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	<title> - ASSESSING THE REGULATORY, ECONOMIC, AND MARKET IMPLICATIONS OF THE DODD-FRANK DERIVATIVES TITLE</title>
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	[House Hearing, 112 Congress]
	[From the U.S. Government Publishing Office]




	ASSESSING THE REGULATORY, ECONOMIC,
	AND MARKET IMPLICATIONS OF THE
	DODD-FRANK DERIVATIVES TITLE

	=======================================================================

	HEARING

	BEFORE THE

	COMMITTEE ON FINANCIAL SERVICES

	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED TWELFTH CONGRESS

	FIRST SESSION

	----------

	FEBRUARY 15, 2011

	----------

	Printed for the use of the Committee on Financial Services

	Serial No. 112-5

	ASSESSING THE REGULATORY, ECONOMIC, AND MARKET IMPLICATIONS

	OF THE DODD-FRANK DERIVATIVES TITLE




	ASSESSING THE REGULATORY, ECONOMIC,
	AND MARKET IMPLICATIONS OF THE
	DODD-FRANK DERIVATIVES TITLE

	=======================================================================

	HEARING

	BEFORE THE

	COMMITTEE ON FINANCIAL SERVICES

	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED TWELFTH CONGRESS

	FIRST SESSION

	__________

	FEBRUARY 15, 2011

	__________

	Printed for the use of the Committee on Financial Services

	Serial No. 112-5



	U.S. GOVERNMENT PRINTING OFFICE
	64-554 WASHINGTON : 2011
	-----------------------------------------------------------------------
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	HOUSE COMMITTEE ON FINANCIAL SERVICES

	SPENCER BACHUS, Alabama, Chairman

	JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
	Chairman Ranking Member
	PETER T. KING, New York MAXINE WATERS, California
	EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
	FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
	RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
	DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
	WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
	JUDY BIGGERT, Illinois BRAD SHERMAN, California
	GARY G. MILLER, California GREGORY W. MEEKS, New York
	SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
	SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
	RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
	PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
	JOHN CAMPBELL, California JOE BACA, California
	MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
	KENNY MARCHANT, Texas BRAD MILLER, North Carolina
	THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
	KEVIN McCARTHY, California AL GREEN, Texas
	STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
	BILL POSEY, Florida GWEN MOORE, Wisconsin
	MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
	Pennsylvania ED PERLMUTTER, Colorado
	LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
	BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
	BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
	SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
	NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
	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

	Larry C. Lavender, Chief of Staff


	C O N T E N T S

	----------
	Page
	Hearing held on:
	February 15, 2011............................................ 1
	Appendix:
	February 15, 2011............................................ 73

	WITNESSES
	Tuesday, February 15, 2011

	Cawley, James, Chief Executive Officer, Javelin Capital Markets,
	on behalf of the Swaps and Derivatives Market Association
	(SDMA)......................................................... 58
	Donahue, Donald F., Chairman and Chief Executive officer, The
	Depository Trust & Clearing Corporation (DTCC)................. 53
	Duffy, Terrence A., Executive Chairman, CME Group Inc............ 55
	Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading
	Commission (CFTC).............................................. 10
	Giancarlo, J. Christopher, Executive Vice President, GFI Group
	Inc............................................................ 60
	Reiners, Craig, Director of Risk Management, MillerCoors LLC, on
	behalf of the Coalition for Derivatives End-Users.............. 51
	Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange
	Commission (SEC)............................................... 8
	Tarullo, Hon. Daniel K., Governor, Board of Governors of the
	Federal Reserve System......................................... 11
	Thompson, Don, Managing Director and Associate General Counsel,
	JPMorgan Chase & Co., on behalf of the Securities Industry and
	Financial Markets Association (SIFMA).......................... 57

	APPENDIX

	Prepared statements:
	Bachus, Hon. Spencer......................................... 74
	Hinojosa, Hon. Ruben......................................... 75
	Cawley, James................................................ 77
	Donahue, Donald F............................................ 81
	Duffy, Terrence A.,.......................................... 257
	Gensler, Hon. Gary........................................... 277
	Giancarlo, J. Christopher.................................... 288
	Reiners, Craig............................................... 309
	Schapiro, Hon. Mary L........................................ 312
	Tarullo, Hon. Daniel K....................................... 323
	Thompson, Don................................................ 330

	Additional Material Submitted for the Record

	Garrett, Hon. Scott:
	Written responses to questions submitted to Hon. Gary Gensler 337
	Editorial from The Wall Street Journal dated February 11,
	2011, entitled, ``The Futures of America''................. 348
	Hinojosa, Hon. Ruben:
	Written responses to questions submitted to Donald F. Donahue 350
	Letter from The Financial Services Roundtable to David A.
	Stawick, Secretary of the Commission, CFTC................. 353
	Written responses to questions submitted to James Cawley..... 357
	Written responses to questions submitted to Terrence A. Duffy 361
	Written responses to questions submitted to Hon. Gary Gensler 364
	Written responses to questions submitted to J. Christopher
	Giancarlo.................................................. 366
	Written responses to questions submitted to Hon. Daniel
	Tarullo.................................................... 369
	Perlmutter, Hon. Ed:
	Written response to a question submitted to Craig Reiners.... 370
	Waters, Hon. Maxine:
	Editorial from The New York Times dated February 14, 2011,
	entitled, ``Vanishing Act: `Advisers' Distance Themselves
	From a Report''............................................ 371

	ASSESSING THE REGULATORY, ECONOMIC,
	AND MARKET IMPLICATIONS OF THE
	DODD-FRANK DERIVATIVES TITLE

	----------


	Tuesday, February 15, 2011

	U.S. House of Representatives,
	Committee on Financial Services,
	Washington, D.C.
	The committee met, pursuant to notice, at 10:03 a.m., in
	room 2128, Rayburn House Office Building, Hon. Spencer Bachus
	[chairman of the committee] presiding.
	Members present: Representatives Bachus, Hensarling, Royce,
	Lucas, Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry,
	Marchant, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga,
	Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm,
	Canseco, Stivers; Frank, Waters, Maloney, Velazquez, Watt,
	Ackerman, Sherman, Meeks, Capuano, Hinojosa, Clay, Baca, Lynch,
	Miller of North Carolina, Scott, Green, Ellison, Perlmutter,
	Carson, Himes, Peters, and Carney.
	Chairman Bachus. In the interest of time, I am going to
	submit my written statement for the record and will not make an
	opening statement. And I will recognize some members on our
	side until our 10 minutes has expired.
	I urge members to give a brief statement or submit a
	written statement so we can move along. We will adhere to the
	10 minute-limit on each side. Without objection, all members'
	written statements will be made a part of the record.
	I want to welcome our witnesses and I look forward to your
	testimony. And with that, I recognize the ranking member for
	his opening statement.
	Mr. Frank. Thank you, Mr. Chairman, and I will ask to be
	recognized for 3 minutes. We will stay within the 10 minutes.
	The hearing today is a prelude to a very important set of
	decisions we are going to be making today on the Floor.
	We have two very able and dedicated regulators who were
	extremely cooperative with us as we drafted the bill. We
	actually have three, but Mr. Tarullo is not on the Floor this
	week with his appropriation since his agency doesn't receive
	one.
	The budget that we have been presented for the Securities
	and Exchange Commission (SEC) and the Commodity Futures Trading
	Commission (CFTC) prevent them from doing the job the American
	people need them to do. The CFTC is a very small agency
	compared to the massive industry we have asked them to
	regulate.
	I believe it is clear. We will hear more about this from
	the people on the Financial Inquiry Commission that the lack of
	regulation of derivatives in various aspects contributed
	greatly to the financial crisis.
	We gave the Commodity Futures Trading Commission and the
	SEC instructions with some latitude as to how to deal with
	that. We are, at this point, in jeopardy of their not being
	able to carry out that mandate. The SEC has other
	responsibilities in investor protection and elsewhere that are
	in jeopardy.
	So I hope we will, as we go through this hearing, and talk
	about the importance of this to be done thoughtfully and in
	coordination between the SEC and the CFTC, keep in mind that an
	absence of funding will make all of this invalid.
	Agencies that are not well-funded are not going to do a
	good job. I would say to people in the industry, the laws and
	the rules, the law has already been adopted, the rules are
	about to be promulgated, it is not in anybody's interest to
	have agencies that are not well-funded, not able to have the
	equipment they need, not able to have the personnel they need
	to carry these out.
	And that, I think, is the overhanging question as we go
	through this hearing. We are about to debate a budget from my
	Republican colleagues that will provide such inadequate funding
	for the SEC and the CFTC as to make all of this academic. I
	will be offering an amendment to increase funding for the SEC.
	The CFTC does not come under the jurisdiction of this committee
	so I have no amendment to offer there.
	I believe the Administration has made some neutral
	proposals about how to increase its funding, and I hope that
	those are also adopted. But we will be voting on an amendment
	to raise the SEC--not to the level I wish it could be at, but
	to a far closer level to what is needed.
	And as we go forward and we talk about the importance of
	doing this, and I would say even to those who are critical, who
	wish we hadn't done some of what we did, unfunding the rules
	that remain in place is the worst of all approaches.
	Chairman Bachus. I thank the ranking member.
	Mr. Royce is recognized for 1 minute.
	Mr. Royce. Thank you, Mr. Chairman. One of the lessons of
	the recent sale of the New York Stock Exchange, a great symbol
	of America's financial strength, to a German exchange is that
	our markets are now competing against mature financial hubs
	throughout Europe and Asia.
	And much of this competition is because of the unfriendly
	business environment we have managed to create here in the
	United States. We have the second highest corporate tax rate in
	the developed world. We have the most active trial bar in the
	world. And we have a regulatory structure that burdens business
	without yielding many benefits.
	In the derivatives realm, if transaction costs to end users
	of derivatives increase because of duplicative rules, because
	of complex, unworkable prescriptions, because of damage
	liquidity, then end users simply will send their business to
	European dealers, whether it is Barclays or Deutsche Bank, with
	whom many already have trading relationships.
	Failure to create a commonsense regulatory structure that
	recognizes this fact will do little to protect investors, but
	will go a long way to benefit these growing financial hubs
	around the world. While Title VII wasn't what I would have
	liked to have seen, the benefit was that it gave the
	regulators, the supposed grownups in the room, the final say.
	Unfortunately, all signs thus far indicate that this, too, was
	a mistake.
	I look forward to hearing from the panel. And I yield back.
	Chairman Bachus. Mr. Lucas?
	Mr. Lucas. Thank you, Mr. Chairman, for holding today's
	hearing. In the last Congress, I worked with my colleagues on
	this committee, as well as the Agriculture Committee, to bring
	meaningful and responsible reform to derivatives regulation.
	Although I was not supportive of the final legislation, it
	is now critical that we work together to ensure that the
	implementation of Title VII is done right. These new
	regulations will undoubtedly have a tremendous impact on our
	country's financial sector and overall economy.
	As we work our way through the rulemaking process, it is
	important that the process be accomplished in a thoughtful and
	transparent manner, and that the necessary regulatory certainty
	be provided for all market participants. I remain concerned
	that the current timeline for implementation is unrealistic and
	that more time is needed to adequately implement the law.
	Additionally, we must ensure that the new rules are
	consistent with the congressional intent of Dodd-Frank. I look
	forward to continuing this discussion and hearing from our
	witnesses, and I yield back the balance of my time, Mr.
	Chairman.
	Chairman Bachus. Mr. Scott, for 2 minutes.
	Mr. Scott. Thank you, Mr. Chairman. As we have seen from
	the recent financial crisis, derivatives bring with them a
	number of certain potential dangers if not properly backed with
	capital, or if the market lacks sufficient transparency. But
	despite these past troubles, derivatives do serve a very
	valuable purpose for American businesses by protecting them
	against legitimate risk.
	The Dodd-Frank legislation passed in large part by our
	committee aims to regulate credit default swaps and other
	derivatives. Title VII of the law requires central clearing and
	exchange trading for derivatives that can, and I emphasize can,
	be cleared and provides the role of both regulators and
	clearinghouses in determining which contracts should be
	cleared.
	In addition, the law adds financial safeguards by ensuring
	that dealers and major swap participants have adequate
	financial resources to meet their responsibilities. And
	regulators now have the authority to impose capital and market
	requirements to swap dealers and major participants.
	These regulations on derivatives were passed as part of
	Dodd-Frank to increase accountability and transparency and to
	encourage stability in financial markets following the 2008
	crisis. However, the effectiveness of this law depends heavily
	on how such rules are implemented by the regulators.
	I look forward to hearing opinions from today's witnesses
	on how the requirements enacted in Dodd-Frank are being adhered
	to now, how the regulatory process is proceeding, and how those
	regulations are contributing to increased financial stability,
	which is the end result we all seek.
	Thank you, Mr. Chairman.
	Chairman Bachus. Thank you.
	Mr. Garrett is recognized for 2 minutes.
	Mr. Garrett. I thank the Chair. I thank the entire panel.
	Over the last several months, there has been a tremendous
	volume of discussion on all the rulemaking coming out of Dodd-
	Frank and the profound effects that it is going to have on the
	derivatives markets and the broader economy as well.
	But when you look at this freight train of rulemaking that
	is really running down the track to a July deadline, I think
	not enough alarm has been raised over the potentially
	devastating impact that this rulemaking may have on the U.S.-
	based derivatives marketplace.
	And when I talked to several market participants, they told
	me that if the rulemaking, particularly of the CFTC, were to be
	implemented in its current form it could literally spell the
	end of the U.S.-based derivatives market. It would simply cease
	to exist.
	That is because the potential negative consequences are
	many and far-reaching, from making it prohibitively expensive
	for thousands of your small, Main Street companies to engage in
	responsible risk mitigation, to making it basically impossible
	for many of our financial firms to compete around the world. So
	the real world impact, of course, will be felt in the loss of
	jobs, lots of jobs.
	Millions of manufacturing jobs have been lost, jobs over
	the last several years, but we have still remained a leader in
	financial services. But if these rules get implemented as is,
	that will no longer be the case.
	We will hemorrhage millions of excellent, high-paying jobs
	to other localities around the world where there will be little
	to no appetite, I think, to follow some of the more outlandish
	rulemakings that are part of a grand and I would say
	unnecessary expense that could have massive negative
	consequences.
	It is bad enough, I think, that Title VII was written
	literally in the middle of the last night of the Dodd-Frank
	conference back in June. So let us not here now exacerbate the
	mistakes made that night by rushing through a rulemaking
	process that is even more far-reaching than that contemplated
	by the bill's authors.
	Derivatives, I think, have been a favorite whipping boy, if
	you will, of many critics. But if we continue down this road,
	and there is not a lot of time to change course, there is--
	literally may not be a U.S.-based derivatives market to kick
	around in this country anymore. I yield back.
	Chairman Bachus. Mr. Lynch for 3 minutes.
	Mr. Lynch. Thank you, Mr. Chairman. I thank the ranking
	member. I would also like to thank the witnesses for coming to
	this committee today to help us with our work. The derivatives
	title of the Dodd-Frank Act is essential to reforming our
	financial system. I believe the derivatives market, its opacity
	and extreme leverage, caused a great deal of the difficulty and
	pain of the financial crisis.
	The interconnectedness of derivatives products and their
	use magnified among anonymous counterparties that concentrated
	risk, and much of it outside of the reach of our regulatory
	framework.
	We have asked the SEC and the CFTC to issue numerous
	rulemakings and hold public hearings and begin the process of
	regulating the over-the-counter derivatives market, which
	neither agency has held jurisdiction over in the past.
	I am concerned, however, that despite the increased
	responsibilities through Dodd-Frank, the SEC and the CFTC have
	received flat funding due to the extension of the continuing
	resolution. The ability of these agencies to police the markets
	and enforce securities and commodities laws is severely limited
	under current funding levels.
	What is particularly concerning is that by holding these
	agencies to Fiscal Year 2010 budget levels, neither has been
	able to hire staff with expertise in the OTC derivatives
	markets, which differ significantly from their prior
	responsibilities in securities and futures markets.
	And to make matters worse, the Republican proposal for a
	full year C.R. would cut $178 million from the SEC and $174
	million from the CFTC. And that would force both of these
	agencies with new responsibilities to lay off staff.
	We need to ensure that these regulators have the tools and
	resources to complete the objectives that Congress has laid
	out. Don't worry about the markets running away to Europe. They
	are trying to strengthen their markets just the way we are
	trying to. This is a red herring.
	And if you think regulation is costly, how about the $7
	trillion that we just lost from not regulating the derivatives
	market? That has not been taken into consideration. I look
	forward to the testimony. I thank you, Mr. Chairman. And I
	yield back.
	Chairman Bachus. Mr. McHenry, for 1 minute.
	Mr. McHenry. Thank you, Mr. Chairman, for yielding time.
	Over the past few decades, the derivatives market has developed
	into a highly sophisticated and yet essential market for U.S.
	businesses of all sizes. Therefore, it is vital that the
	regulators who have been empowered under Dodd-Frank continue to
	allow American businesses to manage their risk and protect
	themselves against market volatility. This is about jobs.
	A recent survey suggests that higher capital requirements
	could potentially cost end users on Main Street billions of
	dollars each year and put up to 130,000 jobs at risk. That is
	something we simply cannot afford to do while our economy is
	attempting to regain its strong footing. I would encourage the
	regulators to keep this in mind. And certainly our oversight
	hearings here in Congress will keep that in mind. And I yield
	back.
	Chairman Bachus. Mr. Luetkemeyer?
	Mr. Luetkemeyer. Thank you, Mr. Chairman. I will yield back
	my time. Thank you.
	Chairman Bachus. Ms. Hayworth, for 1 minute.
	Dr. Hayworth. Thank you, Mr. Chairman. Senior colleagues
	here have rightly noted that the United States has become an
	increasingly hostile environment for investment relative to
	other developed nations.
	I am very concerned that our highest duty in this Congress
	is to ensure the security and freedom of our Nation and our
	people. The specifics of what we do here have a material effect
	on jobs and on prosperity. And that is literally the dignity
	and sustenance of our families.
	If we impede enterprise, as would be the case through
	excessive regulation of end user derivatives, and to wit, a
	Fortune 100 employer in my district would have to curtail key
	investment if required to meet capital requirements for end
	users as may be specified in Dodd-Frank, then we will lose our
	mission as a Congress and endanger our future as a nation.
	So I look forward to hearing your comments on how we can
	relieve that burden from our American enterprise. Thank you. I
	yield back my time.
	Chairman Bachus. Thank you.
	Mr. Dold?
	Mr. Dold. Thank you, Mr. Chairman.
	Chairman Bachus. One minute.
	Mr. Dold. I want to thank the witnesses for their time and
	for coming out today. And I certainly share some of the
	concerns that have been addressed by some of my colleagues
	today.
	Derivatives have been productively and efficiently used for
	a significant period of time by reducing risk and reducing
	price volatility, increasing stability. These derivatives
	markets directly benefited companies, employees, consumers, and
	our overall economy.
	In the past several years, certain companies have made some
	mistakes in the derivatives markets, to be sure. They didn't
	verify that their counterparties had sufficient collateral.
	They didn't verify that their counterparties had the ability to
	pay. They didn't determine whether their counterparties had too
	much exposure in other derivatives markets or market risk.
	However, as far as I can tell, the end users did not make
	these mistakes systematically. And now these end users are
	faced with the uncertain prospects of margin regulations that
	sufficiently and unnecessarily change their longstanding
	successful businesses' models while focusing them to play
	capital inefficiently.
	If they are forced to do so, then we will unnecessarily
	force scarce capital to be unparked unproductively on the
	sidelines. I believe that we will lose jobs here in the United
	States, and we will damage our economy.
	And instead of reducing risk and reducing price volatility
	and increasing stability for businesses, employees, consumers,
	and indeed, I believe all Americans, we will get the opposite
	result as risks that would otherwise have been absorbed into
	the derivatives markets are passed along. I thank the chairman
	for the time. And I yield back.
	Chairman Bachus. Thank you, Mr. Dold.
	Ms. Waters, for 1 minute.
	Ms. Waters. Thank you very much, Mr. Chairman. The Dodd-
	Frank Wall Street Reform and Consumer Protection Act was
	designed to address the lack of transparency and capital in the
	derivatives market, to prevent the industry and its clients
	from needing another taxpayer-funded bailout.
	Specifically, the legislation calls for the SEC and the
	CFTC to regulate the OTC derivatives market to pre-approved
	contracts before clearinghouses can clear them, and to punish
	bad actors. In fact, the Dodd-Frank Act charges the SEC to
	promulgate seven rules to implement reforms to the OTC markets.
	Some critics of the Dodd-Frank Act incorrectly represent
	that these reforms to the OTC market will result in fewer jobs.
	On the contrary, creating a system with transparency and
	regulation allows market participants to know what the rules of
	the game are and protects them from the impact of reckless
	trading of the sort that led to the 2008 financial crisis.
	We saw that impact in 2008. Two years later, we are still
	seeing the effects of high unemployment, lack of credit, and
	limited business investment that resulted from the 2008
	financial crisis. The Dodd-Frank Act will provide the
	transparency and regulation the OTC market needs to protect
	counterparties and taxpayers. In the process, it will save
	jobs.
	Thank you, Mr. Chairman, and I yield back the balance of my
	time.
	Chairman Bachus. I thank you.
	Mr. Canseco, for a minute-and-a-half.
	Mr. Canseco. Thank you, Mr. Chairman. And thank you very
	much for being here today, members of the panel. The breadth of
	rulemaking as a result of Dodd-Frank is extraordinary.
	According to the Committee on Capital Markets Regulations, the
	CFTC and the SEC are both making about 10 times the amount of
	rules per year than they did before Dodd-Frank was passed. The
	amount of days it takes for a rule to get from the proposed
	stage to implementation has been halved at the SEC.
	These two agencies, along with the Federal Reserve and
	others, have been asked to take on an incredible task that has
	serious implications for our financial markets and economy.
	Dodd-Frank left a great deal of discretion to the agencies.
	That is why today's hearing is so important. Our job is to
	ensure that as the Federal agencies write these rules, they do
	not negatively impact the ability to hedge risk in our economy.
	From my experiences in the private sector, where I actually
	worked with the derivatives, I know how important the ability
	of a company to hedge its risk using derivatives is to our
	economy and to our consumers.
	Many of the benefits of derivatives are hidden to
	consumers. But when our fellow citizens go to the store to buy
	gas, milk, clothes or whatever else, they sometimes don't
	realize that the affordability of these products is due in
	large part to the manufacturer's ability to hedge risk. With
	this in my mind, I look forward to hearing from today's
	witnesses on this important issue. And I yield back my time.
	Chairman Bachus. Mr. Carson, for 1 minute.
	Mr. Carson. Thank you, Mr. Chairman. I welcome the
	opportunity to review Dodd-Frank to ensure the bill
	accomplishes what we intended it to do when it was written in
	this committee last year.
	However, I am deeply opposed to defunding the bill because
	our friends on the other side were opposed last year, and
	continue to be opposed. The bottom line is that no legislation
	is perfect, and the opposition has a right to propose changes.
	However, banks and financial institutions have brought
	reform upon themselves. It was through their carelessness and
	disregard for the rights of citizens that our economy nearly
	collapsed and spurred action by Congress in the first place.
	Thank you, Mr. Chairman. I yield back.
	Chairman Bachus. Thank you.
	The last speaker on our side is Mr. Stivers, for a minute-
	and-a-half.
	Mr. Stivers. Thank you, Mr. Chairman. I would like to thank
	the witnesses for being here today. It is really important that
	we get Title VII right, both in law as well as regulation.
	There are companies in my district including American Electric
	Power who are end users. That company has 4,000 jobs in my
	district. There are many other companies who use derivatives to
	reduce risk in their business model.
	And I am really concerned about the inconsistency between
	the SEC and the CFTC on their rules and regulations, especially
	with regard to the definition of a dealer or trader as well as
	capital requirements.
	And because this is so important both to reducing risk in
	our system, cost to consumers, and jobs in our districts, I
	really look forward to hearing from the witnesses and working
	with the witnesses to make sure we take a consistent approach
	that doesn't affect jobs or increase prices but looks out for
	the safety and soundness of the system. Thank you so much.
	And thank you, Mr. Chairman, for holding this hearing.
	Chairman Bachus. Thank you. And now we introduce our first
	panel: the Honorable Mary Schapiro, Chairman of the U.S.
	Securities and Exchange Commission; the Honorable Gary Gensler,
	Chairman of the U.S. Commodity Futures Trading Commission; and
	the Honorable Daniel K. Tarullo, member of the Federal Reserve
	Board of Governors.
	I want to welcome all our witnesses. Without objection,
	your written statements will be made a part of the record, and
	you will each be recognized for a 5-minute summary of your
	testimony.
	Chairman Schapiro.

	STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S.
	SECURITIES AND EXCHANGE COMMISSION (SEC)

	Ms. Schapiro. Thank you very much, Chairman Bachus, Ranking
	Member Frank, and members of the committee. Thank you for
	inviting me to testify today on behalf of the Securities and
	Exchange Commission regarding our implementation of Titles VII
	and VIII of the Dodd-Frank Wall Street Reform and Consumer
	Protection Act. It is a pleasure to appear with my colleagues,
	Chairman Gensler and Governor Tarullo.
	As you know, these provisions are intended to bring greater
	oversight and transparency to the derivatives markets and to
	clear any payment and settlement activities and with that, to
	increase the stability of our financial system.
	While implementing these provisions is a complex and
	challenging undertaking, particularly in light of our other
	regulatory responsibilities, we recognize the importance of
	this task, and we are committed to getting it right.
	These rules are intended, among other things, to reduce
	counterparty risk by bringing transparency and centralized
	clearing to security-based swaps, reduce systemic risk, protect
	investors by increasing disclosure, and establish a regulatory
	framework that allows OTC derivatives markets to continue to
	develop in a transparent, efficient, accessible, and
	competitive manner.
	Since passage of the legislation, we have been engaging in
	a very open and transparent implementation process seeking
	input on the various rules from interested parties even before
	issuing new rule proposals.
	Our staff has sought meetings with a broad cross-section of
	interested parties. We joined with the CFTC in holding public
	roundtables. And we have been meeting regularly with other
	financial regulators to ensure consistent and comparable
	definitions and requirements across the rulemaking landscape.
	Today, the SEC has proposed nine swaps-related rules. Among
	them are: rules that would address potential conflicts of
	interest at security-based swap clearing agencies, execution
	facilities and exchanges that trade security-based swaps; rules
	that would specify who must report security-based swap
	transactions, what information must be reported, and where and
	when it must be reported; rules that would require security-
	based swap data repositories to register with the SEC; rules
	that would define security-based swap execution facilities and
	establish requirements for their registration and ongoing
	operation; and rules that would specify information that
	clearing agencies would provide to the SEC in order for us to
	determine if the swap must be cleared and specify the steps
	that end users must follow to rely on the exemption from
	clearing requirement.
	In addition, with the CFTC, we proposed rules regarding the
	definitions of many of the key terms under the Act. Our staff
	also is working closely with the Federal Reserve Board and the
	CFTC to develop a common framework for supervising financial
	market utilities, such as clearing agencies, which are
	designated by the Financial Stability Oversight Council as
	systemically important.
	In the coming months, we expect to propose rules regarding
	standards for operating and governing of clearing agencies,
	rules to establish registration procedures for security-based
	swap dealers and major security-based swap participants, and
	rules regarding business conduct, capital, margin, and
	segregation and recordkeeping requirements for dealers and
	participants.
	We will also propose joint rules with the CFTC governing
	the definitions of swap, security-based swap, and the
	regulation of mixed swap. We recognize the magnitude and
	interconnectedness of the derivatives market. And so, we intend
	to move forward at a deliberate pace, continuing to
	thoughtfully consider issues before proposing and adopting any
	specific rules.
	The Dodd-Frank Act provides the SEC with important tools to
	better meet the challenges of today's financial marketplace and
	fulfill our mission to protect investors; maintain fair,
	orderly, and efficient markets; and facilitate capital
	formulation.
	As we proceed with implementation, we look forward to
	working closely with Congress, our fellow regulators, and
	members of the financial community and the investing public.
	Thank you for inviting me to share with you our progress on
	and plans for implementations. And I look forward to answering
	your questions.
	[The prepared statement of Chairman Schapiro can be found
	on page 312 of the appendix.]
	Chairman Bachus. Thank you.
	Chairman Gensler?

	STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, U.S.
	COMMODITY FUTURES TRADING COMMISSION (CFTC)

	Mr. Gensler. Good morning, Chairman Bachus--congratulations
	on your chairmanship--Ranking Member Frank, and members of this
	committee. I thank you for inviting me to speak about the Dodd-
	Frank Act.
	I am pleased to testify on behalf of the Commodity Futures
	Trading Commission. And I also want to thank my fellow
	Commissioners and all of the staff of the CFTC for all their
	hard work and dedication in fulfilling our mission.
	I also am pleased to testify along with Chairman Schapiro
	and Governor Tarullo. President Obama announced our nominations
	on the same day back in December of 2008. And I guess this is
	the first time we are appearing in public together at a
	hearing.
	But it reminds me that in 2008, the financial system and
	the financial regulatory system both failed the American
	public. It wasn't one or the other. But I think it was, in
	fact, both. The effects of that crisis reverberated throughout
	the American and global economies.
	In the United States, hundreds of billions of taxpayer
	dollars were put on the line to bail out the financial system,
	ultimately to secure the American public's economy. But
	millions of jobs have been lost and are still lost.
	Though the crisis has many causes, the unregulated swaps
	market played a central role. And Congress, I believe,
	responded by passing Dodd-Frank, specifically Title VII, to
	bring transparency and to lower risk in the swaps market.
	The CFTC is working closely with the SEC, the Federal
	Reserve, and other regulators to implement those features. We
	also are coordinating our consultation internationally. And we
	have received thousands of comments from the public, both
	before we have made proposed rules and after we have made some
	proposals that inform the Commission. And yes, the final rules
	will change based on those comments.
	One area where the CFTC is seeking input is with regard to
	the implementation of various requirements of margin, which
	many Members here have raised with us. And in the Dodd-Frank
	Act, Congress recognized different levels of risk posed by
	transactions between financial entities on the one hand and
	those involved with non-financial entities or what many people
	are calling end users.
	Consistent with this, consistent with what Congress said
	that the non-financial end users would be exempt from clearing,
	we believe at the CFTC that margin requirements should focus
	only on transactions between financial entities rather than
	those transactions with the non-financial end users that so
	many Members have talked about in their opening statements.
	To adequately fulfill our statutory mandate, the CFTC does
	require additional resources. The U.S. futures market today,
	$40 trillion notional size. The U.S. swaps market, roughly $300
	trillion, roughly 7 times the size, far more complicated, and
	it is very important for all the end users to have
	transparency, openness, and competition.
	Yesterday, the President submitted his fiscal budget for
	2012 that included $308 million in funding for the CFTC. This
	is essential for us to be able to fulfill our mission.
	In 1992, our agency had 634 people. It shrank. From 1992 to
	2008, it was down to 440 people right in the midst of the
	crisis. Only last year, with the help of this committee and all
	of Congress, did we get back to our 1990s headcount, about 680
	people.
	But staff is not enough. Technology is critical. The only
	way to really regulate these vast markets is with sufficient
	funding for technology to be efficient. Our small agency has to
	be efficient, working closely with the SEC and international
	regulators.
	Furthermore, I would say that the CFTC's funding, if it
	were returned to the 2008 levels when we were only 440 people,
	the agency would be unable to fulfill its statutory mission.
	Every program would be affected.
	It would be market surveillance, industry oversight,
	enforcement. We would be unable to pursue Ponzi schemes and
	other frauds or market manipulation. Inevitably, we would have
	to develop a backlog of registration applications or rule
	reviews or appellate filings and the like.
	The CFTC, I would contend, is a good investment for the
	American public. Its mission, ultimately, is to promote
	transparency, open and competitive markets which lower costs to
	end users and helps promote economic activity. We will get this
	margin thing right. We understand congressional intent on that.
	The CFTC is a cop on the beat that ensures markets are
	protected from fraud, manipulation, and other abuse. I look
	forward to working with Congress to ensure that we can
	accomplish our mission of protecting the public. Thank you and
	I would be happy to take questions.
	[The prepared statement of Chairman Gensler can be found on
	page 277 of the appendix.]
	Chairman Bachus. Thank you.
	Governor Tarullo?

	STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD
	OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

	Mr. Tarullo. Thank you, Chairman Bachus, Ranking Member
	Frank, and members of the committee. I appreciate this
	opportunity to provide the Federal Reserve Board's views on the
	implementation of Title VII of the Dodd-Frank Act.
	The Board's responsibilities fall into three broad areas.
	The first relates to consultation and coordination with other
	authorities, both foreign and domestic. Dodd-Frank requires
	that the CFTC and the SEC consult with the Board on rules to
	implement Title VII.
	In providing feedback to their request for consultation, we
	have tried to bring to bear our experience from supervising
	dealers and market infrastructure and our familiarity with
	markets and data sources to assist the commissions.
	But important coordination activities related to
	derivatives regulation also are occurring internationally. Most
	prominently, the group of 20, or ``G20,'' leaders set up
	commitments related to reform of the OTC derivatives market
	that would form a broadly consistent international regulatory
	approach.
	The Basel Committee on Banking Supervision has recently
	strengthened international capital standards for derivatives
	and created leverage and liquidity standards applicable to
	them.
	The Committee on Payment and Settlement Systems is working
	with the International Organization of Securities Commissions
	to update international standards for systemically important
	clearing systems, including central counterparties that clear
	derivatives instruments, and trade repositories.
	The goal of all these efforts is to ensure a level playing
	field that will promote both financial stability and fair
	competitive conditions by preventing activity from flowing to
	less regulated jurisdictions.
	The second task given to the Federal Reserve with respect
	to Title VII relates to the strengthening of infrastructure.
	Central counterparties are given an expanded role in the
	clearing and settlement of swap and security-based swap
	transactions.
	If properly designed, managed, and overseen, central
	counterparties offer an important tool for managing
	counterparty credit risk and thus can reduce risk to market
	participants and to the financial system.
	Title VIII of the Act complements the role of central
	clearing to heighten supervisory oversight of systemically
	important financial market utilities. This heightened oversight
	is important because financial market utilities such as central
	counterparties concentrate risk and thus have the potential to
	transmit shocks throughout financial markets.
	As part of Title VIII, the Board was given new authority to
	provide emergency collateralized liquidity in unusual and
	exigent circumstances to systemically important financial
	market utilities. We are carefully considering how to implement
	this provision in a manner that protects taxpayers and limits
	the rise in moral hazard.
	The third task, committed to the Board by Dodd-Frank with
	respect to Title VII, is that of supervision. Capital and
	margin requirements are central to the prudential regulation of
	financial institutions active in derivatives markets, as well
	as to the internal risk management processes of those firms.
	The major rulemaking responsibility of the Board and other
	prudential regulators under Title VII is to adopt capital and
	margin regulations for the non-cleared swaps of banks and other
	prudentially regulated entities that are swap dealers and major
	swap participants.
	The Board and the other U.S. banking agencies played an
	active role in developing the enhanced capital leverage and
	liquidity regime agreed to in the Basel Committee. These
	requirements will strengthen the prudential framework for OTC
	derivatives by increasing risk-based capital and leverage
	requirements and by requiring banking firms to hold an
	additional buffer of high quality liquid assets to address
	potential liquidity needs resulting from their derivatives
	portfolios.
	The statute also requires the prudential regulators to
	adopt rules imposing initial and variation margins on non-
	cleared swaps to which swap dealers or major swap participants
	that they supervise are party.
	The statute directs that these margin requirements be risk-
	based. Within these statutory constraints and instructions, the
	Board and other prudential regulators are working to implement
	the margin provisions in a way that takes appropriate account
	of the relatively low systemic risk posed by most end users.
	For example, one approach under consideration is to allow a
	banking organization that is a dealer or major participant to
	establish a threshold with respect to an end user counterparty
	based on a credit exposure limit that is approved and monitored
	as part of the credit approval process below which the end user
	would not have to post margin.
	The Board understands that posting margins imposes costs on
	end users, possibly inhibiting their ability to manage their
	risks. The Board also believes that the margin regime should be
	applied only to contracts entered into after the new
	requirement becomes effective.
	Thank you for your attention, and I would be pleased to
	answer any questions you might have.
	[The prepared statement of Governor Tarullo can be found on
	page 323 of the appendix.]
	Chairman Bachus. Thank you. There were two Presidents in
	recent history who actually reduced government spending as a
	percentage of GDP, President Clinton and President Reagan. So I
	say that in a bipartisan way, one on each side. A part of that
	was a growing economy, and I think that is going to be the key
	to us facing our national debt and our deficit.
	So I want to applaud, Chairman Gensler, your statement
	today. And I think, if I heard it correctly, it is that all end
	users would be exempt from CFTC clearing and margin
	requirements--
	Mr. Gensler. Yes, sir.
	Chairman Bachus. --the way they are on the over-the-counter
	swaps?
	Mr. Gensler. Consistent to how Congress exempted the non-
	financial end users from clearing, as we take up these rules at
	the CFTC, which we hope to in the near term, that the same end
	users--(h)287 is the provision in the statute, would not have
	any margin requirements. It is really consistent with what
	Congress did on the clearing requirement.
	The financial company consistent with what Congress did
	might be. Again, we are still sorting through these proposals
	to put them forward to the public and get comments.
	Chairman Bachus. I know Members on the Majority feel it is
	critically important that we don't impose margin requirements
	or clearing requirements on end users. And by end users, you
	said non-financial companies, these that do not hedge risk as a
	part of their inherent business.
	Mr. Gensler. That is correct. Hedging is a really important
	thing. Tens of thousands of commercial end users use these
	products, used them successfully before 2008, and need to use
	them for our economy to prosper. Dodd-Frank at its core though
	promotes transparent, open, and competitive markets. And
	markets that are transparent and competitive get the lowest
	pricing.
	I believe Dodd-Frank at its core will lower costs to these
	commercial end users because of the transparency and
	competitiveness and also because they will be less prone to
	risk. The American public did have to stand behind that $700
	billion in the TARP. So it is a balancing that actually
	Congress put forward.
	Chairman Bachus. Of course, the $700 billion, none of that
	was a result of commercial non-financial end users, yes?
	Mr. Gensler. But it did at its core have a risk from the
	unregulated swaps marketplace, particularly credit default
	swaps. And then we all know the story of AIG.
	Chairman Bachus. I appreciate you and I--do you need the
	cooperation of Congress? Do we need legislation to clarify that
	these over-the-counter swaps will not be required to have
	margin requirements for clearing?
	Mr. Gensler. We at the CFTC believe that the Act is well-
	written and it gives us sufficient authority to ensure that
	such margin requirements on the swap dealers do not cover the
	non-financial end users. But that authority is there for us to
	move forward. Of course, it will be subject to notice and
	comment, public comment.
	Chairman Bachus. Governor Tarullo, you looked at that
	provision. Do you agree?
	Mr. Tarullo. Mr. Chairman, what we have done is to read the
	statute as it is written. The statute as it is written tells us
	that each registered swap dealer and major swap participant for
	which there is a prudential regulator has to meet minimum
	capital and minimum initial and variation margin requirements.
	That applies broadly and there is obviously no exception
	provided for any class of counterparties.
	However, the statute goes on to say that these standards
	shall be risk-based. And bringing to bear the risk-based or
	systemic risk-based perspective, which we have tried to bring
	to our activities on Title VII generally, what we are thinking
	in terms of is a risk-based approach to margin requirements
	which would recognize that for end users, generally there is
	much less risk associated with derivatives transactions.
	So in essence we will create--if this approach turns out to
	be the one we adopt, and it is the one that is being worked on
	internally now--these thresholds within which or under which
	margins would not be required.
	And precisely because end users in general present
	substantially less systemic risk--and in many cases no systemic
	risk--the threshold for end users would be substantially higher
	than those for financial market participants.
	Chairman Bachus. All right, thank you. Let me very briefly,
	I think the proper sequencing of your rule needs to have a
	definition of swap and commercial risk prior to some of your
	other definitions. Are you aware that you are going to need to
	define those terms fairly soon?
	Mr. Gensler. The statute defines many terms. Jointly with
	the SEC, we made proposals in December on ``swap dealer'',
	``major swap participant'' and the like. The comment period
	actually closes February 22nd.
	And what we encourage the public to do, and we posted this
	on our Web site, is if you have comments on any of our other
	proposals at the CFTC, even if the comment period is closed,
	please include those comments in the definition comments so
	that we can consider them.
	We do have discretion, even after a comment period is
	closed, to get those comments to the right files, to the right
	team. I know as a Commissioner, we will read them.
	Chairman Bachus. But the definition of ``swap'' and
	``commercial risk'', your other definitions are going to depend
	on that--
	Mr. Gensler. We also put out the definition of ``commercial
	risk'' in December--
	Chairman Bachus. Okay.
	Mr. Gensler. --and that is open through the same period of
	February 22nd. We look forward to hearing broadly from the
	public whether we got that right, consistent with what Congress
	did.
	Ms. Schapiro. I would just add, I think we all share your
	concern that we get the sequencing right so that particularly
	those who have to comment understand the full scope of the
	potential implications of all the rules on them, whether or not
	they are going to be determined to be a dealer or a major swap
	participant or some other kind of participant in the
	marketplace.
	So we have gotten a lot of that done. The not-so-narrow but
	important issues of swap, mixed swap, security-based swap are--
	they are basic statutory definitions, but obviously there is
	more work for us to do there and we are very committed to
	getting those out quickly.
	Chairman Bachus. Thank you.
	Ranking Member Frank?
	Mr. Frank. Thank you. Let me ask Mr. Gensler, you talked
	about, and Mr. Tarullo has concurred and I assume Ms. Schapiro
	does too, that we are not going to see margin requirements
	imposed on end users and they don't have to clear.
	I do want to address though the perception some may have
	that therefore nothing has changed. You did mention the
	transparency. So what will be the effect with regard to end
	users?
	Ms. Schapiro. Even the uncleared swaps have to be reported
	to the swap data repository and public--
	Chairman Bachus. Which means the price will be made public?
	Ms. Schapiro. Yes. Price and calling information, yes.
	Mr. Frank. Which is what we--I will tell you that I had a
	visit that validated that in my mind from a couple of people in
	the financial industry. It was an older one and a younger one
	from two companies. And the younger one said that they had
	these problems. And I said, we are not going to go after the
	end users and all we are talking about is price being made
	public.
	And he said yes, that is what we don't like, then people
	could come in ahead of us. And I asked if that meant that he
	was afraid of competition? And his older colleague said, we are
	not really pressing that argument. So I just want to make it
	clear we are not talking about margin requirements and clearing
	requirements.
	We are talking about reporting requirements, which have, if
	I am correct, the advantage first of all of giving the end
	users some ability to get a better price because they will not
	now be captives and they will get to know what other people are
	charging.
	And secondly, you won't have an unknown quantity of those
	in the economy. Will there be mechanisms for us therefore
	keeping track of what the totals are that are out there, Ms.
	Schapiro?
	Ms. Schapiro. I think the transparency is really the
	critical piece here because it allows market participants to
	understand, particularly with respect to post-trade
	transparency, at what price those transactions have occurred
	and that will encourage price competition.
	There is a provision that will allow for blocked trades to
	be disseminated on a delayed basis so that the concern about
	the potential for front running a large position or front
	running the hedging of a large position should be able to be
	dealt with through the delayed dissemination there.
	Mr. Frank. Because, as someone said, we are talking about
	making it more pro-competitive--
	Ms. Schapiro. Absolutely.
	Mr. Frank. Because people can't be competitive if they
	don't know the number. Now, I want to just ask you about the
	budget proposals. You have been urged to take more time but
	also be more thorough.
	At the levels that have been proposed in the budget that
	came out of the Appropriations Committee, Mr. Gensler, what
	effect will that have on your capacity to accommodate what
	members of this committee are asking you to do?
	Mr. Gensler. The number, I believe, was to take us from
	$168 million in the continuing resolution down to $112 million.
	We would have to have a significant curtailment of our staff
	and resources. We would not be able to police or ensure
	transparent markets in futures or swaps.
	Mr. Frank. So that is--the new responsibilities you get for
	the derivatives market, including primarily, as you said, the
	financial part, the AIGs, the credit default swaps, you would
	not be able to undertake those responsibilities?
	Mr. Gensler. There is no doubt in my mind. We would have to
	go from 680 staff, actually smaller than 440 if it was for the
	whole year because we are already halfway through the year. We
	would have to shrink even further than that.
	Mr. Frank. Ms. Schapiro, you were given in the bill new
	responsibilities, investor protection and elsewhere. What would
	the effect of the proposed budget be on your ability to carry
	those out?
	Ms. Schapiro. I am sorry. It will have a very real effect
	on the SEC's ability not just with respect to Dodd-Frank
	implementation but also with respect to our core mission, which
	is already being impacted by the continuing resolution. But
	most particularly, we have responsibilities now for hedge fund
	examinations starting after hedge funds are registered in July.
	So we have to build a registration capability. We have to
	be able to examine and have examiners deal with hedge funds. We
	will be recipients of large amounts of data that are required
	under the Act for systemic risk reporting purposes for hedge
	funds, being a mechanism for managing--
	So let me say, because I don't want to go over the time,
	and the systemic risk in the data is important again.
	Ms. Schapiro. --right and over-the-counter derivatives
	surveillance. We cannot rely on an SRO in that space. That task
	will fall to the SEC.
	Mr. Frank. I remember when Mr. Bernanke told us in 2008
	that he was going to have to advance $80 billion to AIG. And a
	week later, they needed another $90 billion or $100 billion
	because nobody, including AIG, had any idea what the exposure
	was. And that presumably will no longer be the case.
	But just to summarize with regard to hedge funds and
	derivatives, many of us believe they were insufficiently, not
	just regulated, but we didn't have much information about them,
	that they were a blank slate. And we have with hedge funds
	fairly light regulation but registration and monitoring. With
	derivatives, the financial entities are regulated but the end
	users are not.
	But I take it that if you were to get the budget levels
	that were proposed in the bill that came out of the
	Appropriations Committee, neither one of your agencies would be
	able to do anything significant regarding your new
	responsibilities involving derivatives and hedge funds. Is that
	correct?
	Mr. Gensler. That is correct. We would basically be
	involved in a large reduction in force, about 65 percent--
	Mr. Frank. Right, but you--the effect of that would--
	Mr. Gensler. --the end users wouldn't benefit from any
	transparency.
	Mr. Frank. Ms. Schapiro?
	Ms. Schapiro. I don't know whether it will be in reduction
	of force or technology decline, but we will certainly not be
	able to operationalize many of the rules that are we
	implementing as a result of the new law.
	Mr. Frank. Thank you, and I should mention just one more
	thing. The total amount of money for the two agencies together
	that you are asking--that is in the President's budget is how
	much?
	Ms. Schapiro. President sought for the Securities and
	Exchange Commission $1.4 billion.
	Mr. Frank. And Mr. Gensler?
	Mr. Gensler. In 2012, 308, in 2011, 261.
	Mr. Frank. All right, so for this current year, about a
	billion-and-a-half. And Ms. Schapiro, how much money does the
	SEC take in to the Federal Government?
	Ms. Schapiro. I believe last year our budget was $1.1
	billion and we brought into the Treasury on just from
	transaction fees about $1.3 billion to $1.4--
	Mr. Frank. So at the expense of getting adequate
	regulation, we are going to turn you into a profit center.
	Thank you.
	Chairman Bachus. Thank you. Thank you, Mr. Frank.
	Mr. Hensarling?
	Mr. Hensarling. Thank you, Mr. Chairman.
	Chairman Gensler, in your testimony, I believe you said
	something along the lines that unregulated swap markets played
	a central role in our economic crisis. I am assuming you are
	mainly alluding to AIG. Is that correct?
	Mr. Gensler. Yes, but also I think it helped accelerate the
	asset bubble in housing, credit default swaps more generally.
	Mr. Hensarling. Okay, just to remind us all of the record,
	in March of 2009, the head of the OTS, Mr. Polakoff, testified
	to a question that I asked. Again, in retrospect it wasn't the
	lack of authority. It wasn't the lack of resources. It wasn't
	the lack of expertise. You just flat out made a mistake. Is
	that a correct assessment? Answer, yes, sir. In 2004, we failed
	to assess how bad the mortgage economy, the real estate economy
	would become in 2008.
	So at least the regulator in question thought they had the
	authority and the expertise. I peeked into the testimony, into
	the testimony of the panel to follow yours. So to some extent,
	I am going to try to foist a bit of a conversation here. We are
	going to hear from a gentleman, Craig Reiners with the
	MillerCoors Company.
	And quoting from his testimony, ``A requirement for end
	users like MillerCoors to post margin to its counterparties
	would have a serious impact on our ability to invest in and
	grow our business. Though end users are not directly subject to
	the trading requirements, excessive capital requirements
	imposed on our counterparties aimed at forcing end users onto
	regulated exchanges, execution platforms and clearinghouses
	could significantly increase our cost.''
	Chairman Gensler, a provision that was supposedly aimed at
	Wall Street may be increasing the cost of a six pack. And I
	think you just got the attention of the American people.
	[laughter]
	Has your agency considered the pass-through cost concerns
	in your economic analysis as you develop these new rules?
	Mr. Gensler. I read very closely the testimony of
	MillerCoors. We have met with MillerCoors. We are aware and
	focused on the cost of a six pack because we also oversee
	agricultural markets. And I would say our intention is not to
	have margin requirements apply to an end user such as
	MillerCoors. So very directly to his point, we are very focused
	on his testimony and his concerns.
	Mr. Hensarling. We will be monitoring your progress at the
	local convenience store. I also saw testimony from Mr. Terry
	Duffy, executive chairman of the CME Group. And he testified,
	``Entities such as CME often cannot fully anticipate the
	meaning of a proposed rule when that proposed rule is reliant
	on another rule that is not yet in its final form.''
	For example, rules dealing with the definitions of swaps,
	security-based swaps, swap dealer as you well know, Mr.
	Chairman, the list goes on. Mr. Duffy goes on to say as such,
	``They must be established before interested parties can
	meaningfully address other proposed rules.''
	So your Commission, I believe, has proposed some rules,
	comment periods have closed on other rules, and yet many
	commentators don't even know without the proper definition
	clarity whether or not certain rules will apply to them. So how
	can you have a meaningful comment period, Chairman Gensler?
	Mr. Gensler. I have read Mr. Duffy's testimony very closely
	as well, and we have indicated to Mr. Duffy, with whom we are
	meeting at 2:45 today, that we want all of the CMEs and all of
	the public's comments.
	If these rules have been staggered partly because we are
	humans, we need to just move them out. But if you have comments
	on earlier proposals where closed periods have happened and
	they relate to this definitions rule, include them.
	Send them in. We will use our discretion. We will
	distribute them. We will get them into the right comment files,
	just like this entire hearing, I think we are going to put in
	our comment file. Everything that you all have to say is
	important to our process as well.
	Mr. Hensarling. I think the gentleman makes a good
	argument. I hope you can find a better way to run a railroad
	because I think again we are dealing with trillions of dollars.
	We are dealing with capital. We are dealing with jobs. And I
	just think it is so critical that we have an effective
	rulemaking process.
	I see my time is winding down. One more question for you,
	Chairman Gensler. I understand that you are advocating the
	adoption of position limits even for passive investors such as
	commodity index funds. Is that correct?
	Mr. Gensler. Consistent with the Dodd-Frank Act, we have
	put out a proposal in January and we look at forward to the
	public comments. So I think it is consistent with what--
	Mr. Hensarling. Does the CFTC have any data to indicate how
	the proposed position limit rule would affect the operation of
	these passive funds?
	Mr. Gensler. We publish data regularly on passive funds or
	index investments in the marketplace, and that is on our Web
	site. We have included some of that data in the preamble in the
	rule, but we look forward to the public comment in the proposed
	rules on agricultural, metals, and energy position limits.
	Mr. Hensarling. I see my time has expired. Thank you, Mr.
	Chairman.
	Chairman Bachus. Thank you.
	Ms. Waters?
	Ms. Waters. Thank you very much, Mr. Chairman. I am very
	concerned about the representation that Dodd-Frank is going to
	lead to fewer jobs. And I understand that many of those who are
	critics have been citing a study by the Business Roundtable
	that claims that the margin requirements in Dodd-Frank will
	result in 100,000 fewer jobs. First, just quickly, let me ask
	each of our witnesses today.
	First, Ms. Schapiro, have you seen this study?
	Ms. Schapiro. That was released yesterday, so yes, I did
	have an opportunity to look at it, but I have not studied it in
	detail.
	Ms. Waters. Mr. Gensler, have you seen the study?
	Mr. Gensler. I read the survey, the Keybridge survey last
	night around midnight on the Web.
	Ms. Waters. And Mr. Tarullo, have you seen the study?'
	Mr. Tarullo. I did read it. Yes, ma'am.
	Ms. Waters. Can you tell us how effective regulation of the
	derivatives market can actually help to save jobs? Let me start
	with Mr. Gensler.
	Mr. Gensler. I think that at the core, we lost over 7
	million jobs in this country because both the financial system
	and regulatory system failed the test and swaps were part of
	that. So I think it saves jobs by just making the whole system
	safer for America.
	It also helps end users have more transparency and lower
	costs, competition in the marketplace. As long as we handle I
	think congressional intent on this margin and many of the other
	end user issues, which we want to work with you on,
	transparency promotes economic activity, transparency, and
	competition in the market.
	Ms. Waters. Thank you.
	Ms. Schapiro, I agree with Mr. Gensler that failed
	regulation caused a loss of jobs. So how can better regulation
	cause a loss of jobs? Can you discuss a little bit how better
	regulation, effective regulations can help to save jobs?
	Ms. Schapiro. I think effective regulation can promote
	capital formation, which is in essence the creation of jobs.
	When companies feel that they can go to the market and raise
	capital, that their stocks will be priced fairly, that
	investors will have the opportunity to invest in their company,
	buy their shares of stock and sell those when they want to, it
	enables companies to raise the money necessary to create jobs.
	By the same token, when investors have confidence in the
	safety and the soundness of our financial institutions and the
	regulatory regime, they have a level of comfort in investing.
	So I think there are a number of studies that will show that
	good regulation, intelligent regulation--it is not
	overregulation, not underregulation--can actually lower the
	cost of capital for industry.
	Ms. Waters. Mr. Tarullo?
	Mr. Tarullo. Ms. Waters, I would just say that the study to
	which you alluded acknowledged that what it did was a kind of
	quick and dirty economic assessment because the study didn't
	have access to all the data they would need to give a more
	sophisticated response.
	What they basically did was to say, ``Based on our survey,
	here is what we think the relative level of utilization of
	derivatives is. And we are going to multiply that by a margin
	requirement which we think might be imposed. And that gives us
	the cost--that the cost of the margin requirements--''
	Ms. Waters. I am sorry, so you are saying it was not a
	scientific study?
	Mr. Tarullo. They couldn't--they were not being misleading
	in the least. They basically just said, ``We are going on the
	basis of a survey and extrapolating. We don't really have the
	data.''
	But I think, ma'am, the most important point to make is
	that they were assuming that there would be margin requirements
	applicable to all these end users surveyed. And what you have
	heard this morning is that is not going to be the case.
	Ms. Waters. And so can you tell us how effective regulation
	of the derivatives market can actually help to save jobs?
	Mr. Tarullo. Yes. From our point of view again, which is
	one of systemic risk and trying to contain systemic risk, I
	think the keys are always watching for leverage and
	transparency. And because in the absence of transparency, you
	have ineffectively operating markets, and as we see, you can
	have runs during crisis periods.
	And in the presence of excessive leverage, you can have
	collapses of institutions and markets as well. So I think a
	well-honed, well-conceived regulatory system in the financial
	sector is one that is designed to allow the allocation of
	capital to its most productive uses.
	Ms. Waters. So basically, all three of our witnesses at the
	table today really do believe that an effective regulation of
	the derivatives market can actually help to save jobs. Is that
	correct?
	Mr. Gensler. Yes.
	Ms. Schapiro. Yes.
	Mr. Tarullo. Yes, although, of course, ``effective'' is
	what everybody is going to be discussing as we go through this
	regulatory process.
	Ms. Waters. Thank you very much. I yield back.
	Chairman Bachus. Thank you.
	Mr. Royce?
	Mr. Royce. Thank you, Mr. Chairman. Mr. Gensler, as to the
	application of the CFTC proposed rules to foreign
	counterparties and to foreign dealers, I was going to ask you
	about a concern here over regulatory arbitrage and over the
	fact that they are going to wait this out.
	You implement your policies here. We see more and more
	derivatives business go to Europe. And at the end of the day,
	we have American financial companies severely disadvantaged
	vis-a-vis their foreign competitors.
	I mentioned in my opening statement that in the long run,
	onerous rules that are unnecessary will without doubt drive
	capital to non-U.S. markets. And you have testified here that
	you are in contact with regulators in Europe, you expect them
	to follow the American approach, but how do you have those
	concrete assurances? Do we have a Memorandum of Understanding
	with European regulators? Tell me how you assure us of that
	fact?
	Mr. Gensler. We are working very closely--all three of our
	agencies are working very closely with the Europeans and Asian
	regulators. We actually share our pre-proposal documents,
	memos--
	Mr. Royce. Right.
	Mr. Gensler. --and drafts with them. I think, depending
	upon budgets, I guess, but I will be back over in Europe in
	March in front of the European Parliament possibly.
	So we are working very closely. Their proposals, I am
	optimistic, are quite consistent on clearing this end-user
	approach, swap data repositories, the dealer regimes. They are
	a little bit time-wise behind us, a little later than us.
	Mr. Royce. Yes, they are going to be later. And I don't
	know where Brazil and Toronto and Singapore are going to be
	here, but I think it is going to be very hard to try to
	convince us that American firms are not going to lose business
	to European competitors when that is already happening now.
	Let me ask you another question, and that has to do with
	the fact I know today the SEC and the CFTC, you are saying they
	are trying desperately to get this collaborative environment.
	But on the most important rules, you are failing to get that
	kind of collaboration between the two agencies.
	The differences in the derivatives markets you oversee are
	virtually nonexistent. There is a lot of overlap there in
	products and users. And the fact is that you insist on
	producing two very different sets of regulations here.
	And if this is the end result, end users and investors are
	not going to be better off. It is going to be a boon for
	foreign companies. I will just give you a few of the--in terms
	of what is discussed in the business press--real-time
	reporting, where the agencies have different rules for the
	definition of what real-time means.
	First, block trade definition and reporting time for block
	trades, the number of data fields that must be reported is
	different, which entity is tasked with submitting trade
	information to the public, all different.
	Second, we have the block trade definition where the SEC
	wisely asked for further public comment and will likely embrace
	different definitions, depending on asset class and liquidity,
	whereas, the CFTC has offered a rigid, one-size-fits-all
	approach that many argue is overly restrictive.
	And then third, we have the swap execution facility rules,
	where the CFTC requires sending a request for a quote to at
	least five liquidity providers. The SEC takes, I think, a more
	reasonable approach here in allowing the customers to choose
	how many liquidity providers it will request quotes from.
	But the bottom line is, it is different in every case. And
	I would like your comment on that as well, if you would.
	Ms. Schapiro. I would be happy to comment on that,
	Congressman. I would say a couple of things. One is that we are
	working very closely together and there are many more things
	that are the same than that are different, although, you have
	pointed out, I think, some important differences.
	Mr. Royce. I picked up 50-some in the business press that
	have been pointed out--
	Ms. Schapiro. I will--
	Mr. Royce. --where they differ.
	Ms. Schapiro. We are still at the proposal stage so there
	is lots of opportunity through the comment process and through
	our extensive meetings with industry and others to bring these
	rules closer together.
	And when we propose something, for example, it is different
	than the CFTC. We actually ask people what would be a better
	approach? Is the CFTC's approach a better, more realistic
	approach or is the SEC approach better, or is there yet a third
	way to go about dealing with this?
	I would say also that there are some differences in the
	markets that we are regulating. The security-based swap
	markets, which really just represents about 5 percent of the
	notional value of the swap markets, trade quite differently
	than the interest rate markets do, for example. And so, to some
	extent, the differences in the marketplace will dictate--some
	things that are different.
	But I will--let me please agree with you though, that where
	our rules are going to fall upon institutions that are
	contracting and working in both markets, it really is incumbent
	upon us to make them as close to identical as possible so that
	institutions aren't put under the burden of two separate sets
	of rules.
	Where the rules go to, for example, differences in the way
	orders might interact within the marketplace, there might be
	some justification for slightly different rules because of the
	nature of the products that are being traded.
	Mr. Royce. Mr. Chairman, thank you. Mr. Chairman, I have
	questions for the record, without objection, on position
	limits, which were meant to curtail speculation but could end
	up hitting the long-term passive investors. I meant to ask that
	question, but, I will put that in the record and then get the
	response from the witnesses. Thank you, Mr. Chairman.
	Chairman Bachus. All right. Thank you, Mr. Royce.
	Mrs. Maloney?
	Mrs. Maloney. Thank you, Mr. Chairman, and I thank all of
	the panelists for your public service and your testimony today.
	In the continuing resolution, there is--literally on the Floor
	this week, there is a drastic cut in funds from what the
	President requested in his 2011 budget for the SEC and the
	CFTC.
	And our Republican colleagues have proposed that the SEC
	budget and the CFTC budget be cut back to 2008 levels. Now,
	that is the level and the year that the economy cratered and
	fell. And I can hardly imagine that any of my colleagues are
	pleased with the level of oversight that was performed by our
	regulatory agencies in 2008.
	So cutting them even more than what they had then, I feel
	will make it impossible for them to implement Dodd-Frank and be
	responsible regulators. According to the Inspector General of
	the SEC, the Republican proposal would force the agency, the
	SEC, to cut roughly 600 in staff. Is that correct, Ms.
	Schapiro?
	Ms. Schapiro. I believe that is correct, although I will
	say, I think the budget proposal coming out of the House is not
	to put the SEC all the way back to 2008 levels, although it
	does represent a cut off of the continuing resolution number.
	Mrs. Maloney. I would say that if you put it in perspective
	with the numbers, a total loss of household wealth as a result
	of this ``Great Recession'' has been estimated to be
	approximately $14 trillion and the over-the-counter derivatives
	market is valued at about $600 trillion. And in 2010, the GDP
	of the entire world was just over $74 trillion and the infamous
	flash-crash on May 6th temporarily wiped out over $1 trillion.
	So it seems to me rather penny wise and pound foolish not
	to invest in the agencies that are required to come forward
	with the new rules, the new studies, and to prevent the Madoffs
	of the future. Now, as I understand it, and correct me if I am
	wrong, the Dodd-Frank bill calls for 95 new rules from the SEC.
	Is that correct?
	Ms. Schapiro. It depends a little bit on how you count but
	that has been the ballpark estimate, yes.
	Mrs. Maloney. And 61 from the CFTC, right?
	Mr. Gensler. We think it is more on the order of 45.
	Mrs. Maloney. Forty-five? Okay.
	Mr. Gensler. That is right. But I don't know. People can
	count different ways.
	Mrs. Maloney. And how many studies are you required--I know
	the bill had 60 studies--to do?
	Ms. Schapiro. The SEC is required to do 20 studies--more
	than 20 studies and to create 5 new offices within the agency.
	Mrs. Maloney. How in the world are you going to do that
	with a reduced budget? Can you hire the people to oversee the
	new--the derivatives and everything that you have to do?
	Ms. Schapiro. No. Clearly, we will not be able to
	operationalize the rules that we are promulgating and
	ultimately adopting under Dodd-Frank under that budget
	scenario. I will say, if we were able to hire people, we can
	get them.
	We are getting amazing talent willing to come to the
	Securities and Exchange Commission at this time and work with
	us on all of these important issues. But we are under a hiring
	restriction right now.
	Mr. Gensler. And I would just say this: The staff of the
	CFTC has been excellent under this uncertainty of the budget.
	They are just doing terrific work. I think we will be able to,
	working with the SEC and the public, continue writing rules,
	but there is no doubt that in 2012, we will not be able to
	oversee the markets and ensure the transparency in the markets.
	If we were taken back to 2008 levels, however, then we
	would be in a very different circumstance because we are in a
	unique circumstance where we were just growing back to where we
	were in the 1990s, so taking us back to 2008 would have to
	entail, unfortunately, significant reductions in force.
	Mrs. Maloney. The OTC derivatives market is valued at about
	$600 trillion, and in 2010, the budget for the CFTC was just
	$169 million. So as my colleagues call for more oversight and
	accountability, we certainly need to give the tools to the
	oversight agencies to get the job done. So I certainly hope
	that my colleagues on both sides of the aisle will support
	appropriate funding for the CFTC and the SEC.
	There has been talk that we are not competitive in the
	world. Some of my colleagues said that we have a competitive
	disadvantage, but with Basel II the capital requirements are
	the same. Is that correct? Our capital requirements are not
	higher, are they, Mr. Tarullo?
	Mr. Tarullo. That is correct.
	Mrs. Maloney. So we are in an even playing field on the
	capital requirements and the leverage requirements? Are we on
	an equal playing field there?
	Mr. Tarullo. Yes. We have internationally agreed upon a
	leverage ratio, yes.
	Mrs. Maloney. So do you believe that our markets are in
	some way disadvantaged--
	Mr. Tarullo. First--
	Mrs. Maloney. --because we have regulations?
	Mr. Tarullo. Certainly with respect to--
	Mrs. Maloney. But a regulation that didn't appear to work
	in 2008.
	Chairman Bachus. Mrs. Maloney, we will let him answer the
	question.
	Mrs. Maloney. Okay. Yes.
	Mr. Tarullo. Certainly with respect to capital, we have
	been able to standardize across all the members of the Basel
	Committee. There is obviously still discussion going on about
	the standards to be applicable to central counterparties as
	such. Those are the ones that Chairman Gensler was referring to
	a few moments ago.
	Chairman Bachus. Thank you.
	Mrs. Biggert?
	Mrs. Maloney. But my time has expired.
	Mrs. Biggert. Thank you, Mr. Chairman. This first question
	is for Chairman Gensler. Currently, the CFTC is looking at
	setting position limits on swap data. And my concern is--and I
	know I asked this question, I think of you and of Secretary
	Geithner in 2009--whether there was an analysis that looked at
	the critical and necessary data regarding this?
	And it seems--I am concerned that--and in fact, multiple
	futures exchanges have raised concern that without this
	critical data, there will be improperly set position limits
	which would negatively impact liquidity and effective price
	risk hedging. And it seems like you are putting the cart before
	the horse if you don't have the study of this data that is so
	important.
	And, I think it--not analyzing it before you put a new
	regulation in, and my concern, not only here, but there is talk
	of some dealers looking at moving abroad, and we are going to
	lose those jobs. Could you comment on that?
	Mr. Gensler. The proposal the Commission put out in January
	is consistent with the congressional provisions that we put
	something out with regard to the physical commodities, metals,
	energies, and agriculture. The agency has had, in working with
	the exchanges, position limits and most of these for what is
	called the spot month, but also looking at the other months,
	what is called the back months.
	And there really would be three steps to this. A proposal
	phase--we have asked the public for comment on the very data
	that you are talking about. We are going to be well-informed.
	Final rules will not be taken into consideration until we get
	comments. We got 8,200 comments on an earlier position limit
	proposal a year ago. No doubt, we will get a lot of public
	input, and it will be helpful.
	We changed the proposal based on those earlier comments. We
	will probably change the final based on these comments.
	The third phase is actually getting data from the market
	when the swap data repositories are stood up, and we anticipate
	that that is going to take some time.
	Mrs. Biggert. But that is really crucial in how you are
	going to be able to set those limits so that there won't--there
	won't be something done before you get that data?
	Mr. Gensler. We have actually anticipated that the proposal
	says that even once it is a final rule, it would not be
	implemented until there is data upon which to apply a formula.
	Position limits historically have been done based on a formula
	of the total size of the market. How big is the market and so--
	Mrs. Biggert. But my concern is that we are going to have
	some of these traders that are going to go abroad because they
	can't wait, with all the comments and then to have the--to set
	that later on. It seems like you are putting the cart before
	the horse in not having the data before you really set those
	limits.
	Mr. Gensler. Again, Congress asked us to put proposals out.
	We are soliciting comments. It is very important to get
	comments on these 28 physical commodity markets. We have had
	position limits in the agricultural markets for decades. There
	were positions in the energy markets and metals markets in the
	1980s and 1990s, in fact, all the way through 2001.
	And we look forward to public comments. But it does say in
	the proposal that they would not go into effect until they are
	based on the actual statistics on the size of the futures
	market as well as the swaps market.
	Mrs. Biggert. Okay. Now Congress may have been wrong in how
	they designated that should be done, but--let me go on to
	another question.
	Chairman Schapiro, the Department of Labor has proposed a
	new definition of ``fiduciary'' which would significantly
	modify 35 years of established law defining who is an
	investment advice fiduciary and then the SEC has completed
	their 913 study which looks at the standard of care required of
	broker-dealers and investment advisors providing personal
	investment advice about securities to retail customers.
	Both of these proposals will be setting advice standards
	for retail IRAs. Have the DOE and the SEC consulted on these
	proposals or is there something that could come out differently
	as opposed to--
	Ms. Schapiro. Congresswoman, you are right, we published
	our investment advisor broker-dealer fiduciary study several
	weeks ago. We were very clear there to say that it does not
	implicate the fiduciary standard under ERISA.
	And you are also correct that the Department of Labor has
	recently proposed to expand the fiduciary definition under
	ERISA and that has the potential to affect some ongoing
	arrangements and relationships between broker-dealers and their
	IRA clients.
	We are very prepared to work with the Department of Labor.
	We have offered any information or expertise that we can
	provide to them about the regulation, in particular of broker-
	dealers in the context of advising ERISA accounts. And we will
	continue to reach out to them and see if we can be of help.
	Mrs. Biggert. But have you actually been in contact with
	them?
	Ms. Schapiro. Yes.
	Mrs. Biggert. Okay. Thank you. I yield back.
	Chairman Bachus. Thank you.
	Mr. Watt?
	Mr. Watt. Thank you, Mr. Chairman. I would like to use my
	time here to kind of zero in on the part of this that I had the
	most involvement in, Section 733, which became known as the
	Watt-Meeks amendment, and ask a couple of questions about the
	proposed regulations that cover that section.
	It seems to me that one of the great accomplishments of
	Dodd-Frank was to pull derivatives trading out of the shadows
	and into the sunlight, requiring standardized swaps to be
	traded on swap execution facilities or exchanges that create
	pre-trade price transparency.
	Section 733, known as the Watt-Meeks amendment, even
	includes a rule of construction and directs the SEC and the
	CFTC to update their rules to require the use of the best
	technology available for creating pre-trade price transparency.
	We were intentional in not asking for flexibility for swap
	dealers. When swap dealers had flexibility before Dodd-Frank,
	they chose the least transparent method of trading, which was
	telephone calls. So instead, Congress said that swap execution
	facilities must give multiple participants the ability to trade
	swaps by accepting bids and offers made by other participants
	using the best technology for pre-trade price transparency.
	Chairman Gensler, it seems to me that your draft rule comes
	pretty close to doing what we were trying to get to. Am I
	correct that you require a swap execution facility to include a
	central trading screen where everyone can see everyone else's
	prices?
	Am I clear that you are not going to allow swap dealers to
	trade only on some dark corner of the platform where one
	participant asks for quotes that only he or she can trade and
	that dealers will have to put their prices on the central
	trading screen? Am I correct that is what you intend?
	Mr. Gensler. It is correct that the proposal brings
	transparency, that the facilities have to allow any participant
	to put a live bid or offer. So everybody can see that.
	Mr. Watt. Okay. All right.
	Mr. Gensler. But no one will be required to do it. There is
	no market maker obligation. It is just if you want to, you get
	a choice. But the end users would also have a choice if they
	didn't want to put a firm bid or a firm offer, they could also
	use a request for quotes.
	Mr. Watt. All right--
	Mr. Gensler. But you have that--
	Mr. Watt. --and then let me go to Chairman Schapiro.
	Because it seems to me that your proposal differs and hasn't
	taken Congress' directive as seriously as the CFTC is, because
	you are allowing security-based swap execution facilities--and
	I am quoting from your proposal ``could simply enable every
	participant to choose to send a single request for a quote to
	just a single liquidity provider,'' which seems to me not to be
	what we are trying to get to here.
	Are you all interpreting these things differently? Or are
	you setting up a situation here where you are going to have the
	potential for a race to the bottom with the two agencies
	potentially interpreting this thing differently or setting up a
	different set of rules and enabling participants to argue that
	the lowest common denominator ought to be at play here?
	Ms. Schapiro. I don't think so, Congressman, and we have
	taken it very seriously but we have taken a slightly different
	approach, I think in part dictated by the fact that the
	security-based swap market, which were swaps on single issuers
	or of narrow indices of securities, are really quite different
	than the much more liquid foreign exchange or interest rate or
	commodity swap markets.
	So we thought that it did dictate for a slightly different
	approach in our proposal. And again, it is just a proposal. We
	would not permit single dealer platforms under our proposal.
	What we would do is define SEF as a trading platform that
	allows more than one participant to interact with the trading
	interest of more than one participant.
	And under that, the quote requesting party must have the
	ability to send a single request for quotes to all the
	participants on that trading platform. But if that party also
	seeks to limit the number of participants to whom their quote
	goes to, they would have, at their option only, not at the
	SEF's option, the capability to do that.
	Mr. Gensler. And if I might say, where the two agency's
	proposals line up is both of them say that to be an execution
	platform, you must allow any market participant, even if you
	all weren't in Congress and you set out to be a market
	participant, you could get in and make a live bid, a live
	offer, put your capital at risk and compete.
	Markets work best when they are transparent and there is
	competition, and both rules have that. There is a little bit of
	difference on this request for quote approach, and we are
	looking for public comment to see if they should be synched up
	as well.
	Mr. Watt. Thank you, Mr. Chairman. I yield back.
	Chairman Bachus. Thank you, Mr. Watt.
	Mr. Garrett, the subcommittee chairman?
	Mr. Garrett. I thank the Chair. And so, when you think of
	all the rules that have already come out and all the
	regulations, the proposed and the mounds of paperwork that have
	come out in just a short period of time, with these agencies
	not specifically funded to the level that they want to be
	funded at, I can only hazard a guess what we would be looking
	at right now if they had all the money that they really asked
	for.
	I guess the takeaway from this hearing so far is, from the
	other side of the aisle, the solution to all the problems that
	we have is to simply spend more money on it. And I guess the
	takeaway from this side of the aisle so far is the solution to
	the problems is we want to get it right as far as the rules or
	regulations that these agencies are promulgating.
	If you look at past history. If you look at reg--NMS and
	you look at--compare that to what we are doing today. Now that
	was regs--and rules coming out of the law of around 80-some-odd
	pages. We are looking at 1,000-some-odd pages.
	That took, I am told, from 4 to 6 months from rulemaking--
	period of time, here. There they did it for approximately 15
	months, and there they took over, I guess, oh, about a 3-year
	period of time to roll them all out and actually get into
	implementation.
	Here, we are compressing this into a much, much shorter
	period of time and a much larger area of the environment where
	we are going to ask the industry to come up with an entirely
	new architecture, structure, build new complex--new technology
	systems that they don't have yet, create a whole new
	operational process they don't have yet, a whole new legal
	documentation process that they don't have yet, creation of new
	clearinghouses, SEFs, connectivity between all these entities.
	All of that wasn't there in the past. You are trying to do
	it now in an extremely expedited manner. So it goes to the
	point I raised before. If we do it in the way--in the timeframe
	that you are talking about now, won't this lead to a seizing up
	of the derivatives market?
	Won't it lead to a sending of the derivatives market
	overseas, or at the very least won't it create unfair
	advantages between the big players in the marketplace and the
	very small players who cannot simply keep up with what you are
	trying to do? I will leave that to Mr. Gensler right now.
	Mr. Gensler. We have asked, in the midst of each of these
	rulemakings, and we have asked more generally, to hear from the
	public on the phasing of the implementation. Congress allowed
	us some discretion, both agencies, that no rules should become
	effective sooner than 2 months after the July date, the
	implementation date. But it could be later.
	So for the same reason that you just raised, Congressman,
	we want to hear from the public as to what rules can be done a
	bit sooner which rules need more time. Because there is a
	cumulative cost of this. It is a paradigm shift, as you are
	referring to, and I think we want to, as you say, get it right.
	Mr. Garrett. Ms. Schapiro?
	Ms. Schapiro. I would agree with that. I think, unlike the
	statutory deadlines that we have been working through, we have
	much more discretion with respect to the implementation timing
	and sequencing. So that we can put the rules out and make them
	effective in an order that actually makes sense for the
	industry in order to build systems, develop compliance--
	Mr. Garrett. Right, so can both of you, realizing that the
	feedback that you are already getting on all those points, can
	both of you sit here today and tell us that you would like
	Congress to give you more time? Because we know we have a
	deadline of July.
	Do either one of you think that you can do this
	appropriately and meet the deadline of July and still have
	fairness to the marketplace that we are talking about?
	Mr. Gensler. I think we actually already have the
	discretion on the implementation.
	Mr. Garrett. On implementation, but how about the rule
	promulgation?
	Mr. Gensler. I feel that with the significant crisis of
	2008, which was a very real crisis, and the excellent staff at
	the CFTC and Commissioners, what timing has been put out there
	is doable. We are human. Some of these will happen after July,
	no doubt.
	Mr. Garrett. That is not in the statute. It is--
	Mr. Gensler. It is not like a firm deadline that I
	understand. We are going to get this right and some of these
	will be after July. But we are also going to take up final rule
	writing in the spring and summer.
	Mr. Garrett. One aspect of it, and I will ask both of you
	this, is under the--President Obama's Executive Order
	instructing certain Federal agents to review regulations to
	ensure they do not stifle job creation and make the economy
	less competitive, this doesn't apply to either one of you, I
	don't believe, by the Executive Order.
	But is it part of your process that you are going through,
	that you wish to comply with that Executive Order so you make
	sure we don't stifle jobs and we don't hurt the economy?
	I will start with Ms. Schapiro.
	Ms. Schapiro. Sure. Congressman, as you and I have
	discussed, the terms of the Executive Order don't apply to the
	Securities and Exchange Commission. But we have determined that
	it makes sense for us to try to act as though they do. I should
	say right off the top that much of what is in there, we already
	do. We already comply with the Paperwork Reduction Act, the
	Regulatory Flexibility Act--
	Mr. Garrett. So you are going to try to comply with it?
	Ms. Schapiro. --cost-benefit analysis. But in terms of
	being able to go back and look at some of the rules that have
	been around for many, many years, and see if they are having an
	unintended consequence given all the changes in our economy and
	in technology, in particular, we want to do that. We want to
	look at the impacts on small businesses.
	And we have been very focused in our rulemaking over the
	last year, in particular, to make sure that where we can give
	delayed compliance dates for small business, we are trying to
	do that and be as accommodating as we possibly can.
	Mr. Garrett. Mr. Gensler?
	Mr. Gensler. We took a very close look at the Executive
	Order. Our practices are consistent, though Congress has given
	us directions on how to do cost-benefit analysis. It is called
	15A of our act. So we have to follow congressional mandate
	rather than an Executive Order.
	In terms of looking at our entire rulebook, we do plan to
	do the 120-day plan where we would tell the public how we are
	going to look at our entire rulebook, even if it is not related
	to Dodd-Frank.
	Chairman Bachus. Thank you, Mr. Garrett.
	Mr. Sherman, before I go to you, Mr. Hinojosa has a brief
	unanimous consent request.
	Mr. Hinojosa. Thank you, Mr. Chairman. I am asking
	unanimous consent that my statement be made a part of the
	record.
	Chairman Bachus. Yes, and all statements will be.
	Mr. Hinojosa. Together with two letters, one by Richard
	Whiting of the Financial Services Roundtable dated February the
	7th, and the other is a statement by Craig Reiners of
	MillerCoors Corporation.
	Chairman Bachus. Thank you, and let me say this to all
	members, at the end of this hearing, you can submit any letters
	for the record, if you would like. Thank you.
	Thank you, Mr. Hinojosa.
	Mr. Sherman?
	Mr. Sherman. Thank you, Mr. Chairman. Dodd-Frank redirects
	the CFTC to adopt commodity position limits in order to prevent
	excessive price fluctuation and, of course, deliberate market
	manipulation. I know some of my colleagues have asked about
	this or other aspects of this particular provision.
	As part of this authority, the CFTC is entitled to consider
	exemptions for different classes of investors to allow for
	enhanced protections without unduly restricting investors'
	options. I am concerned that the Commission's proposed
	regulations make no distinction between investor classes,
	treating market speculators the same as ordinary commodity
	index fund investors.
	Is that the way these regulations should work? Or should
	there be a distinction between commodity index funds that buy
	and hold, versus those that are in and out of the market in
	days, hours or minutes?
	Mr. Gensler. We put out proposed rules that, as Congressman
	Sherman has said, did not make a distinction because the
	statute doesn't make a distinction in that way. The statute
	does make a distinction between bona fide hedgers, which in the
	statute, and this has been true in our statutes since the 1930s
	in some regard, relates to having some physical commodity in a
	merchandising channel.
	Congress, in Dodd-Frank, tightened that definition. So we
	have to comply with the intent of Congress. And it tightened it
	with regard to swap dealers. Swap dealers were, under various
	No-Action letters from the CFTC, able to be bona fide hedgers.
	And Congress tightened that to say, only to the extent that
	you actually are helping somebody on the other side hedge
	something who has the physical commodity in a merchandising
	channel, and so forth. So we are trying to take this up as
	Congress decided. But we look forward to the public comments on
	it. It is going to be a very thick comment file.
	Mr. Sherman. Every time I ask a regulator about something,
	they always say it is Congress' fault. Has your Commission
	recommended a technical fix? Or do you think that it is
	appropriate as a matter of policy not to distinguish between
	the in-and-out investor on the one hand and the commodity index
	fund on the other?
	Mr. Gensler. We have not recommended a technical fix. This
	was something that was debated in many committee hearings,
	maybe not in this committee, but in other committees, about the
	role of index investors and so forth.
	But we do look forward to the public comment and your
	comments and, as to getting this--
	Mr. Sherman. Yes, I may disagree with you on whether the
	existing statute gives you the flexibility here. The statute
	does say you are supposed to adopt limitations as appropriate.
	And I look forward to working with your attorneys to convince
	them that we don't need the technical fix.
	Assuming your attorneys do come to you and say, ``Yes, you
	can distinguish between classes of investors in these
	regulations,'' as a matter of policy, should there be a
	difference between the index fund on the one hand and the day
	trader on the other?
	Mr. Gensler. I think I am just going to say I am going to
	keep an open mind. With 8,200 comments on the last position
	limit rule, I think this one is going to be such a thick
	comment file and I am going to keep an open mind as a
	Commissioner, to these views.
	Some have recommended there be class limits on all
	indexers. Some have recommended that there should be no limit.
	So there is a wide set of comments that we are already
	receiving on index investing.
	Mr. Sherman. I hope you are able to give a clear and more
	definite response to some of my other colleagues' questions.
	But on this one, I just gather that you are keeping an open
	mind as to both the law and the policy. And I yield back.
	Chairman Bachus. Thank you.
	Let me say this: This first panel will be excused at 12:15.
	And we will seat the second panel. And I know Mr. Reiners from
	MillerCoors is sitting there on the first row, ready to
	testify. So we will find out what your announcement this
	morning does to the price of beer, whether--if it helps it or
	hurts--
	Mr. Gensler. Hopefully, the transparency will keep beer for
	all Americans well-priced.
	Chairman Bachus. I think the margins requirements may help.
	Mr. Gensler. I hope so.
	Chairman Bachus. Mr. Neugebauer? Thank you, sir
	Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Gensler, I
	have some serious concerns about the high cost and the severe
	consequences and burdens that Dodd-Frank is going to be putting
	on a number of different agencies.
	And I have asked all of the entities that are affected by
	Dodd-Frank to furnish us information of what is the startup
	cost and what is the continuation cost of just implementing
	Dodd-Frank.
	I have heard from your counterparts on either side. I got a
	nice thank-you letter for me sending you a letter. But I am
	looking for a little bit more robust and detailed response to
	that letter from your agency, as well.
	Mr. Gensler. I think that you received it this morning. And
	I apologize if maybe it is just in transit. But I would be glad
	to take any questions about the letter.
	Mr. Neugebauer. Thank you. I think one of the things we saw
	in the President's budget that he laid out is that he is
	estimating that it is a $6.5 billion number to implement Dodd-
	Frank, maybe going to hire over 5,000 new people. I believe
	that number, when we do the calculations and I think when we
	get some history on that, I think it is going to be a much
	bigger number than that.
	But one of the things I am concerned about is, for example,
	the CFTC's chief compliance officer rule requires firms to
	designate a chief compliance officer; establish and
	administrate a complete new set of compliance policies,
	including implementation and compliance with hundreds of pages
	of business conduct rules; prepare an annual report to
	regulators; perform a review of every requirement under the
	Commodity Exchange Act, and your agency's estimate of what this
	would cost the market participants is $13,600.
	Everybody else out there who is about to implement this
	said this is going to cost millions of dollars to comply with
	that. And so one of the things that I think is flawed about
	this and the fact that we are accelerating this process and
	putting these rules out at record levels is we are not doing
	any cost-benefit analysis of these rules.
	And we have underestimated, in many cases, the cost of
	complying with these. So as we talk about Dodd-Frank, in the
	sense that we think this is going to be a wonderful thing for
	transparency and integrity in the markets, the question is,
	what are the markets going to look like when we get through
	making them more transparent and operating with integrity? Are
	they actually going to be incrementally more transparent and is
	there going to be incremental integrity in the markets?
	But also, the cost of achieving that? And what I am very
	concerned about is, long term we are going to be pushing those
	markets to other places. In fact, in the past few weeks, I have
	sat down with some of the people who are participating in these
	markets. These markets are looking for a pressure relief valve
	because they are looking at these kinds of costs. And for our
	smaller participants, this is an extremely big problem.
	And so I guess the question I have to you is, what kind of
	cost-benefit analysis is going on as you are churning these
	regulations out to actually determine the cost of compliance
	and the impact of that cost of compliance to the markets?
	Mr. Gensler. And if I might also answer your earlier
	question, in the letter and in the budget, this agency has
	talked about $308 million, $77 million related directly to
	Dodd-Frank, and about 240 positions directly related to Dodd-
	Frank in the 2012 numbers.
	We as an agency are mandated by our statute, Section 15A,
	on how to do cost-benefit analysis, which was adopted many
	Congresses ago. That has directions, actually rather detailed,
	about taking into consideration the price discovery function,
	the lowering risk, about the integrity of markets to which you
	just referred.
	We also asked, in each of our rules, a question to please
	help us. As commenters come back with the cost, because those
	are important for our consideration before we move to final
	rules, to actually hear from the public.
	I think the figure you might have referred to--though I
	don't know every rule by heart, is within the Paperwork
	Reduction Act piece of it. We asked for comments on those costs
	as well as the cost-benefit analysis costs so that as we go
	forward to consider final rules, we get the public's thoughts
	on that, as well.
	Mr. Neugebauer. So are you doing cost-benefit analysis?
	Mr. Gensler. Oh, absolutely, in compliance with our
	statute.
	Mr. Neugebauer. When in the process are you doing that,
	before you send out the rule or after you get comments from the
	rule?
	Mr. Gensler. It is an ongoing process, but it is pre-
	proposal, it is part of the proposal phase, and then it is
	informed further by commenters as we move to the final rule, as
	well.
	Mr. Neugebauer. Is that cost-benefit analysis made
	available to the people that you are requesting comments for so
	they can record--
	Mr. Gensler. Yes.
	Mr. Neugebauer. --kind of respond to your analysis and--
	Mr. Gensler. Yes. And I don't know if Chairman Schapiro--we
	are under different guidelines, but yes.
	Ms. Schapiro. We publish our cost-benefit analysis. Our
	economists develop data the best they can. They might use
	survey information. They might look to analogous rulemakings to
	see what costs were associated there. We see comments on the
	cost-benefit analysis. And it is, as Chairman Gensler said,
	further informed by the comment process.
	Oftentimes the people who have the best handle on costs are
	going to be the industry charged with complying with the rules
	or implementing the rules. And so we are highly reliant on
	their information.
	Mr. Neugebauer. So is this--
	Chairman Bachus. I thank the chairman. And I will thank the
	gentleman from Texas.
	Mr. Neugebauer. Thank you.
	Chairman Bachus. Mr. Meeks?
	Mr. Meeks. Thank you, Mr. Chairman.
	Mr. Gensler, I just have a couple of quick questions that I
	wanted to ask. I was pleased to see you refer to the
	cooperation with foreign counterparts in your prepared
	testimony. The Dodd-Frank Act, of course, recognizes the limits
	of the U.S. jurisdictional authority by clarifying that
	provisions of Title VII do not apply to activities outside of
	the United States unless they have a direct and significant
	connection with activities in, or effect on commerce of, the
	United States.
	My first question is, what steps have you taken or do you
	propose to take or intend to take to ensure that United States
	firms can compete internationally on a level playing field with
	their foreign competitors and foreign jurisdictions?
	Mr. Gensler. We have had extensive dialogue and discussion
	with regulators around the globe and with the very industry
	that you are referring to, the large international banks. The
	international banks that are not headquartered here, that are
	in Europe and in Asia, have largely come in and say they
	anticipate registering as swap dealers to offer swaps to U.S.
	counterparties.
	So whether you are a European bank or Asian, you want to
	offer swaps to U.S. counterparties. The U.S. banks, of course,
	have considered that they would be registering, sometimes not
	once, but maybe two or three different legal entities would
	register.
	But at the core, we are working with the other regulators
	sharing our drafts with them. Of course, we have a statute that
	has been passed. And the only other country that has one so far
	is Japan. The European Parliament is taking their proposal up
	this spring.
	Mr. Meeks. So there is continuing dialogue, do you think,
	because I am interested especially with the--
	Mr. Gensler. There is continuing dialogue, but there is
	also, through international forums, something that Chairman
	Schapiro I think co-chairs, IOSCO, which is an international
	forum. There are panels that the Federal Reserve sits on. We
	are just a small agency. We are usually the junior member.
	But these international forums have actually pretty aligned
	and consistent rules on clearing, for instance, data
	repositories. And we are also going to be entering in to
	Memorandums of Understanding with at least a half a dozen other
	foreign regulators.
	Mr. Meeks. Let me also--because you also noted in your
	testimony that the CFTC recently proposed position limits on
	several commodities. And I have been told that the experience
	in London shows that it could be difficult to ascertain the
	true position in aggregate of traders.
	Do you believe that sufficient transparency exists for the
	CFTC to effectively enforce such limits? And can you speak on
	the impact of position limits in curbing speculation in
	commodities such as oil?
	Mr. Gensler. I believe with the passage of time, there will
	be such transparency because the statute allows that all the
	information for swaps will come into data repositories. We will
	benefit from that information. And that is why the rule has a
	bit of delayed implementation until some of that information is
	in.
	The CFTC is not a regulator that regulates prices. We are a
	regulator that ensures transparent, open, competitive markets
	that have integrity. And so it is in that context that position
	limits have been used to just ensure, in essence, that there
	are not concentrated positions, particularly in the spot month
	where corners and squeezes in physical commodities can happen.
	Mr. Meeks. I will tell you one concern that I have, how do
	we protect the United States from speculation, especially on
	things like oil occurring outside of the United States, which
	then has a direct impact on us? Could you tell us what we could
	do to try to curb and monitor the risk of speculation occurring
	outside of the United States?
	Mr. Gensler. If I might, speculators have a role in the
	markets. Hedgers and speculators need each other and meet in a
	marketplace. This has been true in our markets even when the
	corn producer or wheat producer wanted to know, how do I hedge
	my crop, come the harvest? There was a speculator on the other
	side. So speculators are part of the commodities markets. They
	are part of the swaps marketplace.
	Position limits authority, which was put in place in the
	1930s, was to guard against burdens that might come from
	excessive speculation. One of those burdens that we know about
	like corners and squeezes, or that the size of the crowd is so
	small that there are only a handful of speculators that might
	have concentrated positions in a marketplace.
	I don't know if that answers your question. The oil market,
	the energy markets are global. The financial markets are
	global. Risk does not know any geographic boundary in today's
	modern, technological, and communications world.
	Mr. Meeks. I am out of time.
	Chairman Bachus. I thank the gentleman.
	Mr. McHenry?
	Mr. McHenry. Thank you, Mr. Chairman. And to follow up on
	my colleague from New York's questions, we have missed having a
	Federal Reserve comment on this question about international
	competition.
	And to that, Mr. Tarullo, looking at the derivatives
	marketplace, do you foresee a major shift in markets other than
	the United States as a possibility?
	Mr. Tarullo. Congressman, I suppose anything is possible.
	But I think--what I think you are hearing today is that there
	are two kinds of processes under way, which actually intersect
	to a considerable degree. The first is a domestic regulatory
	reform exercise driven by statute and implemented by the
	agencies you see in front of you and some others as well. And
	the second is an international process, which pre-existed the
	crisis, but which has been energized and extended because of
	the crisis.
	As I noted in my response to an earlier question, on the
	capital regulatory side we have been able to achieve a
	considerable harmonization of the kinds of requirements that
	would be applied to derivatives as well as to other credit and
	market risk exposures.
	In the payment systems arena, I think there is an awful lot
	of interest among other countries because, frankly, they have
	seen what can happen when you don't have a transparent, well-
	collateralized market functioning in derivatives, or indeed,
	any other set of areas.
	So while I can't sit here today and tell you that I think
	the agencies have collectively gotten the level of agreement,
	much less implementation, they would like to see, my impression
	in this area--and it is only an impression--is that things are
	moving in the right direction.
	I think it is important to note that each of the other
	financial centers that people talk about as growing as the
	emerging market world grows is in a jurisdiction which is a
	member of the Financial Stability Board and the Basel
	Committee. So these people are at the table.
	Mr. McHenry. Thank you.
	Ms. Schapiro, in a Financial Times article today, the Muni
	Enforcement Division Chief is quoted within--from one of your
	SEC employers--employees--is quoted as saying that muni
	disclosures--or the municipal bond market has become, ``a top
	priority of the SEC.'' Can you comment on that?
	Ms. Schapiro. Sure. When we set out to reform how our
	enforcement program worked 2 years ago, one of the goals we
	said was to create specialized units where we could have staff
	focus on particular types of cases become very deep, very
	expert, more efficient in bringing just those kinds of cases.
	And municipal securities was an area we thought was
	particularly important for us to focus upon.
	We have seen, as you have read in the paper and seen in
	some of the cases we have brought, real concern about the
	quality of disclosure on municipal issuers to investors. And we
	don't have the authority at the SEC to dictate or to tell
	municipal issuers the way we can corporate issuers what they
	must disclose.
	We tried to get at that through the intermediaries that buy
	and sell municipal securities. So we will tell broker-dealers,
	you can't buy and sell these securities unless you ensure that
	the municipal issuer is making the following kinds of
	disclosures.
	So that is an indirect tool. It is all we have really with
	respect to the disclosure except for our anti-fraud authority.
	So to the extent that a municipal issuer is misleading in its
	disclosure documents about the state of its pension liabilities
	or something else that is material, we are able to pursue that
	as a matter of anti-fraud.
	Mr. McHenry. Is there a challenge between the government
	accounting standards and the financial accounting standards--
	Ms. Schapiro. There is--
	Mr. McHenry. --a real challenge?
	Ms. Schapiro. --a challenge. We can't dictate what
	accounting standards they use--
	Mr. McHenry. GASB.
	Ms. Schapiro. --either. Many municipalities use GASB. Some
	use FASB and I--there are other alternatives out there. But
	we--so we have a--sometimes have a lack of comparability as a
	result of not having required accounting standards.
	Mr. McHenry. And that lack of comparability it--does that
	pose a challenge in understanding disclosures--
	Ms. Schapiro. It--
	Mr. McHenry. --and enforcement?
	Ms. Schapiro. --it is a challenge for investors, we
	understand. The other problem is the timing of disclosure. We
	can't say that you must report year-end results within 90 days
	or a set period of time. And so some municipalities disclose
	their financial results a year or even more, in some few
	instances, later.
	I will say one of the big improvements in this area has
	been the creation by the MSRB of the EMMA System, which allows
	for a great deal of electronic disclosure. And I think that has
	made life a bit easier for investors.
	Mr. McHenry. Is there more authority that the SEC would
	need to have accurate disclosures?
	Ms. Schapiro. There is authority we would need. We have
	been in the process--although for resource reasons we have had
	to shut it down or pulled in field hearings around the country.
	We did one in San Francisco and one in Washington to collect
	the information about the state of the municipal markets,
	particularly, with respect to disclosure and sales practices,
	accounting, and other issues, so that we could build a really
	strong record for what we think the real issues are, and how we
	might come to Congress and ask for you to help us in solving
	those.
	While we haven't continued the field hearings at this
	point, we are still collecting lots of comments and meeting
	with lots of people who have an interest in this market. And I
	suspect we will come to Congress at some point with some
	proposals.
	Mr. McHenry. Thank you.
	Chairman Bachus. At this time, I will recognize Mr. Lynch.
	But before I do, the witnesses who are on the second panel, if
	you want to be excused for 10 or 15 minutes and just be back at
	12:15, you may want to take a break now.
	Mr. Lynch. Thank you, Mr. Chairman. And again, I thank the
	witnesses. I was reading this morning in one of the reports
	that the notional value of the derivatives market is about $600
	trillion.
	I am also concerned that 97 percent of the U.S. market in
	derivatives outstanding is actually represented by just 5
	commercial banks. They have a very concentrated market here.
	They also have, not surprisingly, 97 percent of the
	clearinghouses owned by just 5 banks.
	I had an amendment in the Dodd-Frank Bill that was sort of
	watered down in the Senate regarding the governance of these
	clearinghouses, and the ownership of these clearinghouses. And
	I know that we have a proposed rule that is out there.
	But there are some real conflict-of-interest risks out
	there, concerns. One is that these clearinghouses could
	operate--being operated by these five banks, basically, could
	operate for their own benefit.
	They could operate as cartels. They could restrict the
	products that are cleared, who gets to play. And probably the
	most dangerous risk is that we are going to allow these
	clearinghouses to set their own risk management standards. We
	are going to allow them to establish their own collateral
	requirements.
	And while we have taken that risk and dealt with it on the
	bank's side, we are going to allow in these clearinghouses this
	small group of individuals to establish how much collateral
	they are going to be required to put up.
	And, it is just ironic that we are seeing a huge shift in
	risk from the banks that are now being dealt with. But we have
	a gap here, in my opinion, on the clearinghouse side.
	Chairman Schapiro, I know you have been doing great work on
	this, as all of you have. But where are we on this proposed
	rule? And do you believe that we are heading in the right
	direction on this?
	Ms. Schapiro. Thank you, Congressman. I think we obviously
	have taken very seriously the requirement that we seek to
	mitigate conflicts of interest in both the clearing agencies
	and the swap execution facilities. And we have identified the
	same risks you have.
	The risks that too few products will actually clear, the
	risk that a small group of dealers if they are in control might
	limit access by other participants to the marketplace. And the
	concern that they could lower risk management controls to
	reduce their collateral requirements.
	So what the SEC did was to propose two alternatives for how
	to deal with ownership in voting within clearing agencies. And
	we have set some numerical thresholds. One alternative would
	say that no single participant can vote more than 20 percent of
	the voting interest.
	And all the clearing agency participants collectively would
	have an aggregate cap of 40 percent. And then, we would have
	some requirements on the board of directors and on the
	nominating committee to have independent directors on those.
	And the other alternative was to say no individual
	participant could have more than 5 percent of the voting
	interest. There would be no aggregate cap. But the board would
	have to be majority independent and the nominating committee
	solely independent.
	What you can see by that is we are trying a couple of
	different triggers and combinations to see if we can try to
	mitigate the conflicts of interest that exist. And at the same
	time, the access rules that we will ultimately propose that
	will provide for as maximum access to clearing agencies as
	possible is yet a third way to help mitigate the conflicts.
	I can tell you that almost nobody liked our proposals. We
	got lots and lots of--
	Mr. Lynch. That is a good sign.
	Ms. Schapiro. I am not sure. Some people thought that they
	weren't tough enough and some people thought they--
	Mr. Lynch. Oh, okay.
	Ms. Schapiro. --were way too tough. And we have to balance
	this with the need to have entities willing to invest in these
	entities so that we can have robust and strong clearing
	agencies. So where we are in short is that we are working
	through many, many comment letters and continuing to refine our
	approach and continuing to talk and meet with people. And I
	couldn't honestly tell you right now where we will land
	Mr. Lynch. Okay. Thank you.
	Mr. Gensler?
	Mr. Gensler. I would associate my remarks with Chairman
	Schapiro. But I think on the point of access, Congress said
	that clearinghouses have to have that open access, meaning
	membership has to be broadened out.
	The futures marketplace and the securities marketplace have
	pretty open access to clearinghouses in each of the spaces. The
	swaps marketplace has been more concentrated. The Congressman
	is absolutely correct on that.
	And so we proposed some rules in December to try to open up
	that membership consistent with what Congress said--
	nondiscriminatory access. These access provisions are critical.
	We want the public comment, but I suspect there will be some
	commenters opposed and some for.
	Mr. Lynch. If I could suggest, rather than just having
	independent directors who might be agnostic, I think what might
	work in that context is actually having competing commercial
	interests on those boards, not necessarily adversarial but
	having competing interests. That will work as a regulatory
	force in sort of balancing out the operation of these
	clearinghouses. I think that is what we have to get at.
	Ms. Schapiro. I think that is an excellent point and we
	actually have fair representation requirements in other
	contexts that would, for example, have institutional investors
	be represented on the Board. And so that is something we are
	very interested in.
	Chairman Bachus. Thank you. And I think we have--
	Mr. Lynch. Thank you.
	Chairman Bachus. --gone over a quite a bit, so thank you.
	Mr. Lynch. Thank you, Mr. Chairman.
	Chairman Bachus. What we will do is we will take two more
	on each side, in fact it, would it be okay if we took three
	more on each side? Would that be okay with the panelists? And
	so, we will take three more on each side.
	Mr. Luetkemeyer?
	Mr. Luetkemeyer. Thank you, Mr. Chairman.
	Mr. Tarullo, in your testimony you say that a much
	discussed part of the Act is the requirement that banks push
	portions of their swap activity into affiliates or face
	restrictions to their access at the discount window of deposit
	insurance.
	I guess my question is, what percentage of--I think the
	gentleman, Mr. Lynch, a minute ago made a comment that 97
	percent of the trades are done by 5 percent or 5 banks. Is that
	basically correct?
	Mr. Tarullo. I think that may be a little bit high. I would
	say it depends on the market. In the commodity swaps market, it
	is far more diverse, with many more participants.
	Mr. Luetkemeyer. Okay.
	Mr. Tarullo. In the interest rate market, it is a pretty
	common rate.
	Mr. Luetkemeyer. Okay, the point I want to get out though
	is the risk that the banks have with these entities that are
	under their corporate umbrella that would be exposed to FDIC
	insurance.
	I think it is imperative that we get those out so we
	minimize exposure not only to the banks but to the taxpayers,
	and I am wondering where you are at with that and how your
	rulemaking is going on there.
	Mr. Tarullo. The rulemaking is a joint rulemaking, of
	course, by all the regulatory agencies. And we don't have a
	proposed rule on that out yet. I would be happy to get back to
	you with the status of where we will be.
	Mr. Luetkemeyer. Okay. I think that is very important
	because I think otherwise we are getting the taxpayer on the
	hook again for some risky behavior that was the cause of the
	problem. And we still have them there rather than getting it
	out of the depositor's pocket.
	Mr. Tarullo. And Congressman, sorry, but as one of your
	colleagues was asking earlier about the coordination of the
	rulemaking, of course this is somewhat related to the Volcker
	Rule rulemaking as well because you have the same set of issues
	of activities being moved out of organizations.
	Mr. Luetkemeyer. Okay, along that same line though with
	other Federal entities that have branches here in the United
	States and then have access to the Fed window, how do you
	minimize our exposure to them through this rulemaking
	authority?
	Mr. Tarullo. Actually, Congressman, as the statute is
	drafted, it appears as though the exemption that is provided
	for insured depository institutions for some kinds of
	derivatives activities--government securities and agencies and
	high quality bonds--would not be applicable to domestic
	branches of foreign banking institutions. So actually, there is
	an asymmetry there, which has been brought to our attention by
	foreign governments.
	Mr. Luetkemeyer. Okay. In your own testimony, you say that
	they may require foreign firms to recognize their existing U.S.
	derivatives activity to a greater extent than U.S. firms.
	Mr. Tarullo. Right, that it might require them to
	restructure in order--
	Mr. Luetkemeyer. Right.
	Mr. Tarullo. --to have it outside of any--
	Mr. Luetkemeyer. Okay.
	Mr. Tarullo. --insured depository institution.
	Mr. Luetkemeyer. I guess the question is, how concerned are
	you with the ability of foreign entities to be able to access
	our Fed window and have our taxpayer dollars involved?
	Mr. Tarullo. Congressman, all borrowing at the discount
	window is fully collateralized with haircuts. And that applies
	regardless of who is accessing the discount window. Also, of
	course, discount window access is contingent upon supervision,
	which ensures that we or our colleagues in the other banking
	agencies have adequate knowledge of the liquidity and capital
	position of the institution accessing the discount window.
	So it is only when there is supervision here and when we
	have full collateralization with appropriate haircuts that
	discount window lending is possible.
	Mr. Luetkemeyer. Are you looking to revise those rules and
	the circumstances around them right now with what is going on
	in Europe?
	Mr. Tarullo. Not provoked by anything going on in Europe,
	pardon me. We are of course always looking at the appropriate
	haircut levels and whether there is a need to refine our
	discount window access features. But as I say, any
	accessibility is going to be based upon an entity present here
	in the United States which is supervised here in the United
	States.
	Mr. Luetkemeyer. Okay, thank you. My time is about up here.
	I just have a really quick question for basically all of you.
	One of the things that is of concern to everybody here today is
	end users. You all recognize that they were not a part of
	systemic risk of the problems that were in 2008? Do you--is
	that an agreed-to statement or is that not?
	Mr. Gensler. They didn't cause the problems. They
	ultimately were--
	Mr. Luetkemeyer. Were caught up in the problem?
	Mr. Gensler. They got caught up into it.
	Mr. Luetkemeyer. Okay.
	Mr. Gensler. --and part of that is to make sure they are
	not--
	Mr. Luetkemeyer. Okay, I am running of time. I understand
	that, but by the same token, if they are not part of the
	problem, you raked them into the problem. And yes, they are--by
	doing this you now--if we don't go with the letters of intent
	from Senator Dodd and Senator Lincoln about what was going on
	here with regards to not imposing some sort of other barriers
	to end users, we may get there.
	And I think this should be a very narrowly focused ruling
	and regulatory mandate from you and not impose other additional
	risks or concerns onto the end user.
	Mr. Gensler. I am agreeing with you that the CFTC does not
	intend to have a requirement of margin with these non-financial
	end users.
	Mr. Luetkemeyer. Okay.
	Mr. Gensler. But they did get caught up in the problem.
	Mr. Luetkemeyer. Chairman Schapiro, I assume you agree with
	that?
	Ms. Schapiro. We haven't formulated any proposals in this
	area yet at the SEC, but I think it is safe to say we are
	extremely focused on this concern that has been raised multiple
	times this morning. The end users likely to be using the very
	narrow category of swaps that we regulate are going to be
	financial institutions--
	Mr. Luetkemeyer. Okay, my comment is they are not the
	problem, so don't make them the problem--
	Ms. Schapiro. We are not going to make them the problem.
	Mr. Luetkemeyer. --by imposing rules and regulations that
	they don't need, okay? Thank you.
	Thank you, Mr. Chairman.
	Chairman Bachus. Thank you.
	Mr. Miller.
	Mr. Miller of North Carolina. Thank you, Mr. Chairman.
	I have a question or two about the ``take my ball and go
	home'' argument that if the regulations here are unpalatable
	here in the United States or for that matter even if we
	coordinate with European systems and have similar regulations
	that some other countries might become host to derivatives
	trading, which reminded me of how reinsurance is regulated.
	Reinsurance companies that are in actual markets are beyond
	the reach of State regulators, but State regulators get at
	those markets by their requirements on their insured, the
	company's insurance companies domesticated in their State.
	If they want to get credit for solvency regulation purposes
	for reinsurance contracts, the reinsurance companies have to
	meet certain requirements, basically that they be able to pay
	on the reinsurance contracts.
	Governor Tarullo, how are derivatives, credit default swaps
	in particular but derivatives generally, treated for purposes
	of safety and soundness regulation now?
	Mr. Tarullo. Right now, Congressman, they are subject to
	two kinds of capital requirements. First, a trading or market
	risk that is the value of the derivatives goes up and down
	regardless of who the counterparties are.
	Mr. Miller of North Carolina. Right.
	Mr. Tarullo. And second, with respect to counterparty or
	credit risk, that is if I have a derivatives transaction with
	you, I rely on your creditworthiness to be able to perform. But
	we have both kinds of capital regulation in place.
	Mr. Miller of North Carolina. Okay. So if American
	financial institutions purchased derivatives, credit default
	swaps or other derivatives from a market that was neither
	transparent nor had collateral requirements, you would be in a
	position to deny those contracts credit as an asset and perhaps
	still consider them as a liability?
	Mr. Tarullo. Or certainly we are in a position to require
	appropriate capital set aside depending on the identity of the
	counterparty. That is absolutely true--
	Mr. Miller of North Carolina. Okay. Well--
	Mr. Tarullo. --so long as we regulate the U.S.
	institutions.
	Mr. Miller of North Carolina. The reinsurance regulation
	through States, through the insurance companies proves to be
	fairly effective regulation. Do you have any doubt that you
	will be able to avoid circumventing all U.S. laws by your
	regulation of safety and soundness of financial institutions?
	Mr. Tarullo. I think two things. One, with respect to
	regulated U.S. financial institutions, we are in a position to
	understand what they are doing and to require them to have
	appropriate safeguards in place depending on their
	counterparties. That is not to say with respect to all
	derivatives activity that we would be in a position to ensure
	that it was being conducted in a safe and sound fashion.
	But the CFTC and the SEC have another regulatory scope and
	then, as we have all said, we are in discussions with other
	important financial centers to make sure that they, too, are
	putting some of these things in place. If I could add one
	thing, Congressman, there is a degree to which counterparties
	are attracted to markets that are well supervised--
	Mr. Miller of North Carolina. Right.
	Mr. Tarullo. --precisely because they give assurance that
	these trades will be completed in a timely fashion.
	I think people have always understood that the success and
	liquidity of our securities markets in the United States was in
	no small part due to the fact that the New York Stock Exchange
	on its own imposed a lot of requirements on transparency.
	Mr. Miller of North Carolina. Derivatives are frequently
	justified as risk management, but according to witnesses who
	sat at that table in the past, only about 10 percent of
	derivatives contracts involve a party that actually has any
	interest in the underlying risk, has any risk to manage.
	And there have been stories, rumors at least that in many
	cases companies have bought large credit default swap positions
	for when they were in a position to cause default and have done
	that.
	An example, again, a rumor that is denied by Morgan Stanley
	was that they were bondholders for one of the largest banks in
	Kazakhstan, which was taken over by the government of
	Kazakhstan. And the bond agreements provided that the
	bondholders could require that the bonds be paid immediately.
	All the bondholders initially said, ``Don't worry about
	that. If you are making the payments, that is fine.'' And then
	Morgan Stanley changed their mind and demanded immediate
	payment, which the bank could not do, causing a default.
	The rumors were that Morgan Stanley had bought large credit
	default swap positions and benefited greatly from the seeming--
	what appeared to be the illogical conduct of precipitating
	default of a performing debt.
	There are other examples of--where at least arguments that
	Goldman Sachs was in a position to know things about AIG's
	solvency that their counterparties did not know. Should there
	be--what protections are there now for that kind of insider--
	what might be considered insider trading in the securities
	arena with respect to credit default swaps?
	Ms. Schapiro. The credit default--we have actually
	prosecuted one case with respect to credit default swaps being
	invoked in insider trading. I will say the problem that you are
	talking about is really what we call the anti-creditor problem
	where you have more of an incentive to see the institution
	against whom you are holding insurance fail than you do as a
	bondholder even to work out their problems in an orderly way.
	And it is a distortion certainly in the marketplace and it
	is an area that we have been quite focused on as we look at
	issues around things like empty voting in the proxy context and
	more broadly at the reporting and other requirements.
	Chairman Bachus. Thank you, Mr. Miller.
	Mr. Posey?
	Mr. Posey. Thank you, Mr. Chairman.
	I can't help but think the best fix for future crises is to
	have some accountability for the first crisis, for the cause of
	the first crisis. And I believe you know this is coming,
	Chairman Schapiro, what kind of accountability have we had at
	the SEC with the people who helped cause the last crisis to
	date?
	Ms. Schapiro. Congressman, I think you know that we have
	worked tirelessly over the last 2 years to try to reform the
	Securities and Exchange Commission and to make it an agency
	that is worthy of the public's--
	Mr. Posey. I have a limited amount of time. Has anybody had
	their wrist slapped yet?
	Ms. Schapiro. I understand. As you also know, most of the
	employees were--
	Mr. Posey. Wait, please, just--has anyone had their wrist
	slapped yet? Has anyone been reprimanded? I know nobody has
	been fired or put in jail but have we blamed anybody? Have we
	actually told anybody they are responsible for doing wrong and
	slapped their wrists yet?
	Ms. Schapiro. Most of the employees involved are gone. For
	the remaining employees involved with Madoff against--
	Mr. Posey. That--listen--
	Ms. Schapiro. --whom discipline was recommended, we are--
	Mr. Posey. --that is like saying--
	Ms. Schapiro. Completing--
	Mr. Posey. --a burglar left the neighborhood to burgle
	another neighborhood.
	Chairman Bachus. All right. Mr. Posey. Mr. Posey, if you
	could let the chairman answer the question and then--
	Mr. Posey. She is not answering it, Mr. Chairman.
	Ms. Schapiro. I am. We are concluding the appeals process
	for the final stages of those employees against whom discipline
	was recommended. That should be completed shortly.
	Mr. Posey. Thank you. So the answer is just no.
	Ms. Schapiro. The answer is the disciplinary process, which
	is laid out in Federal law and is one which I am beholden to
	follow is winding its way--
	Mr. Posey. I know there is some kind of unwritten rule
	about giving a yes or no answer here but it would have saved a
	whole lot of time. Thank you.
	Mr. Gensler, how comparable do you think the community--
	Chairman Bachus. Let me say this to all the members. I
	think that the witnesses are not on trial. And I think they are
	due a certain amount of decorum and respect. I know that these
	are intense questions or they are emotional questions, but I do
	believe the Chairman was trying to answer the question.
	And I am not talking to any one member. I am just saying I
	think it is important that this body treat the witnesses with
	the dignity and respect that they are due. So I appreciate it.
	Mr. Scott?
	Mr. Scott. Thank you very much, Mr. Chairman.
	Mr. Gensler, at last week's agriculture--
	Chairman Bachus. Was he through? Oh I am sorry. Mr. Posey,
	I apologize. You were not through. You have additional time.
	Mr. Posey. Mr. Gensler, do you think the Commodity Futures
	Trading Commission was culpable in any way in the cause of the
	last crisis?
	Mr. Gensler. I think the entire regulatory system failed
	the American public, so I would have to include all of us
	regulators, in a sense and yes, in the broadest sense. I think
	the futures marketplace worked very well--so the futures
	marketplace did not fail.
	Mr. Posey. I appreciate the ``yes'' answer, thank you. Has
	there been any disciplinary action taken against any of the
	employees who were culpable in your agency?
	Mr. Gensler. No.
	Mr. Posey. Thank you for the direct answer.
	Governor?
	Mr. Tarullo. I agree with Chairman Gensler that there were
	widespread problems in the regulatory structure and then in the
	implementation of the regulatory structure by the regulatory
	institutions.
	What the Federal Reserve has tried to do is to determine
	how, with the changes in the law, and with what was learned
	from the last crisis, we can have more effective supervision
	going forward. So there have been lots of changes, both at the
	Board and at Reserve Banks in terms of reordering supervision,
	who is in charge, which people we have working on which
	matters.
	There haven't been any disciplinary proceedings. I wasn't
	at the Board at the run-up to the crisis, but Congressman, I am
	not aware of misconduct of any sort. What I am aware of is the
	collective failure of our regulatory agencies, including the
	Fed, to determine what was needed and to have the resolve to go
	and do it.
	Mr. Posey. Thank you. Does effective regulation involve
	government stopping businesses from making bad decisions? Just
	a quick yes or no from each of you if possible.
	Ms. Schapiro. ``No'', unless it is going to hurt investors.
	Mr. Posey. Okay.
	Mr. Gensler. ``No'', unless it is going to break the law.
	Mr. Tarullo. It is ``no'', unless it puts Federal taxpayer
	funds or the safety and soundness of the financial system at
	risk.
	Mr. Posey. Okay. And then thirdly, I think we all know, but
	I would just like to get your answer on this. Is it possible to
	stop somebody from failing and still allow them to succeed in
	the free enterprise system, to guarantee nobody fails?
	Ms. Schapiro. No. We should not guarantee that nobody
	fails. We should allow institutions to fail.
	Mr. Gensler. I think there has to be a freedom to fail. I
	think there will be banks that fail in the future as there have
	been for centuries in the past.
	Mr. Tarullo. I agree.
	Mr. Posey. Thank you very much.
	Thank you, Mr. Chairman. I yield back.
	Chairman Bachus. I thank the gentleman.
	Governor Tarullo, I think, pointed out that he was not at
	the Board during the financial meltdown or the events leading
	up to it and that is also true of Chairman Gensler--
	Mr. Posey. Me?
	Chairman Bachus. No, I am not talking about--Bill, there is
	nothing--I am not talking about you. I promise this has nothing
	to do with your remarks. I was just telling the new members
	that Chairman Schapiro was not there, and Chairman Gensler was
	not there, and they inherited quite a mess. So Mr.--who is
	that--Mr. Green?
	Mr. Scott. Scott.
	Chairman Bachus. Mr. Scott, I am sorry.
	Mr. Scott. Thank you, Mr. Chairman. Mr. Gensler, last week
	I asked you about this concept of margin separation, if you
	recall the Agriculture Committee meeting, and how it could
	potentially raise the cost of clearing with only a small amount
	of management risk management benefits.
	I still feel it could be very expensive for market
	participation if directed towards a problem that does not seem
	to exist since we are not requiring the same customer
	protection in future clearinghouses which have never failed.
	And I know you answered at that time that it was only
	preliminary, which led me to believe you are reviewing that and
	taking a look at it.
	So I want to explore it a little bit further with you with
	these questions. First of all, can you please tell me what the
	CFTC's rationale for using the advanced notice of proposal
	rulemaking was? Did someone specifically, did someone explore
	this issue and ask you for this particularly, because it was
	not included in the Dodd-Frank Bill?
	Mr. Gensler. The Dodd-Frank Bill says that for swaps that
	brought into clearing, the funds that the people put up shall
	not be comingled. And then it goes on to say, except for
	convenience. We had a roundtable to answer your question.
	We had a roundtable on this whole topic in the fall and
	numerous parties from the asset management side who have had
	segregated collateral accounts would like to continue to have
	that. I would say some from the clearing community and dealing
	community did not.
	And they all raised very thoughtful considerations. So we
	thought we would put out what is called an advanced notice of
	proposed rulemaking, ask the public, and we are considering
	this before even making a proposal, we are considering those
	comments.
	Mr. Scott. Would you, could you characterize for us the
	general feeling within the industry itself? Where are there
	disagreements? Does the buy side agree with their counterparts
	on the selling side, for example?
	Mr. Gensler. No, I would say there is a wide variety of
	views. Some on what is called the buy side or asset managers
	currently have segregated accounts, and they want to continue
	to have that. In the clearing community, you are absolutely
	correct.
	They have been accustomed for decades, our agency has said
	for convenience you can comingle even though the statute said
	not to except for convenience. That started in the 1930s.
	Convenience in the 1930s was different than convenience in the
	21st Century.
	So we are trying to sort that through. We may end up
	exactly as it is in the futures world. We may end up proposing
	some alternatives. We have been very well-informed. There is a
	range of views on that.
	Mr. Scott. Let us take the buy side. Are they of one mind?
	Is there disagreement internally within the buy side?
	Mr. Gensler. I would say that there are a variety of views
	even on the buy side.
	Mr. Scott. Have the clearinghouses weighed in with you on
	this issue yet?
	Mr. Gensler. Yes, and their comments are all on our Web
	site in a public file.
	Mr. Scott. Let me ask you one other question, Mr. Gensler.
	What would you say--would you say that the CFTC is effectively
	managing the resources that it has?
	Mr. Gensler. We are doing--I think the team at the CFTC is
	remarkable, and yes, we are not perfect. There are always some
	things that are going to go on and surprise you on any given
	day of the week. But it is a remarkably talented group of
	individuals who are trying to protect the public and ensure
	transparent markets.
	Mr. Scott. And in the budget the President just released,
	you and the SEC are two of the agencies that--two of the very
	few that have received a substantial increase in your budget.
	How do you characterize this increase? Is this efficient?
	Mr. Gensler. It is a good investment for the American
	public. We have been asked to take on a market that is about 7
	times the market we currently oversee, and it is far more
	complicated. It has fewer transactions, but the swaps market
	means more to all these end users than most people even
	understand. So I think it is a good investment of taxpayer
	money.
	Mr. Scott. And then I would like to get on record your
	response to, if you could provide some insight very briefly on
	how the CFTC is adhering to Dodd-Frank requirements.
	Mr. Gensler. Dodd-Frank requirements said to consult with
	other agencies, to consult broadly with the public and
	international. That is what we were doing. We have had over 500
	meetings. We put those on our Web site. We have had close to
	4,000 comments that have come in, all on our Web site of
	course.
	And we are complying with the statute. We don't want to
	overread the law. We take the comments here very seriously and
	we don't want to underread the law obviously as well.
	Mr. Scott. Thank you, Mr. Gensler.
	Thank you, Mr. Chairman.
	Mr. Garrett. [presiding] And I thank the gentleman. And
	just to let the panel know, and everyone else in the room know
	as well, we will have two more members questioning, Mr. Hurt
	and then Mr. Green, and then this panel will be dismissed.
	Mr. Hurt. Thank you, Mr. Chairman. And thank you all for
	being here. I just had really one question, but I was hoping
	that each of you could answer it. Considering that small banks
	are subject to the new clearing requirements unless the SEC and
	the CFTC use their authority to treat them as end users, I was
	wondering if you could comment on whether they should be
	included as end users in light of the high costs of compliance
	against the small percentage of swaps that they make up.
	But I was wondering if you could comment on whether they
	should be and whether they will be? Thank you.
	Mr. Gensler. Maybe I will address it first, because banks
	generally are in the interest rate space and currency space
	that the CFTC oversees. We put out a series of questions to get
	information from the public.
	We have been working closely with the Federal Reserve, the
	FDIC, and also the Farm Credit Administration and the National
	Credit Administration because those institutions are all
	involved. And so, we have not put a proposal out.
	These small banks, as some of the members have said, were
	not at the heart of the systemic crisis. But they are
	interconnected and so the freedom to fail of a large bank
	sometimes will be dependent upon if they would bring down the
	community banking system.
	You would want to let the large bank fail and not bring
	down the community banking system. So that is where the risk
	can propagate. But we are looking for the public comment to see
	if Congress has directed to consider this possible exemption.
	Ms. Schapiro. Small banks are not likely to be heavy users
	of part of the swaps markets. The SEC will regulate the
	security-based swaps. But we did propose as an alternative a
	small bank exemption.
	Mr. Hurt. But--just to be clear, it sounds like that is
	something the SEC has proposed but the CFTC is not inclined--
	Mr. Gensler. No, in fact what we did was we--
	Mr. Hurt. --to support?
	Mr. Gensler. I wouldn't want to leave you with that
	impression. It is really we are in the midst of a process of
	getting economic data and public comment on how to move
	forward. So we didn't make a formal proposal. We said, give us
	help on this from the public. We are doing the same with the
	Federal Reserve and all of the various regulators.
	Mr. Tarullo. Congressman, you perhaps won't be surprised to
	hear that our position before, during and after the legislation
	has been we do think that there is good reason for smaller bank
	exemption precisely because we want them to be able to do the
	business of banking. They are not swaps dealers, obviously.
	They would be regulated if they were. But of course, it is not
	committed to us by Congress to make that decision. We are just
	a commenter.
	Mr. Hurt. Thank you very much.
	Thank you, Mr. Chairman.
	Mr. Garrett. Thank you. And the gentleman yields back?
	Mr. Green?
	Mr. Green. Thank you, Mr. Chairman. I thank the ranking
	member and the chairman for allowing the time, and I will be
	sharing it with Mr. Perlmutter. I will move as expeditiously as
	possible. Let me ask you, Ms. Schapiro, is it true that if the
	projected budget cuts take place you will have to cut
	personnel?
	Ms. Schapiro. It is not exactly clear yet how we will
	balance the impact on personnel spending with the impact on our
	technology spending. We are a larger agency than the CFTC so we
	have a little bit more flexibility as between those two major
	buckets of our expenditures, and we haven't worked those issues
	out yet.
	Mr. Green. If you have to cut your technology, does this
	mean that you will not be able to upgrade your systems?
	Ms. Schapiro. I think it would be virtually devastating for
	the SEC to have to cut its technology budget. When I arrived 2
	years ago, I discovered that we are many, many years behind our
	markets in our use of technology, sophistication of our
	technology, our capabilities with respect to technology. We
	have made a concerted effort over the last 2 years to try to
	improve that situation and putting the brakes on it is painful.
	Mr. Green. And I will quickly add this, currently you have
	about 3,000--3,800 employees, correct?
	Ms. Schapiro. That is right.
	Mr. Green. And you oversee approximately 35,000 entities?
	Ms. Schapiro. Yes, if you count public companies for whom
	we review the public disclosure, as well as 11,000 investment
	advisors and 5,000 broker-dealers and exchanges and electronic
	trading--electronic communication networks and transfer agents
	and clearing agencies, we get pretty close to that number.
	Mr. Green. And also those advisors that you mentioned. They
	manage about $33 trillion?
	Ms. Schapiro. Yes.
	Mr. Green. So you have a pretty big job.
	Ms. Schapiro. We do. We have about 12 examiners for every
	trillion dollars of assets under management compared to about
	19 examiners just a few years ago.
	Mr. Green. And cutting you would--if you had to cut
	personnel, would it hurt your ability to police?
	Ms. Schapiro. I believe it would. That is not to say we
	can't continue to find, and we have a Tiger Team working on the
	efficiencies and savings because there undoubtedly are some.
	Mr. Green. And may I add--
	Ms. Schapiro. Yes, I would agree.
	Mr. Green. --I admire you for being as delicate as you are
	because I understand that the integrity of the system hinges on
	your every word. So I appreciate the delicate fashion in which
	you have handled this. But I, on the other hand, don't have to
	be quite as delicate.
	And I would hope that we would not take the cops off the
	beat at the time that we need them greatly. We have seen what
	can happen when markets have a sharp downturn and when
	integrity is lost. So my hope is that we won't do this. Now, I
	have to yield to Mr. Perlmutter, the balance of my time.
	Ms. Schapiro. I agree with you though. Investor confidence
	is absolutely critical to our economy, and the cop on the beat
	is important to that equation.
	Mr. Green. Thank you.
	Mr. Garrett. We appreciate those remarks and we will move--
	Mr. Perlmutter. Thank you. I thank the Chair. But I found
	another microphone, and I just want to follow up on what Mr.
	Green just had to say.
	First, let me just put something to bed, Mr. Gensler,
	please. On the end user derivatives, hedging for the future by
	somebody like Coors that wants to buy barley next summer,
	because they have a business that they have to conduct from
	year to year. That is not where you are not talking about
	putting margins on that, are you?
	Mr. Gensler. Absolutely correct. We are not talking about
	putting margins on them. And barley swaps would be allowed
	under a proposed agricultural swap proposal we put out.
	Mr. Perlmutter. But I mean just generally, end users
	hedging for products that they will need as part of their
	business are not part of the margin requirement that you are
	considering?
	Mr. Gensler. We have yet to propose that, but that is
	correct for non-financial end users.
	Mr. Perlmutter. Okay. Good. And let me just get back to the
	basics, though. The basics and what I am bothered about by
	particular questions of my Republican colleagues is that there
	seems to be a mass case of amnesia, that 2 years ago, 2\1/2\
	years ago under the Bush Aministration, the stock market and
	every financial market crashed terribly, multiplied by
	derivatives, financial generally in nature.
	And my question to the entire panel is based on what
	happened when so many people lost their jobs, so many people
	lost their pensions, so many people lost wealth all across this
	country, do we need people in positions to regulate Wall Street
	and the financial transactions that take place there? And will
	the budgets that have been proposed by the Republicans cut into
	your ability to do that?
	Mr. Gensler. Yes, we need people. We are a good investment.
	We are only 680 people, to use arithmetic, that oversees the
	futures market. It is about $60 billion of futures per person.
	But swaps, we will have a half a trillion dollars of swaps per
	person. The budget as proposed--
	Mr. Perlmutter. Half a trillion per person?
	Mr. Gensler. Per person. We think we need more people. And
	we need more technology.
	Mr. Perlmutter. I think we can end on that. I thank you.
	And I yield back to the chairman.
	Mr. Garrett. And I thank the gentleman for yielding back.
	And I thank the gentleman for reminding us of the Bush
	Administration, as well.
	Mr. Perlmutter. I didn't want you to feel left out.
	Mr. Garrett. Without this term. And I would like to thank
	all the members of the panel and also for all the staff that
	you bring with you to these meetings, as well.
	Ms. Waters. And Mr. Chairman, may I have a unanimous
	consent request? I would like to have unanimous consent to
	enter into the record a story from the New York Times that
	appeared last night which notes that some economists who were
	listed as advisors on the Business Roundtable study that I
	noted in my questioning, have requested that their names be
	removed from the study?
	Mr. Garrett. Without objection, it is so ordered.
	Ms. Waters. Thank you.
	Mr. Garrett. And again, I thank the panel. And the Chair
	also notes that some members may have additional questions for
	this panel, which they may wish to submit in writing. So
	without objection, the hearing record will remain open for 30
	days for members to submit written questions to these witnesses
	and to place their responses in the record.
	And as soon as this panel makes their way out, we will be
	looking forward to our next panel.
	I thank the members of the panel for their patience, but
	more importantly, for their testimony that we are about to
	receive. So let me begin. And I will be brief, as we run
	through panel two. I think it is set up in the same order that
	I have here, from left to right, my left to right: Mr. Craig
	Reiners, director of commodity risk management, MillerCoors, on
	behalf of the Coalition of Derivative End Users; Mr. Donald F.
	Donahue, chairman and chief executive officer of the Depository
	Trust & Clearing Corporation, the DTCC; Mr. Terry Duffy,
	executive chairman, CME Group; Mr. Don Thompson, managing
	director and associate general counsel, JPMorgan Chase, on
	behalf of the Securities Industry and Financial Markets
	Association, SIFMA; Mr. James Cawley, chief executive officer,
	Javelin, on behalf of the Swaps and Derivative Market
	Association, SDMA; and Mr. Chris Giancarlo, executive vice
	president, corporate development, GFI Group, Inc. And I thank
	the panel for being with us today.
	At this time, before I proceed, I will turn to Mr. Dold
	from Illinois for an introduction.
	Mr. Dold. Thank you, Mr. Chairman. I just wanted to take
	this opportunity to introduce one of the panelists to my
	colleagues. Coming from the Chicagoland area, having worked in
	the Chicago Mercantile Exchange early on in college, I wanted
	to take this opportunity to introduce Chairman Duffy, who has
	been a CME member since 1981.
	He started out as somebody on the floor, at the bottom, and
	has worked his way up to be the top of the chain, the food
	chain, if you will, and he certainly represents a number of
	people. He was one of the chief architects in 2007 of the
	merger between the Chicago Board of Trade and the Chicago
	Mercantile Exchange, which is now the world's leading and most
	diverse derivatives marketplace.
	He also, at the request of President Bush, served on the
	National Saver Summit on retirement savings, and is a member of
	the Federal Retirement Thrift Investment Board. He is widely
	recognized as a leader and expert in his field. He has
	testified numerous times before Congress; I don't know if that
	is a good thing or a bad thing. But we certainly appreciate
	your time today, as we do all the panelists. And so, we thank
	you very much and I just wanted to give a little background for
	my colleagues.
	Mr. Garrett. And I appreciate that. We will now turn to the
	panel. And I guess one of the most interesting aspects of the
	entire panel that was already referenced earlier today, and
	that is the price of beer, okay, going forward.
	Mr. Reiners, 5 minutes.

	STATEMENT OF CRAIG REINERS, DIRECTOR OF RISK MANAGEMENT,
	MILLERCOORS LLC, ON BEHALF OF THE COALITION FOR DERIVATIVES
	END-USERS

	Mr. Reiners. Good afternoon, Mr. Chairman, and members of
	the committee. My name is Craig Reiners. I am a beer guy from
	Milwaukee. My team manages the commodity price risk for
	MillerCoors. I am also testifying on behalf of the Coalition
	for Derivatives End Users. I am very pleased to have this
	opportunity to offer perspectives on rulemaking relating to the
	Dodd-Frank derivatives title.
	MillerCoors operates breweries in California, Ohio, North
	Carolina, Texas, Georgia, Virginia, Colorado, and Wisconsin, as
	well as the Leinenkugel's Craft Brewery and two microbreweries.
	Last year, we shipped 67 million barrels and sales reached $7.6
	billion.
	Our 9,000 employees share a vision to create America's best
	beer company by driving profitable industry growth. MillerCoors
	insists on building its brands the right way through quality,
	responsible marketing, environmental stewardship, and community
	involvement.
	Rather than read verbatim from my submitted statement,
	allow me to highlight our key six messages. Number one, we
	fully support market transparency. Number two, as an end user,
	our use of derivatives is strictly used to manage price
	volatility intrinsic to physical commodities. Number three, our
	Board-approved commodity risk management policy strictly
	prohibits speculation.
	Number four, we support a broad end user exemption. Number
	five, we urge regulators to avoid creating unnecessary trading
	requirements with the unintended consequences of forcing
	companies to either retain more risk or seek alternatives
	offshore.
	And finally, number six, we urge caution relative to a
	compressed rulemaking timeline, which may not allow market
	participants the opportunity to provide valuable feedback.
	Now, to a bit more clarification. We support this
	committee's efforts to ensure derivatives markets operate
	efficiently and are well-regulated. We agree that proper
	regulation should reduce systemic risk and increase
	transparency in the over-the-counter markets. At the same time,
	the prudent risk of derivatives by end user companies such as
	MillerCoors does not generate risk or instability in the
	financial marketplace and played no role in the financial
	crisis.
	On the contrary, these risk management tools are critical
	to reducing commercial risk and volatility in our day-to-day
	businesses. Our commitment to our customers is to produce the
	best beer in the United States and deliver it at a competitive
	price. In order to achieve those goals, we must prudently
	manage our commodity risks.
	I believe the use of derivatives offers end users of
	physical commodities the risk management tools to provide a
	necessary degree of predictability to our earnings. Our single
	largest risk is aluminum. Our agricultural risks, of course,
	include malt and barley, corn and hops. Our energy risk
	portfolio includes coal, natural gas, deregulated electricity,
	and diesel fuel.
	As I mentioned before, our Board-approved commodity risk
	policy clearly forbids any and all speculation. The policy
	allows us to use over-the-counter swaps to precisely match the
	timing and prices of our complex manufacturing and distribution
	process.
	For example, we match our OTC swaps for aluminum with the
	actual use of cans over the same exact timeframe. This risk
	management technique allows us to manage costs, reduce price
	volatility, and manage cash flow within a reasonable parameter.
	In fact, we would create significantly more price volatility in
	our business by not hedging.
	We believe that end users generally share the concern that
	if the cost of hedging our risks rises significantly, entry
	into swaps may no longer be economical. The result would be a
	reduction in risk mitigation through hedging, which,
	ironically, could increase risk and exposure to market
	volatility. We believe that a broad end user exemption is
	critically important as the CFTC and SEC creates their final
	rules.
	During the regulatory process, we have sought to ensure
	that the exemption created by Congress would not be unduly
	narrowed. In particular, we have urged regulators to give
	thoughtful consideration to key definitions to ensure that end
	users like us are not saddled with bank-like regulation.
	I would like to address the prospect of margin being
	imposed on future, even previously entered contracts. This
	requirement would be particularly burdensome to end users like
	MillerCoors. Retroactive application of margin requirements
	would upset the reasonable expectations we had when we entered
	into our existing risk management contracts.
	We engaged in extensive negotiations with our financial
	counterparties to develop our ISDA agreements, which
	established our expectations for the future and included
	vigorous credit stipulations. Any retroactive application of
	margin requirements would be punitive.
	MillerCoors urges the financial regulators to avoid
	creating rigid and expensive trading requirements that
	unintentionally could cause companies either to retain more
	risk or seek risk management alternatives. By utilizing OTC
	swaps, we are able to customize our hedges to perfectly match
	the underlying exposure.
	The current rulemaking timeline is compressed, which may
	force regulators to prioritize speed over quality. We urge
	Congress to provide regulators with more time for rulemaking
	and for regulators to allow market participants sufficient time
	for implementation. I am confident in the way that these
	products are utilized by our company and other end users,
	actually benefits the economy by reducing volatility and
	increasing stability.
	On behalf of MillerCoors and the Coalition, I thank the
	committee for allowing me to appear today to discuss these
	important issues. And I am happy to answer any questions you
	may have. That concludes my testimony.
	[The prepared statement of Mr. Reiners can be found on page
	309 of the appendix.]
	Mr. Garrett. And sir, thank you for your testimony.
	I believe you were all advised of this beforehand, but I
	will just reiterate, since some of you have testified before
	the committee before and others have not. And that is the clock
	in front of you has green, yellow, and red lights. The yellow
	light gives you the 1-minute warning so you can begin to sum
	up.
	Mr. Donahue?

	STATEMENT OF DONALD F. DONAHUE, CHAIRMAN AND CHIEF EXECUTIVE
	OFFICER, THE DEPOSITORY TRUST & CLEARING CORPORATION (DTCC)

	Mr. Donahue. Chairman Garrett, members of the committee, I
	am here today representing the Depository Trust & Clearing
	Corporation a non-commercial industry utility that in 2010
	settled roughly $1.7 quadrillion of U.S. securities
	transactions.
	Since 2006, we have operated the Trade Information
	Warehouse, a global swaps data repository currently covering
	about 98 percent of all credit derivatives transactions, some
	2.3 million contracts, with a notional value of $29 trillion.
	I appreciate this opportunity to share our thoughts on the
	implementation of Title VII of the Dodd-Frank Act. In
	particular, I will focus on the swap data repository system for
	providing the necessary transparency into the global OTC
	derivatives markets.
	We share Congress' goal of ensuring more transparency in
	these markets to further global regulatory oversight and
	systemic risk mitigation. As many of the regulatory aspects of
	Dodd-Frank remain in development, transparency is a policy
	option that is most right for implementation.
	I make two fundamental points today. First, transparency is
	key to any attempt to mitigate systemic risk in the swap
	markets. All swaps, cleared and uncleared, must be reported to
	swap data repositories.
	To the extent derivatives contributed to the financial
	crisis, it was due to the lack of a unified view of which
	categories of market participants held wide exposures in the
	swap markets. The model needed to address this transparency
	concern has since been largely formalized for the credit
	default swap market in DTCC's Trade Information Warehouse.
	Leveraging the warehouse, late in 2008 we began providing
	standard position risk reports to appropriate authorities
	worldwide and publishing comprehensive market information free
	of charge.
	More recently, as we announced just this morning, we
	inaugurated an online portal through which global regulators,
	currently 19 worldwide, can securely and directly access
	detailed data from the warehouse's global data sets.
	Had this level of transparency about the CDS market existed
	in the run-up to the 2008 crisis, it would have mitigated a
	substantial amount of uncertainty that then contributed to
	market instability.
	DTCC believes that the most immediate and cost-effective
	approach to meeting Dodd-Frank's transparency goals will rely
	on proven repository infrastructure that currently provides
	regulators and the public this type of comprehensive market
	information.
	Providing transparency in the CDS market is a cooperative
	effort. I focused on the warehouse achievement to bring to the
	committee's attention why it has been successful. It would not
	have been possible without a substantial degree of global
	regulatory cooperation and support.
	But while this global supervisory push was a critical
	element, it was also important to the success that DTCC is not
	a commercial entity. We have no motivation other than to
	provide a central place for reporting and regulatory access to
	the data for both market and risk surveillance purposes.
	This removes commercial concerns from what is and must
	remain a market utility-based regulatory and supervisory
	support function. The structure created works because all
	market participants and all clearers and trading platforms with
	any significant volume are cooperating. If this cooperation
	were to fail, the data published and made accessible to
	regulators would fragment leading inevitably to misleading
	reporting of exposures.
	What would follow would be an exceptionally expensive if
	not politically impossible task for regulators to rebuild
	complex data aggregation and reporting mechanisms that the
	industry and regulators themselves have already created in a
	single place at DTCC. Both of these results appear undesirable
	in the extreme.
	The challenge ahead is to bring similar transparency to
	other parts of the swap markets. I commend the work of both the
	SEC and the CFTC in their thorough and thoughtful approach to
	this very complex challenge.
	It is our sense as an industry-governed utility with both
	buy and sell side members on our governing bodies that market
	participants are poised to undertake the significant
	cooperative effort necessary to complete the transparency of
	these markets as contemplated by Dodd-Frank.
	I urge the committee in exercising its oversight function
	to focus on removing obstacles to this process and to continue
	to use proven infrastructure while avoiding injection of
	commercial considerations that could hinder the cooperative
	attitude that so far has made progress possible.
	Thank you, and I am available for any of your questions.
	[The prepared statement of Mr. Donahue can be found on page
	81 of the appendix.]
	Mr. Garrett. Thank you.
	Mr. Duffy?

	STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME GROUP
	INC.

	Mr. Duffy. Thank you. Chairman Garrett and members of the
	committee, I want to thank you for the opportunity to testify
	on the regulatory implementation of the Dodd-Frank Wall Street
	Reform and Consumer Protection Act. I also want to thank
	Congressman Dold for that kind introduction and of course his
	leadership, not only in Congress but back in his district.
	As the Congressman said, I am Terry Duffy, executive
	chairman of the CME Group, which includes our clearinghouse and
	our four exchanges: CME; CBOT; NYMEX; and COMEX. In 2000,
	Congress adopted the Commodity Futures Modernization Act which
	leveled the playing field with our foreign competitors and
	permitted us to recapture our position as the world's most
	innovative and successful regulated exchange and clearinghouse.
	As a result, we remain an engine of economic growth in
	Chicago, New York, and the Nation. In 2008, the financial
	crisis focused well-warranted attention on the lack of
	regulation of OTC financial markets.
	The Nation learned painful lessons regarding unregulated
	derivatives trading. But we also demonstrated that regulated
	futures markets and futures clearinghouses operated flawlessly
	before, during, and after the crisis. Futures customers were
	protected.
	Congress responded to the financial crisis by adopting the
	Dodd-Frank Act to reduce systemic risk through central clearing
	and exchange trading of derivatives, to increase data
	transparency and price discovery, and to prevent fraud and
	market manipulation. We support these goals but our concern is
	that the CFTC's regulation of futures exchanges and
	clearinghouses will impose unwarranted cost and stifle
	innovation.
	We are not alone. Several Commissioners have cautioned
	against regulations that unnecessarily expand the Commission's
	workforce. While we are proponents of an adequate budget for
	our regulator, we object to the expansion of the Commission and
	its budget to enforce regulations that are uncalled for by
	Dodd-Frank or that take over responsibilities from SROs.
	We object to regulations that are not cost-benefit
	justified. Much of the problem results from the CFTC's efforts
	to expand its authority by changing its role from an oversight
	agency, whose purpose has been to assure compliance with sound
	principles, to a front-line decision-maker that imposes its
	business judgments on every operational aspect of derivatives
	trading and clearing.
	This role reversal will require a doubling of the
	Commission staff and budget. It will also impose astronomical
	cost on the industry and the end users of derivatives. There is
	no evidence that any of this is necessary or even likely to be
	useful. Dodd-Frank was not an invitation to pile regulatory
	burdens on regulated exchanges and clearinghouses.
	For example, Congress preserved and expanded a principles-
	based regulatory approach by expanding the list of core
	principles and granting self-regulatory organizations
	reasonable discretion in establishing the manner in which a
	self-regulatory organization complies with the core principles.
	The Commission asked for and Congress gave it power to adopt
	rules respecting core principles but Congress did not direct
	the agency to put an end to a principle-based regime.
	Yet, the Commission immediately and for no apparent reason
	proposed comprehensive regulations to convert most of the key
	core principles into prescriptive rules-based regulatory
	system. This is the ultimate solution in search of a problem.
	The crisis of 2008 did not arise from a failure of the
	regulated transparent futures markets.
	And the scope of Dodd-Frank is narrower than many of the
	CFTC rules proposed would suggest. Implementation would be
	similarly tailored. My written testimony includes numerous
	additional examples of misdirected or improper rulemaking. We
	welcome the outreach Chairman Gensler has recently demonstrated
	in seeking public input on Dodd-Frank implementation.
	This is a step in the right direction but more needs to be
	done. The Congress can mitigate some of the problems that have
	plagued the CFTC rulemaking process. They can do this by
	expanding Dodd-Frank's effective date and the rulemaking
	schedule so that professionals including exchanges,
	clearinghouses, dealers, market makers, and end users can have
	their views heard.
	This would give the CFTC a realistic opportunity to assess
	those views and measure the real cost imposed by these new
	regulations. Otherwise, the unintended adverse consequences of
	those ambiguities and the rush to regulation will stifle
	effective exchange innovation.
	We are concerned that overly prescriptive regulations,
	which are inconsistent with the sound industry practices, will
	make it more difficult to reach Dodd-Frank's goal of increasing
	transparency and limiting risk.
	I thank the committee for its time this morning.
	[The prepared statement of Mr. Duffy can be found on page
	257 of the appendix.]
	Mr. Garrett. Thank you for your testimony.
	Mr. Thompson?

	STATEMENT OF DON THOMPSON, MANAGING DIRECTOR AND ASSOCIATE
	GENERAL COUNSEL, JPMORGAN CHASE & CO., ON BEHALF OF THE
	SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

	Mr. Thompson. Chairman Garrett and members of the
	committee, my name is Don Thompson. I am the senior derivatives
	lawyer at JPMorgan, and I am here today on behalf of SIFMA.
	Thank you for inviting me to testify.
	As this committee is well aware, American companies use
	over-the-counter derivatives to manage a wide variety of risks
	that they encounter in their day-to-day business, such as
	interest rate risk, foreign exchange risk, and commodity price
	risk. We act as a financial intermediary to help clients manage
	these risks in a flexible manner.
	Many clients choose to manage risk from the over-the-
	counter market and as the committee has heard in testimony from
	American companies, the use of over-the-counter derivatives has
	a significant impact on their ability to compete
	internationally. While over-the-counter derivatives have many
	benefits, it is also the case that there have been problems
	with their use and with their oversight.
	We support many of the provisions in Title VII including
	mandatory registration of regulation of swap dealers, mandatory
	clearing of standardized contracts between financial firms, and
	greater pre and post-trade transparency.
	It is worth keeping in mind that these and other reforms
	taken together will fundamentally alter the market structure of
	the over-the-counter derivatives market, which will impact
	liquidity and efficiency in these markets.
	Given these wholesale changes, it is critical that the
	regulations implementing them be done thoughtfully to ensure
	that American companies continue to have access to these
	products. We are increasingly concerned, however, that the
	accelerated pace of rulemaking, risks, unintended consequences
	that will put American end users at a competitive disadvantage.
	We are also concerned that the statutory deadlines may be
	too aggressive, limiting regulatory flexibility to craft
	appropriate rules. For example, for real-time reporting in
	block trade levels, gathering data from market participants is
	a necessary prerequisite to setting effective standards and
	such data should inform these rulemakings.
	In the rush to meet statutory deadlines, there has been
	insufficient focus on the statutory mandate to examine the
	effects of proposals on market liquidity. Without care, there
	is a real risk that the current proposals will drive liquidity
	out of U.S. markets and increase the cost of or even the
	ability to manage risk.
	We believe the agencies need to carefully implement the
	statute to preserve liquidity, enable American companies to
	continue to manage their risks in an increasingly volatile and
	competitive global marketplace.
	Despite transatlantic dialogue over derivatives regulation,
	we are also concerned about the competitive harm resulting from
	differences in final regulations between the United States and
	Europe. This concern extends to the gap in implementation dates
	in Europe and other jurisdictions, as well as confusion over
	the extraterritorial application of Title VII's provision.
	This problem can be addressed by a simple clarification of
	the intended extraterritorial reach of the Act, by harmonizing
	the implementation timetables between the United States and the
	E.U., or by both.
	In addition, certain proposed regulations treat very
	similar products differently in a way that will create
	duplicative reporting and compliance regimes that will be
	burdensome and will reduce the transparency benefits of
	information ultimately reported to the public under those
	regimes.
	I would like to conclude by saying that JPMorgan is
	committed to working with Congress, regulators, and industry
	participants to ensure that Title VII is implemented
	appropriately and effectively. I appreciate the opportunity to
	testify before the committee. I look forward to answering any
	questions you may have.
	[The prepared statement of Mr. Thompson can be found on
	page 330 of the appendix. ]
	Mr. Garrett. I thank you, sir.
	Mr. Cawley, please, for 5 minutes.

	STATEMENT OF JAMES CAWLEY, CHIEF EXECUTIVE OFFICER, JAVELIN
	CAPITAL MARKETS, ON BEHALF OF THE SWAPS AND DERIVATIVES MARKET
	ASSOCIATION (SDMA)

	Mr. Cawley. Thank you. Congressman Garrett and members of
	the committee, my name is James Cawley. I am CEO of Javelin
	Capital Markets, an electronic execution venue of OTC
	derivatives that expects to register as a SEF or swap execution
	facility under Dodd-Frank. Thank you for inviting me here today
	to testify.
	I am here to represent the interests of the Swaps and
	Derivatives Market Association, which is comprised of multiple
	independent derivatives dealers and clearing brokers, some of
	whom are the largest in the world. When called to testify
	today, I was reminded of the main reason for which we are here,
	to fix the derivatives market such that we never again have to
	call upon the U.S. taxpayer to bail out Wall Street.
	The bilateral counterparty risk baked into every credit
	derivatives and interest rate swap contract still constitutes
	an unacceptable systemic risk to the national financial payment
	system specifically and to the broader economy as a whole.
	Simply put, such bilateralism acted as an accelerant to the
	crisis much like gasoline does to a forest fire.
	To help ensure in the future that the government and more
	specifically the U.S. taxpayer doesn't have to bail out the
	next trading firm that fails, we must ensure that central
	clearing and, more importantly, transparent execution of OTC
	derivatives is a success. We must transition away from ``too-
	interconnected-to-fail'', where one firm fails and pulls three
	others down with it.
	Central clearing membership requirements should be
	objective, publicly disclosed, and permit fair and open access
	as Dodd-Frank requires. This is important because clearing
	members act as the gatekeepers to clearing. Without open access
	to clearing, you will not have universal clearing of options,
	increased transparency, and lessened systemic risk.
	Clearinghouses should seek to be inclusive, not exclusive,
	in their membership criteria. They should learn from their own
	experience in the list of derivatives space of futures and
	options.
	In those markets, central clearing has operated
	successfully since the days of post-Civil War Reconstruction
	nearly 150 years ago, long before spreadsheets and risk models.
	In those markets, counterparty risk is spread over 100
	disparate and non-correlated clearing firms. It works well, and
	no customer has ever lost money due to a clearing member
	failure.
	To complement broad participation, clearinghouses should
	not have unreasonable capital requirements. Capital should be a
	function of the risk a member contributes to the system. Simply
	put, the more you or your customers trade, the more capital you
	contribute. The SDMA supports the CFTC's call for clearing
	broker capital requirements to be proportionate in scale
	relative to the risk introduced to the system.
	We support the CFTC's call that the clearing firms' minimum
	capital be closer to $50 million rather than the closer to the
	$5 billion or $1 billion threshold that certain clearinghouses
	have originally suggested. It is worth remembering that Lehman
	Brothers and Bear Stearns would have met the $1 billion
	threshold until the days of their failure.
	Certain clearinghouse operational requirements for
	membership that have no bearing on capital or capability should
	be seen for what they are, transparent attempts to limit
	competition. Specifically, clearing members should not be
	required to operate swap dealer desks just so they can meet
	their obligation in the default management process.
	These requirements can easily be met contractually through
	agreements with third party firms or dealers. Clearinghouse
	governance should be balanced and transparent. Such governance
	bodies should represent the interests of the market as a whole
	and not the interest of the few.
	With regard to conflicts of interest with a clearing
	member, Dodd-Frank is clear. Dealer desks should not be allowed
	to influence their clearing member colleagues and strict
	Chinese law should exist. With regard to trading derivatives,
	clearinghouses must accept trades on an execution blind basis.
	Customers should be allowed to trade with whom they want.
	They should not be forced to execute trades in such a way where
	one side of that trade is done with an incumbent dealer.
	They should also be able to trade with dealers who do not
	self-clear but make markets nonetheless and provide the
	liquidity so vital to the integrity of the system. For their
	part, swap execution facilities should also offer open access.
	They should offer pre and post-trade transparency in an
	otherwise opaque marketplace. SEFs should seek to report their
	trades within seconds, as is the case in other markets. It is
	well-established with the introduction of greater transparency,
	more market makers and increased competition, a safer playing
	field will emerge to directly enhance liquidity and market
	integrity which in turn lowers the systemic risk.
	In conclusion, the CFTC and the SEC should be commended for
	their excellent work. Both agencies have been transparent and
	accessible throughout the entire process. They have adapted to
	industry suggestion when appropriate, and Congress should
	provide them funding that they need.
	We must move away from ``too-into-connected-to-fail.'' We
	must work together to ensure that when the next investment
	house fails, and they do, that we are properly prepared for it.
	I thank you for your time.
	[The prepared statement of Mr. Cawley can be found on page
	77 of the appendix.]
	Mr. Garrett. And I found that illuminating. Thank you very
	much for the testimony and from the gentleman from the great
	State of New Jersey and the 5th District as well.
	Mr. Giancarlo please?

	STATEMENT OF J. CHRISTOPHER GIANCARLO, EXECUTIVE VICE
	PRESIDENT, CORPORATE DEVELOPMENT, GFI GROUP INC.

	Mr. Giancarlo. Thank you, Congressman, and thank you
	members of the committee. I am Chris Giancarlo, executive vice
	president of GFI Group, an American company and a global
	wholesale broker of swaps and other financial products.
	I am also a Board member and former chairman of the
	Wholesale Markets Brokers' Association. As such, I speak from
	the perspective of the wholesale brokerage industry that
	handles over 90 percent of intermediated over-the-counter swaps
	trading in the United States and around the world today.
	Wholesale brokers are the prototype of competing swap
	execution facilities or SEFs. The core impact of Title VII of
	Dodd-Frank is to replace a market in which swaps are often
	traded directly between counterparties with a system for most
	transactions where a central clearing facility acts as a single
	counterparty to each market participant and where transactions
	are executed on regulated trading facilities including the
	newly created definition of SEFs.
	The goal of these two initiatives, clearing and
	intermediation, is better safety and soundness for U.S. swaps
	markets. Dodd-Frank promotes a market structure where competing
	SEFs and exchanges vie with each other to provide better
	services at lower cost in order to win the execution business
	of market participants.
	Dodd-Frank rejected the anti-competitive single silo
	exchange model for the futures industry where clearing and
	execution are intertwined. Dodd-Frank expressly permits swaps
	to be executed by SEFs using ``any means of interstate
	commerce.''
	Congress left it to the marketplace to determine the best
	modes of execution and thereby foster technological innovation
	and development. Congress specifically did not choose to impose
	a federally-mandated one-size-fits-all transaction methodology
	on the swaps market.
	Liquidity in today's swaps markets is fundamentally
	different than in futures and equities markets and naturally
	determines the optimal mode of market transparency and trade
	execution.
	Wholesale brokers are experts in fostering liquidity and
	transparency by utilizing trade execution methods that feature
	a hybrid blend of knowledgeable brokers and sophisticated
	electronic technology that are specifically tailored to the
	unique liquidity characteristics of particular swaps market.
	There are three critical elements that regulators need to
	get right. First, SEFs must not be restricted from deploying
	the many varied trade execution methods successfully used
	today. It would be detrimental to market liquidity to mandate
	restrictive transaction methodologies or to experiment with
	rules taken from the highly commoditized equities or futures
	markets.
	Moreover, U.S. regulations need to be in harmony with those
	of foreign jurisdictions to avoid driving liquidity toward
	overseas markets that may offer greater flexibility in modes of
	trade execution.
	Second, the goal of pre-trade transparency can be realized
	through means that are already developed by wholesale brokers
	to garner and disseminate pricing information and not by
	artificial mechanisms that may restrict market liquidity for
	end users and other traders.
	Third, regulators need to carefully structure a public
	trade reporting system that takes into account the unique
	challenges of swaps trading. The objective must be to strike a
	balance between price transparency and market liquidity.
	If the rules do not properly define the size of block
	trades, information, and time delays, they will surely cause a
	negative impact to liquidity, disturbing end users' ability to
	hedge commercial risk and to plan for their future.
	The Wholesale Markets Brokers' Association has proposed a
	block trade standards advisory board of recognized experts from
	data repositories and SEFs to make recommendations to the
	regulators for appropriate blocks trade rules.
	The regulators and their staff deserve to be commended.
	They are working very hard to get this right. It is crucial
	that they gain a thorough understanding of the many modes of
	swaps trade execution and price dissemination deployed by
	wholesale brokers and accommodate those methods in trading
	practices in their SEF rules.
	It is only with such understanding that they can draft
	regulations that are properly tailored and effective. I am
	optimistic that given enough time and resources, regulators
	will craft SEF rules that are well-suited to the existing
	trading methods in the swaps market resulting in shorter and
	more effective implementation periods.
	As the adage goes, ``measure twice, cut once.'' We
	certainly don't want to have to cut this thing twice. Congress
	can assist with needed technical corrections to Dodd-Frank and
	crucially, by providing regulators with adequate time and
	resources to thoroughly understand the challenges and solutions
	to garnering trading liquidity in the swaps markets. Taking
	adequate time to get the regulations right will expedite the
	implementation of the worthy goals of Dodd-Frank, that is,
	central counterparty clearing and effective trade execution and
	provide end users and other traders with more competitive
	pricing, increased transparency, and deeper trading liquidity
	for their risk management needs.
	I thank you and I look forward to your questions.
	[The prepared statement of Mr. Giancarlo can be found on
	page 288 of the appendix.]
	Mr. Garrett. Thank you. And I thank the entire panel.
	We will now turn to the gentleman from New York, Mr. Grimm.
	Mr. Grimm. Thank you, Mr. Chairman, and thank you to the
	panel. Mr. Giancarlo, since you just finished, I will start
	with you if I may? I wanted you to expand a little bit about
	the multiple modes of execution.
	I for one think it is important: voice, hybrid, electronic.
	These modes, if you can expand why it is so important to have
	multiple modes rather than wholly electronic platform, I would
	ask you that question.
	Mr. Giancarlo. Thank you, Congressman. Liquidity in the
	swaps market is very different than in the futures and equities
	markets, the nature of liquidity. Just to give you an example,
	80 percent of the reference entities, swaps on 80 percent of
	the reference entities in the credit derivatives market, trade
	less than 5 times a day.
	It is not the same type of marketplace where you have a
	continuous tape that you do in a futures market or an equities
	market, and therefore the means by which experienced
	intermediaries bring parties together in this marketplace are
	very different.
	At GFI Group, and at our competing wholesale brokerage
	firms, we use a range of methodologies. Everything from online
	auction systems to fixing and matching session as well as fully
	electronic online platforms. But we also use a mix of humans
	and electronic systems. And often, that is very effective at
	bringing parties together.
	Mr. Grimm. That begs the question, if I may, it appears to
	me that the CFTC has relied heavily upon the regulations
	governing the futures contract in drafting the proposed rules
	for the swaps. Are the regulations for the futures industry
	appropriate for the swaps industry, and if not, why?
	Mr. Giancarlo. There may be some elements of what is--how
	regulations work in the futures industry that are appropriate
	but many, many other ways they are inappropriate. And in the
	proposed regulations, there are a number of areas where the
	proposed regs simply just don't apply, just simple things like
	referring to products listed on SEFs or members of SEF. These
	are concepts that really don't exist in the swaps market. And
	yet as we read the proposed rulemaking, these concepts still
	come through, and are inappropriate for what takes place in the
	swaps market.
	Mr. Grimm. Thank you very much. I appreciate that.
	If I can switch over to Mr. Donahue. Your testimony
	expressed concerns about fragmentation of data. Doesn't the
	technology exist already for the regulators to easily
	consolidate the data it receives from various swap data
	repositories?
	Mr. Donahue. Congressman, I would certainly agree it
	exists. I don't think I would use the word ``easily.'' You can
	consolidate the data. I think our point is the data is already
	consolidated. The data has been unified in a swap data
	repository.
	Having that consolidated view and having the infrastructure
	that we have to permit regulators in the market access to that
	consolidated view is very, very key to meeting the transparency
	goals that the Act has and that Congress had in adopting the
	Act.
	Trying to--allowing that to fragment and allowing the data
	to split out into pieces that get distributed in different
	forms in different data vendors and then imposing the
	obligation to then reunify that and consolidate that is, we
	think, going to be a fairly difficult process, a complex
	process, an expensive process and certainly add very
	significant time to the market's ability to establish the
	transparency that Congress and the regulators want.
	Mr. Grimm. One more question, Mr. Donahue, other than the
	congressional mandate that trades be reported, explain why we
	need repositories please?
	Mr. Donahue. Again, the repository gives a consolidated
	view of all of the activity within a particular asset class so
	that you can see all of the exposures. You know who has what
	exposures. You can see information about contracts conducted
	globally. This is a global market.
	Mr. Grimm. Could I just ask you, why can't the
	clearinghouses collect the information since they are the
	central nexus for the derivatives and let them send the
	information to the SEC and the CFTC?
	Mr. Donahue. Your question answers that, okay? The
	clearinghouses necessarily will fragment the data and you are
	going to be dealing with different groups of data reflecting
	different activities, different contracts.
	You may see offsetting contracts in different
	clearinghouses. You have to bring it together in some place.
	You have to aggregate it to see the entire view. That is
	precisely what swap data repositories do. Going there and using
	that infrastructure from day one we believe is the appropriate
	public policy choice.
	Mr. Grimm. I yield back, Mr. Chairman.
	Mr. Hensarling. [presiding] The gentleman yields back his
	time. The Chair now recognizes the gentlelady from New York for
	5 minutes.
	Mrs. Maloney. Thank you very much, and I thank all the
	panelists. On the central repository, in your statement you
	said that it should be a utility and could you expand on why
	you describe DTCC as--why can't we use it as a for-profit
	model? Why should it be a utility? If you could expand?
	Mr. Donahue. Congresswoman, I think the crucial point there
	is the very, very deep degree of market cooperation and
	collaboration that is needed to make a repository work.
	Mrs. Maloney. Yes.
	Mr. Donahue. DTCC is a market-governed utility. We are
	operated on a not-for-profit basis. We have a governing board
	or a governance committee that has all of the constituencies in
	the market involved in the governance.
	They view us as a neutral meeting place where they can have
	a particular market need addressed in a way that is responsive
	to their concerns and meets the needs of the broad range of
	market constituencies. That is what a utility or an industry
	cooperative does.
	That is very, very crucial to getting the level of
	cooperation and collaboration that is needed to achieve rapid
	implementation of the transparency mechanisms that the
	repository provides. So we think getting the kind of market
	cooperation both within the United States and also crucially
	from overseas is very much facilitated by having a market
	utility supporting that function.
	Mrs. Maloney. When you mentioned overseas, we are
	definitely in a global market, and DTCC just has activities
	here in America, correct?
	Mr. Donahue. No, we actually have offices both in Asia and
	in Europe and we actually have an implementation of our
	derivatives support capability in Europe as well as in the
	States.
	Mrs. Maloney. So that allows you see the entire picture? Is
	everything in DTCC internationally and locally?
	Mr. Donahue. With respect to credit default swaps the Trade
	Information Warehouse is a global infrastructure. It has trade
	feeds from 1,800 counterparties in 52 countries around the
	world. The reference entities referenced in the warehouse
	originate from 90 countries around the world.
	The regulator transparency mechanism that we announced this
	morning gives information to 19 regulators around the world and
	that number will grow. So it is very much a global
	infrastructure, and that is very key given the global nature of
	the marketplace.
	Mrs. Maloney. In your written testimony, you mentioned that
	it would be, and I am quoting from it, it would be ``an
	exceptionally expensive if not politically impossible task for
	regulators to rebuild complex reporting mechanisms.'' Yet there
	were several amendments in Dodd-Frank that would have done this
	earlier.
	Mr. Gensler from CFTC I believe was testifying that he
	thought he would build his own clearinghouse. Can you comment
	on that? Do you think other repositories are necessary in order
	to have all the information to see the exposure, see the risk,
	and prevent another catastrophe like we had in 2008?
	Mr. Donahue. Our view is very much that you need a
	consolidated view per swap asset class. All right? So for
	credit default swaps, the trade information provides that. You
	would need a consolidated view, a repository for interest rate
	swaps, as an example, for over-the-counter equity swaps.
	And consolidating all that information into a unified view,
	we believe, is very crucial to having the kind of transparency
	that the market needs. The CFTC could do that. The regulators
	could do that, consolidating information from a variety of
	sources. That is a fairly expensive proposition. It is a fairly
	time-consuming proposition.
	Mrs. Maloney. Would it offer more information than what
	DTCC now offers--
	Mr. Donahue. It would--
	Mrs. Maloney. --or would it be a duplication?
	Mr. Donahue. I think it would be fair to characterize it as
	a duplication. We are within weeks of having the Trade
	Information Warehouse in a form that is completely compliant
	with Dodd-Frank requirements in terms of the breadth of the
	data we maintain, the kinds of information, and the kinds of
	counterparties we have reflected.
	So I don't see that--pushing, that the regulator level
	would add anything other than additional expense replicating
	what already exists.
	Mrs. Maloney. In my opening comments, I talked about the
	flash-crash, and how we need to try do everything we can to
	prevent it, and I would like to ask the panelists, how do SEFs
	prevent events like May 6th, which has been called a flash-
	crash or the recent hacking into NASDAQ, which was very
	troubling to many of us? How can you minimize or prevent these
	type of intrusions or shocks or disruptions to our financial
	markets?
	Mr. Giancarlo. Congresswoman, if I may?
	Mrs. Maloney. Sure.
	Mr. Giancarlo. As I noted in my testimony, we and other
	wholesale brokers operate a hybrid model of execution which we
	call a melding of man and machine. It is a combination of human
	brokers and very sophisticated electronic trading technology.
	In that type of environment, the risks of the machines
	taking over, if you will, are minimized because the humans are
	sitting there side-by-side watching trading activity, and they
	are very experienced in the way markets work. It is almost as
	if you have a pilot in an airplane; if there is any turbulence,
	they could take it back off autopilot, take it back into manual
	control.
	One of the concerns we have with proposed regulations that
	would seek to impose a sort of an electronic model on a
	marketplace that right now operates on a hybrid model is that
	would exacerbate the risks of an electronic malfunction--
	Mrs. Maloney. Okay.
	Mr. Giancarlo. --taking the market in a direction that is
	unintended.
	Mrs. Maloney. Yes, just tell me--Mr. Donahue, do you have a
	comment? Thank you.
	Mr. Hensarling. You can be brief, sir.
	Mr. Donahue. Certainly, and I think we--obviously with
	respect to the NASDAQ point you make, Congresswoman, we
	certainly have taken very serious note of what happened.
	Obviously, we don't really understand all the details.
	It is something that we are very focused on, and I would
	think most market participants are very focused on ensuring
	that their systems are safeguarded against some incident like
	that, so it is something that gets a lot of focus and a lot of
	attention.
	Mrs. Maloney. Thank you.
	Mr. Hensarling. The time of the gentlelady has expired. I
	wish to announce to the remaining members that votes are
	expected within the next few minutes. We will recognize Mr.
	Duffy on the Majority side, and Mr. Perlmutter on the Minority
	side. And then, we will have to adjourn the hearing.
	The Chair now recognizes the gentleman from Wisconsin for 5
	minutes.
	Mr. Duffy of Wisconsin. Thank you, Mr. Chairman. I, too,
	want to thank the group for coming in and answering our
	questions and giving your testimony. You all look nice and
	tight together, very nice. We looked like that earlier today.
	Specifically, Mr. Reiners, I would like to ask you a few
	questions. I am also from Wisconsin, the 7th District. We like
	our beer in Wisconsin, and cheap beer or inexpensive beer, I
	should say, not cheap. Also, our district is home to
	Leinenkugel's, which is a great employer in Chippewa Falls,
	Wisconsin, and they make great beer there.
	And so I think some questions that are relevant to the
	impact of the Dodd-Frank rules and the beer industry. If you
	look at the regulations that are about to come down--is it
	going to be more expensive for you to enter into derivatives
	contracts to hedge your risk?
	Mr. Reiners. We do, both vanilla over-the-counter trades.
	We do futures trades. We do customized trades as I mentioned in
	my testimony. So should there be a change in the margin
	requirements for end users that would change the complexion of
	our working capital. It would certainly have an impact across-
	the-board.
	Certainly, commodities are a component of our final price
	and how we manage that price. But it is not the only factor
	relative to pricing beer.
	I have to also speak on behalf of the Coalition that these
	margin requirements that were discussed off and on really could
	impact capital investment, could impact how your working
	capital is employed.
	Mr. Duffy of Wisconsin. And with the cost increases,
	potentially those would, obviously, be passed on to consumers?
	Mr. Reiners. If the marketplace--it would be up to the
	marketplace.
	Mr. Duffy of Wisconsin. Okay. And if they are passed on,
	obviously, the cost of our six packs would go up, is it fair to
	say?
	Mr. Reiners. It would certainly have an impact on the cost
	of it, yes.
	Mr. Duffy of Wisconsin. Okay. I knew that was coming.
	Mr. Cawley. Congressman? Excuse me, Congressman? If I could
	just go back because--
	Mr. Duffy of Wisconsin. Oh, yes. I am sorry.
	Mr. Cawley. --there is one other cost you need to consider
	when you are considering the end user away from margin and the
	actual processing of a trade. You need to consider the
	execution costs as well, and sometimes that can go up and go
	down. So one thing I think will be interesting to look at is
	when a marketplace becomes more transparent, the execution
	costs actually go lower.
	There is estimated to be about $50 billion worth of
	execution costs, currently, in interest rate swaps in CDS today
	on an annual basis. And if you allow central limit order books
	and transparency into the marketplace where buyers and sellers
	can meet each other directly, those fees should tend to go
	down. We estimate that those fees could go down by as much as
	$30 billion to $40 billion.
	Mr. Duffy of Wisconsin. In regard to the issue of
	transparency, I think everyone here would agree that companies
	like AIG and all of their contracts we should have more
	transparency or could have stopped the crisis that I think AIG
	played a big part in.
	But is there a concern of, say MillerCoors is entering into
	contracts for aluminum, and we talked about the liquidity in
	the marketplace with aluminum contracts. If you are entering
	into a contract, and it is probably a big contract--does that
	have an impact on the market if you are forced to disclose the
	contract that you are entering into? Is there a cost component
	with the transparency of end users with an over-the-counter
	contract?
	Mr. Reiners. --in regards to transparency, Congressman, I
	think it is really all about the details and the careful
	implementation of any new rules. We would, as a beer guy and
	someone who actually uses these tools that we are talking
	about, the level of confidentiality is certainly critical.
	You have kind of touched on that, and I think the rules
	would allow for that, but I think the issue of additional
	costs, the devil is in the details again. We don't want to add
	additional cost to the regulatory system because that does
	translate right in to our cost of goods sold.
	Mr. Duffy of Wisconsin. Okay. And just if I could ask the
	panel one other question? If you look at what we are doing here
	with our rules, it appears that we are leading the way with
	reforming our rules and regulation in regard to derivatives as
	opposed to the E.U. and other Asian markets. If this raises the
	cost of our contracts--is it possible or feasible that we are
	going to see more of our derivatives markets go to places like
	Singapore and Hong Kong or others?
	Mr. Thompson. We are already hearing from clients,
	especially European clients who deal with multiple banks
	including our London branch--things like it is not clear to me
	whether we will be caught up in Dodd-Frank, but if we deal with
	Barclays or Credit Suisse or a European bank, we won't be
	subject to this. Why should we take the risk of dealing with
	you and having to clear our contracts?
	Mr. Duffy of Wisconsin. So it is--
	Mr. Hensarling. The time of the gentleman has expired.
	Mr. Duffy of Wisconsin. Thank you, Mr. Chairman.
	Mr. Garrett. [presiding] They have just called votes on the
	Floor. We should have time to clear the two remaining members'
	questions.
	The gentleman from Colorado is recognized for 5 minutes.
	Mr. Perlmutter. Thank you, Mr. Chairman, and I just
	appreciate the panel being here today waiting through all the
	questioning of the three previous witnesses. And I know that I
	have had a chance in the first round of Dodd-Frank to talk to
	at least the first four of you or your companies, and learned a
	lot in that process. Derivatives are something that I never
	expected to have to deal with on an ongoing basis as we seem to
	be dealing with it, but a couple of points.
	I will start with you, Mr. Reiners. We tried in that bill
	to limit margins or capital requirements for end users in
	connection with their having to deal with future risk, you guys
	buying barley on a forward basis or aluminum or whatever it
	might be.
	Listening to Chairman Gensler, I am comfortable that he got
	that as part of the bill. I appreciate your company's caution
	that some regulator doesn't get out of hand. And I think you
	brought it clearly to my attention, and I will keep an eye on
	it. Do you have indications in a rule that they are going to
	call and require margin against barley for next year?
	Mr. Reiners. No, Congressman. Thanks for the comment. I
	heard the same thing from the Honorable Chairman Gensler, and I
	had a prior personal discussion with him on this several months
	ago, and I heard the same thing here during his testimony. I
	have to say though that I think I heard some inconsistencies by
	some other participants today that give me pause.
	Mr. Perlmutter. All right. I appreciate that, and we will
	keep an eye out and look to you guys, just something like that
	to advising us, so we can be a good oversight committee.
	The other thing that I am hearing though from several folks
	is that we have to take time in devising and implementing the
	rules, and I don't think there is any question about it. But
	what is your understanding, Mr. Thompson, as to what the timing
	is of the rules from either the SEC or the CFTC? When are they
	going to be promulgated?
	Mr. Thompson. My understanding of the timing, first, with
	respect to the CFTC is they have already put out a draft of
	many of the 30 rulemaking work streams that they are charged
	with promulgating rules on there.
	And my understanding of Mr. Gensler's timetable, based upon
	his public statements, is that he intends to have most, if not
	all of them, in place by the July 17, 2011, Dodd-Frank Title
	VII effectiveness date.
	Mr. Perlmutter. Do you think that date is not a doable
	date,? Is it premature? Is that your concern?
	Mr. Thompson. I think sticking to that date runs the risk
	of serious unintended consequences, in large part, because many
	of these issues are complex. One thing the chairman notes is
	that he has gotten a tremendous amount of input from the
	market. I check the CFTC Web site every day for the comments
	that come in, and I don't see how they are keeping up with the
	information that is coming back in to them.
	Mr. Perlmutter. Let me stop you right there because we want
	to do this right, but there has to be some point where you get
	them done. I mean you can always analyze these to the nth
	degree.
	I would ask that both your company, JPMorgan, which is a
	big player, obviously, and SIFMA, which is a major association,
	speak on behalf of these agencies, the CFTC and the SEC to the
	degree they may need people to get stuff done. And I don't know
	how you want to react to that, if you want to react to that or
	Mr. Duffy, I know CME has been involved in this.
	Mr. Thompson. I will just react by saying both JPMorgan and
	SIFMA have actively provided the comment letters to the
	agencies on a wide variety of issues where we feel that they
	need assistance, technical advice or market-based input. And
	again, my concern is that given the sheer volume of information
	coming in to them, I am concerned about their ability to--
	Mr. Perlmutter. --get it done?
	Mr. Thompson. --take a step back, analyze that, think about
	it thoughtfully, and incorporate it into the final rulemaking.
	Mr. Perlmutter. Mr. Duffy?
	Mr. Duffy. I will just say really quickly and just add to
	what Mr. Thompson said, we have a huge internal legal team
	analyzing each and every one of these rules. We have huge
	external legal firms working on these rules. We can't keep up
	with it. We are kind of perplexed.
	How in the world can a couple of Commissioners with a few
	staffers and their lawyers actually understand what these rules
	mean and what the effects of them could be for this country 6
	months or 6 years down the road? So we do think that the
	prudent thing would be to take some time and for people to
	understand these in more detail.
	Mr. Perlmutter. And make sure it is properly staffed.
	Mr. Thompson. As an order of magnitude in following up on
	Mr. Duffy's comments, Mr. Gensler was describing the size of
	his agency as roughly 400-and-some-odd people. At JPMorgan in
	New York, we have a team of about 350 people working on various
	phases of this.
	Mr. Perlmutter. Okay. Thank you.
	Mr. Thompson. It is a monumental undertaking.
	Mr. Perlmutter. Thank you very much, and I yield back.
	Mr. Garrett. Thank you, and before the gentleman leaves,
	actually, we have a little bit more time, so I am going to
	yield, split our time--
	Mr. Hensarling. Sure.
	Mr. Garrett. --two-and-a-half minutes, Mrs. Biggert?.
	Mrs. Biggert. Thank you, Mr. Chairman. I appreciate that. I
	have just a couple of quick questions that I would like to ask
	Mr. Duffy. The futures exchanges currently employ limits in
	most physically-delivered contracts to mitigate potential
	congestions and to help identify threats that might to
	manipulate the markets.
	It seems like there has been a proposal in the President's
	recent Executive Order which turns this over to the CFTC.
	Wouldn't it be better to learn to leave it back within the
	market rather than put another cost to the Federal Government?
	Mr. Duffy. I do agree it would be best to leave it with the
	exchanges. We have been doing it for a number of years, and we
	have done it quite successfully. We have never had a customer
	lose one penny due to a clearing member default, and that is a
	156-year record that we are very proud of, Congresswoman.
	So I think we have done an excellent job of managing risks
	when it comes to these types of problems as it relates to the
	limits. We have limits on all of our deliverable products, so
	we already have the limits put in place today.
	When it comes to energy, we have hard limits coming in to
	the last 3 days. We have accountability levels 30 days out on
	our grain products. They all have government-mandated limits
	imposed on them today, so these are things that are already in
	place today.
	So I am kind of confused on why the regulator is trying to
	impose more restrictive limits on the regulated market when
	Congress told him to go figure out how to rein in the over-the-
	counter market. And once you do that, then make sure you don't
	disenfranchise the listed market. So we are very confused on
	the process the way it is unfolding--
	Mrs. Biggert. Okay. Thank you. One more quick question, and
	that is with the European Union and foreign jurisdictions, if
	they adopt a less restrictive regime, and considering what we
	talked about, I asked Chairman Gensler earlier this morning
	that on the position limits, isn't that going to force
	companies to go abroad?
	Mr. Duffy. They already have. We talked earlier about
	business going abroad. Our natural gas contract at the New York
	Mercantile Exchange that we own, once Congress--or once the
	rhetoric came out that they are going to impose these very
	stringent limits, we saw a big shift of open interest from our
	nat gas contracts over to the London nat gas contract. So we
	definitely saw that.
	Last week or 2 weeks ago, I think it was Michel Barnier or
	one of the other European officials came out and said exactly--
	I just met with him in August.
	I met with Chairman Gensler and they said that they are
	going to be in lockstep with the United States and our
	regulations. This was back in August. I asked him when they
	passed Dodd-Frank in Europe. They don't have Dodd-Frank in
	Europe.
	Also, they just came out last week and said they are not
	going to impose hard position limits on energy products, but
	yet they have the ability to do so. This is exactly what this
	Congress told our regulator to do, but our regulator looks at
	it in a different light.
	Mrs. Biggert. Thank you.
	Mr. Duffy. Thank you.
	Mr. Giancarlo. Congresswoman, if I could just add on
	foreign competition? We are following very closely the
	directives coming out of MiFID and others coming out of Europe,
	and they don't also adopt the similarly restrictive approach to
	modes of execution for SEFs, that is--appear to be coming out
	of the CFTC.
	And we think that if Europe adopts a more flexible approach
	to intermediation by SEFs that business could also go overseas
	within that regard as well.
	Mr. Garrett. I thank the gentlelady, and we are really--I
	am sorry. I am pressed for time here, so I will just throw out
	a couple of things to Mr. Giancarlo, with regard to the SEFs,
	two quick things.
	One is a little bit in the weeds, and it is the difference
	in approach with regard to the SEC and the CFTC. The SEC seems
	to me a little bit more reasonable as far as it goes. The CFTC
	says no, you have to have five quotes. So if you go out to two
	car dealers and you get prices, now you have to go out to three
	more before we are allowing you to proceed. Can you just
	comment on that briefly?
	Mr. Giancarlo. Yes.
	Mr. Garrett. And two, one of my opening lines here was all
	that we are doing here is impacting upon jobs and job creation.
	Can you just talk with regards to SEFs--how does this--and how
	do we quantify any of this as well?
	Mr. Giancarlo. Sure, absolutely. The SEC has a long history
	of regulating over-the-counter markets, and as we see in their
	rulemaking, their approach to regulating the over-the-counter
	swaps market appears to adopt a great deal more flexibility in
	their approaches. The CFTC does take a more, shall I say,
	restrictive or proscriptive approach to the swaps market. It is
	actually dictating a whole series of methodologies that
	intermediaries need to adopt.
	In the RFQ area, you cited one, which is going out to
	five--having to receive five quotes, but we see that type of
	proscriptiveness running throughout a lot of the CFTC
	proposals, less proscriptive at SEC.
	And just on the issue of jobs, that is an important issue
	for us. Wholesale brokers such as ourselves employ thousands of
	Americans in jobs all over the country from places like
	Houston, Texas, to southern California, to right in our State,
	New Jersey, where we have operations in Englewood, New Jersey,
	and also in the New York City area where our industry probably
	employs close to 10,000 people.
	Their work is what we call the hybrid model where it is a
	combination of the human brokers and very, very sophisticated
	trading technology, technology that is licensed worldwide. But
	it is the combination of the person and the machine that gives
	these markets their particular nature.
	And what we are worried about is in the very proscriptive
	type of rulemaking that would require or force all of this in
	to an electronic-only--
	Mr. Garrett. Right.
	Mr. Giancarlo. --methodology that it would have a severe
	impact on the hiring that we do.
	Mr. Garrett. I appreciate that, but I am just getting a
	buzz in my other ear that I have to be down on the Floor. We
	have to be on the Floor in less than 2 minutes, so I want to
	thank the panel for their answers.
	I would like to enter in to the record with unanimous
	consent, if I may, from the Wall Street Journal, an editorial
	dated February 11th, entitled, ``The Futures of America.''
	And I would also like to say that the Chair notes that some
	members may have additional questions for this panel which they
	may wish to submit in writing. And so without objection, the
	hearing record will remain open for 30 days for members to
	submit questions to these witnesses and to place their
	responses in the record.
	And with that being said, this hearing is adjourned. And
	again, I thank the members of this panel.
	[Whereupon, at 1:45 p.m., the hearing was adjourned.]


	A P P E N D I X



	February 15, 2011


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