[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                     REGULATORY PERSPECTIVES ON THE 
                    OBAMA ADMINISTRATION'S FINANCIAL 
                  REGULATORY REFORM PROPOSALS, PART I 

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 22, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-66

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel












                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 22, 2009................................................     1
Appendix:
    July 22, 2009................................................    39

                               WITNESSES
                        Wednesday, July 22, 2009

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission (CFTC)..............................................    10
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission (SEC)...............................................     8

                                APPENDIX

Prepared statements:
    Garrett, Hon. Scott..........................................    40
    McCarthy, Hon. Carolyn.......................................    42
    Gensler, Hon. Gary...........................................    43
    Schapiro, Hon. Mary L........................................    58

              Additional Material Submitted for the Record

Schapiro, Hon. Mary L.:
    Written responses to questions from Representative Royce.....    69


                     REGULATORY PERSPECTIVES ON THE
                    OBAMA ADMINISTRATION'S FINANCIAL
                  REGULATORY REFORM PROPOSALS, PART I

                              ----------                              


                        Wednesday, July 22, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Maloney, 
Watt, Sherman, Moore of Kansas, Capuano, Baca, Lynch, Miller of 
North Carolina, Green, Cleaver, Moore of Wisconsin, Klein, 
Wilson, Perlmutter, Foster, Carson, Speier, Minnick, Driehaus, 
Kosmas, Himes; Bachus, Castle, Royce, Lucas, Biggert, Miller of 
California, Capito, Hensarling, Garrett, Neugebauer, McHenry, 
Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will begin. We are very happy 
today to have before us two Presidential appointees who head 
important agencies: the Chair of the SEC, Mary Schapiro; and 
the Chair of the Commodity Futures Trading Commission, Gary 
Gensler. I want to begin by saying I am very happy that both 
agency heads are here. I strongly believe that if we were 
starting from scratch, we would not have two separate agencies, 
with the extent to which they share a mission. But we do have 
the two separate agencies. There is no point in wasting energy 
in trying to consolidate them when there would be no chance of 
that happening. I am encouraged by the fact that the two Chairs 
here today have, from the beginning of their appointment, 
worked closely together to try and avoid friction.
    I have to say that in my view, jurisdictional fights--
whether between congressional committees or among congressional 
committees or between or among Federal agencies--represent 
Washington at our worst, because the job getting done well 
ought to be the issue. And people who insist that--people's 
egos get too tied up with their positions. We are working hard 
to avoid that. I have also been working closely with Chairman 
Peterson of the Agriculture Committee because there is a shared 
jurisdiction here. And we have come to a very good agreement on 
substance. We had the hearing a week ago with the Secretary of 
the Treasury an unusual hearing with two major full committees. 
We intend to keep doing this. There will be some disagreements 
I believe at the edges--I am reluctant to say margins here 
because it will get too doubly interpreted--but at the edges, 
there may be some disagreements.
    They clearly are outweighed by the substantial agreement 
that we have. So one of the questions will be on derivatives. 
Another will be in our jurisdiction which, we should be clear, 
is primarily the SEC. I appreciate the fact that Mr. Gensler is 
here. This committee is not the committee of jurisdiction for 
him.
    Mr. Peterson, in the spirit of cooperation, understands 
that. If Mr. Peterson would ask Chair Schapiro to appear before 
Agriculture, I don't know if you have yet, but we would 
encourage that as well, because we don't want these 
jurisdictional issues to be there. With regard to derivatives, 
I will tell you the conceptual approach that Mr. Peterson and I 
have taken, Mr. Peterson's committee has the jurisdiction over 
those for whom hedging is a part of their business. That is, 
the Agriculture Committee are more the end users of this who 
have a product to sell and who hedge because they want to deal 
with price volatility. Our jurisdiction is more over the people 
who do some of the hedging and are in the financial area.
    The concept, it seems to me, we ought to be guided by here 
is what we ought to be thinking about with the financial 
institution in general. Their role is to be intermediaries, not 
to be ends in and of themselves. When there is a breakdown in 
the financial sector, we call it disintermediation. Their job 
is to be a very important, I was going to say bridge, but 
bridge understates the creativity involved. There is nothing 
passive about their role, but their job is to link up 
essentially people in the end of the economy who are producing 
goods and services of value and the people with money to invest 
in them. Their job is to help us in this society agglomerate 
investment funds so that they are made available to the end 
users.
    Obviously, people aren't going to do that unless they make 
a profit off it. That is a very important and sometimes complex 
business. People aren't going to make their money available 
unless they make a profit. But I do think that over the past 
couple of decades, there are some examples in the financial 
sector of the means becoming the ends. We have had people tell 
us that we should not restrict or regulate this or that because 
then certain entities would not be able to make money. Yes, it 
is important that they make money as a by-product of the 
intermediation function they perform. The fact that a given 
institution won't make money is, in itself, no reason to be 
opposed to this. And, in fact, activities whose major 
justification is that they make a profit for some entity 
unconnected to that intermediation function are not going to be 
well received by us.
    I will now add, finally, this is not just about 
derivatives, we have other issues, this committee has been very 
interested in the whole question of mark-to-market. The 
gentleman from Pennsylvania has played a major role there. And 
there is also continued interest in the question of short sale 
and corporate governance. I will say that two of our members, 
the gentleman from California, Mr. Campbell, and the gentleman 
from Michigan, Mr. Peters, in a bipartisan way, have a great 
interest in corporate governance issues. And I expect the 
committee will turn to them this fall after we have done some 
of the major regulatory stuff. But both of those issues are, 
particularly the short sale and the mark-to-market, are going 
to be before us today. The gentleman from New Jersey is 
recognized for 3 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, and thank you, 
members of the panel. Today's hearing is on the President's 
financial regulatory reform proposals. You know, your agencies 
oversee some of the most transparent, efficient, and complex 
markets in the world that are also responsible for ensuring 
that our capital markets promote price discovery, capital 
formation, and investor protection.
    Now, the Administration's reform proposals task the SEC and 
the CFTC with developing a regulatory infrastructure for over-
the-counter derivatives and reporting to Congress by September 
30th on how the agencies will harmonize two very disparate 
regulatory approaches. So I look forward to hearing from you to 
see how well those are coming together and where some of your 
sticking points are going to be, if there are some, I think 
there will, and whether you will be able to meet that deadline. 
You know, with regard to the Administration's proposals, I 
agree with some of them. I think it is evenhanded and certainly 
less radical than other ideas that have been proposed so far in 
Congress.
    Still, there are some aspects of the Administration's 
proposals that trouble me. And I am worried that in the name of 
systemic risk reduction, requirements that would force more OTC 
transactions into central clearinghouses or onto exchanges, as 
well as strident new margin requirements for both centrally 
cleared and noncentrally cleared transactions will make hedging 
just too expensive for many end users of derivatives throughout 
the broader economy. The perverse outcome, therefore, of 
efforts to reduce systemic risk in these markets can actually 
increase risk for many companies if they are no longer able to 
cost effectively engage in a comprehensive risk management 
practice.
    So if you take a step back for a moment, perhaps an even 
more fundamental question should be asked here: Were 
standardized derivatives significantly related to the recent 
meltdown of our financial markets, and if not, why are we 
prescribing cures for a nonexistent ailment? You know, the 
failed oversight of one large dealer directly related to 
broader regulatory failures in the housing finance markets 
should not cause us to pursue radical fixes for the broader OTC 
derivative markets and their nondealers participants that had 
little or really nothing to do with the recent crisis.
    What we do need is comprehensive regulatory reform, but it 
needs to be sensible and we need to make sure that we are 
addressing actual problems in the way that we are doing it and 
not causing more harm than good. The risk of mobile capital 
migrating elsewhere as we overshoot the mark in regulatory 
reform, I think, is a real one and we should take the time to 
carefully evaluate the proposals presented to us before we move 
ahead with legislation.
    So once again, thank you both for coming to the panel 
today, thanks to the people who have been here numerous times 
in the past as well. Thank you.
    The Chairman. Let me just, to balance, because we have the 
time, I call on the gentleman from Texas for 1 minute, Mr. 
Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. I appreciate the 
witnesses providing us with their views on the Administration's 
regulatory proposals as well as an update on their efforts to 
find more harmonization between futures and securities 
regulation. While there are differences in the products in 
marketplaces, there is quite a bit of overlap in regulation. 
One concern I have heard from those with products that fall 
under both regulators is the length of time it takes to get new 
products approved in the process for determining whether the 
product falls under the CFTC or the SEC. We all want our proper 
transparency and disclosure but we also need the regulatory 
process to be effective. I am also interested in hearing from 
Chairman Gensler about the upcoming hearings at the CFTC 
regarding hedge exemptions and positional limits in energy 
futures. We have had quite a bit of discussion on this issue in 
the Agriculture Committee over the past couple of years and 
added new authorities for the CFTC in the 2008 farm bill.
    As the CFTC weighs options, we must maintain efficient 
price discovery and open market and keep the United States 
competitive. As we continue to work through these issues, we 
must remember that government regulations can't substitute for 
the due diligence for investors and other market participants.
    The Chairman. The gentleman from Pennsylvania, the Chair of 
the Subcommittee on Capital Markets, Mr. Kanjorski, for 3 
minutes.
    Mr. Kanjorski. Thank you very much, Mr. Chairman. Among 
other matters this morning we will address the need for 
effective regulatory oversight of the over-the-counter 
derivatives market estimated at $500 trillion in notional 
value. These reforms are long overdue. Fifteen years ago, I 
first advocated for increased regulation of our derivatives 
market. When I helped to introduce the Derivative Safety and 
Soundness Supervision Act, we sought to enhance the supervision 
of derivatives activities of financial institutions. Since 
then, I have endorsed other legislation aimed at improving 
transparency in and enhancing the oversight of our derivatives 
markets. Our witnesses today, SEC Chairman Mary Schapiro and 
CFTC Chairman Gary Gensler, have an important task before them. 
They must reposition their agencies to better respond to the 
crises of today and the problems of tomorrow.
    Fortunately, both of these leaders come equipped with 
extensive experience and a commitment to effective regulation. 
While this crisis also seems to me the ideal time to merge 
these two agencies, political judgments have led us down a 
different path. Thankfully, however, the two seem determined to 
work together constructively rather than battle over 
jurisdictional turf. These two Chairmen are working within the 
Obama Administration which will soon release legislative 
language on derivatives reform and with Congress can help to 
create a more transparent, safer, and less risky over-the-
counter derivatives market. To increase investor protection and 
market confidence, we must make this reform effort a top 
priority.
    Most fair-minded observers have acknowledged that 
unregulated derivatives, such as the credit default swaps, 
played a significant role in contributing to our present 
financial crisis. AIG's disastrous abuse of these potentially 
explosive financial instruments represents the most glaring 
example of the dangers to our system posed by derivatives. By 
moving forward, we should remain sensitive to the highly varied 
nature of derivatives products. Derivatives that consist of 
highly accustomed contracts which thousands of nonfinancial 
businesses, both large and small, employed to managed risk 
simply do not easily fit within the mandatory clearing and 
exchange trading regime. By mandating the collection of certain 
data on such contracts in a repository even where they cannot 
be cleared, we can achieve transparency and access for 
regulators in the hope that we can detect warning signs of 
systemically risky transactions. And by requiring increased 
capital reserves for those who enter into unique derivatives 
contracts, we can also provide incentives for markets to 
standardize these complex financial products going forward.
    In closing, Chairman Schapiro and Chairman Gensler can help 
Congress to sensibly regulate this dark corner of our financial 
markets. I look forward to their testimony.
    The Chairman. The gentleman from Delaware, Mr. Castle--
    Mr. Castle. Thank you, Mr. Chairman.
    The Chairman. --for 1 minute.
    Mr. Castle. I appreciate this opportunity to further 
explore the Administration's regulatory reform proposal, 
particularly looking at securities and futures related reforms 
in particular. A lot has been said about derivatives; currency 
derivatives, interest rate derivatives, and the like. And I 
will be interested to hear what the witnesses have to say about 
the over-the-counter trades and cleared and exchanged trades of 
derivatives. All of these are issues before this committee and 
the organizations our witnesses represent. Although I believe 
registering hedge funds and reforming credit ratings are 
integral pieces of financial reform, I maintain that we must 
fully vet the consequences of the entire proposed regulatory 
reform plan. I hope to hear from the witnesses today about 
their views on the reform proposal and areas that may need some 
improvement.
    In particular, I am curious to know if you believe that 
there will still be gaps in regulation between agencies, if 
investors will be protected as expected, and whether the SEC 
and the CFTC will have the resources necessary to carry out the 
requirements proposed under these reforms. Thank you. I yield 
back, Mr. Chairman.
    The Chairman. The gentleman from California, Mr. Royce, for 
1 minute.
    Mr. Royce. Thank you, Mr. Chairman. Why has the SEC in the 
course of the past dozen years experienced catastrophic 
failures in every one of its four core competencies: rule 
making; filing review; enforcement; and examinations? This was 
the question raised by former SEC Commissioner Paul Atkins 
recently. And I think it is a tough question that needs 
answering prior to giving additional authority to the SEC. Mr. 
Atkins goes on to note that Enron's corporate filings were not 
reviewed for years in the late 1990's, enforcement examinations 
tips were not pursued on Bernie Madoff, and again, potentially 
in the Allen Stanford fraud case.
    In rule making, the Commission proposed in December of 
1997, and again in April of 2005, regulations regarding credit 
rating agencies, but never adopted any of those. According to 
former SEC Chairman Harvey Pitt, the enforcement examination 
failures in the Bernie Madoff case may have been the result of 
the SEC developing a blind spot because it is overlawyered and 
lacked the necessary traders, managers, and veterans of the 
market. This is certainly also the view of Harry Markopolos 
who, for years, tried to bring this Ponzi scheme to the 
attention of the SEC. Before increasing the SEC's regulatory 
authority, I hope we can get to the bottom of these series of 
failures. Thank you, Mr. Chairman.
    The Chairman. The gentleman from California, Mr. Sherman, 
for 1\1/2\ minutes.
    Mr. Sherman. Mr. Chairman, thank you for holding this 
series of hearings on the Obama Administration's White Paper. 
At yesterday's hearing, I relied on secondary sources to agree 
with a witness that the resolution authority set forth in the 
White Paper involved a permanent unlimited bailout authority. 
In fact, page 77, paragraph 2, of the White Paper, does support 
that witness' conclusion in large part because the Treasury has 
been so bold in interpreting whatever statutory authority we 
give them. Secretary Paulson boasted that he went far beyond 
any authority.
    And of course, the bill has been used to bail out auto 
companies and to recycle funds, both real stretches of the 
statute. So the onus is on us to draft a statute that cannot be 
stretched or manipulated by any Treasury no matter how bold. 
And it is especially, the onus is on us to make sure that any 
bill we pass does not provide a permanent bailout authority. 
Whether that is a fair reading of what the Obama Administration 
wants or not, it is certainly not what the people of this 
country expect us to do. So I look forward to revisiting the 
Chairman's statements that sometimes duplication is better than 
ambiguity, and in this case, I may argue for triplication. I 
yield back.
    The Chairman. If the gentleman will yield, we will be glad 
to do that at a hearing at which that is the subject, which is 
not today. The gentlewoman from Illinois is recognized for 2 
minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. Thank you for 
holding today's hearing. And welcome, Chairman Schapiro and 
Chairman Gensler. I am very interested in the Administration's 
evolving ideas regarding regulatory reform. I am interested in 
hearing from you all today about the discussions with the 
Administration about OTC derivatives clearing and reporting. 
How will the Administration define standardized and customized 
OTC derivatives? Will new rules include trigger mechanisms that 
will mandate that OTC products be electronically traded, 
cleared or reported to a central database for review. Which 
firms or trading will fall into these three buckets?
    I think I want to hear your views on the recently House-
passed cap and trade bill, which includes a transaction tax. 
Taxing transactions to raise Federal revenues for more spending 
or creating an unnecessary burdensome regulatory environment 
may force U.S. businesses and jobs to move overseas. Our 
economy can't afford it. I also look forward to you addressing 
concerns about the SEC-CFTC regulatory harmonization, 
specifically concerns about the inefficiencies of the SEC's 
rule-based approach to regulation.
    My fear, which I think is shared by many in Chicago, is 
that an effort to harmonize regulations between the SEC and the 
CFTC may slow down market innovations and give international 
competitors an unfair advantage. It is crucial that we strike 
the right balance, not overreact and fashion sound regulation 
to address the deficiencies in the current regulatory 
environment. With that, I yield back.
    The Chairman. The gentleman from California, Mr. Miller, 
for 1 minute.
    Mr. Miller of California. Thank you, Mr. Chairman. In 
recent months, it has become increasingly clear that accounting 
policy has tremendous impacts on the credit markets which are 
experiencing recovery efforts by the financial stability plan. 
Specifically, the issue of mark-to-market has not been 
adequately addressed. In fact, private market activities, 
lending and investing, as well as recovery efforts, remain 
hamstrung by pricing challenges while the accounting 
policymakers have been willing to or are unable to offer the 
necessary guidance.
    The TALF program is an example. Under TALF, assets that 
investors owned that were placed as collateral are held in non-
mark-to-market accounts to shield the investors from the 
exposure. To me, this indicates the problem with the current 
pricing regime and accounting policymakers' ability to address 
the issues in a meaningful manner. More recently, FAS has made 
changes to the accounting standards that will have a tremendous 
impact on securitization known as FAS 166 and 167. These 
enormous changes are occurring at the same time that the 
Administration is trying to restart the securitized credit 
markets to facilitate private lending.
    It is our understanding that the Federal Reserve has 
serious concerns with the policy shift that will derail efforts 
to stabilize financial institutions and get credit flowing. Why 
is there a disconnect between policymakers who own significant 
issues at a time when we are experiencing extraordinary 
economic circumstances. There is tremendous challenge facing 
the $6 billion--okay, I guess my time is over. Thank you, Mr. 
Chairman.
    The Chairman. The gentleman from Massachusetts is 
recognized for 1\1/2\ minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank our 
panelists. I appreciate the frequency of these hearings to try 
to get a sense of the Administration's White Paper on 
regulatory reform. I would like to hear from the panelists 
during their testimony about the issue of these complex 
derivatives being traded over-the-counter. I still believe, in 
spite of the Administration's position, we have a big payday 
problem with the major banks, so I think a lot of money is 
going to gravitate to the OTC version of these things. There is 
no exchange, so we don't have a consistent valuing mechanism in 
place. And I just think that the complexity here is 
incentivized under the President's proposal.
    I raised these issues with Secretary Geithner in the 
meetings that the chairman has arranged, but I still don't 
think the protections are there. So I would like to hear the 
answer to that in your testimony. And I yield back the balance 
of my time. Thank you.
    The Chairman. The gentleman from Texas for 1 minute.
    Mr. Hensarling. Thank you, Mr. Chairman. I am disappointed 
in the Administration's regulatory reform plan for a number of 
reasons, one of which is it doesn't seem to make sense of our 
current existing regulatory structure as much as simply adding 
new regulatory structure on top of it. Again, the premise is 
wrong that we suffered from a lack of regulation. It wasn't 
lack of regulation, it was regulators making a mistake, and 
frankly, some dumb regulation. I know that one of the members 
brought up the AIG matter. I would have all my colleagues 
recall that the regulators said, do you know what, we had the 
expertise, we had the regulatory authority, we had the 
manpower, we just missed it. And so maybe there are things we 
can do to help make regulators smarter. I am not sure that 
necessarily argues for more regulation. I continue to be 
concerned that if you hamper or customize OTC derivative 
contracts, firms will find it more challenging to hedge their 
risk, that means less credit, which means less job 
opportunities in an economy that has the highest unemployment 
in 25 years. We must do better.
    The Chairman. We will now begin with our statements. And we 
will start with Chairman Schapiro.

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

    Ms. Schapiro. Thank you very much. Chairman Frank, Ranking 
Member Bachus, members of the committee, thank you for the 
opportunity to testify today on behalf of the Securities and 
Exchange Commission. I am especially pleased to be here with my 
colleague Gary Gensler. I am committed to a long and successful 
collaboration. President Obama recently unveiled a plan for a 
stronger and safer financial system. I believe the plan makes 
real progress in filling gaps in our regulatory landscape that 
became apparent in the wake of the financial crisis. In 
particular, it calls for improved regulation, oversight, and 
transparency for over-the-counter derivatives, more consumer 
investor focus by financial regulators, and improved 
macroprudential oversight so that regulators can identify and 
minimize risks that flow across the financial system.
    I believe this plan will strengthen the SEC, build on our 
internal efforts and, in the process, improve investor 
protection and help us to begin to restore confidence in our 
financial system. The most critical regulatory gap we must fill 
involves the enormous over-the-counter derivatives market. 
Given the breadth of this market and the importance and 
interconnectedness of institutions participating in it, the 
Administration has proposed a comprehensive framework for 
regulating OTC derivatives with four broad objectives: 
preventing activities that pose risk to the financial system; 
promoting efficiency and transparency; preventing market 
manipulation and other abuses; and ensuring that these products 
are not marketed inappropriately to unsophisticated parties. 
The SEC, the CFTC, and the Treasury Department have been 
working closely and have general agreement on the pressing need 
for a comprehensive regulatory framework. There is agreement on 
the need for recordkeeping and reporting requirements, 
significant transparency, robust margin requirements, clearing 
systems that monitor and manage risk, comprehensive dealer 
regulation, business conduct and disclosure standards, and 
vigorous enforcement.
    In fashioning a regulatory framework for OTC derivatives, 
it is crucial to recognize the close relationship between the 
regulated securities markets and the now mostly unregulated 
markets for OTC derivatives. For example, when an OTC 
derivative references a security, it can be used to establish 
synthetic long or short positions regarding that underlying 
security. In this way, market participants can replicate the 
economics of either a purchase or sale of securities without 
actually purchasing or selling any securities. Because market 
participants can use unregulated OTC derivatives to service 
synthetic substitutes for securities, these securities-based 
derivatives are closely interconnected with the regulated 
securities markets. This creates significant regulatory 
arbitrage opportunities, that is, moving products away from 
traditionally regulated transparent markets to customized 
unregulated and opaque bilateral contracts. In deciding how to 
fill this regulatory gap, it is important that similar products 
be regulated similarly so that market participants cannot use 
size and leverage to work around the system.
    Accordingly, we believe securities-based swaps should be 
subject to the Federal securities laws. This approach would 
incorporate the securities related OTC derivatives market into 
an existing unified securities regulatory regime. As such, it 
would be relatively straightforward to implement because these 
products would be placed under the same umbrella of oversight 
as the underlying securities. This approach also would 
establish a clear delineation of primary regulatory 
responsibility which would help avoid regulatory gaps.
    And finally, it provides a workable framework for bringing 
transparency, clearing, and exchange trading to this market in 
the near term without creating undue dislocation. In addition 
to OTC derivatives, the SEC and the CFTC have been working 
closely together to identify differences between our two 
regulatory frameworks that might be harmonized. While the 
cultures and missions of our agencies are, in some ways 
different, we share many of the same public policy objectives. 
While I focus largely on my remarks on derivatives, there are 
many aspects of the Administration's plan as well as 
complementary proposals that have a direct bearing on the SEC's 
oversight capabilities. Very briefly, the plan seeks to require 
that advisers to hedge funds and other private investment pools 
register with the SEC. Currently, exemptions in the laws have 
placed hedge funds and many of their advisers outside the 
purview of regulation.
    First, through registration and resulting oversight, we can 
enable investors, regulators in the marketplace to have more 
complete and meaningful information about private fund 
investors, the funds they manage and the impact of their 
activities on the broader markets. Second, the SEC and the 
Administration also appreciate that many investors do not 
realize that they may be treated differently depending on 
whether they seek investment advice from a broker-dealer or an 
investment adviser. I fully support the view that financial 
professionals who provide similar services should be subject to 
the same standard of care, namely, that they act solely in the 
interest of their customers or clients and that they be subject 
to comparable regulatory requirements.
    Third, I support the Administration's proposals to 
strengthen SEC enforcement by giving it expanded authority to 
compensate whistleblowers who bring significant enforcement 
information to our attention, to pursue expanded sanctions 
against wrongdoers, and to increase the potential grounds for 
seeking sanctions.
    Fourth, I agree with the need to do more to address 
conflicts of interest in the credit ratings process. To that 
end, I believe the Administration's legislative proposals are a 
valuable step forward and will help to better align the 
interest of credit rating agencies with investors who rely on 
them. Already, the SEC is taking steps to heighten regulation 
of rating agencies, including establishing a branch of 
examiners dedicated specifically to rating agencies.
    Finally, I believe there is a need for a systemic risk 
regulator as well as a strong and robust financial stability 
oversight council. Such a council would help assess emerging 
systemic risk by setting standards for liquidity, capital, and 
risk management practices. There is clearly much to do, but I 
believe the steps the Administration, the SEC, and the Congress 
are taking will help restore investor confidence. Thank you, 
Mr. Chairman.
    [The prepared statement of Chairman Schapiro can be found 
on page 58 of the appendix.]
    The Chairman. Chairman Gensler.

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

    Mr. Gensler. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. It is good to be back 
with you again after 8 years since I was last before this 
committee. Thank you for inviting me to discuss the White Paper 
on Regulatory Reform on behalf of the full CFTC. Financial 
regulatory reform is critical for the health of our economy. As 
President Obama outlined last month, we must urgently move to 
enact broad reforms in our financial regulatory structure in 
order to rebuild and restore confidence in our financial 
system.
    I would like to start by discussing reforms most relevant 
to the CFTC. First and foremost, this is with regard to 
bringing broad regulatory reform for the derivatives 
marketplace. This will require two complementary regimes: One 
regime that oversees the derivative dealers themselves; and 
another regime that oversees the market functions. I think it 
is only with those two complementary regimes that we are able 
to capture the reforms that are necessary.
    For the dealers, we should set capital standards and margin 
requirements to help lower risk. We should set business conduct 
standards to guard against fraud, manipulation, and other 
market abuses. We should also mandate recordkeeping and 
reporting with an audit trail to promote transparency. The 
dealer regulation will cover all OTC derivatives, standardized 
as well as customized derivatives. This, I believe, won't go 
far enough, though, and we also need to try to lower risk 
further by mandating that standard contracts be on central 
clearing and that standard contracts also be on exchanges 
whether they be fully regulated exchanges or regulated 
electronic trading systems which promotes transparency. 
Requiring clearing and trading on exchanges or regulated 
transparent electronic trading systems will further promote 
transparency, and will further lower risk in addition to the 
dealer regime that I talked about. To fully achieve the 
objectives, we must enact both of these complementary regimes.
    President Obama last month also called for recommendations 
to change the statutes and regulations that would harmonize the 
regulation of the futures and securities markets, and I believe 
this is essential. Specifically, I would just mention three 
areas where the CFTC and SEC harmonization process, I think, 
would benefit the American public. First, as we saw last year, 
there are gaps in our regulatory structure right now. The heart 
of this hearing today is filling one of the major gaps; over-
the-counter derivatives.
    Second, I think there are places where we may overlap in 
regulation. And while in certain circumstances that is 
appropriate, we look to identify those overlaps and seek to 
work with this committee and Congress where we can help clarify 
those overlaps for the marketplace and for all participants.
    And third, there are places where we regulate similar 
products or similar market events or exchanges where we might 
have inconsistent rules, and we look forward to working 
together to identify those inconsistencies and try to harmonize 
them.
    Chairman Schapiro and I are committed to doing this and 
seeking public comment. And in fact, we are looking to have 
joint hearings between the SEC and the CFTC in August and 
September to help inform the Commissions on these views as we 
seek to inform the rest of the Administration and you on our 
views on these matters. As we work with Congress to apply these 
regulations to over-the-counter derivatives, I think it is a 
real opportunity actually to start with harmonization right 
here on over-the-counter derivatives.
    And whether the SEC has jurisdiction or the CFTC, we need 
to have similar fraud standards and manipulation standards, 
that the electronic trading systems that we oversee have 
similar standards and that we embed in statute, the over-the-
counter derivative statute, that we have strong vigorous 
standards with this regard. I would also like to just briefly 
touch upon hedge funds where the Administration is called to 
require hedge funds to register and other investment funds with 
the SEC, which I fully endorse. But I think as we go forward to 
do that, we have to ensure that the CFTC still can make sure 
that anyone participating in the futures markets and those 
markets that we oversee that we are able to have our full 
ability to police those markets and get ready access to 
information from the SEC from these hedge funds.
    Lastly, I just want to say how fortunate I believe to have 
a partner in this effort, SEC Chair Mary Schapiro. She brings 
invaluable expertise which gives me great confidence that we 
will be able to provide Congress with sound recommendations on 
comprehensive oversight of OTC derivatives in the markets as a 
whole. I look forward to your questions, and I am glad to 
testify in front of you at any time, Mr. Chairman.
    [The prepared statement of Chairman Gensler can be found on 
page 43 of the appendix.]
    The Chairman. Thank you. Ms. Schapiro, one of the issues 
that you know people have concern about here that is clearly in 
your jurisdiction is the short sale question. Could you give us 
the state of play now before the Commission, what are you 
thinking about, what is pending, what do you think is going to 
be happening?
    Ms. Schapiro. I would be happy to, Mr. Chairman. As I have 
told the committee before, that has been the number one issue 
on which I receive comments and letters from both the public, 
the industry, and Congress as well. The SEC proposed a rule a 
couple of months ago and the comment period closed on June 
19th, multiple approaches to dealing with short selling in the 
marketplace. Those approaches broke down roughly to two 
categories: a set of proposals that would operate as a market-
wide mechanism to slow the descent of stocks during a declining 
market; and the other set akin to the old uptick rule or a bid 
test.
    The first set of proposals were triggered off of a circuit 
breaker concept so that if the price of a particular stock 
declined by more than, say, 10 percent in one day, then a 
circuit breaker would kick in and no more short selling of that 
stock would be possible for some period of time. As I said, the 
comment period closed on June 19th on the multiple proposals. 
We received 4,000 comment letters. We are working our way 
through those comment letters. In addition, we held a 
roundtable to solicit views.
    The Chairman. What is your timetable for a decision?
    Ms. Schapiro. I am hopeful that we will do some interim 
steps very quickly with respect to fails to deliver and a 
number of other rules that were also in play. And I am hopeful 
that over the next several weeks or next 2 months we will be 
able to come to closure and, assuming the votes on the 
Commission, an appropriate response.
    The Chairman. Thank you. I know members may still have some 
further questions about that. On the registration of hedge 
funds, let me ask both of you, I think there is a fairly broad 
consensus among some on our side of the committee that hedge 
funds should register, but the question is how. That is, hedge 
funds are not mutual funds. And I know when you are a lawyer 
and you have to choose, well, we will take this model or that 
model, A or B or C, but we can make it A-plus or C-minus or ice 
cream. So we can do whatever we want in terms of the form. When 
we come to the drafting on registration of hedge funds, should 
we pick one of the existing models, etc., or would you 
recommend that we draft a registration for hedge funds that 
might vary from some of the existing forms taking into account 
their particular nature? Ms. Schapiro?
    Ms. Schapiro. I think, Mr. Chairman, there are obviously, 
as you suggest, lots of ways to do this. You can register the 
funds themselves as investment companies and then try to exempt 
them from a lot of the requirements. You can register the 
adviser to the hedge fund which is what the SEC has proposed 
doing which would get us I think virtually everything we need 
to effectively regulate hedge funds in terms of registration, 
inspection ability.
    The Chairman. Let me just say, because again, we have the 
power to write the law, requiring to register and then 
exempting from some of the requirements of what we register 
doesn't make a lot of sense, right? We ought to just write it 
right the first time.
    Ms. Schapiro. I don't disagree with that. And I think the 
concern would be that trying to stuff a hedge fund into the 
model of an investment company isn't really the most rational 
way to go. But registering the investment adviser gets us 
access to really everything we need as a regulator of these 
instruments with the exception of the ability to impose on the 
fund itself capital requirements, diversification requirements 
that nobody is envisioning, at this time any event, needing to 
do. So we think adviser registration works.
    The Chairman. I figured that, and depending on how it 
works, that could conceivably be something that a systemic risk 
regulator, however it is constructed, might be taking a look 
at.
    Let me ask the last point on derivatives. One of the 
questions that has come up was mentioned today in one of the 
publications. What is your view on--well, let's put it this 
way. What is the function that is served, and there may well be 
one, when someone who does not own an asset buys insurance 
against a drop at its value, people buying credit default swaps 
who don't have an economic interest, in particular, on the item 
for which they bought the credit default swap. Is that an 
economically important function? Should we, in any way, try to 
change that? Mr. Gensler?
    Mr. Gensler. I think that the function of using a 
derivative to hedge a risk, first and foremost, is generally a 
risk that is in that commercial enterprise. But there are some 
times that you are hedging a risk that is similar to a risk you 
have. So it may be that a commercial bank wants to hedge a 
portfolio of loans and enters into a credit default swap which 
is on a portfolio, again, of listed securities that have some 
correlation or relationship to it. So there are--
    The Chairman. Let me ask you, and finish in writing, is 
there a third category, that is, you might decide to buy one 
because you are taking a good guess that something is going to 
go bad and you will make some money if it does, and is that 
something that is good or bad or indifferent? Well, let me get 
that in writing because we don't have time. We have a lot of 
members who want to ask questions. The gentleman from New 
Jersey.
    Mr. Garrett. Thank you, Mr. Chairman. Taking a page out of 
Mr. Royce's comment, and as I said the last time, we have sort 
of been here before with regard to having a problem and then 
coming back to reform it, and we went through a litany of 
problems in the past of the SEC. Just yesterday, we had a 
panel, and the idea was we were going to give more authority to 
the Fed. And I went through a litany of problems where they 
missed on capital requirements, they missed on regulation, they 
missed on monetary policy, and yet it is the thought right now 
in Congress we are going to give even more authority there to 
the Fed. So in a sentence, why should the American public be 
watching the hearing today and be sanguine to think that we 
should be at this point giving more authority to the SEC?
    Ms. Schapiro. Congressman, I think it is fair to say that 
every regulator over the last several years has had episodic 
failures and missed many of the issues that gave rise to the 
financial crisis, the SEC included, but certainly not only the 
SEC. But at the end of the day, there is an enormous amount of 
work that happens at the SEC that benefits the American 
investor and taxpayer on a daily basis. Whether it is the 
review of corporate filings to ensure that they are honest and 
transparent or ensuring that mutual funds are actually 
operating as they have extremely effectively over the last 
several years.
    Mr. Garrett. I appreciate it. They do some good, but 
obviously, the failures in the past, present company excepted 
because you were not there at the time, is something that just 
raises that question. I don't have much time, so let me go on 
to the next point, because I know you are going to sing the 
praises of things that have been done well. A lot of people 
could have a disparate opinion as to what brought us here. Some 
people would say it is GSEs and their leveraging issues, other 
people would say it is the credit rating agencies and they have 
problems; other people would say it was the regulators or the 
OTS and what have you that simply missed things and what have 
you. A lot of people can point out different things. We have 
not come to a conclusion as to what the problem ultimately was 
that brought us here. Can you point to one example where it was 
standardized derivative products that was ultimately part of 
the cause that brought us here?
    Mr. Gensler. I think that the unregulated derivative 
dealers, the affiliates at Lehman Brothers and Bear Stearns 
and, for that matter, even that which was in the back allowed 
for a great deal extra leverage in the system.
    Mr. Garrett. Okay. That is the--
    Mr. Gensler. And even the standardized product.
    Mr. Garrett. That is the entities. How about the product 
themselves? What we are talking about here is regulating the 
product and putting constrictions around the product itself, 
and its a standardized product as opposed to, because there is 
a whole host of other proposals out there as far as regulating 
the brokers and investment advisers, can we point to where it 
was--
    Mr. Gensler. I am of the firm belief that bringing 
standardized products onto central exchanges and onto central 
clearing will lower risk and enhance transparency. Tens of 
thousands of end users will benefit by that.
    Mr. Garrett. I appreciate we can lower risk, but can we 
give one example so I can go home and say this was part of the 
problem that caused it and here is a specific example.
    Mr. Gensler. I think that AIG is Exhibit 1--$180 billion of 
American taxpayer money for standardized and maximized 
products.
    Mr. Garrett. Excellent point. AIG, would they be products 
that would therefore go through and be considered a 
standardized product that would go through a clearinghouse?
    Mr. Gensler. Many of their products would. Some of them 
were so customized they couldn't. But all of them would be 
regulated for capital and margin. All of them would be 
regulated as a derivative deal.
    Mr. Garrett. Wasn't most of the problem with the AIG 
situation with their credit default swaps which were based upon 
the subprime problem and the mortgage problem? They would not 
be standardized product.
    Mr. Gensler. Also, there was no effective Federal 
regulation for capital or margin. So last September, Congress 
was put in a terrible position we should never put Congress in 
to have to think about the TARP bill and then the Federal 
Reserve and the Treasury loan, you know, this $180 billion of 
the Fed specifically. We want to avoid that in the future. And 
that is for standardized products as well as customized 
products. We need capital and margin requirements to do that.
    Mr. Garrett. Well, I have never heard anyone say that the 
problems over at AIG were with their standardized product.
    Mr. Gensler. It was actually both. The customized product 
get a lot more publicity obviously because they are so exotic. 
But it was also the standard. It is the amount of leverage that 
you can put in the system, how much debt you can put on a very 
small basic capital.
    Mr. Garrett. Very quickly, I have heard a lot of people 
from the business community say even with the nonstandardized 
products which would raise the capital requirements or the 
marginal requirements that this would basically make it 
impossible for them to use them and hedge their businesses. You 
only have 30 seconds.
    Mr. Gensler. I think that it is a very good question, but 
they could absolutely--end users could use the products. We are 
saying there should be customized products. I think that by 
bringing transparency to the standard part it would actually 
lower costs because they should see where the spreads are and 
they could price off the standard product.
    Mr. Garrett. Thank you.
    The Chairman. I recognize the gentleman from Pennsylvania 
and take 15 seconds to say, Mr. Gensler, when you said that the 
AIG thing put Congress in a terrible position, yes, but only as 
spectators. I do want to emphasize. We voted on the TARP, but 
the Administration came to us, the Secretary of the Treasury 
and the Chairman of the Federal Reserve last September, and 
informed us that they decided to advance money to AIG. There 
was never any congressional input into that. A few jaws dropped 
but no votes were taken. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman. And should we add 
that there was a different President at that time?
    The Chairman. Yes.
    Mr. Garrett. We don't want to get partisan, do we?
    Mr. Kanjorski. No, no. Just timeframe. First of all, the 
relationship between the two of you is something we should 
compliment, and I do. And I anticipate that because of this 
good relationship we are going to have very positive things. I 
understand because of prior meetings and other testimony that 
you have made that you have worked out and harmonized a great 
deal of the conflict between the two agencies but that you have 
not resolved all of those conflicts. And you are down to what 
really I would like to ask, what are the remaining 
disagreements between the SEC and the CFTC that have not yet 
been harmonized and are still open in the air, and do you have 
a suggestion where they are going to come down and are they 
resolvable at a given time?
    Ms. Schapiro. Let me take the first crack at that and then 
ask Gary obviously to fill in. I think you point out correctly 
that we have tremendous agreement around most issues. There is 
a very narrow area where we are not in full accord, and that is 
with respect to whether broad-based indices, OTC derivatives or 
swaps on broad-based indices should be regulated by the SEC or 
the CFTC. Our view is that securities-related derivatives ought 
to be under the SEC's jurisdiction.
    The Commodity Futures Modernization Act, while exempting 
these products broadly from regulation, did retain with the SEC 
antifraud authority over anything securities based. As Gary 
will point out, under the Shad-Johnson Accord reached quite a 
few years ago, there was a drawing line between narrow-based 
and broad-based indices. Broad-based went to the CFTC and 
narrow-based went to the SEC for the purposes of options and 
futures. I would say that is the one area that we still are 
trying to work through. As we go through our harmonization 
process, and as Gary said, we are going to hold joint hearings 
to get public input on this, we will discover there are lots of 
areas where our rules approach things differently.
    And on those I don't even know that we will have particular 
disagreement. Some won't be able to be harmonized because the 
nature of the markets and the products is quite different. But 
that is what we are working through right now.
    Mr. Gensler. I would agree with that. I think that we are 
in agreement. And the products, the interest rate, currency, 
and commodity products, the CFTC would take the lead on. On the 
narrow-based, the SEC would take the lead. This is broad-based 
product area. Currently, there are over 150 broad-based futures 
contracts. There are five or six that trade actively that are 
regulated by the CFTC. There are about 60 options on those 
futures, again, regulated by us. So broad-based implicate 
those. But there is a second category that I should mention. I 
do think we can go in and harmonize for the trading platforms. 
And working with Congress and working together we can do that, 
but we haven't yet, between our agencies, been able to get to 
that level of detail. But I think that would be important.
    Mr. Kanjorski. I did hear, though, in Chairman Schapiro's 
testimony, that there is a concession that there will be some 
areas that cannot be harmonized and will take some other 
action. And that is consistent with other things that I have 
seen in the last week or so where regulators have not been able 
to agree as to where a problem should lie in terms of who has 
the responsibility of solving or moving in. I am particularly 
referring to the CIT. There seemed to be three Federal 
regulating entities that were not quite in agreement as to who 
had the responsibility to take action if any.
    As a result of that, and the fact that we have a 
concession, you cannot harmonize, have you thought of the 
possibility of our creating an Uber-regulator so that there is 
a final resolver of conflict of disagreement in the regulatory 
community of the United States if the problem gets--rather than 
just waiting around for months and having the Congress enact 
some special features because of a disaster. Can we close it 
down as if there is an actual decider and a peak and have you 
given any consideration to that?
    Ms. Schapiro. I think it is certainly worth exploring. And 
I do think, to the extent Congress might move forward with some 
sort of financial stability oversight council, whether as the 
systemic risk regulator or as a body over the systemic risk 
regulator as we would propose that might be a forum for broader 
discussion of the differences with other regulators. It might 
help us achieve some kind of a consensus on how to go forward.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you. I noticed that both of you, in your 
opening statements, said that you were working together as 
colleagues and in partnership and I think that is going to be 
critical and I was glad to hear that. I think the key in doing 
this, we are going to continue to have two separate agencies, 
that is apparent. We are the only country in the world that 
really has that dual set of securities and futures, and you 
know they are regulated quite differently.
    So I think there is obviously a need for harmonization. I 
think the key is going to be the leadership of you two. I think 
that will really set the tone and will determine how successful 
we are. So I applaud you for your opening statements. I also 
want to focus on something, and I agree that Chairman Schapiro 
said, she said I want to emphasize to the committee that the 
SEC and other financial regulatory agencies have been making 
solid progress using our existing authority to address the 
financial regulatory problems that face this country.
    You do have a lot of existing authority, and I think it is 
important that we as a Congress realize that. And actually, in 
all this regulatory reform, my concern has been that we are 
telling you what to do as opposed to you looking at your 
authority you have, looking at the problems that we now all 
realize, and they are very complex problems, and saying to us 
this is what we need, you know this is how we are going to 
discharge that authority or we need additional statutory 
authority. As opposed to, particularly with some of the banking 
regulators, saying we are going to totally change our approach 
to regulation and some good, but maybe not so good ways.
    I am going to ask one question and one question only. 
Having to do this by September 30th is to me an overwhelming 
and unrealistic goal. Now, I know that the problems are there, 
but you have already taken steps. And other regulators have 
already taken steps, I think, to minimize a recurrence of what 
we saw last year.
    I don't think in the current climate that businesses are 
going to take that kind of risk, number one, or that regulators 
are allowing that kind of risk. But tell me, I will ask both of 
you, how realistic is that? And will you not hesitate to ask 
for more time?
    Mr. Gensler. We certainly will not hesitate to ask for more 
time, but what we are trying to do--and I think why the 
President and Secretary Geithner asked for that time--is to 
help inform Congress as they are embarking upon legislative 
process. So we are going to have joint public hearings to hear 
from the public. We are doing what I will call a ``gap 
analysis'' to see where the gaps are right now. And then we are 
going to try to have as many meetings as we can fit into our 
schedule to try to resolve those and make recommendations. But 
again, we might have an interim step on September 30th, and 
then have more to report, but to help you in your legislative 
process as well.
    Mr. Bachus. Chairman?
    Ms. Schapiro. I would agree with that completely. We are 
really committed to getting as much done as we can by September 
30th. And if we need more time, we will ask for more time. It 
is very important that we get this right. These are, as many of 
you have pointed out, massively important markets, and we want 
to be sure we are thoughtful about it.
    Mr. Bachus. And I endorse this idea of trying to get at 
least an interim report, but I would caution you as well as you 
cautioned, I think, in your statements, how complex these 
matters are and that you want to get it right because these 
have tremendous implications for our economy if they are not 
done right.
    So I thank you and look forward to what I hope will be an 
interim report September 30th.
    But I would caution you also, you are going to be asked to 
speak to all sorts of forums and all sorts of public addresses. 
You need to limit some of that. You need to set your priorities 
because there is a lot of hard work back at the agencies. And I 
hope that the public and the Congress will realize that the 
agencies are going to have to do a lot of hard work, a lot of 
concentration, and a lot of study in a very short period of 
time.
    Mr. Gensler. Thank you.
    The Chairman. I just would say, I think the gentleman from 
Alabama has just shared with you the advice he probably gets 
from his scheduler, as we all do: Don't speak at every forum of 
your priorities. So you are getting passed on what every one of 
us hears every day.
    The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman. And I thank 
our presenters for being here today.
    As you know, I have introduced H.R. 3145, a bill to ban 
credit default swaps. And that has caused a lot of conversation 
with many saying, well, they should not be banned but we should 
have the central exchange and there should be transparency. But 
the more I learn about them, the more concerned I am. I just 
want to cite this particular situation.
    McClatchy Company provides the most recent example of 
credit default swaps hindering our lending markets. This 
California-based newspaper publisher with large holdings in 
North Carolina and Minnesota recently offered bondholders an 
above-market price for its outstanding debt. The company made 
this offer in order to offset declining advertising revenues 
with reduced costs. More than 90 percent of bondholders have 
turned down this offer.
    According to an industry analyst, the debt offer failed 
because many of the bondholders also had substantial credit 
default swap positions. These bondholders stood to gain more 
from McClatchy's demise than from its continued operation.
    While the company still exists today, it carries massive 
amounts of debt, thanks to the many empty creditors who stand 
to profit from McClatchy's bankruptcy.
    Some say we should only be concerned about naked credit 
default swaps. I say we should be concerned with all credit 
default swaps, particularly when they function as an incentive 
to drive a company into bankruptcy.
    Ms. Schapiro, if your agency was given authority over 
security-based swap agreements, how would you deal with this 
very controversial question of credit default swaps? And if you 
could, comment on other types of swaps, such as interest rate 
and currency swaps.
    Ms. Schapiro. Thank you. I will ask Chairman Gensler to 
talk about the latter two since those are CFTC-related 
products.
    You raise a very important question, and you and I have had 
a little bit of a chance to discuss this previously. There is 
no question but your economic interest, when you are on a 
credit default swap, may dictate that you have less incentive 
to cooperate with a troubled company entering bankruptcy, 
because you are going to be paid when that credit event happens 
in any event. And perhaps to make things worse, there may also 
be an incentive to even short the stock on top of that.
    I think transparency would help tremendously in this 
regard. And I think attaching some greater costs, frankly, to 
doing credit default swaps via regulatory oversight, which 
obviously has a cost to it, the provision of capital and margin 
requirements.
    I do think that as we explore this issue--and we are 
spending a lot of time thinking about it, and whether at a 
minimum there ought to be some kind of an insurable interest--
we have to think about the complexities even of just that piece 
of it, putting aside whether you would ban the product 
entirely.
    A bondholder has an underlying economic interest. Yet in 
this instance, they were not incented to cooperate in the 
bankruptcy. Does an equity holder have an economic underlying 
insurable interest? What about a large supplier to the company 
who would see their revenues disappear if the company declares 
bankruptcy? Might not they want to ensure that revenue stream 
through the purchase of a credit default swap? So I think the 
complexities are very significant and ones we have to work 
through.
    I would say that if Congress decides to go down the path of 
banning naked credit default swaps, it would be good to think 
about doing something like that prospectively, given the size 
of the marketplace that already exists and the potential 
disruption of unwinding those kinds of positions. But again, I 
think these are very difficult questions.
    Ms. Waters. Thank you. I still have time.
    Would you like to comment on that, please, Mr. Gensler?
    Mr. Gensler. Well, I do think that on the credit default 
swaps--and this is one of the reasons why we agree--the credit 
default swaps on single issuers like McClatchy that you 
mentioned, are very related to their stock, are very related to 
their bond. And appropriately, all of these interplay on 
investor protection and should be regulated, I think, jointly 
by the SEC. And just as they are looking very closely at the 
short sale roles on equity, there is some similarity of the 
short sale or naked sales in credit default swaps.
    I think as it relates to interest rate swaps and currency 
swaps, what really are far more about broad interest rates or 
broad--you know, where currencies are, that there is a role for 
both hedgers and speculators. And speculators play an important 
role in the marketplace, even if they are naked, so to speak--
if that term is all right--because they provide the other side, 
so that hedgers can find somebody that may, in essence, provide 
that insurance to them who want to protect themselves in 
currency and interest rate markets.
    Ms. Waters. Thank you very much.
    I yield back the balance of my time.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chairman Gensler, I understand that the CFTC is going to 
have some public hearings regarding hedge exemptions and 
position limits in the energy markets. As you are aware, in the 
2008 farm bill we had quite a bit of discussion about that, and 
we expanded some of the CFTC's authority in that area. There is 
a lot of disagreement about the role of speculators in the 
marketplace. And my opinion is that they provide liquidity and 
price discovery by the fact that they are in the marketplace.
    But what do you think might be the impact if you move to 
limit, and in some cases prohibit, some institutional investors 
from actually being in the energy commodities?
    Mr. Gensler. I thank you, and I thank you for the support 
in last year's farm bill for the additional authorities.
    The CFTC, under a statute that had been in place for some 
70 years, sets limits in the agricultural space--corn, wheat, 
soy, and so forth--and has the authority, in fact, it says that 
we shall set them in other markets.
    And so what we have raised as a question is, we do it in 
the agricultural stock, we don't do it in the energy markets. 
The philosophy really is to protect against the burdens that 
may come from excess speculation. Speculators are good, they 
provide the other side for hedgers to hedge their transactions. 
But conceptually, it is that we have at least a minimum number 
of participants in a market place. If there is a diversity, if 
you had that 10 percent limit, then you would have at least 10 
participants in a marketplace and lower the risk that there are 
dislocations. If they have to liquidate those positions, it 
actually lowers the risk in clearinghouses that we have been 
talking about today.
    So we are going to have hearings starting next week--I see 
Commissioner Dunn from the CFTC is here also today--and we will 
be looking at this over the next several weeks and then trying, 
if appropriate, to move on it during the fall.
    Mr. Neugebauer. One of the issues, though, that I get 
concerned about, when you talk about beneficial interest and 
whether someone is hedging or they are speculating, I would 
submit to you that in the energy business, everybody in this 
room has some beneficial interest when it comes to energy. So 
one of the concerns I have is if we move in this direction, 
what impact could that potentially have on commercial hedging 
if we begin to limit the participants in that? Because, as you 
know, it is a fairly large market.
    Mr. Gensler. And our mission is to make sure that the 
markets are fair and orderly and provide the risk management 
for those hedgers. But through position limits, Congress gave 
us the authority many years ago to set position limits to 
protect those markets, so that they are fair and orderly and 
they represent the price discovery that you are so--so I think 
we are aligned on that, and it is whether this promotes market 
integrity along that front.
    Mr. Neugebauer. And then there is the question out there 
that there are other places for the investors to go and trade 
energy. Obviously, the United States doesn't have a lock on 
that. What impacts, if we get two prescriptive, too overly 
protective here, could that have on U.S. markets down the road?
    Mr. Gensler. It is a very good point. It is why we have 
asked Congress and this committee to consider in over-the-
counter derivatives regulation that we also make sure that the 
position limit authority for commodities of finite supply, that 
we also be able to do that in the over-the-counter market if it 
serves a price discovery function back into the other regulated 
markets.
    Because you are right that you could move from the futures 
to the over-the-counter derivatives. And we saw that in a 
number of cases in the last several years.
    Mr. Neugebauer. Quickly, a question to both of you. You 
know, we see in this regulatory proposal that the 
Administration is putting out, you have the clearinghouses, you 
have the regulators, and you have obviously the investors. 
There has been a lot of discussion about bringing more equity 
and margin to the marketplace. Do you support a more aggressive 
setting of margin requirements from the regulator, or still 
leaving that decision to be made by the individual clearers, 
and basically with the regulators primarily looking at the 
capital structure of the clearing entities?
    Mr. Gensler. I think we need to start with having in 
statute, mandatory centralized clearing for the standardized 
product as contrasted today--it is voluntary--and that there be 
rigorous risk management standards and that clearinghouses have 
open access to members to be part of that.
    Margin could first be set by the clearinghouse, but that 
the regulators, the SEC and the CFTC overseeing those 
clearinghouses should be able to prescribe through rules those 
risk management standards and, where appropriate, if we find 
that a clearinghouse--just as we have in the futures clearing 
and an options clearing now, the regulators do have authority 
to go in and comment on that.
    Mr. Neugebauer. Mr. Chairman, could I ask Ms. Schapiro to 
quickly answer that? Could I ask unanimous consent to have an 
additional 30 seconds?
    The Chairman. We have members low down who don't get to ask 
questions. If everybody gets an extra 30 or 45 seconds, then 
they are not permitted. That is why I would object. People can 
answer in writing.
    The gentlewoman from New York.
    Mrs. Maloney. I first grant 30 seconds to Ms. Schapiro to 
answer his question.
    Ms. Schapiro. Thank you.
    I very much agree. I think that margin levels can be set in 
the initial instance at clearinghouses. I think it will be very 
important for the regulators to have very robust oversight of 
those clearinghouses to ensure that they themselves don't 
become systemic risk concerns over time. And that will involve, 
obviously, making sure they are stress-testing those marginal 
levels and their capital levels, as well as ensuring they have 
all the proper systems and backup and books and records and 
transparency.
    Mrs. Maloney. First, I would like to welcome our 
witnesses--particularly Mary Schapiro, a former constituent, a 
resident of New York; New Yorkers are very proud of your 
service and your current appointment--and to Gary Gensler, the 
Chairman, who was part of the Clinton team that brought us the 
longest period of economic expansion in our country's history 
of balanced budgets and surpluses. I am glad that you are back 
on the economic team. And welcome, it is good to see you again.
    First of all, I want to say that I truly believe that 
reforming the financial markets and system is the most 
important issue before our country. And getting it right will 
determine our economic growth and expansion for the next--
probably 50 years.
    And I want to go on record in support of the many honest 
hardworking men and women in the financial services industry. 
Many people have made mistakes, and they feel like they are 
unjustly being attacked when they are trying very, very hard to 
be part of the solution and part of moving our economy forward.
    I also want to state how important financial services are 
in terms of our exports. Along with Boeing, it is one of the 
largest areas that we export goods and services that helps with 
our trade deficit. So moving forward in a correct way is 
tremendously important.
    I for one would like to wait until the report comes back 
from the Commission that we have put in place that will tell us 
what was really the problem, so that we can make sure we are 
addressing what is the thoughtful process of what caused the 
crisis. I truly believe the best chapter in government since I 
have been in Congress was the 9/11 Commission report that 
expertly pointed out what caused the problem, with concrete 
recommendations of what should be done. And I would like to see 
what this Commission has to say.
    But the first road map we saw was AIG. And it clearly 
showed markets were out of control. No one knew what was going 
on. At the beginning of the week, they said they didn't need 
help. By the end of the week, they needed $50 million. By the 
end of the weekend, they needed another $30 million, and then 
it just continued.
    Former Chairman Fuld testified before this committee on the 
Lehman disaster and crisis and said if he had one 
recommendation, it would be that there would be one central 
clearinghouse so that you had control of what your exposure is 
internationally and nationally so you understood the exposure. 
I don't think you are going to get that with capital 
requirements and margin requirements and leverage requirements.
    And my question, really to Mr. Gensler is, in these 
clearinghouses are you proposing one central clearinghouse, 
which is what he suggested, or several clearinghouses? And then 
what do you determine is going to be over the counter, what is 
going to be in a clearinghouse? But do we have one area where 
we are going to be able to track the exposure of investors and 
the economy of our country?
    Mr. Gensler. I thank you. And I thank you for that warm 
welcome. And having met my wife and having my three daughters 
born in New York, I feel some closeness, too.
    I think that we must bring the standard product into 
clearinghouses, but the reason for the regulation of the full 
dealers is so we can also regulate the customized as well as 
standard--
    Mrs. Maloney. Would it be one clearinghouse or many 
clearinghouses? How many clearinghouses?
    Mr. Gensler. What we would envision is that we would allow 
the market--right now there are three or four clearinghouses 
sort of, as I say, competing for this. They need not to be 
voluntary, but they need to be mandated, and that the 
regulators would be able to see them and rigorously oversee 
them. If they meet the standards, they would be able to 
compete. I believe over time you might see a consolidation and 
a concentration in this, but initially the statute would allow 
for more than one clearinghouse.
    Mrs. Maloney. Very clearly, my time has almost expired.
    Brooksley Born fought very hard to keep derivatives, 
particularly energy derivatives, on the exchange. I put forward 
an amendment that mirrored her recommendation, which failed 
primarily because the regulators were opposed to it. Where does 
that stand now? Are the energy derivatives back on the 
exchange?
    The Chairman. Quick answer.
    Mr. Gensler. We believe that energy derivatives need to be 
brought onto the exchange if they are standardized. With the 
exempt commercial markets through the farm bill, we have more 
authorities than we used to have.
    The Chairman. The gentleman from Delaware. And remember, 
our witnesses are encouraged to respond in writing in greater 
detail, and we will have plenty of time this summer to read it 
before we get to any legislative activity.
    The gentleman from Delaware.
    Mr. Castle. Chairman Schapiro, you and others--even us up 
here--expressed some concern with the revolving-door issue of 
employees at the SEC. Actually, I don't see employees of the 
SEC. I see you or your predecessors, or whatever. But as you 
know, the concern has always been that people go to work at the 
SEC, they are relatively young, they are relatively 
inexperienced, and they may then be looking for offers from 
Wall Street, so that may taint what they are doing--not to 
suggest there is anything wrong with what they have been doing, 
but it may taint their thinking on it. And the thinking was--
and you stated--that we need more experienced people.
    Is that starting to happen with the economy and with your 
desire to change that? Can you give us a brief answer on that 
subject?
    Ms. Schapiro. Yes, very much so, Congressman. We have been 
able to take advantage of some of Wall Street's woes by 
bringing on board tremendously experienced people with a broad 
range of skill sets.
    I am sorry Congressman Royce isn't still here, but we 
aren't just hiring lawyers and accountants, we are actually 
bringing in financial analysts, forensic accountants, people 
with expertise in trading and derivatives, in a wide range of 
areas, and we are very much the beneficiaries of Wall Street's 
woes in that regard right now. And that is very much by design 
that we are bringing in those skill sets.
    Mr. Castle. Thank you. Let me jump to another subject. When 
you talk about hedge funds--and I think there are other private 
pools of capital you were talking about--you indicated they 
should be registered. And I couldn't find it in your written 
testimony, but in your oral testimony you suggested that 
registration would lead to other oversight of those particular 
entities.
    Can you elaborate on that a little bit? I mean, I can 
understand and I am all for the registration--I am probably for 
the oversight as well--but does that automatically lead to 
other regulatory supervision of these entities?
    Ms. Schapiro. Not automatically, but I think there is an 
expectation on the part of the public that if an entity would 
be registered with us, we would have some regulatory oversight, 
including reporting to the SEC and, ultimately, if there is a 
systemic risk regulator, to the systemic risk regulator about 
trading activity.
    We would expect to have the ability to examine the books 
and records of a hedge fund, potentially to write rules that 
might require the provision of certain kinds of information to 
their investors or to counterparties.
    But our commitment is also, though, not to try to force 
hedge funds, PE firms, venture capital firms, into a model that 
doesn't fit for them. We recognize these are different types of 
investment vehicles, but I think we need to bring them under 
the umbrella of regulation.
    Mr. Castle. And if you could share with us what is 
happening with respect to credit-rating agencies, without going 
through all the details of that. We all know that there have 
been some concerns about the ratings of various products that 
ended up falling flat on their faces, etc. And should we be 
doing more with transparency registration of some of the 
credit-rating agencies? Where does that stand right now from 
the SEC?
    Ms. Schapiro. Well, as you know, since the agency got 
authority under the 2006 Act, it has engaged in no less than 
five rulemakings to try to put some structure around the 
regulatory regime for rating agencies. And many of those rules 
are new and we are seeing how they work.
    But I will say that we are going to go forward later this 
summer with some additional rules that we think will be very 
useful. One would propose to require issuers to disclose 
preliminary ratings they have received as a way to get at this 
issue, which I find really pernicious, of ratings shopping.
    Another would require disclosure of the underlying data in 
structured products that are being rated to all other rating 
agencies so they can perform an unsolicited rating as a check 
on the conflicts that exist in the issuer-pays business model.
    We are going to look at sources of revenue disclosure, 
again, to get at the conflicts issue. More performance history, 
how the ratings have performed over 1-, 5-, and 10-year periods 
of time. And we are beginning a road map to explore how the SEC 
and its own rules can lessen reliance on ratings as a way to 
hopefully get investors to do additional due diligence on their 
own as well.
    So we have quite a lot in the works. And of course the 
Administration has a new proposal that came out yesterday to 
require mandatory registration and a number of other things.
    Mr. Castle. Well, thank you. I believe there are a lot of 
legitimate concerns with credit-rating agencies, and we should 
be trying to help with that as well.
    I thank you for your testimony and yield back.
    Mr. Kanjorski. [presiding] We will now hear from Mr. Watt 
of North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Let me go back to a question that was raised earlier by Mr. 
Kanjorski. A lot of people have said that if we were starting 
from scratch, we would have only one agency. And I understand 
the political realities of two existing agencies, the history 
that exists there.
    And you addressed the process that the two of you engaged 
in cooperatively to define what turf should be in the SEC and 
what turf should be in the CFTC. You said you have come to 
fairly good understandings about existing products.
    I guess the question I want to ask is, with respect to a 
new product and the possibility--probability--that at some 
point in the future the two administrators of these agencies 
won't be as nice and kind and cooperative with each other as 
the two of you are, how should we be assuring in this 
legislation that there is not the potential for future conflict 
and legislating a way to resolve that conflict if in fact it 
does occur?
    Ms. Schapiro. I am happy to take the first shot at that.
    I think you have identified a real issue for sure. And we 
have this concern now. We have products that are not clearly on 
the futures side or the securities side, and it takes the 
agencies a very long time--really in some ways an unacceptably 
long time--to resolve where these products will trade and under 
which regulatory regime. And we disadvantage commercial 
entities who are trying to propose these new instruments.
    I think we are of good will here. I think we will try and 
we will be more successful in working those issues out.
    Mr. Watt. I have the utmost confidence in the two of you, 
as I said, but I am not sure that I have the utmost confidence 
in the future. And we are trying to draw a process that will 
last, as this process did until the meltdown, for 75 years or 
more.
    Ms. Schapiro. I think short of merging the agencies--which 
is also not in the cards--that one option would be to use 
something like the Financial Stability Oversight Council that 
has been proposed by the Administration as a mechanism or a 
forum for the resolution of these kinds of issues.
    Mr. Watt. And we can write that into this legislation.
    What is your opinion on it?
    Mr. Gensler. I think if we limit the differences, if we 
harmonize going in, Congress writes clear, statutory guidelines 
on the clearinghouses and on the exchanges, it sort of limits a 
little bit more whether a product is under one set of 
Presidentially appointed people and career staff and another 
set of Presidentially appointed people and career staff--I 
mean, to the extent that we harmonize going in. And so that is, 
I believe, a challenge for all of us.
    Mr. Watt. But you acknowledge that we need to address that 
probably in this legislation; do both of you agree on that?
    Mr. Gensler. Yes.
    Mr. Watt. Mr. Gensler, you actually led to the next 
question I want to try and get some further clarification on, 
because I am not clear in my own mind. You have referred to 
clearinghouses, and I think you also referred to electronic 
platforms. I want to get a clearer understanding of the 
difference between those two as you see it. Just give us a 
little education here so the members of the committee, 
including myself, fully understand.
    Mr. Gensler. I thank you. Both are very important. They 
serve different functions, though. Both, I think, should be 
regulated by the market regulators. The exchange is where 
buyers and sellers meet, and there is transparency on the 
transactions themselves. And what we are proposing is that 
after any transaction in a sort of real-time basis, just like 
we have in the corporate bond market now and the equity markets 
and the futures markets, those trades are reported, so there is 
transparency between buyers and sellers, and then that the 
trades are announced.
    Clearinghouses have lower risk because it is where, after 
the trade, after the transaction had happened--and some of 
these transactions will go on for 30 years if it is a 30-year 
interest rate swap--that we can lower risk because the 
transaction has to do with a lot of things like marking it to 
market, posting collateral, to make sure that the transaction 
can live those 30 years regardless of market events.
    Mr. Watt. My time has expired. If you would just give me 
some more written information about that distinction, because I 
am still a little unclear--electronic platforms, 
clearinghouses, electronic exchanges. I would like to kind of--
    Mr. Gensler. And I would also be glad to come and see you 
in your office anytime you want us to come by.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    Mr. Kanjorski. The Chair recognizes Mr. Royce of 
California.
    Mr. Royce. Thank you, Mr. Chairman.
    Ms. Schapiro, Allen Stanford, who has been accused of being 
a mini-made office, has been in the headlines for the last few 
weeks as people have been trying to get a handle on exactly 
what happened to $8 billion and the full extent of the damage 
of his actions. And recently an alleged Stanford whistleblower, 
Layla Wydler, was interviewed on the matter. And she detailed 
her initial concerns with the Stanford firm, her termination--
which was allegedly tied to her unwillingness to sell their 
offshore certificate of deposits coming out of Antigua, which 
she had had concerns about--and her attempts to bring what she 
believed was a Ponzi scheme to the attention of NESB, now FINRA 
and the SEC. This was some 5 years ago.
    According to a complaint filed by the SEC in February of 
this year, the Stanford bank allegedly touted ``improbable if 
not impossible returns'' while selling $8 billion in those very 
same, apparently cryptic, CDs to investors for more than a 
decade.
    On going to the SEC in 2004, Ms. Wydler said, ``I had a 
list of everything, all my concerns. I wrote down the document, 
and I sent it to them and told them these are my concerns; this 
is what happened, look into it. This might save people's 
savings in the future because we can stop this.'' And it was 
just sent to them, and that's it.
    Now, I understand there is a criminal investigation going 
on. But what can you tell us about this allegation? Are you 
aware of any evidence legitimizing Ms. Wydler's claim that she 
did, in fact, approach the SEC 5 years ago raising concerns 
over this Ponzi scheme, laying out how they were doing it, with 
respect to Allen Stanford's firm?
    Ms. Schapiro. Congressman, I am happy to address it.
    I don't know about her specific claim, so let me be clear 
about that. But I will tell you that prior to the SEC opening 
its formal investigation in 2005 into Stanford, the Agency had 
looked into tips that had come its way. But at the time, my 
understanding is that the staff believed that these were 
largely foreign investors investing in foreign certificates of 
deposit issued by a foreign bank.
    So those jurisdictional issues presented significant 
hurdles, offshore CDs issued by a foreign bank. And those 
jurisdictional issues, we now understand, were significantly 
complicated by the fact that the Antiguan securities regulator, 
who had jurisdiction and authority over Stanford International 
Bank, was on the payroll of Mr. Stanford, and has been sued by 
the SEC, but was clearly subverting the SEC's investigation 
into this matter.
    There is also a period of time of significant coordination 
with other Federal agencies, which also took time--undoubtedly 
longer than it should have. But as soon as it became clear to 
the SEC that there was adequate information for us to go 
forward and that we could overcome those jurisdictional 
hurdles, the case was brought. Nine people and entities have 
been sued, and, as I said, including the CEO of the Antiguan 
Financial Services Regulatory Commission.
    Mr. Royce. Well, I would like to ask you if you could then 
address the questions raised by Mr. Atkins, which I raised in 
my opening statements; specifically, why do you think the SEC, 
in the course of the past 12 years, experienced, in his words, 
``catastrophic failures in every one of its four core 
competencies.'' He started with rulemaking, filing review, 
enforcement, and examinations.
    Ms. Schapiro. I would be happy to do that. I would also be 
happy to come and talk with you directly about these. Needless 
to say, I don't agree with Commissioner Atkin's 
characterization of the SEC's failures over the last number of 
years during that period he was a Commissioner of the Agency.
    I do think all of the Federal financial regulators missed 
issues related to the economic crisis in the last several 
years, but I also think that an enormous amount of positive 
work and important things have happened also under those same 
years.
    Mr. Royce. Let's do it this way, then. For the benefit of 
members, you can do it in writing.
    Ms. Schapiro. I would be happy to.
    Mr. Royce. And I would add two more questions in writing, 
if you could submit. I think going forward it would help the 
committee members. What led to failures in financial 
institutions to recognize the inadequacy of their own risk 
management systems and strategy in time to avert a collapse? 
And second, how did many investors get lulled into complacency 
and not adequately do their own due diligence as well?
    You probably will have some perspectives at the SEC on 
those two questions, and I think a better understanding of the 
failure on that front as well.
    Ms. Schapiro. I would be very happy to do that.
    Mr. Royce. Thank you.
    Mr. Kanjorski. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Chairman Schapiro, I hope I have time to focus 
on the SEC's--what I would hope would be a policy, it is not 
your policy now--to surf the Internet, pose as an investor, and 
deal with all the unregistered activity. Because too much of 
the SEC's attitude seems to be, well, if they don't register 
with us, we don't focus on them. And that is especially 
necessary because we have relied on State regulation. But now 
with the Internet, it is easy to steal half a million dollars 
in each of 50 States; whereas in the past, if you were going to 
steal several million dollars, you had to do it pretty much in 
one area.
    But I want to use my time to focus on derivatives. 
Derivatives offer the potential to make huge fortunes to those 
who are very powerful. And so they are defended because there 
is the tiniest argument that they do some good some of the 
time. And I refer here to over-the-counter derivatives.
    Secretary Geithner reserved the right to use taxpayer funds 
to the full extent of the law not only to bail out old 
derivatives but to bail out derivatives that are issued 
tomorrow. So they operate with that subsidy, or implied 
subsidy, that maybe Treasury will figure out a way to bail out 
counterparties.
    The defense of derivatives is that on rare occasions they 
are actually purchased by someone who has a risk they are 
trying to hedge; and that on even rarer occasions, they can't 
hedge that risk efficiently on an exchange-traded derivative, 
so they need the over-the-counter derivative.
    I don't know if either of you have done any studies. But 
what percent of the over-the-counter derivatives are purchased 
by those who really are hedging a risk rather than the more 
common case of somebody just placing a casino bet? I mean, I 
could wake up today and think pork bellies are going up and 
place a bet, and I would love--those who like gambling would 
think that is a wonderful idea, but I don't own any pigs. I 
will ask either of you.
    Do either of you know what percentage of this 
multitrillion-dollar industry, conducted in part at the risk of 
the U.S. taxpayer, is serving its alleged legitimate, societal 
purposes?
    Ms. Schapiro. I think because this has been such an opaque 
market and it is such a broadly unregulated market, that it is 
very hard for regulators to actually--
    Mr. Sherman. What if we simply said a derivative was 
illegal unless you were really hedging a risk, and we basically 
said you can't use over-the-counter derivatives as a casino?
    Mr. Gensler. We actually need--and this has been a concept 
in our financial markets for many decades, if not over 100 
years--for those that want to hedge a risk, you need 
speculators on the other side--
    Mr. Sherman. One of the two parties has to have a real 
risk.
    Mr. Gensler. And so the vast majority of end users--and 
there are tens of thousands of end users--whether it is a small 
municipality, a small hospital, or a large consumer products--
    Mr. Sherman. Although the vast majority of those end users 
can and do use the exchange-traded derivatives.
    Mr. Gensler. And we believe and we share your view that we 
have to bring the over-the-counter derivatives market onto 
exchanges. And in that regard, I have heard various estimates. 
The low estimate is about half, and the high estimate is about 
80 percent of the over-the-counter derivatives marketplace 
could be considered standardized and on to exchanges. That 
would accommodate all end users. They would be able to see in 
real-time the pricing of these transactions and to be able to 
then decide to use those--
    Mr. Sherman. So we could ban over-the-counter derivatives 
without major harm to the legitimate users of derivatives?
    Mr. Gensler. No, no. I would have to say I think that the 
tens of thousands of end users are able to hedge risk in their 
day-to-day business--it could be interest rate risk, it could 
be risk related to a certain energy product--but we want to 
bring transparency and lower the risk by the reforms we are 
calling for.
    Mr. Sherman. Well, under these reforms, Wall Street will 
continue to have trillions of dollars of societally useless 
betting, using over-the-counter derivatives, and the taxpayer 
may very well be called upon to bail out these derivatives and 
their counterparties.
    What I am asking is, given the risk to taxpayers, are there 
enormous benefits to our economy to have these over-the-counter 
derivatives where neither party has an insurable interest?
    Chairman Schapiro?
    Ms. Schapiro. I think it is a very good question. And it is 
very hard to answer when you are trying to balance societal 
risk with trading, where neither party has an insurable 
interest.
    I guess I would go back to what I said to Congresswoman 
Waters, that defining insurable risk is a very difficult 
question and one we need to think about very carefully.
    I do think it is important where a party does have an 
insurable risk, that there is some flexibility to have a 
customized over-the-counter product, that they not absolutely 
be forced onto the exchange.
    But I think where there is no insurable risk and it is 
merely a matter of two parties speculating, if we don't ban 
them--and that is a question for the Congress, obviously--I 
think the answer is that there has to be sufficient capital and 
dealer regulation and protections in place to ensure that we 
don't end up walking down this same path again.
    Mr. Sherman. I would think we might ban them, and then we 
could open the door later.
    Ms. Schapiro. Exemptive authority actually might be a 
possible thing for Congress to consider.
    Mr. Kanjorski. The gentleman's time has expired.
    Now I recognize the gentleman from California, Mr. Miller.
    Mr. Miller of California. Thank you very much, Mr. 
Chairman.
    FASB has made changes to accounting standards that will 
have tremendous impacts on securitizations known as FAS 166 and 
167, as I said in my opening statement. These changes are 
occurring at the same time that the Administration is trying to 
restart the securitized credit markets through programs like 
TAF to private lending. On the other hand, it is our 
understanding that the Federal Reserve has serious concerns 
with this policy shift that could derail efforts to stabilize 
financial institutions and get credit flowing.
    And, I guess, is that accurate; and what are their 
concerns?
    Ms. Schapiro. Thank you, Congressman. I guess I have a 
couple of comments on this.
    I would say that FASB walked down the path of reviewing off 
balance sheet accounting, really as a result of a concern 
expressed by the Fed and the Treasury and the President's 
Working Group, that more transparency and improvement to all 
balance sheet accounting was absolutely essential; that it had 
been the lack of transparency; the ability to push all these 
products off balance sheet had, in fact, been a contributor and 
perhaps a significant one to the financial crisis.
    So I am surprised to learn that the Fed is not comfortable 
with where FASB landed with the guidance that it issued in 
June. I guess I would also say that these new standards were 
actually--the assumptions underlying these new standards were 
actually even incorporated into the stress-testing that was 
done of the banks. So the Fed has been quite involved and quite 
aware of what FASB was doing here and had quite a lot of input 
throughout this process.
    With respect to what the Fed might do regarding capital 
rules, I think that is a question, obviously, best perhaps 
directed to Chairman Bernanke.
    Mr. Miller of California. That is applying stress tests to 
basically the banks with that slice of the market. How do you 
plan to apply it to the rest? Basically applying the stress 
test to banks is only a slice of the market.
    Ms. Schapiro. Yes. I brought that up only to indicate that 
the Fed has had active involvement in these discussions.
    Mr. Miller of California. Okay. We discussed in Chairman 
Bernanke's hearing yesterday about the challenges facing the $6 
trillion commercial marketplace that we see coming in the 
future. Many of these accounting regulation changes--aimed most 
at the residential market--hit the commercial real estate 
capital market especially hard, which in turn impacts business 
and provides jobs.
    Are the accounting policymakers communicating with the 
financial regulators who oversee the economy and recovery 
efforts? And I guess that would be Chairman Schapiro.
    Ms. Schapiro. Very much so. There is very great sensitivity 
at FASB--and I will say on the international level, the 
International Accounting Standards Board--that while financial 
statements are prepared for investors so that they can make 
rational decisions about the allocation of capital and where 
and how to invest, that there are other constituents that have 
interests. And so they have been very open to receiving input 
from bank regulators, from the SEC, as well as from investor 
groups and others.
    Mr. Miller of California. My concern is, if you look at the 
situation the banks were in at the beginning of the situation 
with the subprime and the residential marketplace, the reserves 
were much healthier than they are today and I think they were 
in a healthier than they are today.
    And if you look at the commercial-backed mortgage 
securities, they are starting to hit about the fourth quarter 
this year; about $5 billion worth of loans are maturing and 
coming due. And then about January, the default rate on the 
commercial sector was about one-quarter of 1 percent. It is 
about 2 percent today. In the coming days, it is expected to 
rise dramatically.
    The loans due by about 2012 are about $1 trillion. The 
growing expectation is that default rates will be between 12 
and 15 percent. How do we realistically handle that when most 
of these loans are 30-year loans, 5-year calls and you have 
gone from a 7 percent cap rate in 2006 to a 10 percent cap rate 
today. Whereby a lender is stuck in a situation where they 
might have a $14 million loan on a piece of property that based 
on a declining marketplace, as we see in a 10 percent cap rate, 
might value at $8 million when they should only get 5 on it, 
how are you going to deal with them trying to extend that loan 
when you have to apply mark-to-market to it, which would 
require a $9 million set-aside?
    Ms. Schapiro. I guess I am not exactly the right person to 
answer that question. But if I could take a step back and say 
that the SEC staff conducted a pretty extensive review of fair 
value and mark-to-market accounting last year and published 
their report before I arrived at the agency in early January. 
And what they found through their efforts is that investors 
value greatly fair-value accounting. It is what allows them to 
make decisions to invest at all.
    Mr. Miller of California. I understand that. But the 
situation we are facing is you are hitting a second round of 
residential foreclosures that is occurring right now. And that 
is the people who have good loans, but have lost their jobs. Or 
they are business people who are no longer able to make their 
payments who are losing their homes today.
    You have about 70 percent of the lending marketplace is 
commercial; you have lenders that are not in a situation they 
were in 4 years ago as far as liquidity and reserves. I am not 
talking about a new loan that somebody wants to make for a 
piece of commercial investor property. I am talking about a 
current situation that the banking and lending industry is 
going be in today when these 5-year calls come due. And based 
on accounting standards, you have to apply mark-to-market--I 
mean, that is the rule today. And based on that rule alone, the 
banking industry is going to be absolutely upside down. I don't 
know how they weather this, or the economy weathers this next 
round of commercial foreclosures.
    And my question is--I am not saying new loans--I am saying 
for existing loans that are coming due, how are we going to 
deal with them? We can't just say, ``well, mark-to-market 
requires.'' We are faced with a financial situation that could 
be devastating.
    Ms. Schapiro. I guess I don't have a quick answer to your 
question. I would be more than happy to come up and maybe bring 
our chief accountant with me and spend some time to talk with 
you about that.
    Mr. Miller of California. I would love to, because this is 
a serious situation for the economy that is going to occur very 
rapidly, and I don't think banks can handle it.
    Ms. Schapiro. I would be very happy to do that.
    Mr. Miller of California. I would love to meet with you. 
Thank you.
    Mr. Kanjorski. Thank you, Mr. Miller.
    We will now hear from Mr. Moore of Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    In light of the Madoff scandal and other Ponzi schemes, 
what can and should we do to improve the return of funds for 
defrauded investors? Chairman Schapiro, are the SEC's fair 
funds fulfilling this mission and should Congress consider 
additional steps for helping out defrauded investors?
    Ms. Schapiro. I think, Congressman, the fair funds program 
has been largely successful. It has returned billions and 
billions of dollars to investors. I think it was actually a 
brilliant idea on the part of this committee and the Congress 
to enable the SEC to get money back to investors through that 
mechanism.
    That said, I think it takes us sometimes a little bit too 
long to get that done. We have a new Director of Enforcement 
who has responsibility for fair funds administration, and he is 
looking at how we can try to speed that process up to get the 
money back as quickly as we possibly can.
    Mr. Moore of Kansas. Thank you.
    Chairman Gensler, do you have any comments, sir?
    Mr. Gensler. Not specifically on the fair funds proposal. 
But I do think that in working to harmonize our roles, that we 
should look very closely at whether our fraud standard between 
the CFTC and the SEC should be the same. We bring about a third 
of our fraud cases with the SEC, we do a lot jointly, and I 
think it would be helpful.
    Mr. Moore of Kansas. Thank you.
    Some people have suggested we should require the largest 
financial firms to undergo an annual stress test that would 
have aggregate information publicly released even in good 
times, not just bad times. Is this something Congress should 
require, Chairman Gensler? And what about leverage? Any 
thoughts on how best to create incentives for firms to maintain 
reasonable leverage ratios?
    Mr. Gensler. Well, I think that one of the ways with regard 
to over-the-counter derivatives is that we be explicit. In the 
past, I think this is one of the assumptions that was sorely 
tested. We assumed that our overall capital standards would 
take into consideration these derivatives. And I think that we 
should be explicit in--whether it be the bank regulators or the 
SEC overseeing the broker dealers where most of the derivatives 
take place, there should be explicit capital standards for 
these derivatives. And then beyond that, we lower risk, of 
course, with centralized clearing.
    Mr. Moore of Kansas. Chairman Schapiro, do you have any 
comments?
    Ms. Schapiro. I guess I would add that I think stress-
testing is critically important. And one of the failures was 
perhaps to include enough low-probability, high-impact events 
in stress tests historically. And that would be important for 
the regulators to insist upon with respect to clearinghouses, 
as well as with respect to dealers and other participants in 
the financial markets.
    Mr. Moore of Kansas. Thanks to our witnesses, Mr. Chairman. 
I yield back.
    Mr. Kanjorski. Thank you, Mr. Moore.
    We will now hear from the gentleman from Florida Mr. Posey.
    Mr. Posey. I thank you very much, Mr. Chairman.
    Madam Chairwoman, I know we have the IG report that we 
should be receiving to give us more information. But I am 
curious as to whether or not we can know if anyone has been 
fired or even reprimanded over the way the Madoff fiasco was 
mishandled?
    Ms. Schapiro. Congressman, we are waiting, obviously, for 
the release of the Inspector General Report, which has been 
quite comprehensive and quite extensive and is due to be 
released at the end of the summer. And based upon whatever is 
in that report, we will have to make decisions about whether 
any kind of personnel actions are appropriate. We do not want 
to interfere in any way with the independent review of the 
Inspector General.
    I will say, though, that I have not wanted to wait for the 
Inspector General's Report to make really extensive changes in 
the Securities and Exchange Commission, both in how we are 
organized--
    Mr. Posey. I know we are going to make changes in the 
future, hopefully, but I think there should be some 
accountability for the people who did not do their jobs. And I 
think that we made the illustration before: If you report a 
bank robbery to the local police department and the bank 
robbery has gone on for 10 years and they never walk over to 
the bank to investigate the robbery, somebody ought to lose 
their job, somebody ought to be reprimanded.
    And it is just incredible that hasn't happened yet and that 
we have to wait for a report to take any action against the 
negligence that cost people, arguably, $70 billion in losses. 
Because your agency would not take any action, even after 
Barron's Magazine writes a feature story about this guy. I 
mean, it was worldwide news.
    The smart hedge fund managers and the money managers know 
to stay away from him, but gullible members of the public were 
still lured in by this because he was allowed to continue doing 
business.
    I just would think that there should be some discipline 
taken for the employees who allowed that to happen.
    Ms. Schapiro. Congressman, I think it is really critical 
that we have the full story of exactly what happened, and that 
is what the Inspector General has been charged with doing. 
There has not been a separate inquiry down to the level of 
employee conduct because that investigation is going on. And no 
one has wanted, and myself included, to interfere in any way 
with that.
    But we are not just making changes in the future, we are 
making changes right now and have, over the last 6 months, made 
extensive changes at the SEC. We have a new Enforcement 
Director, a new Deputy, a new head of the New York office. We 
have new technology, we have new rules--
    Mr. Posey. But the question is, when employees don't do 
their job to protect the public, do we have to have an 
Inspector General come in there and tell us if it is okay to 
fire people? I mean, wouldn't that be a normal management 
routine if you have an employee who is incompetent or lazy, or 
for whatever other reason doesn't do his job to protect the 
public clearly like he should be doing, that we just don't fire 
those people? I mean, isn't there a policy in place to do that?
    Ms. Schapiro. I believe deeply in holding employees 
accountable for their work, but I can't do that until I have 
the facts and the details about how they conducted their work 
and what the issues were. And that is what needs to wait for 
the Inspector General Report.
    Mr. Posey. But don't they have supervisors? Isn't there 
somebody in the organization that already--I mean, I know in 
any business--and I know government doesn't have competition 
like a business, but in any business where someone made a 
business blunder that big, the whole department would be gone, 
the senior manager would be gone. Doesn't that happen anywhere 
in government? I mean, doesn't anybody have the authority to 
get rid of incompetent employees, people who refuse or for 
whatever reason don't do their jobs?
    Ms. Schapiro. We do certainly have the ability to get rid 
of incompetent employees, but I have to have the evidence that 
shows me that employees were incompetent. I can't fire hundreds 
of people or tens of people without having a basis for doing 
that, and I don't have that basis at this point. That is the 
purpose, in part, of the Inspector General's Report, to 
understand--as was by my predecessor, Chairman Cox--to 
understand what went wrong; what did the SEC do; what did it 
fail to do; and where does the responsibility lie? And that is 
a necessary precondition, from my perspective, to taking any 
kind of personnel action.
    Mr. Posey. And with all due respect--and I am not aiming 
this at you--but I think the failure to know what went wrong 
and who is responsible for things that go wrong is culpable 
negligence on the part of management.
    Ms. Schapiro. I understand that concern. And there are 
things that we do know went wrong. We know that, for example, 
the agency receives 1.5 million tips a year and has no 
capability to really manage them or manage that process, so we 
have attacked that. We know we have gaps.
    Mr. Posey. We know twice they blew off Mr. Markopolos, even 
after Barrons Magazine did a big feature cover story on this 
fraud. I mean, anybody with half a brain in the agency, that 
should have been plenty to know right there. I mean, this is 
not one of a million tips that got ignored. This guy took a big 
file down there, he was a qualified, experienced investigator--
I am talking about Mr. Markopolos--he took it down there and 
laid it in their hands, and they did nothing. He went back, and 
they did nothing. It was exposed in Barrons; they did nothing.
    I mean, I can't imagine any excuse. It is just a matter of 
finding out who all had a fingerprint on this thing and getting 
rid of them.
    Ms. Schapiro. There is no question but that the agency did 
not appropriately follow up on the information that he gave 
them; I am not defending that at all. And that is why we are in 
this process. And that is why we have devoted extraordinary 
resources both to the Inspector General's investigation, but 
also to filling all the gaps that we can, putting in place all 
the processes and procedures, and bringing in many senior new 
people to the agency to try to ensure that we can protect 
against this ever happening again.
    This is a tragedy of epic proportions, I fully appreciate 
that. And we are doing everything we can do--
    Mr. Posey. When do we expect the IG's report?
    Ms. Schapiro. The Inspector General has said that he would 
hope to release his report by the end of the summer.
    Mr. Kanjorski. By September 30th, Mr. Posey. And as soon as 
he does, we anticipate having a special session.
    We have five votes on the Floor, and we have another 
committee hearing starting at 2 p.m., so I am going to pose the 
question to the members, do they wish to return and poll the 
panel for an additional hour and then start up, which would 
only give us about 40 minutes? Or should we have one more 
individual on questions and then recess the hearing until a 
further date or some other time? Are there any preferences?
    Mr. Baca. Continue, and have the hearing some other time.
    Mr. Kanjorski. You are next.
    Mr. Baca. That is why I want to continue.
    Mr. Kanjorski. I am not suggesting we do not have you. The 
question is, after you have had your opportunity, should we 
come back in an hour from now after votes? Is there anyone 
terribly in favor of that? Mr. McHenry says no.
    Mr. McHenry. I am in favor of Mr. Baca getting his time, 
though. He is a good pitcher.
    Mr. Kanjorski. We follow seniority, so Mr. Baca gets the 
next question.
    Ms. Moore of Wisconsin. I guess I will write my questions 
to them, Mr. Chairman. Whatever you decide, Mr. Chairman.
    Mr. Kanjorski. And return in an hour? That is what we will 
do. We will hear Mr. Baca, and then take a recess for an hour 
and then return. And we will give the opportunity for the 
witnesses to have lunch or something in the meantime.
    Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman. And thank you 
for holding this meeting, along with the ranking member. And 
thank you, Chairwoman Schapiro and also Chairman Gensler.
    My question is to either one of you two, or both of you can 
answer this. I have a question regarding both of your agencies' 
roles in the Consumer Financial Protection Agency. The bill 
states that CFPA will be required to coordinate with both of 
your agencies in an effort to promote consistent regulatory 
treatment of consumers' investment product and services.
    Can you comment on your role in coordinating with CFPA? 
That is one question. And how do you envision this taking 
place? And what level of interaction would you like to see?
    And finally, would you like to see the interactions be 
limited solely to derivatives, regulations; or does it expand 
beyond that?
    Ms. Schapiro. I am happy to start with that.
    I think it is going to be critically important for the SEC 
to coordinate pretty closely with the CFPA. We both have 
investor or consumer protection missions at our core, and there 
is a possibility for there to be products or issues that arise 
where we will both have an interest. So I think a high level of 
pretty continuous coordination will be important.
    The President's plan actually calls for, I think, a 
quarterly meeting, at a minimum, between the leadership of 
those agencies and the FTC and others, to make sure we are 
sharing information and that no gaps are able to arise between 
our authorities to protect investors.
    Mr. Gensler. I would concur with that. And while the CFTC 
principle focuses on markets and risk management, there is a 
clear consumer piece in protecting against fraud and 
manipulation where we would envision coordination.
    The second part of your question was about derivatives, and 
I am sorry--
    Mr. Baca. Would you like to see interaction be limited 
solely to derivatives regulation or does it expand beyond that?
    Mr. Gensler. I think it really does expand beyond that 
probably for both of our agencies because derivatives are a new 
product. But whether it be futures, options, or securities, 
there is some interplay.
    I can even think of it in terms of how foreign currency 
transactions that are marketed to the retail public, which is 
very much something that we look at and try to protect the 
public on. But this consumer agency, as a bank product, might 
possibly get involved. So I think we need coordination as well 
on other product areas.
    Mr. Baca. And the other question I have, I was wondering if 
you could speak to the concerns that a quick transaction to 
either a mandatory clearing process or a mandatory exchange 
process for all derivatives may cause a disruption in the 
market? Do you share this concern? And what can be done to 
counter this potential problem?
    Mr. Gensler. I think that bringing derivatives onto 
centralized clearing and exchanges will actually be an enormous 
benefit to the market. I think it will promote transparency and 
efficiency, and end users will get the benefit of seeing those 
prices, where right now they can't. And I think it will lower 
risk.
    So, though I might not have understood the question, but I 
don't see it as a disruption, I see it as an enormous benefit 
to markets.
    Mr. Baca. Chairman Schapiro?
    Ms. Schapiro. I agree.
    Mr. Baca. Thank you.
    Mr. Gensler, I want to follow up for a question that was 
asked by one of my colleagues earlier about the clearinghouses. 
Chairman Gensler, you said that you were in favor of having 
several different clearinghouses compete. Wouldn't this create 
the same problem as credit-rating agencies' experience with 
conflict of interest, and how do you safeguard against this?
    Mr. Gensler. I think that your analogy is a very apt one. 
And how we safeguard against it is it should be mandatory 
regulation. Not only do they have to register--which right now 
there is voluntary registration of the rating agencies--but we 
have to have regulation to manage the risk management. Rating 
agencies have very real conflicts of interest.
    And I will defer to Chair Schapiro on whether she has the 
right authorities. But if she needs more, I would certainly 
support that.
    But in this case, we should make sure that these 
clearinghouses have open access, that any member who can meet 
the rigorous risk management standards be able to be there and 
we not allow them to be sort of too clubby or controlled by the 
dealer community, but that they have to meet the rigorous risk 
management standards that we would lay out.
    Mr. Baca. Ms. Schapiro, how would you answer that?
    Ms. Schapiro. I agree with that.
    Mr. Baca. What do you agree with?
    Ms. Schapiro. That we have to have rigorous oversight of 
the clearing agencies in order to assure that, to the extent 
any conflicts of interest arise, that they are fully disclosed 
and, to the greatest extent possible, eliminated.
    Mr. Baca. How will we monitor the oversight? You said that 
we need oversight. How will we monitor that we actually do have 
the oversight and that oversight is really occurring right now 
and the accountability that needs to be done?
    Ms. Schapiro. Both the SEC and the CFTC currently oversee 
clearinghouses for other products, for securities at the SEC, 
for futures at the CFTC, for options at the SEC. So we have 
pretty extensive programs in place to review the governance 
models of clearinghouses, the risk management systems, the 
technology, because if they have a major technology failure it 
can hugely disrupt markets. And so those programs exist. And my 
view would be we would expand them to cover any new clearing 
platforms or agencies that are created.
    Mr. Baca. Thank you very much. I know that my time has 
expired. I yield back the balance of my time.
    Mr. Kanjorski. The Chair notes that some members may have 
additional questions for this panel which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and to place their responses in the record. 
Quite different from what we had originally decided, we decided 
not only to give you a lunch break but to give you the 
afternoon off to enjoy yourselves on the golf course.
    Since we have votes, we are going to recess the meeting at 
this point and ask you to return in the future, probably in 
September, for the SEC as soon as the Inspector General's 
report is out, Ms. Schapiro. And we will annoy you, Gary. We 
won't let you feel abandoned. But with no further questions 
before the committee, the committee stands adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]












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                             July 22, 2009

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