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LEGISLATIVE PROPOSALS TO BRING 

CERTAINTY TO THE OVER-THE-COUNTER 

DERIVATIVES MARKET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 14, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–75 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 14, 2011 ............................................................................................... 1 

Appendix: 

October 14, 2011 ............................................................................................... 43 

WITNESSES 

FRIDAY, OCTOBER 14, 2011 

Bailey, Keith, Managing Director, Fixed Income, Currencies and Commodities 

Division, Barclays Capital, on behalf of the Institute of International Bankers .......................................................................................................................... 8

Bernardo, Shawn, Senior Managing Director, Tullett Prebon, on behalf of 

the Wholesale Market Brokers Association, Americas ..................................... 10 

Boultwood, Brenda, Chief Risk Officer and Senior Vice President, Constellation energy, on behalf of the End-User Coalition .............................................. 11 

Cawley, James, CEO, Javelin Capital Markets, LLC ........................................... 13 

Mason, Kent, Davis & Harman LLP, on behalf of the American Benefits 

Council and the Committee on Investment of Employee Benefit Assets ........ 15 

Voldstad, Conrad, Chief Executive Officer, International Swaps and Derivatives Association ................................................................................................... 17 

APPENDIX 

Prepared statements: 

Bailey, Keith ..................................................................................................... 44 

Bernardo, Shawn .............................................................................................. 55 

Boultwood, Brenda ........................................................................................... 78 

Cawley, James .................................................................................................. 83 

Mason, Kent ...................................................................................................... 86 

Voldstad, Conrad .............................................................................................. 99 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the American Bankers Association ............................. 108 

Written statement of BlackRock ..................................................................... 112 

Written statement of Chatham Financial ...................................................... 113 

Written statement of the Commodity Markets Council ................................ 115 

Written statement of the Coalition for Derivatives End-Users .................... 123 

Written statement of the Investment Company Institute ............................ 126 

Written statement of the Working Group of Commercial Energy Firms 

and the Commodity Markets Council .......................................................... 128 

Hayworth, Hon. Nan: 

Written responses to questions submitted to Conrad Voldstad .................... 139 

(1) 

LEGISLATIVE PROPOSALS TO BRING 

CERTAINTY TO THE OVER-THE-COUNTER 

DERIVATIVES MARKET 

Friday, October 14, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:05 a.m., in room 

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

Members present: Representatives Garrett, Schweikert, Lucas, 

Biggert, Hensarling, Neugebauer, Pearce, Posey, Fitzpatrick, 

Hayworth, Hurt, Grimm, Stivers, Dold; Waters, Sherman, Lynch, 

Miller of North Carolina, Maloney, Donnelly, Himes, Peters, Green, 

and Ellison. 

Also present: Representative Canseco. 

Chairman GARRETT. Good morning. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises is called to order. 

Good morning to everyone on the panel. I think this is the first 

time we started a little bit late. I try to start these things right on 

time. I apologize to all of you. 

But we do welcome the gentleman from Texas for being with us 

here on the committee at the very beginning. This is a rare day, 

too, but thank you. Thank you, everyone. 

Today’s hearing is entitled, ‘‘Legislative Proposals to Bring Certainty to the Over-the-Counter Derivatives Market.’’ 

We have a fairly large panel to hear testimony from, but before 

we do that, we will have opening statements from the Members, 10 

minutes or so on each side, if we actually consume that, and then 

we will look to each of you for your testimony. So I will begin by 

yielding myself 3 minutes, and say, again, welcome. 

I look forward to all of your testimony. I look forward to a good 

discussion on the legislation that is before us. It is my hope that 

at least several of these bills will have, as we have had with other 

bills, bipartisan support. 

I am pleased that my colleagues on the other side of the aisle 

have joined me and others in engaging in implementation of Title 

VII of the Dodd-Frank Act. We have had several proposals before 

today; and I believe it is appropriate to make sure that Dodd-Frank 

is—now that it is the law—implemented by regulators in a comVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
2 

mon-sense manner that actually works. For this to happen: first, 

regulations must not impose overly burdensome and unjustified 

costs on American businesses; second, they must not drive businesses overseas; and third, they must not unnecessarily place 

American businesses at a competitive disadvantage vis-a-vis countries overseas. 

While derivatives are often vilified, and have been at the very beginning of this process, they have served as an extremely important risk management tool for thousands of American businesses 

across the country and pension funds as well. Regulators must be 

mindful of this and must be mindful about not harming the functioning of a mature market. Instead, they should focus on a regulatory structure that allows them to understand where the risk in 

the system actually resides. 

In an effort to provide certainty and direction to the rulemaking 

process, I recently introduced the Swap Execution Facility Clarification Act with Mrs. Maloney, Mr. Hurt, and Mr. Meeks. DoddFrank gave the SEC and the CFTC broad latitude to get the rules 

right. Unfortunately, after these proposals were released, virtually 

the entire market—from the buy side, asset managers, pension 

funds, and commercial end-users, to the sell side, to the dealers 

and even prospective swap execution facilities, told me the regulators got it wrong. 

In order to respect the congressional intent reflected in the heavily negotiated language of the SEF definition, we carefully drafted 

the bill, H.R. 2586, to direct regulators to provide market participants with the flexibility—and this is key—that they need to obtain price discovery in the market and in the method of execution 

they use. 

In addition to allowing voice execution on SEF trade, the bill prohibits the 15-second rule, also, and includes restrictions on the 

RFQ model and sweep book requirements. I feel that the specific 

nature of this direction is necessary to promote the conditions for 

a competitive marketplace in the swaps area. 

Mr. Canseco here has a bill, H.R. 3045, which was also introduced, at least in part, because of concerns over regulatory interpretation of the statute. I heard from pension plans that the SEC 

and the CFTC rules would prohibit them from using swaps to 

hedge against market volatility and manage the obligations owed 

to their retirees. So H.R. 3045 ensures that ERISA pension plans 

can engage in swap transactions without their swap dealer counterparties incorrectly being labeled as fiduciaries. Of course, that 

would make it impossible for the transactions to take place in the 

first place. 

We also have Mr. Stiver’s bill, H.R. 2779, which seems to be another common-sense solution to address inter-affiliate trades, along 

with Ms. Hayworth’s bill, H.R. 1838, which repeals Section 716 of 

Dodd-Frank, otherwise known as the swap push-out provision. 

Now because there was no hearing on this issue, and as Ben 

Bernanke has said, it would make the U.S. financial system less 

resilient and more susceptible to systemic risk, I look forward to 

having a thoughtful discussion now about Section 716, which we 

have not had so far. 

3 

Once again, I thank the entire panel, and I look forward to a 

healthy dialogue on this issue. 

And, with that, Mr. Peters is recognized for 1 minute. 

Mr. PETERS. Thank you, Chairman Garrett, for holding this hearing. 

I also would like to thank the witnesses for taking the time to 

share their testimony with us today. 

I certainly understand the important role that derivatives play in 

our economy. They are safely used every day by companies that are 

managing risk. As a member of the Dodd-Frank Conference Committee, I worked to ensure that Title VII struck the appropriate 

balance between creating a safer, more transparent market for derivatives, and ensuring that these products were still widely available and affordable for those who choose to use them. 

In the year-and-a-half since the law was enacted, I have tried to 

work constructively with regulatory agencies to ensure that their 

rules make sense and are consistent with congressional intent. The 

issues that are being addressed in this hearing are very important. 

I think that many of them could probably be addressed by better 

coordination between the agencies and by greater feedback from 

the agencies to those who have submitted comments. Unfortunately, both the SEC and the CFTC are under a great deal of pressure, both in terms of time and in terms of the volume of work they 

are being asked to undertake. Adding to this pressure is the fact 

that they have so far not been given the resources commensurate 

with their increased workload. 

In any event, I think there are Members on both sides of the 

aisle who are committed to making sure the agencies get this right, 

and I look forward to working with my colleagues to make sure 

that happens. 

Chairman GARRETT. The gentleman yields back. We will be turning to Mrs. Biggert next for 1 minute, but before we do that, I ask 

for unanimous consent that Mr. Canseco can participate in this 

hearing. 

Without objection, we welcome you. 

Mrs. Biggert, for 1 minute. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Good morning to all of 

you, and thank you for being here. 

I am concerned that Title VII of the Dodd-Frank Act is shaping 

up to be one of the worst provisions in a bill loaded with provisions 

that stifle economic growth. This derivatives provision is poised to 

place our financial systems at a severe disadvantage with its global 

competitors and could actually increase risk in our system by forcing many derivatives into the unregulated shadow banking system. 

Federal Reserve Board Chairman Bernanke noted, as the chairman said, that Section 716 would make the U.S. financial system 

less resilient and more susceptible to systemic risk because forcing 

hedging activities out of insured depository institutions would 

weaken both financial stability and strong prudential regulation. 

Section 716 will also place U.S. financial institutions at a competitive disadvantage because non-U.S. jurisdictions have not implemented similar regulations. Despite being promised that U.S. 

regulators would coordinate with their international counterparts, 

4 

Dodd-Frank is in the final stages of implementation, while other 

countries have completely failed to take action. 

While I support bringing better transparency to our derivatives 

market, it is absolutely critical that we do not inhibit the competitiveness of our U.S. institutions. With the struggling economy, we 

simply cannot afford it. 

Thank you again for being here, and I yield back. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from Texas, Mr. Hensarling, for 11⁄2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

A week ago, we awoke to the bad news that once again we had 

an unemployment rate above 9 percent. I believe it has been so for 

27 of the past 29 months. 

As I talk to investors, Fortune 50 CEOs, and small business owners in my district, it is evident that the lack of our job creation is 

resulting from, number one, a debt crisis. As one put it to me, I 

know one day I am going to have to pay for this. I am not going 

to go out and invest in a bunch of new equipment or hire people. 

It has do with our level of taxation and uncertainty. People don’t 

know what their tax rate is going to be 16 months from now, but 

they know it will go up as part of the President’s health care plan, 

as part of the snapback of tax rates that have been in place since 

2001 and 2003, and it certainly is derived from a regulatory onslaught. 

Mr. Chairman, I thank you for calling this hearing, because it is 

far past time that this Congress starts to look at the jobs impact 

of each and every regulation. When it comes to our over-thecounter derivatives market, whether we are talking about Section 

716 of Dodd-Frank, whether we are looking at the affiliate swap 

roles, whether we are looking at the special entity designation for 

ERISA plans, there is either: one, way too much uncertainty; or 

two, certainly bad regulations that I believe are going to harm capital formation and job creation. The legislation that we are talking 

about today goes to the heart of the matter, and I appreciate you 

calling this hearing. Hopefully, we can move these common-sense 

pieces of legislation. 

I thank you and I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Hurt is recognized for 1 minute. 

Mr. HURT. Thank you, Mr. Chairman. Thank you for holding today’s hearing on these important legislative proposals. I appreciate 

the opportunity to work with you as well as Representatives Maloney and Meeks on the Swap Execution Facility Clarification Act. 

This legislation is necessary because the Federal regulators, particularly the CFTC, strayed outside of congressional intent in their 

SEF rulemaking and are attempting to impose a market structure 

that would be detrimental to the swaps market and its participants. These proposed rules would limit market efficiency and lead 

to negative consequences for farmers, manufacturers, small businesses, financial institutions, and pension funds. 

H.R. 2586 will ensure that Federal regulators do not implement 

a Washington-style market structure for SEFs. This bill will provide flexibility to the market and give prospective SEFs and SEF 

5 

participants the ability to interact without constricting liquidity or 

limiting price discovery. 

The importance of getting the SEF rulemaking correct cannot be 

understated. A misstep could lead to significant increased costs for 

risk management and for capital formation for all Americans, and 

these increased costs jeopardize jobs. H.R. 2586 ensures that future 

rulemaking by regulators will be consistent and will help maintain 

a functional and liquid swaps market so that businesses can mitigate risk and uncertainty in their operations. 

Thank you again, Mr. Chairman, for holding this hearing; and I 

want to thank each of the witnesses for being here today. I look 

forward to your testimony. 

I yield back. 

Chairman GARRETT. The gentleman yields back. Thank you very 

much. 

Now, I will recognize the gentlelady from California for 3 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. I thank you for holding 

this hearing on these legislative proposals related to the over-thecounter derivatives market. 

Last July, we passed the Wall Street Reform and Consumer Protection Act and gave the SEC and the CFTC the authority to regulate the use of derivatives. We created transparency in markets by 

requiring that most derivatives be traded on exchanges and that 

the details of these transactions, including price, be reported. 

The reason for this regulation was because we saw the systemic 

panic caused when AIG failed. We saw that Jefferson County, Alabama, was sold derivatives with hefty fees and complex terms that 

they didn’t even understand. And now, we are seeing the uncertainty caused by a lack of transparency as it relates to credit default swaps on European debt. 

So I would like to underline just how important it is that our regulation of derivatives moves forward in a timely manner. I am very 

concerned by attempts to delay implementation of the derivatives 

provisions in Dodd-Frank, particularly the 2-year delay that passed 

this committee earlier this year under unanimous objection of 

Democrats on this committee. Given both the European crisis and 

the continued problems with speculation in the oil market, I think 

that this 2-year delay will be tremendously dangerous. 

I would also like to state my concern with back-door attempts to 

delay regulation by restricting funding to the SEC and the CFTC. 

Current House Republicans’ proposals would hold SEC funding flat 

and would cut CFTC funding by 15 percent relative to Fiscal Year 

2011. Such funding restrictions are simply unacceptable, given the 

new responsibilities provided to these agencies after the historic financial crisis of 2008. 

As for the four bills being considered today, I am, of course, open 

to refining what we did in Dodd-Frank to ensure that rules can be 

implemented effectively, but I am not certain that legislation is 

necessarily needed, given the tremendous flexibility we afforded to 

regulators. 

I would also add that on the issue of H.R. 1838, which is being 

considered today and would repeal Section 716 of Dodd-Frank, I 

am very concerned about a step backwards in terms of ending the 

6 

casino-style betting that got us into the 2008 crisis. I think it 

makes good sense that banks with Federal backing, either through 

a discount window or through deposit insurance, be restricted from 

using that backstop to fund their derivatives business subject to 

some bona fide exception. 

I thank you, and I yield back the balance of my time. 

Chairman GARRETT. And the gentlelady yields back. Thank you 

for that. 

Mr. Dold is recognized for 1 minute. 

Mr. DOLD. Thank you, Mr. Chairman. I certainly want to thank 

you for holding the hearing, and I want to thank our witnesses for 

your time and for being here today. 

We do have an unemployment rate of 9.1 percent, and it has 

been extraordinarily high. It is the number one issue I think we 

face in this Congress, to try to jump-start the economy and put 

people back to work. It is going to be done, I think, in the private 

sector, and when I talk to people about uncertainty, that seems to 

be one of the major things people have in this. 

Whenever Congress passes legislation, especially a 2,000-page 

bill like Dodd-Frank, I think we have an obligation to continually 

review and reevaluate the real-world results of the legislation. We 

must identify and correct unintended negative consequences that 

apply to a general cost-benefit analysis of the legislation’s effects. 

Whether or not we voted for Dodd-Frank, we are not eternally 

bound to support every single provision regardless of whether we 

were for the original bill itself. Instead, we are here to do the best 

we can for our constituents and for our country; and sometimes 

that means making corrections to bills that were previously supported when circumstances change or when new information arises. 

Today, we are here to consider doing that with respect to some 

of Dodd-Frank’s derivatives provisions. Derivatives are very important for our international competitiveness, for American jobs, and 

for our economic prosperity. We can’t afford to persist with these 

mistakes on these issues. So I look forward to hearing from each 

and every one of you and to working with my colleagues on the 

other side of the aisle for some common-sense reform. 

Chairman GARRETT. That is what we are always looking for, the 

common-sense reform, thank you. 

And now, we look to the gentleman from New York, Mr. Grimm, 

for 1 minute. 

Mr. GRIMM. Thank you, Mr. Chairman. 

First of all, I want to thank the witnesses for being here today. 

I appreciate your time. 

And the timing of this hearing could not be more appropriate. 

Just this week, the New York State Comptroller announced that 

New York City, the best portion of which I represent, stands to lose 

another 10,000 financial services jobs by the end of 2012. I believe 

it is clear that many of the regulations put into place by DoddFrank and Title VII in particular are playing a part in these job 

losses. 

In order to maintain the competitiveness of the U.S. financial 

markets, we must ensure that our regulatory structure does not 

put us at a disadvantage relative to the rest of the world. Therefore, I am encouraged by this committee considering these four 

7 

pieces of legislation, two of which, I might add, were put together 

on a bipartisan basis. I look forward to our witnesses’ views on 

these bills and how they can further ensure that our burdensome 

regulation does not put U.S. financial sector jobs needlessly at risk. 

I thank you, and I yield back the balance of my time. 

Chairman GARRETT. I thank the gentleman. 

Did the gentleman wish to be recognized for 1 minute? 

Mr. DONNELLY. Thank you, Mr. Chairman. 

I think we forget that hundreds of thousands of jobs in Indiana, 

Ohio, Pennsylvania, and other places were all lost due to the extraordinary destruction caused on Wall Street, due to the extraordinary destruction caused by derivatives and their failures. 

And, Mr. Grimm, I sympathize with the loss of those jobs, as I 

know you do, of the hundreds of thousands of jobs that went before 

that caused by the destruction from the derivatives and the conduct that occurred on Wall Street and with a number of these actions. And I look forward to getting these derivatives right as well, 

but I also want everyone to understand why we are here today, because of the actions that took place before. 

Thank you. 

Chairman GARRETT. The gentleman yields back. 

Mr. Canseco for 11⁄2 minutes and the final word. 

Mr. CANSECO. Thank you, Mr. Chairman; and thank you for having me here in your subcommittee. 

Millions of Americans rely on income from employer pension 

plans during retirement, and managers of pension plans have a 

duty to prudently manage their portfolios in order to meet their 

long-term obligations to employees and retirees. A crucial part of 

managing investment risk, especially in a large and diversified 

pension portfolio, is having the ability to use swaps in order to 

hedge risk, notably interest rate risks. However, a provision included in the Dodd-Frank bill, and proposed rules from regulatory 

agencies, could seriously curtail the ability of pension plans to 

hedge these risks. 

On the proposed rules from the SEC, the CFTC, and the Department of Labor, a swap dealer that seeks to enter into a transaction 

with a pension plan could trigger a fiduciary obligation under 

ERISA, thereby precluding the dealer from engaging in such transactions. However, neither swap dealers nor pension plans have 

ever considered the dealer to be acting as a fiduciary in such a scenario. 

H.R. 3045, which I have introduced along with Chairman Garrett, would remove pension plans from the special-entity status 

conferred upon them in Dodd-Frank and allow them to continue to 

be able to use swap dealers in order to manage risk responsibly in 

their portfolios, regardless of how regulators implement the rules. 

This bill is an important step towards protecting the retirement income of millions of Americans, and I look forward to hearing from 

witnesses today on this matter. 

Thank you, and I yield back. 

Chairman GARRETT. The gentleman yields back. 

Since there are no other opening statements, we look then to the 

panel. 

8 

Again, we welcome the panel here today; and we thank you very 

much for the testimony you are about to give us. As always, your 

full written statements will be made a part of the record. You will 

each be recognized for 5 minutes. 

So, we will begin with Mr. Bailey. You are recognized. 

STATEMENT OF KEITH BAILEY, MANAGING DIRECTOR, FIXED 

INCOME, CURRENCIES AND COMMODITIES DIVISION, 

BARCLAYS CAPITAL, ON BEHALF OF THE INSTITUTE OF 

INTERNATIONAL BANKERS 

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

members of the subcommittee, my name is Keith Bailey. I am managing director in the Fixed Income, Currencies and Commodities 

division of Barclays Capital. 

I am pleased to be here to testify on behalf of the Institute of 

International Bankers (IIB) regarding four discrete legislative proposals to amend Title VII. Many of these issues sought to be addressed by these bills are very important to the members of the 

IIB. The IIB represents internationally headquartered financial institutions from over 35 countries around the world that have operations in the United States. 

International banks provide an important source of credit for 

U.S. borrowers and enhance the depth and liquidity of U.S. financial markets. Our U.S. operations contribute billions of dollars each 

year to the economies of major cities across the country by employing over 250,000 U.S. citizens and permanent residents. 

The IIB members support Title VII’s objectives of reducing systemic risk and increasing transparency, and many of our home 

countries are working to implement similar reforms. 

As Title VII is implemented, it is important to note that foreign 

banks and U.S. banks alike seek to minimize the number of legal 

entities through which they conduct swap dealing business. This 

benefits both the banks and their customers by increasing efficiencies and decreasing risk through netting and offsetting of exposures. It also allows customers to transact with a more creditworthy entity. 

It is equally important to recognize that, as the swap market is 

a global one, it is imperative that derivatives reforms maintain a 

level global playing field. 

We believe that these two objectives will be better achieved if the 

legislative proposals before the subcommittee today are enacted 

into law. In particular, I would like to focus on H.R. 1838 and H.R. 

2779. 

H.R. 1838, sponsored by Representative Hayworth, would repeal 

Section 716 of Dodd-Frank, also known as the swaps push-out provision. Section 716’s exclusions, grandfathering, and transitioning 

provisions apply only to insured depository institutions. Thus, our 

principal concern with Section 716 is its impact on uninsured U.S. 

branches and agencies of foreign banks which will not benefit from 

these exclusions. 

When Section 716 was enacted, Members of Congress acknowledged that the lack of parity between foreign bank branches and 

U.S.-insured depository institutions was unintended and inconsistent with the U.S. policy of national treatment. These same 

9 

members acknowledge the need to ensure that foreign bank 

branches are treated the same as insured depository institutions. 

However, in the rush to complete the conference and finalize Section 716, there was no opportunity to rectify this significant oversight. 

Less than 2 years remain before the foreign bank branches will 

be forced to push out all of their swaps dealing business. In some 

cases, even existing positions will need to be pushed out. The implications of this impending deadline are serious. 

Swap dealing is typically conducted as an integrated part of a 

bank’s overall business. Swap positions often hedge loans and other 

non-swap positions. Winding down or restructuring swap-dealing 

activities could have a material impact on foreign bank lending in 

this country. Customer agreements will be required to be modified, 

possibly resulting in significant tax consequences and possibly in 

litigation. These renegotiations of agreements will lead to delays in 

affording customers access to liquidity that is offered by foreign 

banks. The customers will lose their ability to net and set off collateral and payment obligations. 

The IIB strongly supports H.R. 1838 as it would effectively accord equal treatment to foreign banks. It also would eliminate the 

significant negative impacts on capital, netting, and risk management which would result from conducting derivative trading 

through multiple U.S. entities. In its current form, Section 716 will 

result in higher execution costs for our customers. 

The IIB also supports H.R. 2779 cosponsored by Representatives 

Stivers and Fudge. H.R. 2779 makes clear that many burdensome 

Title VII requirements do not apply to inter-affiliate swaps. This is 

important because inter-affiliate swaps promote execution flexibility for clients and superior risk management by swap dealers. 

At the same time, H.R. 2779 preserves necessary regulatory oversight. Prudential regulators would continue through their supervisory role to have oversight of these transactions and to impose 

capital and other requirements as appropriate, both at the holding 

company and the subsidiary levels. 

The CFTC and the SEC as market regulators will continue to 

have access to inter-affiliate transaction data. To the extent that 

the Commissions uncover specific evasive conduct involving interaffiliate transactions, they would retain their authority to address 

that conduct. 

We believe that H.R. 2779 strikes the right balance by: first, ensuring that the prudential supervisors and the market regulators 

have the requisite tools to perform their regulatory responsibilities; 

and second, ensuring that Dodd-Frank objectives of reducing systemic risk and increasing transparency are not undermined. 

I thank you for the opportunity to testify today on behalf of the 

Institute of International Bankers. I would be happy to answer any 

questions you might have. 

Thank you. 

[The prepared statement of Mr. Bailey can be found on page 44 

of the appendix.] 

Chairman GARRETT. And I thank you. 

Mr. Bernardo, welcome to the panel and to the committee. You 

are recognized for 5 minutes. 

10 

STATEMENT OF SHAWN BERNARDO, SENIOR MANAGING DIRECTOR, TULLETT PREBON, ON BEHALF OF THE WHOLESALE MARKET BROKERS ASSOCIATION, AMERICAS 

Mr. BERNARDO. Thank you. 

My name is Shawn Bernardo. I am a senior managing director 

for Tullett Prebon, a leading global inter-dealer broker of over-thecounter financial products. I am also the chairman of the Wholesale Market Brokers Association, Americas (WMBAA), an independent industry body whose membership includes the largest 

North American inter-dealer brokers. 

I am testifying today on behalf of the WMBAA. Our trading systems are the prototypes for swap execution facilities under DoddFrank. 

Mr. Chairman, we thank you and your colleagues, Representatives Maloney, Meeks, and Hurt, for your leadership in introducing 

H.R. 2586, the SEF Clarification Act. The WMBAA supports the bipartisan effort to ensure the congressional intent is followed in the 

SEF rulemaking process. 

For example, before John Deere enters into a contract to sell 

tractors to an Argentinean farm co-op, it generally finds a hedge 

for the foreign exchange risk. That hedge is often provided by a 

dealer firm or a bank that undertakes the balance sheet risk knowing it can offset that exposure on one of the hybrid platforms we 

operate. 

So how is this done? Imagine a large room filled with long desks 

not just in New York City but also in Kentucky, New Jersey, and 

Texas. Each desk has a group of professionals with several computer screens and telephone squawk boxes that transmit prices to 

our customers. There are thousands of these professionals in the 

United States who use a wide array of trading technologies to meet 

the demands of the marketplace and their customers. 

It is what CFTC Commissioner Bart Chilton described in a press 

interview as ‘‘big dynamic operations, not just a couple of guys in 

a back room with a phone.’’ Each method we use is geared to the 

specific dynamics of financial products we broker. We call this 

range of training methods hybrid brokerage. 

Swap markets have unique characteristics. They are full of institutional and not retail participants. There is a much larger number 

of complex products compared to the highly commoditized futures 

markets. And while the product range is wider, the trading volume 

is quite variable. The most active single-name credit default swap 

contracts trade a little over 20 times per day, and the majority 

trade once per day. 

It is because of these unique trading and liquidity characteristics 

of swaps that our firms develop the hybrid brokerage methods I 

have described. In my 15 years in the industry, I have seen many 

products transition from voice or hybrid to electronic platforms as 

the liquidity increases. For others, however, hybrid trading systems 

are necessary to create the liquidity needed for businesses to adequately hedge risk. Developing and operating hoses hybrid systems 

creates thousands of American jobs. 

The SEF provision of Dodd-Frank requires post-trade reporting 

and promotes pre-trade transparency as an aspirational goal. In 

11 

fact, Dodd-Frank requires reporting to be balanced against the impact on liquidity. 

Today, the members of the WMBAA create active price discovery 

by providing their platforms prepaid transparency regardless of the 

method of trade execution. As registered SEFs, WMBAA members 

will provide fully electronic reporting of the transaction to the regulators and the swap data repositories. 

While my written testimony addresses the SEF rulemaking in 

more detail, I would like to discuss one key issue this morning. 

Congress made clear in Dodd-Frank that SEFs may conduct business using ‘‘any means of interstate commerce.’’ Congress’ words 

are clear: ‘‘Any means of interstate commerce.’’ And that includes 

the full range of hybrid brokerage methods I have described. 

We are concerned with the CFTC’s proposed SEF rules restricting trading methods to only electronic central limit order book or 

RFQ systems for non-block clear trades. This approach is inconsistent with a plain reading of the statute and its legislative history. Imagine if Apple were told by Congress that they could sell 

their products through any means of interstate commerce, but then 

a regulator told them that they had to fire their sales associates, 

close their retail stores, shut down their toll-free sales line, and 

customers could only purchase Apple products online without 

human interaction at apple.com. That would obviously be an overreaching restriction on the clear statutory language. 

Here, the CFTC is interpreting Dodd-Frank to say that for many 

trades, SEFs can use any means of interstate consumers as long 

as it is only purely electronic systems. 

Getting the rules wrong will impact American businesses that 

use swaps to hedge risk and better manage their capital for growth 

and reinvestment into the economy. As Commissioner Chilton said 

in a recent interview, ‘‘It is important that we don’t mess up platforms that are currently working well.’’ This is a delicate balancing 

act. 

Mr. Chairman, consideration and passage of the bipartisan SEF 

Clarification Act will provide regulators with a clear expression of 

Congress’ intent to permit SEFs to use any means of interstate 

commerce to execute swap transactions. 

Thank you for your time today. 

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

55 of the appendix.] 

Chairman GARRETT. I thank you and thank you for drawing that 

picture for us of what the market actually looks like. 

Ms. Boultwood is recognized for 5 minutes. Welcome. 

STATEMENT OF BRENDA BOULTWOOD, CHIEF RISK OFFICER 

AND SENIOR VICE PRESIDENT, CONSTELLATION ENERGY, 

ON BEHALF OF THE END-USER COALITION 

Ms. BOULTWOOD. Good morning, Chairman Garrett, Ranking 

Member Waters, and members of the subcommittee. It is a pleasure to appear before you this morning. My name is Brenda 

Boultwood, and I serve as chief risk officer and senior vice president of Constellation Energy. 

On behalf of Constellation, and the Coalition of End-Users, I am 

privileged to talk to you today about steps Congress should take to 

12 

fix three problems with the proposed regulations implementing 

Dodd-Frank legislation: first, inter-affiliate swaps should not be 

subjected to margin requirements in order to transact; second, 

swap execution facility (SEF) rules should not place end-users at 

a competitive disadvantage by limiting our choice of counterparty 

options and modes of execution; and third, we need a proper swap 

dealer definition and a de minimis exception to ensure that endusers are not regulated as swap dealers. 

The End-User Coalition includes a diverse group of companies 

that provide goods and services, including agriculture, manufacturing, vehicles, electricity, and natural gas. From the outset, our 

Coalition has supported greater transparency, but we think endusers like us create jobs, not systemic risk, and should not be further burdened by regulations that Congress intended for financial 

dealers who caused the crisis. 

I have been involved in risk management for more than 25 years 

in a variety of settings from academia to financial institutions to 

commercial entities and as a consultant. I serve on the boards of 

the Committee of Chief Risk Officers, and the Global Association 

of Risk Professionals, and I am a member of the CFTC’s Technology Advisory Committee. 

Constellation Energy is a Fortune 200 company located in Baltimore, Maryland, and is the largest competitive supplier of electricity in the country, with more than 36,000 commercial and industrial customers in 44 States. We are the largest due to a variety 

of risk-management tools we employ to the benefit of our customers. Physical energy markets are volatile and unpredictable, 

but derivatives allow us to stabilize this volatility. We pass these 

benefits on to our customers in the form of low fixed prices for the 

energy they need to run their businesses and power their homes. 

Now, I would like to specifically address some of the proposed 

pieces of legislation. First, we strongly support H.R. 2779, the Stivers-Fudge bill, because it recognizes that inter-affiliate swaps do 

not create systemic risks and should not be subject to burdensome 

margin costs. Like many other companies, Constellation uses interaffiliate swaps because it is more efficient to manage our corporate 

risk in total, rather than on an affiliate-by-affiliate basis. And we 

can get better prices by buying our derivatives in bulk through one 

part of our organization. Inter-affiliate swaps are used to allocate 

these derivatives and are largely bookkeeping in nature and do not 

create systemic risk. 

I would also like to speak briefly in support of H.R. 2586, the 

Swap Execution Facility Clarification Act. This measure provides 

clarity for existing voice broker markets so that they can qualify 

as SEFs. Preserving these markets is important as voice brokers 

are often the primary means to facilitate transactions for many illiquid products. Limiting the methods market participants may use 

to execute trades may result in unintended consequences, a reduced market liquidity, price discovery, and access to markets that 

are simply not developed enough to justify the cost of mandatory 

screen-based trading. 

Congress intended for swap trading on SEFs to develop over time 

in a transparent way that maximizes competition through multiple 

methods of interstate commerce and consistent regulation. That is 

13 

why we support the goals of H.R. 2586, which seek to ensure that 

end-users will continue to have a variety of options for hedging 

their risks. 

Finally, legislation will soon be introduced to fix the swap dealer 

definition. A proper definition of swap dealer is crucial to ensure 

that burdensome requirements, such as mandatory margin, capital, 

and clearing are not improperly forced upon non-financial endusers. The de minimis exception much be large enough that it does 

not capture firms like ours that had nothing to do with the financial crisis. We would never rise to the level of too-big-to-fail and are 

not interconnected to the broader market in a way that would create systemic risk. 

The CFTC’s proposed exemptions are too narrow and would catch 

many other end-users in swap dealer rules, like margin, clearing, 

real-time reporting, and capital requirements. Even the Administration’s proposal and the testimony of regulatory officials during 

the Dodd-Frank legislative process spoke of regulating financial institutions, not energy providers or end-users like ourselves. 

In conclusion, I want to thank Chairman Garrett, Ranking Member Waters, and members of the subcommittee for convening this 

hearing. Ensuring the CFTC follows congressional intent is critically important to the entire end-user community. However, if legislation is not passed to clarify the statute’s intent, end-users risk 

being captured as swap dealers, and the end-user exemptions included in the bill will be null and void. It is important to remember 

that end-users rely on derivatives to reduce risk, bring certainty 

and stability to our businesses, and ultimately to benefit our customers. We create jobs, not systemic risk, and we should not be further burdened by regulations Congress intended for financial dealers. Thank for your time, and I look forward to your questions. 

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

78 of the appendix.] 

Chairman GARRETT. And I thank you for your testimony. 

Mr. Cawley, you are recognized and welcome to the committee. 

STATEMENT OF JAMES CAWLEY, CEO, JAVELIN CAPITAL 

MARKETS, LLC 

Mr. CAWLEY. Thank you. Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee, my name is James 

Cawley. I am chief executive officer of Javelin Capital Markets, an 

electronic execution venue of OTC derivatives that will register as 

a swaps execution facility under the Dodd-Frank Act. 

I am also here today to represent the interest of the Swaps Derivatives Market Association (SDMA), which is comprised of several independent derivatives dealers and clearing brokers, some of 

whom are the largest in the world. 

Thank you for inviting me here today to testify. Let me first address H.R. 1838, that calls for repeal of Section 716 of the DoddFrank Act. Section 716 requires that the U.S. Government can no 

longer bail out swap dealers that do not hold deposits from the 

American public. 

The SDMA respectfully opposes H.R. 1838 because it would allow 

for future bailouts of Wall Street by Main Street. We oppose 1838 

14 

because it is not the role of government to intervene in private 

business by picking winners or losers. 

Government bailouts of private business run contrary to the fundamental tenants of free enterprise in this country. Swap dealers, 

like all other private businesses, must be allowed to succeed or fail 

on their own merits. Swap dealers serve no prudential role to the 

economy. To be sure, as we have seen from the financial crisis of 

2008, systemic risk borne at the bilateral construct of an uncleared 

swap increases the systemic risk of these firms. But the swapclearing mandate under Dodd-Frank substantially mitigates such 

risk, and thus, in the future, these firms will be allowed to fail 

without threatening our economy. 

We oppose 1838 because of the moral hazard implications. For 

swap traders to know that somehow their firms and their jobs 

would be protected by the U.S. taxpayer would only encourage further high-risk behavior and drastically increase the likelihood of 

another bailout. 

Lastly, the SDMA opposes such a bill because even if the U.S. 

taxpayer wanted to bail out Wall Street it simply can’t afford it. 

With budget deficits running close to 100 percent of GDP, the U.S. 

taxpayer doesn’t have the funds. Moreover, one need only look to 

the paralyzed economies of Ireland, Portugal, and Greece to appreciate the ills of taking bailouts a bridge too far. As unfortunate as 

it is, bad actors in finance should be rewarded as bad actors in 

other industries, not with bailouts but with bankruptcy. 

With regard to the Swap Execution Clarification Act that calls 

for an override of various pre-trade transparency provisions under 

the Dodd-Frank Act, the SDMA respectfully opposes that, too. To 

not require SEFs to show live firm bids and offers to the entire 

market so that participants can transact on them would dangerously limit fair dealing, restrict competition, and increase systemic risk. 

As empirical evidence and academic research show, the dissemination of live actionable prices to all market participants simultaneously increases market integrity, promotes a level playing field, 

and increases liquidity. Fair and open markets attract more dealers 

and buy-side participants, which, in turn, foster even greater liquidity. As evidenced by the financial crisis of 2008, the credit default swap and interest rate swap markets can never have enough 

liquidity. 

The SDMA opposes H.R. 2586 because it would increase transaction costs. With regard to transaction costs in the swap markets 

today, it is estimated that market participants pay $50 billion annually. By fostering greater pre- and post-trade transparency, it is 

estimated that such transaction costs would fall by 30 percent, or 

$15 billion, annually in the first few years after Dodd-Frank. That 

is $15 billion that corporations can use on their own balance sheets 

to invest in research and development or hire more American workers. That is $15 billion that loan portfolios can pass back to consumers in the form of cheaper small business loans or mortgages 

for American families. To be clear, the current SEF rules promote 

transparency fair dealing and lower transaction costs. The SEC 

and the CFTC have mindfully permitted different execution methVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
15 

ods, such as exchange-like anonymous central limit order books 

and requests for quote methodologies. 

Moreover the Commissions do not restrict voice hybrid broking 

methodologies; they merely require that they operate with certain 

pre-trade transparency precepts. The Commissions have wisely allowed the markets to decide which method works best in each market context. The SDMA, too, has several voice brokering constituent firms, with many hundreds, if not thousands, of voice brokers. And after our careful review, we support the Dodd-Frank Act 

as passed. 

To be sure, to change the rules now would be expensive to roll 

back. Clearinghouses dealers, buy-side, and trading venues have 

already invested hundreds of millions of dollars in anticipation of 

such rules. To reverse these rules now would be costly, inhibit capital formation, cost jobs, and sacrifice economic growth. 

To conclude, the SDMA calls on the members of this subcommittee to forego proposed bills H.R. 1838 and 2586 and instead 

request an immediate finalization of clearing, execution, and trade 

reporting rules by the regulators. As we enter now our second global financial crisis in 3 years, we should be mindful that the swap 

markets are no better protected today than they were back in 2008. 

The sooner we implement Dodd-Frank, the safer the American 

economy will be. I thank you for your time. And I am glad to answer any of your questions. 

[The prepared statement of Mr. Cawley can be found on page 83 

of the appendix.] 

Chairman GARRETT. Thank you, Mr. Cawley. 

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

panel. 

STATEMENT OF KENT MASON, DAVIS & HARMAN LLP, ON BEHALF OF THE AMERICAN BENEFITS COUNCIL AND THE COMMITTEE ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS 

Mr. MASON. Thank you. 

My name is Kent Mason. I am a partner in the law firm of Davis 

& Harman. I have been working in the pension area for almost 30 

years. And I can assure you that time flies in the pension area. 

I am testifying today on behalf of the American Benefits Council 

and the Committee on Investment of Employee Benefit Assets. 

Those two organizations together represent the vast majority of 

this country’s private retirement plans. I want to thank you very 

much for holding this hearing and for inviting us to testify. 

ERISA pension plans use swaps to manage investment risk and 

liability risk. Without swaps, pension funding obligations for companies would become much more volatile. That volatility would 

have two main effects: one, it would undermine the security of employees retirement benefits; and two, it would cause the company 

sponsoring these plans to have to reserve in the aggregate billions 

of additional dollars to hold for funding obligations. Those reserves 

would divert assets away from job creation and investments in the 

economy. 

I am going to focus today on three issues: one, the business conduct standards, which are our highest priority; two, the SEF rules; 

and three, the margin rules. I am going to start with the business 

16 

conduct rules. In the business conduct issue, we have three issues 

there. The first is the fiduciary issue, as Mr. Canseco explained 

better than I am going to here. Under the business conduct rule, 

proposed business conduct rules, a swap dealer has the obligation 

to review the qualifications of a plan’s advisor. That review, under 

current ERISA law would make the swap dealer a fiduciary. As a 

fiduciary, the swap dealer could not enter into a swap with a plan; 

it would be a prohibited transaction, and thus, all swaps with plans 

would have to cease. The answer here is actually very straightforward. We need a simple rule that says no action required by the 

business conduct standards will make a swap dealer a fiduciary. 

That is exactly what H.R. 3045 would do, and we support it. 

The second issue, the advisor issue, under Dodd-Frank, if a swap 

dealer acts as an advisor to a special entity, such as a retirement 

plan, the swap dealer must act in the best interest of that special 

entity. Unfortunately, the CFTC’s proposed regulations would define advisors so broadly that all swap dealers would be required to 

be advisors. This sets up an unworkable conflict of interest. That 

would mean that swap dealers would be required to act in the best 

interest of themselves, do their fiduciary duty to their shareholders, and in the best interest of their counterpart. That is unworkable. If that were to hold, again, all swaps with plans would 

cease. 

Again, H.R. 3045 addresses this very well by removing ERISA 

plans from the definition of a special entity. 

The third issue under the business conduct rules is what I call 

the dealer veto issue. Under the proposed regulations, the swap 

dealer would have the ability to veto the advisor of a special entity, 

such as a pension plan, based on the swap dealers opinion of the 

advisor’s qualifications. This would give the swap dealer enormous 

leverage over the plan and over the advisor. 

Again, H.R. 3045 would deal with this very effectively by removing ERISA plans from the definition of a special entity and remove 

this counterproductive veto power, which hurts plans rather than 

products them. 

The SEF bill, the CFTC’s proposed rules would raise costs very 

substantially for all counterparties, including ERISA plans. For example, by requiring that plans and other counterparties expose at 

least five RFQs to other market participants—this would cause the 

market to know too much about a trade before it happens and sort 

of mean that the ultimate counterparty would have much more 

trouble hedging that trade after it happens. That will obviously— 

the ultimate counterparty will pass on that cost to the plan or 

other end-user, raising costs significantly. 

H.R. 2586 would solve this problem and the other issues arising 

under the SEF rules. 

Lastly, very quickly, I just want to mention the margin requirements. The proposed margin requirements issued by the CFTC and 

the prudential regulators would treat ERISA plans as high-risk financial end-users and would classify them in the same category as 

hedge funds, imposing very onerous margin requirements. This is 

simply a mistake and a very costly one. ERISA plans are among 

the safest counterparties. We need corrective legislation. I thank 

you for your time, and I would be happy to answer any questions. 

17 

[The prepared statement of Mr. Mason can be found on page 86 

of the appendix.] 

Chairman GARRETT. Thank you, Mr. Mason. 

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

the committee. 

STATEMENT OF CONRAD VOLDSTAD, CHIEF EXECUTIVE OFFICER, INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION 

Mr. VOLDSTAD. Thank you, Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee. Thank you for the opportunity to testify today. 

My name is Conrad Voldstad. I am CEO of the International 

Swaps and Derivatives Association, a 25-year old institution that 

has over 800 members in over 50 countries, including in our membership over 60 government and supranational bodies. 

I myself started in the derivatives business back in 1983 before 

ISDA was around. I managed global swaps and fixed-income operations for two large American firms, helped unwind long-term capital, and later managed my own hedge fund. 

In my brief testimony today, I will briefly comment on H.R. 3045. 

We agreed both with Congressman Canseco’s statement and Mr. 

Mason’s testimony. We support this bill because it would correct an 

unintended consequence of the Dodd-Frank Act, one that would 

preclude retirement plans from using derivatives to manage their 

assets and liabilities. 

Regarding the other bills, H.R. 2586 would rectify a number of 

the serious issues related in particular to the CFTC’s proposals for 

how swap execution facilities, or SEFs, must operate. We strongly 

support its passage. 

OTC interest rate and credit default swaps, the products that 

will be the first to be executed on SEFs, are the most common and 

liquid products with very competitive pricing. However, while they 

are common and liquid, they trade very infrequently, and they 

trade in very large size. The interest rate swap market in particular is similar to the U.S. Government bond market, where 

many investors rely on dealer prices for certain types of trades. 

U.S. Government bond investors have the ability to execute electronically or through market makers. They have a choice of venues 

in which to trade. 

It appears the CFTC would like to reduce the choice of end-users. 

They would do so by specifying that SEFs require the requests-forquotes process to include at least five market participants. What 

dealer will put capital at risk in very large size if at least four others see the trade? The result will be reduced liquidity and higher 

prices for end-users. 

We also believe that end-users would have to execute large 

trades in a piecemeal fashion, taking execution risks they do not 

have to take today. 

It is interesting to see that the SEC does not require RFQs to 

be sent to more than one participant and has not reduced choice 

of execution to the extent the CFTC has. 

It is very important to note that unlike the requirements for 

clearing and trade repositories, SEF execution is not an element of 

18 

Dodd-Frank that reduces systemic risk. It does not touch the AIGtype issues that cause losses in the financial markets. It is a structural change that should, in my opinion, be subject to a more careful cost-benefit analysis and safety and soundness provisions. This, 

of course, has not been done. 

With respect to H.R. 2779, ISDA also believes that inter-affiliate 

swaps play an important part in the risk-management practices of 

end-users and dealer firms. For a variety of reasons, they may 

choose to book transactions in a centralized risk-management subsidiary and then book that risk internally to another subsidiary via 

inter-affiliate transactions. Dealer firms of course might do the opposite, have a local entity be the booking firm and manage the risk 

centrally. 

We do not believe that transactions within a corporate family 

should be subject to Dodd-Frank clearing and execution requirements. Treating inter-affiliate transactions as if they are thirdparty swaps will not reduce risk to the financial system. They will 

not increase transparency in a meaningful way, nor will they improve market integrity. 

My last subject will be H.R. 1838, which would repeal Section 

716 of the Dodd-Frank Act. We see four issues associated with Section 716. First, dealers will deal through one entity for one set of 

products and through a second entity for another set of products. 

As a result, netting benefits could be lost and risk would increase 

throughout the system. 

Second, dealers in jurisdictions without a 716 requirement will 

have an advantage relative to their U.S. peers that may result in 

a loss of jobs and business in the United States. 

Third, the non-bank subsidiary required by Section 716 will need 

to be separately capitalized. These capital requirements will be 

greater than the capital savings at the bank that will result from 

the 716 pushout. This extra capital and the capital needed to offset 

lost netting benefits would be far better used to create jobs and economic growth in the United States. 

Finally, the non-bank companies set up as a result of 716 will 

have to duplicate functions that are also carried out in the bank. 

This, of course, will create costs that will be passed on to derivative 

users. What Section 716 will ultimately do is put risk into an entity that is owned by the same parent that owns the bank that 

would otherwise house the business. Is risk in the financial system 

reduced at all? Will the risk be as transparent if it is moved from 

a bank to a bank affiliate? And more importantly, might it move 

to entirely different non-bank entities? 

This concludes my testimony. ISDA appreciates the opportunity 

to testify on these important bills. And I look forward to answering 

any questions you may have. Thank you. 

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

99 of the appendix.] 

Chairman GARRETT. And likewise, Mr. Voldstad, thank you for 

your testimony. 

Since everyone here said they look forward to our questioning, 

let’s go to some questioning. 

I will begin with my questioning. 

19 

I will throw this out, I guess, to Mr. Cawley for a brief answer, 

and then maybe I will throw it out to Ms. Boultwood to follow up 

on an answer, same sort of thing. 

Mr. Cawley, your testimony was it might be a little different 

with regard to how things would play out as far as whether everything would be forced onto a central order book or not. And even 

if it was not all forced on there, whether or not—since your testimony seemed to indicate that there would be some flexibility out 

there whether—the question that comes up in my mind is whether, 

even if there is some flexibility there, whether you still would have 

to first go to a central order book to check that, so to speak, for 

the pricing over there. If it were the case that everything had to 

go there, then some of us would disagree that that was the intention of Congress, that Congress was not intending to micromanage 

the operation of the markets in that place. And even if it is not, 

the effect of the rules, that everything goes there per se, but things 

have to go there indirectly as far as to having to at least check the 

central order book, still I would say that is not the intention of 

Congress. I would like your comments on that. 

And Ms. Boultwood, I would like your comments on that as well. 

Before that, though, I will just share with you what some other 

folks who are not on the panel, from the ICI in general, wrote in 

support of the legislation, the SEF legislation. I am not going to 

read all of it, but they say, the appropriate regulation of SEFs will 

be of critical importance to the success of Title VII of regulation 

rulemaking. ICI believes that the proposed trading restrictions and 

the Commission SEFs related proposals—the current rules, which 

you say, let go into affect—do not strike the right balance of proposed restrictions, enhance transparency at the expense of liquidity 

and efficient pricing, which could discourage the use of SEFs. It 

jumps down and says to another piece of it, the fund is required 

to go to five swap dealers prior to executing swap transactions; to 

that point, it would likely suffer from information leakage and signaling, so they have concerns there. 

Just two other ones really quick, from Chatham Financial. These 

are advisors to the end-user folks, right? Again, they speak in general support of the legislation that we are talking about, the Swap 

Execution Facility Clarification Act. Here is the interesting—in a 

comment letter to regulators, the Coalition for Derivatives EndUsers highlighted the communicating of the details of these language transactions to more than one or two parties could adversely 

affect end-users’ ability to execute trade efficiency. The Coalition 

further emphasized that this would frustrate rather than fulfill the 

goals of promoting SEF usage; it could work against the goals of 

price transparency and price efficiency, right? 

Then they go on, interesting also; it says the New Democrat Coalition expressed similar concerns in its letter to regulators. They 

noted that Congress also recognized, however, that there is not always sufficient liquidity in exchanges in support of all types of 

swaps. So you have those people who sort of side with where we 

are standing on this. 

And then last would be, well, last but not least, BlackRock—and 

we are all familiar with them—Asset Management fully supports 

the objectives of the legislation. We believe the Swap Execution FaVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
20 

cility Clarification Act is consistent with these objectives as put in 

Dodd-Frank but not as—I am paraphrasing them—as being implemented. 

So I will give you just quick time, Mr. Cawley, because my time 

is limited, and then Ms. Boultwood on this. 

Mr. CAWLEY. So by our read, Mr. Chairman, of the rules as proposed, we see two or three different methods, so central limit order 

books, as you probably know, allow customers to see live real-time 

prices, bids and orders, bids and offers, exchange like. 

Chairman GARRETT. But would it have to go—my time is limited. 

Mr. CAWLEY. No, it would not. 

Chairman GARRETT. But would it have to go there first for a 

check? 

Mr. CAWLEY. By our read, the rules offer either the choice of 

going to a central limit order book or to go to an RFQ. Now, voice 

hybrid brokering works today, as Shawn Bernardo talked about, 

very well in the interdealer markets today. But one thing that also 

works well today in those voice hybrid markets is the fact that it 

itself is a central limit order book. Dealers today trade with each 

other using a wholesale central limit order book. They do so with 

the assistance of voice when the market is not as liquid as it might 

be. With interest rate swaps, they are highly liquid. 

Chairman GARRETT. That I understand. Ms. Boultwood, then? 

Ms. BOULTWOOD. I will respond in two ways: one is just practical 

concerns; and the other is, I guess, more conceptual. In our business, hedging output from generation plants as well as supply that 

we provide around the country, there are many locations and types 

of products that we transact in for hedging purposes that either 

you have a very limited number of market participants, you may 

not get to five, for example, or the volumes are very low in those 

transactions. So the point is, for physical transactions where you 

are hedging financially, your mode of communication with parties 

on the other side of the transaction is very critical. You can’t—you 

don’t want to restrict those modes of communication. 

And then second, and more conceptual I think, aligned with ICI 

and Chatham is that this is about interstate commerce and the importance of not having rules and having legislation that would prohibit certain types of interstate commerce just is very important. 

And that is why your legislation is critical and provides clarity that 

isn’t being provided by the current set of rules. 

Chairman GARRETT. Okay. I appreciate both of your testimonies. 

The ranking member is recognized. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Mr. Cawley, section 716 of Dodd-Frank requires banks that have 

access to Federal assistance, such as deposit insurance and access 

to the discount window, to push out their derivatives business subject to some exceptions. Many of the witnesses here likely think 

that this proposal is unworkable or impossible to implement. I 

guess I can conclude from your testimony that you don’t believe 

that it is necessary to repeal section 716, or do you think that the 

industry can collaborate with regulators to make it workable? 

And in answering that—and this may be a little bit unfair—our 

first witness, Mr. Bailey, comes from a company that received 

about a billion dollars in bailout from the discount window. Are you 

21 

saying that the American taxpayers should not be responsible for 

bailing out under the same kind of circumstances that they received their bailout? Please help me understand this. 

Mr. CAWLEY. That is exactly what we are saying. We are saying 

that swap dealers serve no prudential need in the economy, and 

notwithstanding the fact that a bailout was necessary because of 

the bilateral nature of the swaps contract—and we saw that with 

AIG, and we saw that then with TARP, and we saw that then with 

subsidies of guaranteeing bonds issued by various broker-dealers. 

That is not a good—although we got through that, it is not a good 

way to do business. Fundamentally it is not, from the SDMA standpoint and from several other standpoints in the American public. 

Swap dealers should be treated the same way as any other business, whether it is Javelin Capital Markets or a restaurant on the 

corner. You live and die by the decisions that you make, and if the 

collection of decisions that you make are so catastrophic that it results in the demise of the company, that is really unfortunate, but 

so be it. And that is how the capitalist system works. 

So what 716 asks for is merely that for those institutions who 

are swap dealers that don’t hold deposits, there is really no prudential need to protect them, and we really need to get away from protecting entities or giving them special status when they really 

serve no prudential need in the economy. 

Banks, to the extent that they allow the flow of funds to flow 

through our economy, have a prudential or serve a prudential need 

within the economy. That being said, it is well established that 

with that prudential responsibility comes regulation, that they 

themselves can’t get over their skis and bring the economy to its 

knees. 

When we look back at 2008, Congresswoman, I think it is fair 

to say we came very close to the cash machines not working on 

Main Street, and it scared a lot of us on Wall Street, because it 

was getting out of control. We can’t go back there again, and one 

only needs to look across the Atlantic to see what is happening 

with the paralyzed economies with Ireland, Greece, and Portugal. 

We can’t bail them out. Dexia last week was the first bank victim 

of the financial crisis, part 2. It was liquidated. It has now become 

the charge of the Belgian and French taxpayer. So what you see 

is the second notion, which is that the U.S. taxpayer simply can’t 

afford it. We can’t afford to bail out companies that serve no prudential interest. 

Dodd-Frank goes to solving this issue by bringing in clearing. 

What it does is, it says something very, very simple. It says if you 

are going to trade swaps, they are going to trade in a clearinghouse. So if you go down, if you file for bankruptcy, you are not 

going to pull four or five firms with it. 

Back in the late 1980s, when I was in college in Philadelphia, I 

remember one day I had an interview at a company called Drexel 

Burnham, and my interview was scheduled for the day after they 

filed for bankruptcy. It was unfortunate for me. It was also unfortunate mostly for the workers of Drexel and for the bondholders 

and shareholders of Drexel, but by Friday of that week; the market 

had moved on. It was unfortunate that Drexel saw its own demise, 

but it didn’t create a systemic risk in the system. And this was 

22 

something that was highlighted that is unique to derivatives, 

which is the bilateral nature of a swap. If AIG was allowed to go 

down, they had written, I believe, $300 billion of protection that 

they had taken no reserve against. So it is necessary that we recognize that today, and it is necessary that we don’t encourage it in 

the future. 

Ms. WATERS. Thank you very much. You make a very good case. 

I yield back the balance of my time. 

Mr. BAILEY. May I respond? 

Chairman GARRETT. I thank the gentlelady. The gentleman from 

Texas is recognized for 5 minutes. 

Mr. BAILEY. I beg your pardon; may I respond? 

Mr. HENSARLING. Thank you, Mr. Chairman. As one who participated in the legislative process for Dodd-Frank and served on the 

conference committee, I was consistently told that the whole reason 

for being for the legislation was to reduce and minimize systemic 

risk. And now in the testimony that I hear today, if I understood 

properly, Mr. Voldstad, you testified that, ‘‘Some parts of the proposed regulatory application of this legislation, however, work 

against the goal of systemic risk reduction.’’ 

Mr. Mason, I believe in your testimony you said, ‘‘Treating 

ERISA plans as high-risk financial end-users will actually create 

risk rather than reduce it, thereby adversely affecting plan participants.’’ 

Ms. Boultwood, I believe I heard you say, ‘‘We create jobs, not 

systemic risk. There may be others who for whatever reason disagree with that assessment.’’ 

So my first question is, I would really like, Mr. Voldstad, for you 

to elaborate on how the aspects of Dodd-Frank that we are discussing today actually could work against the goal of systemic risk 

reduction. 

Mr. VOLDSTAD. Thank you, Congressman. Number one, ISDA is 

very much in favor of safety and efficiency of the markets in which 

we operate or our members operate, and I think there has been an 

awful lot of progress. The main things that actually improve the 

safety and soundness of the markets that are in Dodd-Frank relate 

to clearing and the trade repositories. Trade repositories have been 

set up largely through our guidance, and are being set up in the 

asset classes that haven’t been done. Clearing is a very good process. It does reduce systemic risk. Our issues relate to the processes 

where through a proliferation of clearinghouses, you start introducing risk in the clearinghouses themselves. You also find that as 

you move transactions into clearinghouses, you often find that 

those transactions themselves were hedging other transactions 

which can’t be cleared and which will now create risk. I mentioned 

in my oral testimony that as you push certain swap activities into 

a 716 subsidiary, you will also reduce netting benefits. I should 

point out— 

Mr. HENSARLING. I am sorry, let me interrupt. My time is limited 

here. 

I would like to move to Mr. Mason and get your views. I am particularly concerned, at least the latest figures I have seen on the 

PBGC say that we have a debt of $23.03 billion, and we have a potential exposure from underfunding of plan sponsors of perhaps 

23 

$190 billion. So when one tells me that a potential interpretation 

of Dodd-Frank could create even greater risk with ERISA plans, 

you certainly get my attention. Could you elaborate, please? 

Mr. MASON. Absolutely. Because of the way the funding rules 

work, it is absolutely essential that pension plans be able to use 

swaps to manage risk, such as investment risk, but primarily interest rate risk. I was sitting with someone recently who said that an 

interest rate swing in 2009 created for them almost overnight a $2 

billion additional liability, and that was almost overnight, and the 

only way they can effectively manage that possibility is through the 

use of swaps. Swaps are a very effective tool to say, I can prevent 

that sudden emergence of $2 billion of liability. Without swaps, we 

couldn’t do it. And the proposed business conduct regulations would 

take swaps out of the hands of the pension plans and expose them 

to that sort of enormous volatility and risk, so this is a creation of 

risk. This is not a diminution. 

Mr. HENSARLING. In the very brief time I have remaining, I am 

curious about what level of concern people on the panel have regarding if the SEC and the CFTC do not harmonize their SEF 

rules and whether one sees any particular harmonization between 

U.S. rules and international rules, and what impact could that 

have on moving these swaps offshore. Anyone who would care to— 

Mr. BERNARDO. I think if the SEC and the CFTC don’t harmonize their rules, just to give you a real-world experience, you 

could have a credit default swap desk in our corporate area, where 

a single broker who brokers both credit default swaps and indices 

following, two sets of rules. So he could be doing a trade, trying to 

follow the rules for indices of the CFTC and doing a single-name 

credit default swap following rules of the SEC. So it is quite burdensome. 

Mr. HENSARLING. Thank you. I see my time has expired. 

Chairman GARRETT. We are going now to the gentleman from 

Massachusetts, but before—just to indicate to the committee, after 

you, we are going to take a 10-minute recess. We have 2 votes on 

the Floor, so we can all go and vote for the 15-minute vote, and 

the 5-minute vote, and then come back and reconvene, so that gives 

the panel a 10-minute recess as well. 

The gentleman is recognized for 5 minutes. 

Mr. LYNCH. I thank the chairman and the ranking member for 

holding this hearing. I also want to thank the witnesses for coming 

before us and helping us with this very important issue. 

I would like to talk about H.R. 3045, which we were just speaking of, Mr. Mason was, regarding the ERISA plans. I am a former 

trustee of a union ERISA plan for the ironworkers, and I understand—first of all, the mission of preserving those resources in retirement for the beneficiaries, in this case ironworkers, is more conservative—with a lowercase ‘‘c’’—with the eye towards steady 

growth, and lack of risk. And I don’t dispute the appeal and the 

effectiveness of the use of some swaps in terms of balancing risk 

within the plan, especially with respect to interest rate swaps, currency swaps where the underlying actually changes hands, there’s 

no leverage there, but you have to admit with the AIG example 

back in 2008, we had many ERISA plans that had billions of dollars in credit default swaps, in more speculative swaps that, but for 

24 

the taxpayers’ rescue and pumping $700 billion to satisfy the calls 

of Goldman Sachs and a lot of these pension funds, there would 

have been some—a fair number of ERISA plans that would have 

been put at risk, possibly even failed because the swaps, the 

counterparty there, AIG, would not have been able to meet the obligations, so there would have been some failure. 

Apart from the swaps that you have talked about, interest rate 

swaps, I guess what we are getting at, and I think what the goal 

of Dodd-Frank was, is to get away from the speculative swap activity that might create some risk within those plans and really provide a greater stability within those plans. 

Is there a balance that we could strike here that would lend the 

advantages that interest rate swaps for your example provide, yet 

stay away from some of the more speculative activities that unfortunately some pension funds—and you have folks who, like me, 

when I was an ironworker, you would go to a couple of meetings 

a month as a trustee and you would be asked to vote on investment 

strategy and things like that. So I am sure there are a lot of smaller ERISA pension funds where perhaps all the trustees are not 

fully up to speed on complex derivatives and the different type of 

swap arrangements. 

Mr. MASON. I think, really, I find myself really agreeing with 

much of what you just said. The overwhelming portion of swaps by 

pension plans are hedges. They are not speculative. Interest rate 

hedging, currency hedging, just as you mentioned, some equity 

hedging. Credit default swaps have historically not been a major 

element. And in our discussions with regulators, with the legislators during Dodd-Frank, we have never defended the use of widespread credit default swaps. 

What we have done, for example—last spring or the spring when 

Dodd-Frank was being considered—was come in to say, for example, on the major swap participant definition, we want exemptions 

when we are hedging. When we are speculating, we are not looking 

for that same kind of protection. 

Mr. LYNCH. Right. 

Mr. MASON. So I think we have common ground, and I guess 

what we are saying here today is, let’s not throw out the vast majority of sound swaps by these rules, which is what these rules 

would do. 

Mr. LYNCH. Right. 

Mr. MASON. And let’s look for other tools to be effective in sort 

of accomplishing the objectives, the worthy objectives that you just 

articulated. So I don’t think there is a lot of space here. 

Mr. LYNCH. Mr. Mason, to your point, I could see where the 

steelworkers’ pension fund might want to enter into some type of 

commodity swap dealing with the price of steel, because that is 

going to affect their work hours, contributions in there, the health 

of their plan in general. They may want to balance that off with 

a swap so that it doesn’t adversely affect the pension fund. So I certainly understand that instance. But there were some cases where 

pension funds got involved in swaps where it was completely gratuitous, it was real estate halfway across the country, there was no 

real physical connection, collateral connection between the—it 

wasn’t a hedge is what I am saying; it was more gratuitous or specVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
25 

ulative. And, I just think it might help us greatly if we could get 

away from that type of swap activity. 

Mr. MASON. And I think we would love to sort of follow up afterwards because our objective here is to be able to hedge our risk, 

and there may be some minuscule sort of speculation, but I think 

we should talk about it in terms of what we can do together to preserve our ability to hedge without crossing lines, and we look forward to that discussion. 

Mr. LYNCH. I thank the gentleman. I yield back. 

Chairman GARRETT. The gentleman yields back. We are going to 

reconvene at exactly 20 minutes of—that will give us enough time 

to go over, vote, and come back, and take a break. So we will see 

you at 20 of. 

[recess] 

Chairman GARRETT. We are pretty close to 20 of. The committee 

reconvenes, and I think we are ready for the next series of questions from the gentleman from Arizona, and he is recognized for 5 

minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman, proving once again 

you will just let anyone ask questions here. 

Mr. Bailey, one of the questions I have been somewhat interested 

in is the threat of sort of a regulatory arbitrage around the world. 

I know you are not necessarily speaking for Barclays, but that does 

provide you quite a world view and expertise. How much of a 

threat are we in if we made no changes, if we left the Dodd-Frank 

law as it is; that I wake up one day and someone like Barclays is 

moving employees or their trading to London or Singapore or somewhere else around the world? And I would love also some insight 

from everyone else on the panel on that. 

Mr. BAILEY. Thank you. I think in relation to the global harmonization point, we do think it is terribly important that in certain 

particular regards, the regulators across the world land in more or 

less—and it doesn’t have to be exactly the same—the same as to 

particular facets of the legislation that is being adopted globally. In 

one respect, I think we think that clearing is likely to be a fairly 

universal and reasonably harmonized activity globally, provided 

there is mutual recognition of clearinghouses by the respective regulators globally, and so that aspect of it, I think will likely be all 

right. 

The issue around execution styles and execution venues and 

what the European MiFID regulations will eventually require in 

terms of the protocols for derivative trading is still somewhat unknown. We do expect some information from the European Union, 

I think next week, which will give us more definition as to what 

their intentions are in that regard. But we really would depend on 

where those liquidity pools go, which in turn I think depends largely on where our customers go. And if customers have a preference 

for transacting on a certain location or certain environment, then 

that is where we would want to be reciprocating with our own liquidity in order to service the needs of our customers. 

I actually think one has to recognize that there are many products that—where the underlying elements are traded in the United 

States, will remain traded in the United States, particularly so in 

credit products and certain other interest rate products and comVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
26 

modities. It actually seems unlikely that there would be a massive 

exodus from our trading population out of the United States. But 

one has to respect that there are other markets, like FX, where it 

is very much a key stroke, it is a click of a button that will take 

your transaction almost anywhere you want to trade it in the 

world, and so I think we would— 

Mr. SCHWEIKERT. Forgive me, but the 5 minutes goes by very, 

very fast when we are doing some of these. Our concern for us as 

policymakers often is how far ahead of the curve we are. Mr. 

Cawley? 

Mr. CAWLEY. Yes. 

Mr. SCHWEIKERT. Your specialty is you actually provide a platform? 

Mr. CAWLEY. Yes. 

Mr. SCHWEIKERT. From what you are seeing around the world, 

are we coming in to—is the world sort of heading towards a common regulatory scheme? 

Mr. CAWLEY. Yes, from what we see. And Mr. Bailey is totally 

correct, there is definitely a global consensus that clearing is good, 

and execution then is up to debate as to how products trade. The 

notion that—and we agree with Mr. Bailey’s thought that the domestics, certainly credit default swaps trading U.S. credits would 

stay here, and dollar credits would stay here as well for interest 

rate swaps. So, investors look for good execution. They also look to 

trade in fair markets where they know that they are going to— 

Mr. SCHWEIKERT. One of my concerns is I have actually seen a 

number of articles talking about the hunger of some of the Singapore Exchange to try to find a regulatory edge, and very stable, so 

I am constantly concerned that we are going to see that regulatory 

arbitrage. 

My last 30 seconds, is it Mr. Mason, forgive me, I am not wearing my glasses so I can’t even read something that is a little esoteric, but I am trying to get my head around it. Would a pension 

plan ever do a very custom hedge—and I was actually thinking before the previous discussion with our friend from Massachusetts— 

I am in a steelworkers’ union and in our pension plan, we actually 

take some ownership as part of our salary negotiations. Would a 

pension plan do a custom hedge on default of that particular entity? 

Mr. MASON. The defaults, default swaps are really the exception 

in our world. In terms of your question, are there customized swaps 

in our world? Absolutely, because actually the interest rate swaps, 

the currency swaps, the equity swaps are all very customized. 

Mr. SCHWEIKERT. But my fear is with the way the rules are 

working, if you are doing something with that level of 

customization, is the platform we are heading towards or the requirements, is that going to make it much more difficult to do 

those highly customized swaps? 

Mr. MASON. No. I think—and this is something we are working 

a tremendous amount with the agencies on because we are completely on board with sort of the clearing structure. But a lot of the 

clearing structure, the sort of customization, is inconsistent with 

the fact that every pension plan has very different demographics, 

27 

and you need to coordinate with the precise demographics to create 

the right hedge, and so we are—I am sorry. 

Mr. SCHWEIKERT. I hope you will forgive me. I am just way over 

my time. Thank you for your tolerance, Mr. Chairman. 

Chairman GARRETT. Sure. The gentlelady from New York is recognized for 5 minutes. 

Mrs. MALONEY. Thank you. I regret that I had a conflict with another hearing. I would like to ask a question that is affecting really 

the district I represent, the fact that the SEC rule and the CFTC 

rule have come out different. And I would like to in a general sense 

ask what is it about the SEC rule that is better or worse, in your 

opinion, and what is it about the CFTC rule—compare the two 

rules and what is better and worse. And I guess, Mr. Voldstad, 

since you are the International Swaps and Derivatives Association, 

can you explain what it will mean for brokers who are engaged in 

business in the equities market and in the commodities market to 

have two different sets of rules for swap execution facilities? And 

then, if people could comment on the two rules, and what it means 

to commerce in the industry competitiveness. 

Mr. VOLDSTAD. I will start, I think, just by comparing the two 

rules. We talked before about the RFQ process that the CFTC has, 

and they say that any request for a ‘‘transaction’’ has to be put in 

front of five participants. The SEC does not require that. They are 

not out to change significantly the structure of the marketplace. 

And Mr. Bernardo said earlier that the CFTC will apply to credit 

default swap indices and the SEC will apply to single-name reference entities. So if you are a dealer, you will have to transact 

your single-name default swaps under one set of rules, and you will 

then have to use—then if you are hedging through an index, you 

will have to do that through another set of rules. And you will also 

have different reporting requirements, and this is very important. 

The SEC has pretty reasonable reporting requirements that can go 

out as long as essentially 20-some-odd hours, whereas the CFTC 

will require near instantaneous reporting requirements, except if it 

is a block. Then you will have a 15-minute delay, but the block 

thresholds are very, very high in the CFTC rules, so the SEC rules 

look quite a bit more reasonable from that standpoint. We don’t yet 

know how the SEC will apply rules with respect to equity derivatives, but I would imagine that they will be a bit more reasonable 

than what we have seen from the CFTC. 

Mrs. MALONEY. It sounds complicated. Does anyone else want 

to— 

Mr. BERNARDO. Just to add on to that, the SEC rules are much 

more flexible as far as the execution of these trades. They allow for 

voice, electronic, and hybrid means of execution. They allow for the 

wholesale market brokers and my competitors to be innovative and 

come up with new ways to trade certain products, whether it be a 

matching engine or an auction platform. The CFTC rules are really 

based off the futures market, and they are relying on an exchange 

model that doesn’t necessarily work in all the products that we are 

looking to regulate. 

Mrs. MALONEY. Just getting to voice, so the SEC allows voice and 

the CFTC does not allow voice; is that correct? 

28 

Mr. BERNARDO. That is correct. To tie that back actually to what 

the Congressman was asking before, even in Europe, the rules are 

much, much less flexible—or much, much more flexible on the 

modes of execution. They are not dictating how trades should happen. They are allowing for the market to have the ability to trade 

electronically, via voice or hybrid. Our companies— 

Mrs. MALONEY. Now, NASDAQ trades in voice, right? 

Mr. BERNARDO. NASDAQ, they have voice brokers, but yes. 

Mrs. MALONEY. Can anyone tell me any reason why you 

shouldn’t have voice? I, for one, like talking to people when I am 

making decisions. 

Mr. CAWLEY. Congresswoman, maybe I can help. James Cawley 

from the SDMA. We, too, have several firms who have voice brokers who operate quite well today in the City and State of New 

York. By our read of the CFTC rules, we do not see that they restrict voice hybrid trading. They merely request that trades occur 

on a screen, on a hybrid basis with voice, which is consistent with 

many OTC markets today in the bond context, certainly within the 

wholesale market context. Voice, we should be clear, voice hybrid 

works within the central limit order book context, and so from our 

read of the rules, we do not see that there is an explicit restriction 

on people trading and using voice brokers in concert with screens 

so long as they meet their pre-trade trading objectives. 

I would also say you can trade without a screen where you have 

two individuals purely voice broke a trade. Even in that context on 

a broker desk, there is a prohibition against what is known as 

‘‘armpitting,’’ so the notion is that me as a broker will see both inquiry from one customer and another, cross the trade myself without showing it to my own desk; so we see that on a broader context, 

this is what the rules that have been suggested or promulgated by 

the CFTC to be an extension of. So even within interdealer brokers, 

there is a prohibition on armpitting, which is not showing the rest 

of the market that a trade is about to occur. 

Mrs. MALONEY. How have companies in your industry improved 

your risk management practices? 

Chairman GARRETT. Gentlelady, this will be the last question 

since you are over by a minute-and-a-half. 

Mrs. MALONEY. I am over? I will wait for the second round then. 

Chairman GARRETT. Okay. Then, Mr. Stivers is recognized. 

Mr. STIVERS. Thank you, Mr. Chairman. I would like to thank 

the chairman for holding this hearing. I would like to thank the 

witnesses for sharing their time and expertise on many issues. And 

I am going to focus in on H.R. 2779. Not a lot of questions have 

been asked about that one. I would like to start with Ms. 

Boultwood. You represent an end-user, Constellation Energy; is 

that correct? 

Ms. BOULTWOOD. That is correct; yes, sir. 

Mr. STIVERS. Can you tell me without H.R. 2779, what would 

happen to the cost of risk management for companies that choose 

to perform their risk management function by using a central entity with experts and then using an accounting swap, for lack of a 

better term, to assign ownership to that internally? What would 

happen to your costs if this bill is not passed, and what could potentially happen to you? 

29 

Ms. BOULTWOOD. Congressman Stivers, our costs would rise. We 

would be forced to execute hedges for generation that we might 

have in Alberta, Canada, hedges that we might—or generation that 

we have in the United States. And with an inability to consolidate 

that risk and hedge centrally, we would be charged transaction fees 

as well as be forced to transact in markets that may in their location not be as liquid as other markets where we could potentially 

more efficiently execute that hedge. 

Mr. STIVERS. And you could potentially be caused to raise your 

expense 3 times for collateralizing those swaps because you would 

have to collateralize the one side with an external entity and both 

sides of a second transaction, which is merely an accounting transaction that does not increase your risk; is that correct? 

Ms. BOULTWOOD. That is correct. Mr. Bailey pointed that out in 

his testimony. 

Mr. STIVERS. Right, and I heard him say that, but I wanted to 

make sure we were clear. 

Ms. BOULTWOOD. Same impact. 

Mr. STIVERS. Tell me what would happen if you had an incentive 

to do that, then, and your costs went up 3 times; do you think you 

would continue to have an external facing entity to execute your 

swaps or would you probably push it into your subsidiaries; and in 

doing so, would you have the same amount of expertise in each 

subsidiary that you are able to have in an external entity? 

Ms. BOULTWOOD. So, two questions. We believe on the first, we 

would have higher costs of hedging that we would pass on to our 

wholesale and retail customers. That is the first item. And then 

second, the process that we undertake to hedge would be a lot less 

efficient and we would in many markets be forced to what might 

be called ‘‘dirty hedge’’ because we couldn’t find an appropriate 

hedge for that specific location, that particular product in that location, that we might more efficiently find through a centralized 

transaction. 

Mr. STIVERS. Great. Thank you. I know Mr. Bailey brought up 

some great points earlier on the cost as well, and I think Mr. 

Voldstad quickly mentioned that he supports this bill because he 

thinks it will make things more efficient. Do either of you have 

anything that you want to add to why you believe this bill makes 

sense that Ms. Boultwood didn’t already cover? 

Mr. VOLDSTAD. I might add something, if I may, Keith. I think 

if you have a plethora of individuals around the world executing 

swaps, there is an issue of expertise but there is also an issue of 

control. I have managed worldwide businesses, and I found that as 

you dispersed risk and authority around the world, it was difficult 

to control that, and typically, you would have much tighter risk 

controls in terms of how far somebody was from you and in terms 

of what kind of market they were operating in. 

Mr. STIVERS. Anything to add, Mr. Bailey? 

Mr. BAILEY. No. 

Mr. STIVERS. Great. I yield back the balance of my time, Mr. 

Chairman. 

Chairman GARRETT. Thank you. 

Mr. STIVERS. Thank you to all of you. 

Chairman GARRETT. The gentleman from New York, Mr. Grimm. 

30 

Mr. GRIMM. Thank you, Mr. Chairman. Let me ask Mr. Cawley, 

do you think that ERISA plans, those subject to ERISA, should be 

able to engage in swaps transactions? 

Mr. CAWLEY. I am no expert on ERISA. We are more on the execution side, so I really don’t have a view on that. 

Mr. GRIMM. Okay. Mr. Mason? My understanding is that even at 

a most basic level of understanding, it is almost essential to properly managing such a portfolio. Is that correct? Could you expand 

on that? 

Mr. MASON. Absolutely. Particularly interest rate risk. Interest 

rate risk can create enormous volatility and liabilities almost overnight, and the way that pension plans manage that liability, by far 

the most efficient, the most inexpensive is through swaps, and so— 

Mr. GRIMM. But am I correct that under Dodd-Frank, as it is 

now, they would be precluded from those transactions? 

Mr. MASON. Under the proposed regulations, they would be precluded, yes. 

Mr. GRIMM. Okay. Mr. Bailey, you spoke very briefly about regulatory arbitrage, and one example would be the FX markets. Do 

you have any concern that traditional end-users—we spoke about 

some here—but even American companies like John Deere or Caterpillar, end-users in the most traditional sense, would be forced to 

send their business offshore where they don’t have to post margin, 

things like that? Does that weigh into the regulatory arbitrage 

equation? 

Mr. BAILEY. It does, absolutely, as to margin. We are hopeful, I 

think, that the margin treatments and the collateral and what has 

to clear will be sufficiently harmonious between the European and 

the U.S. environments to not have that be an issue. But absolutely, 

that would be a concern. 

Mr. GRIMM. And whoever wants to weigh in, one of my—I would 

like to be as optimistic—but after Basel 2, I think we can definitely 

be concerned that the international markets may not move as 

quickly to promulgate the rules. I think it would also be safe to say 

that even if they promulgate the rules, there will be certain markets that will probably not implement nor enforce the rules to the 

standards that the United States would, and there would be a disparity. Am I completely off the mark? Maybe Mr. Bernardo could 

talk about that? 

Mr. BERNARDO. I think you are spot-on. I think that, as I said 

before, the EU’s rules on modes of execution are much more flexible than ours, so if we don’t accept the clarification act, we are 

going to have an issue. Our companies are global companies. It is 

very, very easy for my company to move its employees literally at 

the click of a button over to Europe, over to Singapore, as you suggested. It doesn’t take much, given that if the rules are too prescriptive and it is going to inevitably impact firms, they are not 

going to look to execute here; they are going to look to execute 

someplace else. 

Mr. GRIMM. And lastly, Mr. Cawley, as you look at—I think your 

testimony, and correct me if I am wrong, but overall I think you 

said that the proposed rules for Dodd-Frank are close to spot-on, 

and it is what we need to prevent the systemic risk and future bailVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
31 

outs. Within your analysis, does U.S. competitiveness weigh in 

there, and if so, to what degree? 

Mr. CAWLEY. Without a doubt, U.S. competitiveness weighs in, 

Congressman. And speaking directly to competitiveness, we only 

need to look at the hit that our GDP took and the unemployment 

rate skyrocketing as a result of the financial crisis back in 2008. 

So the notion of American competitiveness, specifically within the 

financial markets, is an area where the United States has led the 

charge. 

Mr. GRIMM. If I could, because I am running out of time, would 

you say that the extremely high unemployment rate is solely due 

to the financial breakdown? It has nothing to do with the crash of 

the housing market, has nothing to do with the policies coming out 

of Washington from both sides of the aisle, maybe some overregulation and the lack of uncertainty in the marketplace overall? 

Mr. CAWLEY. I wish the world worked in black and white. It 

doesn’t. It works in gray, so I wouldn’t use the term ‘‘solely,’’ but 

I would say that the financial crisis and the role that derivatives 

played with the bilateral construct that is baked into an interest 

rate or credit default swap certainly brought about unnecessary 

bailouts of companies that shouldn’t have existed. 

Mr. GRIMM. My time has expired. I just want to make note, I 

think when you really analyze it at its core, derivatives definitely 

played a major role, but it was mostly the firms that were speculating as a business speculation. And Dodd-Frank, when you really 

look at it, goes way beyond speculation of derivatives and more into 

the end-users and legitimate users such as pensions, which you admitted you don’t know very much about. But thank you, and my 

time has expired. 

Chairman GARRETT. The gentleman from New Mexico, Mr. 

Pearce, is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. Ms. Boultwood, Mr. 

Cawley mentions on page 2 of his testimony that transaction costs 

would fall by 30 percent under the current provisions that are 

being implemented; yet, you come out in support of the provision, 

and he opposes it. Can you help me harmonize those two positions? 

You are an end-user. It seems like you would want to be getting 

these 30 percent cost reductions. 

Mr. CAWLEY. Indeed. So— 

Mr. PEARCE. No, I was asking Ms. Boultwood. 

Ms. BOULTWOOD. I would say—I am not familiar with the study 

that Mr. Cawley refers to, but in our markets we transact in very 

often illiquid markets. In the products we require to hedge, there 

aren’t many market participants willing to offer bids or offers on 

sale or purchase of a particular commodity in that location. Our 

transaction costs in terms of both the bid-ask spread and the level 

of market liquidity would clearly rise as a result of, say, for example, a broad definition of a swap dealer and the fallout of certain 

of our market participants from those markets; but also the fact 

that the SEF rules, if they, as Mr. Cawley supports, require either 

that we submit an RFQ or we only transact on a live screen, we 

will either be forced to hedge in very dirty ways in liquid markets 

and not match the underlying asset volatility that we are trying to 

hedge, or we would be posting information in a very public way 

32 

about an intent to hedge often very large amounts of generation in 

a particular region and in such a way that our intentions would be 

known so early in the market that getting a fair price would be 

near impossible. 

Mr. PEARCE. Mr. Mason, you might address the same thing. It 

looks like you all would be interested in reducing your costs by 30 

percent. 

Mr. MASON. Yes. Again, I have not had the opportunity to study 

the numbers from Mr. Cawley. The input we have gotten from the 

pension plans is that the SEF rules proposed by the CFTC would 

drive costs up dramatically, and the one thing that was most identified was the requirement that you expose your RFQs to at least 

five market participants, which would make it immensely difficult 

for your eventual counterparty to hedge the trade, and that anticipated difficulty would be passed on in terms of higher costs. So 

that is the issue that at least the pension plans have identified. 

I think some of my colleagues here are certainly more qualified 

to talk in more detail about the SEF mechanics, but for the pension 

plans, that was the issue which gave us by far the most heartburn. 

Mr. PEARCE. Mr. Voldstad, is that volunteering that I see there? 

You might want to be hesitant of volunteering in front of Congress. 

Mr. VOLDSTAD. I am volunteering, Congressman, and thank you for letting me weigh in. I saw the $50 billion transaction cost number last night, and I was surprised about it, which is what was in 

Mr. Cawley’s testimony, and I ran some numbers. I am an old derivatives guy, so I do this. Let’s assume that interest rate products 

represent 80 percent of the market, so they represent 80 percent 

of the $50 billion. That is $40 billion. And so he is going to eventually—that was $40 billion to exist in the marketplace. Let’s look at 

the bid-offer spread on interest rate swaps. We did a study last 

year that showed there is essentially a two-tenths of a basis point 

bid/offer spread. Bring it down to zero, you save a tenth of a basis 

point per annum. If you take the $40 billion and divide it by the 

savings or create the total amount of notionals that you were required to do, you get an amount of $800 trillion a year of interest 

rate products. That compares with probably $25 trillion a year that 

is actually done. So I would like to see Mr. Cawley’s source for that 

information. 

Mr. CAWLEY. If I may respond? 

Mr. PEARCE. Okay, thank you. Mr. Cawley, you have 20 seconds 

if you want to— 

Mr. CAWLEY. I would be more than happy to share the numbers 

with Mr. Voldstad and anyone else who would care to see them. 

What we looked at specifically was CDS, credit default swaps, 

being approximately $25 billion, and interest rate swaps being $25 

billion. We saw the study that the ISDA had done last year. We 

don’t think that it is—we thought it was a good study. There are 

other studies out there, but we would be more than happy to walk 

the ISDA and anybody else through the numbers by using essentially the same math that Mr. Voldstad is using. 

Mr. PEARCE. Do you have that study available if our staff were 

to check with you after the hearing? 

Mr. CAWLEY. Yes. 

Mr. PEARCE. Thank you. I appreciate that, and I yield back. 

33 

Chairman GARRETT. Thank you. The gentlelady, also from New 

York, is recognized for 5 minutes. 

Dr. HAYWORTH. Thank you, Mr. Chairman. It strikes me as I am 

listening, what we are endeavoring to do, Dodd-Frank is the equivalent of sending out a net to catch tuna and catching a lot of innocent species like dolphins, those being the dollars and the entities 

that we would like to devote to job creation. 

I want to address for a moment, I did speak with the gentlelady 

from California, Ms. Waters, about H.R. 1838, and there are provisions in Section 716 which we are seeking to repeal with H.R. 1838 

that are redundant with other provisions of Dodd-Frank, I believe, 

that would prohibit a bailout. So I have offered to Ms. Waters that 

I will be happy to work with her and her staff to reassure that essential protections against taxpayer risk are in place. That is an 

important concern for all of us. 

Mr. Bailey, could you address a bit further the whole issue of— 

vis-a-vis what we were just talking about—the whole issue of access to the discount window and its equivalency or nonequivalency 

to a bailout concept? 

Mr. BAILEY. Thank you. The foreign banks have access to the discount window on the very same terms that the U.S. banks do. They 

have the same rate, they have to post the same quality of collateral 

at the same discount. It is understood to be a part of a foreign 

bank’s prudential risk management liquidity process to have that 

access. 

We also understand that the Federal Reserve has for a long time 

regarded it as a prudential tool, it is a monetary policy tool, and 

that it is a valuable means by which the Federal Reserve can maintain a sound financial system. The foreign banks in the United 

States lend about 18 percent of the commercial loans that are made 

in the United States, so they are part of a system, and they do benefit from the access to the window on those terms, but those terms 

are the same as the U.S. banks do. 

Dr. HAYWORTH. So essentially, what we are saying is it is a 

mechanism—I am a physician, so it is a mechanism for maintaining a certain amount of what we would call homeostasis, if you 

will; it is a way of keeping things on an even keel as opposed to 

then having to go in and exert extraordinary resources to correct 

a large risk, if you will. Is that a fair way to think about it? 

Mr. BAILEY. Yes. 

Dr. HAYWORTH. Okay. Thank you— 

Mr. BAILEY. I should just qualify that. My earlier response refers 

to the U.S. branches, of course, of the foreign banks. 

Dr. HAYWORTH. Yes, and I appreciate that clarification. 

Mr. Voldstad, we have been talking about Section 716. The formation of subsidiaries under a swaps pushout provision would, of 

course, require a certain allocation of capital that I think we would 

agree is better spent in other ways or better deployed in other 

ways. Could you talk a bit more about the potential cost of this 

kind of activity? 

Mr. VOLDSTAD. I think one first must recognize that the interest 

rate swap market will remain in the bank, that the credit default 

swap market with respect to investment grade securities will remain in the bank, as will the costs, the transactions involving preVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
34 

cious metals and so on, so a large majority of the business will stay 

in the bank and continue to be regulated by the bank regulators. 

The costs, I don’t think we have quantified the costs, but the 

costs would arise out of doing transactions where you might be 

dealing with a hedge fund who wants to take a spread risk between 

a high-yield transaction and an investment grade transaction, so he 

is buying protection on one side, selling protection on the other 

side. If those two transactions are within the same legal entity, 

they could be netted for purposes of managing the counterparty 

risk. If you split them apart, you end up having risk in both of 

those entities. I don’t know how much that would actually create 

in terms of a loss of netting, but it would be a reasonably good-size 

amount. 

If you also then look at how much money will you have to put 

into a new standalone entity to make it creditworthy enough, that 

to me would be a very, very large number. And if anybody wants 

to be a significant swap dealer for high-yield and equity transactions, you would have to, I would think, have a swap dealer with 

multiple billion dollars’ worth of capital that wouldn’t otherwise be 

needed. 

Dr. HAYWORTH. So there are issues of ballasting, if you will, and 

stability when we talk about this, and that requires the deployment or the deferral, if you will, to other entities and a lot of capital that otherwise would be used in better ways by these banks? 

Mr. VOLDSTAD. Because you are capitalizing a separate entity, 

you are creating extra capital that is needed. That extra capital 

could be used otherwise in the operations of the bank. 

Ms. HAYWORTH. Thank you, Mr. Voldstad, and all of our panel. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from California. 

Mr. SHERMAN. Thank you. 

Are there any parties to these over-the-counter derivatives which 

are too-big-to-fail or too-interconnected-to-fail as AIG was? Is there 

any entity in the market today which, if they went completely 

bankrupt and paid zero dollars and zero cents to all creditors, 

would pose a systemic threat to the United States economy? I don’t 

see a volunteer, so I will go with Mr. Bailey. 

Mr. BAILEY. I believe that Dodd-Frank is, through the means of 

living wills and a variety of other provisions, recognizing that there 

are still risks in the system for interconnectivity across banks— 

Mr. SHERMAN. So until we either limit the size of the entities involved or we limit their participation in over-the-counter derivatives, we, every day could come into this Congress and be told, oh, 

my God, we need another $7 billion in unmarked bills; is that the 

current situation? 

Mr. BAILEY. I think part of—Dodd-Frank is attempting to make 

certain— 

Mr. SHERMAN. I know what it is attempting to do. I am asking, 

is it successful? Is there any entity in the market whose destruction tomorrow would imperil the U.S. or world economy? Is there 

anyone else with a firmer answer? 

Mr. CAWLEY. Let me just—one other way, Congressman, is to actually not limit participation or limit the—there is activity. One 

35 

way which I think the Dodd-Frank Act does cleverly is to restructure the derivative itself. So, by making it—taking the leverage out 

of it and making it a little safer to trade— 

Mr. SHERMAN. So that makes it less likely that this problem— 

is anyone on this panel going to guarantee the United States Congress that is there is no one in the derivative markets today that 

we are going have to bail out tomorrow come hell or high water, 

no matter what? I don’t see any hands. Let’s go on to the next 

question. 

How do you anticipate the Department of Labor’s withdrawal of 

their role on fiduciary duty under ERISA will impact the final role 

on business conduct standards for swap deals? 

Mr. Mason? 

Mr. MASON. I think there has been a perception that the fiduciary conflict between the Department of Labor rules and the business conduct rules has gone away with the withdrawal of the proposed fiduciary rules, and that is not the case. Under current law, 

current DOL law, if a swap dealer is required, as the proposed 

business conduct rules would do, is required to review the qualifications of a swap—of a plan’s advisor, that would, under current 

ERISA law, make the swap dealer a fiduciary, which would mean 

all swaps with plans would have to cease. 

So the withdrawal took away other bases on which the swap 

dealer would become a fiduciary, but it left one under current law, 

and you don’t need to die 3 times. It is enough to die once, and we, 

unfortunately would, not be able to enter into swaps. 

Mr. SHERMAN. I thank you for your answer. 

I thank the gentlelady from New York for her indulgence. I have 

to rush back to the Foreign Affairs Committee. 

Chairman GARRETT. Does the gentleman yield to the gentlelady 

from New York? 

Mr. SHERMAN. I do yield to the gentlelady from New York so that 

she will have more than the 5 minutes that she would be entitled 

to otherwise. 

Mrs. MALONEY. That is kind of you. Thank you for your question. 

It was an important one. 

I would like to ask all of you or anyone who would like to comment, how have companies in your industry improved their risk 

management practices since the financial crisis? What is different? 

What is improved in risk management specifically? Nothing? 

Mr. BERNARDO. I can speak for the Wholesale Markets Brokers 

Association. We act as intermediaries, so we do not take risks. We 

are just matching buyers and sellers. We help facilitate trades, and 

we generate liquidity for the markets that we are speaking about, 

but all of our companies have invested previously and continue to 

invest hundreds of millions of dollars in technology to make these 

markets more efficient. So if certain products can be electronic, we 

make them electronic. We provide efficiencies for straight through 

processing, so once a trade is executed, we will send that trade 

electronically to the counterparties of the trade or send it off to a 

clearing. We even at this point in time send it to a swap—what you 

would consider a swap data repository in the future. 

Ms. BOULTWOOD. May I make a comment? I think there has been 

significant advancement. I think there has been a natural moveVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
36 

ment in the market toward more clearing of products as cleared 

products have become available on exchanges. I think, to the point 

Mr. Bernardo made, there have been massive IT investments, and 

many companies have invested more in the analysis of their own 

liquidity risk in understanding the boundaries of their own balance 

sheet and how large their businesses can be become before they 

would be vulnerable to a large price swing. 

I want to make the point also that risk doesn’t go away because 

we change the structure of the market; it simply changes form. So 

in saying that we want to move toward clearing, we may be reducing the amount of counterparty credit risk in a system, but we are 

increasing the amount of liquidity risk because we are increasing 

the amount of capital that would be posted and held aside in separate accounts as collateral or margin. 

We are increasing the amount of potential operational risk because we are centralizing where transactions occur in clearinghouses and exchanges. So the point is, unless we significantly curtail or eliminate business activity, you are not reducing—or you are 

not eliminating risk; you are simply changing its form. 

Chairman GARRETT. Thank you. The gentlelady’s time has expired. 

Mrs. MALONEY. Could Mr. Bailey answer this, too, from his perspective? I am going into my next 5 minutes, right? 

Chairman GARRETT. No. 

Mrs. MALONEY. I am finished? Okay. 

Chairman GARRETT. You are not finished, but you are a little bit 

over. And we have a few other Members who have yet to ask a 

question. 

So we will go to Mr. Hurt. 

Mr. HURT. Thank you, Mr. Chairman. 

I thank you all for your testimony today and your appearance. 

Mr. Cawley, I wanted to explore with you what I thought was a 

very rousing defense of the taxpayer and of free markets. And so 

I am surprised to hear you also in the same breath talk about having the government come in and define these exchanges in such a 

way that, according to the other witnesses, will not lead to efficiency, will not lead to true price discovery; you have the government coming in saying, this is the way we want you to do it. 

At the same time, when you have, from my understanding, derivatives markets that have been migrating to clearing, which I 

think everybody seems to say is necessary to secure the marketplace, and then also reporting, these are things that seem to me 

there is universal agreement on. So why is it you think that the 

government is better positioned to be able to impose an exchange 

structure that somehow makes the market more efficient when we 

hear from both sides, buy and sell, that we don’t want this? After 

you are finished, I would love to hear from Mr. Bernardo and Ms. 

Boultwood, as well. 

Mr. CAWLEY. We don’t see a conflict between both points of view, 

but speaking specifically to government interaction in private markets, there is certainly precedence where those markets serve a 

systemic need or a prudential need. So we disagree, obviously, with 

most everybody here on the panel, but when we go out to speak to 

customers, who are the end-users of derivatives, when we speak to 

37 

them, they tell us that they want to have a choice of execution. 

Now, we don’t see a conflict with the rules that have been promulgated by the CFTC. We frankly don’t see that. We see a choice 

there between central limit order books, which are anonymous. We 

see a choice there that if you want to use an RFQ, you can. You 

can use anonymous RFQ, and you can use regular RFQ. If you 

want to shield your identity to get a better price, you can execute 

on a central limit order book anonymously. We don’t see a conflict 

with our restriction on voice hybrid broking because as I understand it and as we understand it and after having been a broker 

and a trader and being a hybrid broker and using its services, it 

is in context a central limit or wholesale market construct—let me 

explain that—where buyer and seller have the ability to cross the 

bid offer spread and thereby make savings. 

So, with regard to government interaction there, let me just say 

we see there is a systemic need because of liquidity— 

Mr. HURT. Thank you. That is very helpful. 

Because my time is limited, I would like to allow Ms. Boultwood 

and Mr. Bernardo speak to the question of, okay, if you don’t want 

this imposed on you because there are real consequences, real costs 

to having to have the exchange, the execution facility operate this 

way, please, what are those costs? I would like for us to—what are 

the costs of going with Dodd-Frank the way it is currently constructed and setting up these execution facilities that way? 

Mr. BERNARDO. The CFTC rules are too prescriptive. 

Mr. HURT. Could you speak into the microphone? 

Mr. BERNARDO. The CFTC rules are too prescriptive. Again, if we 

use a real-world analogy, when we are talking about the RFQ, request for quote, and you are asking five people to send in a quote, 

if five of you indicated that you wanted to buy something at a certain price, that is going to indicate to the entire market, it is probably going higher, and you are going to give people the ability or 

the opportunity to get in front and push those markets higher. 

Now, if you were with someone who was willing to sell at that 

time, would you actually be willing to sell knowing that the market 

is going to immediately go against you? It wouldn’t make sense; 

you wouldn’t do that. Even if we talk about the 15-second rule, 

which is also in there, why would somebody take risk and create 

uncertainty in the market when you are asking a buyer and the 

seller that we have matched up, we already have an executed 

trade, so you are allowing someone to offset risk, why would you 

then allow the market to view that price that something is going 

to trade at, again, to jump ahead of them and move the market in 

a direction? 

Mr. HURT. Again, my time is running out. 

Ms. Boultwood, if you have any comment on that, I would appreciate it. 

Ms. BOULTWOOD. Sure, with respect to the specific rule around 

SEFs, there are practical implications that really make the rules 

as currently drafted very impractical for an energy end-user in our 

market. Often, we are hedging in markets with less than five potential buyers or sellers. And that market is very—once they know 

you are selling, they will be on the other side of that sale looking 

for the price to go down and can wait or time your sale. We do not 

38 

believe we will get the fair price for, as we do in today’s market, 

for what we are selling the physical asset. 

And beyond SEF rules, I think what we are seeing is regulatory 

overreach, way beyond congressional intent. We all want the goal 

of transparency to be a point. That can be achieved through clearing and reporting, not by forcing all entities in the United States 

to become swap dealers. 

Mr. HURT. Thank you. My time has expired. Thank you for your 

answers. 

Chairman GARRETT. Mr. Canseco for 5 minutes. 

Mr. CANSECO. Mr. Mason, the Dodd-Frank Act classified ERISA 

plans as a special entity, which could end up triggering fiduciary 

liability for swap dealer that wishes to enter into a transaction 

with such a plan. Given the historical role of swap dealers as near 

counterparties in transactions with ERISA plans, and the fact that 

the law already requires ERISA plans to hire fiduciary that has expertise in the area they are advising, does the new standard make 

sense for the swap dealer/ERISA plan relationship? 

Mr. MASON. Absolutely not. I would say one point is that the creation of the concept of a special entity was supposed to identify entities that were not as capable as the swap dealer and thus needed 

more assistance with respect to entering into a swap. That has by 

law no application to ERISA plans. ERISA plans by law are required to hire a prudent expert in the field before they can enter 

into the swap world. So the idea that they need help from their 

counterparties, just simply doesn’t make any sense. And that has 

been the consistent theme. We have talked to pension plans around 

the country, and the idea that they would ever look to their dealer 

for advice just is sort of beyond the pale. And by law, it really 

makes no sense. 

Mr. CANSECO. So if a swap dealer were to be considered a fiduciary to an ERISA plan, that would preclude them from transacting 

any business with them, is that correct? 

Mr. MASON. That is absolutely correct. 

Mr. CANSECO. So under Dodd-Frank law, and subsequent agency 

rulewriting, pension plans now would be unlikely to have the ability to use swap dealers to hedge risk in their portfolios; is that correct? 

Mr. MASON. That is correct. 

Mr. CANSECO. And for millions of Americans who rely on income 

from pension plans, you would say that the special entity status 

conferred by ERISA plans in Dodd-Frank is not a good deal for 

them; is that correct? 

Mr. MASON. That is absolutely right. 

Mr. CANSECO. Could you walk us again through a scenario where 

a pension plan is unable to use swaps to hedge their interest rate 

risk? And how would this affect their portfolio? And what alternative methods would they be forced to use? 

Mr. MASON. I was actually in a meeting, and I started giving a 

hypothetical. One of the people next to me was a chief investment 

officer for a company and jumped in and gave a real-life example, 

so I will give her example. She was in a situation where her pension plan had $15 billion of assets, and $15 billion of liabilities. Interest rates dropped rather quickly 100 basis points. What that did 

39 

to her liability is it took her liabilities from $15 billion to $17 billion. That created a $2 billion shortfall almost overnight. That 

would have required her and her company to fund approximately 

$250 million a year for 7 years. 

The way that people use swaps is they use a swap to hedge 

against that possibility. In other words, by creating an asset, the 

swap, that in a perfectly hedged transaction, the swap would go up 

by the same $2 billion, so they would stay at 100 percent funded. 

That is an enormously useful and popular tool to manage risk in 

a pension plan. If we didn’t have it, you would have two choices. 

One is, you would have to reserve that $2 billion; take $2 billion 

out of operating assets and say, I am not using this to create jobs; 

I am not using this to invest in a company, but I am putting this 

aside because I might have a $2 billion liability over the next few 

years. That would obviously be disastrous. 

The other thing to do is to invest in bonds. The problem with investing in bonds—there are several problems. One, there are not 

enough of them to hedge these risks. They are not of the right duration. They have a lower yield. And if pension plans poured tens 

and hundreds of billion dollars into bonds, the bond yield would go 

down, further exacerbating this problem. So there is not currently 

an effective way to prevent that very frightening scenario, that $2 

billion shortfall, under current law. 

Mr. CANSECO. So the result would be that the pension plans 

would invest in less risk-averse assets and reducing future returns; 

is that correct? 

Mr. MASON. Absolutely. 

Mr. CANSECO. I see that my time has expired, and I thank you 

very much. 

Chairman GARRETT. The gentleman’s time has expired. 

We have a question here from one of our Members who is out, 

so I ask unanimous consent to allow 2 more minutes from each side 

for questions, so, without objection, 2 more minutes to the other 

side, and then 2 minutes to answer this question that one of the 

other chairs of the other subcommittee asked that we ask and be 

done. 

Mrs. MALONEY. I would like to ask the panelists to respond to 

the CFTC’s 15-second rule. I have been getting comments on it. 

Can you describe what it is and why it is important? 

Mr. BERNARDO. The 15-second rule is derived from the futures 

market, and it really isn’t conducive with the OTC markets. In the 

OTC markets, again, you are talking about liquidity that is episodic; it is not liquid if trades are not happening every second. So 

15 seconds in our markets is an eternity. Once you have a buyer 

and a seller that are matched at a certain price, you are then saying, 15 seconds, let’s take a pause and let’s let the rest of the market see where that is about to trade, which would allow other people, again, to front run or move the market in a certain direction, 

which would inevitably impact companies like Constellation when 

they are trying to do a trade. Again, it doesn’t fit in with the OTC 

markets; it is being cut and pasted from the CFTC rules. 

Mrs. MALONEY. And you are saying that 15 seconds is an eternity in the markets. Could you just explain to me how a company 

actually executes transactions? Why is 15 seconds an eternity in 

40 

the markets? I think a day is an eternity in politics, but if 15 seconds is an eternity, I want to understand why it is an eternity. 

Mr. BERNARDO. In these markets, you don’t want to create unwanted uncertainty. There is no reason for it. So if you have a customer who rings in—so let’s hypothetically say they ring in to me 

as a voice broker, and I have Barclays Bank on one side, and I 

have Goldman Sachs on the other side. And I am willing to execute—they are willing to execute at a certain price. Once they are 

willing to execute that trade, it has probably taken a long time to 

get us to that price they are willing to execute at. For us to then 

say, all right, guys, hold on, we are not going to execute at this 

price—we are going to execute at this price—we are going to let the 

rest of the market see what you want to do. If it is a big size trade, 

if it is a $1 billion trade or a $2 billion trade, if other people see 

that somebody is willing to buy at that level, it is going to go higher. So you would entice people to come in and front run and move 

the market up or move the market down. And again, us as intermediaries, we are not taking the risk, but it is going to impact the 

end-users, which is exactly what you don’t want to do. 

Mrs. MALONEY. In the proposed SEF Clarification Act, which 

would allow voice to clarify that there is voice, would you see that 

as an improvement or a rollback of the trading requirements of 

Dodd-Frank, or is it the same? 

Mr. BERNARDO. Voice is part of any means of interstate commerce. Congress had the opportunity to say we wanted to be fully 

electronic in an exchange like trading, but they realized a lot of 

these products don’t necessarily trade fully electronic. You need 

multiple modes of execution. You need to be able to trade by voice. 

You need to be able to trade via a hybrid platform. So you are allowing flexibility. And along with the flexibility, you are allowing 

innovation. My company, Tullett Prebon, as well as the other members of the Wholesale Markets Brokers Association innovate in 

these markets. We created other systems before legislation even 

came about. So we have auction platforms. We have risk-mitigation 

tools. We have a lot of things that would be ruled out if we kept 

the legislation as it currently is. 

Chairman GARRETT. Thank you. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Chairman GARRETT. I think I just started something here. By allowing that now to go over about a minute and 30 seconds, I have 

another request on the other side. So I will yield my—I will be 

brief on my 2 minutes and maybe just wrap this up. 

Mrs. Biggert asks, there has been discussion about the need for 

swaps definition to exclude instruments and products, such as 

those used by the insurance industry, for example, those that mitigate risk of life insurance products, which did not cause a financial 

crisis. Why are narrow swap definitions important? What can the 

impact of a broad definition have on insurance consumers, pension 

plans, and other low-risk financial end-users? 

Mr. Mason? 

Mr. MASON. I can speak to one. Probably the most popular investment in a 401(k) plan is a stable value fund, which is really— 

it is similar in some ways to a money market fund, capital preservation, but with a higher rate of return. Because of the sort of exVerDate Nov 24 2008 18:14 May 04, 2012 Jkt 072616 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\72616.TXT TERRIE
41 

treme breadth of the definition of a swap and sort of lack of clarity, 

there is a concern the stable value contracts would be treated as 

swaps. The SEC and the CFTC are studying that. If they are classified as swaps, the regulatory structure doesn’t fit. It would drive 

costs so far up that this investment, which is the most popular investment in 401(k) plans, would simply be wiped out. 

Chairman GARRETT. Got it. 

I yield the remainder of my time to the gentleman from New 

Mexico. 

Mr. PEARCE. Thank you, Mr. Chairman. I will use all 40 seconds 

wisely. 

Mr. Cawley, I find myself nodding in agreement with a lot of 

what you say; no more bailouts, government shouldn’t be picking 

winners and losers. I would like to drill down a little bit on the 

intervention of the government should not intervene. Yet, at the 

end of your testimony, you say that we should get out of the intervening business from Congress, throw the two bills out, and immediately request the finalization of clearing, execution, and trade reports done by the regulators. Now, the regulators are saying that 

we can’t use the telephone trades, but we can use electronic trades. 

So you don’t favor intervention in the first party or anything, or 

favor the intervention to not allow the competitors to your business. Is that—am I misreading? 

Mr. CAWLEY. It is a good question. Let me be clear, we don’t 

favor intervention, but we recognize that there is a need under certain circumstances for intervention. We would love as free 

marketeers to have no government intervention. We recognize that 

in certain instances, the government is required to step in to maintain the stability of the economy. And we certainly saw that, 

whether some of us liked it or disliked it, we certainly saw that 

back in 2008, and hopefully, we won’t see that again. 

We recognize that government intervention is sometimes necessary, and the test then is, is the systemic test that goes into that 

is, what would require the government through its agencies to intervene either directly or indirectly? 

Within the context of execution, and I think this debate has really fallen down to one thing, if I can be blunt, and that is the RFQ 

for five. We see that within—we don’t see a conflict, first of all, 

when we see government coming in through the CFTC or the SEC 

to say, we view this as systemically important to the execution of 

contracts, not just the clearing of contracts, but the execution of 

contracts and the notion of transparency, pre-trade transparency 

and post-trade transparency. 

Now, ideally, it is my own personal opinion that pre-trade transparency is not met by the RFQ scenario, simply put because, as 

Shawn has mentioned, you cannot have several people once that 

bidder offer is exposed, only one person can hit it. With that said, 

we do recognize that in certain market contexts, certainly credit default swaps—less so indices and less so interest rate swaps—but 

certainly credit default swaps, the idea of having RFQ certainly 

works. 

We do say that we see no tension and no discord between either 

rule sets promulgated that deny a voice broker from interacting 

with a trade, so long as that trade has some modicum of pre-trade 

42 

transparency. That operates, Congressman, with lots of OTC markets, with lots of products that tell it and other firms that his organization trade and also that they may trade today. 

Chairman GARRETT. Since these answers are going much longer 

than we thought, is there any objection to giving the final word to 

Mr. Canseco for 1 minute? 

Mr. CANSECO. Thank you, Mr. Chairman. 

Again, I want to go back to Mr. Mason. Some have labeled 

ERISA employee benefit plans as high-risk financial entities that 

should be subject to initial margin and daily variation margins. 

What is your opinion of that classification? 

Mr. MASON. It was, in our mind, simply a mistake. We are being 

classified with hedge funds. ERISA plans cannot go bankrupt. Even 

if the plan sponsor goes bankrupt, the PBGC steps in and honors 

our swap liabilities. We are not operating companies. In fact, in all 

the discussions we have had, with dealers and companies, and we 

sort of talked to a wide range of folks who are integral to this business, we have never heard of any pension plan ever failing to pay 

off its swap liabilities. So for us to be treated as high-risk financial 

end-users, we think, and based on conversations with some of the 

regulators, was simply an oversight. But it is a very dangerous 

oversight and needs to be corrected because it would create enormous costs and real risk for pension plans. Our folks are telling us 

they would have to cut back their risk mitigation strategies, and 

that is not what we want. 

Mr. CANSECO. Thank you very much, Mr. Mason. 

Chairman GARRETT. I thank you for yielding back. I thank all 

the members of the panel. 

And I thank everyone here on the committee. 

Before you leave, I ask unanimous consent to insert into the 

record the following statements: the Commodity Market Council; 

the Coalition for Derivatives End-Users; and the American Bankers 

Association. 

Also, there were letters I referenced earlier today in support of 

the legislation: Chatham Financial; ICI Investment Company Institute; and last but not least, BlackRock. Without objection, it is so 

ordered. 

And again, I thank the members of the panel. 

The Chair notes that some members may have additional questions for these witnesses which they may wish to submit in writing. 

Without objection, the record will remain open for 30 days for 

members to submit written questions to these witnesse and to 

place their responses in the record. And if it is done, as always, we 

appreciate your response to those. 

With that, the committee is adjourned. Good day. 

[Whereupon, at 12:00 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

October 14, 2011 

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