U.S. GOVERNMENT PUBLISHING OFFICE

31–347 PDF WASHINGTON : 2018

LEGISLATIVE PROPOSALS 

REGARDING DERIVATIVES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 14, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–74 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

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C O N T E N T S 

Page 

Hearing held on: 

February 14, 2018 ............................................................................................ 1 

Appendix: 

February 14, 2018 ............................................................................................ 35 

WITNESSES 

WEDNESDAY, FEBRUARY 14, 2018 

Bentsen, Jr., Hon. Kenneth E., President and Chief Executive Officer, Securities Industry and Financial Markets Association ............................................. 5 

Deas, Thomas C., Chairman, National Association of Corporate Treasurers, 

on behalf of the Coalition for Derivatives End-Users ....................................... 7 

Green, Andy, Managing Director of Economic Policy, Center for American 

Progress ................................................................................................................ 9 

O’Malia, Scott, Chief Executive Officer, International Swaps and Derivatives 

Association, Inc. ................................................................................................... 10 

APPENDIX 

Prepared Statements: 

Bentsen, Jr., Hon. Kenneth E. ........................................................................ 36 

Deas, Thomas C. ............................................................................................... 43 

Green, Andy ...................................................................................................... 50 

O’Malia, Scott ................................................................................................... 78 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Statement for the record from Cboe Global Markets, Inc. ............................ 89 

Statement for the record from Walter L. Lukken, President and Chief 

Executive Officer, Futures Industry Association (FIA) ............................. 91 

Statement for the record from Futures Industry Association (FIA), Commodity Markets Council (CMC), CME Clearing (CME), and Intercontinental Exchange (ICE) ................................................................................. 99 

Statement for the record from The Investment Company Institute ............ 103 

Statement for the record from Mastercard ..................................................... 107 

Statement for the record from Managed Funds Association ........................ 109 

Statement for the record from Western Union .............................................. 115 

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LEGISLATIVE PROPOSALS 

REGARDING DERIVATIVES 

Wednesday, February 14, 2018 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:19 p.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Present: Representatives Huizenga, Hultgren, Wagner, Poliquin, 

Hill, Mooney, Davidson, Budd, Hollingsworth, Maloney, Sherman, 

Lynch, Scott, Himes, Foster, Sinema, Vargas, Gottheimer, and 

Gonzalez. 

Also present: Representatives Lucas and Luetkemeyer. 

Chairman HUIZENGA. The committee will come to order. And 

without objection the Chair is authorized to declare a recess to the 

committee at any time. 

This hearing is entitled, ‘‘Legislative Proposals Regarding Derivatives.’’ 

I now recognize myself for 4 minutes to give an opening statement. 

Derivatives are financial instruments or contracts with prices or 

terms of payments derived directly from the value or performance 

of another asset or commodity. They are primarily used to manage 

risk. While derivatives have long been used to manage risks related to the pricing of goods such as produce and livestock, they 

have become increasingly more complex over time. 

Nowadays corporations including industrial and financial firms 

use derivatives to hedge their exposure to risks such as the 

changes in prices of commodities or fluctuations in currencies, interest rates, or underlying equity securities. 

As of June 2017, the notional amount of outstanding over-the- counter (OTC) derivatives contracts were $542 trillion with a gross 

market value of $13 trillion. 

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission, CFTC are the regulators 

charged with supervising the trading of derivatives. The regulation 

of the derivatives market changed drastically in response to the 

2008 financial crisis. 

Title VII of the Dodd-Frank Act restructured the derivatives 

market to more closely resemble the market for listed securities 

and listed futures tradings. The reforms included mandatory clearmcarroll on FSR431 with DISTILLER

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ing for certain swaps and increased data disclosures meant to promote greater market liquidity and transparency. However, despite 

these well-intentioned reforms Title VII of the Dodd-Frank Act has 

resulted in a fragmented regulatory scheme of the derivatives market. 

Perhaps the largest criticism of Title VII is, one outlined in the 

recent Treasury report on Capital Markets, the lack of clarity provided to the SEC and the CFTC on how they should propose and 

issue their rules. Title VII bifurcated the regulatory jurisdiction 

over swaps. The CFTC oversees interest rate swaps, indexed credit 

default swaps, foreign exchange swaps, certain types of equity 

swaps, and other commodity swaps. 

The SEC oversees the security-based swap market. While the 

CFTC has finalized their swaps rule, the SEC has yet to finalize 

their regulations for registration and regulation of security-based 

swaps, dealers trade reporting, mandatory central clearing of 

standardized security-based swaps, and trade execution requirements. 

This incomplete and disjointed regulatory structure has resulted 

in discrepancies between the SEC and the CFTC’s interpretations 

of Title VII, making it difficult for market participants to comply 

with these inconsistent regulations. 

One of the proposals before us today would require that the 

CFTC and SEC harmonize their over-the-counter swaps rules to 

provide necessary clarity to the market. 

It is encouraging to hear SEC Chairman Clayton say that the 

SEC and the CFTC are already moving in this direction. In a recent speech he said, quote, ‘‘we are seeking to harmonize our ultimate securities-based swap rules with the CFTC where appropriate, to increase effectiveness as well as reduce complexity and 

cost. This requires deliberate and constructive, and current engagement with our CFTC brethren which I am pleased to report is well 

underway,’’ close quote. 

The other proposals before us today fix many of the market irregularities that exist in today’s derivatives markets. I would like to 

thank my friend and chairman of our Financial Institutions Subcommittee, Representative Luetkemeyer for introducing a bill that 

would require the appropriate Federal banking agencies to recognize initial margin in the firm’s leverage ratio calculation. 

The other proposals include drafts to help provide relief for derivatives end-users, clarify the relief from mandatory clearing 

availability to centralized Treasury units of non-financial affiliates, 

and exempt swap transactions between affiliated entities from the 

swaps rules, clarify the definition of financial entity, excluding 

hedging swaps from the swap dealer de minimis threshold, provide 

clarity regarding the de minimis exception, annual thresholds for 

swap dealers and security-based swap dealers, clarify the definition 

of financial end-user as it applies to parent and holding companies, 

and exclude non-U.S. regulated funds from the definition of, quote, 

‘‘a United States person.’’ 

As we address these current legislative proposals, it is important 

to note that derivates are a vital part of the healthy functioning 

of our global economy. Companies of all sizes in Michigan and 

across the United States use derivatives to better manage the risks 

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that they face every day. Derivatives help to ensure that prices are 

stable and that customers are not subject to immense market fluctuations. 

We must work to ensure that the derivatives market is appropriately regulated and is working efficiently to benefit Main Street 

investors. 

And with that I will yield to the gentlelady from New York for 

her 5 minutes for an opening statement. 

Mrs. MALONEY. I thank the Chairman for holding this important 

hearing and welcome all of our guests today, particularly my 

former colleague and friend Ken Bentsen, always a pleasure to see 

you. 

This hearing will examine 11 different derivatives bills. While I 

have never believed that Dodd-Frank was perfect, I think it is important to remember why Dodd-Frank created a regulatory regime 

for derivatives in the first place. 

Derivatives played a central role in the financial crisis. They 

turned losses on sub-prime mortgages in the U.S. into a global financial crisis, allowed financial institutions to take on excessive 

risks, and created dangerous connections between financial institutions that spread and amplified risk across the entire financial system. 

It was derivatives that brought down AIG, a 90-year-old company 

that was one of the largest financial institutions in the world. Taxpayers were forced to spend $180 billion to bail out and restructure 

AIG which failed because of risky, unregulated gambling on credit 

default swaps. 

This is why Fed Chairman Ben Bernanke testified and I quote, 

‘‘making derivatives safer is very important, part of solving Too Big 

to Fail and preventing another financial crisis.’’ 

Dodd-Frank created a comprehensive regulatory regime for derivatives so that they would never bring down the financial system 

again. 

Under Title VII of Dodd-Frank, over-the-counter derivatives are 

now regulated by the CFTC and the SEC. Standardized derivatives 

have to go through central clearinghouses, trade on transparent exchanges, and be reported to regulators. 

Financial institutions have to hold appropriate capital against 

their derivatives, and have to post collateral on their derivatives 

every single day. This is all contributive to a derivatives market 

that is vastly safer than it was before the crisis. But Congress did 

recognize that lots of companies use derivatives to hedge their dayto-day risks and not to take speculative bets. That is why DoddFrank specifically exempted these companies which are known as 

end-users of derivatives from many of the new regulations in the 

bill. 

When sufficient evidence was presented to this committee that 

end-users were being inadvertently swept up in the regulatory regime intended for big banks and hedge funds, this committee acted 

on a bipartisan basis to tweak the law to protect end-users. That 

bill ultimately was signed into law. I remember it well because it 

was attached to the Terrorism Risk Insurance Act, a bill that was 

very important for New York City, the area I represent. 

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Congress also acted on a bipartisan basis to clarify when certain 

derivates trades between affiliates of the same company could be 

exempt from some of the Dodd-Frank rules. And Congress made 

these changes because we wanted to ensure that derivatives remained available for the end-user companies that rely on derivatives to hedge their day-to-day risks. But these were technical fixes 

that were identified immediately after Dodd-Frank passed and 

were intended to help legitimate commercial end-users. 

Any additional changes to Dodd-Frank’s derivatives rules needs 

to satisfy, in my opinion, a high burden of proof for me to support 

rolling back rules on the derivatives market just because they are 

inconvenient for some institutions. There needs to be a real, concrete problem that is both significant and unintended in order for 

me to support further changes to Dodd-Frank’s derivatives rules. 

I look forward to hearing and learning today from the testimony 

of the board here today and from my colleagues. 

I yield my remaining time to my esteemed colleague from the 

great State of California, Mr. Sherman. 

Mr. SHERMAN. Thank you. 

Dodd-Frank was written in this room. It did not come down to 

us from Mount Sinai. I am open to changes and at the same time 

we need a secure financial system. 

As the Chairman points out the purpose of derivatives is to allow 

an investor or other end-user to shift risk. Most of the time we 

shift risk, we call that an insurance contract. We need to make 

sure that whenever derivatives are issued, wherever someone is assuming risk that they can handle that risk and that there is no 

possibility of a bail-out, or even worse yet a telephone call from 

Wall Street saying we had better bail out the issuer of that derivative or the entire economy goes down. 

AIG was in the insurance business and all of their subsidiaries 

seemed to have weathered the crisis except for the only one that 

was not regulated as an insurance company. That entity assumed 

risk, didn’t have adequate reserves, and I yield back. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

And at this point the Chair now recognizes the gentleman from 

Illinois Mr. Hultgren, the Vice Chairman of the subcommittee. 

Mr. HULTGREN. Thanks, Chairman Huizenga. Thanks for holding 

this important hearing. It is not often that we get the opportunity 

for an in-depth discussion of derivatives issues despite our committee maintaining some jurisdiction over derivatives. 

It is important for us to identify opportunities to provide relief 

from Dodd-Frank and Basel regulatory framework, if it means lowering cost for companies simply interested in managing their market risks. 

As a former member of the House Agriculture Committee under 

Chairman Lucas, we used to have more regular opportunities to 

deal with these issues, but I do know how important it is for companies in my district and especially in Chicago to be able to effectively manage their market risk. 

We shouldn’t have regulator impediments that discourage legitimate hedging strategies. We want our markets to function in a way 

that allow for opportunities to lower overall costs. 

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I am very encouraged by a number of legislative proposals under 

consideration today, I am a co-sponsor of Chairman Luetkemeyer’s 

bill calling for a narrow but practical change in the supplementary 

leverage ratio. 

I have also received positive feedback from my constituents on a 

number of draft bills under consideration, such as relief from the 

credit valuation adjustment, amending the definition of financial 

entity, and relief from mandatory clearing for centralized Treasury 

units that I hope to learn more about today. 

Thanks, Chairman. And I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

I would like to address also the participation in the subcommittee hearing today and without objection any member from 

the Financial Services Committee is permitted to participate in today’s subcommittee hearing. 

Misters Luetkemeyer and Lucas are members of the Financial 

Services Committee and we appreciate their interest in this important topic. 

Today we welcome the testimony of Kenneth Bentsen, Jr., President and CEO of the Securities Industry and Financial Markets 

Association, also known as SIFMA; Thomas Deas, who is Chairman 

of the National Association of Corporate Treasurers on behalf of 

the Coalition for Derivatives End-Users; Mr. Andy Green, Managing Director of Economic Policy for the Center for American 

Progress; and Scott O’Malia, Chief Executive Officer, International 

Swaps and Derivatives Association, ISDA. 

We appreciate your time and attention to this. Each of you will 

be recognized for 5 minutes to give an oral presentation of your testimony. Without objection, each of your written testimonies will be 

made part of the permanent record as well. 

So with that, Mr. Bentsen, you are recognized for 5 minutes. 

STATEMENT OF HON. KENNETH BENTSEN, JR. 

Mr. BENTSEN. Thank you, Chairman Huizenga and Ranking 

Member Maloney and members of the committee. I appreciate the 

opportunity to testify on Title VII of Dodd-Frank. 

As was pointed out, Title VII created a new regulatory regime for 

derivatives or swaps. SIFMA believes the key pillars of this regime, 

transparency requirements, central clearing, and capital and margin requirements are beneficial to the market and should remain 

in place. 

But we are concerned that some of the regulations go beyond 

what is necessary to achieve Title VII’s core objectives and may 

even conflict with other regulations. It is important for policymakers to evaluate these issues including Congress. 

I would like to offer SIFMA’s view on four pieces of legislation 

being considered by the committee. 

First, inter-affiliate transactions are for centralized risk management between affiliated counterparties within a firm as they serve 

their clients. Inter-affiliate transactions don’t raise system risk concerns because they don’t create new exposure outside the corporate 

group or increase interconnectedness between third parties. 

We are concerned that U.S. banking regulators have incorrectly 

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actions, whereas the CFTC and other jurisdictions have not. Some 

SIFMA members report that they are locking up more margin for 

risk reducing inter-affiliate transactions than they are collecting 

from third parties. These requirements discourage prudent risk 

management strategies and make it more challenging to provide 

hedging solutions for end-user customers. 

This also locks up capital that firms could allocate to invest in 

the broader economy. We believe that a logical solution would be 

to exempt inter-affiliate swaps from initial margin, mandatory 

clearing, and mandatory trading requirements so long as they are 

part of a centralized risk management program and remain subject 

to variation margin and trade reporting requirements. 

SIFMA currently supports legislative measures to fix the treatment of inter-affiliate swaps. We believe that any such measure 

should apply consistently across all U.S. regulators. 

Second, Title VII’s distinction between swaps and security-based 

swaps did not accurately reflect market practice and the jurisdictional split between the CFTC and the SEC has posed challenges. 

Despite efforts by the agencies to coordinate and harmonize the 

requirements, important differences remain. Some areas where 

more work is needed include reducing conflicts with other legal regimes. For example, the SEC has adopted certification and legal 

opinion requirements relating to the SEC’s access to a non-U.S. 

dealer’s books and records which create conflicts with foreign laws 

that the CFTC has sought to avoid. 

Second, following consistent international standards for margin 

and reporting requirements which helps promote a level playing 

field and efficient coordination among regulators. And third, recognizing instances where satisfying another regulator’s requirements 

would achieve a comparable outcome while avoiding overlapping 

regulations. 

The SEC and CFTC should look for more opportunities to leverage each other’s rules for dual registrants. 

We support recent efforts to consider additional harmonization, 

such as indicated in the recent speeches by Chairmen Clayton and 

Giancarlo, and look forward to contributing to this dialog. 

We also encourage coordination between market regulators and 

banking regulators especially on capital and margin. 

Third, completely risk-insensitive leverage capital measures such 

as the supplemental leverage ratio are becoming binding capital restraints for many banking organizations. As a result, the amount 

of required capital is increasingly unrelated to the level of risk 

taken. This could lead to insufficient or excess capital levels depending on the prevailing economic conditions. 

One particular problematic area is the SLR’s (supplementary leverage ratio) treatment of centrally cleared derivatives. When a 

firm clears derivatives for a client, the firm guarantees the client’s 

obligations to the clearinghouse, collects initial margin from the client to securities obligation, and segregates that margin. Although 

this initial margin largely offsets exposure to the client and the 

clearing firm, the clearing firm cannot use the margin to fund its 

business. The SLR does not recognize an offset for the initial margin. 

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Because the SLR requires clearing firms to hold capital against 

client exposures far in excess of the risk, it discourages client clearing. This incentive runs counter to Dodd-Frank’s mandate to promote clearing. 

SIFMA supports H.R. 4659 as it would deduct client provided initial margin on cleared derivatives from the leverage exposure for 

the clearing firm and it requires amendments to the capital rules 

to reflect this change. This is one of several changes policymakers 

should consider with respect to the SLR. 

Last, Title VII exempts a person from being deemed a swap dealer if the person engages in only a de minimis quantity of swaps 

connected to its dealing activity. 

When the CFTC and the SEC initially adopted rules implementing these provisions, they did not have data to sufficiently inform the process. They therefore set their de minimis thresholds 

conservatively with automatic reductions over a period of time absent a rulemaking. 

We have concerns that decreasing the de minimis threshold 

would reduce the number of market participants willing to deal in 

swaps within commercial end-users. Such an outcome would reduce 

liquidity and concentrate swaps with larger institutions. 

We believe that the changes to the de minimis threshold must 

be supported by robust data and we support the CFTC’s recent 

order providing for additional time to make informed decisions on 

this issue. 

Thank you for the opportunity to present our views. And I look 

forward to your questions. 

[The prepared statement of Mr. Bentsen can be found on page 36 

of the appendix.] 

Chairman HUIZENGA. We can tell Mr. Bentsen is an expert witness. He is turning back time and the Chairman can’t even jam it 

all in, in the time allotted, so way to go. 

With that, Mr. Deas, you are recognized for 5 minutes. 

STATEMENT OF THOMAS DEAS 

Mr. DEAS. Good afternoon, Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee, I am Tom Deas, 

Chairman of the National Association of Corporate Treasurers, 

which is a member of the Coalition for Derivatives End-Users. Our 

coalition represents hundreds of end-user companies across the 

country that employ derivatives to manage day-to-day business 

risks. 

I would like to thank you all for doing so much to protect Main 

Street companies from undue burdens of financial regulations. We 

support the transparency that the Dodd-Frank Act attempts to 

achieve in the derivatives market. We also believe it is sound policy 

and consistent with the law to exempt end-users from provisions 

intended to reduce the inherent riskiness of swap dealers’ activities, but which can increase end-users’ cost and make our risk 

management activities prohibitively expensive. 

As you consider potential changes to Dodd-Frank and its implementing regulations, I want to assure you that end-users comprising less than 10 percent of the derivatives market are offsetting 

business risk, and not creating new financial ones. 

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We support legislative changes to address, first, bill No. 2 on the 

agenda related to capital charges. A bipartisan consensus has clarified that commercial end-users are exempted from having to post 

cash to margin their derivatives positions. However, U.S. prudential banking regulators are requiring swap counter-parties they 

regulate to hold extra capital against end-users on margin trades. 

This effectively negates the exemption with an equivalent economic cost that end-users must bear. This credit valuation adjustment not only adds costs that can make hedging business risk too 

expensive but places American companies at a competitive disadvantage compared to their European and other foreign rivals 

whose regulators have exempted their end-users from this burden 

in recognition that their derivatives are reducing overall economic 

risk. 

Next, bill No. 3 on the agenda, the financial entity definition. 

The coalition believes that end-users employing derivatives to reduce their business risk should not be unduly burdened with regulations intended for those running open books of positions such as 

swap dealers. 

The unifying characteristic for the end-user exemption should be 

the exact matching of a derivative with an underlying business exposure, not whether the end-user is engaged in certain activities 

which might be considered financial in nature. 

Take a real estate company which owns and manages factory 

buildings and supporting infrastructure and leases them to manufacturers. If this company is organized as a real estate fund it is 

characterized as financial. And under the current rules, it cannot 

hedge its business exposures in the derivatives market without 

being subject to the full range of regulations applied to financial 

counterparties. 

We support proposals that would follow European, Canadian, 

and other foreign regulators that have set thresholds for financial 

activity below which companies would be treated as commercial 

end-users. 

Now finally, relating to bills No. 4 and 5 on the agenda, on interaffiliate exemption and centralized Treasury units, end-user treasurers have long widely used the accepted risk reduction techniques 

of netting exposures within our corporate group so we can reduce 

derivatives outstanding with banks. 

We use centralized Treasury units (CTUs) as the hub for netting 

out opposite-way inter-affiliate derivative transactions to achieve 

this reduction in outstanding hedges. These CTUs allow us to centralize control and compliance supervision across often far-flung 

corporate groups. However, the commercial end-user exemption 

needs legislative clarification to ensure it applies to CTUs and the 

inter-affiliate derivatives centralized through them so they are not 

subject to mandatory clearing and the requirement to post margin 

for these internal notional derivative positions. 

In conclusion, end-users employ the OTC derivatives market for 

the efficient transmittal of risk from where they incur it to where 

they can match and offset it with a swap dealer. Undue regulatory 

costs along the way, including those placed on our financial intermediaries are ultimately borne by the end-user. 

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In our world of finite limits and financial constraints, these unintended economic burdens on end-users represent a direct dollar for 

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

hope grow jobs. 

I noted in my written testimony, specifics of these concerns along 

with suggested remedies and will do my best to answer questions 

you may have. 

Thank you again for your attention to end-user companies. 

[The prepared statement of Mr. Deas can be found on page 43 

of the appendix.] 

Chairman HUIZENGA. Thank you for your testimony. 

With that, Mr. Green, you are recognized for 5 minutes. 

STATEMENT OF ANDY GREEN 

Mr. GREEN. Thank you, Chairman Huizenga, and Ranking Member Maloney, for the opportunity to testify in this important topic. 

The derivatives market is a vital avenue for financial and nonfinancial companies to prudently hedge the risks they face. Today’s 

roughly $550 trillion swaps market may not directly impact the 

day-to-day lives of the average American, but a severe disruption 

in the market can have knock-on effects impacting the real economy. 

The unregulated swaps market was at the heart of the 2007, 

2008 financial crisis, which cost 8.7 million Americans their jobs, 

10 million families their homes, and helped eliminate 49 percent of 

the average middle-class family’s wealth compared to 2001 levels. 

Thanks in part to the unregulated swaps market, financial distress in one company quickly reverberated throughout the financial 

system. AIG is the only most commonly discussed example, but 

every other major Wall Street dealer bank faced major threats from 

margin calls and the risk of knock-on losses arising from swaps. 

Nor was the 2008 financial crisis the first time swaps markets 

created major challenges. Long-Term Capital management, Enron, 

Amaranth, Gibson Greeting Cards, Proctor and Gamble, Orange 

County, all got themselves in trouble in one way or another from 

the OTC swaps market, negatively impacting investors, market 

participants, financial stability, and taxpayers. 

In the wake of their devastation brought by the financial crisis, 

Title VII of Dodd-Frank sought to bring stability, transparency, 

and competition to the swaps market. Nearly 8 years since DoddFrank was signed into law, with the exception of the SEC, the 

swaps regime is operational and working. And it is benefiting the 

real economy. 

In just one study, the Bank of England found in the U.S. total execution costs for day-to-days were reduced by about $7 million to 

$13 million a day for SEF-mandated swaps. 

With reform showing positive results in the large investment and 

operations and compliance systems already made by firms, any legislative proposal should have to overcome a heavy burden in favor 

of maintaining what is working. 

Financial regulatory changes also need to be considered as a 

whole. For example, FSOC’s designation process which helps to remcarroll on FSR431 with DISTILLER

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duce the risks that non-bank financial firms create knock-on effects 

across markets. 

The Office of Financial Research monitors and investigates the 

risks across the financial system. And other regulatory protections 

such as bank capital, liquidity, and the Volcker Rule which properly distribute risk and focus firms’ activities on the real economy 

appear under threat. To the extent that these tools are dialed back, 

it places even more strain on any weaknesses that may emerge in 

the derivatives markets. 

Unfortunately, the bills presented today all appear to press in 

the wrong direction. A persistent theme in them is to extend the 

scope of commercial end-user treatment to entities and activities 

that are financial in nature. This violates the basic bargain, that 

strong regulatory protections cover the market which is dominated 

by financial firms, and that special treatment can be accorded the 

relatively small number of commercial entities. 

To draw an analogy to public health, a small number of people 

can avoid being immunized and still remain protected by the 

broader use of a vaccine, but if that group becomes too large, everyone is put at risk, especially those people who actually cannot be 

immunized. 

To the extent that any of the bills today embody specific concerns 

by market participants, far more needs to be done to study specifically identified challenges. 

To facilitate accurate analyses and broad-based consensus on 

these questions, far more market and institutional data, including 

at the subsidiary level, must be made available to, and usable by 

the public. 

Last, policymakers should avoid falling victim to the argument 

that reducing regulation will enhance competition and benefit endusers or the real economy. Financial markets have a tendency toward rent-seeking behavior which comes at the expense of the real 

economy. 

Regulatory standards are required to ensure transparency and 

competition which benefit those that utilize those markets, small 

and medium-size enterprises, family farmers, manufacturers. Energy and commodity companies are far better served by a simple, 

robustly regulated market where prices are transparent and competition is meaningful. 

I have addressed the special proposals today in my written comments and in the interest of time will stop here. I look forward to 

taking your questions. Thank you. 

[The prepared statement of Mr. Green can be found on page 50 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

And with that Mr. O’Malia you are recognized for 5 minutes, 

STATEMENT OF SCOTT O’MALIA 

Mr. O’MALIA. Chairman Huizenga, Ranking Member Maloney, 

and members of the committee on behalf of the International 

Swaps and Derivatives Association and its 900 member firms, I 

would like to thank the committee for holding this timely hearing 

to discuss potential adjustments to the regulatory regime of the derivatives market. 

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11 

I am pleased to offer my written testimony where I have addressed in great detail my observations regarding the progress that 

has been made to implement Dodd-Frank, the important initiatives 

taken by ISDA and its membership to develop mutualized solutions 

to optimize implementation of the rules, and then more specific recommendations on the legislation before this subcommittee. 

The implementation of Dodd-Frank and the related margin in 

capital rules have made the financial market more transparent, 

more resilient and have reduced systemic risk. 

Over the past 7 years, ISDA and our members have made significant progress in implementing the regulatory agenda. Today trade 

data on derivatives is now required to be reported to SDRs and 

fully accessible to regulators. Nearly 88 percent of interest rate derivatives and 80 percent of CDS Index notional trade in 2017 is 

centrally cleared. More than half of all interest rate derivatives in 

the U.S. were traded on an electronic platform in 2017. Globally significant banks have added $1.77 trillion in Tier 1 

capital to their balance sheets since 2009 and further increases are 

contemplated. Nearly $1 trillion of collateral has been posted by counterparties 

with the 20 largest market participants to back the risk of the noncleared swaps and we are only halfway through that process. 

It is important to stress that we are in no way advocating for a 

roll-back of this progress. However, with any regulatory reform of 

this size and this scope we are bound to find areas where anticipated outcomes and the actual results don’t align, creating 

redundancies, higher costs or areas for improvement. And we believe these improvements could be made to the current regulatory 

regime by focusing on three broad areas. 

First, harmonizing regulatory requirements; second, reducing 

operational complexity and cost; and third, providing regulatory relief to market participants, small market participants and endusers. 

Let me begin by discussing the need for greater regulatory alignment. 

As we all know, both the CFTC and the SEC have oversight over 

parts of the swap market. Ideally we would have an effective identical requirement for the market segments the two agencies oversee. However, such an outcome has proven to be difficult to achieve 

in practice. As a result, ISDA recommends that the CFTC and the 

SEC develop a more holistic solution, a safe harbor approach to address these issues. 

Under such an approach, market participants in compliance with 

the CFTC rule sets for swaps including business conduct, capital 

and margin would be granted a safe harbor from the same rules 

sets issued by the SEC and vice versa. To be clear, in either case 

the derivative activity would be thoroughly regulated. 

Most importantly, the safe harbor approach does not contemplate 

the relinquishment of the agencies’ respective authorities or jurisdiction. Both commissions would retain anti-fraud and anti-manipulation enforcement authority and the respective Congressional 

committees would retain their legislative and regulatory oversight. 

One final word on this matter, while it has taken significant 

work between the U.S. and Europe to find a solution to recognize 

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12 

one another’s clearing and trading rules, it would be quite remarkable if we were able to achieve a determination with a foreign government but not within our own. 

Turning now to a second area where greater global regulatory 

harmonization is needed and that is the treatment of inter-affiliate 

transactions under the margin rule. 

My former colleague, Chairman Gary Gensler, explicitly recognized the benefits of such transactions when providing an exception 

from the clearing requirements. This position enjoyed bipartisan 

support on the commission. His successor, Tim Massad, further memorialized the CFTC position by providing an exemption from the 

initial margin requirements which are consistent with policies in 

the EU and Japan. 

Now the rules promulgated by the U.S. prudential regulators 

however do not provide such an exemption and disadvantage certain firms doing business in the U.S. and abroad. The legislation 

being discussed today would remedy this disparity. 

Moving on to my second theme is reducing operational complexity and cost. I can think of no better example than the treatment of margin under the supplemental leverage ratio requirements. In its current form the leverage ratio acts to dis-incentivize 

central clearing adding to cost of banks to provide this service. This 

perverse impact has been highlighted by numerous policymakers 

over the past several years. 

This is not a partisan issue. CFTC chairmen under two separate 

administrations have raised these concerns. It runs counter to the 

objectives of the G20 as implemented by Congress in Dodd-Frank 

and to encourage centralized clearing. 

Now the final broad area which I will discuss is providing relief 

to small market participants and end-users. 

ISDA believes that Congress can have an immediate impact on 

this. We applaud the committee’s focus to address the un-level 

playing field created the Credit Value Adjustment providing a technical fix to the exemption of centralized Treasury units and ending 

the uncertainty over the CFTC’s swap dealer de minimis threshold. 

As noted earlier, ISDA and its members support a safe and efficient market and we have worked hard to implement the regulatory reforms to increase transparency and mitigate systemic risk. 

ISDA looks forward to working with Congress, the U.S., and 

international regulators to develop solutions to further strengthen, 

simplify, and harmonize the regulatory framework. 

Thank you very much. 

[The prepared statement of Mr. O’Malia can be found on page 78 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

At this time I would like to recognize myself for 5 minutes. 

Real quickly and this wasn’t in the oral testimony but in written 

testimony. We saw Mr. Green compare the different rules from different agencies as different types of transportation modes having 

different types of safety rules. It seems to me that it might be the 

same highway but we now have the State police setting truck 

speeds and safety rules, and while the county sheriff is setting vehicle speeds, private vehicles speeds on those same highways and 

roadways. 

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13 

Mr. Bentsen and Mr. Deas, and maybe Mr. Deas first, how are 

these end-users generally different from other participants in the 

OTC derivatives markets and did the derivatives activity by endusers contribute to this financial crisis that we had seen previously? 

Mr. DEAS. Thank you, Mr. Chairman. The fundamental difference between end-users and the other participants in the market 

is that to qualify as an end-user you must be matching a derivative 

exactly as to timing, amount, currency, whatever the characteristics may be with an underlying business exposure. 

So the exposure of the day-to-day business risk and the derivative are matched and they offset each other exactly. Whereas swap 

dealers are maintaining an open book, at times that book doesn’t 

balance and positions going one way may exceed those going another way, and so, that they incur through that imbalance a risk, 

and it is proper we think that there be appropriate capital and 

other charges related to those risks. 

End-users comprise less than 10 percent of the derivatives market and did not contribute to systemic risk. 

Mr. BENTSEN. I guess I would just add, this is a little bit of a 

dilemma inherent in the U.S. regulatory framework that this committee and its predecessor committees have dealt with over the 

years where you have products that are providing the same function but are differentiated by legal definition, and you run into a 

situation of functional regulation which is the U.S. framework that 

we have in place. 

In our mind it doesn’t make a lot of sense for regulators to have 

differing regulation for the same product just because of the legal 

definition. It actually seems, in our mind, to run counter to what 

has been at the top of the house at the U.S. in multiple administrations, in the agreements that are worked out amongst the G20 and 

the Pittsburgh Principals of having harmonization across jurisdictions, particularly in what is a global marketplace. 

So I think those different enforcement schemes are not necessarily the best approach. 

Chairman HUIZENGA. So ultimately you believe the inconsistencies have affected compliance and— 

Mr. BENTSEN. It creates fragmentation— 

Chairman HUIZENGA. Fragmentation— 

Mr. BENTSEN. Yes, it creates fragmentation in what is a global 

market and it affects everything from execution, price, and availability. 

Chairman HUIZENGA. And not in a beneficial way I think is— 

Mr. BENTSEN. No, we have seen that some of our buy-side members have done surveys where they have seen cost and execution 

go up, the number of entities who are willing to provide clearing 

services go down. And then even in the cross-border realm where 

we have seen fragmentation in markets which reduces liquidity, 

which we don’t think is a good thing. 

Chairman HUIZENGA. Ultimately do you believe the CFTC should 

be granted the authority to issue the fees on derivatives? That is 

something that has been proposed in the budget by the White 

House, and I am curious how it would affect market participants 

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14 

and liquidity in the marketplace, maybe have you address that, Mr. 

O’Malia? Mr. O’Malia, if you want to go first? 

Mr. O’MALIA. Thank you. This proposal has come up time and 

time again in different forms and in different administrations. And 

each time it has been rejected because it adds to the cost of risk 

management. We don’t support the fees that are proposed in the 

budget. 

Chairman HUIZENGA. Neither does Mr. Giancarlo. 

I don’t know if Mr. Bentsen— 

Mr. BENTSEN. I think Scott makes a fair point. I think what is 

in—and Chairman Giancarlo did come out against this the other 

day. And there’s the question of how you would let—in some cases 

you could have a fee that exceeds the spread on the product, and 

so, you have to take that into consideration as well. 

Chairman HUIZENGA. With that I will yield back my time and 

recognize the gentlelady who has freshly returned from the floor as 

we are debating some Financial Services bills down there. 

The gentlelady from New York is recognized for 5 minutes. 

Mrs. MALONEY. Thank you. Thank you. Thank you. I thank the 

gentleman for recognizing me. 

First of all I would like to ask Mr. Green. As I mentioned in my 

opening statement I think that there should be a very high burden 

of proof for any bill that makes additional changes to Dodd-Frank’s 

derivatives rules. 

There needs to be a real concrete problem that is both significant 

and unintended before I am willing to support legislative change 

for derivatives rules. 

In your view, Mr. Green, do any of these bills meet this high 

standard of proof or any or the problems that the bills are addressing significant enough to warrant legislative action? 

Mr. GREEN. Thank you. No, they do not on both questions. 

Mrs. MALONEY. Mr. Green, as you know, Dodd-Frank excluded 

legitimate commercial end-users from many of the derivatives rules 

that were intended for banks and hedge funds. One of these bills 

would extend the end-user exemption to commodity pools and even 

to private funds. Are these legitimate commercial end-users or are 

they more like financial institutions? And do you think it is appropriate to treat these entities like end-users? 

Mr. GREEN. Thank you. Absolutely not. Despite the name ‘‘commodity pool,’’ this is not some place that drained the water in their 

backyard pool and has filled it now with corn and wheat. These are 

basically mutual funds or private funds that are offered to investors or other market participants for the purpose of investing and 

I use that term with a little bit of quotes because the commodities 

markets and the comodities derivatives markets are different from 

normal SEC investment markets. 

They are for the purpose of investment they are financial activities, they are not owning commodities or engage in those types of 

activities. It is really quite inappropriate to extend end-user treatment to them. And I would even argue that the real estate funds 

we have seen from the financial crisis, and in other cases, that real 

estate can be a major source of speculative bubbles and that prudent risk management of a financial nature is essential when you 

are engaged in these types of financial activities. 

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15 

Mrs. MALONEY. Mr. Green, one of these bills would reduce the 

capital requirement for banks that are trading derivatives with 

end-users. How would giving relief to banks on their derivatives 

trade help end-users? 

Mr. GREEN. I don’t believe that it would, and I believe the evidence of what we have seen with respect to capital and the approaches to capital overall suggest that it does not historically. 

It is important to remember that it is frequently understood that 

capital is something that people talk about as being held by a company. It is a form of funding. It is there so that firms can withstand losses and be flexible with response to changing market conditions. 

In this particular bill you are referencing, it is very essential that 

fair value risks are of credit, as they change, are appropriately included within capital. And we are ready, we are looking at banks 

overall, very, very much at the bare minimum in terms of a socially 

responsible level in equity capital buffer, any steps taken to reduce 

that would be very unwise. 

Mrs. MALONEY. Do you think banks would pass on this relief to 

end-users in the form of lower trading costs? 

Mr. GREEN. No. I don’t believe the evidence is that would be the 

case. I believe the trading costs are lowered when you have competition, and real transparency in the market and that is why 

those types of parts the reforms are essential and need to be advanced further. 

Mrs. MALONEY. Or would this simply make trading derivatives 

more profitable for banks? 

Mr. GREEN. It would certainly be more profitable. It would certainly make it more profitable, but really what it does is it creates 

more of a risk that is being borne by the taxpayer and the resolution regime that would have to step in if the equity was not there 

to absorb the risks of losses. 

It is important to remember that capital and even margin only 

cover a small portion of the estimated risks that are created by 

these exposures. When models fail and other problems emerge, we 

need a sufficient buffer to be able to withstand what happens in 

the markets. And those benefits would not go on to the end-users. 

Mrs. MALONEY. Thank you very much. My time has expired. 

Thank you. 

Chairman HUIZENGA. The gentlelady yields back. 

With that, the Chair recognizes the Vice Chairman, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thanks, Chairman. Thank you all, so much for 

being here. I want to address my first question to Mr. O’Malia if 

that is all right. It is a multi-part question. 

Is it practical for the credit valuation adjustment (CVA) to apply 

to derivatives transactions with end-users that are designed for 

hedging purposes? And do you believe U.S. bank regulators were 

attempting to address an issue or was this simply an oversight? 

And why would the EU’s implementation of the Basel framework 

exclude hedging transactions with end-users from the CVA calculation? 

Mr. O’MALIA. Thank you very much. The capital rules are really 

developed as global rules and through the Basel committee, they 

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16 

are trying to establish a consistent regulatory framework. That is 

very important because as was noted earlier, these are global markets and so you are dealing with global banks with end-users that 

can trade in different areas and access liquidity. And it is very important that we align those rules in a very comprehensive and consistent fashion. 

As you quite rightly pointed out, the European Commission did 

not impose a CVA charge, chose not to do that. Right now, we are 

trying to assess what the new Basel requirements would do to impact U.S. traders. And it is very important we do the economic 

analysis. I don’t think the data will hide the fact that this is more 

expensive for end-users if you have these in place. And then you 

have to reconcile the international standards and balance and what 

that does for you as competitiveness. 

Mr. HULTGREN. I wonder if you could maybe detail even a little 

bit more some of the unintended consequences of the current CVA 

treatment. For example, does the current CVA treatment 

disincentivize hedging by institutions, instituting a punitive capital 

framework on banks for engaging in hedging transactions with 

end-users, and are U.S. banks and end-users at a disadvantage to 

their European competitors? 

Mr. O’MALIA. I believe they are. And there are several of these 

capital rules whether it is the leverage ratio that adds cost while 

you are including initial market (IM) for cleared risk, that doesn’t 

take that into consideration. There are a number of different capital rules that are just going to increase the cost to end-users in 

these positions making it more expensive to either access capital 

and/or access clearing which is clearly a mandate and a goal of 

Dodd-Frank. 

Mr. HULTGREN. Yes. Thanks, Mr. O’Malia. 

Mr. Deas, if I could address to you, your testimony underscores 

what I think is a widely recognized concern when a company falls 

under Dodd-Frank’s definition of financial entity, it is automatically precluded from qualifying for or otherwise electing any of the 

exceptions or exemptions for uncleared derivatives. Do you know 

the justification for why the law was written this way if any? 

Mr. DEAS. Congressman, no. We feel that the relevant distinction 

should be an end-user should be using derivatives to hedge underlying business risk rather than maintaining an open book as a 

swap dealer would do. If that entity as in my example a real estate 

fund that owns factories and leases those to manufacturing companies, we would think that that should be exempt from these extra 

requirements, and failure to exempt such entities would ultimately 

result in costs being passed on to manufacturers. 

Mr. HULTGREN. Yes. Do you believe the draft bill under consideration today named Derivative 03 would address this issue and 

bring parity for these companies deemed as financial entities that 

use derivatives for hedging? 

Mr. DEAS. Our coalition does support the bill scheduled as agenda item 3 and that it would not only do that, but it would bring 

the U.S. in line with Europe, Canada, Singapore, Australia, and 

other of our foreign competitors. 

Mr. HULTGREN. Thanks. 

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Mr. Bentsen, my last minute here, CFTC Commissioner 

Quintenz recently spoke at the conference in D.C. hosted by the 

Mercatus Center and the Institute for Financial Markets where he 

focused on the need for updating the de minimis exemption for 

swap dealers and security-based swap dealers, noting and I quote, 

‘‘the threshold’s reduction to $3 billion would create a ‘black hole,’ 

sucking in community banks and end-users who pose zero systemic 

risk. At the center of that ‘black hole’ lies an enormous set of 

costs.’’ 

Do you believe that legislation proposing to exclude all hedging 

from the swap dealer de minimis threshold would provide relief to 

those dealers concerned with exceeding the threshold? 

Mr. BENTSEN. That is a good question. First of all, to your first 

point and what the Commissioner was talking about is a concern 

that if you—and as I said in my testimony, we really need more 

data to see who is subject to the de minimis threshold. 

All the larger banks are obviously well beyond the threshold and 

whatever you are going to set it at. But there are a lot smaller 

dealers who are not subject to it, and our concern is that many of 

those smaller dealers, while they pose no systemic risk, might not 

be willing to stay in the business if they are going to be subject to 

that compliance to serve their clients so this is traded away to others. 

You will create more concentration in the market and you will 

take more players out of the market. We think that the commission 

needs to be very cautious in their approach here. They now are getting more data since these rules have come into place. Let us look 

at the data and see what it says. 

Mr. HULTGREN. Thanks. 

My time has expired. I yield back. Thanks, chairman. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from California is recognized for 5 minutes. 

Mr. SHERMAN. Mr. Bentsen, welcome back. As market participants work to comply with U.S. derivative rules, do you have any 

suggestions for how U.S. regulators like the SEC, the CFTC can 

achieve their regulatory objectives in situations where there are 

conflicts with international data privacy, blocking, secrecy laws, 

and other jurisdictions? 

Mr. BENTSEN. It is a very good question. It is something that, obviously, national regulators have not only their legal mandate that 

the Congress provides, puts forth for them but when you are dealing with global markets you have to deal with other national laws 

and cross border. 

In the case of the data reporting, the ability to look at books and 

records is a problem that both the SEC and CFTC are confronting. 

The CFTC, I think, is trying to be more accommodative where they 

conflict with the national law, privacy laws that are in place. The 

SEC, I think, is still struggling with that and we think that they 

need to do more work in that area. 

And it is something that I think the U.S. needs to be very cognizant of because this can cut both ways. We have been through 

this process of trying to get equivalency regimes put in place for 

trading and clearing, where we have had foreign regulators who 

want to have access to books and record and the like in the U.S. 

mcarroll on FSR431 with DISTILLER

18 

And we have had to work through the process. I think any time 

we are negotiating and trying to accomplish our goals in negotiating with a foreign entity, we need to consider the two-way street 

approach. And I think this is only going to get more complicated 

as we go through the Brexit regime. 

Mr. SHERMAN. One reference from outside this room is the exchange of information provisions that we have in our tax treaties 

where we also have regulators, in this case tax authorities, looking 

at the same regulation. 

Mr. Deas, you are here for the end-users. A certain amount of 

capital is posted at various times with the exchanges. Question is 

whether this is adequate enough for you to assure me that none 

of these end-users that you represent are ever going to come to 

Congress and say, they didn’t post enough capital so they are now 

liable to us, we sue them, they are bankrupt, you will have to bail 

us out. Is there enough capital being posted so that none of your 

members will ever say such and such a derivative issuer went 

under and Uncle Sam has got to write a check? 

Mr. DEAS. Congressman, thank you for that question. Just to address an answer Mr. Green just gave, I can’t tell you that the vaccination regime we have guarantees that nobody will get sick. 

What I can tell you is that end-users comprise less than 10 percent 

of the derivatives market by notional amount outstanding and during the financial crisis, represented a far lower percentage than 

that of defaulting parties. 

Mr. SHERMAN. But we may be in a circumstance where we need, 

if we just required higher capital, we might be OK, but because we 

didn’t, Uncle Sam has to write a check. 

Mr. DEAS. Sir— 

Mr. SHERMAN. Before the entire economy falls apart. 

Mr. DEAS. End-users seek to do their derivative transactions in 

the majority with Fed-member banks or other regulated financial 

institutions of that type and in our case, the Federal Reserve does 

stress tests and conducts other examinations. 

Mr. SHERMAN. The higher standards that there are imposed on 

those you are buying derivatives from, the less likely it is that they 

will default, the less likely that either you or I will be holding the 

bag. 

Mr. DEAS. We believe that there is an adequate capital cushion 

to guard against these kinds of outlier events. 

Mr. SHERMAN. OK. 

Let me just ask Mr. Green, this is insurance, I have got a comprehensive auto insurance. If my car is stolen, I give the pink slip 

which is what we call the title to the insurance company and they 

write me a check for 20 grand. 

If instead we structured that as a credit de-car swap and we 

would say under certain circumstances I give them the pink slip 

and they give me $20,000 worth of U.S. treasuries, that would just 

be the trade of one piece of paper for another piece of paper. I 

guess it would not be regulated as insurance. 

Why and I realize this is national or international so you might 

need a national regulator but why don’t we regulate this like insurance? 

Chairman HUIZENGA. Quickly answer. 

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19 

Mr. SHERMAN. Very quick answer. 

Mr. GREEN. You make some very important conceptual points. 

We have not historically done that, but there are some very strong 

arguments why particularly certain parts of the market ought to be 

treated like that, particularly credit markets and certain parts of 

Dodd-Frank do start to push in that direction such as prohibiting 

a firm from betting against a securitization product that they issue. 

I think there is a lot of conceptual backing to the argument you are 

making and ought to be supported further. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the gentlelady from Missouri is recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Chairman Huizenga. 

And thanks to all of our witnesses for being here today; many of 

you are repeat customers. 

The 2017 Treasury report on capital markets contains recommendations for the CFTC and the SEC to undertake a joint effort to review their respective rulemakings in order to eliminate 

redundancies. 

Mr. Bentsen, in your testimony, you also note and I quote, ‘‘the 

regulatory distinctions between swaps and security-based swaps as 

defined under Title VII did not accurately reflect market practice 

and the resulting jurisdictional split between the CFTC and SEC 

has posed challenges for market participation.’’ 

Mr. Bentsen, can you please briefly explain how the different 

regulatory timelines and approaches under both the SEC and 

CFTC have created these inconsistencies and redundancies? 

Mr. BENTSEN. I think what we are finding is, a lot of it is in my 

testimony but the treatment of rules in terms of how you define a 

U.S. person and, a lot of the rules the SEC has not finished yet 

so they are still in the promulgation period. 

Mrs. WAGNER. Yes. 

Mr. BENTSEN. But it moved and not clearly been moving in the 

same direction. We think where we are now is an opportunity with 

the Treasury recommendations, with the two new leaders of the 

two commissions to try and create either harmonization or as one 

of the other witnesses testified, a safe harbor approach or a substituted compliance approach between the two regimes. 

Mrs. WAGNER. Thank you. 

Mr. O’Malia, you also talked about duplicative requirements in 

your testimony and for a need to level that playing field. For some 

market participants who must adhere to both sets of rules, how do 

these different approaches for many of the similar activities and 

products create compliance concerns and additional costs? 

Mr. O’MALIA. The operational challenges of implementing dual 

sets of regulation and we have examples on a global level, in particular the data rules, each jurisdiction requires a different data reporting regime. I think we have to look at this in a very practical 

approach and then also look at it in what results do you want to 

achieve. 

Now, the CFTC and the SEC have largely well-aligned swap 

dealer definitions and rules. They are being implemented on a different timeframe, so the results you are going to get if you deal 

with the safe harbor approach, basically saying to the extent you 

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have complied fully with the CFTC rules for swap dealer registration and meet all those, you are compliant with the SEC or vice 

versa if you chose to start with the SEC. 

Now, the two agencies could work together to figure this thing 

out. 

Mrs. WAGNER. How about a holistic approach, what about that? 

Mr. O’MALIA. We would like a safe harbor approach. You comply 

with one or the other. And there are examples of this that we 

achieved at the CFTC back in 2013 with FERC (Federal Energy 

Regulatory Commission). We were not the FERC tariff rate-setter, 

but yet we had jurisdiction over some of those commodity markets. 

We deferred to the FERC to make those decisions. 

These are workable solutions. We also worked with other SROs 

to defer some of that regulatory oversight. It is imminently possible 

and available to us. It is letting the chairman sort this out given 

the strong direction from the committee and others to get those results and then I think you will have an operational solution. 

Mrs. WAGNER. I appreciate your elaborating especially on the 

regulatory safe harbor testimony that you have given. 

Mr. Bentsen, since the U.S. and EU have been able to determine 

regulatory equivalence in terms of clearing and trade execution 

rules, does it make sense for the SEC and CFTC to do the same 

within the U.S. regulatory framework? 

Mr. BENTSEN. Yes, I think so. Yes, absolutely, I think that we 

have functional regulation in the U.S. that sometimes is defined by 

legal definition but we are talking about similar products. I think 

that we should certainly domestically try and have similar coordination that we are trying to do cross border. 

Mrs. WAGNER. Many requirements in the Title VII of DoddFrank tasked the SEC and CFTC with virtually identical 

rulemakings. One would think that requirements for swaps and security-based swaps would be very similar if not identical. Has this 

been the case, Mr. Bentsen? 

Mr. BENTSEN. I think as we have gone through the rulemaking 

process, we have seen that there have been differences in interpretation of Title VII between the two regulators. I don’t want to say 

that it is necessarily one regulator versus another. And to be fair, 

they have come at it from their legacy focus. 

The CFTC was much a futures regulator; the SEC obviously a securities regulator. But as we have had some experience now, 7, 8 

years of experience, this is really something where we should be 

able to converge or just, as Scott said, employ a safe harbor approach. 

Mrs. WAGNER. I appreciate that. My time has expired. I have 

some other questions, Mr. Chairman, I will submit for the record. 

I thank the witnesses and I yield back. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

The gentleman from Massachusetts, Mr. Lynch, is recognized for 

5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the witnesses for your help on this matter. First 

of all, this grouping the bills, the 11 bills that are presented, they 

are not actually bills, they don’t have bill numbers. But I guess 

they call them proposals, taken in the aggregate would wipe out 

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much of the taxpayer protections that were put in place by DoddFrank after the crisis back in 2008. 

In particular, one of the bills before us today H.R. blank number 

6, I guess at least that is in the memo, creates a large exemption 

for swaps between quote, ‘‘affiliated entities.’’ They would be exempt from CFTC and SEC regulations. We have addressed before, 

during Dodd-Frank, and subsequent to that. 

We have previously considered this matter with input from both 

Treasury and the FDIC (Federal Deposit Insurance Corporation). 

And we have some pertinent communications specifically from Vice 

Chairman Tom Hoenig of the FDIC. And I think it is instructive 

that he says inter-affiliate margin ensures that there is sufficient 

capital and liquidity to the financial firm in the market should any 

unit of a consolidated bank company find itself in a position where 

it cannot serve end-users or where its failure becomes a threat to 

the broader economy and the taxpayer. 

Chairman Hoenig then pointed out that affiliates are 

incentivized to transfer their risks through uncleared swaps to U.S. 

banks who have valuable subsidies including importantly the implicit presumption that they will be bailed out by the U.S. taxpayer. 

If the banks don’t collect margin from their affiliates on these 

trades, the bank effectively takes on the affiliate’s risks which are 

subsidized by the taxpayer. Mr. Hoenig also wrote that requiring 

JPMorgan’s affiliate operating in London to post margin to 

JPMorgan’s U.S. bank, that would have helped keep the $2 billion 

London Whale losses outside of the federally insured bank. I think 

it is a great example in what we are talking about here today. 

The bill would also eliminate the CFTC’s initial margin requirement for swaps with foreign affiliates that are not subject to comparable regulatory regime, exposing us to considerable risk. 

Mr. Green, are we seeing here a case of a purported exception 

actually swallowing the rule? If an affiliate is described too broadly, couldn’t companies simply funnel their derivative trades 

through a so-called affiliate to evade U.S. requirements? 

Mr. GREEN. Yes, I agree with that. I think this is an area that 

is extremely dangerous. It is extremely broad, some estimates are 

at the inter-affiliate swaps are half the swaps that are out there. 

The large financial firms have thousands of affiliates, the most important affiliates are a smaller number of that. 

But given the interactions between resolution and also cross border where a lot of the conversation about inconsistency in CTFC 

versus SEC regulation that was just noted a couple of minutes ago, 

are actually about the extent to which foreign affiliates that are 

foreign affiliates of U.S. firms where the risk will come back to the 

U.S. are subject to the basic protections that we set in place for the 

U.S. taxpayer. 

If you start to undermine those, you have major, major challenges. Now, as Commissioner O’Malia has noted, Chairman 

Gensler and others have noted, there are distinct differences that 

require these swaps to be tailored slightly and we can discuss and 

debate particularities but the bill that is presented today is a broad 

base exemption that is not acceptable. 

mcarroll on FSR431 with DISTILLER

22 

Mr. LYNCH. Right. What does this bill do to the requirements for 

posting margin with foreign affiliates that are not subject to overseas regulatory regimes, that are comparable to our own? You 

touched on that a little bit but I am just concerned that aren’t we 

just creating a loophole to allow foreign-funnelled trades to have an 

advantage over U.S. banks that don’t operate through a foreign affiliate? 

Mr. GREEN. Absolutely. This is, any time where you are getting 

into a description like you mentioned, I think that is a very real 

risk. This is the Export U.S. Financial Service Jobs Abroad Act. 

This is import foreign risk into the U.S. because the U.S. taxpayer, 

for a variety of reasons, has been the one that has had to step up 

and make sure that U.S. financial institutions are there when need 

be. 

And a far more appropriate approach is to ensure a broad, consistent using substitute compliance comparability regime so that 

there are good regulatory approaches around the world and where 

there are not, we need to make sure that the U.S. regulatory regime is the floor and then no one can evade it with a large exemption like the one that is being proposed in the bill today. 

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

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from Maine is recognized for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate it very 

much. 

And thank you, gentlemen, for all being here today. 

One of the roles of Government as I see it is to make sure that 

we create laws and rules are made such that our families are 

helped in such they live better lives with more opportunities and 

more freedom. That is why I have been a very big proponent and 

continue to about reducing or limiting the regulatory environment 

that is redundant and unnecessary and harmful. 

Second of all, I have been a big supporter of our tax reform package which is being quite successful as far as stimulating economic 

growth and job creation here in this country and my State of 

Maine. 

The State of Maine, gentlemen, has world-class fisheries and agriculture and also wood products. We have tremendous resources, 

natural resources with our sustainable forests and what have you. 

I am really concerned about some of the folks on the other side of 

the aisle today saying something to this and I will paraphrase, I 

hope I get it right that they are concerned about any adjustments 

to Dodd-Frank when it comes to derivatives because they believe 

that doing so will represent or cause potentially systemic risk to 

our economy. 

Now, what would be helpful to me, Mr. Deas, if I am pronouncing it correctly. 

Mr. DEAS. Deas, sir. 

Mr. POLIQUIN. Deas, thank you sir, could you use a specific example of an end-user, say, a potato farmer in Aroosta county, how 

such an end-user might us such a derivative, such a financial instrument to help that farm conduct his business to lower its risk 

so it can grow, be more successful and also offer more price stamcarroll on FSR431 with DISTILLER

23 

bility to the consumer. And explain to us clearly, sir, how that does 

not represent a systemic risk to the U.S. economy. 

Mr. DEAS. Yes, sir. I am privileged to have served 18 years in 

the treasury and corporate finance function at Scott Paper Company which as you know— 

Mr. POLIQUIN. When I was a kid growing up in Central Maine, 

Scott Paper was a great employer right across the river in Winslow, Maine and we appreciated those jobs. My best buddy across 

the street, his dad was a machinist at Scott Paper, thank you for 

that job. 

Mr. DEAS. Thank you, sir. And it was my privilege to finance the 

construction of those operations. And I can tell you for example at 

the Winslow mill where there are, quite a bit of energy is consumed in the transformation of wood pulp into paper, those energy 

exposures to the extent they are variable represent a risk to the 

business and to the extent that Scott Paper Company’s treasury 

were able to hedge those energy purchases forward in the over-thecounter derivatives market matching up exactly the exposure of 

when we are buying the energy against the derivative, it helped 

stabilize the business, maintain level cost base and ultimately support those jobs in Winslow. 

Mr. POLIQUIN. That in your opinion, sir, represented no potential 

systemic risk to the U.S. economy? 

Mr. DEAS. We think it is risk-reducing and the Europeans have 

taken the same view and exempted their end-user companies from 

many of these regulations we are advocating be adopted in the U.S. 

Mr. POLIQUIN. Mr. Bentsen, do you have a further experience 

that could shed light on this issue where the end-user is representing no risk to the U.S. economy? 

Mr. BENTSEN. I think Mr. Deas has laid it out well. The end-user 

is effectively buying the product to mitigate their risk or to hedge 

their risk activity. They are really in a different function than in 

a financial risk. 

Mr. POLIQUIN. Explain to us if a paper company like Scott might 

not have the ability to hedge its risk, how that might be more risky 

to the economy and to the families that depend on those jobs. 

Mr. BENTSEN. And, again, Mr. Deas is probably better to speak 

to this fact, to talk about having to mitigate your risk to fluctuations and the cost of fuel or feedstock for your plants or fluctuations for a global company, fluctuation in currency prices. 

Mr. POLIQUIN. How might there be some confusion, gentlemen, 

either one of you, between this issue that we are talking about in 

the use of derivatives in other parts of the economy that could have 

and did in some parts cause problems in 2008. 

Mr. BENTSEN. I think, first of all, we have to step back and look 

at where we are today compared to where we were in 2007–2008. 

We have a very robust new architectural regime that has been put 

in place for the derivatives markets in the U.S. and across the 

globe. And much of what we are talking about today is how do we, 

in what is truly a global marketplace, how do we make sure that 

the plumbing is the same across the organization. We don’t create 

fragmentation or diminish liquidity in different market sectors so 

companies like Scott Paper or a global company can function globally as well. 

mcarroll on FSR431 with DISTILLER

24 

Here we are talking about do we have the calibration right after 

7 years of imposing a dramatic series of rules, many of which the 

industry supports. But the time is now to see what works, what 

does not work and are we accomplishing the policy goals. 

Mr. POLIQUIN. Thank you, gentlemen, very much. Appreciate 

your time. 

Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair at this time recognizes the gentleman from Georgia, 

Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. This is a very 

interesting and very important hearing dealing with a very important matter. But first, I want to thank Mr. Luetkemeyer for, again, 

partnering with me on some common sense legislation. And I want 

to devote that to our legislation that Mr. Luetkemeyer working 

with H.R. 4659 of which I am the Democratic lead on. 

It forces banking regulators to recognize the exposure-reducing 

nature of client margin for cleared derivatives. Now, first of all, I 

have recognized the importance of client margins and I believe that 

client margin should be excluded from what we refer to as supplemental leverage ratio calculations, but more importantly, if we 

were to include client margin in supplemental leverage ratio calculation, it would put our clearinghouses at a very distinct disadvantage. 

And a major thing we wanted to do in Dodd-Frank was bring 

transparency to this over-the-counter market that previously operated in the shadows of our financial system. But we made a decision as a Nation to expand the use of central clearing. 

That is why I struggle to understand why anyone could not be 

supportive of putting together regulations that incentivize more 

companies to clear derivatives. That is what our bill, Mr. 

Luetkemeyer and I, our bill 4659 does. It makes clearing more attractive to our country’s biggest institutions. 

Mr. Bentsen, you and Mr. O’Malia, I would like for you to comment and explain, am I going wrong? Am I right? And does not our 

bill help in this matter? 

Mr. BENTSEN. Mr. Scott, I think you are right on point. This is 

counterintuitive and goes against what really was official policy of 

trying to drive more product that could be driven to central clearing and now you are being penalized for doing this. It is one of the 

problems in the construct of the SLR and we think needs to be approached. We think you all are right on target. 

Mr. SCOTT. Now, let me ask you this and Mr. O’Malia you comment, too, because this could get into record questions I always try 

to be able to not just look down the road but look down the road 

and around corners to see what might be coming. And I think as 

we get further in this bill, a question might be raised that what 

we are trying to do with 4659, somebody could say what Mr. Scott 

and Mr. Luetkemeyer are doing could make our financial system 

riskier. 

Do you, anybody agree with that we want to make sure that 

what we are doing is making our system stronger. I don’t want 

anybody arguing later on as we get to moving this bill that there 

mcarroll on FSR431 with DISTILLER

25 

is any risk involved. Would you all comment on that? Anybody, Mr. 

O’Malia? 

Mr. O’MALIA. Sir, ISDA supports the legislation and the lead— 

Mr. SCOTT. Pardon me. Repeat that again. 

Mr. O’MALIA. ISDA supports the legislation. 

Mr. SCOTT. Thank you, sir. 

Mr. O’MALIA. We are pleased to support it because we think it 

is prudent and recognizes that clearing has put IM aside and that 

is a very important risk-reducing measure. And to add an SLR 

component on it or not to recognize the fact that you have got riskreducing IM associated with it just makes it more costly. 

Mr. SCOTT. Thank you very much. 

Mr. Chairman, I think I would be derelict in my duty if I not 

mention that I am the ranking democrat on the derivatives committee in agriculture and when my staff alerted me that we would 

be having an 11-bill legislative hearing on derivatives, I absolutely 

thought right then that they would give our little subcommittee in 

agriculture that I am head of where Dodd-Frank exclusively gave 

our subcommittee on commodities markets interchange and on derivatives a little bit of a warning and say can you work with us on 

that. 

And I see my former chairman Mr. Lucas there and I know he 

would be proud of me for getting respect for our agriculture committee on this, and perhaps you might pass that along to the chairman. We hope that it wasn’t a disrespect but we work hard there, 

Austin Scott and I and we would have loved to have a little part 

in this. 

Thank you, sir. 

Chairman HUIZENGA. The gentleman’s time has expired but it is 

my understanding that there has been communication between our 

committee and the agricultural committee and Dodd-Frank as you 

pointed out did put CFTC in charge of certain aspects but it also 

created bifurcated authority under which the SEC is also a part of 

that. 

That is the reason— 

Mr. SCOTT. I don’t argue any exclusivity. I just as the ranking 

member, I certainly was not informed and thought I would bring 

that out. I look forward to going forward, however. 

Chairman HUIZENGA. Fair enough. 

All right. With that, the Chair recognizes the gentleman from 

Ohio, Mr. Davidson, for 5 minutes. 

Mr. DAVIDSON. Thank you, chairman. 

I really thank our witnesses and as Mr. Scott alluded about the 

intersection with agriculture, that will highlight one of the many 

reasons the topic of derivatives is so important to Ohio’s 8th district, agriculture being very critical to our district but manufacturing companies like AK Steel, retail companies like Speedway in 

Enon, Ohio who are purchasing fuel and so many others, in the insurance markets, derivatives are a massive part of global trade. 

They are a massive part of risk management. And before coming 

to Congress, I spent the past 15 years starting and growing manufacturing companies. I know firsthand the effect Basel III has had 

and those international standards on the regulatory overreach that 

has been happening across our whole economy, particularly with 

mcarroll on FSR431 with DISTILLER

26 

the need for small companies to access capital that they need to 

grow. 

But in 2014, European regulators exempted risk-weighted assets 

held by European banks from the Basel imposed capital variation 

adjustment requirement also known as CVA. This exemption has 

provided a business advantage to European banks, European customers, and European end-users at the expense of American businesses, banks, and end-users. 

Mr. Deas, you addressed this exact concern in your opening testimony and I wonder in regards to the U.S. markets, what consequences you have seen as a result of the European exemption. 

Mr. DEAS. Congressman, thank you for that question. I am also 

privileged to represent U.S. treasurers at the international group 

of treasury associations and our colleagues in Europe calculated 

that that difference was about 5 basis points on an average swap. 

If you take—I don’t have my calculator with all the zeros in it— 

but if you take the $500 trillion number that the Chairman mentioned of derivatives and take 10 percent as the estimate for endusers and then take 5 basis points of that, that is real money. 

And we would propose to be exempted from that and keep us in 

line with our European competitors. 

Mr. DAVIDSON. That is terrific. I think anyone would have a hard 

time calling that crumbs but I have been surprised by the use of 

the term lately. Do you believe this exemption only has hurt U.S. 

financial institutions or does it go through the rest of the economy 

and affect end-users? 

Mr. DEAS. Absolutely, I can tell you that we prefer to trade in 

general. I am speaking now on behalf of corporate treasurers with 

member banks regulated by the prudential banking regulators as 

our swap counterparties and I can tell you that they have to cover 

their cost and to the extent they have to hold aside capital for 

transactions with us, they absolutely price that in. And we ultimately bear the cost as end-users and that is passed on to our customers. 

Mr. DAVIDSON. Thank you for that. 

Mr. Bentsen, in their capital markets report last year, the Treasury Department expressed U.S. derivatives market participants 

were at a disadvantage when compared to their international counterparts. Does the EU CVA exemption play a role in fostering this 

competitive disadvantage and have other nations taken any action 

in response to this? 

Mr. BENTSEN. I think it was $25 billion maybe but I think the 

EU CVA decision was a diversion from what Basel was trying to 

get to having a uniform approach but it also underscored problems 

in the Basel approach to CVA and more inherently. And it was a 

problem for the U.S. I know it was a problem for the—the Canadians had raised concerns about it as well and other jurisdictions 

also. 

Basel as I understand it is now I think starting to take a look 

at going back and looking at CVA. It is not helpful to have diversions within jurisdictions on global marketplaces, number one, but 

even before that is the calculation, the right calculation. We hope 

that this can be resolved and we can get back to a uniform standard globally. 

mcarroll on FSR431 with DISTILLER

27 

Mr. DAVIDSON. In the interim, do you feel that the CVA requirements for U.S. over-the-counter derivatives could be exempted so 

that the U.S. would be in that level playing field? 

Mr. BENTSEN. Yes. That is an issue I know that Mr. Deas’ group 

has weighed in more than ours. It is an issue that needs to be resolved for sure one way or the other. 

Mr. DAVIDSON. Mr. Deas, do you feel like Congress providing 

that exemption would level the playing field? 

Mr. DEAS. Yes, sir. That would be important and so we fully support, the coalition does, bill No. 2 on the agenda that would achieve 

that for us. 

Mr. DAVIDSON. Would the net effect of such an exemption be felt 

in sectors such as agriculture and really across the U.S. economy? 

Mr. DEAS. Absolutely. I was privileged to serve as treasurer of 

FMC Corporation which is a leading supplier of agricultural chemicals and I can tell you that to the extent that that company is 

hedging its risks with bank counterparties in the derivatives market, it bears the cost of the CVA charge they have to incur. 

Mr. DAVIDSON. Thank you. 

My time has expired. Mr. Chairman, I yield. 

Chairman HUIZENGA. Not seeing anybody on the other side of the 

aisle, gentleman from North Carolina, Mr. Budd, is recognized for 

5 minutes. 

Mr. BUDD. Thank you, Mr. Chairman. 

Again, thank you to our witnesses for your being here today. 

We have some exciting proposals that would impact the derivatives market and we have actual legislation like Mr. Luetkemeyer’s 

bill here 4659 which if enacted would rightfully ensure that the 

SLR recognizes the exposure of reducing nature if initial client 

margin in cleared derivative transactions. 

My questions have to do with proposal No. 1 which would direct 

the SEC and CFTC to harmonize rules overseeing the over-thecounter swaps. The different regulatory timelines and approaches 

under SEC and CFTC create inconsistencies and sometimes 

redundancies which we can fix with this proposal. 

My first question is, and this is an open question, for some market participants who have to adhere to both sets of rules, how do 

these different approaches for many similar activities and products 

create compliance concerns and additional costs? 

Again, for any of you. 

We can start with you, Mr. Bentsen, if you like. 

Mr. BENTSEN. Again, as I pointed out, we are still getting the 

SEC rules so they are lagging a little behind so firms have been 

focusing more on their compliance with the CFTC rules. But as 

we’re seeing where the SEC has been headed, it is raising the concerns that you would have conflicting compliance regimes that you 

would have to apply for different products. 

We do know as I pointed out how you define U.S. person and, 

again, both agencies maybe have some things that are good, some 

things that are not so good. The idea of while we are still in this 

process of creating, mandating harmonization, driving harmonization would be a good thing. 

Mr. BUDD. Mr. Deas or anyone else? 

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Mr. O’MALIA. If I may, the significant implication of just filing 

and complying with the swap data or the swap dealer rules themselves is massive. It is thousands of pages, a lot of compliance back 

and forth working with the staff and the agencies to develop the 

right compliance regimes. 

In fact, I don’t think the CFTC has officially and finalized the 

swap dealer checklist yet for anybody to be in an official—they are 

on their temporary registration. It is a massive challenge today and 

to double that with different rules with the SEC, different rules 

from the CFTC, different guidance you may receive from the staff 

will just make that operation that much more difficult. 

I think a safe harbor when you complied eventually with the 

SEC or the CFTC rules, either one, then you have met that mandate. Then, you think about some of the capital requirements and 

other requirements that will pass on as a result of that. From a 

practical standpoint, it is an operational challenge of enormous consequence. 

Mr. BUDD. Thank you. Mr. Green? 

Mr. GREEN. Just a couple of thoughts. One is, these are very different markets. Credit default swaps look to bonds, foreign exchange look to currencies, commodities, very different from interest 

rates, et cetera, and total return swaps are in the equities market. 

There are legitimate differences that can and should emerge based 

on these different markets. Everybody wants as much similarity as 

possible. I do think we are seeing that. But one of, the U.S. person 

definition, frankly, the SEC has taken a weaker approach, in part 

due to massive lobbying to try to dial back jurisdiction toward 

being only the U.S., whereas the CFTC took an approach as mandated in Dodd-Frank that said if the risk is going to come back to 

the U.S., we are going to capture that. So I think there are tensions and things going on that we need to think about. 

Mr. BUDD. Thank you, Mr. Green. I want to go ahead and jump 

to the second question while we have some time. Besides this proposal which I support, are there any other approaches to this body 

we should consider, such as a regulatory safe harbor? 

Mr. BENTSEN. Yes, a safe harbor would be a good idea. And I 

think the other thing to keep in mind is where we are today versus 

where we were a year ago, or certainly 8 years ago, a lot has already been done. I would caution mandating starting all over 

again. Let us start with the framework that we are in, and let us 

figure out how we can make it work, and a safe harbor is a good 

example of that. 

Mr. O’MALIA. I think to Mr. Green’s point, if you do believe that 

the SEC should have different rules, a safe harbor works nicely. 

Because then it respects the SEC’s differences to whatever extent 

there are, and then you can say, if you have complied with one, you 

have complied with the other. A safe harbor also protects this committee’s jurisdiction. And when you think about, as Mr. Green 

pointed out, the difficulty around products, the difficulty around jurisdictions, there is no way to neatly divide this up, and to protect 

everybody’s current jurisdiction, as Mr. Scott pointed out, it is important that agriculture have its oversight. This is the easiest way 

in our opinion to make sure that everybody still controls their piece 

of the pie. 

mcarroll on FSR431 with DISTILLER

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Mr. BUDD. Thank you for that, and I want to go ahead and yield 

back since I am out of time. 

Chairman HUIZENGA. The gentleman’s time has expired. And 

with that, we welcome our guest, the gentleman from Oklahoma, 

Mr. Lucas for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman, and I appreciate the opportunity to join this subcommittee today. Not necessarily being a 

member of the subcommittee, but a member of the full committee, 

and as was noted by my colleague off the Ag committee and fellow 

member here, Mr. Scott, an old Ag committee chairman, and ranking member at the time Dodd-Frank was put together, I am very 

sensitive about this issue, and in fact it is a topic that matters to 

my farmers, my ranchers, all my end-users in the district who use 

these derivative products to hedge their positions in the market. 

And I would note, as has been discussed by a variety of members, I am also particularly pleased to note the two proposals under 

consideration today, and very happy to be one of the original cosponsors of Mr. Luetkemeyer’s bill 4659 to support the initial, offsetting the initial margin for SLR calculations, and the second of 

this proposal regarding margin requirements for inter-affiliated 

transactions which mirrors my amendments to the CFTC reauthorization bill that was passed out of the full House last year. 

But first, turning to Mr. O’Malia and the SLR issue, this issue 

is not immediately obvious to people that don’t interact a lot with 

derivatives markets. But could you briefly explain the rules that 

ensure that posted customer margin cannot be used to fund a 

bank’s own operation? Let us get to the core of the issue here. 

Mr. O’MALIA. Yes, that is an important point, because that just 

shows that the IM or the initial margin is reserved and protected, 

not on the bank’s balance sheet. It is with a clearinghouse, for example, or it could be possibly with a U.S. Federal Reserve account 

where they have put the cash as well. These are in very safe and 

secure spots and are truly reserved for risk reduction, they are also 

the property of the customer. 

Mr. LUCAS. One more time, let us make it very clear. So there 

is no real threat that money can be misappropriated by a bank 

when it is placed in one of these accounts. 

Mr. O’MALIA. Correct. In the secured third-party accounts, there 

is— 

Mr. LUCAS. Because that is one of the concerns of my colleagues 

is that this money that is in secured third-party accounts might be 

manipulated by the banking institution. But that is not going to 

happen. Let us assume this bill were to be passed into law and 

CFTC Chairman Giancarlo has estimated that enacting this simple 

change would reduce leverage exposure by a mere 0.22 percent nationwide. That is about a quarter of a percentage point nationwide. 

Do you have any sense as to how much clearing activity would be 

increased by such a bill? 

Mr. O’MALIA. We do not, sir, offhand. 

Mr. LUCAS. But it is a fair statement to say there would indeed 

be an increase. 

Mr. O’MALIA. It certainly reduces the cost of not paying two insurance protection items. One, IM, which is significant, and then 

mcarroll on FSR431 with DISTILLER

30 

the other is any charge you have had to pay for dealing with a 

bank that it will charge you an SLR. 

Mr. LUCAS. With, as Mr. Giancarlo noted, an increase of 22 hundredths of a percentage point nationwide in exposure. That is a 

pretty cost-effective balance out, I would think. 

Mr. Bentsen, turning to the inter-affiliate margin requirements, 

could you give us some reasons why affiliates might want to enter 

into these transactions? We are a body where you need to reinforce 

the important points. 

Mr. BENTSEN. Banks will enter into inter-affiliate transactions 

when they have got an outbound transaction and then they will do 

swaps to better manage and mitigate their risks as an organization. And so they are not taking on more risk, they have already 

collected margin where they need to. It is really in effect collecting 

margin again. And that ends up trapping, and to your point that 

you were just making with respect to central clearing and the SLR, 

that ends up trapping assets which are not actually available to 

the bank in that instance as well. In fact, the prudential regulators, who are different from the CFTC, different from Japan and 

Europe and other Basel entities, the prudential regulators do not 

count this margin in the bank’s resolution plans. It is not viewed 

as available for single point of entry in the resolution plans. 

In effect, it is not really adding value from a safety and soundness or a systemic aspect, but it is trapping capital that could be 

allocated elsewhere. 

Mr. LUCAS. Which is a cost to the economy as a whole when you 

put that weight out there. 

Mr. Chairman, in a final observation, I would simply note to my 

colleagues, a handful of us only anymore it seems like were here 

for the Dodd-Frank process and all the things we went through in 

that bill. I would note to my colleagues that the document that 

dealt with derivatives that came out of the Ag committee was done 

in a very bipartisan way, 8, 9 years ago. And the work that was 

done in this committee was done in a relatively bipartisan way. It 

is when we got to conference that the bill that came out of there 

was not a bipartisan document. I always note to my friend, when 

the primary authors of legislation retire shortly after it is signed 

into law, that is an indication. Yield back, Mr. Chairman. 

Chairman HUIZENGA. That is an interesting observation. With 

that, we would like to welcome our other guest, Chairman of Financial Institutions, Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Chairman Huizenga, I appreciate 

the opportunity to be in your committee this afternoon and listen 

to some of the testimony and the questions. As I have been listening here, they have been discussing H.R. 4659, and have thoroughly discussed it in my mind, a lot of the ins and outs, and I 

don’t know that I have got a whole lot of questions left here. But 

let me just thank Congressman Scott for his hard work on the bill, 

I know Congressman Lucas who just asked some questions did a 

very good job of framing some of the concerns that we had, that 

we tried to address with supplemental ratio, leverage ratios here. 

Let me just ask a couple of quick questions here with regards to, 

I am a firm believer that banks need to hold adequate capital to 

protect themselves and their customers and the financial system. 

mcarroll on FSR431 with DISTILLER

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That is one thing that both Republicans and Democrats agreed 

upon coming out of the financial crisis as Chairman Lucas just indicated. With respect to supplemental leverage ratio, do you believe 

the current treatment of client margin is appropriate? 

Mr. O’Malia? 

Mr. O’MALIA. We do. 

Mr. LUETKEMEYER. Very good. Do you want to elaborate more 

than just yes? 

Mr. O’MALIA. Yes. This has gone back years and years that so 

many things around client protection of margin and, goes back all 

the way to the early futures markets, and we built those solutions 

on those, and those have been robust, they have not changed, they 

are protective. They are resilient, we have found with different 

FCM failures that there is a way to protect the client margin here. 

And it is very important as we think about what we are going to 

do with raising the standards around CCPs (central counterparty 

clearinghouses) going forward, because the resolution and recovery 

tools around CCPs we think can be increased, you have better protection around protecting IM and customer margin that has been 

given to a CCP. We want to make sure that the waterfall events 

do protect that customer money going forward. It is the foundation 

of this very safe system. 

Mr. LUETKEMEYER. Perfect. With respect to the impact of H.R. 

4659, the CFTC has calculated that an offset for initial client margin will result in a less than 1 percent decrease in overall capital 

reserves. Do you agree with the financial—do you agree that the 

financial system could withstand a capital reduction to less than a 

penny on a dollar in exchange for both significantly reduced costs 

on agricultural producers and encouraging more clearing in the derivatives market? 

Mr. O’MALIA. We do, we do believe that it could withstand that 

and the system will be safe. 

Mr. LUETKEMEYER. Anybody else? 

Mr. GREEN. The supplementary leverage ratio is based on the 

idea that we want a risk-neutral way of evaluating the capital, the 

equity that is in the system. And the more you start adjusting 

things based on the, how people view the riskiness or the usability, 

et cetera, of a particular asset, the less value it is overall of being 

risk-blind. And it is important I think to remember that this is, the 

supplementary leverage ratio is calculating, tending to calculate a 

broader overall exposure. The margin, or even the capital against 

the swap is only a portion of the overall risk that could come back 

to the firm. The firm stands in with a full guarantee to the 

counterparty. And so the SLR attempts to calculate that. And as 

folks like Sheila Bair and other respected regulators, Tom Hoenig 

at the FDIC have noted that it is the simplicity of the leverage 

ratio that gives us its value. We ought to try to retain that as much 

as possible. 

Mr. LUETKEMEYER. Mr. Bentsen, are you going to come in on 

that? 

Mr. BENTSEN. Sure. First of all, again, it contravenes official policy going back to the Obama Administration to drive more of the 

swap business to central clearing. And not just Chairman 

Giancarlo but Chairman Massad had come out and said that this 

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should be changed. The second thing is, the SLR which is gold-plated in the U.S., we have had a leverage ratio In the U.S. since the 

Great Depression. We took it from 3 percent to 5 percent and 6 percent. And it has become the binding constraint on top of what is 

an extremely robust capital regime that has been put in place since 

the financial crisis, which can exceed to high double digits for 

many firms. The idea of making this one change that is counterintuitive to what the policy is to drive, really, the benefits or the 

cost in this instance far outweigh the benefits as to what policy has 

been. 

Mr. LUETKEMEYER. You have a comment you are going to make, 

sir? 

Mr. DEAS. Sir, just speaking as a corporate treasurer, I can tell 

you that if ultimately the initial margin and capital through CBA 

and other requirements are intended to offset risk, and yet if initial 

margin is not calculated in the determination of risk for capital 

purposes, it seems to be out of sync with the economic realities, 

and ultimately, that will get us off-track. 

Mr. LUETKEMEYER. Appreciate your comments, I see I am out of 

time. I yield back. Thank you, Mr. Chairman, for your diligence 

today. 

Chairman HUIZENGA. No problem, gentleman’s time has expired. 

With that, Mr. Hollingsworth from Indiana is recognized for 5 minutes. 

Mr. HOLLINGSWORTH. If nobody has told you yet, Happy Valentine’s Day. I actually live in the very southern part of my district 

in Indiana, and I live just literally two or three miles from the 

Kentucky border. And sometimes, I run into businesses based in 

Indiana that say, I have a location in Kentucky and a location in 

Indiana. And I am literally required to do something in Indiana 

and I am barred from doing that same thing in Kentucky. And they 

are trying to work across those two jurisdictions. Now, that is a 

really small problem for a lot of small businesses, but it could be 

a really big problem, and I think it was addressed in the Treasury 

report, for large multinationals trying to comply with U.S. rules, 

but might find themselves in a situation where non-U.S. jurisdictions bar them from certain activities. 

So this is coming to Mr. Bentsen and Mr. O’Malia. I wanted to 

really address this. I think both of you alluded to this in your testimony earlier, but I want to draw your attention to pages 133 and 

135 of the Treasury report, quote, ‘‘market participants have raised 

concerns with aspects of the SEC’s cross border rules and have 

highlighted those that conflict with privacy, blocking and secrecy 

laws in non-U.S. jurisdictions.’’ 

A company is here, trying to comply with rules here but maybe 

see cross currents of rules elsewhere preventing them from full 

compliance here. And I think this has a long history of us trying 

to work these things out; task force getting together, signing 

MOUs, forbearance, et cetera. 

I guess I really wanted to get at what do you think that those 

trying to comply with U.S. derivatives rules, what suggestions of 

how U.S. regulators including the SEC and the CFTC should work 

to help ensure there is harmony between these two or ensure there 

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are opportunities for cross national companies to be able to operate 

in both jurisdictions, meet the rules of both jurisdictions? 

Are there any suggestions you have for the SEC or CFTC on how 

we could best work through that process as quickly as possible to 

ensure that these companies that want to do the right thing can 

quickly do the right thing for both the jurisdictions they operate in? 

Mr. BENTSEN. I guess I will start. I think this is an issue that 

it is hard to believe why this can’t be worked out. And I think if 

you read the other parts of the Treasury report particularly the 

first Treasury report, it makes a very important point that is indicative of the U.S. financial markets because we have a very open 

market system here where we have both U.S. and non-U.S. domiciled firms that invest in our markets and provide capital credit 

and liquidity to our markets to the betterment of the country as 

a whole. 

And one of things it points out is that non-U.S. domiciled financial institutions provide a tremendous amount of credit and capital 

to the U.S. markets including to areas like Indiana in the agricultural space and elsewhere. That is important and we should value 

that. 

The problem is where we have rules that conflict and we have 

this inbound also from other jurisdictions sometimes in the U.S., 

rules that conflict with a domestic rule that could preclude an entity from actually providing the services in the U.S. and that would 

create a cost to the system here. 

To us it seems in the case where a European-based swap dealer 

cannot comply with the rule as defined by the SEC and, therefore, 

can’t be a registered swap dealer does not seem to—there has got 

to be a way to work through that. 

Mr. HOLLINGSWORTH. It doesn’t benefit us, right? 

Mr. BENTSEN. It doesn’t benefit us. 

Mr. HOLLINGSWORTH. For those that might say, we want to keep 

foreign firms out, that is not true of the financial services industry, 

it is not true generally. Everybody participates. 

Mr. BENTSEN. It would be a disadvantage to the U.S. 

Mr. HOLLINGSWORTH. That’s exactly right. Well said. 

Mr. O’MALIA. There a number of examples and I know each of 

the chairmen of the respective agencies have worked very hard to 

build the international bridges I would have to say that the relationship among this Administration and internationally has been 

quite strong. Time has passed since some of the earlier rules, the 

exporting of U.S. regulation has dissipated a little bit and the conversation has probably moved on. 

But there are always going to be these little issues where there 

is a misunderstanding or you just simply can’t deliver the rules. 

There are plenty of data rules globally that privacy functions prevent entities from reporting. Asia in particular has a number of 

these things. 

To Ken’s point, you certainly don’t want to put the U.S. at a disadvantage in terms of attracting capital or business. 

Mr. HOLLINGSWORTH. Yes. I am a big believer that frankly the 

more participants we have, more varied participants that we have, 

the better and stronger, more resilient the ecosystem is overall. 

That resiliency is a more emergent quality than a dictated quality. 

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We need to welcome foreign firms operating here. Rising tide lifts 

all boats but we have to figure out a way to get through some of 

these gaps and make sure that across jurisdictions they can comply 

with both sides at the same time to better empower them which 

ultimately empower Americans better and that is what I am really 

excited about. 

And with that, Mr. Chairman, I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

I would like to thank our witnesses for their testimony today. I 

think this was very illuminating and helpful as we are having this. 

Without objection, I would like to submit the following statements 

for the record. First, the statement from Richard Baker, President 

and CEO of Managed Funds Association and without objection and 

a letter of support from FIA, Commodity Markets Council, CME 

Group and the Intercontinental Exchange and without objection. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

Once again, I appreciate your time and expertise in this very 

complicated space and we look forward to continuing this conversation. With that, this hearing is adjourned. 

[Whereupon, at 4:03 p.m., the subcommittee was adjourned.] 

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A P P E N D I X 

February 14, 2018 

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