deviate from other 

funding measures, OUf results do not indicate whether or not such misreporting may have occurred." 

However, a 2010 draft of a related paper had said that banks appeared to be paying higher rates to borrow from other 

banks during the financial crisis compared with the levels they reported. 

One step the New York Fed could have taken in 2008 when questions initially were raised was to find a way to get its staff 

embedded in the Ubor calculation process, Yale's Verstein said. 

There, they could use the Fedwire Funds Service - an electronic system through which banks settle interbank loans 

between one another ~ as a backstop to measure whether banks were accurately reporting borrowing costs Then after the 

financial crisis had passed, regulators could have helped "urge on a newer and better system," he said. 

The New York Fed was not part of the Barc!ays settlement, which was the first major resolution in the Ubor probe. 

The U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, and the FinanCial Services Authority in 

Britain, settled with 8arclays. 

NO ULTIMATE RESPONSIBILITY 

The scandal has thrown into sharp relief a potential regulatory gap: No single regulator appears to have had ulttmate 

responsibility for making sure rates banks submitted were honest. 

On Monday, the Bank of England's Tucker called the issue of banks improperly submitting rates a "cesspit." 

In documents released with the Barclays settlement, the CFTC said 8arclays traders on a New York derivatives desk 

asked another Barclays desk in London to manipulate Ubor to benefit trading positlons. 

"For Monday we are very long 3m (three-month) cash here in NY and would like the setting to be set as low as possible," a 

New York trader emalled 1n 2006 to a person responsible for setting Barc!ays rates. 

Darrell Duffie, a Stanford UniverSity finance professor who has followed the Ubor issue for several years, said that he 

believed regulators were "on the case reasonably quicklt after questions were raised in 2008. 

"It appears that some regulators, at least at the New York Fed, indeed knew there was a problem at that time. New York 

Fed staff have subsequently presented some very good research on the likely level of distortions in Libor reporting," Duffie 

said. "I am surprised, however. that the various regulators in the U.S. and UK took this long to identify and act on the 

misbehavlor." 

© Thomson Reuters 2011 reserved 

own persona! and norl-c.r\mrnercial use only Rel)ublicalion 

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B_- Bond 

Dealers of 

America 

Written Statement of 

Michael Nicholas 

Chief Executive Officer 

Bond Dealers of America 

Submitted to 

House Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

United States House of Representatives 

Hearing on the Impact of Dodd-Frank on Customers, Credit, and Job Creators 

Tuesday, July 10,2012 

r. Introduction 

This written statement is submitted on behalf of the Bond Dealers of America (BDA), 

and the BD A appreciates the opportunity to set forth our views for the record of this important 

hearing. The BDA, with over fifty members headquartered coast to coast, is the Washington, 

DC, based organization that represents securities dealers and banks predominantly focused on 

the u.S. fixed income markets. The BDA is the only organization representing the unique 

interests of national, middle-market securities dealers. In addition to federal advocacy, the BDA 

hosts a series of meetings and conferences specific to domestic fixed income, in addition to 

spearheading industry cooperation on surveys and market practice documents. 

Additional information about the Bond Dealers of America can be found by reviewing 

our website at www.bdamerica.org. 

II. The Vo1cker Rule Should Not Be One Size Fits-All 

While the BDA has many concerns with the Dodd-Frank Wall Street Reform Act of2010 

(Dodd-Frank or DFA), one of our primary concerns is the DFA requirement of a so-called 

Vo1cker Rule. Lost in the chorus of commentary about the impact of the multi-billion dollar 

trading loss incurred by JP Morgan Chase & Co. is the devastation that the Vo1cker Rule could 

1 
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76114.137

impose on financial institutions and communities all around our country if the Rule is not drafted 

carefully and appropriately tailored. Little of this commentary has focused on the fact that the 

vast majority of banks - middle market and regional banks headquartered nationwide - do not 

engage in "portfolio hedging" to the tune of billions of dollars, if they engage in the practice at 

all. Yet, thus far, there appears to be an absence of recognition by the drafters of the Rule that 

not all banks or markets should be treated the same. 

There are many securities broker-dealers affiliated with banks that specialize in the fixedincome markets that are likely to be subject to the restrictions on proprietary trading under the 

Volcker Rule, even though they do not represent any systemic risk to the financial system and 

did not cause the financial crisis that led to the enactment of Dodd-Frank. These bank affiliated 

broker-dealers are actively making markets in fixed income securities by acting as principal and 

thus are increasing efficiencies and reducing costs for investors. They are not engaging in 

proprietary trading in the manner originally addressed by former Chairman Paul Volcker. These 

firms represent middle-market brokers and dealers who are headquartered in cities all over the 

country, doing business throughout the United States coast to coast. They help communities 

around the country finance their schools, roads and bridges. They help businesses raise the funds 

they need to grow. They provide individuals and institutions with fixed ineome investment 

opportnnities in municipal, eorporate and agency-backed securities. They also provide liquidity 

for the investors in those securities. 

The markets in fixed-ineome securities are not like the equity markets or the market in 

Treasury obligations. Most bonds do not trade very frequently, and they do not trade on 

exchanges. In the municipal market alone, there are over 50,000 issuers, most of which do not 

issue often; and each of which is nnique. In such a market, broker-dealers play an important role 

by being familiar with the issuers and their credit, by selling bonds from their inventories to 

investors, and by purchasing bonds from investors to hold in their inventory for later resale - at a 

profit governed by the markup and markdown rules of the Securities and Exchange Commission 

(SEC), the Financial Industry Regulatory Authority, and the Municipal Securities Rulemaking 

Board. 

It usually goes like this. An investor approaches his or her broker-dealer in search of a 

suitable investment. The broker searches what is available - including what is in the broker's 

own inventory - and proposes an investment. Or, on the other side, an investor seeks to liquidate 

an investment; and unless his or her broker can find an immediate buyer, the broker purchases 

the bonds. As one can tell from that description, this looks a lot like proprietary trading; but it in 

fact is crucial to the operation of these markets. A Volcker Rule that makes no distinction on the 

basis of size and market type, principal trading versus proprietary trading could disrupt these 

markets, resulting in less liquidity and higher transactional costs for investors. 

The Volcker Rule is supposed to have several exceptions that Congress intended to 

preserve the businesses and market functions of broker -dealers. Those include statutory 

exceptions for market making and for state and local obligations. However, if not crafted 

properly, the Volckcr Rule could be too narrow, complex, and ultimately unworkable for these 

exceptions to be meaningful. 

2 
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76114.138

For example, the exception for market makers could be particularly troubling when it 

comes to fixed-income securities. This is because the SEC has never put forward a definition of 

market making for fixed-income securities, and the definition for equity market making is 

unsuitable for the fixed-income markets. Further, under the proposed Volcker Rule, only bonds 

that were issued by units of general government - such as a state, a county or a city - would be 

exempt from the Volcker Rule. Bonds issued by agencies or authorities - such as turnpike 

authorities, water and sewer districts, school districts, levee districts, housing authorities would 

not be exempt. These latter bonds could face a diminished market, as bank-affiliated broker 

dealers would not be able to purchase or sell them from their inventory. 

At a minimum, the Volcker Rule should provide that all state and local government bonds, 

including those of agencies and instrumentalities, are exempt from the Rule. Otherwise, the 

result could be that municipal securities investors will have less liquidity, issuers will have 

higher costs (which are ultimately passed on to taxpayers in the fonn of higher taxes or fees), and 

the current network of middle market broker-dealers who have served those investors and issuers 

will face greater stress. 

The consequences of a broad, severe Volcker Rule that makes no distinctions on the basis 

of firm size or market type could be immense. A poorly drafted, overly-broad Rule with a one 

size fits-all approach could increase the costs to issuers of fixed-income securities, reduce 

investor liquidity, bifurcate the market in state and local bonds, and increase the business 

challenges of middle market broker-dealers. A fair cost-benefit analysis of such a Volcker Rule 

would undoubtedly establish that the Rule, as applied to fixed-income broker-dealers, is simply 

not worth the cost 

III. Conclusion 

The BDA has several recommendations to the drafters of the Volcker Rule in order to 

avoid the adverse ramifications to the fixed-income markets set forth in this statement Our 

foremost recommendation is that the Volcker Rule should not apply at all to fixed-income 

broker -dealers, even if they are affiliated with a financial institution. Alternatively, if that 

recommendation is not to be adopted, our secondary recommendation is that the Voleker Rule 

should not apply to securities broker-dealers affiliated with a financial institution with balance 

sheet assets of less than $10 billion. For certain, all state and local government bonds, including 

those of agencies and instrumentalities, should be expressly exempt from the Rule. And, finally, 

the Rule shonld incorporate by reference a definition of market making for fixed-income 

securities to be defmed by the SEC. 

Again, the Bond Dealers of America appreciates the opportunity to submit this written 

statement to the Subcornmittee on Capital Markets and Government Sponsored Enterprises. If 

you have any questions or need any further infonnation, please contact me at 202-204-7901 or at 

mnicholas@bdamerica.org. 

3 
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~I MORTGAGE BANKERS 

ASSOCIATION 

Investing in communities 

Statement for the Record 

Mortgage Bankers Association 

U.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored 

Enterprises 

Hearing on liThe Impact of Dodd-Frank on Customers, Credit, 

and Job Creators" 

July 10, 2012 

1717 Rhode Island, NW I Washington, DC 20036 I www.mortgagebankers.org I (202) 557·2700 
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76114.140

MBA Statement for the Record 

House Subcommittee on Financial Markets and Government Sponsored Enterprises 

INTRODUCTION 

July lO, 2012 

Page 2 

The Mortgage Bankers Association (MBA)' appreciates the opportunity to submit this statement 

for the hearing of the House Financial Services Subcommittee on Capital Markets and 

Government Sponsored Enterprises entitled "The Impact of Dodd-Frank on Customers, Credit, 

and Job Creators." 

We commend Chairman Garrett and Ranking Member Waters for holding this important 

hearing that addresses the impacts of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act' (Dodd-Frank Act) on a variety of constituencies. While the Dodd-Frank Act is 

broad in its scope, we will primarily focus our comments to the area of the law that most 

significantly impacts commercial, multifamily and single family real estate lenders: credit risk 

retention.' 

CREDIT RISK RETENTION AND IMPORTANCE OF SECURITIZATION 

On April 29, 2011, the federal regulatory agencies' (Agencies) issued for comment a proposed 

rule that seeks to implement the Dodd-Frank Act's risk retention requirements. MBA notes that 

a well-designed and robust regulatory framework can be fully compatible with a vibrant 

securitization market for commercial, multifamily and residential real estate debt. MBA is 

committed to facilitating the establishment of a fully-functioning, transparent, liquid and 

responsible securitization market for these debt categories. 

MBA appreciates a number of aspects of the proposed rule on risk retention. We strongly 

support the optional menu approach for risk retention structures in the proposal, because it 

provides flexibility for a broad range of market participants. A one-size-fits-all approach for the 

form of risk retention would not adequately address the range of issues that arise for RMBS and 

, The Mortgage Bankers Association (MBA) is the national association representing the real estate finance 

industry, an industry that employs more than 280,000 people in virtually every community in the 

country. Headquartered in Washington, D.C., the association works to ensure the continued strength of 

the nation's residential and commercial real estate markets; to expand homeownership and extend access 

to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters 

professional excellence among real estate finance employees through a wide range of educational 

programs and a variety of publications. Its membership of over 2,200 companies includes all elements of 

real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street 

conduits, life insurance companies and others in the mortgage lending field. For additional information, 

visit MBA's Web site: www.mort~a~ebankers.or~. 

2 Public Law lll-203, 124 Stat.l276-2223 (July 21, 2010). 

3 The credit risk retention requirement is set forth in section 941 of the Dodd-Frank Act. 

4 Office of the Comptroller of the Currency, Treasury ("oce'), Board of Governors of the Federal Reserve 

System ("Federal Reserve Board"), Federal Deposit Insurance Corporation ("FDIC"), US. Securities and 

Exchange Commission ("Commission"), Federal Housing Finance Agency ("FHFA"), and Department of 

Housing and Urban Development ("HUDn). 
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MBA Statement for the Record 

House Subcommittee on Financial Markets and Government Sponsored Enterprises 

July 10, 2012 

Page 3 

CMBS. Therefore, MBA supports the flexibility provided in the proposed rule and seeks 

additional, optional risk retention structures that meet the statutory risk retention requirement. 

Unfortunately, as proposed, other elements of the proposed rule have the potential to severely 

curtail or shut down new issuance for the commercial mortgage-backed securities (CMBS) 

market and the private label residential mortgage-backed securities (RMBS) market. 

For commercial real estate, the reduction or elimination of this important source of capital 

would have dire consequences. The lack of CMBS capital would likely increase borrowing costs 

and in some instances could prevent borrowers from refinancing their commercial or 

multifamily projects. For residential real estate, private label RMBS issuance could be stalled, 

which would memorialize the existing reliance on government guarantees for residential 

mortgages. Consequently, addressing the challenges in the proposed rule is important not just 

to the commercial, multifamily, and residential mortgage markets, but to the national economy. 

Premium Capture Cash Reserve Account Proposal 

A proposal that would be highly problematic for both the CMBS and RMBS markets is the 

Premium Capture Cash Reserve Account (PCCRA). We urge its elimination. The PCCRA calls 

for securitization profits to be placed into a separate account that would be placed in a first-loss 

position in the securitization structure. As proposed, we believe the PCCRA would be 

exceedingly disruptive to the CMBS market and effectively would remove the financial 

incentive to issue CMBS, potentially eliminating CMBS as a source of permanent mortgage 

capital for commercial and multifamily real estate borrowers. For RMBS, the PCCRA would 

effectively stall the return of the private label RMBS market. 

Recommendations Specific to Commercial and Multifamily Real Estate 

A vibrant and sound commercial and multifamily real estate ("CRE") market is integral to our 

nation's economy. The securitization market represents an important source of capital for CRE. 

At $575 billion', CMBS is the second largest source of outstanding commercial and multifamily 

real estate finance debt and represents 24 percent of total commercial and multifamily debt. 

Due to the tumultuous capital markets, CMBS issuance plummeted from $230 billion in 2007 to 

a total of $28 billion from 2008 through 2010-' With $30 billion of issuance in 2011, the CMBS 

market has started to strengthen. This fragile recovery of the CMBS market could be imperiled 

if the proposed rule is not properly implemented. 

Risk Retention Hold Period. The CMBS market provides extensive and robust transparency 

with regard to the performance of underlying loans, which allows investors the opportunity to 

5 This number also includes collatcralized debt obligations (COOs) and other asset-backed securities 

(ABS) issuancc. 

'MBA Commercial Real Estate/Multifamily Finance, Quarterly Data Book, First Quarter 20J 2, p. 52. 
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MBA Statement for the Record 

House Subcommittee on Financial Markets and Government Sponsored Enterprises 

July 10, 2012 

Page 4 

determine loan performance and identify loans or securitizations that are not performing as 

expected, Accordingly, the required risk retention hold period should be three years for all risk 

retention holders, including issuers, originators, and first-loss B-piece buyers. 

Third-Party Risk Retention. The Dodd-Frank Act specifically takes into account the critical role 

served by third-party purchasers of the first-loss, B-piece CMBS position. We support the role 

of the B-piece buyer serving the risk retention function and emphasize the importance of the 

economic viability of this structure, consistent with the statutory language. For example, MBA 

is concerned that if B-piece buyers must hold the risk retention portion of the securitization for 

the duration of the security, they would be reluctant to serve the risk retention role. This could 

result in only those CMBS issuers who have balance sheet risk retention holding capacity being 

able to issue CMBS. 

Operating Advisor. The proposed rule calls for the appointment of an "Operating Advisor" with 

broad unilateral powers beginning at the inception of the securitization. In lieu of this proposal, 

MBA recommends a framework that would more effectively and efficiently serve the investorprotection objectives of the proposal. Specifically, a special servicer (affiliated with the thirdparty B-piece buyer fulfilling a risk retention role) would be required to provide enhanced 

disclosure of relevant information in one consolidated place that is maintained by an 

independent third-party source. In addition, governing documents would set forth a dispute 

resolution mechanism available for investors. Finally, the Operating Advisor's role should only 

begin when a "change in control event" occurs through the application of appraisal reductions 

and realized losses to a level specified by the CMBS loan documents. 

Financing of Risk Retention Interests. MBA recommends allowing sponsors and third-party 

purchasers to use some financing to fund its risk retention position, including first-loss, 

horizontal "B-piece" interests. Prohibiting all such financing would limit the incentive to 

engage in securitizations and, in particular, reduce the number of third-party purchasers willing 

to assume the risk retention role and increase the cost of securitization (and ultimately, the cost 

to borrowers). 

Underwriting Standards for Zero Risk Retention. As proposed, the underwriting standards for 

CMBS are so restrictive that a negligible percent (less than 1 percent) of existing CMBS loans 

would qualify for zero risk retention. Accordingly, MBA has provided regulators with 

recommended revised metrics for a low-risk loan and changes to the proposed rule that would 

make the standards consistent with long-held CRE lending practices, ultimately providing a 

more meaningful exemption under the low-risk loan statutory directive. 

Recommendations Specific to Residential Real Estate and QRM 

MBA supports efforts to enhance the accountability of all housing finance transaction 

participants including borrowers, lenders, securities issuers and investors. A risk retention 

requirement is an important step in establishing a better regulatory plan to protect borrowers 
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July 10, 2012 

Page 5 

and investors, and ensure a safe and reliable mortgage system. At the same time, it is essential 

that any risk retention requirements be done without unnecessarily constraining liquidity. 

Without a viable securitization market, the nation's housing finance needs cannot be met. 

MBA believes that Congress' intent in crafting the Dodd-Frank Act's risk retention 

requirements was to address errant securitizer and originator behavior inherent in the 

originate-to-sell model by aligning the interests of borrowers, lenders and investors in the longterm performance of loans. This "skin in the game" requirement, however, is not a cost-free 

policy option. Recognizing these costs, the Dodd-Frank Act establishes an exemption from risk 

retention requirements for qualified residential mortgages (QRMs). By requiring a QRM 

exemption, the statute would keep consumer costs lower for QRMs, with higher costs for nonQRM loans. Congress has repeatedly expressed in statements and letters to regulators its belief 

that the QRM should be broadly defined? 

Below are recommendations for specific elements of the proposed rule that MBA has provided 

to the Agencies: 

Align ORM with OM. The risk retention regulations should operate in concert with proposed 

regulations implementing the "Qualified Mortgage" (QM) definition under Dodd-Frank's 

"Ability to Repay" requirements. This section of the Dodd-Frank Act requires lenders to verify 

a consumer's ability to repay a mortgage. 

Loan-to-Value (LTV). The rules should not hardwire a specific LTV amount, but instead permit 

offsetting factors in the context of prudent underwriting. Higher LTV loans may pose greater 

risks. However, these risks can be mitigated by compensating factors such as strong credit and 

appropriate documentation. 

Debt-to-Income (DTI). In lieu of the QRM's hardwired proposed front-end and back-end DTI 

ratios, the final rule should instead require lenders to consider and verify a borrower's income, 

assets and obligations. 

Credit History. The proposed rule's mandatory thresholds for individual negative credit events 

should be eliminated. This requirement may disproportionately penalize consumers for 

potentially minor offenses. Instead, lenders should be required to consider and verify credit 

history using widely accepted government or non-government standards. 

Risk Retention Duration. The rule should provide for the sun-setting of risk retention 

requ irements between hvo to three years from loan origination. Defaults due to improper 

7 See for example Credit Risk Retention comment letter submitted by Senators Mary Landrieu, Kay 

Hagan, and Johnny Isakson (May 26, 2011) and comment letter submitted by Representative Tom Price 

(April 15, 2011). 
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July 10, 2012 

Page 6 

underwriting or other defects typically occur during the first two years. Beyond that period, 

most defaults are caused by life events or other external economic circumstances. 

Exempt Seasoned Loans. The rule should exempt seasoned loans from risk retention 

requirements. A loan seasoned for two to three years prior to securitization and current at all 

times during that period should be exempt from risk retention requirements. 

Permit Commingled QRM and non-QRM Pools. The rule should permit blended pools of QRM 

and non-QRM loans that meet the QM definition. If a securitizer must wait until it has 

assembled a "critical mass" of QRM loans sufficient to support an MBS offering, the liquidity of 

these loans could be significantly impaired. 

MBA believes that without substantial revisions, the proposed risk retention regulations will 

have a significant negative impact on credit availability and affordability for first-time, 

minority, low-to-moderate income homebuyers as well as others in the marketplace. While we 

endorse the promotion of safe and sound lending standards through the statutory QRM 

exemption, we urge that the proposed exemption be redrawn to more closely follow the 

parameters set by Congress. 

OTHER ELEMENTS OF THE DODD-FRANK Acr 

An element of the Dodd-Frank Act that is outside of risk retention but may require future 

legislative action is section 939A, which requires all federal agencies to remove reliance on 

credit ratings from their regulations and replace them with appropriate alternatives for 

evaluating creditworthiness of a securitization. We understand that this provision was added 

to the Dodd-Frank Act because policymakers had concerns that structured security purchasers 

were overly reliant on ratings and did not perform adequate independent due diligence. 

Unfortunately, the unintended consequences of section 939A have already been realized in the 

bank regulatory capital context. Specifically, the alternative to credit ratings that has been 

finalized for risk-based capital standards for market risk in the simplified supervisory formula 

approach (SSFA). This approach contains structural issues that can cause it to unfairly increase 

risk-based capital for structured securities, including CMBSs 

The SSFA is also part of the Basel III proposed rule that provides an updated regulatory capital 

framework for banks." MBA would urge Congress to monitor the implementation of the SSFA 

and be prepared to take corrective action if the SSFA or other consequences of section 939A 

significantly harm the securitization market. 

, See MBA comment letter: Risk Based Capital Guidelines: Market Risk, Alternative to Credit Ratings for 

Debt and Securitization Positions, February 3, 2012. 

9 BasellII is comprised of three rules and can be accessed from the following website: 

http://www.federalreservc.gov/newsevents/press/bcreg/20120612a.htmut 
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July 10, 2012 

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In addition to the Dodd-Frank Act, there are far reaching proposed bank regulatory capital 

rules (such as Basel III), securitization rules (such as Regulation AB), as well as rapidly evolving 

financial accounting reporting rules that have combined to create regulatory uncertainty for 

financial institutions. The inability to quantify pending regulatory compliance costs and 

business operational changes has resulted in financial institutions retaining capital that could be 

more efficiently deployed in the private sector. Consequently, when implementing the DoddFrank Act, MBA would urge policy makers to be mindful of the aggregate compliance costs of 

new regulations, as well as the regulatory capital and financial accounting reporting regimes 

that financial institutions are and will be required to implement on a cOncurrent basis. 

CONCLUSION 

The proposed risk retention regulations are of the utmost importance to restoring a strong and 

stable housing market. MBA urges Congress to request the Agencies conduct a more 

substantive economic impact analysis and publish revised proposed regulations in order to give 

interested parties another opportunity to review and comment. MBA greatly appreciates the 

opportunity to provide the single family, commercial and multifamily perspectives on the 

impact of the Dodd-Frank Act. 

o