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ONE YEAR LATER - THE WALL STREET 

REFORM AND CONSUMER PROTECTION ACT: 

IMPLEMENTATION OF TITLE VII 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 15, 2011 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

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

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

DEBBIE STABENOW, Michigan, Chairwoman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

E. BENJAMIN NELSON, Nebraska 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Jr., Pennsylvania 

AMY KLOBUCHAR, Minnesota 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

PAT ROBERTS, Kansas 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

SAXBY CHAMBLISS, Georgia 

MIKE JOHANNS, Nebraska 

JOHN BOOZMAN, Arkansas 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

JOHN HOEVEN, North Dakota 

CHRISTOPHER J. ADAMO, Majority Staff Director 

JONATHAN W. COPPESS, Majority Chief Counsel 

JESSICA L. WILLIAMS, Chief Clerk 

MICHAEL J. SEYFERT, Minority Staff Director 

ANNE C. HAZLETT, Minority Chief Counsel 

(II) 

(III) 

C O N T E N T S 

Page 

HEARING(S): 

One Year Later - The Wall Street Reform and Consumer Protection Act: 

Implementation of Title VII ................................................................................ 1 

Wednesday, June 15, 2011 

STATEMENTS PRESENTED BY SENATORS 

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

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

Panel I 

Born, Hon. Brooksley, Former Commissioner, Financial Crisis Inquiry Commission; and former Chairperson, Commodity Futures Trading Commission, 

Washington, DC ................................................................................................... 20 

Conner, Hon. Charles, President and CEO, National Council of Farmer Cooperatives, Washington, DC ................................................................................ 32 

Cooper, Adam, Senior Managing Director and Chief Legal Officer, Citadel 

LLC on behalf of Managed Funds Association (MFA), Chicago, Illinois ......... 33 

Damgard, John, President, Futures Industry Association, Washington, DC ..... 35 

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

Washington, DC ................................................................................................... 4 

Gibson, Michael S., Ph.D., Senior Associate Director, Division of Research 

and Statistics, Board of Governors of The Federal Reserve System, Washington, DC ............................................................................................................. 6 

Roth, Daniel, President and CEO, National Futures Association, Chicago, 

Illinois ................................................................................................................... 22 

APPENDIX 

PREPARED STATEMENTS: 

Chambliss, Hon. Saxby .................................................................................... 44 

Born, Hon. Brooksley ....................................................................................... 47 

Conner, Hon. Charles ....................................................................................... 54 

Cooper, Adam .................................................................................................... 58 

Damgard, John ................................................................................................. 71 

Gensler, Hon. Gary ........................................................................................... 77 

Gibson, Michael S. ............................................................................................ 88 

Roth, Daniel ...................................................................................................... 95 

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Gensler, Hon. Gary: 

Additional material submitted to the Committee on Agriculture, Nutrition 

and Forestry .................................................................................................. 102 

Financial Services Agency Government of Japan, prepared statement ....... 103 

National Rural Electric Cooperatives Association, prepared statement ...... 105 

The Farm Credit Council, prepared statement .............................................. 112 

QUESTION AND ANSWER: 

Chambliss, Hon. Saxby: 

Written questions to Hon. Gary Gensler ........................................................ 134 

Page

IV 

Chambliss, Hon. Saxby—Continued 

Written questions to Michael S. Gibson ......................................................... 140 

Roberts, Hon. Pat: 

Written questions to Hon. Gary Gensler ........................................................ 129 

Stabenow, Hon. Debbie: 

Written questions to Hon. Gary Gensler ........................................................ 124 

Written questions to Michael S. Gibson ......................................................... 141 

Thune, Hon. John: 

Written questions to Hon. Gary Gensler ........................................................ 138 

Gensler, Hon. Gary: 

Written response to questions from Hon. Debbie Stabenow ......................... 124 

Written response to questions from Hon. Pat Roberts .................................. 129 

Written response to questions from Hon. Saxby Chambliss ......................... 134 

Written response to questions from Hon. John Thune .................................. 138 

Gibson, Michael S.: 

Written response to questions from Hon. Debbie Stabenow ......................... 141 

Written response to questions from Hon. Saxby Chambliss ......................... 140 

(1) 

ONE YEAR LATER - THE WALL STREET 

REFORM AND CONSUMER PROTECTION ACT: 

IMPLEMENTATION OF TITLE VII 

Wednesday, June 15, 2011 

UNITED STATES SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, 

Washington, DC 

The Committee met, pursuant to notice, at 9:36 a.m., in room 

SR–328A, Russell Senate Office Building, Hon. Debbie Stabenow, 

Chairwoman of the Committee, presiding. 

Present: Senators Stabenow, Klobuchar, Gillibrand, Roberts, 

Lugar, Chambliss, Johanns, Boozman, and Thune. 

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

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

Chairwoman STABENOW. Well, good morning. The meeting 

will come to order of the Committee on Agriculture, Nutrition, 

and Forestry. We welcome our witnesses today and thank you to 

everyone that is joining us for our second in an ongoing effort to 

do oversight related to financial services reform. 

We are here today to continue the oversight particularly of Title 

VII of the Wall Street Reform and Consumer Protection Act, and 

one year after passing financial regulatory reform, I think it is important to take a moment to remember why Congress passed this 

historic legislation. 

In 2008 the world held its breath as we watched financial markets collapse and global financial institutions crumble. By the time 

the crisis subsided, millions of jobs were lost. Not only did hardworking Americans lose their jobs, but many lost their homes and 

their life savings in the process. 

Make no mistake. The United States experienced an unparalleled 

crisis that required bold action. The reforms in the Wall Street Reform and Consumer Protection Act, and in particular in the derivatives title, were passed to protect the public, reduce systemic risk, 

increase transparency, and promote competition and decrease costs 

for companies that use these markets to hedge their risks. 

I look forward today to the testimony and the discussion, to hear 

from our regulators and market participants on the implementation of Title VII. These rules and regulations will significantly impact global financial markets and our economy, which is why we 

must take the time to get the rules right while not unnecessarily 

delaying important reforms. 

2 

To that end, I would like to thank the CFTC for their commitment to phasing in the reforms, provided temporary relief for regulatory requirements, and allowing market participants to weigh in 

on the rules as a whole. We have seen a remarkable amount of 

work coming from the regulators in the past year, and I would like 

to commend everyone involved and their staffs for what I know is 

a tremendous amount of hard work moving forward. 

I have several concerns that I hope the witnesses will address 

today as well. While we gave substantial new authority to the regulators, it will remain critical that the rules reflect congressional intent. The rules must maintain market liquidity, preserve the ability of end users to hedge and manage risk, and foster transparent, 

competitive markets. Regulators must also harmonize regulations 

not only domestically between agencies but also internationally 

with other jurisdictions. We must promote international harmonization to ensure that we do not undermine strong reforms to the 

financial markets. 

These oversight hearings are an important part of the process, 

and I look forward to working with my colleagues and agencies and 

market participants to ensure that we never allow the failures of 

the past to be repeated. 

So, again, welcome, and it is now my pleasure to turn to Senator 

Roberts, my partner on the Agriculture Committee. Senator Roberts. 

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

STATE OF KANSAS 

Senator ROBERTS. Madam Chairwoman, I appreciate your calling 

this hearing today. CFTC oversight is a critically important function of this Committee, and I am looking forward to hearing from 

our witnesses today with regard to the implementation of the 

Dodd-Frank Act, especially since we are only a month away from 

the act’s effective date. Roughly 11 months ago, the more-than-800- 

page Dodd-Frank bill was passed and began the process of what 

appears to be a re-engineering of our financial markets. 

What has followed has been 385 new rules and thousands of 

pages of new regulations which cover areas, I think, well beyond 

the scope of the financial crisis or the Dodd-Frank legislation. 

Fifty-one of the new rules are proposed by the CFTC’s 31 different 

rulemaking teams that are still in operation, I am sure. I fear some 

may suffer a classic case of the cure for Government regulations is 

more Government regulation. 

I am curious to know whether these additional Government regulations will actually fix the mess created by non-market forces in 

the housing market and if any in-depth cost/benefit analysis of 

some of these rules has been done. That, by the way, was ordered 

by the President in his Executive order of January 18. 

I am concerned with yet another agency putting out a litany of 

regulations that will raise transaction costs, stifle legitimate economic activity, increase unemployment, and create new risks and 

uncertainty where it did not exist before. Some of these regulations 

re-engineer the principles-based risk management of futures markets that did not cause the financial crisis and that have operated 

well for decades. 

3 

Madam Chairwoman, raising compliance costs and stifling the 

ability to actually manage the risks in today’s global marketplace 

are not the objectives of this Committee, and I do not believe this 

administration as well. I have a real concern that choking off innovation and risk management by increasing the cost of entering into 

a swap transaction at a time when U.S. firms are struggling to 

compete globally may cause U.S. firms to seek distant shores for 

relief. I am worried that the Fed, the SEC, and the CFTC have 

spent too much time in their own respective foxholes, not really coordinating the overall regulatory impact of this act. And I am particularly concerned, as the Chairwoman and I have expressed in a 

recent letter to our European counterparts, that our regulatory 

process is headed for trouble internationally. 

Here are just a couple of the pieces I am interested in exploring 

today. Senators Lugar, Chambliss, and I, all three former Chairmen of this Committee and a Committee in the House, sent a letter 

concerned that the Dodd-Frank Act creates a black hole when it 

comes to regulating swaps and transactions after July 16 of this 

year—sort of a swaps purgatory, if you will. 

What happens next? I am expecting Chairman Gensler will fill 

us in on the Commission’s actions today for members’ own edification. The Chairman and the CFTC has made the top page of the 

Wall Street Journal, above the fold, so congratulations at least on 

honing in on that. Come to think of it, we could probably read this 

and not have the hearing, but then that is not what we are going 

to do. 

[Laughter.] 

Senator ROBERTS. Secondly, I have here an unusual letter from 

the Financial Services Agency of Japan asking why U.S. regulations would apply to Japanese financial institutions operating in 

Japan, and I think that is a fair question. They did not say, ‘‘Domo 

arigato.’’ They said, ‘‘Wakarimasen,’’ meaning ‘‘I do not know what 

is going on.’’ 

My third question today has me wondering why fundamental and 

commonly used methods of hedging on futures markets, not swaps 

but wheat and corn futures markets, which have been in operation 

for decades without incident, had absolutely nothing to do with the 

financial crisis, would suddenly be considered speculation by one of 

the rules that is proposed by the CFTC. More on that later. 

In closing, I would simply suggest that instead of looking back 

over the past year at this hearing today, we should be examining 

the overall effect of all of these new regulations on our economy 

and globally over the next 10 years. 

I thank you. 

Chairwoman STABENOW. Thank you very much. 

We have three excellent panels today. I am going to turn to our 

witnesses. I do want to say for my colleagues any opening remarks 

we would be pleased to enter into the record. And Senator Roberts 

and I, because of the importance of this hearing, have agreed that 

for our first panel we are going to lengthen the questioning from 

the regular 5 minutes to 7 minutes to allow a little more time rather than going to a second round because we have three panels 

today and that would make it difficult in the time allowed. But we 

4 

have agreed to lengthen for our first panel to a 7-minute round, 

and so I appreciate that. 

Senator ROBERTS. Madam Chairman, if I may? 

Chairwoman STABENOW. Yes, Senator Roberts. 

Senator ROBERTS. Could I ask unanimous consent that the letter 

I received from the Financial Services Agency of the Government 

of Japan follow my comments and be inserted into the record at 

that point? 

Chairwoman STABENOW. Without objection. Absolutely. 

[The letter can be found on page 103 in the appendix.] 

Chairwoman STABENOW. Let me turn now and welcome our first 

panelists. Of course, Chairman Gensler, Gary Gensler, is no stranger to the Committee. As Chairman of the Commodity Futures Trading Commission, we welcome you back. Chairman Gensler has 

spent his career in finance, both in the public and private sectors. 

He is widely known for his work on oversight of the accounting industry and corporate governance and Sarbanes-Oxley, and we 

thank you very much for joining us today. 

Our second panelist is Michael Gibson, a Senior Associate Director within the Division of Research and Statistics of the Federal 

Reserve Board. Mr. Gibson joined the Fed after completing his 

Ph.D. in economics at MIT and has been there since, focusing on 

risk management, financial markets, and corporate finance. 

We welcome both of you today, and we will ask Chairman 

Gensler to begin. 

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

Mr. GENSLER. Good morning, Chairwoman Stabenow, Ranking 

Member Roberts, members of this Committee. I thank you for inviting me here today to testify. I am pleased to testify on behalf of 

the Commodity Futures Trading Commission. 

Though the financial crisis in 2008 had many causes, it is clear 

that the swaps market did play a central role. Swaps added leverage to the financial system with more risk being backed by less 

capital. And they contributed, particularly through credit default 

swaps, to the asset bubble in the housing market and helped accelerate the crisis when we got closer to it. And I believe they also 

contributed to a system where large financial institutions which 

had been thought too big to fail, all of a sudden this new term, ‘‘too 

interconnected to fail.’’ So that swaps, initially developed to help 

manage and lower risk—and that is what they do for most of 

America—they also concentrated and heightened risk in the economy and to the public, and ultimately millions of Americans found 

themselves out of work due to the crisis. 

It is essential that oversight ensures that the swaps market function with integrity, transparency, openness, and competition, free 

from fraud, manipulation—in essence, to make sure, as has been 

true for 100-plus years, that futures and then, later, swaps can be 

used to lock in a price, lock in an interest rate or currency rate so 

that businesses can focus on what they want to focus on and innovate and invest and lay off a risk to the marketplace somewhere 

else. 

5 

The CFTC has substantially completed the proposal phase of our 

rule writing. That took us about 9 or so months. And the public has 

had an opportunity to look at the entire mosaic. We reopened all 

the rules for 30 days of comments, and those comment periods 

closed June 3rd. 

We will begin to consider final rules only after staff can actually 

analyze all of those comments. We have about 20,000 comments to 

date, 12,000 of which are on one rule, position limits, but the others you can see are spread across 50 other rules. We will summarize, consider those comments, but the Commissioners will weigh 

in individually. We have a wonderful Commission, and they will 

each weigh in on these 50 or so rules. We will start taking up some 

this summer, but no doubt we will be at this well into the fall, and 

it may well be, since we are human, that it takes a bit of time. 

We are also coordinating and consulting closely with domestic 

regulators and international regulators. On the international front, 

Michel Barnier was just here a couple of weeks ago, and Europe 

looks to be moving on a similar approach to us. It is being debated 

in the European Parliament now, and they look to try to finalize 

their legislative package this fall on clearing, data repositories, capital, margin, and the like. 

The Commission yesterday also addressed the issue that I thank 

the three Senators—it was a very timely letter, and we agreed with 

your letter. We addressed this issue of what happens with regard 

to July 16th. And what in essence we did yesterday is the law says 

that those things that are subject to a mandatory rule do not go 

in effect on July 16th. So until we finish these rules, they do not 

go into effect, and we published a list of what we thought were the 

mandatory rules. 

But on those things that are self-effectuating, those things that 

would go into effect, we published relief in a proposed order until 

December 31st of this year. We will get public comment over 2 

weeks; we will see what the public has to say about the proposed 

order and finalize an order of before July 16th so that the market 

has this certainty it needs over this period of time. If we come to 

November and there are still things that we have not done, then 

we can look and tailor appropriate relief at that time as we continue on this process. 

We will be finalizing rules over the course of the summer and the 

fall, as I said, and you were kind enough and Congress gave the 

CFTC and SEC flexibility in phasing implementation dates. And it 

is our belief that we lower risk and we lower cost to phase the implementation rather than having it all at one time. We had a 60- 

day comment period. We had 2 days of roundtables on this. That 

comment period just closed last week, so we are trying to pull together thoughts on the phasing as we move forward. 

With that, I look forward to taking any questions. 

[The prepared statement of Mr. Gensler can be found on page 77 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Dr. Gibson? 

6 

STATEMENT OF MICHAEL S. GIBSON, PH.D., SENIOR ASSOCIATE DIRECTOR, DIVISION OF RESEARCH AND STATISTICS, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC 

Mr. GIBSON. Thank you. Chairwoman Stabenow, Ranking Member Roberts, and other members of the Committee, I appreciate 

this opportunity to provide the Federal Reserve Board’s views on 

the implementation of Title VII of the Dodd-Frank Act. The Board’s 

responsibilities with respect to OTC derivatives fall into three 

broad areas: consultation and coordination with other authorities, 

efforts to strengthen the infrastructure of derivatives markets, and 

supervision of many derivatives dealers and market participants. 

Our consultation and coordination with other authorities consist 

of both domestic and international activities. Domestically, DoddFrank requires that the CFTC and SEC consult with the Board on 

many of their Title VII rulemakings. Staffs of the Commissions and 

the Board have fashioned a process for this consultation, and to 

date, Federal Reserve staff have commented on the proposed rules 

of the Commissions at each stage of their development. 

Internationally, the G–20 leaders have set out reform commitments for the OTC derivatives markets that will form a broadly 

consistent international regulatory approach. The Board also participates in international groups such as the 

Basel Committee on Banking Supervision and the Committee on 

Payment and Settlement Systems that are coordinating policies related to derivatives markets. 

The goal of all of these efforts is to develop consistent approaches 

to the regulation and supervision of derivatives products and market infrastructures to promote both financial stability and fair competitive conditions to the fullest extent possible. 

Dodd-Frank gives central counterparties an expanded role in the 

clearing and settling of OTC derivatives transactions, and the 

Board believes benefits can flow from this reform. If they are properly designed, managed, and overseen, central counterparties can 

reduce risk to market participants and to the financial system. 

Central counterparties that are designated as systemically important by the Financial Stability Oversight Council will be subject to 

heightened supervisory oversight. 

Title VII requires that the CFTC, the SEC, and the prudential 

regulators adopt capital and margin requirements for the noncleared swap activity of swap dealers and major swap participants. 

The Board and the other prudential regulator have released a proposed rule on capital and margin requirements. Our proposal is 

currently out for public comment. 

Our proposal would impose initial and variation margin requirements on the non-cleared swaps held by swap dealers or major 

swap participants that have a prudential regulator. For swaps with 

a non-financial end-user counterparty, the proposed rule would not 

specify a minimum margin requirement. Rather, in keeping with 

the statute, it establishes a risk-based rule that would allow a 

banking organization that is a dealer or major participant to establish an exposure threshold below which the end user would not 

have to post margin. The proposed rule would not impose any caps 

on the thresholds for non-financial end-user counterparties. In conVerDate Nov 24 2008 00:59 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\71629.TXT MICHA
7 

trast, for swaps with other counterparties, the proposal would cap 

the allowable thresholds. 

Thank you and I look forward to answering your questions. 

[The prepared statement of Mr. Gibson can be found on page 88 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Again, we will use a 7-minute question period for the first panelists. 

Chairman Gensler, I want to talk for a moment about pensions 

and business conduct standards. We continue to hear a lot of concern from the pension community that the proposed business conduct rules conflict with the Department of Labor’s current and proposed fiduciary rules. As a result of this, there is a lot of concern 

that banks may not enter in the swaps with pensions, in part because of the concerns about legal risk. It is important that we do 

not create a situation where the protection of pensions and other 

entities, special entities, unintentionally limits their ability to use 

swaps. And so I am wondering what you are doing to address this 

issue. Can you provide us with certainty that pensions will continue to be able to hedge their risks using swaps? 

Mr. GENSLER. I think it was the clear intent of Congress that 

pensions would be able to use swaps to hedge their risk. They do 

it quite often to hedge fluctuations in the bond markets and interest rate risks. We have been working directly with the Department 

of Labor to ensure that the provisions of Dodd-Frank are harmonious with what they are doing, and in essence that a swap dealer 

working with a special entity and complying with Dodd-Frank with 

special entities does not somehow inadvertently become a fiduciary 

under ERISA rules. The Department of Labor sent us a very specific letter, which is a public letter—I believe you all have that as 

well—which we think addresses much of this. But we continue to 

talk with the pension industry, talk with the Department of Labor 

on remaining concerns that they have. 

Chairwoman STABENOW. And I very much appreciate in general 

the Commission’s efforts to provide legal certainty for swap transactions to mitigate disruptions in the market. But it is important 

to provide certainty to market participants regarding the timing 

and scope of the new requirements as well, and I know you have 

spoken to this, but I am concerned that we have not seen enough 

clarity on the order and the timing of implementation, which would 

help market participants prepare for the changes. 

Does the CFTC have sufficient authority in your mind to do all 

of the phase-in of the reforms that you believe need to be done? 

And how do you plan to provide that certainty needed to allow the 

market participants to really be able to plan going forward since 

that is so important as we phase in these rules in terms of the ability to avoid disruptions? 

Mr. GENSLER. We do believe that we have sufficient legal authority. Congress said that any rule can go effective no sooner than 60 

days after the rule, but we feel that we can phase after that. We 

put concepts out publicly in late April, 13 key concepts of how to 

phase them, and we had 2 full days of roundtables and a 60-day 

comment period that people commented. 

8 

What we are looking to do is through each of the final rules to 

provide timing, but we might also summarize that which we have 

brought together from these roundtables and comment periods and 

so forth and provide that with further guidance to the marketplace 

overall. 

We think it is very important that the data repositories, the 

clearinghouses, and the various execution platforms be what we 

have come to call ‘‘registration ready’’ or ‘‘open for business,’’ have 

their rule books in place before there is any mandatory clearing or 

mandatory trading, and that mandatory clearing, trading, transaction compliance be phased after that and have the marketplace 

have sufficient time. 

Chairwoman STABENOW. Let me also ask you to speak a little bit 

more about what is happening globally, and this is something I am 

hearing a great deal of concern about in terms of the international 

harmonization. And we know that Europe is behind us. You have 

spoken about their process. Senator Roberts and I recently sent a 

letter to our European counterparts. When we look at what is happening, given the importance to our financial industry in a global 

economy, to having international coordination and the need for a 

holistic understanding of the rules, how are you addressing the different timelines if there are significant differences in the rules 

themselves? What steps are you taking to avoid regulatory arbitrage? And from a practical standpoint, how do you plan on regulating global financial institutions, particularly in this time of limited resources? To me, this is a very important piece of how we 

move forward. 

Mr. GENSLER. All great questions, on which you could have a 

whole hearing. But, first, the President and the heads of 19 other 

nations came together in September of 2009 and committed to 

mandatory clearing and the trading and some of the keys that were 

in Dodd-Frank. Some nations moved ahead of us—Japan, as Senator Roberts mentioned. But Japan, Canada is ready, we are moving about it. 

Europe, they will move their legislative package through by this 

fall on clearing and many of the key issues. The trading components they will take up through something called MIFID probably 

in the fall and into next year. We, of course, are a little—we are 

taking some more time to get our rules in place, and it is appropriate. So some of the timing will become aligned, but also we are 

setting up work streams with the Europeans in particular to look 

at any differences. 

We are an agency of only about 675 people now. We need a lot 

more resources. But we have had a long history of doing mutual 

recognition agreements where we recognize comparable and consistent regulation overseas and then defer to overseas regulators. 

The best example might be in London where the largest clearinghouse actually that exists today is registered with us, but we sort 

of defer to the British regulators, the FSA, who take the lead on 

that clearinghouse that clears swaps. 

So we look to enter into maybe 15 or 20 mutual understanding 

arrangements with foreign regulators where we sort of defer where 

we can, as long as there is enough comparability. It does not have 

to be exact, but that is the standard approach that we have taken. 

9 

Chairwoman STABENOW. Thank you very much. 

In a very short time limiting, Dr. Gibson, let me just say that 

I am particularly concerned as we go forward about the intent regarding protecting end users by providing exemptions for clearing, 

exchange trading, and margin rules. I want to follow up with you. 

I am going to do that in writing in order to respect the time that 

we have here, but I am concerned about the divergence of interpretation of the statute between the CFTC and our prudential regulators in terms of the stringency of the approach that is taken and 

very concerning to me and I know to the Ranking Member and others on the Committee that full legislative intent is followed related 

to this issue. So I will follow up with you in writing on that. 

Senator Roberts? 

Senator ROBERTS. Thank you, Madam Chairwoman. 

The commodity industry from growers to buyers is concerned 

with your proposal, Mr. Chairman, to what constitutes a bona fide 

hedge. I would like to give you an example and then get your 

thoughts, if I may. 

A Sumner County, Kansas, elevator expects in the near future to 

enter into a forward contract with the area wheat farmers at a 

fixed price with delivery at a later date. To hedge this risk, the elevator goes short on wheat futures. Under the CFTC’s proposed 

rule, this would seem to make the elevator’s future transaction a 

speculative one and, therefore, not eligible for the commercial 

hedge exemption from any position limit since at the time the elevator’s futures position was taken, there, in fact, was not an underlying physical contract. This example seems to me to be a very normal transaction by a person who deals in the physical commodity, 

and he was trying to help farmers manage the risk. This is not 

AIG. This scenario is real and current. We are cutting wheat today 

back home, and we need clarity. Are they hedging or not? 

Mr. GENSLER. I think what you have described is a hedge, so— 

and I think that is my answer. What you have described—somebody in the wheat markets, whether they are a farmer, a wheat elevator operator, or anyone in the supply chain, your merchant producer, they can take that physical grain into their ownership, enters into a forward or, for that matter, enters into a future, they 

have for a long time—and I think it was consistent with what Congress did in Dodd-Frank, is a bona fide hedger under the bona fide 

hedge definition. 

Senator ROBERTS. So they would be eligible for the commercial 

hedge exemption? 

Mr. GENSLER. Well, there is a number of different hedge exemptions. I believe you are referring to—Congress addressed it—I am 

asking because I am not entirely sure. Are you referring to the 

bona fide hedge transaction exemption from position limits? 

Senator ROBERTS. Yes. 

Mr. GENSLER. As you described it, Senator, I believe so. If there 

is ambiguity in the language, I would love to follow up with your 

staff, and we know your staff very well. Thank you, by the way. 

He is very good. You took him from us, but he is good. And we 

would be delighted to follow up to understand the ambiguity that 

it might be—— 

Senator ROBERTS. They are not on loan, by the way. 

10 

Senator Lugar, Senator Chambliss, and I sent you a letter May 

27 asking for clarity on what exactly happens on the effective date 

of Title VII of Dodd-Frank. In your response you told us to wait 

for your meeting yesterday. Then yesterday you said to wait until 

the details were made public. 

I finally saw your answer just this morning. We had one staffer 

who got it 7 o’clock last night, and with the 23 pages and two 

addendums, and are starting to digest it. I tried to digest it this 

morning, but I got indigestion. 

I believe you have done—this is not the way to deal with a Committee hearing. Madam Chairman, I do not think we can have this 

kind of—I do not want to call it a ‘‘cavalier attitude,’’ but that is 

about what it amounts to. In fact, if you are sent a letter, you respond a week later and say we are going to have a meeting, you 

have a meeting and then the very next day we come here and we 

still do not know the details—and I am going to recommend very 

strongly we have additional hearings. I know we have 7 minutes, 

but 7 minutes? We need 17 to get into this. 

From what I understand you included a sunset date of December 

31 of this year. Even if the rules are still not in place, that means 

we would have a 6-month purgatory. Won’t that put us back in the 

same position of uncertainty as the date draws near? Why does it 

make more sense to just simply provide certainty until the new 

regulations become effective? 

Mr. GENSLER. Senator, any regulation that is called for in the 

statute does not go effective until that regulation is finalized. The 

6-month date only is to those things that might otherwise be selfexecuting, so the clearing rules, the business conduct rules, and position limit rules, and many of the rules, if the statute says write 

a rule, it does not happen until we—and the pressure is on us to 

finish that, but it does not happen even if that is March of next 

year. 

This sunset of December 31st is only on those things that might 

otherwise be self-executing, and we will take a look again in November and I am committed to take a look in November to see if 

there are things that we should do and working with this Committee and working with market participants, if there is tailored, 

appropriate relief at that time. 

Senator ROBERTS. I appreciate that. The CFTC has proposed over 

50 rules since the passage of Dodd-Frank, comprising thousands of 

pages of materials. As I understand the Administrative Procedures 

Act, major revisions to a proposed rule require that an agency repropose the rule for further comment. Who at the CFTC will make 

the ultimate determination on what changes require a rule to be 

re- proposed? Are you encouraging interested parties to suggest 

changes to rules that would not require re-proposal? We have 

heard this from various market participants. Will you be willing to 

re-propose rules if necessary? Or will the only changes that get 

made to your original proposed rule be those that can be made 

without requiring re-proposing? My commentary would be: Isn’t 

really getting the rules right the most important thing, not timing? 

Mr. GENSLER. I would agree with you, getting the rules right. 

The American public, though, is also still unprotected, so there is 

11 

a balancing, and we are focused on trying to get these rules completed. 

On your central question, with 51 proposed rules there is no 

doubt that there will be some that will be re- proposed. That is the 

nature of rule writing, and that does not, I do not think—I am very 

proud of the CFTC, but really what we have asked the market to 

do is to give us their best comments. Given the statutory construction, we do not want to overread the law or underread it. We want 

to do just what Congress intended us to do, and I think that most 

of our rules, the final rules, will have come changes to them, and 

those final rules will be logical outgrowths of what we proposed. 

But if it is more than a local outgrowth, if it truly something new, 

then the Administrative Procedures Act says you re-propose. 

Senator ROBERTS. I am concerned that a large number of regulations that the CFTC is proposing and the huge regulatory costs 

that will be imposed on industry will threaten the economic utility 

of derivatives. Is there a detailed analysis—has CFTC done any of 

the detailed analysis of the costs of being imposed on this financial 

system and the impact of those costs on participation in this market? That is what the President intended in his January 18 directive to all Federal agencies. There was some question as to whether 

or not independent agencies like yourself are included. He has 

since clarified that and said, yes, they are, and I certainly give him 

a lot of credit for that. 

If CFTC has done the analytical work, would you please provide 

it to this Committee? 

Mr. GENSLER. We worked to comply with the cost/benefit considerations as laid out by Section 15(a) of our statute. You may have 

well worked on it years ago helping us get that. Subsequent to the 

President’s Executive order, which you correctly said does not technically come over us, we had our chief economist and our general 

counsel issue new guidance to all of these 30 or so teams as to how 

to comply with 15(a) but also take in mind what the President said, 

and that is what we will be following for our final rulemaking and 

any new proposals we—— 

Senator ROBERTS. I really appreciate that, and you will please 

provide it to the Committee, in terms of the analytical work, who 

is doing it, the detailed analysis of the cost, i.e., the cost/benefit 

yardstick. Just show us the yardstick. 

Mr. GENSLER. Well, we include cost/benefit considerations in 

each of the rules we have in our proposals. We will continue to do 

that in the finals. We have new guidance which we would be glad 

to share with this Committee, that new guidance. 

Senator ROBERTS. I appreciate that. Thank you. 

Chairwoman STABENOW. Thank you very much. 

We will go to Senator Klobuchar and then Senator Lugar. 

Senator KLOBUCHAR. Thank you very much, Madam Chairwoman, and thank you for holding this hearing. 

I think we all know that reckless trading of unregulated overthe-counter derivatives played a significant role in triggering the financial crisis in 2008. Bringing transparency and accountability to 

this market is essential, and that is why I am glad we are having 

this oversight hearing and that you are both here to talk about the 

implementation of Wall Street reform. 

12 

I think it is also important to remember, as I think both of you 

know, that while many financial institutions gambled in the overthe-counter derivatives market, farmers, cooperative manufacturers, and a host of other businesses that produce goods and provide 

services were successfully using derivatives to reduce risk in their 

business. Derivatives, when used properly and backed by sufficient 

collateral, play a crucial role in our financial and economic system. 

Now, my questions are first about the speculation in the oil market. I do not think you are surprised by this first question, Chairman Gensler. We have had an ongoing dialogue about it, and I 

would like to hear what progress the CFTC has made. Frankly, the 

CFTC was required by law to implement position limits by legislation adopted by this Congress, passed in January. Back in January, 

these position limits were supposed to—the rules were supposed to 

be put in place, and I am concerned that we have not been moving 

ahead, at least in the energy market. We have seen some recent 

drop in gas prices, but I also think that we know that the recent 

run-up has already had a significant impact on our economic recovery. 

We all know speculation alone cannot be blamed for the rising 

price of oil, but I think the evidence is pretty clear back in 2008 

and now that excessive speculation can contribute to volatility in 

the market and a periodic spike in prices that we have also seen 

more and more of the speculation in the hands of hedge funds and 

others and not in the hands of people like, say, Delta Airlines that 

are legitimately hedging their bets. 

So could you explain the reasons behind the delay and how you 

are going to address this to get this done? 

Mr. GENSLER. One of the critical components of the Dodd-Frank 

Act is that Congress mandated that we, as the Senator says, get 

this done. We have had position limit at since the 1930s, but Congress specifically broadened that to include part of the swaps market and also narrowed certain exemptions from it. 

We proposed these rules in January of this year, received a little 

over 12,000 comments on them. We put significant resources on 

summarizing those comments so we can comply with the Administrative Procedures Act and get the best judgments of the public as 

well. And we are trying to bring that together in a way that we 

can put a version of this, a document in front of our Commissioners 

and get Commissioner feedback based upon what to do with these 

12,000 comments. There is nothing that would please me more if 

I could tell you that we are going to vote on it next week, but I 

am not here. I cannot tell you that with 12,000 comments. 

But we are moving forward on large trader reporting. I think we 

will vote on that in the next month, and that is an important piece 

of this to get the data in on these position limits. And we are going 

to try to move this as soon as we humanly can. 

Senator KLOBUCHAR. I appreciate that. I continue to be concerned, and as you know, biofuels are now 10 percent of our fuels 

in this country, and there has been a lot of sudden discussion about 

that and some potential sudden changes that I think could also affect the price of gas. So I hope that we will move forward quickly 

with this speculation issue. 

13 

Minnesota boasts the largest number of agricultural co- ops in 

the country, and there has been a concern that they could be classified as a swap dealer under the new rules. As the co-chair with 

Senator Thune of the Congressional Farmer Co-op Caucus—I do 

not know if you know that exists, but it does—I believe—— 

Mr. GENSLER. I have known it from you. 

Senator KLOBUCHAR. I believe that we must maintain the ability 

of farmers to band together to market their products and manage 

their risk. I know the farmer co-ops have been in to meet with you 

as well as Commission staff to discuss this issue. How do you see 

agricultural co-ops that offer risk management tools to their members fitting under the new regulatory structure? Do you think they 

will be classified as a swap dealer? 

Mr. GENSLER. We have been working I think very actively and 

constructively with them. Most of what they do are actually probably not even swaps. They are forwards, and under our product 

definition rule, which we look to get comments on, I think that will 

be clarified. But to the extent they do do swaps only with their 

members in the agricultural space, we have been trying to look 

through how we can sort of define that into the swap deal definition so that it is out, not in. Congress gave us authorities under 

de minimis definitions, and so we have been actively sort of working with the various members, not just from your State but from 

other States as well. 

Senator KLOBUCHAR. Well, thank you, because I hope there is a 

way to uniquely define farmer co-ops so they can continue to do the 

kinds of things that they do. 

Dr. Gibson, I would like your take on the margin issue. While 

the CFTC made clear that end users will not have to post margin, 

the Federal Reserve, along with the other banking regulators, proposed rules that exempt end users up to a certain threshold of exposure after which the margin would have to be collected. Can you 

take me through the Federal Reserve’s thought process—I always 

like the entire Federal Reserve’s thought process—on this proposed 

rule? And what practical effect do you think it will have on end 

users? 

Mr. GIBSON. Yes. As required by the statute, the proposed rule 

of the prudential regulators applies to all swaps of a swap dealer, 

and also as required by the statute, it takes a risk-based approach 

so it divides the swap dealer’s counterparties into three groups: 

other swap dealers or major swap participants, which is a high-risk 

group; financial end users are in the middle; and commercial end 

users are the low-risk group, because we believe that the commercial end users pose little or no systemic risk, so that justifies putting them in the low-risk group. 

Our proposed rule, like the CFTC’s proposed rule, would not require any margin to be collected from commercial end users as long 

as the exposure is below a threshold that the bank swap dealer establishes, which we believe is consistent with the status quo where 

banks set limits on their exposures to all their customers, limits 

above which they would not be comfortable having an exposure. So 

we believe the general structure we have proposed is consistent 

with the status quo for commercial end users. 

14 

Also, like the CFTC, the prudential regulator proposed rule 

would require trading documentation, including a credit support 

agreement, or a CSA. We understand that would be a change for 

some commercial end users that currently do not have that sort of 

trading documentation. So that would be an additional burden, 

both of our rule and the CFTC’s rule. But in keeping with the general improved transparency and regulation of the derivatives market, we feel like that is a reasonable requirement. So that is it. 

Senator KLOBUCHAR. Okay. Thank you very much. 

Chairwoman STABENOW. Senator Lugar. 

Senator LUGAR. Thank you, Madam Chairman. 

Chairman Gensler, you mentioned that as many as 15 agreements may have been coordinated with trading commissioners in 

other countries. My question comes from this letter that has been 

mentioned from the chairman of the Japan Financial Services 

Agency which expressed ‘‘a concern regarding extraterritorial application of rules relating to the U.S. Dodd-Frank Act,’’ and especially 

in regard to registration and clearing requirements. 

Leaving aside the specifics of the Japanese concern, what concerns do you have or what has already developed as far as traders 

in the United States or others who might use the CFTC deciding 

to use other countries’ mechanisms? To what extent, in other 

words, has there been deliberate evasion or really plans, simply, to 

express whatever they want to do through these swaps markets in 

some other situation? 

Mr. GENSLER. Well, money and capital and risk know no geographic border or boundary, and today’s modern financial system 

and modern communications can be moved anywhere. So that is 

why it is so important that we seek to work with other regulators 

and harmonize what we are doing. 

I do not know the specific of that one letter, but I think the 

Dodd-Frank Act was quite specific on it in a section in Title VII 

where if it has direct effect, you know—if there is a U.S. 

counterparty somewhere in the mix— it is not, say, a Japanese 

bank doing a trade with a Japanese insurance company. But if it 

is U.S. counterparties, that may come under that. I say ‘‘may’’ because there are lots of specifics that could be aligned with that. 

So if a foreign bank is doing business here in the U.S., they may 

have to register as a swap dealer. But we also were given authority 

by the Congress to be able to recognize some foreign regulators if 

they are consistent regulation or comparable, if they have capital 

regime or the clearing regime. Again, it does not have to be identical but, you know, that it is comparable enough that we can recognize some of those regimes. 

Senator LUGAR. To what extent, if there was a crisis that occurred really through swaps, could those who created the crisis in 

the United States simply transfer their operations to another country? In other words, have we suppressed the specifics of at least 

American situations, but simply transferred to the international 

community something that may come back to bite us in another 

way? 

Mr. GENSLER. I now understand the question. I think that the 

worst example one might say is AIG. AIG Financial Products was 

operating in Connecticut and London. Just because it was—actuVerDate Nov 24 2008 00:59 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\71629.TXT MICHA
15 

ally, the gentleman that ran it ran it out of London. Just because 

he was in London, it was the American taxpayers that ended up 

on the hook for $180 billion. So because capital can be placed anywhere around the globe, yes, it can hurt the U.S. economy. 

I think what we are looking at and what Congress asked us to 

look at is if it has a direct or significant effect on U.S. commerce 

or the U.S. economy, you know, we have to at least consider that 

and ensure that the public is protected and there is the transparency and openness to that transaction. 

Senator LUGAR. Give that predicament, it is not too late ever to 

amend the Dodd-Frank Act, but from your experience taking a look 

at the problems that occurred in the markets they are trying to 

regulate, what should Congress have done here? Was an attempt 

made to overregulate situations that really do not require that and 

simply bollix up the situation? Or is there a legitimate concern on 

your part that the Dodd-Frank Act was necessary? Can you give 

some feel for our market? 

Mr. GENSLER. I think that Title VII, the derivatives title, was 

necessary. I think that the American public remains exposed today 

and unprotected because the market. The $300 trillion size market 

or $20 for each $1 in our economy is yet to have the transparency 

and risk-reducing features like clearinghouses that can help. So I 

think what Congress did was both historic but necessary. 

Senator LUGAR. The House of Representatives, perhaps you 

know, in their budget has reduced funding for the CFTC by 15 percent, as I understand it. That is not the final word on how the Federal budget may come out this year, but what are the implications 

for CFTC if a 15-percent reduction were to occur? How do you manage at that point? 

Mr. GENSLER. It would be bad for the American public. We will 

get these rules done. Anybody who is thinking of the delay, and 

cutting our budget is a good way to slow that down, I think that 

would be sort of unlikely. I think we will find a way even if we are 

cut. But the immediate effect of cutting the budget 15 percent is 

that we would have to cut staff. We are only a little bit larger than 

we were in the 1990s. We are 675 people. We are taking on a market seven times the size—you know, you are from a great State, 

but think of seven more States that your police force has to take 

on. You need more funding. We have asked for about 50 percent 

more funding, and given our Nation’s budget deficits, I am a little 

hesitant to ask for that 50 percent more. But we are taking on 

seven times the size. So that is, I think, a good investment for the 

American public. A cut to our funding would mean we could not 

oversee these markets. We will get the rules done, but not only 

could we not oversee and be a cop on the beat, but all those questions that market participants, that some of the later panels—we 

will not have the people to answer their telephones. There will be 

more market uncertainty in 2012 than necessary. We would rather 

have the lawyers and economists and accountants to answer the 

questions, give interpretations, and actually work to make sure 

this is a smooth transition. 

Senator LUGAR. Thank you very much. 

Chairwoman STABENOW. Thank you very much. 

Senator Johanns? 

16 

Senator JOHANNS. Thank you, Madam Chair. 

Mr. Chairman, let me start out by reading into the record just 

a couple paragraphs from an article that—very, very recent, in fact, 

within the last 10 days. This article says, ‘‘Europe’s relatively pragmatic approach to reforming derivatives regulations offers a ‘terrific opportunity’ at the expense of the United States, which risks 

scoring ‘one of the biggest own-goals in financial markets history,’ 

a senior banker said.’’ 

It goes on to say, ‘‘ ‘The U.S., through Dodd-Frank and other 

means, is excessively focused on derivatives markets,’ Colin 

Grassie, chief executive of Deutsche Bank’s operations in the 

United Kingdom, told the recent annual conference of International 

Capital Market Association.’’ 

He goes on to say, ‘‘Grassie said that Europe’s reforms of overthe-counter derivatives were so far more pragmatic than those in 

the U.S. and much more in tune with the derivatives markets. Derivatives are like cars and guns,’’ and this is a quote from him, ‘‘not 

inherently bad. ‘It is what you do with them,’ he said. ‘If they do 

what they should do, they play a very important role. Europe understands this,’ he says. The U.S. has failed to understand it.’’ 

Now, you know, I listened to the testimony today, and you throw 

these phrases around like the rest of the administration, to be honest with you. I sit on Banking, I sit on Ag. You know, this parade 

of people come and taxpayers are on the hook for $180 billion. I am 

so tempted to walk through where that money went to with you, 

but I will spare everybody that. You talk about the American public is currently unprotected. You talk about capital and risk know 

no boundaries, et cetera. All of the right things to say. But I sit 

here and listen as a former Cabinet member, a former Governor, 

trying to promote economic development, et cetera, and I say to 

myself, ‘‘How did a wheat farmer and a co-op in Kansas get tangled 

up in this?’’ And, you see, to me and the average person out there, 

that makes no sense whatsoever. They just go, ‘‘This is ludicrous.’’ 

But, most importantly, what is happening out there in my personal opinion is this: You are seizing up the marketplace. People 

cannot decide what to do next. They do not know if you are going 

to be regulating them, not regulating them, what the extent of the 

regulations are. And I think it is just having a depressing impact 

on the whole economy, and I am not just talking about the Kansas 

wheat farmer. I am talking about the entire financial markets. 

They are just freezing up from this fear of what Dodd-Frank is 

turning into. 

Let me just ask you directly. Don’t you think we overdid it here? 

Mr. GENSLER. With all respect, I think that the Dodd- Frank derivatives title was very necessary. A market that is so large does 

affect the wheat farmer. That wheat farmer in Kansas is not going 

to be a swap dealer, is not going to be an end user, is not going 

to have to post—come into clear or post margin under the proposed 

rules. If there are any doubts about the co-ops, we are working 

with the co-ops, because that is clear, that is congressional intent. 

But is lowering risk because that wheat farmer actually lost out. 

They lost out when the financial system failed in 2008. And, by the 

way, the regulatory system failed. It was not just Wall Street. The 

regulators failed, too. And so that is, I think, what is necessary and 

17 

appropriate. Based upon a lot of public input, we are going to get 

the rules finished and balanced. We have given more time here. I 

think that balance is important. But I think that was very much 

appropriate because millions of Americans were put at risk by a financial system that at least in part failed due to derivatives. There 

were a lot of other reasons as well. 

Senator JOHANNS. You know, and my response to that is, ‘‘There 

you go again.’’ You just create this impression that if we are not 

out there regulating everything and eliminating risk from the marketplace, that somehow the wheat farmer in Kansas is going to get 

punished again. And all I am asking you—and I think it is a very 

fair question here: Doesn’t it occur to you that with the risk of losing this business, literally forcing jobs and capital to the place of 

least resistance, which, holy smokes, that might be Europe? I 

mean, can you imagine? Haven’t we just gone too far? Aren’t we 

just crazy in our overregulation here? Isn’t there someplace where 

you would just give me a little victory here and say, ‘‘I think maybe 

we did too much here’’? Because it looks to me like we have punished everybody for no good reason. 

Mr. GENSLER. I think that Congress took a balanced approach in 

Title VII and that there is going to be more transparency and more 

competition in a marketplace and that markets work best when 

there is that transparency and competition in the marketplace. We 

are going to work closely with European regulators to harmonize 

and where we can within the statute try to harmonize and bring 

it together. 

There are certainly things that we are doing to try to interpret 

the statute in a way to harmonize. It was even a good question the 

Chairman and the Ranking Member raised about indemnification 

in the data repositories that Chairman Schapiro and we have come 

together to try to find a way and thread the needle to lower that 

concern of the Europeans. So where we can, we are looking to try 

to harmonize as best we can to bring alignment but also to make 

sure that our financial markets are strong and that the taxpayers 

do not stand behind the large financial institutions as they, unfortunately, have. 

A perverse outcome of the crisis is that a lot of people in the 

market think it is even more likely that taxpayers will bail these 

companies out because they are even larger. They are larger as a 

percentage of the economy now. And we did it once. We did it in 

2008. That is a perception, and Title VII helps to address that in 

part. 

Senator JOHANNS. Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you. 

Senator Chambliss? 

Senator CHAMBLISS. Thanks, Madam Chairman. Chairman 

Gensler, Dr. Gibson, good to see both of you. 

Mr. Chairman, you will recall leading up to the debate on DoddFrank as well as throughout the debate, you and I had tons of conversations in my office and by telephone and in this Committee 

room about the implication of these drastic changes in the regulation and how the impact of it was just—as Senator Roberts, Senator Lugar, and Senator Johanns just alluded to, it is going to 

drive business offshore. And we were very concerned about that, 

18 

and you kept reassuring us, as well as Secretary Geithner kept reassuring us that, no, no, that is not going to happen. We are going 

to lead the way. The Europeans are going to follow us. The Asians 

are going to follow us, and everybody is going to be happy, and everybody is going to have the same amount of business. 

Well, I hear you defending the language in Dodd-Frank with respect to the overregulation, in my opinion, of the swaps and derivatives market and that, you know, the Europeans are still going to 

come along. But very honestly, Mr. Chairman, the facts are not on 

your side. The letter Senator Lugar referred to earlier was dated 

back in April. It came from the head of Japan’s Financial Services 

Agency. In that letter he says they have a concern regarding the 

extraterritorial application of rules relating to the U.S. Dodd-Frank 

Act. He went on to voice a particular concern over registration and 

clearing requirements, and the letter concludes by saying that Japanese institutions might have to avoid trading with U.S. institutions, exactly the concern that we had back then. 

Last week Secretary Geithner gave a speech in which he said the 

U.K. had set a tragic example through light-touch regulation, and 

he warned that it was essential for European and Asian jurisdictions to fall in line with the United States on derivatives regulations. Well, what did the Europeans do? A gentleman, a European 

regulator from Britain, Martin Wheatley, responded in this way: 

‘‘To suggest that the United States sets a gold standard that other 

markets should follow is nonsense.’’ 

I mean, Mr. Chairman, if we continue down the road of overregulating this industry—and certainly there was some participation by 

this industry in the collapse of 2008, but it was not the sole reason. 

There were many, many other reasons why the collapse occurred. 

And if we continue down the road of overregulation, it is pretty obvious that the concerns that a number of us had that were attempted to be allayed by you during the debate and, unfortunately, 

you prevailed and we did not, but our fears are going to come true, 

and are true today. We are seeing swaps and derivatives traded 

around the world in markets even like Panama, and we are supposed to take some confidence in the fact that because we are going 

to overregulate the financial markets in the United States that everything is going to be safe and secure in the future. 

I would like your comment to that. 

Mr. GENSLER. Well, I think that what happened in 2008 and 

what was addressed by Congress was to ensure that the transparency comes to these markets and we lower risk in the markets 

if U.S. commerce is affected. ‘‘Directly and significantly affected’’ I 

think are the words of the statute. So if it is a transaction, whether 

it is in Panama, Germany, Japan, and it is between, you know, 

Germans, Panamanians, or Japanese, that is not what is under 

this. But if it relates to the U.S. commerce, to have that transparency, to have that openness in the marketplace. And that is 

going to—that is the core of it. We are going to work very closely 

with the Securities and Exchange Commission, with the other domestic regulators like the Federal Reserve but also with the international regulators on this harmonization. We share just about all 

of our draft rules with the Europeans and sometimes with the Canadians and the Japanese and have them take a look—they give 

19 

us comments—even before we published them as proposals. And we 

have gotten a lot of very constructive feedback. 

We meet with the most senior folks and the staff folks. We have 

ongoing work streams with them on this. And so we are not going 

to end up identical, and certainly if there is a transaction in Germany between German parties, that is not what we are covering 

here. But it is really related to U.S. commercial and derivatives 

markets. 

Senator CHAMBLISS. Well, I appreciate your response, but very 

honestly, I do not think that is good enough to provide security in 

the U.S. marketplace. For example, it is my understanding that 54 

percent of the credit default swaps that have been issued by financial institutions in Greece are owned by U.S. financial institutions. 

We know what is going on in Greece, and if the economy of Greece 

collapses and the financial institutions in Greece collapse, I am not 

sure what impact that will have, but I would like your comment 

on whether or not that is, in fact, the case, what regulatory measures do you have in place to ensure that U.S. institutions do not 

get overloaded and countries that are on the brink of collapse like 

Greece? And what would be the impact of the collapse of the Greek 

economy as to our financial institutions? 

Mr. GENSLER. The last part of it I might let the Federal Reserve 

answer, but I think that that is actually an example why you 

would want U.S. regulators to be looking at U.S. banks for the 

credit default swaps they might write, as you say, on Greece or any 

other country, because if they are providing insurance—and that is 

in essence what a credit default swap does, is insures against the 

risk of a default in a country overseas, and if that is going to come 

back and hurt the capital base of U.S. banks and maybe hurt the 

taxpayers in the U.S., you would want the banking regulators and 

the appropriate market regulators to be looking at that. 

I do not know if the 54 percent number is accurate. We could try 

to get back to you on that specifically. But if it were accurate, I 

think that is an example why you would want U.S. regulators, 

banking regulators particularly, to be able to see into those banks 

and make sure there is enough capital and margin behind those 

credit default swaps. 

Mr. GIBSON. I can add that we have been looking closely at the 

exposures of U.S. banks to Greece in particular for a number of 

months, and exactly as Chairman Gensler said, making sure that 

we are comfortable that the exposures are kept in check relative 

to the capital and resources available. 

Senator CHAMBLISS. Do you know if that number is correct? 

Mr. GIBSON. I do not know about the specific number you cited, 

but we can look into that. 

Senator CHAMBLISS. Are you concerned about the amount of 

money that U.S. banks hold on Greece-issued credit default swaps? 

Mr. GIBSON. We have been monitoring it closely for a number of 

months, and our efforts are designed to make sure that whatever 

exposures there are are manageable. 

Senator CHAMBLISS. Thanks, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

As we conclude the first panel, thank you very much for joining 

us today. We take our oversight responsibilities very seriously on 

20 

this issue, and we will continue to work with you. We appreciate 

all of the efforts and the responsibilities that have been given 

through the new statute. And we also know that we continue to 

have to work together on these international issues, which are very 

important, as we make sure that first and foremost we are focused 

on the American consumer, the American taxpayer, the American 

citizens in terms of how this system moves forward, but we are impacted about what happens around the globe. And as you can tell 

from the questions by the Committee, we are concerned about how 

this will proceed and the implications of it when we are involved 

in the challenges of harmonizing with various countries around the 

globe. 

So thank you both very much. We look forward to working with 

you. 

Mr. GENSLER. Thank you. We look forward to continuing working 

closely with you. 

Chairwoman STABENOW. Thank you very much. 

We will ask our second panel to come forward. I am very pleased 

to have two additional distinguished leaders with us to speak about 

this topic. And we will have a third panel today as well, so we ask 

the patience of the Committee. We have a lot of important information to be gathering from the hearing today. 

Well, good morning. We are so pleased to have both of you with 

us this morning. Let me introduce our first witness on our second 

panel. 

Brooksley Born, we welcome you to the Committee and appreciate your leadership over the years. Recently a member of the Financial Crisis Inquiry Commission, a group tasked with investigating the causes of the recent financial crisis, also a former 

Chair of the CFTC under President Clinton, and someone who has 

extensive experience with the derivatives markets and certainly 

the issues leading up to the crisis that our country faced. So we 

welcome you this morning and look forward to your testimony. 

We also want to welcome Dan Roth. Mr. Roth is the president 

and CEO of the National Futures Association, where he has been 

for over 25 years. We all know that the NFA is a congressionally 

authorized organization intended to self- regulate and protect the 

integrity of the derivatives market. 

So we welcome both of you, and we would ask Ms. Born to proceed. 

STATEMENT OF HON. BROOKSLEY BORN, FORMER COMMISSIONER, FINANCIAL CRISIS INQUIRY COMMISSION; AND 

FORMER CHAIRPERSON, COMMODITY FUTURES TRADING 

COMMISSION, WASHINGTON, DC 

Ms. BORN. Thank you very much, Chairwoman Stabenow, Ranking Member Roberts, and members of the Committee. Thank you 

so much for inviting me to appear before you to discuss the implementation of the derivatives provisions of the Wall Street Reform 

and Consumer Protection Act. Effective and prompt implementation of these provisions is critically important to protect the American public and our financial system. 

The Financial Crisis Inquiry Commission on which I served recently issued its report on the causes of the financial and economic 

21 

crisis in the United States. In that report the Commission concluded that profound failures in financial regulation and supervision along with failures of corporate governance and risk management at major financial firms were among the prime causes of 

the financial crisis. The Dodd-Frank Act addresses a number of the 

causes of the financial crisis found by the Commission, including 

the unregulated over-the-counter derivatives market. 

The Commission in its report specifically concluded that OTC derivatives contributed significantly to the financial crisis. The Commission found that this enormous market was characterized by uncontrolled leverage, lack of transparency, lack of capital and margin requirements, speculation, interconnections among firms, and 

concentrations of risk. 

The Commission concluded that derivatives known as credit default swaps fueled the securitization frenzy and the housing bubble 

by encouraging investors in mortgage- related securities to believe 

that they were protected against default and also were used to create synthetic CDOs, which were merely bets on real mortgage securities and amplified the losses from the collapse of the housing bubble. 

Insurance giant AIG’s sale of the credit default swaps on mortgage-related CDOs without adequate capital reserves brought it to 

the brink of failure and necessitated its rescue by the Government, 

which ultimately committed more than $180 billion because of concerns that AIG’s collapse would trigger cascading losses throughout 

the financial system. 

In addition, the existence of millions of OTC derivatives of all 

kinds, not merely credit default swaps, created interconnections 

among a vast web of systemically important firms through 

counterparty credit risk, exposing the financial system to contagion 

and helping to precipitate the massive Government bailouts. 

The financial regulatory reforms in Title VII of the Dodd-Frank 

Act are vital to strengthening the financial system and reducing 

systemic risk posed by this unregulated market. However, there 

now appears to be a concerted effort by some large financial institutions and their trade associations to prevent full implementation 

and enforcement of Title VII and other provisions of the DoddFrank Act. Bills are pending in Congress that would weaken or repeal the act. Efforts to persuade or require agencies to issue watered-down regulations or to delay or otherwise fail to fully implement provisions of the act are underway. The CFTC is threatened 

with funding cuts that will impair its ability to implementation and 

enforce Title VII. 

The political power of the financial sector is still enormous, and 

policymakers in Congress and the executive branch must have the 

political will to resist these efforts to derail regulatory reform. If 

we as a country do not learn from the financial crisis and put in 

place the regulatory reforms needed to address its causes, we may 

be doomed to suffer future financial crises. The American people 

deserve better. 

Thank you. 

[The prepared statement of Ms. Born can be found on page 47 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

22 

Mr. Roth, welcome. 

STATEMENT OF DANIEL ROTH, PRESIDENT AND CEO, 

NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS 

Mr. ROTH. Thank you, Madam Chair. For the last 30 years or so, 

NFA has acted as the self-regulatory organization, the industrywide self-regulatory organization for the U.S. futures industry. 

Now, though, it looks like we may be taking on some significant 

additional responsibilities in light of the CFTC’s Dodd-Frank rulemaking. 

What I wanted to do today, if I could, would just be to spend a 

little bit of time talking about the new responsibilities that may be 

coming NFA’s way and what we are doing to prepare for those responsibilities. 

The first involves the registration process. The CFTC has proposed that NFA handle the registration process for all swap dealers 

and major swap participants. Frankly, for the last 25 years we 

have handled the registration process for every category of registration under the Commodity Exchange Act, so this is not anything 

that is particularly new to us. We have already made the changes 

necessary to our Web-based registration system to accommodate 

these new categories of registration, and we can begin accepting 

and processing applications and conducting the necessary background checks whenever the CFTC asks us to do that. 

The trickier part of the registration process is going to come as 

the CFTC’s new rules under Section 4s of the Act are implemented. 

What the Commission has proposed is that each firm would become 

provisionally registered as a swap dealer or major swap participant, but then as each of the new rules kicks in, the applicant 

would have to submit to NFA its policies and procedures that are 

reasonably designed to demonstrate that they will be in compliance 

with the new rule, and NFA will then have to review those fairly 

voluminous submissions in a thorough and meaningful and timely 

manner. So this is going to require us to really bring on additional 

staff from outside of NFA. We are going to have to redeploy some 

of our existing resources temporarily to handle that charge. And we 

are going to have to develop very clear guidance for our staff to review those submissions. And on all of that we will be working very 

closely with the CFTC, but we cannot really complete that process 

and develop the guidance for our staff until the rules themselves 

are adopted in their final form. 

In addition to the registration process, the CFTC has proposed 

that all swap dealers and major swap participants become members of National Futures Association, and our responsibility, our 

basic responsibility, would be to monitor those firms for compliance 

with the applicable regulations, though obviously for some of the 

major bank firms that have prudential regulators, our responsibilities might be somewhat more limited. 

In order to take on that additional responsibility, we have got to 

accomplish three basic undertakings that I have described in my 

written testimony. 

First, we have to revamp our governing structure at NFA to ask 

sure that our board structure has enough checks and balances to 

deal with the issues that I described in my written testimony. We 

23 

have a committee that is working on that. We have made significant progress on that. We cannot complete that process, though, 

until we have final definitions of the terms ‘‘swap dealer’’ and 

‘‘major swap participant.’’ 

Secondly, we have to work out a funding mechanism to make 

sure that NFA recovers its costs of performing these regulatory 

functions. And, again, we cannot say for certain what those costs 

are. You do not know until you know. You do not know until you 

see how many firms walk through the door and how many members you actually have. We are working under the assumption that 

we will have to almost double the size of our compliance department and generate somewhere in the neighborhood of $25 million 

a year in order to recover our costs. 

The third thing we have to do is just prepare to do the work 

itself. We have to recruit and hire and train staff that have experience in these markets. We need to train the existing staff at NFA 

to perform some of these functions, and we need to prepare audit 

modules and audit programs so that when our staff goes out into 

the field they can monitor for compliance with the rules in a manner that is very effective and yet very efficient and a smart way 

to approach the work. So we have to develop those audit modules. 

We cannot, obviously, complete that work, again, until the 4s guidance is complete. 

One final thing I wanted to make a third area of responsibility 

for NFA will involve swap execution facilities. Dodd-Frank imposes 

certain self-regulatory functions and surveillance responsibilities on 

swap execution facilities. The CFTC has proposed allowing those 

SEFs to outsource that function to an organization like NFA. This 

is something we have been doing for the last 10 years with respect 

to some of the smaller contract markets. We know this is a very 

different sort of business model than the contract markets. We are 

going to have to revise our surveillance programs to accommodate 

those changes. We have been working very closely with SEFs and 

with the CFTC to try to determine the exact audit trail of information we will need to perform that function, and we will continue to 

work with SEFs and with the Commission to try to make sure we 

can take on that responsibility when the time comes. 

So it is a very different time for NFA, a lot of new responsibilities coming our way, but we look forward, as we have for the last 

30 years, to working very closely with the Commission and the industry to find solutions that hopefully work for everybody. 

Thank you. 

[The prepared statement of Mr. Roth can be found on page 95 in 

the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Ms. Born, when we look back at the year 2000 and we look at 

your position with the CFTC at the time, you were a lonely voice 

expressing concern about deregulation at that time and what could 

happen, and we fast-forward to see, unfortunately, what did happen. I wonder if you might talk about what you believe are the 

most important reforms or authorities in Dodd-Frank that could 

have prevented the financial crisis. 

Ms. BORN. Well, as the Financial Crisis Inquiry Commission 

found, the statute in 2000, the Commodity Futures Modernization 

24 

Act, that deregulated the over-the-counter derivatives market was, 

we believe, a key turning point in the process going toward the financial crisis. I think the most important reforms in Title VII are 

the central clearing provisions and the exchange trading provisions. 

What we saw in the financial crisis in 2008 was an enormous 

market of more than $670 trillion in notional amount worldwide 

that was not transparent. It was opaque. Regulators, market participants, traders in the marketplace did not have a picture of the 

market itself. They did not know the amount of exposure of their 

counterparties. 

Transparency is provided by exchange trading. Price discovery 

was also lacking in many aspects of the market. There was an inability to price many transactions. Exchange trading provides price 

discovery in a meaningful way. 

Counterparty credit risk was what added to the panic in the fall 

of 2008. It is the reason that the derivatives market froze up, that 

the credit markets froze up, and we were on the brink of being 

plunged into another Great Depression. Central clearing provides 

protection against counterparty credit risk in a significant way and 

will make a big difference. 

Chairwoman STABENOW. Thanks very much. I wonder, again, 

with your experience at the CFTC if you might speak a bit about 

what is happening in terms of the debate around the budget for the 

CFTC. There is a lot of debate about defunding, about reducing the 

budgets, and I am concerned that this will actually create more 

delays or more uncertainty or potentially more damage to financial 

markets if they are not able to fully address the concerns in a timely manner and move forward in a way where the implementation 

is done in the right way. But I wonder if you might speak to 

whether or not from your judgment you think that the current 

budget is sufficient to implement the reforms, to oversee the global 

market issues that we have been talking about, and what impact 

it would have on our ability to protect consumers if we were to see 

what the House passed, which I believe was a 44-percent cut in 

funding for the CFTC. If that actually were to happen, how would 

that impact what we are all concerned about in terms of implementing these changes in the right way? 

Ms. BORN. Well, I believe that the CFTC needs more resources 

in the next fiscal year than it has in this fiscal year, and that it 

should have a substantial increase rather than any decrease. 

The size and resources of the CFTC are not that much bigger 

than they were in the late 1990s when I was Chair. There was a 

10-year period where there was little or no expansion of staff. Indeed, the staff fell below the staffing levels in the late 1990s. 

The staffing level is now back up to about what I had or slightly 

above it, but, of course, the regulated futures and options markets 

have grown exponentially in the 10 to 12 years since I was Chair. 

And the responsibility for the over-the-counter derivatives market, 

which approaches $300 trillion in notional amount just in the 

United States, is an enormous new responsibility. 

I think that to be really effective in full implementation and enforcement of the act, the CFTC needs more resources. 

Chairwoman STABENOW. Thank you very much. 

25 

Senator Roberts? 

Senator ROBERTS. Mr. Roth, regarding the registration of swap 

dealers and major swap participants, in your testimony you mention that the CFTC’s proposed rules allow provisional registration 

for swap dealers and major swap participants before all the rules 

are finalized. As each rule is finalized, the NFA would review compliance with the new rule by each provisional swap deal and major 

swap participant. Do you think this process, this provisional registration process, is the most effective means of registering new 

swap dealers and major swap participants? Could there be a better 

or more efficient process in your view? 

Mr. ROTH. Yes, I think the provisional registration process is actually workable in that it is an opportunity for firms to begin the 

registration process while allowing the CFTC to phase in the 4s requirements over a period of time. The provisional registration process provides that those submissions have to be made at NFA. 

There is not a specific clock or deadline by which those submissions 

have to be reviewed and approved. So I think there is some flexibility built into that system that will allow the registration process 

to occur while these rules are being phased in. So I actually 

thought it was a fairly workable approach. 

Not to minimize the effort that is going to be involved for the 

firms to make the submission. 

Senator ROBERTS. I am glad you added that last part. 

I noticed that your testimony suggested a phased-in approach to 

regulatory requirements for swap execution facilities—everything 

has to be an acronym in this town, so that is a SEF so that NFA 

would not have to attempt to begin to perform regulatory services 

for all interested SEFs on the same day. Do you have any indication that the CFTC will agree with your suggestion? In the absence 

of a phase-in, how would one determine which SEF would receive 

your regulatory services first, thus perhaps providing a competitive 

advantage to the earliest SEF? 

Mr. ROTH. In its rule proposal regarding SEFs, the CFTC proposed to avoid exactly the sort of competitive advantage that we 

were talking about in our testimony by providing that all SEFs 

that had their applications by a certain date would be able to continue to operate while their applications were being reviewed. 

I think the approach that we are suggesting with our testimony 

is completely consistent with that, which is, again, that the SEFs 

should be allowed to continue to operate while—to the extent that 

they are contracting with NFA for us to perform those services, 

while we phase in that operation, they should be allowed to continue to operate to avoid an artificial competitive advantage for 

those that are there first. 

So I think the Commission is—based on its rule proposal, I think 

they are sympathetic with our view, and I would certainly hope 

that they would be. 

Senator ROBERTS. I appreciate that. 

Thank you, Madam Chairman. 

Chairwoman STABENOW. Thank you very much. 

Senator GILLIBRAND. 

26 

Senator GILLIBRAND. Thank you, Madam Chairwoman, for holding this hearing. Thank you for your testimony, both of you. I have 

two areas of questions. 

The first is the issue of extraterritorial application of margin. I 

do not know if you have seen it, but a number of Senators, we sent 

a letter to Chairman Gensler and to other agencies and regulators 

asking them specifically about whether they intended to have the 

same margin requirements on U.S. subsidiaries operating abroad 

in non-U.S. firms because obviously the concern is it creates an 

enormous competitive edge for competitors if we have to satisfy 

those margin requirements in those markets. I would like your 

thoughts on that issue. 

Ms. BORN. Well, I have not done much thinking specifically on 

that issue. You know, it was a foreign subsidiary of a U.S. company 

that brought down AIG. Most of AIG Financial Products’ activities 

were in London, and they entered into an enormous portfolio of 

credit default swaps without putting forth collateral, without putting forth margin, without putting aside capital reserves. 

So one should keep in mind about this issue that this can threaten the U.S. parent; it can threaten the U.S. financial system. 

Mr. ROTH. Can I just mention that regulatory arbitrage is always 

going to be an issue, and Chairman Gensler alluded to this. If you 

look at the CFTC’s previous experience in dealing with its Part 30 

regulations, the Part 30 regulations create exemptions for certain 

foreign intermediaries if they are subject to a regulatory regime 

that is comparable to the U.S. regulatory regime. That Part 30 regime has been in place for a long time and has worked extraordinarily well, I think. But a key ingredient of it is, again, assessing 

the overall comparability of regulation. And to the extent that a 

particular jurisdiction, for example, had margin requirements that 

were far less stringent than ours, then I think it would not qualify 

for that sort of reciprocal recognition. 

Senator GILLIBRAND. Further to that question, in the AIG example a lot of their contracts were with U.S. counterparts, so that was 

one of the reasons why—and, granted, they had all contracts in one 

direction, assuming that the real estate industry would never go 

down in value. Bad assumption. But some of those contracts were 

with the U.S. counterparts, and under the regulatory framework 

that we have talked about in Dodd-Frank, those U.S. counterparts 

would have capital requirements as well and 100 percent disclosure. 

So if you know enough details about the AIG example, do you see 

those protections as being sufficient if we did not have capital requirements for the non-U.S.-based entities? 

Ms. BORN. Well, AIG Financial Products also had enormous credit default swap commitments to European banks. I do agree with 

Mr. Roth, however, that international discussions, international 

harmonization, can be a solution here. Certainly when I was at the 

CFTC, we worked very closely with European regulators to try to, 

number one, harmonize derivatives regulation but also, secondly, to 

recognize equivalent regulatory schemes abroad. And we entered 

into a number of memoranda of understanding with European 

countries’ regulators that recognized that their regulatory scheme 

was essentially comparable. And I think that that is what the 

27 

United States regulators and Secretary Geithner are working toward today. 

Senator GILLIBRAND. I agree that that is what they said, and I 

also agree that we have made efforts with memorandums of understanding. But, unfortunately, we have also heard from foreign regulators that they think that they are skeptical of the U.S. approach, that they do not necessarily follow the approach or that 

they are skeptical about the pace of reform. And so my concern is 

that if we do not make it a priority—because I really believe we 

have to have international harmonization, because if we do not 

there will be immediate regulatory arbitrage, and that will be very 

devastating to the U.S. economy. If you have billions of dollars of 

transactions that would normally originate in the U.S. being conducted abroad, that is an enormous amount of—or less investment 

in the U.S. and I our economy at a time when everything we are 

trying to do here in Washington is to create a greater opportunity 

for job creation, to make a greater landscape for economic growth. 

So what should our regulators be doing now or what should the 

administration be doing now to make it more likely that we will 

have harmonization in a timely fashion? Because even Chairman 

Gensler said this morning he expects the regulatory reform to take 

an additional 6 months from his July deadline, but how do we expect to have harmonization within the next 6 months? And what 

could we do to make that more likely? 

Chairwoman STABENOW. And I will ask you to be brief in your 

answer. 

Senator GILLIBRAND. Sorry. Thank you, Madam Chairwoman. 

Ms. BORN. Well, from my view—and I have talked to both U.S. 

regulators who are working on this, and I have met with a number 

of EU personnel who are involved—I think there is a very goodfaith, strong effort going on right now, and I believe that there will 

be adequate harmonization. Of course, as Chairman Gensler said, 

some countries are ahead of us, for example, Canada. 

Chairwoman STABENOW. Senator Lugar. 

Senator LUGAR. Thank you, Madam Chairman. 

Chairman Born, in testimony before our Committee at the time 

the Dodd-Frank bill was being drafted, we had many persons coming in and saying we are just regular businesses in the United 

States doing manufacturing, trying at least to get some pricing of 

commodities, or we are wheat farmers or corn farmers or what 

have you, we are not AIG or we are not very sophisticated people. 

And as a matter of fact, they were attempting to draw a distinction 

between persons in the back room at AIG or very sophisticated 

bankers trying to figure out how to game the system and in due 

course, as you pointed out, brought it to a crashing halt. 

Was there any way of drafting Dodd-Frank in ways that recognized these more modest uses of swaps and derivatives as opposed 

to some defensive mechanism toward the cleverest of all, who may 

still be thinking even as we are talking today, about how to outsmart Dodd-Frank or the system we are talking about? In other 

words, the idea of transparency is very important, trading on exchanges, but is there any potential differentiation between the sophisticated bankers and regular businesses and farmers? 

28 

Ms. BORN. Well, I think Dodd-Frank Title VII actually recognizes 

the difference with the end-user exemption, Senator. You know, 

commercial entities that are using these contracts for hedging purposes should be treated somewhat differently, but they, too, need 

transparency; they need protection against counterparty credit risk. 

So that I think it is very important that the market as a whole 

should come under the regulatory regime. 

Senator LUGAR. The end-user situation, in other words, you believe does make this differentiation so that this is not quite so onerous to other people. 

Ms. BORN. Indeed. Yes, not only does it allow them an exemption 

if they wish from clearing, but also both the SEC and the CFTC 

Chairs have said that margin will not be imposed on those contracts as well. 

Senator LUGAR. Mr. Roth, you have described the work of your 

organization and the great amount of additional application paperwork that folks will be involved in. Does this create such a burden 

that U.S. firms are likely to be competitively affected? In other 

words, have we imposed, by attempting to do the right thing in the 

United States as we see it, such substantial costs that we really 

are not competitive? With regard to people abroad, leaving aside 

any desire of evasion, it just simply would be easier to do business 

in some other country that did not have the regulations and the 

forms. 

Mr. ROTH. To discuss that in sort of general terms, any form of 

regulation imposes additional costs, and the balancing act obviously is always that in a long-term perspective, the more well regulated—not overregulated but well-regulated jurisdictions are the 

ones that thrive over time, and that is a very difficult balancing 

act, and there is always a temptation, I think, to move one way or 

the other and miss the mark by overregulating or underregulating. 

But, clearly, additional regulation imposes additional costs. The 

question that everybody has to answer is whether over a long period of time those additional costs are a good investment. 

Senator LUGAR. Are you going to be able to identify, as we have 

future hearings, which I am certain we will, be able to quantify 

those costs or offer us some metrics so we understand this is reasonable, excessive, or out of reach? 

Mr. ROTH. We certainly can provide updated information on what 

the costs are. Frankly, the problem that we have— just at NFA, 

when we do a little—sometimes when you are trying to do a cost/ 

benefit analysis, it is hard to measure the impact of something that 

you prevented. You know, how many firms did not go under? How 

many customers were not defrauded? There is an inherently difficult process of trying to measure a negative, and that complicates 

the process. But we can certainly provide additional data as it becomes available on the costs. 

Senator LUGAR. Thank you very much. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you. 

Senator Boozman? 

Senator BOOZMAN. Thank you, Madam Chair. 

Mr. Roth, I want to follow up on Senator Lugar’s line. A lot of 

our agribusinesses, a lot of our—I am thinking of a manufacturing 

29 

business that makes motors and, you know, hedges on the materials that they use for that. I do not think right now that they really understand the impact of what is going to happen. 

I guess my question to you would be: Do you think there is 

enough clarity at this point, is there enough information out that 

that is a correct statement? 

Mr. ROTH. Senator, I certainly think that until the final definitions of the terms ‘‘swap dealer’’ and ‘‘major swap participant’’ are 

promulgated, certain firms are not going to know which side of the 

line they are on and, therefore, do not know what additional costs 

they will be taking on or not taking on. 

So I think to the extent that if the question is how much can people assess the impact—— 

Senator BOOZMAN. How they are going to be impacted. 

Mr. ROTH. —of the regulations on them, I think it is hard to do 

that until you know what the final definitions are. 

Senator BOOZMAN. I guess the next question then is: If that is 

true, how can they make the necessary changes that they are going 

to need to do for compliance? 

Mr. ROTH. And I think the approach there has to be— that is 

why I think it is important to phase in regulations in a time that 

gives—a rule that people cannot comply with is a bad rule. And I 

know that from personal experience because I have written some 

of them. 

[Laughter.] 

Mr. ROTH. And that is why I think the phase-in approach is so 

important, and I think the Commission is very consistent with that 

and very supportive of the concept of phasing these regulations in, 

and they have to be phased in where it takes into account both 

their importance to the public policy and the difficulty of coming 

into compliance. Firms have to have that time. But you lose credibility of a regulatory system if you have rules that cannot be complied with. 

Senator BOOZMAN. Thank you, Madam Chair. 

Chairwoman STABENOW. You are welcome. 

Senator Thune? 

Senator THUNE. Thank you, Madam Chair, and I want to thank 

you and the Ranking Member for holding this important hearing 

today, and I appreciate the panels that are testifying. 

You know, we have a lot of concerns about Dodd-Frank and hope 

to correct some of those. I think it is important that this Committee here work together to try and monitor the work that is done 

by the CFTC, the Fed, and the SEC to make sure that these troubles with the bill, the concerns that we have, are not compounded. 

And I am in particular concerned about the limited definition the 

CFTC is looking to instate for the de minimis exemption when defining ‘‘swap dealers.’’ I understand there has been some discussion 

of this already with the first panel, with Chairman Gensler, but, 

you know, there are a lot of elevators and local co-ops that provide 

important risk management opportunities for producers. They are 

hardly the large and systemically important entities that Congress 

intended to be regulated by this law, and including them in the 

definition of ‘‘swap dealers’’ will only raise prices for producers and 

limit their chances to engage in bona fide hedging. 

30 

So I say that just as sort of a prefatory remark, but I am interested in knowing—I think this was perhaps answered by the previous panel, but if you could shed some light on whether you think 

that farm cooperatives pose a systemic risk to our economy and 

should they be regulated in the same way. 

Ms. BORN. Well, I certainly think that they should be trading in 

regulated markets and that it is important to have the Dodd-Frank 

derivatives reforms in place to protect them by providing more 

transparency, protection against counterparty credit risk, open and 

fair access to markets. 

Senator THUNE. Mr. Roth, would you comment on that? 

Mr. ROTH. I certainly agree with what the former Chair said. If 

there is a farmers co-op out there that poses a systemic risk to the 

economy, I have not bumped into it yet. 

Senator THUNE. Okay. Well put. 

I would like to ask you a little bit about the factors that the 

CFTC ought to consider, or at least you think ought to consider 

when making these new capital and margin requirements. Obviously, should they consider whether an institution is systemically 

important, I think that is probably a given. But should they consider the economic cost of tying up capital and margin requirements? 

Ms. BORN. Well, I think that there should be some cost/benefit 

analysis done, but I think in terms of assessing the benefits of having margins and collateral requirements, we need to focus on what 

happened in 2008 when the lack of such requirements played a significant role in bringing the financial system to a standstill. 

Senator THUNE. Do you think they ought to consider the benefit 

of price discovery that comes from having many investors in a liquid market? 

Ms. BORN. Absolutely, and that is why transparency is necessary, 

and price discovery is best effectuated through exchange trading. 

So I think the higher the percentage of transactions that actually 

go on exchange where everybody, all market participants, all commercial entities, can see what the prices are, the better. 

Senator THUNE. Should end users who are hedging financial risk 

be given an exemption? 

Ms. BORN. An exemption from clearing? 

Senator THUNE. Yes. 

Ms. BORN. They have been given the exemption. If it had been 

up to me—and it was not—I would have been concerned because, 

of course, they will not have the protections of central clearing, 

which reduces counterparty credit risk. They will not have the advantages of transparency, which would reduce their costs. But Congress and the President of the United States made that decision, 

and I accept it. 

Senator THUNE. Will users who are not or should users who are 

not systemically important be allowed to front less capital? 

Ms. BORN. To have less capital themselves? 

Senator THUNE. To front less capital, right. 

Ms. BORN. Well I think you need to distinguish between capital 

requirements and margin requirements. I think they need to put 

up margin. I do not think the capital requirements of small participants is a significant—— 

31 

Senator THUNE. A final question. My time is running out. I 

would direct this to either one of you. But do you believe that the 

position limits that are being proposed by the CFTC will raise costs 

for smaller investors who have money in commodity mutual funds? 

Ms. BORN. I have not thought of it in those terms. I do think that 

the position limits are critically important to stem excessive speculation, which I think we have seen in a number of commodity markets. Recently we certainly saw it—and the Financial Crisis Inquiry Commission discusses this. We saw it in the summer of 2008, 

and it certainly made the financial system much more fragile. 

Senator THUNE. Mr. Roth? 

Mr. ROTH. I would assume that the imposition of new regulations 

generally increases costs for someone. The question is always: Is 

there an offsetting benefit to that regulation? And in this case the 

judgment is whether there is excessive speculation and whether it 

is hurting the overall economy. 

Senator THUNE. Okay. Thank you, Madam Chairwoman. 

Chairwoman STABENOW. You are welcome. 

Thank you very much to both of you. We will excuse you and ask 

our third panel to join us. 

[Pause.] 

Chairwoman STABENOW. Well, good morning, and thanks very 

much to each of you for coming and for your patience. It is always 

a challenge being the third panel of witnesses, so we appreciate 

your patience this morning. Let me introduce our witnesses. 

Mr. Chuck Conner is the president and chief executive officer of 

the National Council of Farmers Cooperatives. He has worked at 

the USDA as Deputy Secretary, at the White House as a Special 

Assistant to President Bush, and as president of the Corn Refiners 

Association, and we welcome you this morning. 

Mr. Adam Cooper is the senior managing director and chief legal 

officer at Citadel LLC in Chicago, and he is here today on behalf 

of the Managed Funds Association, an organization he knows well, 

having served two terms as the chairman. At Citadel Mr. Cooper 

is responsible for the firm’s global legal compliance transaction 

management and regulatory affairs function. We welcome you. 

I should also mention just on the side that Mr. Cooper is a graduate of the University of Michigan, so even though I went to Michigan State, I will welcome you. 

[Laughter.] 

Chairwoman STABENOW. And then last, certainly not least, is 

John Damgard, who has been president of the Futures Industry 

Association for nearly 30 years. Mr. Damgard also has a record of 

public service with stints at the USDA and the White House, and 

while at the USDA served as Deputy Assistant and Acting Assistant Secretary of Agriculture, was responsible for major marketing 

and regulatory functions at the USDA. 

So we welcome all three of you, and we will ask Mr. Conner to 

go first. 

32 

STATEMENT OF HON. CHARLES CONNER, PRESIDENT AND 

CEO, NATIONAL COUNCIL OF FARMER COOPERATIVES, 

WASHINGTON, DC 

Mr. CONNER. Chairwoman Stabenow, Ranking Member Roberts, 

and members of the Committee, thank you for holding this hearing 

today to review the implementation of the Dodd- Frank Act. I appreciate the opportunity to be here to discuss the role of the overthe-counter derivatives market in helping farmers and, more specifically, farmer-owned cooperatives manage commodity price risks, 

which is such an important factor today. 

Before proceeding further with my testimony, Chairwoman Stabenow, I just do need to say that while my remarks express some 

degree of criticism against the Commodity Futures Trading Commission and the direction they are taking, as an organization we 

have been given unprecedented access to them as well and certainly given full opportunity to make our views known throughout 

that process, both to the Commissioners as well as to the staff 

members at the CFTC, and for that we are very, very appreciative 

to them. 

NCFC is here today to ask for your continued help in ensuring 

that the implementation of the Dodd-Frank Act does indeed preserve the management tools available for farmers and their cooperatives. We were pleased to hear your own remarks, Chairwoman Stabenow, and those of Senator Klobuchar at the earlier 

hearing on March 3rd on Dodd-Frank implementation. 

Due to market volatility in recent years, co-ops using more and 

more over-the-counter products to better manage their risk exposure by customizing what are known as commercial hedges, and 

more producers are depending upon their cooperatives to provide 

them with these tools to manage price risk and to assist them in 

locking in these margins. 

As I indicated earlier, and as others have noted, volatility is 

probably one of the most difficult challenges that we face in American agriculture today. American farmers and ranchers must continue to have access to these new and innovative risk management 

products if they are to survive. 

NCFC supports elements of the Dodd-Frank Act that bring more 

transparency and oversight to the over-the-counter derivatives 

markets. However, the uncertainty created by the ‘‘definitions’’ 

rules is our greatest concern at this time. While the CFTC has proposed regulations for swaps and swap dealers, it is unclear to us 

who will be subjected to these additional regulations. Further, 

some activities of co-ops would appear to be swept into the ‘‘swap 

dealer’’ definition category. 

The two main issues in the proposed rule are the application of 

the so-called interpretive approach for identifying whether a person 

is a swap dealer and the very low thresholds on the de minimis exception. The proposed rule would likely capture a number of entities that were never intended by this Committee to be regulated as 

swap dealers, including farmer cooperatives. 

Additionally, some cooperatives are at risk of being designated as 

swap dealers due to their unique structure. For example, a federated grain or farm supply co-op is owned by many local cooperatives which are separate business entities. Unlike a traditional corVerDate Nov 24 2008 00:59 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\DOCS\71629.TXT MICHA
33 

porate structure where risk can be transferred and consolidated internally, cooperatives look to transfer risk from the local level to 

an affiliated federated co-op. Using swaps as a tool to transfer that 

risk should not lead them, we believe, to be designated as dealers. 

Under the draft rules, they simply would be. 

These rules were intended for large, systemically important institutions, and to answer an earlier question, we are not in that category by any means. Imposing them on co-ops would mean increased financial requirements and other regulatory costs. This in 

turn would make offering these services to our farmer members 

simply uneconomical. Such action would result in the unintended 

consequence of increasing risk in the agriculture sector and to 

farmers— the exact opposite of what this Committee, I believe, 

would have happen. We do not believe this was your intention. 

So I thank you again for the opportunity to testify before the 

Committee. We appreciate your role, your very active role, in ensuring that farmer co-ops will continue to be able to support the 

viability of their member farmers and for the cooperatives that we 

own, and we look forward to answering any questions you may 

have. 

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

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. COOPER. 

STATEMENT OF ADAM COOPER, SENIOR MANAGING DIRECTOR AND CHIEF LEGAL OFFICER, CITADEL LLC ON BEHALF 

OF MANAGED FUNDS ASSOCIATION (MFA), CHICAGO, ILLINOIS 

Mr. COOPER. Thank you, Chairman Stabenow, Ranking Member 

Roberts, members of the Committee. I am here on behalf of the 

Managed Funds Association and its members, but also on behalf of 

Citadel, which is a global financial institution that provides asset 

management services and a range of capital markets activities 

from our headquarters in Chicago and offices in financial centers 

such as New York, San Francisco, Boston, London, and Hong Kong. 

MFA appreciates the opportunity to provide its views on the implementation of Title VII of the Dodd-Frank Act, and we commend 

the Committee for its diligent oversight of the new regulatory 

framework affecting derivatives. MFA is the voice of the global alternative investment industry, and our members help pensions, endowments, and other institutions diversify their investments, manage their investment returns, and generate reliable returns to meet 

their obligations to their beneficiaries. 

Our members are active participants in the OTC derivatives 

markets. We have a strong interest in promoting the integrity and 

the proper functioning of these markets through the increased 

transparency, competition, and systemic risk mitigation. MFA recognizes the efforts of the CFTC and the SEC in promulgating numerous new regulations called for under Dodd-Frank. 

We believe it is imperative that the regulators implement the 

rules in a straightforward, common-sense, and workable manner. 

To assist in these efforts, we have provided regulators and we have 

submitted in connection with our testimony here today a blueprint 

34 

which contains a detailed plan for adopting and implementing all 

Title VII rules. By properly ordering priorities and establishing defined milestones, the OTC derivatives market could achieve substantial progress towards key regulatory forms, including central 

clearing, sooner rather than later. 

MFA supports policymakers’ efforts to reduce systemic risk by requiring central clearing and data gathering about swaps. We believe that a straightforward and workable phased implementation, 

starting with central clearing, will play an essential role in reducing systemic, operational, and counterparty risk; will enhance market transparency, competition, and regulatory efficiencies; and will 

fulfill the primary goal of Title VII of Dodd-Frank. We are confident that good clearing—and, that is, clearing with open access 

and real-time processing—will become the foundation for competitive execution facilities and significant improvements in transparency. 

Clearing of OTC derivatives is not new. Extensive dealer-to-dealer clearing happens today. The buy side has also undertaken significant preparations. For example, a number of buy-side firms, 

Citadel included, have negotiated clearing agreements, tested margin methodologies, tested straight-through processing, and worked 

through a wide range of operational and reporting issues necessary 

to clear at scale. It makes good sense from a policy perspective to 

capitalize on this momentum and facilitate greater buy-side access—great buy-side access to clearing now. 

We urge regulators to move promptly and to ensure that all market participants that want access to clearing have access to clearing. The success of central clearing and data gathering will depend 

on the structure, governance, and the financial soundness of the 

clearinghouses, the data repositories, and the other institutions in 

this marketplace. We strongly believe there is a need for those entities to have transparent and replicable risk models and straightthrough clearing processes that enable fair and open access that 

incentivize competition and that reduce barriers to entry. It is important to have customer representation on the governance and 

risk committees of the clearinghouses and for no one group to constitute a controlling majority. As financial end users, MFA’s members regularly exchange margin with their counterparts. 

The prudential regulators’ proposed capital and margin requirements for swap dealers and for major swap participants do not require those entities to post variation margin to their non-dealer 

counterparts. This will undermine market discipline. In fact, the 

absence of this two-way margining discipline and regime is the central lesson to AIG’s failure. 

We are also concerned that the CFTC’s proposed margin and segregation rules may impair arrangements that permit netting across 

customers’ cleared and uncleared positions. We believe this will increase systemic and settlement risk and will restrict the efficient 

use of capital. 

MFA remains concerned about the efficacy of position limits. We 

are particularly concerned about the workability of the CFTC’s proposed rules, which depart from its longstanding policy on 

disaggregation of independently controlled accounts. Inappropriately formulated limits would impair the ability of markets to serve 

35 

their essential risk allocation function, which would increase the 

cost of managing risk and harm hedgers and ultimately consumers 

of these products. 

Lastly, we are aware that in Europe and throughout the world, 

regulators are working on proposed OTC derivatives regulations to 

align with the Dodd-Frank Act. We are concerned about the 

extraterritorial application of these regulations; however, we very 

much appreciate the ongoing efforts of U.S. and non-U.S. policymakers and regulators to coordinate and ensure the harmony, the 

efficacy, and the alignment of derivatives reforms. 

On behalf of Citadel and the MFA, I very much thank you for 

the opportunity to testify and stand available to answer any questions. Thank you. 

[The prepared statement of Mr. Cooper can be found on page 58 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Damgard, welcome. 

STATEMENT OF JOHN DAMGARD, PRESIDENT, FUTURES 

INDUSTRY ASSOCIATION, WASHINGTON, DC 

Mr. DAMGARD. Thank you. Chairwoman Stabenow, Ranking 

Member Roberts, Senator Lugar, I am John Damgard, president of 

the Futures Industry Association. On behalf of the FIA and its 

members, I want to thank you for the opportunity to appear before 

you today. 

FIA is the leading trade association for the futures, options, and 

over-the-counter cleared derivatives markets. Its membership includes the world’s largest derivatives clearing firms, as well as the 

leading derivatives exchanges from more than 20 countries, including Citadel. 

We take justifiable pride that throughout the financial crisis, the 

futures markets continued to function exactly well. The futures 

regulatory system passed the test with flying colors. And I would 

like to say, in contrast to what Mrs. Born said, our trade association has no interest in stonewalling or undermining this process. 

Our members have spent hundreds and hundreds of millions of dollars in their efforts to make sure that they are ready for these 

changes, and I think I speak for all other trade associations that 

are in the financial world. 

One of our greatest concerns with the Dodd-Frank Act is the potentially adverse effect on competition. As the president of the FIA, 

I can assure you that the global derivatives marketplace is becoming more and more competitive every year. Just last week, I was 

in London for our annual international derivatives expo, and I 

heard a lot of discussion about the potential impact of these new 

regulations. Our competitors in London and in other financial centers around the world are watching what we do here very closely 

indeed. While our regulators are making a strong and sustained effort to consult with their counterparts abroad, there are some significant differences emerging in our respective approaches, and we 

need to do our utmost to preserve a level playing field. 

In my written testimony, I have attached a six-page summary of 

more than two dozen comment letters that the FIA has filed on 

various Dodd-Frank rulemakings. I doubt that any of us realized 

36 

last year just how complicated this process would be. Yes, the futures regulatory system provided Congress with an excellent model 

for regulating swaps, but cleared swaps are not the same as futures. One size does not fit all. To get this right, the new regulatory framework must be carefully designed and sensibly implemented. 

I commend the leadership of the CFTC and the SEC for their determination to carry out the monumental rulemaking mandate assigned them by Dodd-Frank. But through no fault of their own, it 

has become obvious to everyone that the July 16th deadline was 

simply too ambitious. 

Just yesterday, the CFTC issued a proposed order providing temporary regulatory relief for several important provisions of the 

Dodd-Frank Act that are due to take effect on July 15th, and I 

think Chairman Gensler went over that fairly carefully. But this 

is only a temporary measure. Of far more importance is the substance of the many rulemakings now under consideration and the 

overall impact of the proposed regulations as a whole. The CFTC 

has not yet made decisions on a host of critical issues that will 

have an important influence on the structure of this industry and 

the costs that my members must bear. 

The CFTC confirmed yesterday that the final definitions of 

‘‘swap, ‘‘swap dealer,’’ and ‘‘major swap participants’’ will be among 

the very last rules adopted, and yet many of the new regulatory requirements will hinge on these core definitions; and until they are 

finished, it is hard to know for sure who and what will be covered. 

Chairman Gensler has correctly observed that the proposed rules 

fit together in a mosaic. Mosaics, however, are nothing more than 

chips of colored stone until they have been pieced together into a 

work of art. The Commission has shown us the individual chips, 

but it has not shown its vision on how they will fit together. The 

industry and the public deserve an opportunity to analyze and comment on this regulatory mosaic before it is set in concrete. 

In conclusion, I would like to circle back to my opening theme, 

namely, the international dimension of Dodd- Frank. When Congress was considering this legislation, many in the financial services industry and in Congress cautioned that the extraterritorial 

reach of the regulatory such being established here would inhibit 

the ability of U.S. market participants to compete internationally. 

Today there is increasing evidence that last year’s fears will be this 

year’s reality. 

We were pleased to learn that the Chairman and Ranking Member of this Committee recently wrote to their colleagues in the European Parliament expressing their concern. As the Senators emphasized, ‘‘a key objective of the [Dodd-Frank] Act was to ‘consult 

and coordinate with foreign regulatory authorities on the establishment of consistent international standards’ for the regulation of derivatives transactions.’’ The FIA welcomes your pledge to work with 

your European colleagues to harmonize these rules and stands 

ready to help in any way we can. 

In our experience, the CFTC’s Part 30 rules provide a successful 

model for limiting the extraterritorial impact of Dodd-Frank. The 

Part 30 rules, which govern the offer and sale of foreign futures 

and options to U.S. participants, were promulgated in 1987, as Dan 

37 

Roth said, and have promoted international trade for nearly 24 

years without sacrificing customer protections. CFTC’s Part 30 

rules recognize we cannot expect other countries to implement regulations identical to ours. Instead, it provides a mechanism for providing exemptions to exchanges and clearinghouses that are subject 

to comparable regulations in their home countries. 

The swaps markets, even more than the futures markets, are 

international in scope. This is in part because swaps have been 

traded in bilateral transactions, and there have been no trading 

platforms or central clearing organizations that would focus trading in certain locations. As regulations around the world develop 

rules, it is essential that they be coordinated and comparable, both 

with respect to substance and timing. 

Thirty years ago, the CFTC determined that given the agency’s 

limited resources, it is appropriate this time to focus the Commission’s customer protection activities upon domestic firms and upon 

firms soliciting or accepting orders from domestic users of the futures markets. This same policy should govern the regulation of 

swaps. 

In particular, we urge the CFTC to use its authority under DoddFrank to provide an exemption for swap clearinghouses located outside the United States that clear swaps for U.S. participants, provided that they are subject to comparable regulations in their home 

country. Such an exemption would facilitate international competition, provide more choice in clearing for U.S. entities, and free the 

CFTC staff to focus on transactions that more directly affect U.S. 

market participants, and I thank you very much for the opportunity to testify. 

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

71 in the appendix.] 

Chairwoman STABENOW. Thank you very much, and, Mr. 

Damgard, you answered the first question I was going to ask you 

in terms of what is happening abroad. Senator Roberts and I have 

sent a letter, and we will be working together with our European 

counterparts, and I appreciate your comments on that. As you can 

tell from the Committee discussion today, we are very concerned 

about how all this fits together and making sure it is done in the 

right way. 

Mr. Cooper, being part of a firm that is very active in these markets, I would like to hear more about your perspective on phasing 

in implementation of financial regulatory reform and any potential 

delays. Would delaying the bill create additional legal or market 

uncertainty, in your opinion? And what sort of information or certainty from the regulators would be ideal to help your firm meet 

the changes required by reform? 

Mr. COOPER. Thank you, Chairwoman. I think that I approach 

it really from the fundamental premise that we are today maybe 

literally 1,000 days from the demise of Lehman. We still do not 

have meaningful central clearing of derivatives. One of the greatest 

goals of Dodd-Frank was to reduce systemic risk that built up from 

the daisy chain of interconnectedness. 

Phasing-in represents a common-sense approach to—we do not 

subscribe to a big bang theory. There are a lot of rules. There are 

a lot of issues. But what we do know is that today the infrastrucVerDate Nov 24 2008 00:59 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\71629.TXT MICHA
38 

ture for clearing exists. I think as Mr. Damgard alluded to, we 

have been clearing derivatives for nearly a century in this country. 

Clearing takes place today between the dealers. The buy side is 

ready. We are asking for mandatory access to clearing for those 

firms that are ready to clear. Most of the risk that exists in the 

system today is derived from the largest firms and those that are 

capable and desirous of clearing. 

Certainty is key. Once we launch clearing and the related data 

that will be available to the regulators from reporting the swap 

data repositories, the regulators can then be much more thoughtful 

about phasing in and providing specificity about the subsequent aspects of implementation of Dodd-Frank. So we think the launch of 

clearing will, in fact, provide a range of data that will help our regulators make more informed decisions, smarter regulation, and 

greater certainty for the marketplace. 

Chairwoman STABENOW. Thanks very much. 

Mr. Conner, we appreciate your testimony today and for highlighting what is certainly an important responsibility of this Committee as we look at the importance of risk management for farmers and co-ops and end users in general. But I wonder if you might 

go into more detail about the impact of increased volatility in the 

commodity markets, how it has impacted your members, why it is 

critical to preserve the relationship between the farm and the coop, and also if you might have any specific examples on the impact 

of farmers or co-ops in terms of additional regulations that are 

coming, such as swap dealer requirements, that kind of thing. 

Mr. CONNER. Thank you, Senator Stabenow. Let me just say the 

costs are substantial, we feel, and, you know, the volatility in today’s marketplace is really just unprecedented. I mean, this is not 

theory. This is not, you know, hypothetical ‘‘what if’s.’’ I mean, we 

are living in the midst of, you know, the most volatile commodity 

times that we have ever seen in our Nation’s history. Last week 

USDA’s crop report and immediately, you know, prices are locked 

up, the maximum daily limits, you know, there are consequences 

associated with these kind of price moves, and you have both producers and buyers out there on any given day, you know, you are 

not looking to limit your exposure over the course of a day or a couple of days. I mean, you are trying to limit your exposure over the 

course of hours and minutes because there is that kind of volatility 

in this marketplace. 

You know, for our producers, obviously, you know, they just simply cannot withstand that kind of volatility. They cannot be sitting 

on a commodity that is worth something one day and the next day 

it may be worth 50 percent less—or 50 percent more. And if you 

are a livestock guy, you know, how do you deal with that that on 

any given day there can be that kind of change in your input cost? 

So this is a huge, huge issue for American agriculture. Co-ops did 

not get into this business, you know, because we saw opportunities 

out there. We got in there because our farmer owners came to us 

and said, you know, this may well be the number one issue we are 

facing, and as our co-op, what can you do to help us manage these 

kinds of risks? 

Individual farmers, despite, you know, the presence of a very 

strong futures market there for hedging, in many cases individual 

39 

farmers simply do not have the ability to hedge their commodities 

on the futures market and withstand the kind of margin calls that 

you could get in that daily price movement. They do not have access to that kind of capital to lock up, you know, to handle those 

margin calls. They have looked to the co-ops to say, you know, 

what can you do for me to basically absorb some of that margining 

kinds of requirements so that you can offer me a forward price at 

some point? You know, once I have my crop in hand, I will take 

that price, but I cannot handle the margin of then hedging that 

particular price on our futures exchanges. 

Co-ops, one of the functions we have done is we have assumed 

that. We have taken over that price risk function. We have taken 

over the responsibility for margining, if you will, those kinds of 

transactions. Some of that margining has involved over-the-counter 

swaps in order to limit our own exposure. 

The example I use, Madam Chairman, is I have had one co-op 

that on one given day, as a result of change in the corn and soybean market, had a $100 million margin call in one day. That is 

one transaction. So, I mean, you know, these are not small numbers, and the impact of trying to capitalize yourself to be able to 

withstand that kind of action on a given day—you know, you walk 

into the office and someone is on the phone saying, ‘‘I need $100 

million of your capital.’’ You know, you cannot sustain that kind of 

thing. And we have used, I think effectively, been forced to use 

these over-the-counter transactions to try and manage that on behalf of our producers. 

Mr. DAMGARD. Which in turn finds its way to the exchange. As 

a corn and soybean producer, I certainly sympathize and agree 

with everything Chuck says. And ye clearinghouses are very, very 

complicated organizations. I mean, they are very, very capital intensive, and to your point, Adam, the clearinghouses have to be 

very careful about establishing standards about who can be members of that clearinghouse and how much money it requires to be 

a member. You cannot let the local corner shoe store guy become 

a clearing member without running the other people that have substantial capital deciding to get out of the clearinghouse. 

So the clearinghouses have worked exactly well, but they do not 

eliminate risk. They mutualize it among the people that have the 

deep pockets. 

Chairwoman STABENOW. Thank you very much. 

Senator Roberts? 

Senator ROBERTS. Madam Chairman, once when I was Chairman 

of the Emerging Threats Subcommittee of the Armed Services 

Committee, I made it mandatory that every panel member be 

shackled to their chair so that they could hear all panels, and I just 

think it would be appropriate here, shackling. 

[Laughter.] 

Senator ROBERTS. But at any rate, it would be interesting to 

have a panel here with Mr. Conner and then have Ms. Born and 

then Mr. Cooper, and then I would like to place Chairman Gensler 

right next to John Damgard, and then have at it and have about 

a 15—you know, a roundtable discussion, and I think it would be 

very helpful. 

40 

Chuck, welcome back. Thank you for your contribution. Thank 

you for that last statement. What are you going to tell your membership as a result of this hearing? Are you going to say that you 

have every confidence that a farmer cooperative is free in regards 

to some of the CFTC rulings that you are worried about? What are 

you going to tell them? 

Mr. CONNER. Well, that is a great question, Senator Roberts. You 

know, again—— 

Chairwoman STABENOW. I am just going to say, he is going to 

start by saying it was chaired brilliantly. 

[Laughter.] 

Senator ROBERTS. I think that is a given, Madam Chairwoman. 

Mr. CONNER. We have had unprecedented access to Chairman 

Gensler and the Commissioners and the staff at CFTC, and so 

we—— 

Senator ROBERTS. Well, now, Chuck, wait a minute. 

Mr. CONNER. —have been given the opportunity—— 

Senator ROBERTS. Wait a minute, wait a minute. 

Mr. CONNER. All right. 

Senator ROBERTS. The Chairwoman has held a hearing. We sent 

a letter, three of us, down to the CFTC saying, ‘‘What is the legal 

standing after July 16?’’ And it was not until yesterday that they 

met. There were several 3–2 votes, which were obvious, in regards 

to deadlines and what was going on. And then we had the order. 

I guess that is the order. I said regulations. I was chastised by staff 

saying it is an ‘‘order,’’ and it is 23 pages long with two appendixes. 

I have not read it all. I am supposed to digest it. As I said before, 

I will probably get indigestion. 

Now, you cannot tell me that you have had access to the 31 

working groups and the 51 regulations and the thousand pages of 

regulations. You may be able to tell me as to your specific concern 

that you have had some access and have had some guarantee or 

something like that. 

Now, Senator Boozman indicated, ‘‘What am I going to tell a 

local manufacturer?’’ The Chairwoman does not know, I do not 

think. She is awfully good and awfully brilliant in conducting a 

hearing, but I doubt if she has had time because we did not get 

these things until 7 o’clock in the morning. The Wall Street Journal had more than we had. At any rate she does not know. Senator 

Klobuchar does not know. Senator Gillibrand does not know. Senator Thune does not know. Senator Johanns does not know. Senator Boozman does not know. Senator Chambliss does not know. 

Senator Lugar does not know. And I certainly do not know. We 

have staff, one member, that does know, but we have not had time 

to really digest it. 

I do not think that Chairman Gensler knows what all these 31 

working groups and 51 regulations are going onto the detail that 

we would like to know, and so they have simply delayed it until 

December 31, and we are in another state of swap purgatory, although there are some exceptions that we have been advised not 

to worry, you know, we are going to take care of this. 

Now, I am being a little harsh here, but the way that this has 

been handled, having a hearing the day before they come up and 

then regs showing up at 7 o’clock in the morning, I do not like that 

41 

at all. I do not think that is the way to be treated. I do not think 

the Chairwoman should be treated like that, or me or, for that 

matter, any other Senator. So I am sort of being obstreperous 

about this. 

Mr. Cooper, what are you going to tell your membership, John, 

what are you going to tell your membership in terms of what you 

found out at this hearing? 

Mr. DAMGARD. Well, Senator, we also—— 

Senator ROBERTS. How about another hearing a little bit later 

on? 

Mr. DAMGARD. We welcome that very much. We know that this 

mosaic that I spoke of is going to be very, very difficult to put together. I have great sympathy for Chairman Gensler. I think you 

are right. I think that, you know, he is working as hard as he can 

for coordination, but, I mean, somebody handed me this today, 

which he could not have known. Simon Lewis, who is the chairman 

of the Association of Financial Markets in Europe, was quoted as 

saying yesterday, ‘‘ ‘There remains the risk of poorly calibrated, 

rushed, inconsistent, or unclear regulation,’ Lewis told the Brussels 

audience.’’ So it is not easy for these things to be coordinated in 

a way that is going to make sense. 

Senator ROBERTS. Mr. Damgard, you said in your testimony the 

European Parliament is considering regulatory retaliation against 

the United States clearing organizations unless the U.S. allows 

mutual recognition of equivalent foreign regulatory regimes. It is 

not follow along or get in line. It is basically equivalent foreign regulatory regimes. 

What should the CFTC do to address this possibility? And what 

would be the consequences if the CFTC does not act in regards to 

a retaliatory kind of situation here in regards to what you heard 

over there in the European Parliament? 

Mr. DAMGARD. Well, in my testimony I talk about Part 30 initial 

recognition, and I think that really is the answer. And I think 

sometimes Secretary Geithner’s remarks about, you know, whatever, the light touch in London was the reason for this terrible 

tragedy, that was not constructive. I happened to be over there at 

the time, and people were not happy with that. They were saying, 

‘‘Well, you did not have any regulation on these products at all, so 

why can you criticized us for light regulation?’’ It tends to make it 

more difficult to reach any accommodation, and my sense last week 

was that if the United States goes it alone, we would be risking 

an awful lot of not only retaliation but damaging U.S. participants 

in the market. 

Senator ROBERTS. Well, I thank you for your comment. I am over 

time by a minute and 40, typically, but at any rate—and I have 

been rather unpleasantly irascible this morning, but I am irascible 

because of the situation, and I am just trying to figure out what 

you are going to tell your people. And I think what you are going 

to tell them is, well, it was a pretty darn good hearing, we had 

some pretty good pertinent questions, Chairman Gensler did the 

best that he could, Ms. Born was reliving the thrilling days of yesteryear in 2008, et cetera, et cetera, et cetera. But I am not sure 

if you got any specific, concrete answer that can put you at ease 

that you can tell your membership do not worry about this. It is 

42 

a situation where I think this Committee has to continue our 

strong oversight responsibility, and when things clear up a little 

bit—and Lord know, you know, Chairman Gensler has a tremendous challenge ahead because of the budget restrictions and what 

he is forced to do, mandated to do, what he wants to do under 

Dodd-Frank. 

So I do not know. Do you have any specific positive thing that 

you could go back to your membership and say, hey, you know, we 

think we are going to be all right? 

Mr. COOPER. Senator, if I may, I do think there is something encouraging that I can report to my members, and, that is, I have not 

heard anything that would detract from the regulators’ opportunity 

to announce a date certain by which clearinghouses will be open for 

business and that those who want access to clearing can have access to clearing so that we can phase in those rules, so that we can 

launch central clearing and reduce systemic risk today in a meaningful way. 

Senator ROBERTS. That is a good thing, and with that I think I 

will yield back. Thank you. 

Chairwoman STABENOW. Well, thank you very much. 

Let me say as we conclude the hearing, we thank all the witnesses today. We certainly appreciate your comments, and as we 

have said since the beginning of the year, we take our oversight responsibilities very seriously, and we will continue to do that both 

through the Committee hearing process but also on a day-by-day 

communication that is happening at staff, and certainly Senator 

Roberts and I are very engaged at various levels in this. 

So we thank you very much. Any additional questions for the 

record should be submitted to the Committee clerk within 5 business days, and the Committee hearing is adjourned. Thank you. 

[Whereupon, at 12:01 p.m., the Committee was adjourned.] 

(43) 

A P P E N D I X 

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DOCUMENTS SUBMITTED FOR THE RECORD 

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QUESTIONS AND ANSWERS 

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