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OVERSIGHT HEARING: 

IMPLEMENTATION OF TITLE VII OF THE 

WALL STREET REFORM AND CONSUMER 

PROTECTION ACT 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 3, 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): 

Oversight Hearing: Implementation of Title VII of the Wall Street Reform 

and Consumer Protection Act ............................................................................. 1 

Thursday, March 3, 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 

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

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

Schapiro, Hon. Mary, Chairman, U.S. Securities and Exchange Commission, 

Washington, DC ................................................................................................... 6 

Panel II 

Bunkin, Steven M., Managing Director and Associate General Counsel, Goldman Sachs, New York, New York ....................................................................... 27 

Duffy, Terrence A., Executive Chairman, CME Group Inc., Chicago, Illinois .... 25 

Greenberger, Michael, Law School Professor and Director, Center for Health 

and Homeland Security, University of Maryland School of Law, Baltimore, 

Maryland ............................................................................................................... 30 

Harlan, Jill, Corporate Risk Manager, Caterpillar, on behalf of the Coalition 

for Derivatives End Users, Peoria, Illinois ........................................................ 24 

Thompson, Larry, General Counsel, Depository Trust and Clearing Corporation (DTCC), New York, New York .................................................................... 28 

APPENDIX 

PREPARED STATEMENTS: 

Brown, Hon. Sherrod ........................................................................................ 44 

Chambliss, Hon. Saxby .................................................................................... 47 

Cochran, Hon. Thad ......................................................................................... 50 

Harkin, Hon. Tom ............................................................................................ 52 

Bunkin, Steven M. ............................................................................................ 54 

Duffy, Terrence A. ............................................................................................ 60 

Gensler, Hon. Gary ........................................................................................... 81 

Greenberger, Michael ....................................................................................... 92 

Harlan, Jill ........................................................................................................ 120 

Schapiro, Hon. Mary ........................................................................................ 124 

Thompson, Larry .............................................................................................. 133 

QUESTION AND ANSWER: 

Stabenow, Hon. Debbie 

Written questions for Hon. Gary Gensler ....................................................... 151 

Written questions for Hon. Mary Schapiro .................................................... 180 

Written questions for Larry Thompson .......................................................... 201 

Page

IV 

Roberts, Hon. Pat 

Written questions for Steven Bunkin ............................................................. 146 

Written questions for Terrence A. Duffy ........................................................ 148 

Written questions for Hon. Gary Gensler ....................................................... 154 

Written questions for Jill Harlan .................................................................... 178 

Written questions for Hon. Mary Schapiro .................................................... 182 

Written questions for Larry Thompson .......................................................... 201 

Chambliss, Hon. Saxby 

Written questions for Hon. Gary Gensler ....................................................... 172 

Written questions for Hon. Mary Schapiro .................................................... 194 

Cochran, Hon. Thad 

Written questions for Hon. Gary Gensler ....................................................... 175 

Written questions for Hon. Mary Schapiro .................................................... 195 

Gillibrand, Hon. Kirsten 

Written questions for Hon. Gary Gensler ....................................................... 171 

Written questions for Hon. Mary Schapiro .................................................... 193 

Harkin, Hon. Tom 

Written questions for Hon. Gary Gensler ....................................................... 166 

Written questions for Hon. Mary Schapiro .................................................... 189 

Leahy, Hon. Patrick J. 

Written questions for Hon. Gary Gensler ....................................................... 164 

Written questions for Hon. Mary Schapiro .................................................... 185 

Nelson, Hon. E. Benjamin 

Written questions for Hon. Gary Gensler ....................................................... 170 

Bunkin, Steven M. 

Written response to questions from Hon. Pat Roberts .................................. 146 

Duffy, Terrence A. 

Written response to questions from Hon. Pat Roberts .................................. 148 

Gensler, Hon. Gary 

Written response to questions from Hon. Debbie Stabenow ......................... 151 

Written response to questions from Hon. Pat Roberts .................................. 154 

Written response to questions from Hon. Patrick Leahy .............................. 164 

Written response to questions from Hon. Tom Harkin ................................. 166 

Written response to questions from Hon. Ben Nelson .................................. 170 

Written response to questions from Hon. Kirsten Gillibrand ....................... 171 

Written response to questions from Hon. Saxby Chambliss ......................... 172 

Written response to questions from Hon. Thad Cochran .............................. 175 

Harlan, Jill 

Written response to questions from Hon. Pat Roberts .................................. 178 

Schapiro, Hon. Mary 

Written response to questions from Hon. Debbie Stabenow ......................... 180 

Written response to questions from Hon. Pat Roberts .................................. 182 

Written response to questions from Hon. Patrick Leahy .............................. 185 

Written response to questions from Hon. Tom Harkin ................................. 189 

Written response to questions from Hon. Kirsten Gillibrand ....................... 193 

Written response to questions from Hon. Saxby Chambliss ......................... 194 

Written response to questions from Hon. Thad Cochran .............................. 195 

Thompson, Larry 

Written response to questions from Hon. Debbie Stabenow ......................... 201 

Written response to questions from Hon. Pat Roberts .................................. 201 

(1) 

OVERSIGHT HEARING: 

IMPLEMENTATION OF TITLE VII OF THE 

WALL STREET REFORM AND CONSUMER 

PROTECTION ACT 

Thursday, March 3, 2011 

UNITED STATES SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, 

Washington, DC 

The Committee met, pursuant to notice, at 2:34 p.m., in room 

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

Chairman of the Committee, presiding. 

Present: Senators Stabenow, Klobuchar, Bennet, Gillibrand, Roberts, Chambliss, Johanns, Boozman, Thune, and Hoeven. 

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

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

Chairwoman STABENOW. I am calling the meeting to order, and 

let me, before formally beginning—certainly welcome and good 

afternoon. We were just commenting upon the candy that is here. 

I have been looking for some dried cherries or blueberries to bring 

in for the Committee, and Senator Roberts beat me to it with— 

where is this candy from, Senator Roberts? 

Senator ROBERTS. Madam Chairwoman, they are from Abilene, 

Kansas, home of Dwight David Eisenhower. It is just one to a 

member and one to the people who are testifying, and then the people who share my views get two. 

Chairwoman STABENOW. Get two, okay. 

[Laughter.] 

Chairwoman STABENOW. Well, thank you. Thank you for the 

treats. Good afternoon, everyone, and we want to thank our two 

Chairmen for joining us today—we very much appreciate your 

time—and the other witnesses that will be with us, and we are 

here today, as we know, to discuss an extremely important part of 

the Committee’s jurisdiction: oversight of derivative reforms and 

the Wall Street Reform and Consumer Protection Act. 

Derivatives are a significant part of our financial markets and 

play an important role in our economy. More than 38 million Americans work at companies that use derivatives to manage their risk, 

and many more from pensions to municipalities use them to protect 

against market volatility. 

Unfortunately, derivatives also played a very significant role in 

the failure that led to the financial crisis. Before regulatory reform, 

2 

swaps were trading over the counter, off exchange, and in the dark. 

The result was that people who had saved money and played by 

the rules saw their 401(k)s plummet in value. Small businesses 

and farmers could not get the credit they needed to keep the lights 

on. Many had to close their doors permanently. Before it was over, 

8 million Americans had lost their jobs. 

Last year, Congress passed the Wall Street Reform and Consumer Protection Act to address the abuses in these markets and 

to give significant authority to our regulators to prevent future crises. During that debate I fought to ensure that the bill preserved 

the ability of American farmers, co-ops, manufacturers, utilities, 

and businesses to use derivatives for legitimate business purposes. 

They use derivatives to protect themselves from fluctuating currency exchange rates, interest rates, fuel prices, and commodity 

prices. This risk protection provides companies with the certainty 

to be able to grow and to be able to create jobs. 

While Congress greatly expanded the authority of the SEC and 

the CFTC, that authority came with a warning: not to overreach. 

These agencies must follow congressional intent and protect end 

users from burdensome margin requirements which, if imposed, 

would divert much needed capital from investments in job creation. 

Chairman Gensler, Chairman Schapiro, I hope you have considered how new rules with fit together in a way that makes sense 

for the markets, whether that is phasing in implementation or 

carefully sequencing the rules. We must make sure that market infrastructure is in place, the technology is ready, and that market 

participants are able to meet the requirements of this law. 

The new accountability and transparency we have created is 

clearly in the public interest, and the most important thing is to 

get it right. 

We also know there are serious budget constraints, and I am concerned that if our agencies do not have the tools that you need, we 

are asking for a repeat of the crisis that cost, as I mentioned, 8 million American jobs. 

It is also critical that the system be able to adapt to the significant changes in the law. These are dynamic, diverse markets, and 

we need to provide as much certainty as possible. 

I look forward to working with everyone involved to make sure 

that we are getting the implementation of these reforms right to 

protect our system from another crisis while maintaining the competitiveness of U.S. farmers, businesses, and financial markets. 

I would now like to yield to my distinguished Ranking Member, 

Senator Roberts. 

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

STATE OF KANSAS 

Senator ROBERTS. Thank you, Madam Chairwoman, and especially for holding what should be the first of several hearings regarding the implementation of the derivatives provisions included 

in the Dodd-Frank Wall Street Reform Act. 

Now, you and I are new in this particular leadership position on 

this Committee. We have the privilege of doing that. But we are 

not new, Madam Chairwoman, to the very important issues surrounding derivatives regulation. We have both worked very hard, 

3 

albeit from the different perspectives, on the Dodd-Frank bill as it 

went through the Senate last year, yet we share similar ultimate 

goals of properly reforming the derivatives markets while maintaining robust and liquid markets to allow our farmers and ranchers and commercial end users to manage risk and to discover market-driven prices. 

I think it is fair to say that, as the Ranking Republican of this 

Committee, I would have preferred a more measured approach 

than what was passed, but I am optimistic that the regulators, specifically the Commodity Futures Trading Commission and the Securities and Exchange Commission have sufficient discretion in 

their newly granted authorities to ensure that we stay competitive 

and do no harm to our domestic markets, exchanges, or users. I 

sincerely hope that you use it. 

That being said, I want to stress that the Dodd-Frank derivatives 

provisions reach far beyond financial firms. It will impact every 

segment of our economy from farmers and ranchers to manufacturers to energy companies to health care and to technology. DoddFrank gave the CFTC and the SEC nearly limitless authority with 

regard to the regulation of those derivatives, formerly known as 

over-the-counter swaps. 

Now, proponents of the derivatives portion of Dodd-Frank surely 

believe it will prevent the next financial meltdown, and I hope that 

that is true. However, the regulation provisions of Dodd-Frank go 

well beyond dealing with credit default swaps, which, as far as I 

can tell, were the only derivatives ever mentioned as being part of 

the financial crisis, and completely regulate every aspect of every 

swap and every swap user, including a whole lot of people and 

businesses who had nothing to do with causing the financial crises. 

So, the CFTC and the SEC have a lot of authority, and that does 

worry some folks. If our regulators stay focused, as indicated by the 

Chairwoman, on only writing regulations that truly reduce systemic risk and avoid actions that will unnecessarily raise risk management costs, then American farmers and businesses will be able 

to keep managing their business risk with derivatives in an economically sustainable manner. 

Madam Chairwoman, with the fragile state of the economy today, 

we need to ensure that all new derivatives regulations and, for that 

matter, any regulation meets two tests: it must lower the systemic 

risk and, two, costs cannot outweigh any benefits. With the 

globalization of derivative markets, we need to ensure our regulators are exercising their authority in a manner that ensures we 

will continue to have thriving domestic derivatives markets. 

I look forward to hearing from our witnesses today, and I thank 

them for their time. 

Chairwoman STABENOW. Thank you very much, Senator Roberts. 

And let me stress what you said in your opening statement as well, 

that this is the first but not only oversight hearing, and I look forward to working with you on this. 

In the interest of time, we will ask other members to submit 

their opening statements for the record, and we want to welcome 

our two distinguished Chairmen, Chairman Gensler and Chairman 

Schapiro, and we would ask, Chairman Gensler, if you would provide us with your comments. 

4 

Senator CHAMBLISS. Madam Chairwoman? 

Chairwoman STABENOW. Yes, Senator Chambliss. 

Senator CHAMBLISS. Before you turn to them, can I just make a 

quick statement? Since this is the first opportunity I have had to 

attend a hearing with you taking over the chairmanship and with 

my shotgun rider here for the last 6 years being the Ranking Member, I just want to tell you we are very proud of you. Congratulations to you for assuming the chairmanships, and it is going to be 

a fun time over the next couple of years. And I know under your 

leadership and with Pat’s assistance, we are going to continue to 

work in a very strong and bipartisan way, and I want to commend 

and congratulate both of you. 

Chairwoman STABENOW. Well, thank you. Thank you very much. 

It was a pleasure to work with you on the last farm bill in your 

position as Ranking Member, and we spent a lot of time working 

together to get that done, and I am looking forward to doing it 

again. So thank you very much. 

Chairman GENSLER. 

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

Mr. GENSLER. Good afternoon, Chairwoman Stabenow, Ranking 

Member Roberts, and members of the Committee. I thank you for 

inviting me here to testify on the Dodd-Frank Act, and I am 

pleased to testify on behalf of the Commission. I also thank my fellow Commissioners and CFTC staff for all their hard work and 

commitment to implementing the legislation. 

I am pleased to testify along with Chair Schapiro. I think it is 

probably the 10th or 12th time we have done this together over the 

2 years, and the work between the staffs of the two agencies has 

been very close. We have formed a great partnership, and I think 

it is a great partnership as well. 

Before I mention the testimony, I do want to congratulate the 

new Chair. I know it has been a difficult week. I read your statement and I express my condolences to you and your staff on your 

loss. It sounds like a wonderful individual. 

I also congratulate Senator Roberts. I hope that from time to 

time I will get that second chocolate, that we will agree. 

The CFTC is working very closely with the SEC and other regulators in the U.S. to implement Dodd-Frank. We also are coordinating and consulting with international regulators to harmonize 

the oversight of the market. And we have received thousands of 

comments from the public, both before the proposals were made 

and during public comment periods, that have helped inform the 

Commission. 

At this point in the process, the CFTC has come to a natural 

pause. We have actually proposed rules in 28 of the 31 topic areas 

that the rule lays out. We do have three important topics to move 

forward on, and we anticipate at least on the two major ones to do 

that hopefully in the next month or 6 weeks. 

As we receive comments from the public, we are looking at the 

whole mosaic, and hopefully the public is able to look at the whole 

mosaic as it is out there now. 

5 

Two components that we have asked the public specifically on is 

phasing of implementation, particularly with regard to the cumulative effect of these rules, and the cost/benefit analysis. The public 

comments will help inform the Commission as to what requirements can be met sooner and what requirements need to be phased 

over time. 

Further, asking the public is one of the best ways to actually get 

a clearer picture on the cost and benefits of proposed rules as they 

bring those estimates and thoughts to us. 

We will begin considering final rules only after the staff can analyze, summarize, and consider the comments, only after the Commission is actually able to discuss the comments and provide feedback from a wonderful five-person Commission to the staff and only 

after the Commission also consults with the SEC and the other 

Federal regulators and the international regulators. So this will 

take some time. We do not yet have any scheduled or planned final 

rule hearings. But as we bring this together, some of the, I will 

say, easier ones we will move on earlier, and others will certainly 

be over the course of the summer. And we are human. I will say 

it again. The July 15th deadline I do not think needs to change, 

but some of these rules will certainly be finalized after the July 

15th date. 

One proposed rule that I did want to comment on is with regard 

to margin. With the Dodd-Frank Act, Congress did recognize different levels of risk posed by different transactions in financial entities and the non-financial entities. This is what you took up in 

the clearing exemption. 

Consistent with that, proposed rules on margin requirements— 

the CFTC I am speaking for—should focus only on transactions between financial entities rather than those transactions that involve 

non-financial end users. And as I mentioned, I think that we will 

probably take up that proposal towards the early part of April. 

Before I conclude, I will briefly address the resource issue. We 

appreciate the difficult decisions that Congress and our great Nation face with regard to the budget deficit. Even in this context, the 

CFTC we believe is a good investment. Its mission is to promote 

transparent, open, and competitive markets, lowering the cost to 

end users and helping promote economic activity. The CFTC has a 

key role to play in overseeing derivatives markets for key commodities, including agricultural, energy, metal, and also financial products. 

Now, the U.S. futures market is about $40 trillion notional size; 

the U.S. swaps market, about $300 trillion size. We will share 

some of that responsibility, but it is about 7 times the size of what 

we oversee now, and it is far more complex. 

Last month, the President submitted a fiscal year 2012 budget— 

so for next year, not this year—of $308 million. That would be up 

from our current funding of $168 million. The CFTC, at about 675 

people, is not that much different in size than we were 16, 18 years 

ago. In the early 1990s, we were 634. Unfortunately, we did shrink 

all the way down to the crisis when we were only 440 people in 

2008. 

So only last year with this Committee and all of Congress’ help 

did we get back to our head count of where we were in the 1990s. 

6 

But staff is not enough. We will also need technology. Technology 

is the best way to be efficient as a regulator, and leveraged resources to the President’s budget in 2012 would actually double our 

resources for technology, remarkably just from $31 million up to 

$66 million, far less than most of the large dealers spend in technology in a month—actually less than most of them spend in a 

week. But it does ask for about 45 percent more people. 

I look forward to working with Congress to get these rules in 

place, and I look forward to your questions. 

[The prepared statement of Mr. Gensler can be found on page 81 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Now, welcome, Chairman Schapiro. 

STATEMENT OF HON. MARY SCHAPIRO, CHAIRMAN, U.S. 

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, DC 

Ms. SCHAPIRO. Chairwoman Stabenow, Ranking Member Roberts 

and members of the Committee, thank you for inviting me to testify today on behalf of the Securities and Exchange Commission regarding our implementation of Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. It is a pleasure to appear with my colleague Chairman Gensler. 

Title VII of the Dodd-Frank Act creates an entirely new regulatory regime for the previously unregulated over-the-counter derivatives market. In particular, it calls upon the SEC and the 

CFTC to write a substantial number of rules designed to bring 

greater transparency and oversight to the market. While implementing these provisions and meeting these goals is a complex and 

challenging undertaking, we recognize the importance of this task, 

and we are committed to getting it right. 

As part of that effort, we have engaged in a very open and transparent implementation process, seeking input from interested parties even before issuing formal rule proposals. In addition, our staff 

has sought meetings with a broad cross-section of market participants. We joined with the CFTC to hold public roundtables, and we 

have been meeting regularly with other domestic and international 

financial regulators to ensure consistent and comparable requirements across the rulemaking landscape. 

Title VII is intended, among other things, to reduce counterparty 

risk by bringing transparency and centralized clearing to securitybased swaps, reduce systemic risk, protect investors by increasing 

disclosure, and establish a regulatory framework that allows the 

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

To date, the SEC already has proposed ten swaps-related rules 

designed to achieve these goals. Among others, we have proposed 

rules that would address potential conflicts of interest at securitybased swap clearing agencies, security-based swap execution facilities, and exchanges that trade or will trade security-based swaps; 

rules that would specify who must report security-based swap 

transactions; what information must be reported and where and 

when it must be reported; and then what information will be disseminated to the public; rules that would require security-based 

swap data repositories to register with the SEC; rules that would 

7 

define security-based swap execution facilities and establish requirements for their registration and ongoing operations; and rules 

that would specify information that clearing agencies would provide to the SEC in order for us to determine if security-based 

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

follow to rely on their exemption from clearing requirements. And 

just yesterday, we proposed rules that would establish the standards for how clearing agencies should operate and be governed. In 

addition, with the CFTC, we have proposed rules regarding the 

definitions of many of the key terms within the Dodd-Frank Act. 

In the coming months, we expect to propose rules to establish 

registration procedures for security-based swap dealers and major 

security-based swap participants and rules regarding business conduct, capital, margins, segregation, and recordkeeping requirements for dealers and participants. Finally, we will also propose 

joint rules with the CFTC governing the definitions of swaps, security-based swaps, and the regulation of mixed swaps. 

We recognize the magnitude and the interconnectedness of the 

derivatives market, and so we intend to move forward at a deliberate pace, continuing to thoughtfully consider issues before proposing and certainly before adopting specific rules. 

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

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

As we proceed, we look forward to continuing to work closely 

with Congress, our fellow regulators and members of the financial 

community, affected end users, and the investing public. 

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

plans for implementation, and I look forward to answering your 

questions. 

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

124 in the appendix.] 

Chairwoman STABENOW. Well, thank you very much to both of 

you, and let me thank you for your service. We have given you 

major new responsibilities and tremendous amount of hard work 

that I know that you and your staffs are involved with. And issues 

around resources make it even more challenging, so thank you very 

much for your service. 

The first question I would have is regarding the harmonization 

of the rules that you talked about. I have some concerns regarding 

coordination, both domestically and internationally. There are not 

only significant differences between the U.S. and Europe and Asia 

approaches to swap regulation, but also certain rules that are between agencies right now. For example, the SEC and the CFTC 

rules regarding swap execution facilities and the definitions, realtime trade reporting are different. Also, we are still waiting on the 

product definition rules. These are rules such as swap or mixed 

swap that require coordination between the agencies and have significant market and jurisdictional implications. 

Having a different set of rules that governs similar transactions 

could have negative impacts on the markets. What can you do to 

assure us that the agencies are working together to iron out the 

differences on these rules, first? Second, could you expand on your 

8 

efforts to ensure that global financial regulation is harmonized to 

the maximum extent possible? And where do you think international regulators might take a different approach than what we 

are talking about in the U.S.? Chairman Schapiro? 

Ms. SCHAPIRO. We are having trouble coordinating who should 

speak first, so that maybe does not bode well for—— 

[Laughter.] 

Ms. SCHAPIRO. I think to some extent there are differences, clearly, in the rules that have been proposed by the two agencies, and 

I think that that is perhaps to be expected, in part because we 

have two agencies in largely overlapping spaces; but I also think 

because to some extent we have products that, while they are overthe-counter derivatives, are actually quite different. And the narrow area that is under the regulatory auspices of the Securities 

and Exchange Commission’s security-based swaps is a relatively 

small piece of the market and not a highly liquid piece of the market. So there may be some differences that arise just from the fact 

that we are, in fact, regulating different products. 

But what I would say is that, first of all, we are still only at the 

proposing stage, so there is opportunity for us to come together and 

have very highly consistent rules. Also, where we have proposed 

something slightly different than the CFTC, we have asked for 

comment on CFTC’s approach in our releases so that we can understand whether industry or other commenters think the CFTC has 

a better approach than the one that we have proposed. And so we 

are looking also at all the comment letters the CFTC receives in 

response to their proposals. 

I think that we will continue to work together very, very closely. 

We meet on a consistent basis. Our staffs meet virtually continuously. We have held many meeting with industry in particular on 

a joint basis so we can hear the same comments at the same time, 

and we will continue to push forward to ensure that we have as 

consistent an approach as possible. 

I would just add one thing in that I think that while differences 

in the products we regulate might dictate some differences, if I 

could use the example of swap execution facilities, we will both 

have rules requiring chief compliance officers. I think the obligations of those chief compliance officers must be the same. We cannot put an institution through very different rule proposals or final 

rules. But at the same time, because of the difference in the products we regulate, there might be some reason to have different 

rules about how orders have to intersect and interact in the marketplace because of the nature of the products being different. 

So we are very focused on this issue, and I am happy to speak 

to international, but I will let Chairman Gensler go ahead, and 

then if you wish, I can come back to that. 

Mr. GENSLER. I would just echo, I mean, I think that we are 

working very closely together. Maybe other than my fellow Commissioners, the four Commissioners at the CFTC that deserve any 

thanks that you have, it is for them as well. Chair Schapiro and 

I have spent an enormous amount of time, and I consider it a close 

working partnership. And I think I speak for probably a hundred 

plus other people at the agency who have similar partnerships with 

the SEC back and forth. We shared all our drafts with them. We 

9 

shared our memos with them in September and August and continue to do that. 

In terms of international coordination, it has been very positive. 

It is more than our two agencies. Of course, it is the Treasury and 

the Federal Reserve and the FDIC as well. I plan to be back over 

in Europe again in a couple of weeks in front a committee somewhat similar to this but in the European Parliament. They are currently considering and taking up rules that are very similar to 

what we have here on clearing, on data repositories—and, yes, they 

have an end user exception that is very similar to ours—and on 

dealer oversight. They are separately looking at something called 

MiFID reform, which is about trading, and that is a little later in 

timing. 

We have shared with them directly many of the drafts with the 

European Commission, the folks in London, the FSA. We even 

shared with Tokyo and Canada some of our drafts and got comments from them, though we do have different cultures and politics 

so there will be some differences. But I feel good that we are trying 

our best and they are, too. 

Chairwoman STABENOW. Well, thank you. In the interest of time 

here—my 5 minutes are almost up—let me just ask one thing 

about end users because you know how strongly I feel, and I hope 

the Ranking Member shares that as well. I am concerned about 

that there are differences—Chairman Gensler, you have said you 

will not impose margin on end users, but there is a difference with 

the Federal Reserve looking at a proposal for end users, and I am 

wondering if you are still committed to following congressional intent as it relates to this, not to apply this for end users and their 

affiliates. And how are you coordinating with the Federal Reserve? 

Mr. GENSLER. To the first part of your question, yes, for the 

CFTC Congress gave both of our agencies oversight for capital margin for non-banks, for the various products we oversee. We are 

working very closely with the banking regulators. We have been 

since August on this topic and are very close. So I cannot speak for 

them. They can speak for themselves. But I think we are looking 

to try to take up rules, as I said, in that early part of April and 

maybe even try to do it all on the same day, if that was possible. 

Chairwoman STABENOW. Thank you. 

Senator Roberts? 

Senator ROBERTS. Thank you, Madam Chairwoman. 

For both of you, thank you again for coming. The President recently issued an Executive order—it got a lot of notice and made 

the press; very happy to see that—that intended to cut through the 

red tape and needless regulations all throughout Government, 

which I think all of us support. Unfortunately, his Executive order 

does not apply either to the SEC or the CFTC. I said ‘‘unfortunately.’’ Perhaps you believe fortunately. 

I recently introduced legislation that would correct that oversight 

and I think would be a very good starting point for reviewing not 

only the regulations being proposed by the SEC and the CFTC in 

the implementation of Dodd-Frank, which is why we are here 

today, but also to all of the economically significant regulations 

being pushed out by Cabinet agencies across the board and across 

the country. 

10 

During a CFTC public meeting last week, Commissioner 

Sommers noted that all of the CFTC’s proposed rulemakings for 

Dodd-Frank contain what we might call boilerplate language stating—and I am stating here—the CFTC has not attempted to quantify the cost of the proposal because Section 15(a) of the Commodity 

Exchange Act does not require the Commission to quantify the 

cost—we talked about this a little bit when you had the courtesy 

to come to my office, and we had a nice visit—and that the CFTC 

is merely obligated to consider costs and benefits without determining whether the benefits outweigh the costs. 

I agree with Commissioner Sommers that the CFTC should 

quantify the costs of its proposal, especially when the original goal 

of the legislation was to reduce systemic financial risk. 

Chairman Gensler, given the importance of getting these rules 

right, will you commit to voluntarily included a meaningful cost/ 

benefit analysis prior to issuing any final rules? And that question 

would also apply to Chairwoman Schapiro. 

Mr. GENSLER. We at the agency are committed to do that, and 

it is also in our statute. Congress took this up, I do not know, probably more than a decade ago and included it directly in our statute, 

as you said, Section 15(a). And more broadly, with regard to the 

President’s Executive order, we actually are following the key principles in there about public involvement. We have also said that we 

will take up within 120 days is that it asks to have a plan to look 

at our entire rulebook, not just related to Dodd-Frank, but to have 

the plan to look at the whole rulebook. That might be later this 

year. And one of the best ways to actually learn about costs and 

benefits is also to ask the public. 

And so what we have asked each of our teams to do is to take 

all of the public comments, these thousands of comments, and summarize it and that we as Commissioners will consider each of those 

detailed comments from the public on the costs and, as I said, the 

benefits, quantities as well as qualitative issues that the public 

raises with us. 

Ms. SCHAPIRO. Senator, we actually consider economic data to 

really be core and central to all of our rulemaking proposals, and 

so we do include a cost/benefit analysis in our proposals, and we 

ask for comment on that and we will evaluate before we go final. 

I think specifically the language we look to is the economic implications of proposed rules under our statute. 

We also consider the impact of our rules on competition under 

the Securities Exchange Act. We have to do a Paperwork Reduction 

Act analysis so we can understand the burdens of information collection because, as you can imagine, we have lots of reporting rules. 

We do a regulatory flexibility analysis to understand the impact of 

our rules on small businesses. And as with the CFTC, we routinely 

ask people to provide us with economic analysis and data that we 

can incorporate into our rulemaking process. 

We are also following a very public notice and comment process 

for all our rules, which is suggested under the President’s Executive order. And we have made a determination that we would on 

a voluntary basis look at our existing rules, particularly with respect to their impacts on small businesses, to see if there are 

11 

things we can do to facilitate small business capital formation 

going forward. 

Senator ROBERTS. So I take it from both of your answers that the 

answer is yes. 

Ms. SCHAPIRO. Yes. A very long way. 

Senator ROBERTS. I have just a few seconds here, but, Chairman 

Gensler, I have a CFTC-specific question about the current budget 

situation. Your testimony states that you operate on $169 million 

per year. The President requested $308 million. As you have indicated, the other body is contemplating—i.e., the House budget— 

about $112 million. 

My question is: You have 680 employees apparently transferring 

from the information technology budget to avoid some layoffs. This 

concerns me given the fact that these new regs will require significant technological investments—we have talked about that—to administer. There is already a self-regulating body. The National Futures Association looks like it will be quite capable of shouldering 

some of the burden, if not a lot of the burden, of these implementation issues. 

Question: How will you handle Dodd-Frank implementation if 

the Commission stays at or below its current funding level? How 

will you prioritize the regulatory enforcement? Shouldn’t we at 

least define swap first and know what we are regulating? And 

what role do you see, if any, for the National Futures Association 

in implementation? 

I apologize for being over time to my colleagues and the Chairwoman. 

Chairwoman STABENOW. That is perfectly fine. It is an important 

question, but I would ask you both to be brief. 

Mr. GENSLER. If we were actually rolled back to the 2008 levels, 

we could not ensure the public that we can fulfill our mission on 

the futures market let alone take on swaps. We only had 440 people in 2008. Particularly if it came in the middle of the year, we 

would have to have reductions in force far more significant to 

smaller than that. 

On technology, I agree with the Senator very much. It is a very 

hard choice. It was not one that I wished to make, but to put it— 

we only spent $31 million on technology last year out of $168 or 

$169 million, only 18 percent. We think we need to spend significantly more. The President has proposed $66 million in technology. 

I think that is the right thing, spend more on technology, obviously 

some more on people, and, yes, we are working closely with the 

NFA and Dan Roth as to how they can take up registration and 

possibly examination of swap dealers. 

Ms. SCHAPIRO. Senator, I think that our ability to operationalize 

these many rules under Dodd-Frank under the current continuing 

resolution or a cutback is very much in question, and we will obviously need to be very transparent about what we are able to do and 

what we are not able to do. 

We are a little bit more disadvantaged in the sense that we cannot rely on a self-regulatory organization on the securities side the 

way the CFTC can rely on the NFA under the statute as it was 

drafted. So we will not have the option to push off hedge fund examination or swap dealer examination unless they are also dually 

12 

regulated and registered as broker-dealers on the securities side. 

So that will create some additional stress for us. 

We have made no decisions at this point about how to make the 

trade-offs between human resources and technology resources without knowing yet what the budget numbers really will look like. 

Chairwoman STABENOW. Okay. Thank you very much. 

We will now go to members’ questions for 5-minute rounds. If we 

finish and there is someone who wants to ask a question after we 

have done this once, then we can offer that. But right now I would 

like to ask for 5 minutes, and we will start with Senator Bennet. 

Senator BENNET. Thank you, Madam Chair. Thank you for holding the hearing. 

Thank you for your testimony. We get to see each other all the 

time on Agriculture and Banking. 

I wanted to come back on the international question for a second 

that the Chairwoman had raised because it is incredibly important 

that our efforts here do not force trading in other places rather 

than here, especially in markets that are untransparent or have 

vastly different regulatory regimes. And I wonder whether that, 

first of all, is a risk in your view and what we are trying to do to 

mitigate that risk. And are there regions or countries that you 

worry about? 

Mr. GENSLER. It is a risk because risk and money know no geographic boundaries or borders. And, in fact, it moves not just in 

minutes but it moves in microseconds and nanoseconds. So we are 

working very closely with international regulators. I think we have 

made great progress with Japan, with Canada, with Europe, but 

there are some regions that are not as engaged. 

I would say this, that the statute is very clear. If an international bank is dealing with U.S. commerce, is entering into 

swaps with U.S. counterparties under Section 722 of the act, it is 

supposed to be transparent and supposed to have the benefits of 

the act. And so one of the things we are trying to ensure is, whether it is an international bank or a U.S. bank that is dealing with 

a U.S. counterparty, that it would be a level playing field. And we 

think that is very important, and we think that was Congress’ intent to make sure that U.S. banks somehow, you know, did not 

have the same treatment. 

Ms. SCHAPIRO. I would agree these are incredibly global markets, 

and there are many, many cross-border issues for us to resolve. But 

I do think that most other foreign jurisdictions are in the process 

of developing their own derivatives regulatory regimes. I would say 

they are, as a general matter, at earlier stages than we are, but 

I think also very much committed to having a reasonable regulatory approach. 

It seems to me that we have to build a system in this country 

that makes people want to do business here because a race to the 

bottom will not serve anybody well, and as you know from the 

Banking Committee, after May 6th, when we had that extraordinary volatility in our equity and futures markets, we saw lots of 

people pull out because they were not sure about the basic integrity 

and quality of the U.S. markets. And a sound, rational regulatory 

system can do a lot to giving people basic confidence that this is 

someplace where they want to do business. 

13 

So we have to translate that desire, which I think all regulators 

share, into very consistent, concrete rules that make it possible for 

businesses to operate fluidly around the world but not engage in 

regulatory arbitrage and not have the regulators looking for a race 

to the bottom. 

Senator BENNET. I think that is well put, and Senator Roberts 

said at the beginning that he hopes this is the first of several, and 

I agree with that. And I hope over time we can keep our eye on 

this question about what is really happening globally, whether we 

are pushing people away, and also away to places that create systemic risk, which brings me to my last question. 

There was a lot of discussion that we had when we were legislating Dodd-Frank about the risk of the clearinghouses themselves 

becoming systemically risky. I used the word ‘‘risk’’ twice in one 

sentence—appropriate given what we have just been through. 

Could you tell us a little bit about that, what you are doing to mitigate that danger? 

Ms. SCHAPIRO. I would be happy to. In fact, it is a little fresh in 

my mind because yesterday the SEC proposed clearing agency 

standards that will now go out for comment, and the goal there is 

to ensure that clearing agencies do not marshal risk together and 

then not have the risk management capabilities to manage it so 

that they—the proposals we set out yesterday is quite a large number of requirements, but the basic goal is to create fair and open 

access so we have competition, promote prompt and accurate clearances and settlement, finality of payments, safeguarding of securities and funds, and good risk management practices, including testing of margin models, limiting exposure to individual counterparties, maintaining financial resources so that transactions—so that 

the institution can withstand the default by, in the case of the 

rules we propose, the two largest exposures in a security-based 

swap clearing agency. 

And so I think we will be very anxious to get comment on this 

set of proposals, but I think it does a lot to really bolster the risk 

management and integrity of clearing agencies because what you 

have said is exactly right. We have to get this right, or all of this 

effort to move transactions into clearing agencies to reduce 

counterparty risk will really come to naught. 

Mr. GENSLER. I would just say what we are doing is following 

international standards, so it is good news on the international 

front. IOSCO, which Chair Schapiro plays a big role in, but we 

have a lesser role at the CFTC, has international standards. They 

are still updating those, but our clearing rules are meant to be consistent also so that our U.S. clearinghouses will be accepted by Europe. Europe has a provision in there, what they are considering 

in front of the European Parliament, that there has to be an 

equivalency. So for European banks and European end users to use 

the clearinghouses, they want them up to international standards. 

So that is a harmonization and clearing question together. 

Senator BENNET. Thank you. 

Chairwoman STABENOW. Thank you. 

Senator Johanns? 

Senator JOHANNS. Thank you, Madam Chair, and I thank both 

of you for being here today. I really appreciate it. 

14 

I am listening to the testimony of both of you, and I know you 

both to be people of enormously good faith, and I think you deal 

with this straight. But there is such a different story between the 

world you see from where you are at and those who are regulated. 

In fact, I would go so far as to say that I really do think that 

we are going to look back in 5 years and ask ourselves what happened to this market. I do think we are forcing it out of the United 

States to areas where it will be in the shadows and it will be less 

regulated. This is a big business. Any country would want this 

business, and they will do everything they can, I believe, to take 

it away from us. So I think we are just subjecting our economy to 

enormous risk here by overregulation. 

Let me ask you a couple of specific questions, though. By any 

measure, I think both of you would have to agree that because of 

the act, not because of something new invented, there has been a 

massive amount of regulations and paper. I mean, we must be 

clearing forests to keep the paper going into your office. 

Just speaking honestly, there cannot have possibly been any kind 

of decent economic analysis or cost/benefit analysis of these rules 

and regulations, especially the interrelationship between your two 

areas. Is that a safe assumption? 

Ms. SCHAPIRO. Senator, I think our staff—we have about 30 

economists on our staff, and as I say, we do cost/benefit analysis 

for all of our rule proposals and our final rules, and I think they 

have worked very hard to do the best quality economic analysis 

possible. And as I said, we seek economic data and information 

from the industry, which has lots of access to good data because it 

is their data and lots of access to high-powered economists to help 

generate it and we try to incorporate that in our rulemaking process. 

There is no question that the pace of rulemaking has been a 

challenge, and we will undoubtedly miss a number of the deadlines 

because we are trying to take the time we need, even if it was not 

necessarily time that was offered under the statute. Part of that 

time is to enable us to try to do high-quality cost/benefit analysis. 

I understand your concern. I clearly hear it. I think we have to 

be highly sensitive to the regulatory regimes that develop around 

the world. But we also, I think, have to be leaders in bringing people to rational, high-quality regulation of this market in a way that 

allows businesses to continue to function effectively. 

Senator JOHANNS. Chairman, here is my concern. You know, everything I read about the financial crisis is that there were a handful of enormously greedy people who created a system that darn 

near brought our economy down. And I am not talking about millions of people, although millions got caught up in it. I am talking 

about a handful of very, very powerful people in key positions who 

made very dumb decisions over time. 

And I look at this, and I find it heart-breaking. I mean, I hear 

about the little gas and oil company somewhere out there that is 

trying to hedge risk, or the farmer, and all of a sudden they are 

caught up in this massive rewrite, and they just do not have the 

economic power to deal with you. 

Ms. SCHAPIRO. I agree with that, and that is why I think end 

user exemption from the clearing requirement is so important, and 

15 

Congress was very wise to include that. The clear congressional intent we have heard with respect to margin on end users, with respect to rules that are not really the subject for today but hedge 

fund reporting, for example, on the SEC side. We have tried to tier 

the market so that we can have lesser burden on smaller hedge 

funds. We have proposed a small bank exemption as well from the 

clearing requirements on the SEC side. So we are trying to be very 

sensitive to those issues, and there is no desire to make it harder 

for any institution to mitigate the risks that it faces in running its 

business. 

Senator JOHANNS. Chairman Gensler, I am out of time, and I do 

not want to abuse the privilege of being here, and others want to 

ask questions. Here is what I would ask of the two of you, just to 

wrap up. You have been very, very accommodating in stopping by 

all of our offices. I would hope that you would set aside some time 

to do that again. I have got some very serious concerns, and I do 

not want to be Chicken Little running around, ‘‘The sky is falling, 

the sky is falling.’’ But I think we are overregulating in a massive 

sort of way, and I just want to try to come to grips with what we 

are headed toward here. 

Mr. GENSLER. I would like to do that. I think it is a marketplace 

that is enormously consequential to those farmers, those oil producers, the gas stations. It is to make sure it is transparent and 

it does not pose risks to those folks. They are not going to be in 

the clearing. They are not going to be in the margin at the CFTC. 

They are not going to be major swap participants and so forth. But 

they benefit from transparency and they benefit that the folks that 

are the big actors do not force millions of people out of work because of the calamities like we had in 2008. 

Chairwoman STABENOW. Thank you very much, and I would just 

echo what Senator Johanns has said in terms of continuing to be 

available. We appreciate that very much. But it is very important 

to members of the Committee given the impact on the economy and 

the fact that we need to make sure that this is being done correctly 

and we have the opportunity to continue to have dialogue. So I 

would echo Senator Johanns’ request. 

Senator Gillibrand? 

Senator GILLIBRAND. Thank you, Madam Chairwoman. 

Thank you both for being here. I respect you both immensely and 

appreciate your dedication and service at this time. 

I would like to drill down on two of the questions that the Chairwoman started with, compliance costs and competitiveness and 

international harmonization, and then ask a question about fiduciary duty if we can get to it. 

But on compliance costs, many people are concerned that because, you know, you are making this effort to work together to 

make sure your rules are compatible, there are still a number of 

significant differences in implementation that may result in higher 

compliance costs. For example, under current proposed real-time 

reporting rules, the SEC has put forward 12 categories of data it 

requires while the CFTC has between 29 and 37 varying requirements for block trades and other specific inconsistencies. 

What are you actually going to do to iron out the differences for 

these technical differences to make it straightforward and simple 

16 

to report this essential information? And, you know, do you have 

a plan to do that? And how will you do that? 

Ms. SCHAPIRO. Well, I would say that as the comment letters 

come in and we read both the CFTC’s comment letters on their proposals and our own, we will sit down together and try to hammer 

all of these differences out. I think there are some differences that 

will perhaps continue to exist for very good reason because the nature of the markets is so different. As you know, the Securitiesbased swaps, we are talking about under the SEC’s jurisdiction are 

only about 5 percent of the notional value of this marketplace. So 

it is a pretty small piece, and these are products that do not trade 

anywhere near the way interest rate swaps trade, with anywhere 

near that kind of liquidity. So there may be some reasons for us 

to approach something like block quite differently than the CFTC 

has chosen to do it. We have actually not put out our block proposal yet. We have asked for comment on how should we think 

about block trading in the context of our markets, and then we will 

come out with some standards, objective standards on block trading 

at a later time. 

Mr. GENSLER. I know we have about 75 comment letters on the 

real-time reporting rule. It closed about 3–1/2 weeks ago, so the 

staff is still summarizing it. But we will be looking very closely at 

the SEC’s comments, our comments, and as Chair Schapiro said, 

some of the product differences because we cover oil swaps, interest 

rate swaps, agricultural swaps. So some of those fields may be relevant for, for instance, agricultural swaps that are not relevant for 

interest rate swaps. 

Senator GILLIBRAND. Okay. In terms of international harmonization, one of the concerns that I have is in timing and making 

sure we have a timetable because obviously we do not want to create the opportunity for regulatory arbitrage, and we want to avoid 

incentives for market participants to go abroad. So are you seeking 

a memorandum of understanding with other countries? What are 

you actually going to do to prevent this kind of reaction? 

Mr. GENSLER. We have actually initiated dialogue with a number 

of other countries. We think that the CFTC will probably have between a dozen and 20 memorandums of understanding, principal 

amongst them the European Union and the new ESMA, which is 

their joint regulator for this in Europe, the FSA, and elsewhere. 

We have been an agency for long that has mutual recognition 

agreements. Maybe it is just partly that we are small. We need to 

leverage off of international regulators. 

Ms. SCHAPIRO. I would say that I think the European markets 

are a bit behind us, and I understand that timing is a concern. But 

I think that we do not yet really know the timing in the United 

States just because we are going to have to be very thoughtful 

about how we sequence the implementation of the rules that we ultimately adopt, allowing the industry sufficient time to develop the 

technology that they need, allowing us some time to develop the 

technology that we need to have oversight of this market. 

So I think I am not worried yet about the fact that we are on 

different timetables, but it is something for us to keep a very close 

watch on. 

17 

Senator GILLIBRAND. Okay. The last issue is, you know, during 

Dodd-Frank we worked very hard to ensure that municipalities and 

other entities that had little experience in the swap markets would 

be protected while continuing to provide market access to entities 

that need to address their risk. And, additionally, we expanded fiduciary responsibilities for investment advisers to similarly protect 

investors. 

But in recent weeks, we have seen that the Department of Labor 

has issued a new proposal that would expand the scope of fiduciary 

duty requirements for many of these same market participants. 

What are you doing to work with the Department of Labor to coordinate the proposals and the new rules that you are developing 

to avoid conflicting requirements? 

Ms. SCHAPIRO. Well, we have delivered to Congress—on time, in 

fact—our fiduciary duty study, but we were very careful there to 

say that we were not implicating fiduciary duty under the ERISA 

statute, which is solely the responsibility of the Department of 

Labor. 

There are some issues with respect to how the Department of 

Labor is contemplating—and they have just closed their comment 

period, and I think they actually had 2 days of hearings this week 

that our staff attended, and I believe CFTC staff attended as 

well—and where they are considering expanding the definition of 

‘‘fiduciary,’’ and the concern being whether fulfillment of any of the 

business conduct obligations of Dodd-Frank will turn dealers or 

others into fiduciaries under ERISA bringing in all the prohibited 

transaction language. 

We have been talking with DOL about this. We stand ready to 

provide expertise and assistance to them in any way they choose 

going forward. 

Mr. GENSLER. We, too, are in dialogue directly with the Department of Labor. I believe that we can harmonize the business conduct standards as Congress anticipated with what the Department 

of Labor is doing. 

Senator GILLIBRAND. Okay. Thank you. 

Thank you, Madam Chair. 

Chairwoman STABENOW. You are welcome. 

Senator Boozman? 

Senator BOOZMAN. Thank you, Madam Chair. 

I was with an individual the other day, and he was telling me 

about a hearing over in the House, and they were questioning one 

of the other agencies, one of the other regulators, and the House 

Member said something to the effect of, ‘‘Every place I go, people 

are so angry,’’ at, you know, this and that. ‘‘What have you done 

to upset so many people?’’ And I hope that, you know, in a matter 

of months you are not back over here and we are asking you the 

same question as you go forward with this. This is really very, very 

serious, and I just want to reiterate the importance. 

All of us agree that, you know, so many of the—while the end 

users themselves were not in a position to cause any of the problems that we had, and we need to protect them. It is so important, 

not only in fairness but also because of the economy. There is so 

much uncertainty out there right now, you know, it is so difficult 

to plan, so difficult to look forward as you go forward with your agVerDate Nov 24 2008 00:09 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\71625.TXT MICHA
18 

ricultural venture, whatever, if you do not know the certainty of 

things. 

So I would just encourage you. I think that I would just want to 

echo, you know, what you are hearing at the Committee, how important that is, and we really do expect you to do that as you go 

forward. But it is important not only, like I say, a fairness issue, 

doing things right, but also the importance of the economy that we 

try and get some stability so that people can plan, so that they can 

make decisions, so that we can get things moving forward. 

Mr. GENSLER. I deeply appreciate that. I think this market fundamentally is helping end users, investors, and municipalities to 

plan for risk. It is really a market that helps them shift risk to 

somebody else, whether it be a speculator or somebody else to hold 

that risk. And at the core of Dodd-Frank is to lower risk to those 

systemically important folks, but also to create transparency for 

whether it is the agricultural user in Arkansas or elsewhere to use 

these products. And we have proposed rules. We look forward to 

comment on agricultural swaps as well. 

Senator BOOZMAN. Thank you, Madam Chair. 

Chairwoman STABENOW. You are welcome. 

Senator Klobuchar? 

Senator KLOBUCHAR. Thank you very much. Thank you, both of 

you, for being here today. 

I am the co-chair with Senator Thune of the bipartisan Congressional Farmer Co-op Caucus. I bet you did not know there was 

such a thing, but there is. Minnesota boasts the largest number of 

agricultural co-ops, and these co-ops use the future and swap markets to lock in prices for fuel and fertilizer, and also to guarantee 

that their farmer members receive a certain price for their crop. 

There is concern that these farmer co-ops will face additional regulations because of your work, which I know is done for all the good 

reasons, but they are concerned that they are going to be facing 

these additional regulations intended for swap dealers which will 

increase costs. 

So my question is this: Assuming that farmer co-ops are using 

the market to hedge the risk of their members, how do farmer coops fit into the new transparency and regulatory requirements? 

And will the CFTC classify farmer co-ops as a swap dealer or a 

major swap participant? 

Mr. GENSLER. We have been working very closely with farmer cooperatives—Dairy Farmers of America, Land O’Lakes, others, some 

in the non-dairy area as well. The comment period on that proposed rule just closed last week, but I think that much of what 

they do, in fact, will not be a swap at all. Often they use documents 

called ISDA documents to do what is called forwards or options embedded in forwards, and though I know we have not proposed it 

yet, this product definition rule we anticipate will extend the forward exclusion from futures to being a forward exclusion from 

swaps. And that has clearly been the congressional intent, and 

there were a lot of colloquies and letters on that. 

Senator KLOBUCHAR. Right, yes. 

Mr. GENSLER. We plan to extend that. 

Senator KLOBUCHAR. I am so glad you read them. 

19 

Mr. GENSLER. I have read as many as I can, but, yes, I have read 

them and the staff has, and we plan to follow that congressional 

intent. But we are looking closely and working and meeting with 

them because many of them are quite small, also, and might fall 

as they sense—even that which they do might be de minimis, but 

working with them closely on these matters. 

Senator KLOBUCHAR. Okay. Thank you. 

I think you remember that during our work on the Agriculture 

Committee I worked to include language that would authorize the 

CFTC to regulate companies that act as both swap dealers and end 

users according to the actual activity that they are engaged in. 

Could you comment on the progress you have made to ensure that 

diversified businesses will have the segments of their business that 

use the market to hedge risk qualify for that end user exemption? 

Mr. GENSLER. Well, if somebody is a non-financial entity, they 

are an end user as long as they are hedging a commercial risk, and 

we put a proposal out that has a very wide definition of commercial 

risk. 

Secondly, on the language to which you refer, we have been talking to a number of companies directly, just as they think that they 

might want to be a swap dealer. And there are not many in the 

commercial space that want to be, but some of them provide risk 

management services. We are talking to them already about how 

they might work with us to comply with the statute, as you say, 

that some activities are a swap dealer and then something over 

here is not. But it is usually then—and this is partly why we need 

resources, to have that give and take, to meet with companies and 

make sure that we get it exactly as Congress has laid out. 

Senator KLOBUCHAR. Okay. And just the last question would be 

that I know you spoke earlier before I got here about the resources 

and the staffing level needs, and it was only, I think, this year that 

these staffing levels returned to the levels that they were in the 

1990s. We could see what happened when we did not have enough 

staff with some of the problems we have incurred in this country. 

But if you could explain a little more to the Committee about the 

need for the modern technology, why that is needed, how the size 

and the complexity of today’s marketplace requires having more 

regulators overseeing the marketplace. 

Mr. GENSLER. Well, I thank you for that. The marketplace that 

we oversee and the futures marketplace is about 40 trillion notional, but it is also all on exchanges. By statute, since the 1930s 

it has all been on exchanges. This swaps marketplace is about 7 

times the size. A lot of it will still be bilateral and off-exchange. 

And so in terms of technology, our needs for technology—it is only $30 million or $31 million we spent last year—is less than 

even one week’s budget of the major swap dealers that they spend 

on technology. It might only be a few days’ budget. We need the 

technology to actually take the information in, aggregate it, and 

make sure that we check for trade practices, whether those be 

trade practices that we all could lock arms and say we should not 

have wash sales and things like that. But if you do not have technology to bring it in—there are 12 million transactions a day in the 

futures marketplace. There are not as many in the swaps marketplace. It is low volume transactions but high risk and so forth. So 

20 

it is aggregating data. And May 6th, it took us months, really, between our two agencies to aggregate data and actually do a really 

thoughtful report on that, and that makes it difficult. 

Senator KLOBUCHAR. Well, thank you. I think I have always believed, in my old job as a prosecutor, that you have to be as sophisticated as the people you are trying to in this case regulate. I think 

the added piece of that is we want this market to function, and we 

want you to be able to work with some of these companies that 

should not come under the regulations, and that is why I have supported your added staff, so thank you. 

Chairwoman STABENOW. Thank you very much. 

We have a second panel that we certainly want to hear from, but 

because of this important discussion, we are going to give one more 

opportunity for a question from any members in terms of doing a 

second round. 

I would just simply, first of all, ask a follow-up to Senator 

Klobuchar’s question in terms of farmers and co-ops being an important part of the end user exemption that we talked about. And 

I just want to make sure that you are saying—or that you are 

going to guarantee that the relationship between farmers and coops will be preserved and that farmers will continue to have affordable access to risk management tools. 

Mr. GENSLER. That is a broad question. Farmers are end users— 

I have not found any farmer that is not an end user. At most, thousands of co-ops are end users. There is a short handful of co-ops 

who have been very gracious to come in, give us their comments, 

because they are providing some risk management services to 

farmers. And so we are sorting through that, you know, these six 

or eight co-ops that are sort of the Federal co-ops, where we are 

helping— they are helping us and we are sorting it through with 

them. 

Chairwoman STABENOW. Thank you. One other question on 

transparency, because increased transparency is one of the most 

important aspects, as we know, of the reform efforts. We wanted 

to give you and the markets more access to trade information in 

order to increase market efficiency and identify market manipulation and, of course, price discovery. There will be a lot of sensitive 

data moving back and forth and a lot of analysis that is going to 

need to be done. And so my question would be: Will your agencies—the technology and the market infrastructure be ready to 

handle the information load by this summer? And then what are 

you doing to deal with information security breaches? And can you 

guarantee that data confidentiality and protections for proprietary 

information will be there? 

Mr. GENSLER. Two excellent questions. I think in terms of timing 

we have asked the public on the phasing of this. I think that it will 

take longer than this summer. The data repositories in some fields, 

like interest rate swaps and credit default swaps, are earlier. There 

is not yet a data repository for agricultural swaps, for instance, and 

that will take longer. Under the statute, there is strict confidentiality about individuals’ positions, but we have also included in the 

real-time reporting questions for the public to help us that the confidentiality has to be protected about who the counterparty is. And 

21 

in some cases, that means there will be less information to the public. 

Ms. SCHAPIRO. I would just add that we would not register a 

swap data repository if it could not prove to our satisfaction that 

it had the capacity to protect the confidentiality of the data in its 

possession. 

Chairwoman STABENOW. Thank you. 

Senator Roberts? 

Senator ROBERTS. Thank you, Madam Chairwoman. And thank 

you for your testimony. It is very pertinent to the concerns that we 

all have. Let me identify and associate myself with the remarks by 

the Senator from Colorado, Senator Bennet, and Senator 

Johanns—if Senator Johanns is Chicken Little, I am Rooster Big— 

and Senator Gillibrand. 

Let me ask just a couple of real quick ones and then get to the 

main question, and then I will submit the last one for the record. 

Chairman Schapiro, you said you only had 30 economists. How 

many do you need? I cannot imagine 30 economists in one room. 

[Laughter.] 

Senator ROBERTS. What you need is an economist with one arm 

so he cannot say, ‘‘On the other hand.’’ 

Ms. SCHAPIRO. That is exactly right. 

[Laughter.] 

Ms. SCHAPIRO. Well, we are actually recruiting right now for a 

new chief economist, although we have a very fine acting—— 

Senator ROBERTS. Well, if you get the chief and you have got 30, 

how many more do you need? Thirty, 40, 50, 60? I mean, for economists? Come on. 

Ms. SCHAPIRO. I guess given—our economists work not just on 

rule writing at the SEC and on our cost/benefit analysis, but we 

also use them, for example, after the May 6th events, to help us 

reconstruct data and do trading analyses, but also to assist us in 

our enforcement efforts. So I would love to come back to you with 

a specific number because I do not have one off the top of my head, 

but we would like—— 

Senator ROBERTS. Okay. That is fine. I just think that numbers 

of economists sort of boggle my mind. But at any rate, you said you 

had a small bank exemption. Can you tell me where you are on 

that? What are we talking about? 

Ms. SCHAPIRO. That is out for proposal. The statute directed us 

to contemplate whether it would be appropriate to—— 

Senator ROBERTS. What, 100 million and less? 

Ms. SCHAPIRO. It is 10 billion. 

Senator ROBERTS. Oh, I am for you. All right. 

Ms. SCHAPIRO. Yes, small banks, credit unions—— 

Senator ROBERTS. No, wait a minute. I am not for you. I need 

to raise it up. I am sorry. 

Okay, go ahead. I am sorry. 

Ms. SCHAPIRO. It is out for comment right now, and I am not 

sure exactly when that comment period ends. 

Senator ROBERTS. All right. I appreciate that very much. 

The European proposal on position limits—I am being repetitive 

here—which is you have to go through the numerous legislative 

steps before it is close to final, and it is going to be significantly 

22 

less prescriptive than the CFTC proposal. Won’t this timing gap 

alone create arbitrage opportunities? Moreover, if the EU adopts a 

less restrictive regime, won’t that be an obvious invitation to move 

business away from the U.S. A very similar comment and question 

by Senator Gillibrand and others. 

Ms. SCHAPIRO. I am sorry, Senator. I did not hear the first part. 

Was this about position limits? 

Senator ROBERTS. No. We are talking—yes, about the position 

limits on the European proposal and the timing in regards to the 

steps before it is close to final, significantly less prescriptive than 

the CFTC proposal. Won’t this timing gap alone create arbitrage 

opportunities? Moreover, if the EU adopts a less restrictive regime, 

won’t that be an obvious invitation to move the business away from 

the United States overseas? 

Mr. GENSLER. Once again, we are working very closely with the 

Europeans on position limits as well as many other perspectives. 

I think what Congress did in terms of position limits is ask for agricultural, metals, and oil, energy commodities that we shall put a 

proposal forward. We have done that. I would suspect this is one 

we will get thousands of comments on. We put a proposal forward 

last January to reinstate energy position limits. We got 8,200 comments. And they were helpful. We withdrew that and re-proposed 

based on those 8,000 comments, based upon the Dodd-Frank Act, 

and I think it is very important to get this right. And as you say, 

it has not been over in Europe, and that is part of the considerations as well. 

Senator ROBERTS. I appreciate that. The 15 largest dealers will 

spend about $1.8 billion, an estimate, to implement the derivatives 

portion of the Dodd-Frank bill over 3 years. Question: Who do you 

think will end up paying that bill? Answer, my answer: Consumers. 

Divided by three, that is $700 million, that is more than you are 

asking for your budget. Any comment? 

Mr. GENSLER. Well, I think that it does put in light a small agency budget of $168 million. The $1.8 billion, which was an estimate 

by the Tabb Group, is in the context that the U.S. financial industry, that same Tabb Group, spends $20 to $25 billion a year on 

technology. So while $600 or $700 million a year sounds large—and 

it is—it is in the context of an industry that is spending $20 to $25 

billion a year. 

Senator ROBERTS. Yes, but they are not going pay for it. The consumer is going to pay for it, with all due respect. 

I have another question about the rules for swap execution facilities and for security-based swaps is different than the CFTC, but 

I am going to submit it for the record in the interest of time. 

[The question of Senator Roberts can be found on page 205 in the 

appendix.] 

Chairwoman STABENOW. Thank you very much. 

Senator Gillibrand, did you have another question. 

Senator GILLIBRAND. One more. 

Chairwoman STABENOW. Yes. 

Senator GILLIBRAND. Chairman Gensler, the CFTC proposed 

rules require requests [inaudible] the SEC says many customers 

want. Many people are concerned about low trades where they are 

23 

the only possible counterparties whether it will make it hard to 

trade these kinds of products. Why doesn’t CFTC feel it is needed? 

Mr. GENSLER. Well, this was a proposal whose comment period 

still runs for another week, and we look forward to the comments. 

But as we looked at the swap execution facility rules, Congress had 

said that they had to have multiple participants have the ability 

to execute with multiple participants, so what some people call 

‘‘many to many.’’ And we have a history, a 70-plus-year history, in 

the futures market and a statute that says that all futures have 

to come to an exchange. 

That is not the case with swaps. There are bilateral swaps and 

customized swaps. But it is in that context that we also took up 

this rule, and we are very focused on how the SEC and we work 

to harmonize and try to be as consistent as possible, but at the 

same time not undercut a futures regime in some way and have 

some regulatory arbitrage between futures and swaps. So there is 

that trade-off. But we look forward to the public comment. We look 

forward to working consistently with the SEC. 

Senator GILLIBRAND. Thank you. 

Chairwoman STABENOW. Well, thank you very much. We appreciate your time today. You have a very big job, both of you, the 

Commissions, and the work that you are doing, again, we appreciate the hard work. We look forward to working with you as we 

go forward. We are very anxious to see this be done correctly, as 

I know that you are, and that the time that is necessary to do it 

right is taken to sequence and to phase this in in a way that is 

going to be good for our economy and good for consumers and provide the light of day that we know is very important on these markets. 

So thank you very much again. 

Mr. GENSLER. Thank you. 

Ms. SCHAPIRO. Thank you. 

Chairwoman STABENOW. We will welcome our second panel. We 

have a very distinguished second panel that is going to join us. 

Welcome. We very much appreciate all of you being here and 

your patience, and I do want to reiterate, as members are moving 

to other meetings, that as you know, we will be both reviewing all 

of your comments. They are in the record and are a very important 

part of the record, and so Senator Roberts and I, while we are the 

only two here at the moment, you are providing a very, very important part of our discussion on oversight, and it will be part of our 

effort moving forward. You are providing us very important insight, 

and so we thank you very, very much for being here. Let me just 

briefly introduce everyone. 

Ms. Jill Harlan is the corporate risk manager at Caterpillar, and 

we appreciate your being here this afternoon. 

Terry Duffy, it is good to see you, the executive chairman of CME 

Group. Welcome. 

And Steven Bunkin, who is the managing director and associate 

general counsel at Goldman Sachs, where he is the global co-head 

of commodities legal coverage. 

And Larry Thompson, who is with us, general counsel for the Depository Trust and Clearing Corporation. 

24 

And last, certainly not least, Professor Michael Greenberger, who 

is with us as a professor at the University of Maryland School of 

Law and former director of Division of Trading and Marketing at 

the CFTC under Chairperson Brooksley Born. 

So we welcome all of you. We appreciate having this level of expertise and input as we move forward on our oversight. Ms. Harlan, we would ask you to go first. 

STATEMENT OF JILL HARLAN, CORPORATE RISK MANAGER, 

CATERPILLAR, ON BEHALF OF THE COALITION FOR DERIVATIVES END USERS, PEORIA, ILLINOIS 

Ms. HARLAN. Good afternoon, Chairwoman and members of the 

Committee. Thank you very much for the opportunity to be with 

you today. My name is Jill Harlan, and I am the corporate risk 

manager for Caterpillar, Inc. I am also testifying on behalf of the 

Coalition for Derivatives End Users, of which Caterpillar is a member. The coalition represents thousands of companies across the 

country that use derivatives to manage their day-to-day business 

risk. 

For more than 85 years, Caterpillar, Inc. has been a global leader 

in making sustainable progress possible. We directly employ 47,000 

people in the U.S., and our dealer network employs an additional 

34,000. We have manufacturing facilities across the U.S. and successfully compete globally from that significant U.S. production 

base, with approximately 70 percent of our sales outside of the U.S. 

in 2010. 

We support this Committee’s efforts to ensure that the derivative 

markets operate efficiently and are well regulated and appreciate 

the opportunity to share with you some of our concerns related to 

derivatives regulations impacting the end user community. 

Understanding and managing risk is key to successfully operating our business and thousands of others in virtually every sector 

of the U.S. economy. The best-run companies identify risks associated with external and internal factors and seek to mitigate both. 

At Cat, for example, we can control many internal risk factors. 

We cannot, however, control many external factors like the global 

price of copper, fluctuation in value of the Japanese yen, or the 

movement of interest rates in key economies. We do mitigate these 

risks by hedging our net exposures with derivative contracts. 

In my written statement, I describe an FX forward transaction 

that illustrates how we use derivatives to mitigate currency risk. 

While I find FX derivative transactions very exciting, I will not 

bore the Committee by describing it again here this afternoon. 

[Laughter.] 

Ms. HARLAN. It is important to understand that Cat does not use 

derivative contracts for speculative purposes. Cat’s derivative policies are specifically written to ensure we only focus on the management of risks associated with our business operations. 

Cat and our coalition partners have many concerns about the impact of potential rulemaking on our end user derivative activities. 

I will focus today on four primary areas. My written statement 

goes into these concerns in some detail, so I will just summarize 

them this afternoon. 

25 

First, we are very concerned about the costs associated with direct or indirect imposition of margin costs on end users. Such regulatory action appears contrary to congressional intent and would 

harm our ability the ability of end user companies generally to 

manage our risks. It would also divert capital from more productive 

uses such as growing the economy and creating jobs. 

Second, we are concerned about uncertainty surrounding foreign 

exchange forwards. We hope that the Treasury Secretary will exercise his statutory authority to exempt foreign exchange swaps and 

forwards from the regulations that will be applied to other derivatives contracts. 

The third area of concern I describe in my written statement is 

the need for clarity concerning the impact of regulations on captive 

finance affiliates such as Caterpillar Financial Services, which 

bring an important source of liquidity to small and medium customers. The Dodd-Frank Act contains language exempting certain 

captive finance companies from the mandatory clearing requirement and the major swap participant definition. The standard, 

though, needs greater regulatory clarity in order to ensure that the 

captive’s function of facilitating sales of the parent organization is 

able to be fulfilled. 

A lot is at stake in the regulatory rulemaking process, and our 

final concern is the amount of time that has been allocated to draft 

and implement these critically important rules. We would like Congress to provide regulators and affected parties with more time for 

rulemaking and for regulators to allow market participants sufficient time for implementation. 

The end user market for over-the-counter derivatives functioned 

well both before, during, and after the crisis. The responsible and 

effective use of these products by Cat and other end users helped 

reduce risk at both the individual company and the systemic level. 

We hope that active oversight from the Committee will help avoid 

a situation where implementation of rules increases costs for Main 

Street businesses and drives behavior that inhibits economic 

growth. 

On behalf of Caterpillar and the coalition, I would like to thank 

you very much for your time this afternoon and the opportunity to 

share our thoughts on these important issues. I am happy to answer questions. 

Thank you. 

[The prepared statement of Ms. Harlan can be found on page 120 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Duffy, welcome. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CME GROUP INC., CHICAGO, ILLINOIS 

Mr. DUFFY. Thank you, Chairwoman Stabenow, Ranking Member Roberts, and members of the Committee. I want to thank you 

for the opportunity to testify on the implementation of the DoddFrank Wall Street Reform and Consumer Protection Act. I am 

Terry Duffy, executive chairman of CME Group, which includes our 

clearinghouse, our four exchanges—CME, CBOT, New York Mercantile Exchange, and COMEX. 

26 

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

It gave us the opportunity to grow and put us in a position to become the world’s most innovative and successful regulated exchange and clearinghouse. As a result, we are now an economic engine of growth in Chicago, New York, and the Nation. 

The 2008 financial crisis focused attention on the lack of regulation of OTC financial markets. The Nation learned painful lessons 

about unregulated derivatives trading. But we also demonstrated 

that regulated futures markets and futures clearinghouses operated flawlessly before, during, and after the crisis. Futures customers were protected. 

Congress responded to the financial crisis by reining in the OTC 

market to reduce systemic risk through central clearing and exchange trading of derivatives, to increase data transparency and 

price discover, and to prevent fraud and market manipulation. We 

support these goals, but we are concerned that the CFTC has 

launched its own initiative to turn back the clock on regulation of 

futures exchanges and clearinghouses. This will impose unwarranted costs and stifle innovation. 

We are not alone. Most careful observers, and even some of the 

Commission, have concluded that many of the proposed regulations 

unnecessarily expand the Commission’s mandate under DoddFrank. 

Much of the problem results from the CFTC’s efforts to expand 

its authority, and it is changing its role from an oversight agency 

whose purpose has been to assure compliance with sound principles 

to a front-line decisionmaker that imposes its business judgments 

on every operational aspect of derivative trading and clearing. This 

role reversal, which is inconsistent with Dodd-Frank, will require 

doubling the Commission staff and budget. It will also impose astronomical costs on the industry and the end users of derivatives. 

There is no evidence that any of this is necessary or even likely to 

be useful. This is the classic solution in search of a problem. 

The crisis of 2008 did not arise from a failure of the regulated 

transparent futures markets. My written testimony includes numerous examples of rulemaking that will have costly adverse consequences on customers, end users, exchanges, and the economy. 

We are strong proponents of an adequate budget for our regulator. However, we object to expanding the Commission’s staff and 

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

or that duplicate the duties that are now being performed by SROs, 

which are self-regulatory organizations, at no cost to the taxpayer. 

The Commission justifies its budget demands by focusing on a 

couple of points: one, the growth in the notional value of the contracts it oversees on regulated futures markets; and, two, the notional value of the swap markets that it will be responsible for 

under Dodd-Frank. But there is no valid relationship between notional value of contracts traded and the regulatory burden associated with them. 

The swap market today that the CFTC will regulate involves 

only 4,000 to 5,000 transactions per day. The futures market, on 

the other hand, has grown to millions of transactions per day. It 

27 

has become a global electronic marketplace with a sophisticated 

audit trail and high-tech enforcement tools. 

The CFTC’s budget should reflect the positive impact of technology and other enforcement tools that SROs already have in 

place which meet the regulatory obligations imposed by DoddFrank. This Congress can mitigate some of the problems that have 

burdened the CFTC’s rulemaking process. It can do this by demanding a full and fair cost-and-benefit analysis on every proposal. 

It also can extend Dodd-Frank’s effective date in the rulemaking 

schedule so that professionals, including exchanges, clearinghouses, 

dealers, market makers, and end users, can have their views 

heard. This would give the CFTC a realistic opportunity to assess 

those views and measure the real costs imposed by its new regulations. Otherwise, we believe that the well-regulated futures industry will be burdened by overly prescriptive regulations. These regulations would be inconsistent with the sound industry practices and 

make it more difficult to reach Dodd-Frank’s goal of increasing 

transparency and limiting risk. 

I thank you very much for your time and attention this afternoon, and I look forward to answering your questions. 

[The prepared statement of Mr. Duffy can be found on page 60 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Bunkin, welcome. 

STATEMENT OF STEVEN M. BUNKIN, MANAGING DIRECTOR 

AND ASSOCIATE GENERAL COUNSEL, GOLDMAN SACHS, 

NEW YORK, NEW YORK 

Mr. BUNKIN. Thank you. Chairwoman Stabenow, Ranking Member Roberts, and members of the Committee, my name is Steve 

Bunkin. I am a managing director at Goldman Sachs. Thank you 

for inviting me to testify at today’s hearing. 

The over-the-counter derivatives market plays an essential role 

in the capital markets and the economy generally. Various entities, 

including corporate end users and investment funds, use these instruments as risk management and investment tools. 

In debating Title VII of the Dodd-Frank Act, Congress considered 

the possibility of requiring that all derivatives be traded on exchanges and centrally cleared. Congress recognized the importance 

of OTC products and determined that they should continue to be 

available to the broad range of market participants that rely on 

them. As a firm, Goldman Sachs has supported many of the policies reflected in Title VII. 

Since Congress enacted the Dodd-Frank Act last summer, the 

CFTC, SEC, and other regulators have been working with great 

dedication to propose various rules contemplated by the act. We appreciate the remarkable effort that the agency’s staff and Commissioners have made to develop the rules. 

It is critically important that the implementation of these complicated reforms be done in a manner that avoids disruption and 

allows continuing access to derivative instruments. To protect market liquidity, the final rules must be developed with great care. 

With that in mind, we offer the following recommendations to support the Committee in its Title VII oversight responsibilities. 

28 

First, we recommend that Title VII rules be phased in on a sequence that will best enhance financial stability. We propose a 

three-part process. Phase 1 would involve the creation of swap data 

repositories and the application of requirements to provide transactional information to them. Phase 2 would involve the application 

of clearing requirements. Phase 3 would involve the application of 

requirements to execute relevant swaps on exchanges or swap execution facilities and have information regarding all swaps be reported to the public. 

Second, we recommend that the regulators establish a strong 

foundation to promote an evolution of markets to achieve the overarching goals of Dodd-Frank. 

Third, we recommend promoting liquidity as a central means of 

reducing systemic risk by, A, closely following the statutory definition of swap execution facility; B, defining a block transaction as 

a trade that is larger than customary social size and designing appropriate alternative public reporting requirements for such transactions; and, C, adopting position limits only if the statutorily required determination that such a rule is appropriate has been 

made and then ensuring that such a rule adheres to the four-part 

mandate articulated in Title VII. 

Fourth, and finally, we recommend that the CFTC reconsider the 

proposed business conduct rules. In particular, these proposed rules 

would severely restrict access to derivatives for pensions, endowments, and governmental entities because of the fiduciary-like 

standards contained in them, notwithstanding the specific decision 

by Congress not to include a fiduciary standard in the statute 

itself. 

Goldman Sachs is committed to working with Congress, the regulators, industry participants, and, of course, our clients to achieve 

a successful transition to the reforms adopted in Title VII of the 

Dodd-Frank Act. 

I appreciate the opportunity to testify before this Committee and 

look forward to any questions you may have. 

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

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Thompson, welcome. 

STATEMENT OF LARRY THOMPSON, GENERAL COUNSEL, DEPOSITORY TRUST AND CLEARING CORPORATION (DTCC), 

NEW YORK, NEW YORK 

Mr. THOMPSON. Thank you, Chairwoman Stabenow, Ranking 

Member Roberts, and members of the Committee. I am the general 

counsel of the Depository Trust and Clearing Corporation, a noncommercial utility that in 2010 settled approximately 1.7 quadrillion in securities transactions. 

Since 2006, DTCC has also developed and operated the Trade Information Warehouse, a global electronic database that now has 

virtually all position data on credit default swaps. The TIW currently represents about 98 percent of all credit derivatives transactions in the global marketplace, constituting approximately 2.3 

million contracts with a notional value of $29 trillion. 

29 

DTCC shares Congress’ goals of ensuring more transparent markets for global regulatory oversight and systemic risk mitigation. 

Today I would like to make two central points: one, transparency 

is a key pillar of any attempt to mitigate systemic risk in the 

swaps markets; and, two, providing transparency is a cooperative 

effort. 

The Dodd-Frank Act requires that all swaps, cleared and 

uncleared, must be reported to swap data repositories. To the extent that OTC derivatives contributed to the 2008 crisis, we believe 

it was due to a lack of a comprehensive view of who held what exposures in the swaps markets. That uncertainty, that lack of transparency, contributed to the hesitancy about the creditworthiness of 

institutions at just the wrong time. 

The basic safety net needed to address these sorts of situations 

has since been put in place for the credit default swaps market on 

a global basis in cooperation with the OTC derivatives regulators 

form, which comprises over 40 regulators and other authorities 

worldwide, including all of the major regulators and central banks 

in the U.S. and Europe. 

In response to the 2008 crisis, DTCC used the warehouse to provide standard position reports to appropriate regulatory authorities 

worldwide, and since then DTCC has responded to over 100 ad hoc 

requests from such authorities. We also began publishing comprehensive market information to ensure public transparency. 

Just 2 weeks ago, we launched a web-based regulator portal 

through which regulators and other authorities can directly access 

and query detailed position risk data relating to their regulatory 

purviews. At present, 20 regulators worldwide have used our portal. 

Providing transparency is a cooperative effort. Transparency has 

been achieved because of the substantial degree of global regulatory cooperation and support. One factor that made this possible 

was that DTCC is now a traditional commercial entity and does not 

use the data for commercial purposes. This removes commercial 

concerns from what is and what must remain a market utility, 

base regulatory, and supervisory support function. This structure 

works because all market participants, all clearers, all trading platforms are cooperating. 

If cooperation fails, if the reporting of data becomes fragmented, 

the inevitable result will be misleading public reporting of exposures and regulatory errors. What would follow is a very expensive 

if not politically impossible task for regulators to build complex 

data aggregation and reporting mechanisms that the industry and 

the regulators themselves have brought to fruition in a single place 

within DTCC. Both of those results would be undesirable. 

The challenge is to bring similar regulatory and public transparency to other asset classes of the swaps markets, as we have 

done in the CDS market. As an industry-governed utility, it is our 

sense that market participants are poised to undertake the significant cooperative effort necessary to achieve complete transparency 

across all asset classes and derivatives markets as contemplated by 

Dodd-Frank. 

I urge the Committee in exercising its oversight function to focus 

on removing obstacles to this process and to continue to use proven 

30 

infrastructure while avoiding the injection of commercial considerations that would hinder the cooperative attitude that has so far 

made progress possible. 

Thank you, and I welcome your questions. 

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

133 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Now Professor Michael Greenberger, welcome. 

STATEMENT OF MICHAEL GREENBERGER, LAW SCHOOL PROFESSOR AND DIRECTOR, CENTER FOR HEALTH AND HOMELAND SECURITY, UNIVERSITY OF MARYLAND SCHOOL OF 

LAW, BALTIMORE, MARYLAND 

Mr. GREENBERGER. Thank you, Chairwoman Stabenow and 

Ranking Member Roberts and other members of the Committee. I 

have submitted testimony that has an introduction that I think 

hits my major themes and has a lot more information in it. I am 

fully prepared to answer substantive questions, but I think process 

questions need to be addressed in the few minutes I have. 

I have worked as a volunteer adviser to Americans for Financial 

Reform and the Commodity Market Oversight Coalition. The latter 

is an end user group that represents petroleum marketers, heating 

oil dealers, many farm groups, airlines, truckers, car manufacturers in some sense, and it is reflective certainly of a bipartisan, at 

a minimum, philosophical ideology. I also work with Americans for 

Financial Reform, which is a coalition of 250 consumer groups, 

unions, environmental groups, public interest groups, the AARP, 

and others. 

Those two groups that represent the broadest bipartisan spectrum have come together, I would say, while they have not had 

time to review my testimony, I believe that they represent the 

rank-and-file people who are exposed to—were exposed to the worst 

financial crisis since the end of the Great Depression, and if we 

think we are sitting here today with the war being over and now 

we can cut against the edges of Title VII—which, by the way, this 

Committee should take a lot of credit for. Were it not for the Senate Agriculture Committee, Title VII would not be in the excellent 

shape it is in. The war is not over. 

First of all, all the derivatives that are executed up until the 

point that the CFTC and the SEC put their regulations into place 

are unregulated. I pointed out how Mr. Paulson, who did a perfectly legal, shrewd thing, represents the investors who, without 

having any exposure to subprime mortgages, got insurance at a 2- 

percent minimum and insured themselves trillions of dollars if 

those subprime mortgages, which they did not own, failed. The hole 

that was blown into the economy was not the defaults. It was the 

fact that those mortgages were bet on often 9 times by people who 

did not own them that they would fail. 

Now, Senator Johanns said there are 15 people who made some 

terrible mistakes. The people who made those terrible mistakes essentially insured the subprime market at 100 percent on the dollar. 

Now, some people say that is a zero sum game. If the American 

taxpayer had not intervened to trillions of dollars, it would have 

been a lose-lose game. Your end users, who are saying, oh, we are 

31 

just doing perfectly business-like kind of things, ask them how they 

would feel if Lehman Brothers was their swap dealer. They would 

now be in a bankruptcy hoping to get 10 cents on the dollar. 

We cannot cut back on this process. If municipalities start failing—and Jamie Dimon, who is the CEO of JPMorgan Chase, gave 

a speech a month ago worried about the stability of municipalities—municipal bonds will fail, and Republicans, Democrats, Tea 

Party members, and Independents will lose pension money because 

of that. 

If sovereign defaults occur in Europe, there are credit default 

swaps up the gazoo on people who do not own the debt but are betting that Ireland, Italy, Portugal, and the euro will fail. 

Everybody is asking questions about what could go wrong with 

Title VII. If AIG had had to post capital as a swap dealer, they 

would have never gotten to the $75 billion business of insuring that 

the cherrypicker in California who earns $14,000 a year got a 

$729,000 mortgage. They insured that mortgage because it was 

AAA rated, and it was so confusing because it had been manipulated so many times, they did not understand what they were insuring. 

If AIG had to post capital to get in the business of being a swap 

dealer, they would have had to go to their holding company, and 

the holding company would have said, ‘‘We are not going to put billions of dollars of capital into insuring the cherrypicker in California.’’ 

The transaction would have been transparent, and you would 

have CNBC and Fox business analysts talking all day about the 

stupidity of people who are trying to insure the subprime market. 

Now, the subprime market, you have got the same instruments for 

the prime market, commercial real estate, credit cards, student 

loans. This market is still out there, and I spend half my time worrying about al Qaeda, and if I had to bet who is a greater threat 

to the United States within the next 2 years, it is the next round 

of commitments that are undercapitalized to insure somebody who 

does not own municipal bonds or does not own sovereign debt will 

fail, and there will not be capital to make that payment. And the 

American taxpayer—that is what too big to fail means—will be 

looked to again to bail these people out. 

The reason the American taxpayer is furious about the budget 

crisis is trillions of dollars have been spent to put Wall Street back 

in the saddle again, and it has not meant anything for jobs, pensions, or anything else. 

So the Commissioners who work on this, this Committee, this 

Congress have got to keep in mind when your end users come to 

you and say, ‘‘We do not want to post collateral, and we do not 

want the bank to post collateral,’’ what happens if that bank becomes the next Lehman, Bear Stearns, AIG? Their shrewd business 

hedging will collapse in the absence of clearing, transparency, and 

pricing. 

You have got in my assessment the most important job of any 

Committee in this Congress, and if there are municipalities failures 

or sovereign debt failures, or if oil and food, which are related to 

betting through swaps, start going through the roof, you will be 

back here not voluntarily, but you will be back here. Chairwoman 

32 

Stabenow, you remember July 2008 when we met and had a debate 

in front of the Democratic leadership about whether supply-demand or speculation and swaps caused $4-a-gallon gasoline. 

My final point would be to say, Senator Roberts, talk to YRC in 

Overland Park, Kansas. They almost went bankrupt because the 

holders of credit default swaps did not want them to work out a 

bankruptcy. I volunteered as a lawyer to the Teamsters and the 

90,000 employees who would have lost their jobs but for the fact 

that the Teamsters and the State Attorneys General went to the 

holders of those credit default swaps and said, ‘‘You cannot drive 

the largest truck manufacturer in the United States into bankruptcy.’’ 

Thank you. 

[The prepared statement of Mr. Greenberger can be found on 

page 92 in the appendix.] 

Chairwoman STABENOW. Well, thank you very much, and let me 

just indicate that, of course, there is a concern, I would just say, 

Professor Greenberger. That is why we passed the law, and that is 

why, as you talk about the impacts on families, on farmers, on 

businesses, on consumers, the need to bring things into the light 

of day, to have transparency, to have accountability, that is what 

this is all about. 

I guess from my perspective I think it is important to also look 

at the role of hedging risks in the marketplace and the capital that 

it has made available for businesses that are hedging their own 

risk. And I do think we have got to make sure we are addressing 

everything you are talking about, but also making sure that we are 

allowing businesses and farmers and co-ops to continue to function 

in terms of their activities in the marketplace as well. 

And so I guess that would lead me, Ms. Harlan, to ask you a 

question, to talk a little bit more about why it is important from 

your standpoint to be able to have the end user exemption. And 

could you talk more specifically about how Caterpillar uses its finance arm and why it is critical in your judgment to your competitiveness that margin requirements are not applied to the swap 

transactions? 

Ms. HARLAN. As far as our financing arm goes, Caterpillar Financial Services, it does exist solely to provide financing for Caterpillar equipment. Now, we need the definition to be a little bit 

broader than that because that is their purpose. But certainly 

there are times when they provide financing for an attachment, for 

example, to a Caterpillar unit, or another example might be to provide financing for an entire vessel to support the sale of a Caterpillar engine. But they use the derivatives products in the same 

way as the Cat Inc. parent does from a standpoint of we only enter 

into a derivative product if we are trying to protect a risk. So we 

are hedging or mitigating our risks. In their case either it could be 

a foreign exchange movement or it could be an interest rate movement. So as a captive finance, they are there to support the parent 

and in the sale of the parent product, and that is their main purpose. 

As far as the margin issue—I believe that was your other question—today we do not post margin, so that would be an additional 

cost and additional expense to us in the future. So it appears that 

33 

as an end user, the way the regulation is going, we would not post 

margin. We are still concerned that our bank counterparty would 

be in a situation—it appears some of the regulators may be thinking along the lines that they would post margin. If that happens, 

we think those costs would still end up coming in our direction, 

coming towards us. So that is our concern from the other side of 

the transaction with our counterparty. 

Chairwoman STABENOW. And could you speak a little bit more 

about what that means in the real world to you in terms of the 

business and jobs? 

Ms. HARLAN. It means an additional cost. We would not treat 

that cost any differently than any other cost. So, for example, if we 

have an additional cost in our product, we would have to consider 

numerous things. One would be, you know, do we move the price 

of our product? Does it impact that? Caterpillar has not specifically 

considered the cost and how we would manage it at this juncture, 

but that probably would not be a popular choice. So we would look 

at do we hedge or do we stop hedging. If we do not hedge to try 

to avoid that cost, that obviously means we would be taking on 

more risk, which in the end could, in fact, be a lot more costly. 

We also would consider if there is a cheaper way to still be able 

to enter into that derivatives contract, and one of those options 

may be to utilize our regional treasury centers that are located in 

other places if we did not need to post a margin in those locations. 

Chairwoman STABENOW. Thank you. When looking at the important changes that were made in the Dodd-Frank legislation and 

looking at the important transparency measures, the real-time reporting, the mandatory clearing and trading provisions, the reliance on swap execution facilities and swap data repositories, I wonder if each of you might speak about the timelines in terms of from 

your perspective how long you think the markets need to adapt to 

the new requirements, and just speak from your perspective from 

where you sit in terms of timelines. 

Mr. Duffy, I will start with you. 

Mr. DUFFY. You know, I think it is kind of hard to predict the 

timeline as these things get rolled out. There are still, as Chairman 

Gensler said, many comment letters that are still yet to even be 

read by the staff of the CFTC, yet to be analyzed and how they are 

going to write the rules. 

As I said in my testimony, Madam Chairwoman, I do believe that 

the Congress needs to extend the rulemaking process so everybody 

can have an adequate amount of time to assess the different rules 

that are being proposed, and then we can decide how they should 

come out and in what sequence, because sequencing, as everybody 

has said, is very important. 

Chairwoman STABENOW. Mr. Bunkin? 

Mr. BUNKIN. Senator, the question on timing and implementation is very important. I think as you said in your opening remarks, the most important thing is that we get this right. And in 

terms of how we would view this, it is no different than building 

a house. You really have to survey the land, get the plans drafted, 

build the foundation, build the walls and so forth. And we are talking about a very significant build across swap data repositories, enhancement to clearinghouses, the creation really for the first time 

34 

of swap execution facilities, of a magnitude that we have not seen 

probably since the 1933 and 1934 act. 

In terms of the total time that that will take, it will probably be 

dependent to a large extent on the existing infrastructure that we 

have for particular asset classes. So as you heard from Mr. Thompson, in the context of the credit markets the existence of DTCC 

gives us a great head start in having a swap data repository that 

will be ready, willing, and able to begin its mission. 

In other asset classes, such interest rates, currencies, and commodities, we do not have the benefit of having that much of a head 

start. So it will be asset class dependent, and I think the important 

thing, as you had indicated, is that we get it right, we do it 

thoughtfully and based on the data that we collect so that we have 

a good, informed understanding of how we are going about the 

process as it moves forward. 

Chairwoman STABENOW. Mr. Thompson? 

Mr. THOMPSON. Madam Chairwoman, I think Mr. Bunkin stated 

it very well. It depends on how well you use the present infrastructure that is already in place, which has already been built at great 

expense. The credit default swaps market through DTCC is in pretty good shape. There obviously will be some things that we will 

have to add. 

What I said in my testimony, written as well as spoken here 

today, is that that should be used as well for other asset classes. 

So there are some extensions. The communication lines to some of 

those members in the interest rate swaps and the equity swaps 

area already exist, and those things should be utilized in order to 

save money and to speed implementation. 

I also stated that transparency should be the number one goal. 

With transparency, you could prevent some of the things that Professor Greenberger was concerned about. What is going to happen? 

It would give the supervisors and the regulators the tools that they 

need in order to oversee the market while the market is phasing 

in at a deliberate rate, the rest of the regime in a pace and a time 

that works for them. 

As to DTCC, we are committed, once the regulations are clear as 

to what needs to be built, to build that as quickly as we can possibly do it. But as Mr. Bunkin said, this has to be an industry 

build, and the industry is made up of both large and very small 

participants. And each one of those will have to spend a great deal 

of funds in order to build some of this infrastructure in order for 

it to work. 

Thank you. 

Chairwoman STABENOW. I see I am over my time, but, Mr. 

Greenberger, would you want to respond to that as well? 

Mr. GREENBERGER. Yes. I would say [inaudible] dealing with 

rulemakings, and those statutory deadlines are very hard to enforce, and the Commission Chairmen, Chairman Schapiro and 

Chairman Gensler, already said they will not be able to meet them. 

The second thing is the rules contemplate phase-in periods. Gary 

Gensler did not just fall off a hay wagon yesterday. He was the 

youngest partner in the history of Goldman Sachs. He has been on 

the other side of these things. He knows how these things run, and 

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35 

bers, they are very sensitive to phasing these things in in a realistic way. Obviously, there is some infrastructure available. A lot 

is not. That will be taken into account, I have no doubt in my 

mind. In other words, if there is a final rule, that does not mean 

right away everything is going to happen. 

Chairwoman STABENOW. I think that became clear from the 

Chairmen today, so thank you. 

At this point I am going to turn this over to our Ranking Member, Senator Roberts. 

Senator ROBERTS. Thank you, Madam Chairwoman. 

Some very quick questions, Ms. Harlan. What are the biggest potential deterrents to hedging in the Dodd-Frank bill and the proposed implementation rules? I am sorry. Did you hear me? 

Ms. HARLAN. No, I am sorry. Could you repeat that? 

Senator ROBERTS. What are the biggest potential deterrents to 

hedging in the Dodd-Frank bill and the implementation rules that 

are being proposed? 

Ms. HARLAN. I would say if we are required to post margin, that 

is by far our biggest concern because of the additional costs it 

would impose upon us to hedge. 

Senator ROBERTS. I appreciate that. 

Moving right along, a lot of questions for the record. Mr. Duffy, 

tell me what you think about the effects of Dodd-Frank implementation will be on U.S. derivatives markets’ competitiveness? 

Mr. DUFFY. To be quick, sir, I am very concerned about the competitiveness of the Dodd-Frank Act. If the Dodd-Frank Act overextends itself, these over-the-counter products, which are important 

derivative products. They are also very complementary towards 

regulated futures markets. If they were to migrate to different jurisdictions, you could absolutely take the futures business along 

with it, and that is the last thing in the world that you would want 

to see happen, is to have regulated futures markets migrate out of 

the United States. So I am concerned about some of the overreaching on the over-the-counter markets because it is an integral 

part of the regulated market. 

Senator ROBERTS. Mr. Thompson, comment briefly on any areas 

of your operations that will be affected by the lack of harmonization between the SEC and CFTC proposals. Some of them, as you 

know, are quite different. How would this lack of harmonization 

impact your businesses and customers? 

Mr. THOMPSON. Well, thank you, Ranking Member Roberts. 

There is a significant difference in terms of how some of the reporting is going to be done. In the SEC proposal on reporting, swap 

data repositories have to report the data to the SEC; whereas, in 

the CFTC proposal, there is no requirement, similar requirement 

for that. So you could have a non-commercial entity which is not 

regulated, which does not come under the swap data repositories, 

registration requirements, being required to give the same data. 

We think that is something that should be very carefully considered. 

But there is equally a more important issue from our mind, and 

it concerns the international harmonization. There is a requirement right now in Dodd-Frank that swap data repositories receive 

an indemnification from foreign regulators in order to receive cerVerDate Nov 24 2008 00:09 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\71625.TXT MICHA
36 

tain information. In our talks with foreign regulators, that has 

been a very sore point. They believe that this is data that they are 

entitled to, and, in fact, it is data that they are presently receiving 

in the credit default swaps market from our Trade Information 

Warehouse. And just as our regulators would be upset if they had 

to indemnify a foreign company, they see no need to have to indemnify us. And, quite frankly, we do not see it either. And we think 

that could be a source of fragmentation going forward into the future. 

Thank you. 

Senator ROBERTS. I thank you for that. 

Mr. Bunkin, many folks have been complaining about the al 

dente approach of the CFTC, Dodge City language, throw all the 

rules on the wall at once and see which one sticks. Some of us have 

suggested, as you did in your testimony, that a more rational approach would be to phase in the rules in a tiered manner basically 

by order of importance and necessity. If the CFTC were to do this, 

either voluntarily or with some encouragement by Congress, how 

much time do you think each phase needs in terms of the implementation period? And what should come first? I would suggest 

perhaps definition might be a consideration. 

Mr. BUNKIN. Thank you, Senator. That is an important question. 

And I think that it has—the answer has two aspects to it. 

The first is I think a lot of the rules that are going to be finalized 

would benefit from having better data with regard to the market. 

That would include: How do you establish the right block transaction size? How do you determine which products should be 

cleared? How do you determine whether to apply position limits 

and, if so, how to size the position limits? 

So from our point of view, all of the rules would benefit from 

having good data on the market, and from that perspective what 

makes sense is to first create the data repositories so that the information can be collected to ensure that we have rules that are 

done on an informed basis. 

Senator ROBERTS. I appreciate that. I am down to one second. 

Professor or Mr. Greenberger, whatever title you wish, we will 

meet in Kansas City at the Gates Barbecue and talk over the saving of YRC. Thank you, sir. 

[Laughter.] 

Senator ROBERTS. Thank you, Madam Chairwoman. 

Chairwoman STABENOW. Thank you, Senator Roberts. 

Senator HOEVEN. 

Senator HOEVEN. Thank you, Madam Chairwoman. 

My question essentially is, I guess, for each one of you, if you 

would address it. What is the best way to make the commodities 

market—and I am talking about futures options, certainly derivatives. What is the best way to achieve transparency, to understand 

it in terms of systemic risk so the regulators can some way and the 

public can some way determine what is the systemic risk? Who in 

terms of an end user should get an exemption in terms of their 

hedging their product for business purposes, not speculate, not creating premiums, if you will, in times of scarcity or great uncertainty or, you know, some of the issues that we face now in the oil 

markets, for example? Other commodity markets, too. 

37 

So I would ask each panel member, transparency, what do we do 

to make it transparent in terms of derivatives, commodities market, futures options, transparent, understandable in terms of the 

systemic risk in the market from a regulatory standpoint, and for 

end users, who should have that hedging exemption? So if you 

would just respond to that. 

Mr. THOMPSON. Well, perhaps I should go first because I made 

transparency the highlight of my particular talk, both in my written as well as my oral testimony. 

I agree with Mr. Bunkin that swap data repositories need to be 

built, and along the lines that we have already built the Trade Information Warehouse. That will lead to more transparency into the 

marketplace. That information should be made available to all regulators, and it should be made available to the public as the regulators see fit so that the public understands exactly what is going 

on and sees transparency. And, therefore, we have already done 

that. We already make available information to the public about 

the CDS marketplace. We are building an equity repository. We intend to do the same thing with that information that we have done 

with the credit default swap. 

I think the answer to some of your other questions really sort of 

depends on what does the information inform the regulators of, 

which is what Mr. Bunkin had said earlier. They need to understand what the position limits are, and you will not have a full understanding of that unless you have all of the positions in one 

place. And the thing I think we have to remember is that this is 

a global marketplace. And even though the U.S. is a large part of 

that marketplace, in some of the asset classes we are not as much 

as 50 percent. Those are in Europe and in Asia. And in order to 

encourage that, we have got to be certain that those markets are 

also participating on a global basis in a cooperative fashion in order 

to get the information that they need as well. 

Senator HOEVEN. And do you feel the systems you are building 

are transparent and understandable and that the regulators will be 

able to both understand them and assess risk? 

Mr. THOMPSON. At this particular point, we do believe that with 

the credit default swaps information that we built because we built 

it in cooperation with the regulators. There are 40 regulators in the 

OTC Regulators Forum. They come up with the guidelines that we 

have adopted. They are the ones who go into our portal to retrieve 

the information that they are looking for. They are the ones who 

are giving us the ad hoc requests for the information so that we 

can give back the information to them. And so we have worked cooperatively with them over the course of the last 2 years to build 

a system that they are comfortable with. 

Senator HOEVEN. My next question would be to whoever wants 

to go next. Then if that system is being built and if it is transparent and accountable, then how should it be managed in terms 

of capital, in terms of margin requirement, and who should get end 

user exemptions on the basis of hedging versus speculating? Mr. 

Duffy? 

Mr. DUFFY. If I may, since I think I am the only one that runs 

an exchange and owns a clearinghouse, we are a transparent institution. The central limit order book is the first way to figure out 

38 

transparency on price. The second way to get the transparency is 

through central clearing. On trade data repositories, clearinghouses 

have the ability today without going through a third party to go directly to the regulator. So we already have that transparency. 

As far as end user exemptions go, I think the CME—and I have 

been very consistent in this. We never believed that anything 

should be mandated from an end user perspective. We believe that 

there should have been capital incentives for people that want to 

clear and not clear. 

So I think that is the best way to get the transparency, and as 

far as the costs go and who should manage it right now, exchanges 

like ours and others throughout the U.S. are already incurring 

these costs today. And to get the duplication, as we talked about 

earlier, through the regulator does not make any sense at all. 

Senator HOEVEN. Mr. Bunkin? 

Mr. BUNKIN. Yes, Senator, I think there are a couple of different 

kinds of transparency. Mr. Thompson talked about transparency of 

having complete information about all transactions which would reside in a data repository and be completely accessible to the regulators. They would understand the full composition of positions at 

any given moment in time. 

Another type of transparency is what the market sees, what the 

public sees. That is a type of transparency that comes perhaps 

through closing settlement prices on an exchange or through reporting requirements that are made available publicly. And the 

concern that requires attention with respect to that type of transparency is its potential impact to liquidity and the continuing 

availability of products. 

As it relates to end users, I think the question is: When can an 

end user be exempt from clearing requirements, execution requirements, margin requirements? But also when do they get an exemption from position limits? It is a very critical aspect of their ability 

to enter the market and hedge risk. And one of the concerns that 

exists with respect to the CFTC’s proposal on position limits is, 

notwithstanding the fact that there is a specific exemption for end 

users, the way that the rule is otherwise defined, it will severely 

impact the ability of the intermediaries to provide liquidity to the 

end users. And I think that is a subject that would appropriately 

deserve the attention of the Committee. 

Senator HOEVEN. I do have another question or two, but I would 

certainly wait until the next round. 

Chairwoman STABENOW. Senator Roberts and I said we would 

like to give you a little bit more time because you were joining us 

a little bit late in the meeting, so we would like to have you have 

an opportunity for another question. I think once you are finished 

we will be wrapping up. 

Senator HOEVEN. Thank you, Madam Chairman. 

Mr. Bunkin, does Goldman Sachs understand and do you feel 

have accurately quantified its risk under all derivative transactions 

it is currently engaged in? And would you say that is true for other 

not only investment bankers but hedge funds? Do they understand 

their full risk involved in their derivatives that they have outstanding at this point? 

39 

Mr. BUNKIN. I cannot speak for other organizations, Senator, but 

I can—— 

Senator HOEVEN. I am just asking for your opinion. 

Mr. BUNKIN. I can tell you with respect to our firm we spend a 

tremendous amount of resources and effort to understand and manage risk. That is a critical function of what we do. It applies across 

all types of instruments and markets in which we are involved, and 

derivatives would be a key focus for those efforts. 

With regard to other organizations, I think it really is dependent 

on the extent of their involvement in the markets and their resources that they dedicate to that activity. 

Senator HOEVEN. So you feel that you have a good handle as an 

organization on your risk involved in all your derivatives and option and futures activity? You assess that, you have models that 

quantify it, you feel you understand it, and that if there is some 

type of event—Mr. Greenberger referred to, you know, something 

happening either in one of our markets or, as Mr. Thompson said, 

in a market overseas—you feel that you would understand how 

your derivative products would react in that situation, that you 

have adequate capital margin and so forth to make sure that you 

do not have a financial problem for the firm should something like 

that occur? 

Mr. BUNKIN. We do a number of different things to address our 

risk. We value it every day, both at the level of the individuals who 

are responsible for putting on positions and then independently 

through a separate control function that verifies prices independent 

of the traders. 

But we also do other things such as run scenario analyses and 

shock tests and various types of reviews to imagine different market scenarios and the potential effects that they would have on our 

liquidity position and so forth. So that is a very important part of 

what we do at Goldman Sachs. 

Mr. GREENBERGER. Senator, if I might have a chance just to address some of your questions? 

Senator HOEVEN. Just a second. Madam Chairwoman, I want to 

be respectful of my time and the Committee’s time, so I—— 

Chairwoman STABENOW. Yes, well, we do need to wrap up in the 

next couple of minutes, but, Mr. Greenberger, if you would like to 

respond to that. 

Senator HOEVEN. Specifically, Mr. Greenberger, my question to 

you would be: Should there be any end user exemption? And if so, 

for whom? Remember, certainly Senator Roberts and myself will 

tell you about our farmers and others who are out there trying to 

hedge and already have many cost constraints that they face. But 

as you can tell, I also am very concerned about systemic risk and 

whether or not we have handled that. 

So should there be end user exemptions? And what should they 

look like? 

Mr. GREENBERGER. Yes. As I said, the Commodity Market Oversight Coalition, which I do a lot of work with, has a lot of—the 

farmers are not unified in this, and it tends to be on what their 

size is. And Caterpillar may have a different view than the family 

farmer. But I will say Dodd-Frank has an end user exemption. The 

Commodity Market Oversight Coalition supported it. But it is limVerDate Nov 24 2008 00:09 Mar 27, 2012 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 C:\DOCS\71625.TXT MICHA
40 

ited to commercial hedging by people who physical handle the farm 

product, the oil, and everything else. 

I think it is now beyond peradventure, pursuant to what Mr. 

Gensler said and Chairman Schapiro, that they will not be charged 

margin for that. Now, as is evidenced, I think that is risky, but my 

political judgment is they are doing the right thing. 

So the end user has a great exemption. What worries us all is 

that the Goldmans of this world—the position limits, end users 

have never since 1936, when position limits were created by that 

Congress, they are not applied to farmers or people who handle the 

product. The position limits keep speculators—speculators are 

needed to make the market liquid, so we do need speculators. But 

if you have too many speculators, the markets go haywire. So the 

farmers in your region have given up trying to hedge on the CME 

because speculators have taken over those markets because there 

are not adequate position limits. 

Farmers should not be subject to position limits. They should 

hedge for every dollar of risk they feel they have. 

Senator HOEVEN. A last question—— 

Chairwoman STABENOW. I would say this will have to be the last 

question. Thank you. 

Senator HOEVEN. You have got to be quick, because I wanted to 

ask Ms. Harlan to respond to what Mr. Greenberger just said. But 

it sounds like, Mr. Duffy, you would like to as well. 

Mr. DUFFY. I certainly would. 

Chairwoman STABENOW. I would ask 2 minutes each because we 

really do have to wrap up. 

Mr. DUFFY. If you do not mind, Madam Chairwoman, I really appreciate it, because we were not in a discussion around speculators 

in the marketplace, which there has been absolutely no evidence 

that they have anything to do with the effective price, whether it 

comes from an academic, whether it comes from a Government 

study or anything else. So just to put that clear. So the farmers 

that are in your State and the farmers in Kansas are hedging quite 

a bit on the CME today, and they do have position limits to put 

in place. 

Secondly, your other question, sir, where you talked about risk, 

Mr. Thompson talked about a quadrillion. I do not know if anybody 

heard that number but me. We did 1.2 quadrillion value of contracts cleared in CME in 2008. We did 900 trillion of value cleared, 

notional value of contracts in 2010. We did not come to the taxpayer for any monies. We settled those products completely each 

and every night, and I think that is how you risk manage the product. 

So when you are talking about risk, I think that we are talking 

about oversight and we are talking about overreaching of rules that 

are being written on regulated exchanges. I think it is important 

to highlight the record that no customer has ever lost a penny in 

156 years at the CME Group due to one of our clearing member 

defaults. And I think that is a record that we could put up against 

anybody in the financial services industry. 

I just wanted to get that on the record. I appreciate it very much. 

Senator HOEVEN. Thank you. 

Chairwoman STABENOW. And we have the 2-minute warning. 

41 

Ms. HARLAN. Our position, Caterpillar’s position and the coalition’s position, is that there should be a strong end user exemption, 

and I will wrap up. I know we are close for time. But that is our 

position, that there should be a strong end user exemption. When 

we put on a derivatives contract, we are taking risk off the table. 

We are not putting risk on the table. We are taking risk off the 

table because of our business operations, and we are mitigating 

that risk. 

Chairwoman STABENOW. Thank you very much to everyone. 

Let me say this is a very important discussion that we need to 

continue as we move forward to implementation, and from my perspective, as somebody who was very involved in creating a narrow 

end user exemption for the purposes of people being—entities being 

able to hedge their own risk, we certainly want to maintain that 

narrow focus, but at the same time have that available for those 

that are involved in managing their own risks as a tool. 

But there is a very important set of issues that we want to continue to work with all of you on as this is implemented. We want 

to get this right. There was a reason we passed the law. There was 

obviously an incredibly serious crisis that affected millions and millions of Americans, and there was a reason to put in place this new 

law. But there is also a reason to spend the time to get this right 

and to make sure that it works and maintains liquidity in the marketplace and allows us to continue to create jobs and growth. And 

so that is why very much appreciate all of your time and attention 

and look forward to continuing to work with you. 

Thank you. 

[Whereupon, at 4:47 p.m., the Committee was adjourned.] 

(43) 

A P P E N D I X 

MARCH 3, 2011 

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(145) 

QUESTIONS AND ANSWERS 

MARCH 3, 2011 

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