[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



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

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               ----------                              

                           FEBRUARY 15, 2011

                               ----------                              

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-5

      ASSESSING THE REGULATORY, ECONOMIC, AND MARKET IMPLICATIONS

                  OF THE DODD-FRANK DERIVATIVES TITLE




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

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 15, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-5



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff


                            C O N T E N T S

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

                               WITNESSES
                       Tuesday, February 15, 2011

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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

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

                              ----------                              


                       Tuesday, February 15, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                            A P P E N D I X



                           February 15, 2011


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