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


 
                     HARMONIZING GLOBAL DERIVATIVES
                 REFORM: IMPACT ON U.S. COMPETITIVENESS
                          AND MARKET STABILITY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2011

                               __________

                           Serial No. 112-17


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois         TIM HOLDEN, Pennsylvania
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas            JOE BACA, California
JEFF FORTENBERRY, Nebraska           DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio                   DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania         HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida            JIM COSTA, California
MARLIN A. STUTZMAN, Indiana          TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio                      KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
SCOTT R. TIPTON, Colorado            WILLIAM L. OWENS, New York
STEVE SOUTHERLAND II, Florida        CHELLIE PINGREE, Maine
ERIC A. ``RICK'' CRAWFORD, Arkansas  JOE COURTNEY, Connecticut
MARTHA ROBY, Alabama                 PETER WELCH, Vermont
TIM HUELSKAMP, Kansas                MARCIA L. FUDGE, Ohio
SCOTT DesJARLAIS, Tennessee          GREGORIO KILILI CAMACHO SABLAN, 
RENEE L. ELLMERS, North Carolina     Northern Mariana Islands
CHRISTOPHER P. GIBSON, New York      TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             JAMES P. McGOVERN, Massachusetts
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
------

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                  K. MICHAEL CONAWAY, Texas, Chairman

STEVE KING, Iowa                     LEONARD L. BOSWELL, Iowa, Ranking 
RANDY NEUGEBAUER, Texas              Minority Member
JEAN SCHMIDT, Ohio                   MIKE McINTYRE, North Carolina
BOB GIBBS, Ohio                      TIMOTHY J. WALZ, Minnesota
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
MARTHA ROBY, Alabama                 DENNIS A. CARDOZA, California
TIM HUELSKAMP, Kansas                DAVID SCOTT, Georgia
RENEE L. ELLMERS, North Carolina     JOE COURTNEY, Connecticut
CHRISTOPHER P. GIBSON, New York      PETER WELCH, Vermont
RANDY HULTGREN, Illinois             TERRI A. SEWELL, Alabama
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois

               Matt Schertz, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     4
    Prepared statement...........................................     6
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     3
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................    20
    Submitted letter.............................................   109
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     6
    Prepared statement...........................................     8

                               Witnesses

Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................     8
    Prepared statement...........................................    11
Chilton, Hon. Bart, Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................    13
    Prepared statement...........................................    14
    Submitted letter.............................................   112
Callahan, Thomas F., Executive Vice President and Chief Executive 
  Officer, NYSE Liffe U.S., LLC, New York, NY; on behalf of NYSE 
  Euronext.......................................................    35
    Prepared statement...........................................    37
Damgard, John M., President, Futures Industry Association, 
  Washington, D.C................................................    41
    Prepared statement...........................................    43
Deas, Jr., Thomas C., Vice President and Treasurer, FMC 
  Corporation; President, National Association of Corporate 
  Treasurers, Philadelphia, PA...................................    47
    Prepared statement...........................................    49
Miller, Sarah A. ``Sally'', Chief Executive Officer, Institute of 
  International Bankers, New York, NY............................    52
    Prepared statement...........................................    53
O'Connor, Stephen, Chairman, International Swaps and Derivatives 
  Association; Managing Director, Morgan Stanley, New York, NY...    77
    Prepared statement...........................................    80
Thompson, Larry E., Managing Director and General Counsel, The 
  Depository Trust & Clearing Corporation, New York, NY..........    91
    Prepared statement...........................................    92


                     HARMONIZING GLOBAL DERIVATIVES
                 REFORM: IMPACT ON U.S. COMPETITIVENESS
                          AND MARKET STABILITY

                              ----------                              


                        WEDNESDAY, MAY 25, 2011

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. K. 
Michael Conaway [Chairman of the Subcommittee] presiding.
    Members present: Representatives Conaway, Neugebauer, 
Schmidt, Austin Scott of Georgia, Crawford, Huelskamp, 
Hultgren, Hartzler, Schilling, Lucas (ex officio), Boswell, 
McIntyre, Kissell, McGovern, David Scott of Georgia, Courtney, 
Welch, and Peterson (ex officio).
    Staff present: Tamara Hinton, John Konya, Kevin Kramp, Ryan 
McKee, Matt Schertz, Debbie Smith, Heather Vaughan, Liz 
Friedlander, Clark Ogilvie, and Jamie Mitchell.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    The Chairman. Again, thanks for everybody being here. Today 
we hold our fifth hearing to examine the implementation of the 
derivatives provisions within the Dodd-Frank Act. In previous 
hearings, many witnesses touched on international efforts to 
adopt derivatives regulatory reform and the impact such changes 
and regulation will have for the competitiveness of the U.S. 
and the stability of global financial markets.
    In this morning's hearing we will explore the critical 
element to implementation: international reform and the 
importance of global coordination. Among many lessons, the 
financial crisis served as a severe reminder that instability 
can spread quickly through a global financial system.
    Efforts to improve regulation of financial markets must be 
both cooperative and coordinated among nations. Assuring a 
coordinated and international regulatory approach is important 
to Members on both sides of the aisle and to stakeholders 
regardless of their size or role in the marketplace. Further 
ensuring we do not inadvertently place our own domestic 
financial system at a competitive disadvantage due to 
unnecessary cost and regulatory burdens should be a goal we 
must not lose sight of. Following the G20 commitment to adopt 
certain OTC derivatives reforms by the end of 2012, countries 
around the world began to craft their own proposals for 
derivatives reform. Both in timing and scope, the U.S. is far 
ahead of other nations in implementing these reforms.
    Our position as we move first represents significant 
coordination challenges at home and abroad. By acting well 
ahead of other nations, we needlessly risk creating serious 
disadvantage to our own markets by failing to understand and 
prepare for the substance of international proposals that are 
far behind us.
    Today it is my hope that we can explore certain critical 
issues for international harmonization. First, the impact of 
timing on the ability for the U.S. to coordinate with foreign 
regulators. As nations move at different speeds and with 
staggered effective dates, how will this impact coordination 
and the competitiveness of U.S. firms and markets?
    Second, the impact on competitiveness of U.S. businesses. 
An overly narrow or limited approach to end-users exemption by 
U.S. regulators will increase costs and the reduce the ability 
of businesses across the country to manage risk. The question 
is how will a more flexible approach to the end-user exemption 
in the EU or elsewhere impact the competitive position of U.S. 
businesses vis-a-vis their international competitors.
    Third, the implications for global coordination of 
inconsistent proposals among U.S. regulatory authorities. 
Consistency among proposals should begin first at home. The 
U.S. regulatory agencies to date have not demonstrated a high 
degree of coordination. The question is how will these 
inconsistencies among our domestic agencies' proposals impact 
the ability for the U.S. to coordinate with foreign regulators.
    Fourth, the existing or potential differences between the 
U.S. and foreign proposals that will create opportunities for 
regulatory arbitrage. Market activity will invariably flow to 
geographical and financial sectors where the regulatory burden 
is lowest. Significant differences in regulatory proposals will 
lead to arbitrage and they will ultimately undermine the very 
market stability and transparencies these reforms were intended 
to promote. Where is the risk of arbitrage the greatest and are 
the U.S. regulatory--and what are the U.S. regulatory agencies 
doing to avoid divergence?
    And finally, the reach of the Dodd-Frank in the U.S. into 
non-U.S. activities of global market participants. Just as 
markets are global, so are market participants. U.S. financial 
regulators have a history of recognizing and deferring to 
foreign regulatory regimes when registered entities engage in 
activities outside the U.S. Yet to date, significant 
uncertainty remains around the implication of Dodd-Frank 
internationally and recent proposals indicate that our 
regulatory agencies intend to take a different approach that is 
contrary to Congressional intent. The question is what will be 
the consequences of extraterritorial application of Dodd-Frank 
particularly for the competitiveness and viability of U.S. 
firms. At the end of the day, that should--today's hearing is 
about American competitiveness and ensuring U.S. businesses are 
not put at disadvantage that will inhibit their ability to 
create jobs and grow the economy. Without any shortage of 
issues to discuss, I look forward to hearing from our--today's 
witnesses.
    [The prepared statement of Mr. Conaway follows:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas

    Today, we hold our fifth hearing to examine the implementation of 
the derivatives provisions within the Dodd-Frank Act. In previous 
hearings, many witnesses touched on international efforts to adopt 
derivatives regulatory reform, and the impact such changes in 
regulation will have for the competitiveness of the U.S. and the 
stability of global financial markets. In this morning's hearing we 
will explore this critical element to implementation--international 
reform and the importance of global coordination.
    Among many lessons, the financial crisis served as a severe 
reminder that instability can spread quickly through a global financial 
system and efforts to improve regulation of financial markets must be 
both cooperative and coordinated among nations. Ensuring a coordinated, 
international regulatory approach is important to Members on both sides 
of the aisle and to stakeholders regardless of size or role in the 
marketplace. Further, ensuring we do not inadvertently place our own 
domestic financial system at a competitive disadvantage due to 
unnecessary costs and regulatory burdens should be a goal we mustn't 
lose sight of.
    Following the G20 commitment to adopt certain OTC derivatives 
reforms by the end of 2012, countries around the world began to craft 
their own proposals for derivatives reform. Both in timing and scope, 
the U.S. is far ahead of other nations in implementing these reforms. 
Our position as first-mover presents significant coordination 
challenges at home and abroad. By acting well ahead of other nations we 
needlessly risk creating serious disadvantages to our own markets by 
failing to understand and prepare for the substance of international 
proposals that are far behind us.
    Today, it is my hope that we can explore some critical issues for 
international harmonization:

   The impact of timing on the ability for the U.S. to 
        coordinate with foreign regulators. As nations move at 
        different speeds and with staggered effective dates, how will 
        this impact coordination and the competitiveness of U.S. firms 
        and markets?

   The impact on the competitiveness of American businesses. An 
        overly. narrow or limited approach to the end-user exemption by 
        U.S. regulators will increase costs and reduce the ability of 
        businesses across the country to manage risk. How would a more 
        flexible approach to the end-user exemption in the EU or 
        elsewhere impact the competitive position of U.S. businesses 
        vis-a-vis their international competitors?

   The implications for global coordination of inconsistent 
        proposals among U.S. regulatory agencies. Consistency among 
        proposals should first begin at home. The U.S. regulatory 
        agencies to date have not demonstrated a high degree of 
        coordination. How will inconsistencies among our domestic 
        agencies' proposals impact the ability for the U.S. to 
        coordinate with foreign regulators?

   Existing or potential differences between the U.S. and 
        foreign proposals that will create opportunities for regulatory 
        arbitrage. Market activity will inevitably flow to geographical 
        and financial sectors where the regulatory burden is lowest. 
        Significant differences in regulatory proposals will lead to 
        arbitrage and may well ultimately undermine the very market 
        stability and transparency these reforms were intended to 
        promote. Where is the risk of arbitrage greatest, and are the 
        U.S. regulatory agencies doing enough to avoid divergence?

   The reach of Dodd-Frank into non-U.S. activities of global 
        market participants. Just as markets are global, so are market 
        participants. U.S. financial regulators have a history of 
        recognizing and deferring to foreign regulatory regimes when 
        registered entities engage in activities outside the U.S. Yet 
        to date, significant uncertainty remains around the application 
        of Dodd-Frank internationally, and recent proposals indicate 
        our regulatory agencies intend to take a different approach 
        that is contrary to Congressional intent. What would be the 
        consequences of extraterritorial application of Dodd-Frank, 
        particularly for the competitiveness and viability of U.S. 
        firms?

    At the end of the day, today's hearing is about American 
competitiveness, and ensuring U.S. businesses are not put at a 
disadvantage that will inhibit their ability to create jobs and grow 
the economy.
    Without any shortage of issues to discuss, I look forward to 
hearing from today's witnesses.

    The Chairman. Ranking Member Mr. Boswell, do you have a 
comment?

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE 
                     IN CONGRESS FROM IOWA

    Mr. Boswell. Well, I do, and I want to thank you again, Mr. 
Chairman, for staying on the course to look at this. We have a 
lot of responsibility in ag and you have a major one with this 
Subcommittee, no question about it. And I have learned a lot. I 
want to say a couple comments, but I want to say to our 
witnesses, both of you, I don't know you personally, but I know 
something about your history.
     I admire what you do. It is probably thankless. You both 
have to vote. You both have to participate and so I just 
appreciate you coming here and giving us the all sides, and 
what you think. Calling on your experience and all those things 
is extremely important to this country because, just for 
example, and I will say something in my comments here in a 
second, I have learned a lot.
    I farm corn, soybean, cattle, hogs, that is kind of what I 
know about--the Chairman, the Ranking Member of the full 
Committee, and I. But I have learned a lot, for example, from 
Mr. Neugebauer and so on about cotton. Not why, because I am 
not a cotton farmer, but my best--one of my very best friends 
going to college and in our life, our flying experience--it 
just goes on and on and his two sons and my kids and so on--we 
have stayed that way.
    I have learned a lot about cotton. But I know that when the 
price of cotton is good well, everybody says, ``Look, there 
they go, forgetting the cost of inputs.'' And those days we 
had, those years we had those droughts--both of you guys know 
about this. Well, it is the same way with corn. You know 
everybody is all pumped up now, $7.00 corn, maybe more. Wow, 
look what is going on. They never mention what the cost of 
inputs are. Have you ever heard them talk about that?
    They talk about gas, but I don't think there is hardly 
anybody that realizes what it has advanced to. The cost to 
produce a bushel of corn, costs about $6.00. And you know; that 
is not much margin. You think about the high cost of the 
capital investment to raise that bushel of corn. Risk is big. 
And so we need this kind of information. We need the pros and 
cons and everything whether it is--whatever it is.
    So I just wanted to tell you that I personally admire you 
for serving on that Commission, both of you. Thank you. Now, 
the hearing today seeks to investigate the timing and 
coordination of derivatives oversight at home and globally. I 
understand they are concerned regarding global reform and the 
pace at which our G20 partners are addressing the problems that 
led to international market failure in 2008.
    During the Pittsburgh Summit of 2009, the G20 nations 
agreed to adopt regulations that would create a framework to 
regulate over-the-counter derivatives and improve oversight and 
transparency of the domestic and international markets. I know 
that some here today will be commenting on extraterritorial 
jurisdiction and how market reform and the definition of a swap 
execution facility will affect subsidiaries and parent 
companies overseas. And we look forward to hearing your insight 
and working on these issues as we try to move forward.
    A great deal of concern has been levied on global 
competitiveness, the effects of regulation, and the policy of 
U.S. companies and subsidiary branches here in our country. 
However, the Commissioners present today, you both note in your 
testimony there has been a great deal of coordination and 
consultation with foreign regulators. You have each called the 
proactive amount of consultation unprecedented.
    And Commissioner Sommers, you note in your testimony at 
CFTC and the SEC staff engage in these discussions with the 
European Commissioners on a daily basis. I agree that we must 
work with our global partners on international policies for 
reform and I thank the Commissioners for your hard work in 
crafting rules and regulations. Thank you.
    I also want to thank industry participants who have put in 
the time and the dedication to review these regulations and 
their effects on American business and market liquidity. So far 
I have been confident in what I have seen and heard from CFTC 
and the testimony submitted here that we are communicating with 
the G20 and moving in the right direction.
    My opinions on implementation are not breaking news as I 
have expressed these sentiments toward our pace in OTC reform 
several times, I don't think we can slow down. An important 
agreement made among the G20 at the Pittsburgh Summit was much 
more than on international agreement. The decision to create 
effective reform to reduce systemic risk and enhance market 
stability is a promise that we made to American taxpayers, and 
we have a responsibility to make good on those promises. We 
must ensure our implementation provides harmony for all users 
and maintains the integrity of the marketplace for risk 
mitigation.
    I remain committed to working with my colleagues in 
Congress to provide the CFTC with the tools and personnel 
needed to create successful reform. And I am disappointed that 
our colleagues on the Appropriations Committee have overlooked 
this in their current mark-up for the Fiscal Year 2012 funding.
    Just in the last few hours, the CFTC did identify important 
work to all of us to protect not only market users, but also 
every American affected by the players who manipulate markets 
for their own financial gain. Just yesterday the CFTC charged 
several oil traders with purposely driving up the price of oil 
in order to make huge profits. This was done on the backs of 
our constituents not only at the pump, but at the grocery 
store, on the farm, small businesses--about every aspect of our 
life across the country.
    In closing, I appreciate your contribution again to the 
investigation and increased transparency not only in our 
markets, but in this rule-making process and I look forward to 
hearing the testimonies and working with you to ensure fair and 
practical implementation with our global partners on behalf of 
the American taxpayers. Thank you very much. I look forward to 
what you have to say. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Boswell follows:]

  Prepared Statement of Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa

    Thank you Chairman Conaway. I would like to thank our witnesses and 
everyone for joining us today as we review implementation of the Dodd-
Frank Wall Street Reform Act and global derivatives reform.
    The hearing today seeks to investigate the timing and coordination 
of derivatives oversight at home and globally. I understand that there 
are concerns regarding global reform and the pace at which our G20 
partners are addressing the problems that led to international market 
failure when our nations met in 2009. During this meeting at the 
Pittsburgh Summit the G20 nations agreed to adopt regulations that 
would create a framework to regulate over-the-counter derivatives and 
improve oversight and transparency of domestic and international 
markets.
    As well, I know that some here will be commenting on 
extraterritorial jurisdiction and how market reform and the definition 
of a swap execution facility will affect subsidiaries and parent 
companies overseas. I look forward to hearing your insight and working 
on these issues as we move forward.
    A great deal of concern has been levied on global competitiveness, 
the effects of regulation and policy on U.S. companies and subsidiary 
branches here in our nation. However, at the same time, Commissioners 
Sommers and Chilton, you both note in your testimonies that there has 
been a great deal of coordination and consultation with foreign 
regulators. You each called the proactive amount of consultation 
``unprecedented'' and Commissioner Sommers, you note in your testimony 
that CFTC and SEC staff engage in these discussions with the European 
Commission on a ``daily'' basis.
    I agree that we must work with our global partners on international 
policies for reform and I thank the Commissioners for your hard work in 
crafting rules and regulations; I also want to thank industry 
participants who have put in the time and dedication to review these 
regulations and their effects on American business and market 
liquidity. However, so far, I remain confident in what I have seen and 
heard from CFTC and in the testimonies submitted that we are 
communicating with the G20 and moving in the right direction. My 
opinions on implementation are not breaking news as I have expressed 
these sentiments toward our pace of OTC reform several times: we must 
not slow down.
    An important agreement made among the G20 at the Pittsburgh summit 
was much more than an international agreement. The decision to create 
effective reform to reduce systemic risk and enhance market stability 
is a promise we made to American taxpayers and we have the 
responsibility to make good on this promise. We must ensure our 
implementation provides harmony for all users and maintains the 
integrity of the marketplace for risk mitigation. I remain committed to 
working with my colleagues in Congress to provide the CFTC with the 
tools and personnel needed to create successful reform and I am 
disappointed that our colleagues on the appropriating committee have 
overlooked this in their current mark for the Fiscal Year 2012 funding.
    As always, I appreciate your contribution to this investigation and 
increased transparency not only in our markets but in this process. I 
look forward to hearing the coming testimonies and working with you to 
ensure fair and practical implementation with our global partners on 
behalf of American taxpayers.
    Thank you.

    The Chairman. Thanks, Mr. Boswell. Our Ranking Member of 
the full Committee is with us. Mr. Peterson, you have comments 
you want to make?

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman, and thank you, Mr. 
Boswell for holding this hearing and welcome to the 
Commissioners Chilton and Sommers, and I associate myself with 
Mr. Boswell's remarks. We appreciate the work you are doing.
    It is important for us to have a thorough understanding of 
the steps that the CFTC is taking to implement the Dodd-Frank 
Wall Street Reform and Consumer Protection Act. As everybody 
knows, this Committee played the primary role in writing Title 
VII of this legislation with the goal of bringing greater 
transparency and accountability to the derivatives marketplace. 
And I think it is imperative that we make sure that the 
Commission is on track so I think the sharing is good.
    Today we are looking into global derivatives reform and I 
still have some serious concerns that banks are once again 
trying to pit regulators against each other as part of their 
efforts to delay or even repeal financial reforms. When this 
Committee went to Europe for a week back--I think it was in 
December of 2009--probably the biggest thing we learned was 
that these big banks were telling the Europeans that if they 
regulated them they were going to move to the U.S. and they 
were telling the U.S. if they regulate them they were going to 
move to Europe.
    Well now, I am hearing rumors that some of these big U.S. 
banks that operate over there as well are telling the European 
regulators that if that if they will not have as tough 
regulations as we have in the U.S., they will move their 
business to Europe. So it is kind of a preemptive strike in 
that case. So I am concerned about what is going on here. 
Apparently some of the other exchanges in Singapore and so 
forth are trying to lure people there. The whole idea, I guess, 
is to try to avoid any kind of regulation.
    But the other thing that I am concerned about is that 
yesterday the House Appropriations Committee's Agriculture 
Appropriations Subcommittee marked up their work. And in page 
55 of their bill, there is a limitation not to exceed $25,000 
for expenses for consultations in meetings hosted by the 
Commission with foreign governmental and other regulatory 
officials. So if we are concerned about arbitrage and if we are 
concerned about getting these regulations in sync, why would we 
put a limitation on the Commission's ability to be able to meet 
with these folks? You know, this is kind of crazy.
    So these are some of the concerns I have that--of what is 
going on here. So I would like some answers about what that 
provision is trying to accomplish. I also hope that today's 
witnesses will be able to shed some light on the issue of this 
supposed arbitrage between Europe and us.
    In closing, I want to reiterate that while the rulemaking 
process so far may have not been perfect, I do not think that 
we need to hit the reset button and send the agency back to 
square one as some may like to see. Again, these are proposed, 
not final rules and I think we need to be patient and let the 
agency work through their process, and they are giving plenty 
of time to folks and they are having public input and so forth. 
And I just think if we delay this until December like some 
people want to do then we are just going to put more 
uncertainty into the situation not less. So I thank you, Mr. 
Chairman, for holding today's hearing and I look forward to 
hearing from our witnesses. I yield back.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    Good morning. Thank you Chairman Conaway and Ranking Member Boswell 
for holding today's hearing. And welcome, Commissioners Chilton and 
Sommers.
    It is important for us to have a thorough understanding of the 
steps the CFTC is taking to implement the Dodd-Frank Wall Street Reform 
and Consumer Protection Act. This Committee played the primary role in 
writing Title VII of this legislation with the goal of bringing greater 
transparency and accountability to the derivatives marketplace. It is 
imperative that we make sure the Commission is on track.
    Today we are looking into global derivatives reform. I have some 
serious concerns that banks are trying to pit foreign regulators 
against each other as part of their efforts to delay, or even repeal, 
financial reforms. I have heard that banks are still lobbying EU 
regulators to water down their proposed rules with the promise that 
they will move to Europe; then they turn around to lobby U.S. 
regulators with the same promises.
    I hope today's witnesses will be able to shed some light on this 
issue.
    In closing, I want to reiterate that while the rulemaking process 
so far may not be picture perfect, I do not think we need to hit the 
reset button and send the agency back to square one as some may like to 
see. Again, these are proposed, not final, rules. We need to be patient 
and let the agency work through their process.
    Again, I thank the Chairman for holding today's hearing and look 
forward to hearing from our witnesses.

    The Chairman. Thanks, Mr. Peterson. I appreciate that. The 
chair would ask that other Members submit their opening 
statements for the record so that our witnesses may begin their 
testimony.
    Our first panel today are two Commissioners from the CFTC. 
I want to welcome them both here. We have the Honorable Jill 
Sommers, Commissioner, Commodity Futures Trading Commission, 
Washington, D.C.; and the Honorable Bart Chilton, Commissioner, 
Commodity Futures Trading Commission, Washington, D.C. Thank 
you both for coming. I appreciate the time you have put in 
getting ready for today. So Ms. Sommers, if you will start 
first, and then Mr. Chilton, we will go to you.

  STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITY 
                  FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Ms. Sommers. Good morning Chairman Conaway, Ranking Member 
Boswell, and Members of the Subcommittee. Thank you for 
inviting me to today's hearing on harmonizing global 
derivatives reform: impact on U.S. competitiveness and market 
stability. I am Jill Sommers and I have worked in the 
derivatives industry for over 15 years and have been a 
Commissioner at the Commodity Futures Trading Commission since 
August of 2007. The views I present today are my own and not 
those of the Commission.
    Over the past 10 months, the CFTC has been moving at a 
rapid pace to promulgate swaps rules included in the Dodd-Frank 
Act. Staff has been working closely with their counterparts at 
the Securities and Exchange Commission and other U.S. 
regulators and has been consulting closely and sharing draft 
rulemaking documents with regulators in the European Union, 
United Kingdom, Japan, Canada, and elsewhere.
    Notably, staff has been communicating daily with European--
with the European Commission to narrow differences on 
derivatives reform between our jurisdictions. This 
unprecedented level of cooperation has proven effective in 
aligning regulatory objectives and harmonizing most regulatory 
requirements. However, I am concerned that some important 
substantive differences between derivatives reform in the U.S. 
and in other jurisdictions do exist.
    Other jurisdictions are not as far along in their reform 
process which may harm the global competitiveness of U.S. 
businesses, and our failure to clarify how our rules will apply 
internationally has created a great deal of uncertainty both in 
the U.S. and abroad. I would like to briefly address each one 
of those issues today.
    At the G20 Summit convened in Pittsburgh in September of 
2009, President Obama and other world leaders agreed that 
standardized OTC derivatives contracts should be traded on 
exchanges or electronic trading platforms where appropriate and 
cleared through central counterparties by the end of 2012 at 
the latest. Other jurisdictions are working to meet this end of 
2012 deadline, but we are working to implement reform much 
sooner. I believe a material difference in the timing of rule 
implementation is likely to occur, which may shift business 
overseas as the cost of doing business in the U.S. increases 
and create other opportunities for regulatory arbitrage.
    In Europe, legislation on clearing and reporting 
requirements for over-the-counter derivatives called the 
European Market Infrastructure Regulation or EMIR may not be 
finalized for weeks. Yesterday, the ECON Committee of the 
European Parliament adopted its report. The next phase of this 
process is for the Member States or Council to adopt a position 
and then the two bodies will work--excuse me--will work for an 
agreement on a common position. After adopting legislation, 
EMIR directs authorities to draft technical standards which may 
take close to a year.
    While the timing differences on these specific reforms 
between the U.S. and the EU will depend in large part on how 
quickly we are able to finalize and implement rules at the 
Commission, there is even a greater disparity in timing between 
the U.S. and EU in implementing other reforms in the OTC 
derivatives market. Rules on mandatory trade execution and 
other provisions that are parallel to provisions in Dodd-Frank 
are being considered as part of a review of the EU's 2007 
Markets and Financial Instruments Directive or MiFID. However, 
formal legislation has not been proposed and I am not certain 
that these reforms will be complete until 2012 at the earliest.
    In Asia, Japan has passed its legislation and plans to 
implement reform by the end of 2012. Other jurisdictions such 
as Singapore, Australia, Hong Kong, and Korea are also either 
providing or planning to provide clearing services. At the 
CFTC, on the other hand, after 10 months, eight public round 
tables, 14 open Commission meetings, and more than 50 proposed 
rules, notices, or other requests seeking public comment, we 
have nearly completed the proposal stage of our rules and are 
moving forward with reviewing comments from the public in 
preparation for drafting and voting on final rules.
    In order to do so effectively, however, I believe we must 
work at a more deliberate pace, not simply so that our timing 
is aligned with other jurisdictions, but so that we can 
thoroughly consider proposed rules to ensure that we get it 
right. Beyond timing, carefully tailoring these rules to 
address legitimate concerns from the public while upholding out 
statutory obligation is, I believe, a critical component of 
rulemaking. However, I feel these concerns may be addressed 
differently across jurisdictions.
    For example, a provision in the EU's proposed legislation 
on clearing and reporting of OTC derivatives would explicitly 
exempt multilateral development banks such as the International 
Bank for Reconstruction and Development. Such organizations 
whose statutory mission is to combat poverty and foster 
economic development are not exempt under any of the 
Commission's proposed rules. And I believe this should be 
addressed.
    As another example the EU is considering exempting pension 
funds from mandatory clearing of their swaps transactions while 
Dodd-Frank does not contemplate any such exemption. I am also 
deeply concerned that differences remain with respect to rules 
being considered at the Commission and in Europe for the 
mandatory execution of swaps on a trading platform.
    The rule that the Commission proposed on swap execution 
facilities will create an inflexible model whereby all requests 
for quotes must be submitted to, at a minimum, five swap 
dealers. The more flexible approach being considered in Europe 
and also by the SEC would allow counterparties to submit a 
request for quote to a single dealer and still satisfy the 
trade execution requirement. This is another area where there 
is a potential for regulatory arbitrage.
    In other areas such as capital and margin requirements for 
uncleared swaps, exemptions from mandatory clearing for inter-
affiliate transactions and ownership limits on market 
infrastructure, we may not know the extent of regulatory 
divergence for some time, but our staff continues to work 
closely with our regulatory counterparts as rules develop.
    I am also concerned about the uncertainty we are creating 
in the marketplace by not addressing the application of Dodd-
Frank to foreign entities in foreign transactions. Section 
722(d) of Dodd-Frank explicitly states that the Act does not 
apply to activities outside the United States unless those 
activities have a direct and significant direction with 
activities in, or effect on, commerce of the United States or 
contravene the rules that the Commission may promulgate to 
prevent evasion of the Dodd-Frank Act. The Commission has not 
given the public any formal guidance on what this section means 
in practice.
    In the past, staff at the Commission has used its authority 
to rely on the assistance of foreign regulators for the 
supervision of entities located abroad, so long as the foreign 
jurisdiction is found to have a comparable regulatory structure 
in place. Unfortunately, we have not proposed a mechanism to do 
this with respect to any of the rules being put forth under 
Dodd-Frank. This has already created regulatory uncertainty for 
firms with global operations as they attempt to plan for the 
future.
    Not only will our failure to establish clear rules in this 
area leave firms unable to determine what their compliance 
obligations may be, but it will most certainly drain critical 
Commission resources if we attempt to respond to these 
questions on a case by case basis. I am hopeful that this is 
one of the areas in which the CFTC and the SEC will each adopt 
a similar approach to prevent market participants from being 
subjected to multiple interpretations.
    Finally, I believe that one of the most important 
components of this new regulatory landscape for swap 
transactions is to achieve global consistency and cooperation. 
I believe we must maintain clear sight of our global objectives 
of improving transparency, mitigating systemic risk, and 
protecting against market abuse in the derivatives markets as 
we address the challenges in front of us. Thank you for 
inviting me to testify today and I will answer any questions 
from the Members of the Subcommittee. Thank you.
    [The prepared statement of Ms. Sommers follows:]

  Prepared Statement of Hon. Jill E. Sommers, Commissioner, Commodity 
              Futures Trading Commission, Washington, D.C.

    Good morning Chairman Conaway, Ranking Member Boswell and Members 
of the Subcommittee. Thank you for inviting me to today's hearing on 
``Harmonizing Global Derivatives Reform: Impact on U.S. Competitiveness 
and Market Stability.'' I am Jill Sommers. I have worked in the 
derivatives industry for over fifteen years and have been a 
Commissioner at the Commodity Futures Trading Commission since August 
of 2007. The views I present today are my own and not those of the 
Commission.
    Over the past 10 months, the CFTC has been moving at a rapid pace 
to promulgate swaps rules included in the Dodd-Frank Act. Staff has 
been working closely with their counterparts at the Securities and 
Exchange Commission (SEC) and other U.S. regulators, and has been 
consulting closely and sharing draft rulemaking documents with 
regulators in the European Union (EU), United Kingdom, Japan, Canada, 
and elsewhere. Notably, staff has been communicating daily with the 
European Commission to narrow differences on derivatives reform between 
our jurisdictions. This unprecedented level of cooperation has proven 
effective in aligning regulatory objectives and harmonizing most 
regulatory requirements.
    However, I am concerned that (1) some important substantive 
differences between derivatives reform in the U.S. and other 
jurisdictions do exist, (2) other jurisdictions are not as far along in 
their reform process, which may harm the global competitiveness of U.S. 
businesses, and (3) our failure to clarify how our rules will apply 
internationally has created a great deal of uncertainty, both in the 
U.S. and abroad. I would like to briefly address each of these issues 
today.
Timing
    At the G20 summit convened in Pittsburgh in September 2009, 
President Obama and other world leaders agreed that ``standardized OTC 
derivatives contracts should be traded on exchanges or electronic 
trading platforms, where appropriate, and cleared through central 
counterparties by end of 2012, at the latest.'' Other jurisdictions are 
working to meet this end of 2012 deadline, but we are working to 
implement reform much sooner. I believe a material difference in the 
timing of rule implementation is likely to occur, which may shift 
business overseas as the cost of doing business in the U.S. increases 
and create other opportunities for regulatory arbitrage.
    In Europe, legislation on clearing and reporting requirements for 
over-the-counter (OTC) derivatives, called the European Market 
Infrastructure Regulation, or EMIR, may not be finalized until the end 
of summer. After adopting legislation, EMIR directs authorities to 
draft technical standards by June 30, 2012. While the timing 
differences on these specific reforms between the U.S. and EU will 
depend in large part on how quickly we are able to finalize and 
implement rules at the Commission, there is an even greater disparity 
in timing between the U.S. and EU in implementing other reforms to the 
OTC derivatives market.
    Rules on mandatory trade execution and other provisions that are 
parallel to provisions in Dodd-Frank are being considered as part of a 
review of the EU's 2007 Markets in Financial Instruments Directive, or 
MiFID. However, formal legislation has not been proposed and I am not 
certain that these reforms will be complete until 2012 at the earliest. 
In Asia, Japan has passed its legislation and plans to implement reform 
by the end of 2012. Other jurisdictions such as Singapore, Australia, 
Hong Kong, and Korea are also either providing or planning to provide 
clearing services.
    At the CFTC, on the other hand, after 10 months, eight public 
roundtables, fourteen open Commission meetings, and more than 50 
proposed rules, notices, or other requests seeking public comment, we 
have nearly completed the proposal stage of our rules and are moving 
forward with reviewing comments from the public in preparation for 
drafting and voting on final rules. In order to do so effectively, 
however, I believe we must work at a more deliberate pace, not simply 
so that our timing is aligned with other jurisdictions, but so that we 
can thoughtfully consider proposed rules and ensure we get it right.

Substantive Differences
    Beyond timing, carefully tailoring these rules to address 
legitimate concerns from the public, while upholding our statutory 
obligations, is, I believe, a critical component of rule writing. 
However, I fear these concerns may be addressed differently across 
jurisdictions. For example, a provision in the EU's proposed 
legislation on clearing and reporting of OTC derivatives would 
explicitly exempt multilateral development banks such as the 
International Bank for Reconstruction and Development. Such 
organizations, whose statutory mission is to combat poverty and foster 
economic development, are not exempt under any of the Commission's 
proposed rules, and I believe this should be addressed. As another 
example, the EU is considering exempting pension funds from mandatory 
clearing of their swaps transactions, while Dodd-Frank does not 
contemplate any such exemption.
    I am also deeply concerned that differences remain with respect to 
rules being considered at the Commission and in Europe for the 
mandatory execution of swaps on a trading platform. The rule the 
Commission proposed on swap execution facilities, or SEFs, will create 
an inflexible model whereby all requests for quote must be submitted 
to, at a minimum, five swap dealers. The more flexible approach being 
considered in Europe (and also by the SEC) would allow counterparties 
to submit a request for quote to a single dealer and still satisfy the 
trade execution requirement. This is another area where there is a 
potential for regulatory arbitrage.
    In other areas, such as capital and margin requirements for 
uncleared swaps, exemptions from mandatory clearing for inter-affiliate 
transactions, and ownership limits on market infrastructure, we may not 
know the extent of regulatory divergence for some time, but staff 
continues to work closely with our international counterparts as rules 
develop.

Extraterritoriality
    I am also concerned about the uncertainty we are creating in the 
marketplace by not addressing the application of Dodd-Frank to foreign 
entities and foreign transactions. Section 722(d) of Dodd-Frank 
explicitly states that the Act does not apply to activities outside the 
United States unless those activities have a direct and significant 
connection with activities in, or effect on, commerce of the United 
States or contravene rules that the Commission may promulgate to 
prevent evasion of the Dodd-Frank Act. The Commission has not given the 
public any formal guidance on what this section means in practice. In 
the past, staff at the Commission has used its authority to rely on the 
assistance of foreign regulators for the supervision of entities 
located abroad so long as the foreign jurisdiction is found to have a 
comparable regulatory structure in place. Unfortunately, we have not 
proposed a mechanism to do this with respect to any of the rules being 
put forth under Dodd-Frank. This has already created regulatory 
uncertainty for firms with global operations as they attempt to plan 
for the future. Not only will our failure to establish clear rules in 
this area leave firms unable to determine what their compliance 
obligations may be, but it will most certainly drain critical 
Commission resources as we attempt to respond to questions on a case-
by-case basis. I am hopeful that this is one of the areas in which the 
CFTC and the SEC will each adopt a similar approach to prevent market 
participants from being subjected to multiple interpretations.
    I also wanted to briefly mention differences between the U.S. and 
Europe in our approach to position limits. The Commission has for years 
imposed position limits in the agriculture commodity markets, and has 
proposed a rule to impose position limits in the energy and metals 
markets. Regulators in the EU have historically not used position 
limits and, even under current proposals, may only mandate position 
limits in agricultural commodity markets. This is an area in which we 
need to ensure that our rules are harmonized to the maximum extent 
possible.
    I believe one of the most important components of this new 
regulatory landscape for swap transactions is to achieve global 
consistency and cooperation. I believe we must maintain clear sight of 
our global objectives of improving transparency, mitigating systemic 
risk and protecting against market abuse in the derivatives markets as 
we address the challenges in front of us. Thank you. I am grateful for 
the opportunity to speak about these important issues and am happy to 
answer any questions.

    The Chairman. Thanks, Ms. Sommers, we appreciate that. Mr. 
Chilton, your comments?

         STATEMENT OF HON. BART CHILTON, COMMISSIONER,
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Chilton. Thanks. Thanks, Mr. Chairman. Thanks for 
inviting me. Thank you, Mr. Boswell, Ranking Member Peterson, 
Members of the Committee. It is great to be with Commissioner 
Sommers, my colleague. She is the chair of our advisory 
committee on global markets and she does an excellent job. We 
owe her a debt of gratitude for the meetings she has put 
together.
    Mr. Conaway, I actually agree with a lot of what you said 
at the beginning about making sure--and what my colleague said 
about being sure we do this in a deliberate way and that we are 
careful, and that we don't create these opportunities for 
regulatory arbitrage. But I guess where I diverge is that you 
know the law is the law. That is our mandate to deal with and I 
think it is a good law in that we had this economic fiasco and 
clearly the regulatory apparatus we have for the OTC land, this 
is the over-the-counter swaps. None of the companies that had 
to be bailed out went under because of business done on the 
regulatory exchanges.
    The regulatory exchanges in the U.S. did very well, and I 
think we did a good job of regulating them. But the over-the-
counter swaps were a credit. The dresit default swaps were 
created and led to the downfall of AIG and this hideous bailout 
we had. That is the regulation that we are trying to deal with. 
That is really the focus. I think we need to do it. The 
question is doing it in a deliberate way, as you said, Mr. 
Chairman, and making sure that we are cautious and we don't go 
too far and overreach. And we are in the process of the 
rulemaking right now.
    I think if we do it the right way, it will actually not 
just make markets safer and sounder, but that it will be more 
efficient and effective. If you looked at markets, whether it 
is, hogs or corn, or metals or energy, you will see a lot of 
nearly unprecedented volatility recently. And we can address 
part of that through some of these rulemakings. But I think the 
added residual benefit if we do it correctly is that it will, 
in fact, make us more competitive, that people will want to use 
our markets more because we have legitimate sideboards on the 
regulatory--our regulatory regime. I don't know. Mr. Boswell 
left, but that movie, Field of Dreams. I don't know if anybody 
remembers it where Kevin Costner talks to the cornfield, and it 
says, ``If you build it they will come.'' I sort of had that 
view about regulation and the Europeans, that if we went first 
that maybe they would come along, but I wasn't sure. And I 
think what is being demonstrated now is that they really also 
believe that it will give them a competitive advantage if they 
have the regulatory regime in place.
    And so, actually by listening to my colleague's timing on a 
lot of this I think it is different than what we would have 
thought 2 years ago or a year and a half ago. We were talking 
about delays of 1\1/2\ or 2 years between the U.S. and the EU. 
But that chasm has been compressed now so that we are not 
looking at a year delay. We are looking at maybe 6 months and 
that is if we don't, for example, stagger our implementation. 
We are required to do things by certain dates under the law. We 
are not going to meet all our deadlines because we want to be 
deliberative.
    But there is a provision in Dodd-Frank that says we can't 
implement it--a final rule--we can't require anybody to do 
anything in less than 60 days, but there is no end time. We 
could implement it in 2 years. I am not suggesting that, but it 
gives us the flexibility. If we think we are going down the 
wrong path and this Committee or any other Committee wants to 
call us up and tell us we are doing a bad job, it gives us the 
ability to delay that already. We have that authority 
currently. It is in the law and I think it is a good provision.
    So as Commissioner Sommers said we are working really in an 
unprecedented fashion, not just with our colleagues on the SEC 
and other Federal agencies, but with our European counterparts. 
The Chairman has been over there many times. Some of us have 
been over there talking about these issues, and I think we are 
actually making significant progress on harmonizing. And while 
I am concerned about regulatory arbitrage to some extent--I 
think that we have to be, I think ultimately I am very 
optimistic about where we are headed.
    You know in that movie, I don't know if maybe he is talking 
about something nobody remembers, but the banker constantly 
wants Kevin Costner to sell the farm. He says you got to sell 
it. You are going under. You got to sell it. You have Kevin 
Costner invest in a baseball diamond and finally at the end the 
banker says wait a minute. Where did all these ballplayers come 
from? Don't ever sell this farm.
    And I know this isn't a dream. I know this isn't a movie--
that we are talking about serious issues here but there is a 
little bit of a parallel in that if we invest in these 
regulations then they will have greater value. And I think the 
banks are beginning to see that. I think the traders are seeing 
that. It is just a matter of not going too far and seeking the 
right balance. And if we do that, we need the budget to do that 
as Ranking Member Boswell and Ranking Member Peterson talked 
about. We need the budget to do that. You know the thing that 
passed yesterday in Appropriations Subcommittee is a 45 percent 
cut from the Administration's proposal and a 15 percent cut 
from the current fiscal year budget. So, we won't be able to do 
the job that we have been asked to do if we don't have the 
resources.
    But ultimately, I believe, Mr. Chairman, that if we do this 
the right way it will make us more competitive and that this 
will be good not just for market participants, not just for the 
folks that are going to testify later and in this room, but it 
will actually be good for consumers, and it will be good for 
the economic engine of our democracy. Thanks very much.
    [The prepared statement of Mr. Chilton follows:]

   Prepared Statement of Hon. Bart Chilton, Commissioner, Commodity 
              Futures Trading Commission, Washington, D.C.

    Good morning, Chairman Conaway, Ranking Member Boswell, and Members 
of the Subcommittee, and thank you for inviting me to today's hearing 
on global derivatives regulation. I am pleased to testify alongside my 
colleague, Commissioner Jill Sommers, who does an outstanding job as 
the Chair of our Global Markets Advisory Committee (GMAC).
    I believe the financial regulatory reforms that we are currently 
working upon in the U.S., and specifically at our agency, will make the 
U.S. futures industry safer, sounder, more efficient and effective, and 
more competitive than ever before. I also believe that the European 
Union has the same view with regard to the need for financial 
regulatory reform, and the benefits thereof. The U.S. and the European 
Union are the predominate swaps markets, and reform in both of these 
markets will provide the basis for other jurisdictions to undertake 
similar measures. I am hopeful that our brethren Asian regulators also 
have such a view.
    I would note with great concern consideration by the House 
Appropriations subcommittee of language that would essentially cut our 
budget. To my mind, this is penny-wise and pound-foolish. We went to 
the brink of economic disaster, Congress gave us the directives in 
Dodd-Frank to ensure that doesn't happen again, and now there are those 
who would keep us from having the budget to do the job.
    This morning I will provide comments on the status of the Commodity 
Futures Trading Commission's (CFTC's) efforts in the area of 
international harmonization on derivatives reform and implementation of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act. I will 
be meeting with regulators in several European Union countries in June, 
and so my remarks are made in light of those upcoming discussions.
    We have been coordinating--in an unprecedented manner--with our 
European and Asian counterparts on all major issues relating to the 
implementation of over-the-counter (OTC) oversight regulation. Of 
course, there are differences on some provisions of our respective 
laws, but the level of overall harmonization is substantial. In 
addition, it's fortuitous that many jurisdictions are developing 
regulations contemporaneously. This allows us to craft corresponding, 
standardized, conforming, or complementary rules as appropriate.
    In addition to frequent, ongoing, and productive staff phone 
contact with regulators around the world, we also maintain--as much as 
possible with our budget constraints--face-to-face contact with foreign 
regulators. Our Chairman made two visits to Brussels over the past year 
to speak to high-level European politicians about the legislation, and 
our director of international affairs also meets regularly with the 
European Commission's financial attache here in Washington to discuss 
salient issues. We also have video conference with European Commission 
staff and the other U.S. financial regulators on OTC regulatory reform. 
In addition, we participate in numerous International Organization of 
Securities Commissions (IOSCO) and Financial Stability Board (FSB) 
committees, which are instrumental in providing fora to discuss and 
develop policy and guidance.
    Generally, in our international discussions, we are guided by the 
2009 Pittsburgh G20 Communique, which set forth four key directives 
which all G20 countries must implement by the end of 2012. Those are, 
specifically:

   Clearing of all standardized OTC derivatives;

   Trading on an exchange or electronic trading platform, 
        ``where appropriate'';

   Reporting of all OTC derivatives to a regulator or trade 
        repository; and

   Higher Capital Requirements on uncleared derivatives.

These four elements provide a useful benchmark that entities such as 
IOSCO and FSB can use in their assessment of progress on OTC reform. 
Most importantly, these guidelines are consonant with the Congressional 
directives provided in the Dodd-Frank Act.
    Dodd-Frank is our primary compass in this area, and Section 752(a) 
of the Act expressly provides for international coordination on 
regulatory matters. In that vein, we are adjured specifically to 
``consult and coordinate with foreign regulatory authorities on the 
establishment of consistent international standards'' as to OTC 
transaction regulation.
    As we move forward in this area, one of the thorniest issues we 
have to deal with is the topic of ``extraterritoriality.'' Section 
722(d) of Dodd-Frank provides that the Act won't apply to activities 
outside the U.S. unless they have a ``direct and significant connection 
with activities in, or effect on, commerce'' in the U.S., or contravene 
Commission regulations needed to prevent evasion of the futures laws. 
This is an issue that has been the subject of much legal debate, but I 
think that we need to cut through that morass to provide some certainty 
to market participants who are concerned about what laws are going to 
apply to them. In that respect, while we don't yet have all the 
answers, we are working toward a consistent method to discuss and 
develop a satisfactory resolution of the issue, and provide legal 
certainty for markets and participants. Just as we have with all of our 
other Dodd-Frank initiatives, we welcome the input of market users in 
addition to that of our fellow regulators, here and abroad.
    As to the timing of initiatives, while the European legislation 
that is set forth in the European Markets Infrastructure Report (EMIR) 
and in the European securities laws (MiFID) are likely to be adopted 
later this year (and thereby putting Europe somewhat behind the U.S. 
timeframe), in practice, this may have little substantive impact, as 
Chairman Gensler has indicated that we will be pursuing a phased 
implementation in the U.S. In each jurisdiction, the key goal is to 
meet the end-2012 deadline set by the G20.
    In closing I'd like to briefly mention two issues that are 
particularly important to me: speculative position limits and high 
frequency traders (HFTs). I appreciated the opportunity to testify 
before this Subcommittee last December on speculative position limits. 
Dodd-Frank provides that, in establishing position limits for exempt 
and agricultural commodity futures and options traded on or subject to 
the rules of a designated contract market, the Commission ``shall 
strive to ensure'' that trading on foreign boards of trade (FBOTs) in 
the same commodity will be subject to comparable limits and that any 
Commission limits will not cause price discovery in the commodity to 
shift to trading on FBOTs. We are considering how we can engage foreign 
regulators to ensure parity in regulatory controls over significant 
position holders. In the E.C.'s MiFID review, it is considering giving 
all national regulators the power to impose position limits. I have 
said numerous times that we in the U.S. can and should do better in 
this area, that there are things we can do now (such as spot month 
limits in swaps and on the regulated exchanges, based on a percentage 
of deliverable supply). I hope that we, both in the U.S. and 
internationally, can move forward expeditiously in these efforts to 
protect markets and consumers from excessive speculation.
    As to HFTs, while I recognize the value that these participants can 
bring to the market in terms of adding liquidity and tightening 
spreads, I have concerns about some possible negative effects that this 
relatively new type of activity may have on traditional market uses. I 
have heard from commercial entities, and indeed from some HFTs 
themselves, that this is an area that deserves some heightened scrutiny 
from regulators, to ensure that all market participants get a fair 
shake and a level playing field. I look forward to working with my 
colleagues, here and abroad, to ensure that these types of market 
innovations do not result in anticompetitive effects for any markets or 
participants.
    Thank you again for the opportunity to testify. I'd be pleased to 
answer any questions.

    The Chairman. Thanks Mr. Chilton. I appreciate that. Mr. 
Peterson, just by way of clarification, the restriction on the 
$25,000 that was in yesterday's mark-up was in the 2009 
Appropriations bill--exact same language when you were chair.
    Mr. Peterson. No--will the Chairman yield?
    The Chairman. Yes.
    Mr. Peterson. No, I am aware of that, but in 2009 we didn't 
have this issue in front of us and we weren't obviously having 
a hearing worrying about harmonization, so----
    The Chairman. Well, it--
    Mr. Peterson.--it would appear to me that the right thing 
to do would be to take that restriction out of it.
    The Chairman. Right. Yes, the implication I had from you 
that we stuck it in there kind of out of left field in whole 
cloth and it wasn't--real provisions, okay.
    Mr. Peterson. No, no, I just think it is ironic that we are 
sitting here concerned about making sure that we harmonize and 
yet we are putting restriction on them. And as Mr. Chilton just 
said, you know we are also cutting their budget significantly 
and this is going to--I think it is going to cause a bigger 
problem than some of those other----
    The Chairman. Well, I don't disagree that the provision 
probably shouldn't be in there, but I just also want to make 
sure the record reflects----
    Mr. Peterson. Well, well----
    The Chairman.--that was carried over. And probably----
    Mr. Peterson.--maybe we can work together to get it out----
    The Chairman. Exactly.
    Mr. Peterson.--when the bill comes to the floor.
    The Chairman. There will be a period of time when the 
regulations are different no matter what happens under the--you 
can't paint a scenario in which everybody pulls the trigger on 
the exact set date, so there will be a natural period for 
arbitrage that we will be able to observe. Maybe because it 
doesn't look to be permanent there won't be a lot of movement 
between markets as a result of forum shopping or regulatory 
scheme shopping, however you want to phrase that. But Ms. 
Sommers, first and then Mr. Chilton, how are you going to 
address clear meaningful differences between the EU proposals 
and/or Asian proposals as you get the final rules in place once 
they get theirs in place and you see perhaps a better scheme. 
How--what kind of flexibility does the Commission have to 
adjust on the fly for the betterment of all the good things 
that Mr. Chilton said at the closing of his comments?
    Ms. Sommers. Thank you, Mr. Conaway. I think that you made 
a very good point in your question by saying that we probably 
won't all pull the trigger on the same day. The important part 
is that we make sure that the rules are in--as consistent as 
possible across jurisdictions no matter what date they are put 
into effect. So what we are doing right now is trying to make 
sure that any of the inconsistencies that do exist, that we 
know exist, we are working to resolve those with our 
counterparts. The hard part for us will be if we have already 
finalized a rule this year with regard to trading requirements, 
reporting requirements--when those are not even going to be 
considered in Europe. We wouldn't see what the legislative text 
would look like until this time next year.
    The Chairman. Well, what are the mechanics that you have 
available to do that? Do you have to go through the full new 
rule proposal altogether if you?
    Ms. Sommers. Right. If we want----
    The Chairman. Let us assume that Europe came up with a 
scheme that we like better. We would have to repropose----
    Ms. Sommers. Right.
    The Chairman. And then while that is going on we would have 
an industry that is out there putting in systems and building a 
scheme to comply with our rule, and yet we are headed in a 
different direction. So you would have to go through this whole 
rule making process again?
    Ms. Sommers. We would have the ability to re-propose a rule 
if we wanted to change something that we had put in place.
    The Chairman. Mr. Chilton, any comments about how flexible 
you guys----
    Mr. Chilton. Just briefly, Mr. Conaway, you know that we 
are in the middle of a process. This is sort of like, you don't 
want to call an end to it, but we do have plenary authority, in 
general, in the Act that we could go in and re-propose a rule. 
We also have a provision in there that talks about comparable 
and comprehensive regulations. So we can sort of say well, 
there is another agency in Europe or wherever, they do a good 
job. But we can also say we are not so sure about that. So we 
have authority where we could go in and be creative if we see a 
problem that would create issues for U.S. businesses or for 
U.S. consumers. But I agree. We need to be deliberate on this. 
We need to make sure we are working closely with them.
    The Chairman. Ms. Sommers, is there--do you have a 
counterpart in the SEC of an advisory committee that looks at 
harmonization for not only the SEC share of Dodd-Frank but 
yours and the international link? Do you have a--is there a 
round table or something that you guys work with?
    Ms. Sommers. To my knowledge the SEC doesn't have advisory 
committees, but SEC Commissioner Kathy Casey is very involved 
in international issues. She and I both participate in IOSCO 
meetings. Ms. Casey participates in the Financial Stability 
Board, so they are also very actively coordinating with 
international counterparts.
    The Chairman. Is there a rational conversation between you 
two----
    Ms. Sommers. Absolutely.
    The Chairman.--at reference to making sure, because we have 
some instances already just between our two regulators in which 
you have the industry jammed up. Okay. Then I yield back. The 
Members will be recognized for questions on seniority of when 
the gavel went down, for those that were present. So with that 
we will go to Mr. Boswell for 5 minutes.
    Mr. Boswell. Well, thank you. These are challenging times. 
Don't make any mistake about it. I catch myself saying that 
history is being written. We just don't know what it is going 
to say. It is kind of up to you and us to make it the best we 
can and it probably won't be perfect, but we have to do the 
best we possibly can. I was called away so I didn't follow 
everything that you said, Mr. Chairman, but I don't want to 
get--if I get redundant just give me an elbow and I will move 
to another--no, I am serious. I don't want to do that because I 
read the report. But, did you discuss somewhat more about the 
cooperation, the unprecedented level of cooperation among 
foreign regulators? Did you discuss that? Did you make any 
further comment on that?
    Ms. Sommers. Yes, sir. In my testimony I did discuss it.
    Mr. Boswell. Yes, okay. We will pass on that for a minute. 
Regarding your testimony, Commissioner Sommers, positional 
limits--is it your view that if the Europeans decide to let 
speculators have free reign by imposing no position limits that 
we should match them in order to, ``ensure our rules harmonize 
to the maximum extent possible?''
    Ms. Sommers. No, sir. I--our markets and specifically with 
addressing the enumerated agricultural markets, we do have 
position limits. Europe does not have those limits on their 
agricultural markets, so I think that the system that we have 
right now works very well for us and works in our agricultural 
markets. We also have accountability levels in our energy 
complex which is consistent with what they have right now for 
those products that trade in the UK. I am suggesting that I 
think we try to harmonize what we may do in the future with 
them as well.
    Mr. Boswell. Okay. Mr. Chilton, you have any comment on 
that point?
    Mr. Chilton. Just briefly, there are spot month limits in 
the agriculture commodities. The law requires that we have not 
only spot month limits in just the agriculture, but also in the 
metals complex and the energy complex, so we are expanding. It 
also requires that we have deferred month limits, so that would 
be other months and then an aggregate limit and this is both 
for the OTC area and for the regulated exchanges. So it is true 
that we have had position limits in ag, and quite frankly, I 
think it is sort of a testament to how well position limits can 
work, that we have had them for so long, and that by in large 
there haven't been too many problems. So, I am hopeful as I 
have said before this Subcommittee and many times that we put 
limits in place right now. I think that we wouldn't see such 
volatility in some prices and that it wouldn't actually impact 
that many traders, the proposal that we have had. We said that 
you can't have more than ten percent of a market. Then we have 
a little multiplier on there over--in markets with over 25,000 
contracts you can have 2.5 percent of it. So, I mean we are 
talking about very large positions. You know if it were my 
decision I would probably be a little bit more restrictive, but 
I think our proposal, Mr. Chairman, errs on the high side to 
allow for us to put some legitimate limits, only the largest of 
the large would be under this. I think that would help markets, 
but ultimately we may have to recalibrate, reassess where we 
are on the limits. Thank you for the question.
    Mr. Boswell. Well, I will address this question to you 
first then. Your testimony cites the Dodd-Frank requirement for 
the Commission that these limits do not cause price discovery 
in the commodity to shift trading to foreign boards of trade. 
Given your interest and speculative position limits, how is the 
Commission working to balance the needs of setting appropriate 
limits for speculators without encouraging mass migration to 
foreign markets?
    Mr. Chilton. That is a good question. I will try to be 
brief, Mr. Boswell. We have an agreement already that we 
reached with the IntercontinentalExchange in London where they 
have a look-a-like contract to our West Texas Intermediate 
Crude and they actually--working with the FSA, the regulator in 
the UK, they actually give us data on a daily basis. And they 
have said and the IntercontinentalExchange has said that they 
would comply with limits that we would put in place. You know 
again, I think you err on the high side on limits at first 
because you don't want to have these market disruptions. You 
don't want to have migration and then you see whether or not 
you need to recalibrate at some point. Is our proposal that we 
call 10 and 2.5, that I explained, is that the magic number? Is 
that the same for--should it be the same for silver as it is 
for crude oil? I don't think so, but right now we should just 
err on the high side, get them in place, have folks get used to 
them, and then if we need to recalibrate, then we could 
recalibrate up at some point if we think we need to. Not many 
people have given us a whole lot of heartache on the limits 
being too restrictive so far. A few, but not many.
    Mr. Boswell. Thank you.
    The Chairman. Thanks, Mr. Boswell. We will deviate just a 
minor bit to recognize the Chairman of the full Committee, 
Frank D. Lucas.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman, and I appreciate the 
courtesy. Commissioner Sommers, I want to congratulate and 
thank you for addressing the very real concern about legal 
certainty at the Commission's last public meeting. And I share 
this concern as do a growing number of market participants. I 
sense that if it weren't for the need to respond to the 
Commission's crushing request for comments on some 60 proposed 
rules, the legal certainty issues would be the primary concern 
for all currently engaged in trading OTC swaps. As you know, 
Commissioner, the CFMA protected the OTC swap markets from 
being regulated like futures contracts by exempting them from 
the futures contracts regulatory scheme. Dodd-Frank eliminates 
that exemption or legal certainty. Swap contracts have been 
relied on for nearly a century opting for a robust regulatory 
scheme of the OTC swap market. The very real problem that we 
have now is is that the legal certainty is eliminated on July 
16 of this year, but the new regulatory regime created by Dodd-
Frank won't be implemented by then. And by some estimates won't 
be implemented perhaps for a year or 2. Just this morning I 
received a copy from the Electric Trade Associations petition 
for reconsideration of an exemptive relief. I would like to 
submit, Mr. Chairman, this petition submitted by the National 
Rural Electric Cooperatives Association and four other trade 
associations for the record.
    The Chairman. Without objection.
    [The document referred to is located on p. 109.]
    Mr. Lucas. Thank you. With Chairman Gensler's continued 
optimism concerning the implementation schedule, I can 
understand why the Commission rejected the Association's 
petition back in December. But now 5 months later and less than 
2 months away from the implementation date, it is crystal clear 
that the end-users will be looking for and need similar relief. 
Can you tell this Committee if the Commission will look 
differently upon the Associations petition to have its swap 
activity grandfathered and remain legally certain under the 
Commodity Exchange Act? Can you--would you suggest ways that we 
can aid and broaden your review of these applications?
    Ms. Sommers. Thank you for the question, Mr. Chairman. I 
think that the Dodd-Frank statute does provide the CFTC with 
the authority to grant grandfather relief to the sections 
2(h)(1) and 2(h)(3) markets. We did address that by asking for 
entities to submit petitions to us last fall. We denied 
granting this grandfather relief because as you said we were 
hopeful that the new framework would be in place by then. I do 
think that we have the authority to grant these entities relief 
to let them continue to rely on the Sections 2(h) that were put 
in the Act by CFMA, and we could do that by Commission order. 
And I would hope that we would be able to do that for the 
section 2(h)(1) and section 2(h)(3) markets.
    What we are not able to do because the statute does not 
give the CFTC the authority is to address the repeal of other 
provisions like sections 2(d) and 2(g). Market participants 
that rely on the relief under sections 2(d) and 2(g) would not 
be able to have the legal certainty given to them under the 
grandfather relief.
    Mr. Lucas. It would appear then that the--in this case the 
Electric Trade Associations have a real point and a real bone 
of contention and that--I do not pretend to be an attorney, 
Commissioner, but I can see where the certainty ends on July 
16. Up until the point either a relief is provided in part of 
the issue or the final rule is put into place, I can see if 
where I thought I were legal counsel to these groups, I would 
be spastic about making any new decisions or engaging in any 
contracts. Is that an unreasonable observation on my part?
    Ms. Sommers. No, sir. I do believe that the Commission 
needs to take some action in this and within these issues.
    Mr. Lucas. Thank you, Commissioner. I yield back the 
balance of my time, Mr. Chairman.
    The Chairman. Thanks, Mr. Lucas. The chair now recognizes 
the Ranking Member of the full Committee for 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman. Ms. Sommers, you 
have been involved in this international stuff. Have you heard 
about these rumors that I have, about people going to the 
regulators and trying to come up with lighter rules? Have you 
heard any of that?
    Ms. Sommers. I have not heard specifically from foreign 
regulators that those comments have been made to them, but I 
can assure you that they are--those concerns are expressed to 
us quite frequently with regard to any sort of inconsistency 
within the rules and making it easier for foreign competitors 
to do business than it is for U.S. businesses. They are 
stressing to us that companies here are concerned about any 
inconsistencies. So as we work forward implementing all of 
these rules, I think all of us have to keep that in mind that 
we want to be as consistent as possible with our international 
counterparts and that is what we are trying to do.
    Mr. Peterson. Can either one of you tell me the practical 
impact of this--if this appropriations bill that went through 
yesterday actually becomes law and you--it is a reduction of 
about $30 million from what you have now. Do you know what 
impact that is going to have? Or if you don't is there some way 
to have somebody from the Commission give us information about 
what would actually happen if the cuts took place. What 
wouldn't you do that you would normally do and so forth? And 
then also on this $25,000 deal if that is going to limit your 
ability to work with the foreign regulators, should we get rid 
of that limitation? I don't know if you have answers to that 
today, but----
    Ms. Sommers. I do not have specific information about the 
$25,000. I would guess that that does not limit our ability to 
travel to----
    Mr. Peterson. No, I don't think it does, but it apparently 
limits your ability to host people here. That is not very much 
money, you know. And I think the European regulators were just 
here. I guess this has been in the law. I don't know, so I 
don't know how it works exactly. But I guess if somebody down 
there that deals with this can get me that information. That 
would be helpful.
    Ms. Sommers. We can absolutely get you more specific 
information. Just with regard to the first part of your 
question, as you know, we just received our appropriation for 
2011 a few weeks ago and received approximately a $35 million 
increase in our budget which was very helpful because a 
significant portion of that money went towards technology. And 
that is one of the places that we are in most dire need. The 
number that was marked up yesterday would take us back to 
approximately the level we were at in Fiscal Year 2010.
    Mr. Peterson. So that probably would impact the technology 
more than anything then?
    Ms. Sommers. I would guess that that is true.
    Mr. Peterson. In the last one we had--I had been told and I 
guess I haven't actually seen this in writing that a couple--3 
weeks ago Goldman Sachs said that they thought that all this 
uncertainty, all this passive money in the oil market had 
raised the price of oil $27 a barrel and then somebody else, 
some other group said it was $20 a barrel. Is that in fact the 
case?
    Mr. Chilton. Well, I am not an economist.
    Mr. Peterson. No, no, but I mean were those statements 
made?
    Mr. Chilton. Those are statements--you accurately reflect 
statements that other people made. And a lot of people want to 
make these arguments and they want to have an actual number and 
I have been very reluctant to ever give them. But yes, Goldman 
made that statement and so have others. Just let me say, Mr. 
Chairman, briefly on the budget. It would be crippling to our 
budget--we would not be able to enforce the regulations that 
Congress asked us to do so under the proposed budget that was 
approved yesterday.
    Mr. Peterson. But----
    Mr. Chilton. We could----
    Mr. Peterson.--you could write the rules?
    Mr. Chilton. We could write the rules but we would be a 
hollow shell. We wouldn't be able to actually enforce them. And 
you know, Members, we are going from a $5 trillion annualized 
trading in the regulated exchanges to hundreds of trillions of 
dollars. And Commissioner Sommers is absolutely right on the 
technology. There is something that I have talked about a lot 
recently called high frequency traders. And I call them cheetah 
traders as in the fastest land mammal because they are so fast, 
fast, fast. I think they are having an impact on markets, but 
we can't keep up with these guys. We can't keep up with the 
cheetahs. And when I say that I am not like with a Boston 
accent, like a card cheetah. But we can't keep up with these 
guys because we don't have the technology, so we need the 
budget.
    Mr. Peterson. All right, thank you Mr. Chairman.
    The Chairman. Yes, sir. The gentleman yields back. Mr. 
Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I thank the panel. 
I want to go back to a little bit about this harmonization 
process and particularly around the swap activities occurring 
outside the United States. Is it my understanding that both the 
CFTC and the SEC have yet to address the territorial scope of 
their proposals. But however, in April, the prudential 
regulators proposed a rule for the application of margin 
requirements as required by Title VII for major swap 
participants and swap dealers. Under this, prudential 
regulators proposed margin requirements would apply to all 
transactions of U.S. financial institutions whether they are 
U.S. or non-U.S. customers. And so the question that I have is 
that if we haven't worked out the territorial issues, to me 
this is going to put some of our U.S. companies in somewhat of 
a disadvantage here if they are having to impose those on their 
non-U.S. customers. So I think these are the kinds of things 
that many of us are concerned about in this harmonization 
process. Ms. Sommers, do you want to address that?
    Ms. Sommers. Thank you for the question, Congressman 
Neugebauer. I think that the proposal that was put forth by the 
prudential regulators is with regard to the capital and margin 
for banks or bank holding companies that they regulate. So it 
is for swap dealers or major swap participants that are under 
the regulation of the Fed or prudential bank regulators. There 
is no question that they address, you know the issue of 
extraterritoriality within that provision by saying that if 
capital and margin would apply to all activities of U.S. 
businesses and that potentially could put U.S. businesses at a 
competitive disadvantage.
    What we are looking towards is harmonizing capital and 
margin with our regulatory counterparts in Europe. So if, for 
instance, Europe imposes the same type of capital and margin 
scheme in Europe on their regulatees, then there would not be a 
discrepancy between what foreign banks would have to post 
versus what U.S. banks would have to post. We just don't know. 
At this point there is some uncertainty.
    Mr. Neugebauer. Well, and here is I think one of the things 
that could concern me is that if we are out in front of 
everybody and then we assume, as you articulated that you feel 
like you are in a cooperative mode with these regulators; but 
ultimately the people you are negotiating with probably aren't 
the people that are going to vote on whether to adopt those are 
not.
    Mr. Sommers. That is right.
    Mr. Neugebauer. And so what would be--what does the world 
look like in a year or 2 when the parliament or the governments 
in the Asian markets decide to adopt different and maybe less 
restrictive regulations, then what is our recourse at that 
particular point in time?
    Ms. Sommers. I am not sure, but I think as Mr. Conaway 
suggested, we would have to rethink our regulations in my 
opinion.
    Mr. Neugebauer. So is there, Mr. Chilton, did you want to 
reflect this?
    Mr. Chilton. I will try to be brief.
    Mr. Neugebauer. Yes.
    Mr. Chilton. You know, the law says that we have this 
provision where we can defer if something is comparable and 
comprehensive like I talked about earlier, but we also have 
this provision that people talk about section 722(d) in the 
Act, which says that if the activity has a significant and 
direct impact on U.S. commerce. So we could at some later 
point, Congressman, say, ``You know what? Now that we have seen 
what the EU has done maybe we want to reassess that issue of 
significant and direct impact.'' I think we have some 
flexibility.
    Mr. Neugebauer. Well, I just want to go to an agricultural 
question and it is really for my edification. So the other--
obviously agriculture in U.S. uses commodities and hedging 
opportunities extensively. Do we see that same kind of activity 
in other countries? Are other countries utilizing the hedging 
strategies as well?
    Mr. Chilton. Yes, and a lot of them, Congressman, use our 
markets for those strategies. Mr. Boswell was talking about 
cotton early. Some of the volatility we have seen in some of 
the markets occurs actually when our markets aren't open during 
the trading day, but during the overnight trading hours when 
some of these electronic firms and maybe some of the cheetah 
traders are involved in the market. So, they use our market. 
They do use them for agriculture hedging, sir.
    Mr. Neugebauer. Yes, this will follow-up, is my 
understanding that the transactional fees in some of those 
markets are less than the transactional costs in our markets. 
So is cost a part of this harmonization piece?
    Mr. Chilton. Well, those are generally set by the 
exchanges, sir, so you know they all have their own business 
propositions, so I don't know about the exact transaction cost 
in exchanges outside of the U.S. I am sorry.
    Mr. Neugebauer. Yes, I think--and I know that my time--I 
think one of the things I was talking about was not setting the 
price, but also making sure that the parameters are such that 
the pricing should be more market driven.
    The Chairman. The gentleman yields back. Mr. Kissell, 5 
minutes.
    Mr. Kissell. Thank you, Mr. Chairman. Thank you for this 
opportunity to have the hearing today and try to examine the 
implementation of this most important legislation. And thank 
you, Commissioners, for being here today. My first question is 
one of curiosity. I happened to read, and it is probably 3 
weeks ago and it was in a newspaper that indicated that there 
were concerns in Europe that certain banks there were trying to 
dominate and manipulate the derivatives market and they were 
being investigated. I was just wondering if you have knowledge 
of that. If so, how accurate of a summary was that and what 
implications might it have towards what is going on here?
    Mr. Chilton. I will give sort of a bureaucratic answer to 
you, Congressman Kissell. You know we can't comment on any 
investigations that we have, et cetera. I read the news story 
that you did, but, unless we were in Executive Session, we 
couldn't discuss it.
    Mr. Kissell. Well, that was not the answer I was expecting, 
but I understand that answer. It would seem to me that it would 
indicate there are certain issues that are taking place in the 
markets over there that we are trying to avoid long term, and 
some of the problems that we have had here in the markets. So, 
I thought it was kind of interesting. And so at some point in 
time if we could elaborate there it would be interesting to 
know how that might affect the discussions here.
    Mr. Chilton. Congressman, I just want to be clear. I am not 
suggesting anything either way. I am just saying that those 
sorts of questions about investigations would be done in an 
Executive Session. So I am not saying yes, no--I am not saying 
anything.
    Mr. Kissell. Understood completely. Understood completely. 
As we talk about the give and take of trying to implement 
regulations and Commissioner Sommers, you said we are not going 
to pull the trigger on the same date. And I think that goes 
without saying. As we have gone back and forth in looking at 
what we are doing versus what we expect some of the foreign 
markets to do, are there any exceptionally daunting challenges, 
things where we see that this could be bad? Anything that we 
know we have to overcome that just stands out above others in 
terms of trying to even this out as much as possible?
    Ms. Sommers. Yes, sir, I do think that there are some 
inconsistencies that do exist currently. Of course, Europe has 
not passed a final version of their legislation yet, so 
anything could happen from now until then. Some of the issues 
that I point out in my testimony with regard to pension funds, 
they are exempting pension funds from the clearing requirement 
in Europe, and that is a significant discrepancy because we do 
not have the authority to do that under Dodd-Frank.
    There may be differences in how they consider end-users in 
Europe. There may be differences in how they will allow trading 
on swap execution facilities. The current CFTC proposal 
requires a request for quote to go out to a minimum of five 
dealers. And Europe may not do that. If they have single dealer 
platforms, that will be a significant discrepancy. So those are 
issues that we are watching very closely.
    Mr. Kissell. And Commissioner Chilton, you indicated you 
know that we do have some flexibility in implementation of this 
as we see these things start to pan out as more definition is 
given. Are you comfortable, and I guess a question for both of 
you, comfortable that we have the structure to implement what 
we need to do, plus have the ability to adjust as we need to 
and still keep that structure?
    Mr. Chilton. We do not have the structure in place to deal 
with the regulation that Congress has asked us to undertake. We 
can't do it without the budget--particularly talking about the 
technology point that, Commissioner Sommers, I think you and I 
both agree on. But we don't have the staff. I mean, we have 
been looking at markets with $5 trillion annually. These 
markets are growing to be hundreds of trillions of dollars. We 
need to set up new divisions to deal with swaps. We need 
experts. We need economists. We don't have the ability to do it 
now, and the budget that is proposed would cripple us at this 
point. We could continue to do what we are doing right now, 
sort of the status quo. I don't think that is good enough. I 
think consumers demand more and I think given the realities of 
the economy in the last several years they deserve it.
    Mr. Kissell. Commissioner Sommers, any thoughts?
    Ms. Sommers. I agree with Mr. Chilton that we no doubt need 
the resources to be able to implement all of the additional 
authority that we received under Dodd-Frank. I also think that, 
as we look through the authority we were given, we were not 
given exemptive authority, broad exemptive authority like we 
have had in the past. So if we look towards either foreign 
entities or domestic entities that we would like to exempt from 
the regulation, we don't have that authority to make those 
decisions within the Commission. But otherwise, I do think that 
we have some discretion and flexibility in what we propose.
    Mr. Kissell. Okay. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. Mr. Austin Scott, from 
Georgia, for 5 minutes. Mr. Scott?
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman, and I 
think we all agree that we are in a global financial market and 
certainly transactions can occur in the U.S. or outside of the 
U.S. and that is I think where our concerns are. But just to 
get a feel, and I know that there are a lot of people watching 
us, Commissioner would you--the total value of the outstanding 
contracts today for the OTC, what approximately is that?
    Ms. Sommers. I don't have a current number for that. I 
think that the numbers that are usually thrown about are $300, 
$400, $500 trillion. Somebody on the next panel may have a much 
better idea of that.
    Mr. Chilton. She is right that the numbers are thrown 
around. Bloomberg said the other day $601. I thought it was 
$615 trillion. Last year it was $585. I don't know and that is 
the point.
    Mr. Austin Scott of Georgia. Yes, sir.
    Mr. Chilton. We don't know what is going on and that is why 
I believe we are given the authority to figure it out, because 
it had a direct impact on our nation's economy.
    Mr. Austin Scott of Georgia. Yes, sir. It is my 
understanding that it is somewhere north of $600 trillion and 
that even in the market value that would be over $20 trillion 
which is a huge number and which far exceeds even the value of 
the S&P 500.
    Mr. Chilton. Now, we wouldn't get all that, Congressman, 
because the SEC is going to do some of those which is a 
significant share.
    Mr. Austin Scott of Georgia. Yes, sir. But what I am 
getting at and it somewhat gets back to your question, 
Commissioner. I mean do we know--I guess what would help me and 
what I would ask if you would have somebody on your staff put 
it together. It is kind of the last 10 years, the increases on 
an annual basis of the value of the outstanding contracts as 
best we can estimate them, the gross market value of those 
contracts, the number of transaction annually. Do we have any 
idea how many transactions we have annually?
    Ms. Sommers. BIS does publish some numbers on the over-the-
counter market and we can get you those.
    Mr. Austin Scott of Georgia. And then the percentage of it 
that is debt related, has that changed? I mean, most of the 
time we see that \2/3\ of it is debt related or over the course 
of time has that changed?
    Ms. Sommers. I don't know the answer to that.
    Mr. Austin Scott of Georgia. And I think that gets back to 
one of the concerns that we have is that there are so many 
questions, and there are so many paths that we can go down. The 
European Union, my understanding is they have their list of 
exemptions. If it is easier for someone to trade overseas, they 
are probably going to trade overseas, but they also--the 
capital requirement that they set I mean, approximately $14 
million U.S. dollars. Is that correct--for a clearinghouse? Is 
that--that is what was reported in Bloomberg or Forbes or one 
of the articles that I read--$14 million?
    Ms. Sommers. Is this a capital requirement, I am sorry, 
on----
    Mr. Austin Scott of Georgia. Yes, sir. Yes, ma'am. I am 
sorry.
    Ms. Sommers.--who?
    Mr. Austin Scott of Georgia. The capital requirement to be 
a clearinghouse. Was it $14 million?
    Ms. Sommers. Their rules have not been finalized yet so I--
this may be something that is in their current proposal. They 
did approve something within committee yesterday.
    Mr. Austin Scott of Georgia. Yes, ma'am. What do you expect 
the capital requirement to be? Just approximately what would 
you think would be an appropriate capital requirement?
    Ms. Sommers. For entities that want to be clearing members 
of----
    Mr. Austin Scott of Georgia. Yes, ma'am.
    Ms. Sommers.--of a clearing house? The open access 
provisions that we proposed in our proposal last fall, I 
believe we are at $50 million. Is that right, $50 million for 
an entity before they could be a clearing member of a 
clearinghouse.
    Mr. Austin Scott of Georgia. I personally feel that $14.1 
million is a pretty small bank and even in South Georgia. I 
have some other questions, Mr. Chairman, but I will yield back 
to you. But I would appreciate it if you could have some 
staff--just so that we can help explain to the general public 
why it is necessary to do something at this stage.
    The Chairman. If the gentlemen would yield? Could you 
modify that just a bit to add to that the number of contracts? 
I do think there is a--the number of contracts versus notional 
value may not track the growth and notional value may not track 
the number of contracts themselves. And the real issue is the 
number of contracts and players playing with those contracts. 
The notional value is important, but if we could add the number 
of contracts along that track as well. The gentleman yields 
back. Mr. Welch for 5 minutes.
    Mr. Welch. Thank you very much. One of the frustrations in 
the chair I sit in is this: On the one hand, the futures 
markets do play a very important role and historically have 
provided significant benefit to our farmers and to our 
consumers. But there is, I think beyond dispute, evidence that 
the financial markets have been inverted so that instead of 
them providing that price setting function they provide a 
speculator opportunity. And on the one hand speculators are an 
important part of the market to provide liquidity, but on the 
other hand if it gets out of balance, then the consumer ends up 
getting smashed. And I just want to--and so I get frustrated 
about that because we have to protect our consumers.
    And then when we get into the rule-making question, I hear 
the concerns about the implementation of the regulations and 
the go slow approach. The focus then becomes about protecting 
the financial players in the futures market and that 
oftentimes, as I see it, comes at the expense of protecting the 
consumers. So there has got to be, and mind you Mr. Chairman, a 
bit of a balance here. And Ms. Sommers, I guess I want to ask 
you what your philosophy is. Do you see that the level of 
speculation that has injected itself into the futures market in 
fact is threatening the smooth functioning of that toward 
achieving its other goal of providing some protection to our 
consumers, our end-users, our commodity producers?
    Ms. Sommers. Congressman, thank you for the question. I 
think that, it is part of our mission at the CFTC to make sure 
that our markets are free from abuse and manipulation and that 
is what we do every day. Looking at our markets, is making sure 
that we do not see manipulative activity or abuse in those 
markets.
    Mr. Welch. I am trying to understand this a little bit 
more. It is not necessarily manipulation. If the rules allow 
this enormous infusion of cash, people can legally do that. But 
their purpose and their use of that is different than some 
farmer in Illinois. And bottom line, who are we working for? 
Are we working for the farmer in Illinois, or the hedge fund in 
New York? They are both doing legal activities, but one comes 
at the expense of the other. So how do you see it, your 
responsibility as a Commissioner--I will ask Mr. Chilton this, 
too. When it comes to balancing those concerns: that farmer, 
who is trying to get stability in his price and that hedge fund 
guy who is trying to make a slight margin on a legal activity?
    Ms. Sommers. I think that that is what our economists are 
there to do, to review the market activity every day to make 
sure that we don't see some sort of imbalance.
    Mr. Welch. Well, did you see that Mr. Peterson cited that 
Goldman study that said $27 in the price of a barrel of oil 
which is in the range of $100 now is due to a speculation 
premium? Do you agree with that? Do you have any reason to 
dispute that?
    Ms. Sommers. It is just not something that our economists 
have put together. That is--it is not even----
    Mr. Welch. Well, why wouldn't that be of concern to you? I 
mean, if the average person going to the pump is paying 25 
percent higher gas prices, $4 instead of $3, why is that not a 
concern of ours?
    Ms. Sommers. Sir, I am not suggesting I wouldn't be 
concerned about that. It is something that our economists look 
at constantly and when there are issues, they bring them to our 
attention and we focus on those.
    Mr. Welch. Mr. Chilton?
    Mr. Chilton. I agree with your concerns, Congressman, and 
you know I talk about it a lot. But let me go right to this 
with regard to producers, ag producers. And I have heard this 
from a lot of folks. I do think speculators are having an 
impact. I don't think they are driving prices, but I think they 
keep them beyond what they should be. So I do think there is a 
speculative premium there every time somebody goes and fills up 
their tank. But what I have heard from commercials and a lot of 
farmers is that it doesn't serve the same purpose, some of the 
markets that it used to, that there is so much volatility that 
they can't get into the markets. Earlier I talked about 
overnight trading and when folks in Tennessee wake up and want 
to trade cotton sometimes but the market is limit up or limit 
down. And I don't want to pick on just cotton. This happens in 
a number of the commodities. So it is a concern that the 
function, Congressman, that you talked about has been changing. 
And that is why it is up to us to try and figure out what is 
going on with the speculative influence and it is not really 
just a black and white issue as much as people want to portray 
it as that. And it is also why we need to look at things like 
these cheetah traders that I have talked about. And I know I 
keep raising it, but when you--can you believe that no place in 
our regulations, no place in Dodd-Frank are the words ``high 
frequency trading.'' So this is something very new and it is 
another thing we have to look at.
    Mr. Welch. I yield back. Thank you, Mr. Chairman.
    The Chairman. Thanks, Mr. Welch. Mr. Crawford for 5 
minutes.
    Mr. Crawford. Thank you, Mr. Chairman. This question is 
actually directed to both Commissioners and you can decide who 
or both of you may want to respond. As I understand it, 
implementation of rules and regulations in the time frame that 
we are currently operating under will make regulatory arbitrage 
a very real threat to U.S. markets in various capacities. It is 
unclear to me, however, how this might affect various market 
participants. Would there be any short or long term 
consequences to end-users such as farmers who are long actuals 
in the markets if this threat materializes?
    Mr. Chilton. Yes, I am concerned in general about how the 
markets have shifted, Congressman, and the impact on end-users. 
You know, if you had to say why do we have these markets, I 
would say one, it was for the ability for hedgers to--from 
commercial end-users, to farmers, to people that have an 
underlying interest in the physical commodity grown: corn, or 
beans, or cotton, whatever--it is a vehicle for them to hedge. 
And two, would be to level out prices for consumers so that 
they aren't paying hardly anything at harvest time and paying a 
lot at planting time. And I think the markets, as I said 
earlier, I think they operate efficiently and effectively, but 
we need to watch out for these changes that are occurring. And 
so I would agree that we need to look at it and do a better 
job, I think.
    Mr. Crawford. Did you want to add to anything, 
Commissioner?
    Ms. Sommers. Yes, Congressman, I think what I would say is 
as we move forward promulgating all the rules that we are 
required to promulgate under Dodd-Frank; we have to consider 
the costs to all of the market participants. So if the cost of 
doing business increases dramatically in the United States, of 
course they are going to pass that on to end-users, to the 
customer, to the consumer. I think there is no doubt that new 
regulation has costs associated with it, but we need to keep in 
mind those costs as we are moving forward to make sure that we 
are doing everything we can in the most efficient and effective 
way so that we are not overly burdening market participants.
    Mr. Crawford. Well, I see--and if you will indulge me for 
just a minute, you mentioned the cotton market, Commissioner 
Chilton. And I have watched that very closely. I come from a 
pretty heavy cotton area in the Arkansas Delta and we lost some 
pretty big players as a result of some instability a few years 
ago. And that had to do with limits up over several days. And 
my concern is that bona fide hedgers, and those are the farmers 
in my district, whether it be cotton farmers, rice farmers, 
soybean, whatever, are losing their real price discovery 
mechanism that allows them to plan. Certainly, there is fallout 
that the consumers are going to face because of the issue you 
just illuminated. At what point do we get to a place where we 
can rely on that real time price discovery, the open outcry 
model that has really brought us to the dance thus far. At what 
point do we get back there, because we have the 24/7 dynamic. 
We were seeing limits that were off the charts. I mean, in the 
700 point limit up for several days in a row that caught two 
major cotton players and put them out of business. How do we 
fix these problems and get more capital from bona fide hedgers? 
Because the truth is if you are farming, you are long actuals. 
You have to offset that risk. I want to see us incentivize 
those farmers to invest in the short position to hedge the 
risk, but they are not wanting to do it. They are afraid to do 
it. When do we get to that point?
    Mr. Chilton. Well, again, Congressman, these markets are 
changing, the dynamics are changing, the traders are playing; 
you have speculative interests who were not in these markets 
before becoming enlarged--to a large extent. You have pension 
funds, hedge funds, exchange traded funds that put their money 
in and keep it for a long period of time. That is a dynamic. 
The cheetah traders I talked about is a different dynamic. And 
then the 24-hour cycle that several Members have talked about 
is a dynamic. And so on the IntercontinentalExchange, I think 
they do a very good job trying to adapt to the market, but they 
are dealing with a moving target.
    I will give you one example in cotton in particular. At the 
beginning of the year there were a bunch of limit ups. There 
were--there have been limit ups and lots of limit downs, but at 
the beginning of the year I think it was until the beginning of 
February, there were 14 limit ups. And I looked at--had our 
staff look at it when those occurred. Well, of the 14, 11 
occurred before the markets in Washington--in New York even 
opened up. They were dealt with. Now, you don't want to say 
that is a bad thing for the business, because that trading was 
coming from China, a lot of it, and it was adding some 
liquidity to the markets. But at the same point, people in your 
state were getting up and saying, ``Well, I think I will go 
trade today. Wait a minute, I can't trade. The market is 
closed.'' So they are trying to adapt with all these things and 
I think they do a good job. But we--they just need to keep at 
it and so do we.
    Mr. Crawford. Thank you, Commissioners, I appreciate it.
    The Chairman. I thank the gentleman for yielding. I 
insulted one of the twins over there, Mr. Courtney or Mr. Welch 
when I looked up. So Mr. Welch, I apologize. Mr. Courtney, I 
apologize. One of you guys got----
    Mr. Welch. All us Irish guys look alike, you know.
    The Chairman. You have very similar haircuts so I will 
just--sorry about that--and you sit beside each other. Mr. 
Courtney, for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman, and thank you both 
Commissioners for being here today and for your testimony. You 
know I wanted to make one observation about what is going on 
with your budget. The numbers which were mentioned earlier here 
today, a number of us sit on the Armed Services Committee and 
the Pentagon is the number one consumer of fossil fuels in the 
world. Secretary Mabus during one of his appearances recently 
observed that every $10 a barrel increase in the cost of oil 
costs the Navy $300 million a year in terms of its annual fuel 
costs. The Air Force, I am sure is even exponentially higher in 
terms of their fuel consumption.
    So the taxpayer actually has some skin in this game in 
terms of trying to make sure you get your job balanced and 
functioning because you know we are all paying. And to the 
extent that there are inefficiencies which Commissioner Chilton 
talked about because of the excessive volatility, I just think 
it is incumbent on all of us who set budgets to recognize that 
for a relatively small investment, the taxpayer will 
potentially get a much bigger return in terms of stabilizing 
some of the costs that our military incurs, as well as a whole 
host of other Federal agencies. And certainly state and local 
governments are in the same boat as well in terms of their fuel 
usage.
    You know Commissioner Chilton, thank you for your 
leadership in terms of the testimony on the position limits. I 
can tell you that back home the end-users in terms of heating 
oil have basically exited the market. They will not sell lock-
in contracts to their customers next winter because they have 
no confidence that what is going on in terms of the price has 
any possible connection to supply and demand.
    And, I was interested to hear your remarks that there 
actually have been some--it sounded almost like an MOU with 
folks in London regarding position limits. And I was wondering 
again, if you could just sort of talk about that a little bit 
more. Because certainly that is one of the issues that I am 
sure our people are nervous about moving too fast.
    Mr. Chilton. Yes, Congressman, good question. Thank you for 
your leadership. Yes, the IntercontinentalExchange in London, 
not the one I was talking about a minute ago in New York. A 
couple of years ago I agreed to stick by our limits should we 
impose them and give us real time date about the market. So 
that is a contract on delivery in the U.S. Now, they are not 
giving us information on their own contracts that are happening 
in Europe, but on a contract that is delivered in the U.S. They 
have agreed to do this. And actually, I think it showed a lot 
of leadership on their part.
    Congressman, I did want to--you were giving little facts 
there and you know it is not just the government and state and 
local governments, too. The airlines, for example, Don 
Bornhorst who is a VP at Delta said that for every dollar 
increase in the cost of crude oil they annualize, it cost them 
I think it is $300 million. Now, nobody likes paying baggage 
fees, but you sort of see hundreds of millions of dollars and 
say that is a significant impact on businesses. It has a 
significant impact on consumers also, so again, I think it is 
just getting these things right. On limits, I think we should 
do it. I think we should have done it back in January. But we 
will get there eventually, I am confident.
    Mr. Courtney. The other sort of little factoid that I think 
you could sort of look at here is that we went through a lot of 
consternation about extending the tax cuts in December. One of 
the provisions was to reduce the Social Security payroll tax 
for employees by two percent. An average American family was 
calculated to get about $800 in this year in 2011 because of 
that change. And, when I am talking to a Chamber of Commerce in 
eastern Connecticut or a senior center, that savings has just 
been obliterated in terms of what has been going on just in the 
last few months or so. So the economic bounce that we were 
hoping to get by getting people some money in their pockets is 
just getting totally eaten up.
    I realize that there are economists who maybe are advising 
you differently about what is actually happening out there, but 
I will tell you that the public who pays your salaries and who 
is looking to us and looking to you doesn't buy it. They just 
feel that there is no justification for what is going on out 
there and their whole--sort of the whole momentum of an 
economic recovery is being undermined. And I would yield back.
    The Chairman. The gentleman yields back. Thanks Mr. 
Courtney. Mr. Hultgren for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. Thank you both and 
sorry it is kind of a busy morning. I know a lot of us have 
been in and out with some other committee hearings going, as 
well. So I apologize if you have touched on some of this. I 
know you have, but maybe not as specifically as I was hoping to 
hear.
    Commissioner Sommers, I just wanted to follow up on some of 
the discussion of pension funds and impact on pension funds. 
And I just wanted to drill a little bit more deeply of what you 
expect the impact or outcome of the different treatment of 
pension funds that we see here in the U.S. versus the EU. Since 
there is that difference there, what do you see as the outcome 
of that difference?
    Ms. Sommers. I think it is a cost to the people who have 
invested in those pension funds. I am sure there will be 
somebody on the next panel who can answer this more 
specifically, but the exemption in the European legislation 
text is to exempt those pension funds from clearing 
requirements for I think either 2 or 3 years, and then looking 
to what should be done with them after that. Dodd-Frank does 
not give us the ability to do that, so pensions will not be 
exempted from the clearing requirement in the U.S. So obviously 
that adds cost.
    Mr. Hultgren. How significant do you think those costs will 
be? Do you have any sense?
    Ms. Sommers. I don't.
    Mr. Hultgren. Okay. Switching gears just a little bit. In a 
March letter to Chairman Gensler, the FSA expressed concern 
that CFTC's proposal to set a $50 million cap on the amount of 
capital clearinghouses can require potential clearing members 
to have, it could actually increase risk to the system. I just 
wondered do you agree with that? Would it increase risk? And 
are there any other proposals currently before the Commission 
that you think may also increase risk to the system?
    Ms. Sommers. Congressman, I--what I would say about that is 
I agree that there is a legitimate concern out there from the 
buy-side that they have not been given access to clearing. And 
to be able to deal with that concern, there is a provision in 
Dodd-Frank that requires open access from clearinghouses. What 
we did to address that is to set a very low threshold for 
clearing members. We have received public comment on that and 
will now revisit what the appropriate threshold or what the 
appropriate number will be before we move to a final rule.
    Mr. Hultgren. Okay. Thank you very much. I yield back.
    The Chairman. The gentleman yields back. Mr. Huelskamp, for 
5 minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman, and I apologize for 
my tardiness, but I do have a few questions I would like to 
follow up on and it is a question I asked last time I was here, 
and asked of the Commissioners or other Commissioners. But is 
it still the case that in your new rules you have yet to define 
a swap dealer and end-user? Have those been defined in 
regulations yet?
    Ms. Sommers. Sir, we have proposed definitions for those, 
yes.
    Mr. Huelskamp. And the proposed definitions, those are not 
yet approved by you?
    Ms. Sommers. They have not been finalized.
    Mr. Huelskamp. Okay. Then I indicated previously the 
difficulty with expecting folks to comment on rules that they 
don't know if they have been impacted yet. Is that still the 
difficult situation these folks are in?
    Ms. Sommers. What we did to address that, sir, is when we 
proposed the definition for products, what is a swap, what is 
not a swap, what--jointly with the SEC, is we reopened a number 
of other comment files that relied on that definition. So those 
comment files were opened for an extended 30 days to allow 
people to look at the product definition and be able to comment 
on the other proposals as well at the same time.
    Mr. Huelskamp. But they are still uncertain whether or not 
it would apply to them, so they are sending in comments such as 
if they would happen to somehow, sometime apply to me, this 
would be our comments. Is that generally what they are saying?
    Ms. Sommers. They would, I assume, be sending in comments 
based on the rule that we have proposed. So as proposed, what a 
swap would be that there is no certainty that that is what the 
final rule will say as to a definition, but they would be 
commenting with regard to the proposal.
    Mr. Huelskamp. Okay. That is still difficult for me to 
understand why we would do it in that manner. Second thing I 
would like to comment on or ask questions on something you 
mentioned as I was walking in. And I apologize about--did you 
mention a cost-benefit analysis of these regulations? And those 
are--have those been--is that part of the proposed regulations 
that you put before the public?
    Ms. Sommers. Sir, within our proposals of--we have complied 
with Section 15(a) of the Commodity Exchange Act which requires 
that we consider costs and benefits of proposals. So there is 
really just kind of cursory language included in those 
proposals. It is my understanding that as we move forward 
because we are not prohibited to go further and to actually 
quantify what the costs would be associated with proposals, 
that we will be able to do a more thorough economic analysis of 
our proposals, going forward.
    Mr. Huelskamp. And you are able to--are you able to do 
those before you define the actual entities that would be 
impacted or do you have to await that final rule?
    Ms. Sommers. I am hopeful that we will include a more 
thorough economic analysis within any final rules.
    Mr. Huelskamp. But if you haven't defined swap, swap 
dealer, end-user, how do you do the economic analysis? Are you 
telling me you need to wait until those definitions have been 
finalized?
    Ms. Sommers. The economic analysis based on the definitions 
would be within that specific proposal. So when we finalize the 
definition of a swap dealer, the economic analysis based on 
that definition would be within that proposal.
    Mr. Huelskamp. So then the comments then could not be 
directed towards the economic analysis given that you have 
closed the comments on the proposed rule. Is that correct?
    Ms. Sommers. If the comment had been closed, then they 
wouldn't have the ability to do that. I think what you may be 
suggesting, sir, is that the definition should be finalized 
first and I agree with that.
    Mr. Huelskamp. So you will finalize the definitions first?
    Ms. Sommers. I can't give you that commitment. I am hopeful 
that we would do that.
    Mr. Huelskamp. Yes, who can give me that commitment? The 
other Commissioner or two of you? Who would make that--who 
makes that final determination?
    Mr. Chilton. There would have to be a third one of us here, 
sir, to make a commitment.
    Mr. Huelskamp. Could I count on both of you to be two of 
the three that we need to provide that certainty?
    Mr. Chilton. I believe we need to do these definitions 
first. I agree with you 100 percent that it is very difficult 
for us to know what we are doing without doing the definition. 
And it is an uncertainty that we need to remedy quickly and I 
also believe--agree with Commissioner Sommers, that we need to 
do a better job with our cost-benefit analyses. Some of this, 
in all fairness, is with regard to this OTC world that we don't 
have a lot of experience in. So I think that is why we have 
probably given a more cursory view of doing that than we would 
have like to have done.
    Mr. Huelskamp. Yes, and I appreciate that commitment. We 
are looking for number three then and but yes, that is my 
concern is about the lack of experience with that particular 
world and its impacts. That is the uncertainty that I think 
will do considerable damage if we get this wrong. So I 
appreciate that and the time, Mr. Chairman, thank you.
    The Chairman. The gentleman yields back. I want to thank 
our panel for coming and spending time with us today. Thank you 
very much. Mr. Chilton, can I get you to take a question? Well, 
you have a comment. Go ahead.
    Mr. Chilton. I just wanted to correct the record, Mr. 
Chairman. I was informed when I talked about the cost for Delta 
Airlines, a dollar increase is $100 million. I believe I said 
$300 million. So I just wanted to correct the record.
    The Chairman. It is just numbers, but thank you for 
correcting the record on that. Mr. Chilton, would you take a 
question for the record? You made a comment I think earlier 
about a 64 percent increase in speculation as a result of 
information you received on a special call authority of ICE. 
Can you help our staff understand how you computed that--
understand how you did it and those kinds of things? Don't do 
it right now but for the record?
    Mr. Chilton. Yes, we look at----
    The Chairman. Well, if you wouldn't mind, we don't need it 
just--if you wouldn't mind.
    Mr. Chilton. For the record, on the record, Mr. Chairman, 
absolutely.
    The Chairman. Because we have another panel and we need to 
get to those.
    Mr. Chilton. Yes.
    [The information referred to is located on p. 112.]
    The Chairman. So thank you very much both for coming today. 
The comments are helpful and we appreciate it. Ms. Sommers, Mr. 
Chilton, thank you very much.
    Ms. Sommers. Thank you.
    The Chairman. We will now move to the second panel who have 
been waiting patiently for the grilling to cease with our first 
panel so if you could move. All right, well, let me introduce 
the panel. The panel and Commission brought a big entourage 
with them this morning and it clears much of the seating. Our 
first witness on the second panel will be Mr. Thomas Callahan, 
the Executive Vice President and Chief Executive Officer of New 
York Stock Exchange, Liffe U.S., LLC, on behalf of the New York 
Stock Exchange Euronext from New York. We have Mr. John 
Damgard, from the Futures Industry Association here in D.C. We 
have Mr. Thomas Deas, Vice President and Treasurer for FMC 
Corporation in Philadelphia. We have Ms. Sally Miller, CEO of 
Institute of International Bankers, right, right. We have Mr. 
Stephen O'Connor, Managing Director, Morgan Stanley, and 
Chairman, International Swaps and Derivatives Association, New 
York, New York. In the interest of full disclosure, my son 
works for Morgan Stanley in Los Cruces, New Mexico and has 
absolutely nothing to do with what Mr. Connor's going to say 
this morning. Put a plug in for my son. And Mr. Larry Thompson, 
Managing Director and General Counsel for The Depository Trust 
& Clearing Corporation in New York City.
    Before we begin I am going to have to apologize to the 
panel. I committed to a speech at noon and I am going to have 
to slip out before you get too--we have Mr. Neugebauer coming 
back and if he is not here when I have to leave then Mr. 
Huelskamp will sit in and I have read your testimony--will read 
your comments from the questions that are answered. I 
appreciate you coming, putting up with this process of being 
the second panel. So with that, Mr. Callahan, if you will try 
to squeeze yours in within 5 minutes that way we will be able 
to get to everybody.

 STATEMENT OF THOMAS F. CALLAHAN, EXECUTIVE VICE PRESIDENT AND 
CHIEF EXECUTIVE OFFICER, NYSE LIFFE U.S., LLC, NEW YORK, NY; ON 
                    BEHALF OF NYSE EURONEXT

    Mr. Callahan. Terrific. Chairman Conaway, Ranking Member 
Boswell, and Members of the Subcommittee, my name is Tom 
Callahan. I am the CEO of NYSE Liffe U.S. which is the U.S. 
futures exchange of NYSE Euronext. The NYSE Euronext group 
operates 13 securities and derivatives exchanges in six 
countries. Thank you for holding this hearing today.
    As a multinational company with operations in multiple 
countries, with customers located on every continent, we are 
particularly grateful for your focus on U.S. competitiveness 
and the fact of international coordination. We recognize that 
Dodd-Frank has placed enormous strains on the CFTC resources 
and we commend the CFTC and its staff for their extraordinary 
efforts to implement the Act. However, we are concerned that in 
some instances the CFTC is electing to use its discretionary 
authority under Dodd-Frank to propose burdensome and 
unnecessary restrictions that are not consistent with the 
purposes of Dodd-Frank, and will impair U.S. competitiveness 
and market stability.
    One such example is the CFTC's proposal on registration of 
foreign boards of trades or FBOTs. Currently, U.S. market 
participants can access comparatively regulated FBOTs directly 
from terminals in the U.S., so long as the foreign board of 
trade has obtained an approval letter from CFTC staff. This is 
commonly referred to as no action relief. This kind of 
framework has worked well for years and has benefitted the U.S. 
market participants through increase in access to global 
products and liquidity. Dodd-Frank provides the CFTC with 
discretionary authority to register FBOTs that offer terminal 
access in the U.S.
    However, the CFTC has proposed to use this authority to 
replace the existing approval regime entirely with a formal 
registration requirement for all FBOTs offering access in the 
U.S. We believe this is an unnecessary and burdensome and 
costly approach. Given the significant resource constraints 
that the CFTC currently faces requiring each existing no action 
recipient to resubmit and for the CFTC to re-review previously 
submitted information seems unwarranted. In addition, this 
proposal would set a negative precedent for other jurisdictions 
who could use this proposal as an excuse to erect barriers to 
access by U.S. exchanges.
    The second example is the CFTC's proposed overhaul of the 
core principles governing designated contract markets or DCM's. 
In particular, the CFTC proposed to require a DCM to delist a 
futures contract that fails to maintain average trading volume 
through the centralized market of at least 85 percent. Just as 
with FBOT registration, these changes are not mandated by Dodd-
Frank. This proposal seems contrary to the goals of Dodd-Frank 
since it will likely cause market participants to decrease 
trading on the regulated futures exchanges and increase their 
trading in OTC swaps.
    In addition, the proposal would create an incentive for the 
trading to move offshore which is not--to places such as Europe 
which are not contemplating similar requirements. This proposal 
may inhibit development of liquid markets in new products. 
These products often require more than the CFTC's proposed 12 
month grace period to establish liquidity before they can trade 
and exchange on a centralized market.
    Recall that DCM's or as they are more commonly known, 
futures exchanges performed remarkably well during the recent 
crisis. This begs the question of why U.S. exchanges are now 
being targeted by reforms that potentially disadvantage them in 
the global marketplace even though Dodd-Frank did not mandate 
these changes.
    A third example of regulation not required by Dodd-Frank is 
that of ownership restrictions on exchanges. While Dodd-Frank 
requires the promulgation of rules to address conflicts of 
interest, it does not require application of rigid ownership 
percentages or caps. Nonetheless, the CFTC is considering 
arbitrary ownership limits for DCMs. These restrictions may 
inhibit the creation of new DCMs and DCOs and have negative 
effects on market competition; certainly not the intended goals 
of Dodd-Frank. Furthermore, European regulators have not 
proposed similar ownership restrictions, thereby compromising 
the ability of U.S. and foreign exchanges to operate across 
borders.
    In closing I want to mention two areas where there are 
significant differences between the CFTC's approach and that of 
foreign regulators and the SEC. We are concerned that these 
differences may impair U.S. competitiveness and cross border 
access for U.S. market participants.
    First, the CFTC's proposal on swaps execution facilities or 
SEFs have significant differences both at the SEC's parallel 
proposal and the proposal of EU and other jurisdictions. For 
example, the SEC and the CFTC do not seem to agree on how many 
participants must receive a quote transmission in an RFQ 
transmission. Finally, the timing and scope of the clearing for 
OTC derivatives in the U.S. should coordinate with the rest of 
the G20. As it currently stands, the clearing mandate for OTC 
derivatives will likely take effect in the U.S. prior to those 
mandates being established in other jurisdictions potentially 
incentivizing swap trading by market participants in foreign 
markets not yet subject to a clearing mandate. Thank you and I 
look forward to any questions you may have.
    [The prepared statement of Mr. Callahan follows:]

Prepared Statement of Thomas F. Callahan, Executive Vice President and 
Chief Executive Officer, NYSE Liffe U.S., LLC, New York, NY; on Behalf 
                            of NYSE Euronext

    Chairman Conaway, Ranking Member Boswell, Members of the 
Subcommittee. My name is Tom Callahan, and I am the Chief Executive 
Officer of NYSE Liffe U.S., LLC (``NYSE Liffe U.S.''), a subsidiary of 
NYSE Euronext. The NYSE Euronext group operates 13 securities and 
derivatives exchanges in six countries.\1\ NYSE Liffe U.S. is a futures 
exchange designated by the Commodity Futures Trading Commission 
(``CFTC'') as a contract market (``DCM''). I am pleased to appear this 
morning on behalf of NYSE Euronext and its affiliated exchanges as the 
Subcommittee considers both the progress towards and challenges to 
international harmonization in connection with the implementation of 
the derivatives title of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank'').
---------------------------------------------------------------------------
    \1\  NYSE, NYSE Arca Equities, NYSE Arca Options, NYSE Amex 
Equities, NYSE Amex Options, NYSE Liffe, NYSE Liffe U.S., NYSE Blue, 
NYSE Alternext Equities, Euronext Paris, Euronext Brussels, Euronext 
Amsterdam, and Euronext Lisbon.
---------------------------------------------------------------------------
    We believe that the reduction of systemic risk and the enhancement 
of transparency through expanded use of clearinghouses and organized 
trading markets are important objectives. The adoption of these and 
related goals by the Group of Twenty (``G20'') countries is also a key 
and indeed critical element in enabling us to accomplish these 
objectives. As a multinational company with exchange operations in 
multiple countries, and customers located on every continent, we are 
acutely aware that effective international coordination is critical 
both to the accomplishment of Dodd-Frank's intended results as well as 
to the commercial success and competitive positioning of U.S. 
exchanges, clearinghouses and other market participants.
    Effective global coordination will have the salutary effects of 
preventing regulatory arbitrage, improving market efficiency and 
raising the quality of regulatory oversight in all participating 
jurisdictions. Ineffective coordination of regulatory policy, however, 
will lead to market fragmentation. Where that occurs, U.S. end-users 
and investors could be disadvantaged both in accessing foreign markets 
and in their ability to trade in liquid U.S. markets.
     We believe there are three key dimensions to effective global 
coordination: first, working cooperatively to establish coordinated 
regulatory policy at the international level; second, establishing an 
appropriate framework for cross-border market access that does not 
require regulators to assume unrealistic and unduly costly 
extraterritorial regulatory obligations that they are not positioned to 
discharge effectively; and third, adopting a mutual recognition 
framework for comparable foreign regulatory regimes recognizing that 
comparable policy objectives may be realized through varying regulatory 
mechanisms.
    We believe that the CFTC's traditional approach to recognition of 
comparable foreign regulatory regimes has worked well over the years, 
but we have some concerns that its proposals under Dodd-Frank would 
unduly depart from that approach. Before addressing those specific 
proposals, however, I would like to highlight two overriding principles 
that we believe should inform the CFTC's and the Securities and 
Exchange Commission's (SEC) implementation of Dodd-Frank:

   First, we believe that Dodd-Frank should not serve as a 
        basis for the CFTC (or the SEC) to take on unnecessary and 
        inappropriate extraterritorial regulatory obligations. Rather, 
        Dodd-Frank should serve as a basis to supplement the CFTC's 
        existing approach to cross-border market access through the use 
        of new authorities to address clearly evasive activity. In this 
        regard, extraterritorial jurisdiction is only appropriate where 
        legitimate U.S. regulatory concerns exist, such as where 
        foreign markets offer ``look-alike'' products that are linked 
        directly to contracts traded on U.S. DCMs and that may be used 
        to circumvent important U.S. regulatory objectives. However, 
        any such exertion of extraterritorial jurisdiction should be 
        narrowly tailored to preventing such circumvention. As a 
        corollary, permitting U.S. investors to access foreign markets 
        on an appropriate basis is critical if U.S. market providers 
        are to be permitted to access investors outside the United 
        States on appropriate and commercially viable terms.

   Second, it is critical that the CFTC, where possible, seek 
        harmonization--or, at a minimum, comparability--with other 
        regulators in implementing derivatives reforms. Significant 
        differences with foreign regulators, particularly the European 
        Union (``EU''), and domestically with the SEC, could preclude 
        the establishment of an effective comparability-based framework 
        for cross-border access. This will in turn encourage regulatory 
        arbitrage that can only be addressed, at a significant cost to 
        market participants, through steps that will invariably 
        fragment markets regionally and foster illiquidity and 
        increased costs of execution. Harmonization and comparability, 
        in contrast, will protect the international competitiveness of 
        U.S. exchanges, clearinghouses and other market professionals 
        and ensure U.S. market participants have cost effective access 
        to critical risk management products.

1. Cross-Border Market Access

A. Access to Foreign Markets
    Currently, U.S. market participants can access comparably regulated 
foreign boards of trade (``FBOTs'') directly from terminals in the U.S. 
This access has been permitted by the CFTC under a long line of no-
action relief. The NYSE Liffe markets in London and Paris have been 
open to U.S. market participants under this system since 1999, and the 
Amsterdam market has been open to U.S. market participants since 2005. 
Not only has this existing approval process proven effective at 
expanding the range of products available to U.S. market participants, 
increasing liquidity, and lowering costs, but it also has given the 
CFTC a great deal of flexibility in terms of tailoring relief to 
particular markets and modifying the conditions for such individual 
operations over time. This framework for cross-border access has worked 
well since its inception, benefitting U.S. market participants.
    Dodd-Frank provided the CFTC additional flexibility in the form of 
discretionary authority to directly register FBOTs that offer terminal 
access in the U.S. While we appreciate that adoption of a rules-based 
standard may be useful as a supplement to the existing no-action 
regime, particularly for FBOTs that offer ``look-alike'' contracts that 
are linked directly to contracts traded on U.S. DCMs, we are concerned 
that replacing the no-action regime entirely with a registration 
requirement for all FBOTs offering access in the U.S. is unnecessary 
and unduly costly.
    Pursuant to this authority, the CFTC has proposed to require the 
registration and oversight of FBOTs that provide qualifying U.S. 
persons with direct electronic access to their trading and order 
matching engines. The proposed approach would represent a striking 
departure from the CFTC's existing regime, which has been influential 
in encouraging other jurisdictions to look to comparable U.S. 
regulation as a basis for mutual recognition.
    In particular, given the significant resource constraints the CFTC 
faces in implementing Dodd-Frank, the CFTC's proposal to require each 
existing no-action recipient to re-submit, and the CFTC to re-review, 
information that was already reviewed by CFTC staff in connection with 
the original approval seems especially unwarranted. It would also 
impose unnecessary costs and burdens on foreign applicants.
    The CFTC's proposal, if adopted, would also set an undesirable 
precedent for other jurisdictions, such as the EU, which are 
considering permitting U.S. market operators to operate abroad on a 
mutual recognition approach.

B. Access to U.S. Markets
    In the futures markets, the CFTC has traditionally allowed foreign 
market participants and intermediaries to access U.S. Designated 
Contract Markets (``DCMs'') without subjecting them to direct CFTC 
regulation so long as they, like U.S. customers, access the DCM through 
a CFTC-registered futures commission merchant. While the CFTC has 
proposed to extend this approach to swaps at the intermediary level, 
there are still questions about whether a foreign market participant 
can trade swaps on a U.S. DCM or swap execution facility (``SEF'') 
without becoming subject to regulation as a swap dealer or major swap 
participant. So that we can, in the future, offer trading in swaps on 
NYSE Liffe U.S. to both U.S. and foreign market participants--thereby 
attracting the greatest amount of liquidity--we believe it is important 
for the CFTC to clarify this point.

2. Harmonization and Comparability
    In order for any mutual recognition regime to work--and to avoid 
undesirable arbitrage between U.S. and foreign markets and different 
types of U.S. markets--regulators must take care to adopt consistent 
approaches to similar issues or at least recognize where different 
means can be used legitimately to achieve common objectives. These 
principles have, for over twenty years, been implicit in the CFTC's own 
approach to comparability under Part 30. We are concerned, however, 
that the CFTC's current proposals for DCMs, including ownership 
restrictions, might lead to an unwarranted departure from those 
principles; the approaches being proposed for the regulation of SEFs 
are inconsistent; and we also believe it is important that the CFTC 
coordinate with other G20 jurisdictions on key aspects of reform, 
including clearing mandates and swap data repositories (``SDRs'').

A. Designated Contract Markets
    The CFTC has proposed a substantial overhaul of the core principles 
governing DCMs, including proposing to require a DCM to delist a 
contract that fails to maintain average trading volume through 
centralized markets of at least 85%. These changes are not mandated by 
Dodd-Frank and will likely have a significant negative impact on the 
competitiveness of U.S. DCMs. In the U.S., market participants may 
increase their trading in swaps that offer futures-like exposure, 
including on SEFs. In the EU, current reform proposals do not 
contemplate any such requirements, thus creating an incentive for 
derivatives trading to move offshore to European exchanges.
    The proposed 85% central trading threshold is particularly 
problematic because it may inhibit the development of liquid markets in 
new products, which are often initially traded outside of centralized 
markets and often require more than the proposed 12 month grace period 
to establish adequate liquidity. Trading in these products will almost 
surely move to SEFs and offshore--thereby eliminating the still 
significant price discovery function played by block transactions that 
are executed subject to the rules of DCMs. The potential migration of 
these existing contracts away from DCMs seems completely contrary to 
the goals of Dodd-Frank and will likely have serious ramifications for 
market participants with open positions in affected contracts, 
disrupting effective risk management strategies by reducing contract 
liquidity and in some cases requiring market participants to hold 
existing positions to expiration. There are significant adverse market 
and risk management effects of applying an arbitrary and inflexible 
standard.

B. Ownership Restrictions
    The CFTC is considering substantial restrictions on the ownership 
of DCMs and SEFs which may inhibit the creation of new DCMs and SEFs 
and have deleterious effects on market competition. These effects are 
magnified by the significant capital requirements for DCMs also 
mandated by the CFTC. Moreover, European regulators have not proposed 
similar ownership restrictions for exchanges operating in Europe, 
compromising the ability of U.S. and foreign exchanges to operate 
across borders in any future comparability-based cross-border 
framework.
    We acknowledge that potential conflicts of interest can raise 
potentially serious issues and we applaud the CFTC for its leadership 
in addressing these concerns. However, we feel strongly that the 
consistent oversight of compliance with the existing core principles, 
CFTC rule approval requirements and other safeguards provide 
substantially better tools to mitigate potential conflicts than blunt 
ownership limitations that could stifle innovative solutions and new 
ventures. The market is too diverse to become subject to a one-size-
fits-all approach to conflicts. Rather, different market models must be 
allowed to develop for different products. For these market models to 
develop in a successful and transparent manner, a broad range of market 
participants must have input. This will allow for greater competition 
and innovation in areas such as cross-margining arrangements and 
trading functionalities.

C. Swap Execution Facilities
    The CFTC's proposal for SEFs has significant differences both with 
the SEC's parallel proposal and proposals in the EU and other G20 
jurisdictions. These differences may impair the competitiveness of U.S. 
markets, encourage trading elsewhere and restrict the effectiveness of 
any comparability-based cross-border regime.

D. Clearing Mandate
    The timing and the scope of the clearing mandate for OTC 
derivatives in the U.S. should be coordinated with the rest of the G20. 
As it currently stands, the clearing mandate for OTC derivatives will 
likely take effect in the U.S. prior to those mandates being 
established in other jurisdictions, potentially incentivizing swaps 
trading by market participants in foreign markets not yet subject to a 
clearing mandate. Moreover, eventually, cross-border swap transactions 
may be subject to clearing mandates in more than one jurisdiction, with 
potentially conflicting requirements. The CFTC should work together 
closely with foreign regulators to develop a framework for regulatory 
cooperation that avoids such conflicts. For instance, the CFTC should 
facilitate the clearing of swaps by U.S. market participants on 
clearing organizations outside the U.S. that are subject to comparable 
regulation, so as to foster reciprocal treatment from foreign 
regulators and promote an efficient, transparent global market.

E. Swap Data Repositories
    Dodd-Frank requires Swap Data Repositories (SDRs) to obtain an 
agreement for indemnifications from foreign regulators before sharing 
information regarding swaps transactions. This requirement is contrary 
to existing approaches to information sharing and, in our view, unduly 
burdensome. Dodd-Frank also does not grant the CFTC express authority 
to exempt a comparably regulated foreign SDR, which is inconsistent 
with proposals in the EU and elsewhere. Left unaddressed, these issues 
will contribute to regional fragmentation of global information 
collection and impede the CFTC's exercise of its regulatory 
responsibilities under Dodd-Frank.
    While we would support statutory changes to address these SDR 
concerns, we also believe that the CFTC could address them through its 
rulemaking and interpretive authority. The CFTC could, for instance, 
address the indemnification issue by interpreting the indemnification 
provision not to apply where information is provided, either directly 
or through the CFTC, pursuant to a CFTC Memorandum of Understanding 
with a foreign regulator. The CFTC could also adopt a notice 
registration regime for comparably regulated foreign SDRs that fulfills 
the statutory mandate without requiring the CFTC to directly regulate 
SDRs already regulated abroad.

3. Conclusion
    We recognize that the passage of Dodd-Frank has placed enormous 
resource burdens on the CFTC, and we commend the CFTC and its staff on 
their proactive and timely efforts to nevertheless implement the many 
required rulemakings under Dodd-Frank. As a globally integrated company 
whose operations are often subject to overlapping regulatory regimes 
and requirements, we are particularly concerned about a number of CFTC 
proposed rules that would impede appropriate cross-border market access 
by U.S. or foreign persons as well as those that may thwart the 
development of comparability-based mutual recognition or exemption 
regimes. We have highlighted a number of these concerns today in this 
testimony.
    Going forward, we strongly believe that the CFTC should develop its 
final rules under Dodd-Frank, as well as utilize its other rulemaking 
and interpretative authorities, in light of two primary objectives. 
First, the CFTC should not view Dodd-Frank as an opportunity to expand 
extraterritorial application of U.S. law--or to establish the need for 
resources to administer a global examination and supervisory reach--
unnecessarily, especially in light of the significant resource 
constraints the CFTC already faces and the history of successful 
comparability regimes. Second, the CFTC should seek actively to 
harmonize its derivatives reform rules with the SEC and with regulators 
in other G20 countries in order to discourage regulatory arbitrage and 
facilitate the development of comparable international regulatory 
frameworks and to avoid market fragmentation and other inefficiencies.

    The Chairman. Mr. Callahan, thank you very much. I 
appreciate that. It was not lost on me when Chairman Chilton, 
Commissioner Chilton in fact bragged on the regulated markets 
as having had no function properly during the crisis in late 
2008. So it does beg the question as to why they are--expansive 
work in that regard. Mr. Damgard for 5 minutes. Thank you, sir. 
We appreciate you being here.

   STATEMENT OF JOHN M. DAMGARD, PRESIDENT, FUTURES INDUSTRY 
                 ASSOCIATION, WASHINGTON, D.C.

    Mr. Damgard. Thank you, Mr. Chairman. I thank--I join Mr. 
Callahan in thanking you all, and I thank the Members of the 
Committee for having this hearing and inviting me to speak. I 
am John Damgard. I am President of the Futures Industry 
Association. I am also soybean and corn producer from Illinois. 
And on behalf of the FIA, I want to thank you for the 
opportunity to appear here today.
    I share your concern about extraterritorial impact of the 
Dodd-Frank Act and the importance of international regulatory 
harmonization. In my testimony today, I will discuss two 
specific rulemakings that exemplify these issues, but first I 
would like to take a moment to put these issues into a broader 
context. It was not so long ago the derivatives markets in 
general, and futures markets in particular, were viewed as 
secondary to other aspects of modern finance such as trading of 
stocks and bonds. That is clearly no longer the case. 
Derivatives markets will be as important in the financial 
markets of the 21st century as the stock exchanges were in the 
20th century preserving our ability to compete in the global 
derivatives marketplaces, therefore, critical to our economic 
standing in the world.
    As the President of the FIA, I can assure you that the 
global derivatives marketplace is becoming more and more 
competitive every year. Our statistics on trading volume show 
that last year North America was outstripped by the Asia 
Pacific region in terms of the number of futures and the 
options that trade on their exchanges. At the moment, the 
largest exchanges in the region draw most of their volume from 
domestic customers, but it is only a matter of time before they 
open to the outside world, and when they do our markets will be 
challenged like never before. I might add that the Dalian 
Commodity Exchange is now the largest agricultural futures 
market in the world.
    In our industry, liquidity is the key to success. Anything 
that adds to the cost of doing business on our markets creates 
an economic incentive to use an alternative or not any at all. 
No matter how well-intended, Dodd-Frank punished the U.S. 
futures industry, an industry that had absolutely no 
responsibility for the financial crisis and indeed worked 
flawlessly throughout the entire period. If Dodd-Frank makes 
our markets less efficient and more expensive we run the risk 
of pushing another industry off shore.
    Let me give two examples of specific rule makings with 
adverse extraterritorial impact and on this I agree with Mr. 
Callahan. The first example with--relates to the cross border 
clearing of swaps. Under Dodd-Frank any non-U.S. clearinghouse 
that clears swaps for participants in the U.S. must be 
registered with the CFTC as a derivatives clearing 
organization. In addition, any firm that is a member of that 
foreign clearinghouse must register with the CFTC as an FCM, a 
futures clearing if it clears swaps on behalf of U.S. 
customers.
    Let us think about the practical implications of that 
position. Adding these clearing organizations to the 
Commission's oversight responsibility will severely strain the 
agency's resources and put a substantial and unnecessary 
financial and operational burden on FCM's. Some firms and 
clearing organizations could well decide it just isn't worth 
the trouble. The net effect will be fewer choices for U.S. 
customers who need access to clearinghouses for their swaps. 
There is also the risk that foreign regulators will follow our 
lead and impose burdensome requirements on our firms, an 
outcome that none of us would like to see called retaliation.
    In our view, the logical solution is to rely on the 
successful model now in place in the futures markets. The 
CFTC's part 30 rules which govern the offering for sale of 
foreign futures to U.S. participants do not require either a 
foreign clearing organization or its clearing members to be 
registered with the CFTC if they are subject to comparable 
regulation in their home country. This approach has worked 
extremely well and has facilitated the ability of U.S. FCMs and 
their customers to participate in international markets.
    The second example is the CFTC's proposed rule for position 
limits. I want to emphasize that the CFTC strongly supports 
robust large trader reporting requirements which assure that 
the CFTC and other regulators have complete visibility into the 
activities of the more active traders. Our concern is that the 
lack of international harmonization on position limits 
threatens to place U.S. markets and market participants at a 
severe competitive disadvantage.
    Furthermore, the proposed rules do not satisfy the 
statutory prerequisites for establishing position limits. No 
evidence has been cited by the CFTC to justify position limits 
as necessary to diminish, eliminate, or prevent excessive 
speculation. Unsupported claims about the effect of speculation 
should not be allowed to undermine the price discovering and 
risk shifting function of the U.S. derivative markets, or cause 
these markets to shift to foreign boards of trade.
    Just today, the FIA filed a comment letter requesting that 
the CFTC republish the position on the rules with information 
on how the agency intends to apply the rule governing 
aggregation of positions. If applied as written, this rule will 
stifle legitimate use of the markets by investors and end-
users. We urge the CFTC to republish this proposal so that the 
public will have appropriate notice and the opportunity to 
comment on aggregation of positions.
    In closing, I would like to raise a procedural concern. 
Chairman Gensler has correctly observed that the proposed rules 
fit together in a mosaic. Mosaics however, are nothing more 
than chips of colored stone until they have been pieced 
together into a work of art. The Commission has shown us the 
individual chips, but it hasn't shared its vision of how they 
fit together in a comprehensive regulatory scheme. The industry 
and the public deserve an opportunity to analyze and comment on 
this regulatory mosaic before it is set in concrete and takes 
its final form. We therefore recommend that the Commission 
provide an additional 60 day comment period after it has 
determined how the proposed rules fit together and before it 
promulgates these rules. We think a 60 day comment period would 
be well within the time table set by the G20. Thank you very 
much for my opportunity to appear before you today.
    [The prepared statement of Mr. Damgard follows:]

  Prepared Statement of John M. Damgard, President, Futures Industry 
                     Association, Washington, D.C.

    Chairman Conaway, Ranking Member Boswell, Members of the 
Subcommittee, I am John Damgard, President of the Futures Industry 
Association (FIA). On behalf of FIA, I want to thank you for the 
opportunity to appear before you today.
    When Congress was considering the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), many in the financial 
services industry--and in Congress--cautioned that the extraterritorial 
reach of the regulatory structure being established would unnecessarily 
interfere with the regulatory programs being established in the 
European Union and Asia and would inhibit the ability of U.S. market 
participants to compete internationally. As we approach the effective 
date of the Dodd-Frank Act, and the regulatory regime contemplated by 
the Commodity Futures Trading Commission (Commission) in its proposed 
rules has come into focus, there is increasing evidence that last 
year's hypothetical fears will be this year's reality.

Concern Over the Extraterritorial Scope of the Commission's Rules Is 
        Increasing
    In March, the UK Financial Services Authority (FSA) filed a comment 
letter with the Commission objecting to the Commission's proposed rules 
prohibiting registered derivatives clearing organizations (DCOs) from 
setting minimum capital requirements for swap clearing members higher 
than $50 million. While acknowledging that minimum capital requirements 
may help assure fair and open access to clearing organizations, FSA 
warned that ``impos[ing] them on clearing arrangements for products 
that have complex or unique characteristics could lead to increased 
risk to the system in the short to medium term.'' FSA has a direct 
interest in the Commission's rules affecting DCOs, since two registered 
DCOs active in clearing swaps--LCH.Clearnet Ltd. and ICE Clear Europe--
are located in London and are subject to regulation by FSA as 
recognized clearing houses. Therefore, the Commission's requirements 
for DCOs may conflict with FSA's.
    Earlier this month, Paula Dejmek, a Member of the Cabinet of 
Michael Barnier, the European Commission's internal market and services 
commissioner, speaking at a conference of the Association for Financial 
Markets, observed:

        We are aware of the extraterritorial application of the Dodd-
        Frank Act. We are not happy with it and this is something we 
        are discussing with our U.S. counterparts, hoping to find 
        mutually convenient solutions. . . . The issue of regulatory 
        convergence is extremely important. . . . We have important 
        questions to address, notably with regard to the mutual open 
        access to each other's market operators and infrastructures.

    International regulators are not the only authorities troubled by 
the extraterritorial reach of the Dodd-Frank Act. Just last week, 
Senators Schumer and Gillibrand joined 16 Members of the New York House 
of Representatives both Democrats and Republicans, including 
Congressman Gibson and eight Members of the House Financial Services 
Committee, to express their fears that the Commission's proposed rules 
imposing margin requirements on uncleared derivatives transactions 
between non-U.S. subsidiaries of U.S. entities and non-U.S. 
counterparties:

        will inevitably result in significant competitive disadvantages 
        for U.S. firms operating globally. . . . [A]bsent harmonization 
        between new rules here and abroad, disparate treatment of U.S. 
        firms will only encourage participants in derivatives markets 
        to do business with non-U.S. firms. Accordingly, it is 
        important to strike a balance between implementing the new 
        safeguards and harming the competitiveness of U.S. financial 
        institutions vis-a-vis their international counterparts. . . . 
        Congress . . . included provisions in Dodd-Frank that instruct 
        regulators . . . to impose regulations extraterritorially 
        beyond the U.S. only if there is a `direct and significant' 
        connection with U.S. activities or commerce. These provisions 
        are intended to protect . . . the competitiveness of U.S. 
        institutions, which is necessary for a healthy banking system.

    We do not underestimate the challenges facing the Commission, and 
we recognize that the Commission and its staff are working hard to 
comply with the very tight timeframes set out in the Dodd-Frank Act. It 
is perhaps understandable, therefore, that the Commission has not 
considered fully, and provided guidance on, the intended 
extraterritorial scope of the Dodd-Frank Act. As the above examples 
indicate, however, the Commission cannot wait any longer.

Guidance on the Extraterritorial Scope of the Commission's Rules Is 
        Essential
    Many provisions of the Dodd-Frank Act do not require implementing 
rules and will become effective in less than 2 months. The failure of 
the Commission to provide clear guidance on the extraterritorial scope 
of the Dodd-Frank Act prior to its effective date, and the resultant 
legal and regulatory uncertainty to which market facilities and 
participants both here and abroad will be exposed, will require such 
participants to incur significant costs to comply with the Dodd-Frank 
Act or assume the regulatory risk that they will be found to be in 
violation of one or more provisions of the Dodd-Frank Act and, perhaps, 
ordered to cease business activities until they are in compliance. No 
market facility or participant can afford to take this risk.
    One example that I would like to highlight for you today that 
directly affects many FIA members are the provisions of the Dodd-Frank 
Act requiring any clearing organization, wherever located, that clears 
swaps for participants located in the U.S. to be registered with the 
Commission as a DCO and the concomitant obligation of any clearing 
member clearing swaps on behalf of U.S. participant to be registered as 
an FCM.
    Section 725 of the Dodd-Frank Act provides that it is unlawful for 
any clearing organization ``directly or indirectly, to make use of the 
mails or any means or instrumentality of interstate commerce to perform 
the functions of a derivatives clearing organization with respect to . 
. . a swap,'' unless that clearing organization is registered with the 
Commission as a DCO. On its face, therefore, this section requires a 
foreign clearing organization to be registered as a DCO if it cleared 
just one swap for or on behalf of a U.S. participant. This is the case 
even if the Commission has not determined that the swap is required to 
be cleared.
    Section 724 of the Dodd-Frank Act provides that it is unlawful for 
any person to accept any money or securities ``from, for, or on behalf 
of a swaps customer'' to margin a cleared swap, unless that person is 
registered with the Commission as an FCM. Consequently, a clearing 
member of a foreign clearing organization that clears swaps, directly 
or indirectly, on behalf of one or more U.S. swap participants is 
required to be registered with the Commission.
    Requiring the registration of such foreign DCOs threatens to: (i) 
severely strain the Commission's resources; (ii) impose substantial 
financial and operational burdens on FCMs, subjecting FCMs to 
duplicative and conflicting laws and regulatory requirements; (iii) 
restrict competition among clearing organizations and FCMs; and (iv) 
enhance rather than reduce systemic risk.
    In his testimony before the House Appropriations Subcommittee on 
Agriculture, Rural Development, Food and Drug Administration, and 
Related Agencies in March, Chairman Gensler stated that the Commission 
currently oversees 14 registered DCOs and anticipates that the Dodd-
Frank Act will result in an additional six or seven clearing 
organizations applying for registration as a DCO. Consequently, the 
Commission is requesting a 30 additional staff, in addition to the 
current staff of 40, ``to address the significant increase in the 
number of DCOs, the more complex nature of the swaps markets and the 
Congressional mandate that we annually examine systemically important 
DCOs.''
    Providing appropriate exemptions from registration to foreign 
clearing organizations whose activities do not have ``a direct and 
significant connection with activities in, or effect on, commerce of'' 
the U.S. would relieve the Commission of the cost of overseeing such 
foreign clearing organizations and free staff to focus on transactions 
that more directly affect U.S. market participants. An exemption would 
also permit such clearing organization to offer clearing services to 
U.S. participants without having to incur the costs of applying for 
registration and, thereafter, meeting duplicative and potentially 
conflicting regulatory requirements of the Commission and its home 
country regulator.
    Importantly for our member firms, an exemption from registration as 
a DCO would relieve U.S. FCMs of the difficult choice of complying with 
multiple financial and operational requirements attendant to membership 
in clearing organizations around the globe or choosing not to offer the 
broad range of swaps clearing services to customers. Moreover, such 
firms may have to become registered in the home jurisdiction of the 
foreign DCO and, potentially, become subject to taxation in multiple 
jurisdictions.
    As the Subcommittee is aware, one of the principal purposes of the 
Dodd-Frank Act is to encourage competition among clearing organizations 
and clearing members. Requiring each foreign clearing organization that 
clears swaps for or on behalf of U.S. participants to become registered 
as a DCO and each clearing member that, directly or indirectly, clears 
for U.S. participants to become registered as an FCM will almost 
certainly restrict rather than encourage competition. Requiring U.S. 
FCMs to become registered with multiple foreign DCOs may also enhance 
systemic risk, by exposing such FCMs to the risks of being members of 
clearing organizations that are subject to different regulatory regimes 
and bankruptcy laws.
    As noted earlier, two of the more active swaps clearing 
organizations registered with the Commission, ICE Clear Europe and 
LCH.Clearnet Ltd., are located outside of the U.S., and we fully expect 
that other foreign clearing organizations will elect or be required to 
be registered with the Commission as DCOs. Certainly, any foreign 
clearing organization that elects to apply for registration as a DCO 
should be permitted to apply. However, we do not believe every foreign 
clearing organization that clears swaps, directly or indirectly, for or 
on behalf of U.S. participants should be required to be registered 
simply because it offers clearing services to U.S. participants.

A Successful Model for the Regulation of Foreign DCOs
    This does not need to be result. We agree with the New York 
Congressional Delegation that the Dodd-Frank Act should not apply to 
activities outside of the U.S., i.e., clearing on a foreign clearing 
organization, unless such clearing activities have ``a direct and 
significant connection with activities in, or effect on, commerce of'' 
the U.S. We believe the Commission has authority to interpret this 
provision to exclude from its jurisdiction certain entities and 
transactions that do not have a significant impact on that do not have 
a significant impact on U.S. commerce. Moreover, the Commission has 
specific authority under the Dodd-Frank Act to exempt a foreign 
clearing organization from registration as a DCO, subject to 
appropriate conditions, if the Commission determines that the foreign 
clearing organization is subject to comparable, comprehensive 
supervision and regulation by the appropriate government authorities in 
the home country of such organization.
    The Commission's Part 30 rules, which govern the offer and sale of 
foreign futures and options transactions to U.S. participants, is a 
tested, successful model for the regulation of international 
transactions that could serve as a starting point for exempting foreign 
clearing organizations and other market participants from the 
Commission's registration requirements. The Commission's Part 30 rules 
were first promulgated nearly 24 years ago in 1987. Under these rules, 
foreign clearing organizations are not required to be registered with 
the Commission to clear futures contracts executed on foreign exchanges 
on behalf of U.S. participants. In addition, a foreign clearing member 
is not required to be registered with the Commission as an FCM, if the 
foreign clearing carries only a customer omnibus account on behalf of a 
U.S. FCM and does not carry an account directly for a U.S. customer.
    These rules assure that the accounts of U.S. participants are 
carried by U.S. FCMs, subject to the Commission's rules regarding the 
protection of foreign futures and options customer funds, as well as 
the Commission's sales practice and other requirements to which FCMs 
are subject. Customers that trade on non-U.S. markets also receive 
prescribed risk disclosure, which assures that they understand the 
additional risks of trading outside of the U.S.
    Further, the Commission's Part 30 rules provide that a foreign 
clearing member may deal directly with FCMs and their affiliates 
without having to be registered with the Commission as FCMs. Having 
determined that a foreign clearing member is not required to be 
registered as an FCM to carry a U.S. FCM's customer omnibus account, 
the Commission concluded that registration would not be required to 
clear the U.S. FCM's proprietary accounts. The Commission concluded 
that U.S. FCMs are able to assess the risks of trading on foreign 
markets.
    Finally, under the Part 30 rules, the Commission has granted 
exemptions from registration to non-U.S. firms that deal with U.S. 
customers and that the Commission determines are subject to comparable 
regulation in their home country.
    When I appeared before you in February, I noted:

        Because Congress gave the regulatory agencies, including the 
        Commission, broad discretion in adopting rules to implement 
        provisions of the Dodd-Frank Act, it is essential that the 
        Committee on Agriculture, as the Committee of jurisdiction with 
        respect to matters relating to the [Commodity Exchange Act], 
        monitor carefully the Commission's implementation of the Dodd-
        Frank Act and provide additional guidance when appropriate.

    FIA urges the Subcommittee to encourage the Commission to exercise 
its interpretative and exemptive authority broadly in order to 
facilitate U.S. FCM participation in the development of international 
cleared swaps markets. The Commission must act now; if it waits until 
the end of the rulemaking process, it will be too late.

Exemptive Relief Will Facilitate Coordination Among International 
        Regulators
    By granting appropriate exemptive relief, we believe the Commission 
will facilitate greater coordination among international regulators and 
the establishment of consistent standards with respect to the 
regulation of swaps. The need for such coordination has been brought 
into sharp relief with reports that the European Parliament is 
considering amendments to the European Union's European Market 
Infrastructure Regulation (``EMIR''), which would effectively prohibit 
a third-country clearing organization from providing clearing services 
to EU entities, unless the clearing organization was authorized by each 
EU member state. Moreover, a third party clearing organization could be 
authorized only if the European Commission recognized that the legal 
and supervisory arrangements of its home jurisdiction were 
``equivalent'' to those contained within EMIR.
    If the European Parliament adopts these amendments, it would be 
extremely difficult, if not impossible, for U.S. DCOs to offer their 
clearing services to entities within the EU. The ``balkanization'' of 
derivatives clearing in this way benefits no one, denying market 
participants access to clearing, reducing competition and increasing 
global systemic risk. Yet, the Commission's ability to challenge these 
amendments will be severely constrained if the Dodd-Frank Act is 
interpreted to require EU clearing organizations to be registered here 
to offer clearing services to U.S. participants.
    The Commission has been a leader in developing standards for mutual 
recognition among international regulators for more than 20 years. The 
Dodd-Frank Act should not be interpreted in a manner that requires the 
Commission to surrender this leadership role.

Position Limit Rules Must Be Harmonized
    In their letter to Chairman Gensler, the New York Delegation noted:

        [A]bsent harmonization between new rules here and abroad, 
        disparate treatment of U.S. firms will only encourage 
        participants in derivatives markets to do business with non-
        U.S. firms. Accordingly, it is important to strike a balance 
        between implementing the new safeguards and harming the 
        competitiveness of U.S. financial institutions vis-a-vis their 
        international counterparts.

    I would like to take a moment to address one aspect of the 
Commission's proposed rules with respect to which the lack of 
international harmonization threatens to place U.S. markets and market 
participants at a severe competitive disadvantage, i.e., position 
limits. FIA fully supports a robust large trader reporting system 
across markets. It is important that the Commission and other 
regulatory agencies and self-regulatory organizations know the identity 
of market participants with meaningful positions. However, we cannot 
support the proposed position limit rules.
    FIA filed extensive comments in response to the proposed rules in 
which we argued, among other things, that the proposed rules do not 
satisfy the statutory prerequisites for establishing position limits. 
Specifically, in publishing the proposed rules for comment, the 
Commission cited no evidence for concluding that position limits are 
``necessary to diminish, eliminate or prevent'' the burden on 
interstate commerce caused by excessive speculation, or that the levels 
proposed by the Commission are ``appropriate.''
    We also expressed concern over the public policy considerations of 
imposing significant new restrictions on the ability of market 
participants to trade listed and over-the-counter derivatives without 
adequate factual support for those restrictions. The price discovery 
and risk-shifting functions of the U.S. derivatives markets are too 
important to U.S. and international commerce to be the subject of a 
position limit experiment based upon unsupported claims about price 
volatility caused by speculative positions.
    Equally important, we are concerned that the proposed rules could 
cause non-U.S. participants that currently use U.S. futures and 
derivatives markets to trade and manage their commercial or financial 
risks will shift their trading activities to locations outside of the 
U.S., which do not have position limits. As the Subcommittee will 
recall, the Dodd-Frank Act requires the Commission, within 12 months of 
adopting any position limits to ``conduct a study of the effects (if 
any) of the position limits imposed . . . on the movement of 
transactions from exchanges in the United States to trading venues 
outside the United States.'' Our fear is that, without the necessary 
factual predicate, the Commission cannot assure Congress or market 
participants that the position limits it sets will not adversely cause 
the price discovery and risk allocation functions that U.S. futures 
exchanges perform so well to shift to foreign boards of trade.

The Commission's Rules Should Be Published for Additional Comment
    FIA has previously expressed to the Subcommittee its concern that 
the pace and order in which the Commission has proposed rules to 
implement the Dodd-Frank Act were such that meaningful analysis and 
comment difficult was difficult, if not impossible. Earlier this month, 
the Commission announced that it would reopen the comment period on 
many of the proposed rules for an additional 30 days. We appreciate the 
Commission's action. However, we are disappointed that the Commission 
did not share its views on the many thousands of comments it has 
received to date and, more importantly, how the Commission sees these 
various rule proposals fitting together to form a comprehensive and 
coherent regulatory structure.
    Chairman Gensler has correctly observed that the numerous rules the 
Commission has proposed form a mosaic, and he has suggested that this 
30 day comment period will allow commenters to see the entire mosaic at 
once. Mosaics, however, are nothing more than chips of colored stone 
until they have been creatively assembled to make a work of art. We 
suggest that the Commission's proposals are still just chips waiting 
for the Commission to assemble them into a comprehensive regulatory 
structure. The industry and the public deserve an opportunity analyze 
and comment on the Commission's vision of its regulatory mosaic before 
it is set in concrete. We, therefore, recommend that, once the 
Commission has determined how these various proposed rules will fit 
together, it provide an additional 60 day comment period before 
promulgating final rules. We think a 60 day comment period would be 
well within the timetable set by the G20.
    Thank you again for the opportunity to appear before you today. I 
would be happy to answer any questions you may have.

    Mr. Neugebauer [presiding.] Thank you, and now Mr. Thomas 
C. Deas. Mr. Deas.

STATEMENT OF THOMAS C. DEAS, Jr., VICE PRESIDENT AND TREASURER, 
 FMC CORPORATION; PRESIDENT, NATIONAL ASSOCIATION OF CORPORATE 
                          TREASURERS,
                        PHILADELPHIA, PA

    Mr. Deas. Thank you and I want to thank Chairman Conaway, 
Ranking Member Boswell, and Members of the Committee for 
allowing me the opportunity to speak with you today on 
derivatives regulation. I am Tom Deas, Vice President and 
Treasurer of FMC Corporation, and also President of the 
National Association of Corporate Treasurers.
    FMC and NACT are also part of the Coalition for Derivatives 
End-Users representing thousands of companies across the 
country that employ derivatives to manage their day to day 
business risks. FMC Corporation was founded almost 130 years 
ago to provide spray equipment to farmers. Today, in addition 
to making agricultural chemicals farmers apply to protect their 
crops, our 5,000 employees have worked hard to make FMC the 
leading manufacturer and marketer of a whole range of 
agricultural specialty and industrial chemicals. FMC has 
achieved this longevity by continually responding to our 
customer's needs with the right chemistry delivered at the 
right price. Along with many other U.S. manufacturers and 
agricultural producers, FMC uses over-the-counter derivatives 
to hedge the business risks that we incur in a cost effective 
way. By managing the risk of foreign exchange rate movements, 
changes in foreign interest rates, global energy and commodity 
prices we can compete more effectively in the increasingly 
global marketplace.
    We are very concerned that several of the proposed 
derivatives regulations, the aggressive schedule for rule 
making could hamper our use of this important risk mitigating 
tool and adversely affect our global competitiveness. We 
support this Committee's efforts to redress the problems with 
derivatives, and I want to assure you that FMC and other end-
users employ OTC derivatives to offset risks not create new 
ones.
    In the United States, FMC sells more crop protection 
chemicals for soybeans than any other crop. Our ability to 
continue bringing U.S. farmers new chemistries at the right 
price and controlling costs on existing products depends on our 
capacity to compete effectively on a world-wide basis. FMC 
meets and beats foreign competition in several overseas markets 
for our crop protection chemicals.
    In Brazil, for example, building on our leading position in 
cotton and sugarcane, we offer to sell our products to soybean 
farmers there for use at planting time in exchange for an 
agreed quantity of soybeans that they pay to us at harvest 
time. We can do this because we simultaneously enter into a 
custom, over-the-counter derivative that offsets the amount and 
timing of the future delivery of soybeans by our customers. In 
a developing country like Brazil, farmers do not have FMC's 
degree of access to the world-wide financial markets. Our banks 
did not require FMC to post cash margin to secure mark-to-
market fluctuation in the value of our derivatives, but instead 
priced the overall transaction to take this risk into account. 
This structure gives us certainty that we never have to post 
cash margin while the derivatives are outstanding.
    However, last month U.S. regulators proposed that they, not 
end-users and their counterparties, will have the final say 
over how much cash an end-user will have to divert to a margin 
account where we are concerned it will sit idle, unavailable 
for productive uses. In our world of finite limits and 
financial constraints, posting a fluctuating cash margin would 
be a direct, dollar for dollar subtraction from funds that we 
would otherwise use to expand our plants, build inventory to 
support higher sales, conduct research and development, and 
ultimately grow jobs and sustain our international 
competitiveness.
    In the Brazilian soybean market, we compete against 
international producers based in Germany, Switzerland, 
Australia, as well as local Brazilian companies. Because of 
significant differences in the way derivatives regulation is 
being implemented in Europe and elsewhere outside the United 
States, FMC and other U.S. companies could be put at a 
competitive disadvantage. Our foreign competitors in the 
Brazilian markets will not be subject to margining by their 
regulators as we now understand the rules.
    International derivatives regulation as we heard from 
Commissioner Sommers is on a much slower track than we are 
moving in the United States. Unfortunately for American 
business, we will be at a relative competitive disadvantage 
until such time in the future when and if those rules might 
converge. We will also bear higher absolute costs than we did 
before the new rules and will be subject to the risk of 
regulatory arbitrage. Competitors in countries that are not 
pursuing so stringent a new regulatory framework for end-users 
will have that advantage.
    Although I have focused here on international 
competitiveness and margin, end-users are concerned about the 
more than 100 new rules, how they will operate when taken 
together, whether we can continue to manage our business risks 
through derivatives. I noted some of these concerns in my 
written testimony and I am happy to discuss them during 
questioning. Thank you again for your attention to our 
concerns.
    [The prepared statement of Mr. Deas follows:]

     Prepared Statement of Thomas C. Deas, Jr., Vice President and 
    Treasurer, FMC Corporation; President, National Association of 
                               Corporate
                      Treasurers, Philadelphia, PA

    Good morning, I am Tom Deas, Vice President and Treasurer of FMC 
Corporation and also President of the National Association of Corporate 
Treasurers (``NACT''), an organization of treasury professionals from 
several hundred of the largest public and private companies in the 
country. FMC, NACT, and another organization of which FMC is also a 
member, the Agricultural Retailers Association, are part of the 
Coalition for Derivatives End-Users (the ``Coalition''). Our Coalition 
represents thousands of companies across the United States that employ 
derivatives to manage business risks they face every day. Thank you 
very much for giving me the opportunity to speak with you today about 
derivatives regulation.
    I am particularly gratified to appear before this Committee because 
support of American agriculture was the very reason for my company's 
founding almost 130 years ago. FMC Corporation began operations in the 
1880s as a manufacturer of agricultural spray equipment to aid farmers 
combating infestations in their fields and orchards. Today in addition 
to making agricultural chemicals farmers apply to protect their crops, 
our 5,000 employees work hard to ensure that FMC continues to be a 
world-leading manufacturer and marketer of agricultural, specialty and 
industrial chemicals.
    Along with many other U.S. manufacturers and agricultural 
producers, FMC uses over-the-counter (``OTC'') derivatives to hedge 
business risks in a cost-effective way. We are very concerned that 
several of the proposed derivatives regulations and the aggressive 
schedule for rulemaking could hamper our use of this important tool and 
adversely affect our global competitiveness. I had the valuable 
experience of negotiating and executing some of the very first OTC 
derivatives--currency swaps--back in 1984. The OTC derivatives market 
has grown from its inception at that time to its current size by 
offering end-users a degree of customization not available in exchange-
traded derivatives. FMC and other end-users enter into OTC derivatives 
customized to match the amount, timing, and where necessary, the 
currency, of their underlying business exposures. By matching 
derivatives to our business exposures, we create an effective economic 
hedge. The value of the derivative moves in an equal, but opposite, way 
in relation to the value of the underlying risk we are hedging. Let me 
give you a specific example of how proposed derivatives regulation 
could hamper my company's ability to compete against foreign producers.
    FMC competes very effectively against foreign companies in several 
markets for our crop protection chemicals. For example in Brazil, we 
have leading positions in sugarcane and cotton. To enhance our product 
offering to Brazilian soybean farmers and profitably grow our business 
there, we offer to sell our agricultural chemicals for use at planting 
time in exchange for an agreed quantity of soybeans at harvest time. We 
can do this because we simultaneously enter into a custom OTC 
derivative that offsets the amount and timing of the future delivery of 
soybeans by our customers. In a developing economy like Brazil, farmers 
do not have FMC's degree of access to the worldwide financial markets. 
We provide our products to Brazilian farmers on terms that insulate 
them from the risk of changes in future commodity prices and foreign 
exchange movements in the price of the Brazilian real against the U.S. 
dollar. In the Brazilian soybean market, we compete against 
international producers based in Germany, Switzerland, and Australia, 
as well as local Brazilian companies. Because of significant 
differences in the way derivatives regulation is being implemented in 
Europe and elsewhere outside the United States, FMC and other U.S. 
companies could be put at a competitive disadvantage. Our competitors 
in the Brazilian market will not be subject to margining by EU, Swiss, 
Australian, or Brazilian regulators. We understand EU regulation is 
moving toward legislative enactment sometime this autumn with 
regulations not fully effective before the end of 2012. Few of our 
large developing-economy trading partners, Brazil included, have 
announced any plans for local derivatives regulation.
    In January I met with economic development authorities in 
Singapore. I can tell you that they are making a vigorous effort to 
attract treasury centers from multinational corporations through 
targeted incentives and a predictable regulatory framework. They do not 
propose to require cash margining of derivative positions for companies 
operating there.

Competitive Consequences of End-User Margining
    At the time of passage of the Dodd-Frank Act, we understood from 
the legislative language as well as from letters and colloquies by the 
principal drafters, that end-users would be exempted from any 
requirement to post cash margin. However, rules proposed last month 
would give the prudential regulators the authority to impose a 
framework with many complicated parameters, each of which is subject to 
future adjustment, which could result in many end-users--regardless of 
their size--having to post cash margin for their derivatives 
transactions. This proposal and the uncertainties it creates represent 
a real challenge to making business decisions about the future. As 
previously mentioned, the European Union regulators have taken a much 
slower track to derivatives regulation, but we know their approach thus 
far with regard to non-financial end-users is to provide them with a 
clear exemption from margining. They have accepted the argument that 
end-users, whose derivatives activity comprises less than ten percent 
of the total OTC derivatives market, are not significantly contributing 
to systemic risk and should be exempt from regulations designed for 
swap dealers. At this point, just weeks away from the mid-July 
implementation deadline, U.S. end-users still do not know with 
certainty what their future cash margin requirements will be. The U.S. 
regulators have taken a pair of offsetting transactions that match 
completely, and settle with offsetting cash payments at maturity, as 
does FMC's soybean sale and hedge, and created a new and unwelcome 
uncertainty--that of funding a daily fluctuating cash margin call. 
While this may be appropriate for swap dealers making a market in 
derivatives or those using derivatives for speculative purposes, its 
application to end-users hedging underlying business exposures creates 
an imbalance that is economically burdensome to end-users. We have been 
encouraged by comments of regulators signaling they may phase 
implementation over an extended period. We believe it essential that 
such phasing account for the limited resources end-users have to comply 
with new requirements. We also believe it essential that regulators 
clearly communicate the implementation schedule so that market 
participants can have certainty as to the timing of new requirements.
    I had the privilege of representing the United States at the most 
recent meeting of the International Group of Treasury Associations. I 
can tell you that treasurers from more than thirty other countries from 
all over the world were sympathetic that we, not they, would be the 
first to implement derivatives regulations. Their expectation was that 
for a market so large and complex there would be many areas that would 
have to be adjusted based on U.S. experience. Unfortunately for 
American business, we will be at a relative competitive disadvantage 
until such time in the future when the rules might converge. We will 
also bear higher absolute costs than we did before the new rules and 
will also be subject to the risk of regulatory arbitrage from 
competitors in countries not pursuing a stringent new regulatory 
framework for end-users.

Cost of End-User Margining
    FMC's derivatives are executed with several banks, all of which are 
also supporting our company through their provision of credit lines. 
None of these banks require FMC to post any form of collateral to 
secure their credit support. Our banks also do not require FMC to post 
cash margin as collateral to secure mark-to-market fluctuations in the 
value of derivatives. Instead they price the overall transactions to 
take this risk into account. This structure gives us certainty so that 
we never have to post cash margin while the derivative is outstanding. 
However, if we are required by the regulators to post margin, we will 
have to hold aside cash and readily available credit to meet those 
margin calls.
    Depending on the extent of price movements, margin might have to be 
posted within the trading day as well as at the close of trading. 
Because failure to meet a margin call would be like bouncing a check, 
and would constitute a default, our corporate treasury would act very 
conservatively in holding cash or immediately available funds under our 
bank lines of credit to assure we could meet any future margin call in 
a timely fashion and with a comfortable cushion.
    Adopting more conservative cash management practices might sound 
like an appropriate response in the wake of the financial crisis. 
However, end-users did not cause the financial crisis. End-users do not 
contribute meaningfully to systemic risk because their use of 
derivatives constitutes prudent, risk mitigating hedging of their 
underlying business. Forcing end-users to put up cash for fluctuating 
derivatives valuations means less funding is available to grow their 
businesses and expand employment. The reality treasurers face is that 
the money to margin derivatives has to come from somewhere and 
inevitably less funding will be available to operate their businesses.
    FMC and other members of the Business Roundtable estimated that 
BRT-member companies would have to hold aside on average $269 million 
of cash or immediately available bank credit to meet a three percent 
initial margin requirement. Though the rule proposed by regulators is 
not specific as to the precise amount of collateral, in our world of 
finite limits and financial constraints, any cash margin requirements 
represent a direct dollar-for-dollar subtraction from funds that we 
would otherwise use to expand our plants, build inventory to support 
higher sales, undertake research and development activities, and 
ultimately sustain and grow jobs. In fact, the study extrapolated the 
effects across the S&P 500, of which FMC is also a member, to predict 
the consequent loss of 100,000 to 120,000 jobs. The effect on the many 
thousands of end-users beyond the S&P 500 would be proportionately 
greater. We would also have to make a considerable investment in 
information systems that would replicate much of the technology in a 
bank's trading room for marking to market and settling derivatives 
transactions.

Exemption from Margining for Foreign Exchange Transactions
    End-users welcomed the determination last month by the Secretary of 
the Treasury that most foreign exchange (``FX'') forward transactions 
would not be considered derivatives subject to regulation under Title 
VII of the Dodd-Frank Act. However a common type foreign exchange 
hedge, technically known as a ``non-deliverable forward'' was not 
included in this exemption. This type of transaction is typically used 
to hedge currencies that are not freely traded such as the currencies 
of Brazil, China, India and those of other rapidly developing economies 
that have imposed exchange controls. It is used in the same way as 
those FX forwards that were exempted.
    The cumulative effect of these regulations could mean that U.S.-
based exporters would be subject to higher risks based on an inability 
to hedge efficiently their foreign exchange risk with derivatives. As a 
result they could be forced to move production offshore to match their 
costs directly with the currencies of their customers.

Summary of End-User Concerns
    Let me take a moment to summarize some of our principal concerns 
with the implementation of derivatives regulation:

   First, we are concerned that the regulations have imposed an 
        uncertain framework for cash margin on end-user trades, 
        potentially diverting billions of dollars from productive 
        investment and employment into an idle regulatory levy.

   Second, even if the final regulations clearly exempt end-
        users from margin requirements, we still have the risk that the 
        regulators will require swap dealers to hold excessive capital 
        in reserve against uncleared over-the-counter derivatives--with 
        the cost passed on to end-users as they manage their business 
        risks. We believe that swap dealers' capital requirements 
        should be appropriate to the actual loss experience of the 
        specific type of derivative. The unintended consequence of 
        punitive capital requirements could be for some end-users to 
        cease hedging risks and for others to use foreign markets.

   Finally, we are concerned that regulators will make 
        customized derivatives prohibitively expensive through margin 
        and increased capital requirements, with the effect of forcing 
        us into standardized derivatives from common trading facilities 
        that will not provide the exact match we seek with our 
        underlying business exposures. It is the customization 
        available with OTC derivatives that is so valuable to us and 
        makes the derivatives effective in hedging our exposures.

    I know many people who suffered through the financial turmoil of 
2008 are tempted to label all derivatives as risky bets that should be 
curtailed. However, I hope these examples of prudent use of derivatives 
by my company and other end-users who form the backbone of our 
country's economy have demonstrated the wisdom of the end-user 
exemptions that we believe to have been the legislative intent.
    I will note that in general those charged with the responsibility 
of drafting derivatives regulations have been very forthcoming and open 
in soliciting input from end-users. We appreciate being involved, but 
we have only weeks until the deadline for finalizing these rules. The 
end-user exemption we thought was clear is now uncertain and several 
important rules required by July have not been finalized. Inadequate 
time has been allowed for us to understand and comment on how the rules 
will operate together. We support fully efforts to extend the statutory 
date by which rules must be promulgated until the remaining 
uncertainties can be clarified and we can be assured the rules will 
operate effectively in this very complicated cross-border market. We 
also support legislation to create a true exemption from margin 
requirements that would apply to all end-users. The consequences of 
getting derivatives regulation wrong will be borne by American business 
and ultimately our fellow citizens.
    Thank you for your time. I would be happy to respond to any 
questions you may have.

    Mr. Neugebauer. Thank you, Mr. Deas. And now Ms. Miller.

    STATEMENT OF SARAH A. ``SALLY'' MILLER, CHIEF EXECUTIVE 
   OFFICER, INSTITUTE OF INTERNATIONAL BANKERS, NEW YORK, NY

    Ms. Miller. Mr. Chairman, Members of the Subcommittee, my 
name is Sally Miller and I am the Chief Executive Officer of 
the Institute of International Bankers. I am pleased to be here 
today to testify on Title VII of Dodd-Frank and the need to 
harmonize global derivatives reform.
    The Institute represents internationally headquartered 
financial institutions from over 35 countries. Our members 
include international banks that operate branches and agencies 
and bank and broker-dealer subsidiaries in the United States. 
Our members have more than $4.5 trillion of total assets in the 
U.S. They employ more than 250,000 U.S. citizens and permanent 
residents. Our members also include eight of the 14 largest 
international derivatives dealers. Our members support Title 
VII's objectives of reducing systemic risk and increasing 
transparency. Together, we have developed a proposal on the 
cross-border application of Title VII. Our members are not 
looking for a free pass. We are not seeking a competitive 
advantage over U.S. firms. Instead, we have sought to assist 
global regulators to develop a workable regime for supervising 
U.S. and foreign firms that operate global swap businesses.
    Before I get into the details of our proposal, it is 
important to note that foreign and U.S. firms alike seek to 
minimize the number of legal entities through which they 
conduct swap dealing activities. This increases efficiency and 
decreases risk by permitting the dealer and its counterparties 
to net and offset their exposures.
    It also allows counterparties to transact with a more 
creditworthy entity and for foreign firms that entity is 
usually located and supervised outside of the U.S. U.S.-based 
personnel may however have relationships with U.S. customers. 
Our proposal would apply the following four principles.
    First, we are not asking for an exemption from swap dealer 
registration. Anytime that swap dealing activities occurs 
directly with U.S. customers or from within the U.S., a U.S.-
registered swap dealer would be involved.
    Second, U.S. clearing trading, reporting, business conduct, 
and similar requirements should apply to transactions with U.S. 
persons or to transactions that are entered into from the 
United States. All transactions with foreign persons entered 
into abroad, however, should be subject to the relevant foreign 
rules rather than U.S. rules.
    Three, where they determine it to be comparable, U.S. 
regulators should leverage effective foreign supervision of 
foreign firms, capital and other entity-wide requirements. U.S. 
regulators would still retain their full enforcement authority.
    And four, foreign regulators should be encouraged to adopt 
comparable regulations and open access further to U.S. firms. 
In particular, we want to encourage the EU's recent proposal 
for recognizing the equivalent third country regimes. We 
believe that these principles will maintain the liquidity of 
the U.S. derivatives market and the preeminence of the U.S. as 
a leading international financial center. These principles 
would also allow U.S. and foreign dealers to access U.S. and 
foreign markets on the same terms without imposing an 
artificial business structure.
    If U.S. regulators were to require foreign dealers to 
conduct their U.S. swap activities through separate U.S. 
subsidiaries, U.S. customers and foreign dealers would face 
additional costs. The significant negative impacts on capital, 
netting, and risk management resulting from trading swaps 
through multiple U.S. and non-U.S. legal entities could also 
reduce U.S. market liquidity.
    I would also like to take this opportunity to discuss 
briefly Section 716 or the Swaps Push Out Provision. Section 
716's exceptions for FDIC insured banks do not extend to 
uninsured U.S. branches or agencies of foreign banks. When 
Dodd-Frank was enacted Members of Congress recognized that this 
oversight was unintentional. Left uncorrected, this error will 
conflict with the U.S. policy of providing parity of treatment 
between foreign and U.S. banks.
    This is because Section 716 will prevent foreign banks from 
conducting bank permissible businesses and managing their risk 
through U.S. branches. It will also cause serious disruptions 
as foreign banks are forced to move possibly off shore, entire 
portfolios currently booked in their U.S. branches. We strongly 
support extending 716's exception to U.S. branches and agencies 
of foreign banks. However, we recognize that this would be an 
imperfect solution.
    It would still require some swap activities to be pushed 
out of both U.S. and foreign banks and accordingly we would 
support further efforts to prevent the adverse impacts on 
capital, netting, and risk management that will otherwise 
result from forcing swap activities to be conducted across 
multiple legal entities. Thank you for the opportunity to 
appear here before you today. I would be happy to answer any 
questions you might have.
    [The prepared statement of Ms. Miller follows:]

   Prepared Statement of Sarah A. ``Sally'' Miller, Chief Executive 
       Officer, Institute of International Bankers, New York, NY

    Chairman Conaway, Ranking Member Boswell, Members of the 
Subcommittee:

    My name is Sally Miller and I am the Chief Executive Officer of the 
Institute of International Bankers. I am pleased to be here today to 
testify on Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act and the need to harmonize global derivatives reform. The 
Institute and its members support Dodd-Frank's objectives of reducing 
systemic risk and increasing transparency in the OTC derivatives 
markets. We also support the commitments of the G20 leaders to setting 
high, internationally consistent requirements for OTC derivatives and 
avoiding overlapping regulations.
    Consistent with these principles, we have worked with our members 
to develop a proposal on the cross-border application of Title VII. Our 
goals are four-fold; to be (1) faithful to the statute, (2) protective 
of U.S. customers, (3) sensitive to the challenges faced by regulators 
in supervising foreign entities and activities, and (4) supportive of 
international harmonization.
    We believe that, under our proposal, Title VII can be applied 
fairly to all derivatives dealers in a way that does not cause undue 
disruption and increased costs to customers and the overall financial 
system.

Background
    Before describing our proposal in more detail, I would like to 
provide some background on the Institute and our members. The Institute 
represents the interests of internationally headquartered financial 
institutions from over 35 countries. Our members include international 
banks that operate branches and agencies and bank and broker-dealer 
subsidiaries in the United States.
    Our members play an important role in the U.S. economy and its 
markets:

   The U.S. operations of our members have more than $4.5 
        trillion in total assets;

   Our members employ more than 250,000 U.S. citizens and 
        permanent residents;

   Our members include eight of the 14 largest international 
        derivatives dealers; and

   Many of our members use derivatives extensively in 
        connection with their U.S. lending activities.

    As a general matter, the international framework for the 
supervision of cross-border banking activities is based on 
considerations of comity and appropriate allocation of supervisory 
responsibilities across home and host country supervisors. As applied 
in the United States, this framework is reflected in the longstanding 
policy of national treatment, i.e., there should be parity of treatment 
between U.S. banks and international banking firms that operate in the 
United States, and the understanding that international banking firms 
are subject to primary supervision by their home country authorities 
with U.S. authorities, primarily the Federal Reserve Board, as host 
country supervisors, exercising appropriate oversight of international 
banking firms' U.S. operations. Accordingly, the U.S. banking and non-
banking operations of our members, like their U.S. counterparts, are 
subject to extensive U.S. regulation and supervision by the Federal 
banking agencies, the Securities and Exchange Commission and the 
Commodity Futures Trading Commission, as appropriate.

Swap Dealer Registration and Regulation
    Foreign banks and U.S. banks alike seek to minimize the number of 
legal entities through which they conduct swap dealing activities and, 
where possible, to use a single legal entity to transact with swap 
counterparties globally. This increases efficiency and decreases risk 
by permitting the bank and its counterparties to net and offset their 
exposures. It also allows counterparties to transact with a more 
creditworthy entity, which for foreign banks is usually located and 
supervised outside the U.S. The personnel who have relationships with 
U.S. customers or manage U.S.-related portfolios on behalf of their 
head office are often, however, located inside the U.S.
    Our proposal, which would apply Title VII to this and other common 
ways in which international derivatives dealers operate, has been 
guided by the following considerations:

    (1) We have sought to be faithful to the statute; we are not asking 
        for an exemption from swap dealer registration. Any time that 
        swap dealing activities occur directly with U.S. customers or 
        from within the U.S., a U.S.-registered swap dealer would be 
        involved. Additionally, the personnel interacting with U.S. 
        customers would be employed by a U.S. registrant subject to 
        supervision and examination by the CFTC and the SEC.

    (2) We have sought to protect U.S. customers. Under our proposal, 
        U.S. regulations that apply to particular transactions, such as 
        customer business conduct standards, would apply to 
        transactions entered into with a U.S. counterparty or from 
        within the U.S. Transactions entered into with foreign 
        counterparties from abroad would, of course, be subject to the 
        rules of the relevant foreign jurisdictions, rather than U.S. 
        rules.

    (3) We have sought to be sensitive to the resource constraints of 
        U.S. regulators. Under our proposal, U.S. regulators could 
        leverage effective foreign supervision while retaining their 
        full enforcement authority. So, if U.S. regulators determine 
        that home country capital and other similar entity-wide 
        regulations are sufficiently comparable to U.S. regulations, 
        then compliance with those regulations would constitute 
        compliance with U.S. requirements, and failure to comply would 
        be treated as noncompliance with U.S. requirements enforceable 
        by U.S. regulators. This is consistent with the Federal Reserve 
        Board's current proposal for swap dealer capital requirements.

    (4) We have sought to support and encourage international 
        harmonization. We believe that our proposal would encourage 
        foreign regulators to adopt regulations comparable to the U.S. 
        and to open access further to U.S. banks. In particular, we 
        believe it would be consistent with the approach of recognizing 
        equivalent third country regimes that is currently under 
        consideration by the EU.

    We believe that this proposal will help maintain the preeminence of 
the U.S. as a leading international financial center by maintaining the 
liquidity of the U.S. derivatives market. By contrast, if Title VII 
were to effectively require foreign banks to conduct their derivatives 
dealing activities in the U.S. through separately incorporated 
subsidiaries, U.S. customers and foreign banks would face 
inefficiencies and additional costs of transacting in derivatives 
through multiple legal entities. The significant negative impacts on 
capital, netting and risk management resulting from conducting 
derivatives trading through multiple U.S. and non-U.S. legal entities 
could also reduce the liquidity available to U.S. market participants.

Swaps Push-Out and Swap Dealer Definition
    I would also like to discuss two other provisions of Title VII, 
specifically Section 716 of Dodd-Frank, also known as the ``swaps push-
out'' provision, and the definition of ``swap dealer'' under Section 
1(a)(49) of the Commodity Exchange Act. Although Section 716 contains 
exceptions for FDIC-insured banks, those exceptions do not extend to 
uninsured U.S. branches or agencies of foreign banks. When Dodd-Frank 
was enacted, Members of Congress recognized that this oversight was 
unintentional. Left uncorrected, it will, contrary to U.S. policy, 
prevent foreign banks from conducting bank-permissible businesses and 
managing risks through their U.S. branches. It also will cause serious 
market and business disruptions as foreign banks are forced to assign 
and re-document entire portfolios booked in their U.S. branches.
    While we strongly support extending Section 716's exceptions to 
U.S. branches and agencies, we recognize, however, that this would be 
an imperfect solution, since it would still require some swap 
activities to be ``pushed-out'' of both domestic and international 
banking entities. Accordingly, we would support further efforts to 
prevent the adverse impacts on capital, netting and risk management 
that will otherwise result from forcing derivatives activities to be 
conducted across multiple legal entities.
    Finally, we would support revisions to the definition of ``swap 
dealer'' that would allow branches and agencies of international banks, 
like FDIC-insured depository institutions, to enter into swaps with 
customers as an adjunct to their loan origination activities without 
having to register as a swap dealer. Branches and agencies of 
international banks are significant credit providers in this country. 
Indeed, the U.S. operations of international banks account for 
approximately 25% of all U.S. commercial and industrial loans. To 
permit these institutions to enter into swaps with their customers only 
as a registered dealer puts foreign banking institutions at a 
competitive disadvantage to U.S. firms and, more importantly, could 
discourage further lending in this country by foreign banking 
institutions.
    In conclusion, we believe that the U.S. branches and agencies of 
foreign banks should be treated the same as U.S. banks with respect to 
the swap push-out safe harbor and the ``loan origination'' exclusion 
from the definition of ``swap dealer''. More generally, and of equal 
importance, we believe that our proposed framework will assist global 
regulators to develop a rational and workable supervisory regime for 
those U.S. and foreign banking operations that operate global swap 
businesses.
    Thank you for the opportunity to appear before you today. I would 
be happy to answer any questions you might have.

                              Attachments

January 10, 2011





Elizabeth M. Murphy,                 David A. Stawick
Secretary,                           Secretary,
Securities and Exchange Commission,  Commodity Futures Trading
                                      Commission,
Washington, D.C.;                    Washington, D.C.



Re: Registration of Swap Dealers and Major Swap Participants, RIN 3038-
    AC95; \1\
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    \1\ 75 Fed. Reg. 71379 (Nov. 23, 2010) (the ``CFTC Registration 
Proposal'').
---------------------------------------------------------------------------
  Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
    Dealer,'' ``Major Swap Participant'' and ``Eligible Contract 
    Participant,'' RIN 3235-AK65.\2\
---------------------------------------------------------------------------
    \2\ 75 Fed. Reg. 80174 (Dec. 21, 2010) (the ``Joint Definitions 
Proposal'' and, together with the CFTC Registration Proposal, the 
``Proposed Rules'').

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    Secretary Murphy, Secretary Stawick:

    The Institute of International Bankers (the ``Institute'') 
appreciates the opportunity to provide comments to the Securities and 
Exchange Commission (the ``SEC'') and the Commodity Futures Trading 
Commission (the ``CFTC'' and, together with the SEC, the 
``Commissions'') with respect to the Proposed Rules. The Institute and 
its members support the efforts of the Commissions and their 
counterparts in other jurisdictions to enhance the resiliency of the 
financial system, reduce systemic risk and increase transparency in the 
OTC derivatives markets. Given the truly global nature of the OTC 
derivatives markets, the Institute believes that, to accomplish these 
objectives, the Commissions must establish, in the near-term, an 
appropriate framework for U.S. regulation of the cross-border swap 
activities of foreign banks.\3\
---------------------------------------------------------------------------
    \3\ For convenience, unless otherwise specified, references in this 
letter to ``swaps'' are intended to refer to both swaps and security-
based swaps.
---------------------------------------------------------------------------
    While such a framework must of course be consistent with the 
Commissions' statutory mandates under the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank'') and appropriately 
protective of U.S. markets and customers, the Institute emphasizes that 
it must also take into account the various ways in which cross-border 
swap activities are conducted, inherent limitations on the Commissions' 
ability to effectively oversee extraterritorial activities, and the 
legitimate interests of regulators outside the U.S. in discharging 
their responsibilities as the primary supervisors of foreign banks.
    In light of these considerations, the Institute respectfully 
proposes to the Commissions below a framework for global supervision of 
cross-border swap activity by foreign banks. The proposed framework is 
designed to (i) allocate to the Commissions the regulation of swap 
activity conducted with U.S. counterparties, (ii) allocate to home (or 
non-U.S. host) country authorities the regulation of swap activity 
conducted with counterparties located outside the U.S., and (iii) 
establish an appropriate allocation of regulatory responsibilities for 
registration, transaction-specific and non-transaction-specific 
supervision. In recognition of the structural diversity of the swap 
markets, this letter provides an overview of how this framework would 
be applied to a variety of common transaction paradigms.
    The Institute believes that this proposed framework is best-suited 
to accomplishing Dodd-Frank's objectives while minimizing the potential 
for overlapping and inconsistent requirements. As a result, this 
framework would reinforce continued cross-border regulatory 
cooperation, promote efficient use of supervisory resources, prevent 
fragmentation of the derivatives markets along regional lines, and 
avoid the concomitant adverse consequences for systemic risk, 
transparency and economic efficiency. We believe that the proposed 
framework is consistent with the purposes of Dodd-Frank and within the 
scope of the Commissions' interpretive and definitional authority 
thereunder.

Summary
    Sections 731 and 764 of Dodd-Frank require swap and security-based 
swap dealers (collectively, ``Swap Dealers'') and major swap and 
security-based swap participants (collectively, ``MSPs'') to register 
with the CFTC and the SEC. Sections 721 and 761 of Dodd-Frank generally 
define a Swap Dealer as any person who (i) holds itself out as a dealer 
in swaps; (ii) makes a market in swaps; (iii) regularly enters into 
swaps with counterparties as an ordinary course of business for its own 
account, or (iv) engages in any activity causing the person to be 
commonly known in the trade as a dealer or market maker in swaps. 
Sections 721 and 761 generally define MSPs, in turn, to include persons 
whose swap positions exceed thresholds established for the ``effective 
monitoring, management, and oversight of entities that are systemically 
significant or can significantly impact the financial system of the 
United States'' or whose ``outstanding swaps create substantial 
counterparty exposure that could have serious adverse effects on the 
financial stability of the United States banking system or financial 
markets'' (emphases added).
    Section 712(d) directs the Commissions, in consultation with the 
Board of Governors of the Federal Reserve System (the ``Board''), to 
further define Swap Dealer and MSP. Section 712(d) also provides the 
Commissions with broad, flexible authority to adopt such other rules 
regarding the Swap Dealer and MSP definitions as the Commissions 
determine are necessary and appropriate, in the public interest, and 
for the protection of investors.
    Sections 722 and 772 of Dodd-Frank, in turn, establish the 
territorial scope of each Commission's jurisdiction with respect to 
swap activities. For the CFTC, Section 722 provides that the provisions 
of the Commodity Exchange Act (``CEA'') relating to swaps that were 
enacted by Title VII of Dodd-Frank ``shall not apply to activities 
outside the United States unless those activities . . . have a direct 
and significant connection with activities in, or effect on, commerce 
of the United States [or] contravene [CFTC anti-evasion rules].'' For 
the SEC, Section 772 provides that ``[n]o provision'' of the Securities 
Exchange Act of 1934 (the ``Exchange Act'') added by Title VII of Dodd-
Frank ``shall apply to any person insofar as such person transacts a 
business in security-based swaps without the jurisdiction of the United 
States, unless such person transacts such business in contravention of 
[SEC anti-evasion rules].'' These provisions are consistent with 
existing interpretations and statutory provisions setting forth each of 
the Commissions' jurisdictions.\4\
---------------------------------------------------------------------------
    \4\ See, e.g., Statement of Policy Regarding Exercise of [CFTC] 
Jurisdiction Over Reparation Claims that Involve Extraterritorial 
Activities by Respondents, 49 Fed. Reg. 14721 (Apr. 13, 1984) (whether 
a person is required to be registered under the CEA may be determined 
by reference to whether (i) the person is based in the U.S., (ii) the 
person engages in the prescribed activities with customers in the U.S. 
or (iii) the prescribed activities take place or originate in the 
U.S.); In the Matter of Sumitomo Corporation, Comm. Fut. L. Rep.  27, 
327 (May 11, 1998) (CFTC enforcement action for manipulative copper 
trading outside the U.S. that directly affected U.S. prices); Exchange 
Act Section 30(b) (providing that the Exchange Act ``shall not apply to 
any person insofar as he transacts a business in securities without the 
jurisdiction of the United States'').
---------------------------------------------------------------------------
    Congress also recognized the Board's expertise in supervising the 
cross-border banking operations of foreign banks when it designated the 
Board, in Section 721's ``prudential regulator'' definition and the 
capital and margin provisions of Sections 731 and 764, as the 
prudential regulator of Swap Dealers and MSPs that are state-licensed 
branches and agencies of foreign banks, foreign banks that do not 
operate insured branches, and foreign banks that are, or are treated 
as, bank holding companies under the International Banking Act of 
1978.\5\
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    \5\ Section 721 similarly designates the Office of the Comptroller 
of the Currency (the ``OCC'') as the prudential regulator of Swap 
Dealers and MSPs that are federally-licensed branches and agencies of 
foreign banks. Notably, in exercising supervisory authority over 
Federal branches and agencies in matters relating to capital, the OCC 
looks to the capital of the foreign bank itself. See 12 CFR  28.14(a).
---------------------------------------------------------------------------
    As a general matter, the international framework for the 
supervision of cross-border banking activities is premised on an 
allocation of supervisory responsibilities across home and host country 
supervisors. The Board's own framework for supervising the cross-border 
banking operations of a foreign bank is based on an understanding that 
the foreign bank is subject to primary supervision by its home country 
authority, with the Board, as a host country supervisor, exercising 
appropriate oversight of the bank's U.S. operations.\6\
---------------------------------------------------------------------------
    \6\ See Federal Reserve Board, ``Policy Statement on the 
Supervision and Regulation of Foreign Banking Organizations'' (Feb 23, 
1979), Federal Reserve Regulatory Service 4-835; Federal Reserve Board 
Supervisory Letter SR 08-09 re Consolidated Supervision of Bank Holding 
Companies and the Combined U.S. Operations of Foreign Banking 
Organizations (Oct. 16, 2008).
---------------------------------------------------------------------------
    As part of this framework, the Board assesses a foreign bank's 
capital adequacy in approving applications by the bank to establish a 
U.S. branch or agency or to make a bank or non-bank acquisition in the 
United States.\7\ Such assessments require a determination regarding 
whether the foreign bank's capital is equivalent to the capital that 
would be required of a similarly situated U.S. banking organization.\8\ 
Similarly, the Board assesses a foreign bank's capital in connection 
with a declaration by the bank to become a financial holding company 
(``FHC''), which requires that the foreign bank be ``well-
capitalized.'' For these purposes, the Board's assessment is based on 
whether the foreign bank's capital is comparable to the capital 
required in the case of a similarly situated U.S. banking organization 
seeking FHC status, ``giving due regard to the principle of national 
treatment and equality of competitive opportunity.'' \9\ In the case of 
a foreign bank whose home country supervisor has adopted capital 
standards that are consistent with the Capital Accord of the Basel 
Committee on Banking Supervision, these various determinations are made 
on the basis of the bank's capital ratios calculated in accordance with 
applicable home country standards.\10\
---------------------------------------------------------------------------
    \7\ See 12 U.S.C.  1842(c), 1843(j) and 3105(d)(3)(B) and (j)(2).
    \8\ In the case of branches and agencies, the capital adequacy 
determination is made by reference to the capital of the foreign bank 
since a branch or agency does not have any capital itself. See, e.g.,, 
12 CFR  225.2(r)(3)(ii).
    \9\ See 12 U.S.C.  1843(l)(3).
    \10\ See, e.g., 12 CFR  225.2(r)(3)(i)(A) (bank and non-bank 
acquisitions) and 225.90(b)(1) (FHC declarations). In considering 
whether a foreign bank that seeks to become an FHC is well-capitalized 
in accordance with comparable capital adequacy standards, the Board 
also considers the foreign bank's composition of capital, Tier 1 
leverage ratio, accounting standards, long-term debt ratings, reliance 
on government support to meet capital requirements, anti-money 
laundering procedures, and whether the foreign bank is subject to 
comprehensive supervision or regulation on a consolidated basis by its 
home country authorities. See 12 CFR  225.92(e)(1).
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    As a result, as the Board is vested with, and will retain, 
authority to set and enforce capital and margin standards for foreign 
banks and state-licensed U.S. branches and agencies that register as 
Swap Dealers, it would be consistent with the Board's long-standing 
approach to cross-border banking supervision for it to give appropriate 
deference to home country supervisors with respect to capital and 
margin oversight in those cases where the Board has determined, or in 
the future determines, that the relevant supervisory regime is 
consistent with the standards required under Dodd-Frank.\11\ This 
approach is also consistent with the international harmonization 
provisions contained in Section 752 of Dodd-Frank.
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    \11\ Sections 731 and 764 of Dodd-Frank require the Board's capital 
requirements for Swap Dealers and MSPs to ensure the safety and 
soundness of the Swap Dealer or MSP and be appropriate for the risk 
associated with the noncleared swaps held by the Swap Dealer or MSP. In 
the Institute's view, home country capital requirements deemed 
comparable by the Board in accordance with its longstanding approach to 
cross-border banking supervision would clearly satisfy these standards, 
especially as deference to those requirements would facilitate 
consolidated supervision by home country authorities. For similar 
reasons, the Institute also views this approach as warranted for non-
U.S. entities for which the Commissions are responsible for setting 
capital and margin requirements, such as foreign broker-dealers and 
investment firms that are also subject to comparable requirements 
supervised by home country authorities. Such an approach would help to 
ensure that the Commissions and the prudential regulators establish and 
maintain comparable capital and margin requirements, as required by 
Sections 731 and 764 of Dodd-Frank.
---------------------------------------------------------------------------
    Further, the Swap Dealer/MSP provisions of Dodd-Frank must be 
interpreted in light of generally applicable principles of statutory 
construction. In particular, as reaffirmed by the Supreme Court in its 
recent Morrison v. National Australia Bank decision, it is a ``long-
standing principle of American law that legislation of Congress, unless 
a contrary intent appears, is meant to apply only within the 
territorial jurisdiction of the United States.'' \12\ The presence of 
the territorial limitations in Sections 722 and 772 should not be 
regarded as indicating a contrary Congressional intent to apply Title 
VII of Dodd-Frank extraterritorially, except in the limited 
circumstances expressly addressed by Sections 722 and 772.\13\ This is 
especially the case given that, under principles of statutory 
construction, Congress is deemed to have been on notice of the Morrison 
decision when it enacted Dodd-Frank and Congress chose to enact 
language in Section 772 that is modeled on the language in Section 
30(b) of the Exchange Act interpreted by the Court in Morrison.
---------------------------------------------------------------------------
    \12\ 130 S. Ct. 2869 (2010) at 2877. Notably, in applying Morrison 
in the context of security-based swaps to hold that the Federal 
securities laws do not permit recovery of losses from swap agreements 
that reference securities traded on a foreign exchange, the U.S. 
District Court for the Southern District of New York recently 
emphasized ``Morrison's strong pronouncement that U.S. courts ought not 
to interfere with foreign securities regulation without a clear 
Congressional mandate.'' Elliot Associates, L.P. v. Porsche Automobil 
Holding SE, No. 10 Civ. 532 (HB) (S.D.N.Y. Dec. 30, 2010) at 13. The 
Institute urges the Commissions to apply the same principle to Title 
VII, i.e., to avoid applying the normative regulatory provisions of 
Title VII in a manner that would unduly interfere with the regulation 
of foreign banks by their home country authorities.
    \13\ See id. at 2882-83 (applying the same analysis to the 
analogous language in Section 30(b) of the Exchange Act).
---------------------------------------------------------------------------
    Moreover, as the CFTC has noted, even where the Commissions may 
have jurisdiction, considerations of international comity should play 
an important role in determining the appropriate scope for the 
Commissions' oversight of extraterritorial activities under Federal 
statutes.\14\ In the particular context of Title VII of Dodd-Frank, the 
Commissions must take into account the nature and structuring of the 
interactions between swap counterparties located within and outside the 
U.S., the extent to which other regulatory regimes substantially 
parallel U.S. law, and the extent to which non-U.S. regulators are 
better positioned to effectively supervise the activities conducted, 
and the institutions domiciled, in their jurisdictions.\15\
---------------------------------------------------------------------------
    \14\ CFTC Registration Proposal at 71382 (citing Hartford Fire 
Insurance Co. v. California, 509 U.S. 764 (1993)).
    \15\ See 1 Restatement (Third) of Foreign Relations Law of the 
United States  402-403 (1987), cited in CFTC Registration Proposal at 
71382.
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    These legal considerations underscore the very real practical 
considerations that the Commissions must address. Globally, there are a 
number of paradigms under which swap activity is conducted. To achieve 
the benefits of reduced risk and increased liquidity and efficiency 
associated with netting and margining on a portfolio basis, foreign 
banks (like their U.S. domestic counterparts) typically seek to 
transact with swap counterparties globally, to the extent feasible, 
through a single, highly creditworthy entity. In many cases, however, 
the personnel who have relationships with U.S. customers or who manage 
the market risk of the foreign bank's swap portfolio are located 
regionally, outside the jurisdiction in which the foreign bank is 
domiciled. In some cases, entities other than the foreign bank (such as 
a U.S. branch, agency, or affiliate) transact with local customers in 
order to satisfy unique customer documentation, insolvency, tax, 
regulatory, or other considerations.
    Additionally, the swap and other activities of most foreign banks 
are already subject to comprehensive prudential supervision and 
regulation by home country authorities, who, of necessity, serve as the 
primary supervisors of those activities. Authorities in those 
jurisdictions likewise also often permit U.S. banks to deal in 
derivatives with institutional customers in those jurisdictions without 
becoming subject to host country licensing or registration 
requirements.\16\ The European Commission (``EC'') has proposed for 
comment and is in the process of considering revisions to the Markets 
in Financial Instruments Directive (among others) that would allow it 
to negotiate mutual recognition frameworks with non-EU countries that 
would result in ``exemptive relief for investment firms and market 
operators based in jurisdictions with equivalent regulatory regimes 
applicable to markets in financial instruments.'' \17\ The Institute 
strongly urges the Commissions to work cooperatively with authorities 
in the EU and other jurisdictions, consistent with the principles 
articulated by the G20,\18\ in implementing frameworks for cross-border 
access, based on home country supervision that is determined to be 
equivalent to that of the host jurisdiction(s).\19\
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    \16\ See, e.g., FSA PERG 2.9.15-17 (overseas person exclusion).
    \17\ Public Consultation: Review of the Markets in Financial 
Instruments Directive (MiFID) (Dec. 8, 2010) at Section 8.3 (Dec. 8, 
2010), available at http://ec.europa.eu/internal_market/consultations/
docs/2010/mifid/consultation_paper_en.pdf. The EC also noted that it 
considers it necessary to establish an EU-wide regime for access by 
non-EU market participants to EU financial markets ``in order to create 
a real level playing field for all financial services actors in the EU 
territory.'' Id.
    \18\ Consistent with declarations by the G20, both the proposed 
European Market Infrastructure Reform (``EMIR'') and the amendment to 
Japan's Financial Instruments and Exchange Act enacted in May 2010 
provide for mandatory clearing and enhanced public and regulatory 
transparency requirements for OTC derivatives. See Derivatives Reform: 
Comparison of Title VII of the Dodd-Frank Act to International 
Legislation, presentation prepared by the CFTC Staff for the Global 
Markets Advisory Committee (Oct. 5, 2010), available at http://
www.cftc.gov/ucm/groups/public/@newsroom/documents/speechandtestimony/
gmac_100510-cftc2.pdf. A further proposed compromise version of EMIR 
was published by the Presidency of the Council of Ministers on December 
7, 2010, and is available at http://register.consilium.europa.eu/pdf/
en/10/st17/st17615.en10.pdf.
    \19\ To the extent that the Commissions believe that further 
legislative authorization would facilitate the implementation of such 
frameworks, the Institute strongly urges the Commissions to pursue such 
authorization.
---------------------------------------------------------------------------
    Accordingly, the Commissions should establish a framework for 
cross-border swap activities that preserves and leverages the strengths 
of existing market practices and home country supervision and 
regulation. Such a framework would have the salutary benefits of 
facilitating cross-border liquidity and access of counterparties to 
both domestic and offshore markets. The Commission should likewise 
avoid a framework that is duplicative, inefficient (for supervisors and 
market participants) and would result in unrealistic extraterritorial 
supervisory responsibilities for the Commissions and potential 
fragmentation of the derivatives markets. In this regard, we note that 
any inefficiencies associated with an inappropriate U.S. framework are 
likely to be compounded to the extent that any such framework engenders 
reciprocal approaches abroad.
    Specifically, the Institute respectfully recommends that the 
Commissions use the interpretive and definitional authority granted to 
them under Title VII of Dodd-Frank to provide certain clarifications 
discussed in Part I below regarding the nature of the connections to 
the U.S. that would require a non-U.S. person to register as a Swap 
Dealer or MSP. The Institute further recommends that the Commissions 
use that authority to establish a framework for Swap Dealer and MSP 
registration and regulation that addresses the following transaction 
paradigms:

    (a) Transactions Directly with a Foreign Bank. As discussed in Part 
        II.A below, a foreign bank that transacts in swaps in a dealing 
        capacity directly (or through U.S. introducing brokers and/or 
        broker-dealers) from abroad with U.S. customers without 
        intermediation by a U.S.-registered Swap Dealer should be 
        subject to registration with the Commissions as a Swap Dealer, 
        should be required to comply with Dodd-Frank's business conduct 
        standards in connection with such activity, should be required 
        to comply with home country capital and margin standards as 
        deemed comparable by the Board in accordance with its 
        longstanding approach to cross-border banking supervision (as 
        described above), and should otherwise be subject to home 
        country standards and supervision;

    (b) Transactions Intermediated by a Registered U.S. Branch, Agency, 
        or Affiliate. As discussed in Part II.B below, a foreign bank 
        subject to home country capital requirements deemed comparable 
        by the Board in accordance with its longstanding approach to 
        cross-border banking supervision that transacts in swaps 
        indirectly with U.S. customers through the intermediation of a 
        U.S.-registered Swap Dealer acting as agent of the foreign bank 
        should not itself be required to register as a Swap Dealer in 
        the U.S. where the U.S.-registered Swap Dealer acting as agent 
        takes responsibility for complying with Dodd-Frank's business 
        conduct and other transaction-specific requirements as though 
        it were the swap counterparty;

    (c) Transactions with a U.S. Branch, Agency, or Affiliate Acting as 
        Principal in a Dealer Capacity. As discussed in Part II.C 
        below, a U.S. branch, agency, or affiliate of a foreign bank 
        that, acting as a principal in a dealer capacity, transacts in 
        swaps with counterparties located within and outside the U.S. 
        should be required to register as a Swap Dealer in the U.S. and 
        to comply with Dodd-Frank's business conduct and other 
        regulatory standards (including capital and margin requirements 
        as applied by the Board or the OCC, as applicable, in the case 
        of a U.S. branch or agency) \20\ in connection with all of its 
        swap activity conducted from the U.S., but the foreign bank 
        itself should not need to register and be subject to regulation 
        as a Swap Dealer; and
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    \20\ As discussed above in the text accompanying note 8, the 
capital of a U.S. branch or agency is assessed by reference to the 
capital of the foreign bank.

    (d) Inter-Branch or Inter-affiliate Transactions. As discussed in 
        Part II.D below, swap transactions between a registered U.S. 
        branch, agency, or affiliate and an unregistered foreign bank 
        (or between a registered foreign bank and its unregistered U.S. 
        branch, agency, or affiliate) conducted for the purpose of 
        allocating market risk arising from swap dealing activities 
        should not require the participating unregistered entity to 
        register as a Swap Dealer or MSP, and such transactions should 
        also not be subject to Dodd-Frank's mandatory clearing, 
        execution, margin, or counterparty business conduct 
---------------------------------------------------------------------------
        requirements.

    Regardless of which of these transaction paradigms applies, this 
proposed regulatory framework would ensure that (i) the Board would be 
able to make a determination as to the comparability of the foreign 
bank's capital in accordance with its longstanding approach to cross-
border banking supervision and, in appropriate circumstances, defer to 
home country capital requirements and prudential supervision and (ii) 
responsibility for compliance with Dodd-Frank's mandatory clearing, 
execution, counterparty business conduct, margin, segregation, and 
record-keeping requirements would lie with a Commission registrant.\21\
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    \21\ In recommending this proposed framework, the Institute has 
sought to focus on certain core interpretive, definitional and other 
issues that arise in relation to cross-border swap activities. There 
are naturally other issues relating to the Swap Dealer and MSP 
definitions and other aspects of Dodd-Frank (including Section 716) 
that are relevant to internationally headquartered banks but are beyond 
the scope of this comment letter. For instance, the Institute urges the 
Commissions to apply the de minimis exception to the Swap Dealer 
definitions to foreign banks in a manner consistent with Sections 722 
and 772 of Dodd-Frank, such as by excluding swaps with counterparties 
located outside the U.S. from the calculation of any relevant threshold 
based on size of positions or number of counterparties. The Institute 
also would like to call the CFTC's attention to the exclusion from the 
Swap Dealer definition for an insured depository institution that 
offers to enter into a swap with a customer in connection with 
originating a loan with that customer. Consistent with the longstanding 
U.S. principle of national treatment and equality of competitive 
opportunity with respect to foreign banks' U.S. operations, the CFTC 
should exercise its authority under Section 712(d) of Dodd-Frank to 
make that exclusion available to uninsured branches and agencies of 
foreign banks on the same terms that it is available to U.S. banks that 
are insured depository institutions.
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Discussion

I. Overall Scope of Swap Dealer and MSP Registration
    In order to address the application of Swap Dealer or MSP 
registration and other requirements to particular transaction 
paradigms, the Commissions must first determine the nature of the 
connections to the U.S. that could require a non-U.S. person to 
register as a Swap Dealer or MSP.
    In this regard, the Institute agrees with the CFTC that a person 
should not be required to register as a Swap Dealer if its only 
connection to the U.S. is the use of a U.S.-registered swap execution 
facility, derivatives clearing organization, or designated contract 
market in connection with its swap dealing activities, or its reporting 
of swaps to a U.S.-registered swap data repository.\22\ The Institute 
urges the SEC to adopt a similar interpretation with respect to 
security-based swaps, consistent with its approach to foreign 
securities broker-dealers under the Exchange Act. The Institute 
similarly does not regard the reference to a U.S. underlier or 
reference entity in a swap conducted outside the U.S. by counterparties 
located outside the U.S. as a sufficient connection to the U.S. to 
subject either counterparty to U.S. Swap Dealer registration 
requirements, and we urge the Commissions to adopt such an 
interpretation.\23\
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    \22\ CFTC Registration Proposal at 71382.
    \23\ The Institute acknowledges that the reference to a U.S. 
underlier or use of a U.S. execution venue could be relevant to the 
Commissions' exercise of so-called ``effects'' jurisdiction under 
appropriate circumstances. (``Effects'' jurisdiction generally refers 
to a U.S. regulator's authority to regulate or prosecute conduct 
outside the U.S. that has a certain ``effect'' within the U.S. that is 
subject to regulation or prohibition.) The extent of the Commissions' 
effects jurisdiction is beyond the scope of this comment letter. We 
merely note that determinations with respect to the non-regulation or 
non-registration of certain activities or persons outside the U.S. do 
not imply limitations on the scope of the relevant Commission's effects 
jurisdiction.
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    Similarly, neither the manner in which a swap is executed nor the 
underlier or reference obligation for the transaction should have any 
bearing on MSP registration, since neither factor is relevant to 
whether a non-U.S. person's swap activities give rise to the 
exceptional risks to the U.S. financial system that are the basis for 
MSP registration. Rather, the analysis of whether a non-U.S. person 
should register as an MSP should turn upon the scope and nature of its 
swap positions with unaffiliated U.S. counterparties (including U.S. 
clearinghouses, to the extent positions in cleared swaps are relevant 
to the determination of whether an entity is an MSP), and the related 
credit exposures to which they give rise.
    Solicitation of or negotiation with counterparties located outside 
the U.S. by U.S.-based personnel employed by a separate U.S. branch, 
agency, or affiliate acting as agent for a non-U.S. person should also 
not subject a non-U.S. person to Swap Dealer registration. Dodd-Frank 
contemplates separate registration regimes, where appropriate, for 
persons who act in such an introducing capacity--introducing broker 
registration for swaps, and broker-dealer registration for security-
based swaps. Similarly, swap portfolio management activities by a U.S. 
agent or U.S. advisor of a non-U.S. person are best addressed by 
requiring the agent or advisor, where appropriate, to register as 
either a commodity trading advisor (for swaps) or investment adviser 
(for security-based swaps), and should not subject the non-U.S. person 
to MSP registration unless the non-U.S. person's swaps are with 
unaffiliated U.S. counterparties (including U.S. clearinghouses, as 
noted above).\24\
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    \24\ The Institute notes that whether registration as an 
introducing broker, broker-dealer, commodity trading advisor, or 
investment adviser is required under the relevant provisions will, in a 
given case, of course depend on the facts and circumstances of the 
activities conducted by U.S. personnel.
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    It bears noting, in this regard, that different branches and 
agencies of a foreign bank should not be treated as the same legal 
``person'' for purposes of Swap Dealer designation. As noted above, 
Dodd-Frank's ``prudential regulator'' definition distinguishes between 
a state or federally-licensed branch or agency of a foreign bank, on 
the one hand, and a foreign bank that does not operate an insured 
branch, on the other. These distinctions suggest that Congress intended 
to take an approach to Swap Dealer designation that is consistent with 
the traditional approach of Federal banking regulation, which likewise 
distinguishes between the U.S. branch or agency of a foreign bank and 
the foreign bank's branches and agencies outside the U.S.\25\
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    \25\ See Section 1(b) of the International Banking Act of 1978 (12 
U.S.C. 3101(b)) (distinguishing between an ``agency,'' a ``branch,'' 
and a ``foreign bank'').
---------------------------------------------------------------------------
    To the extent that a U.S. branch or agency of a foreign bank or the 
foreign bank itself chooses to register as a Swap Dealer, Dodd-Frank 
provides the Commissions with authority to designate and regulate only 
those branches or agencies that transact with U.S. customers. 
Specifically, Dodd-Frank's Swap Dealer definitions provide that a 
``person may be designated as a [swap/security-based swap dealer] for a 
single type or single class or category of . . . activities and 
considered not to be a [swap/security-based swap dealer] for other 
types, classes, or categories of . . . activities'' (emphases 
added).\26\ Accordingly, in circumstances where it is appropriate to 
require registration, the Commissions should designate as a Swap Dealer 
only the particular U.S. or non-U.S. branch or agency of the foreign 
bank involved in the execution of swaps with U.S. customers.
---------------------------------------------------------------------------
    \26\ See Sections 1a(49)(B) of the CEA and 3(a)(71)(B) of the 
Exchange Act, each as amended by Dodd-Frank.
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    Moreover, the Institute strongly believes that swaps with a non-
U.S. affiliate of a U.S. person should not give rise to Swap Dealer or 
MSP registration requirements for that non-U.S. affiliate's 
counterparties located outside the U.S. Although, as noted by the CFTC, 
market participants are able to transfer swap-related risks within 
affiliated groups,\27\ the Commissions should encourage effective 
group-wide risk management, not discourage it through unnecessary 
registration requirements. Moreover, just as the Commissions would 
expect to regulate the swap activities of a U.S. affiliate of a non-
U.S. person, the swap activities of a non-U.S. affiliate of a U.S. 
person with counterparties located outside the U.S. are more properly 
the subject of regulation by authorities in the relevant non-U.S. 
jurisdiction. A contrary result would be inconsistent with Sections 722 
and 772 of Dodd-Frank, which do not contain any language suggesting 
that the territorial limits on the Commissions' jurisdictions with 
respect to swap activities are subject to an exception in the case of a 
non-U.S. affiliate of a U.S. person. Furthermore, no financial 
regulatory statute adopts such an approach to extraterritoriality, 
since it would effectively prevent U.S. market participants (including 
corporate end-users) from accessing non-U.S. markets through their non-
U.S. affiliates.
---------------------------------------------------------------------------
    \27\ CFTC Registration Proposal at 71382.
---------------------------------------------------------------------------
    The Commissions should also clarify that a non-U.S. person would 
not be subject to Swap Dealer or MSP registration requirements simply 
by virtue of contacting a U.S.-domiciled professional fiduciary that 
acts for a counterparty located outside the U.S., since that 
counterparty would not expect U.S. Swap Dealer or MSP requirements to 
apply to swap transactions with a non-U.S. person merely because its 
account is managed by a U.S.-resident fiduciary. This clarification 
would be consistent with the SEC's existing approach in the context of 
foreign broker-dealer registration.\28\
---------------------------------------------------------------------------
    \28\ See Cleary, Gottlieb, Steen & Hamilton (avail. Nov. 22, 1995, 
revised Jan. 30, 1996).
---------------------------------------------------------------------------
    Finally, the Commissions should clarify that a non-U.S. person will 
not be deemed to be acting as a Swap Dealer within the U.S. solely on 
the basis of swaps it enters into with U.S.-registered Swap Dealers 
(including U.S. branches and agencies that are registered) from outside 
the U.S. This clarification is necessary to preserve access to non-U.S. 
markets by U.S.-registered Swap Dealers. The existence of a U.S.-
registered Swap Dealer on one side of such transactions ensures that 
the requirements of Title VII are appropriately satisfied. Moreover, 
this clarification is also consistent with the territorial scope 
limitations contained in Sections 722 and 772 of Dodd-Frank, since the 
relevant activity of the non-U.S. person would take place outside the 
U.S.

II. Application to Common Transaction Paradigms
    With the foregoing clarifications in mind, the Institute describes 
below how its proposed framework for Swap Dealer and MSP registration 
and regulation would apply to the four most common paradigms under 
which an unregistered U.S. person may have a foreign bank (or its U.S. 
branch, agency, or affiliate) as its swap counterparty: (a) 
transactions directly with a foreign bank acting from abroad without 
intermediation by a registered Swap Dealer, (b) transactions with a 
foreign bank as principal intermediated as agent by a U.S. branch, 
agency, or affiliate that is registered as a Swap Dealer, (c) 
transactions with a U.S. branch, agency, or affiliate acting as 
principal in a dealer capacity, and (d) transactions in which the 
market risk from swap dealing activities is allocated by a registered 
U.S. branch, agency, or affiliate to the unregistered foreign bank or 
by a registered foreign bank to its unregistered U.S. branch, agency, 
or affiliate.
    The proposed framework is designed to apply to these paradigms in a 
complementary fashion to address the structural diversity of the swap 
markets in a manner that ensures compliance with Dodd-Frank. 
Accordingly, in the case of each paradigm, (i) the Board would be able 
to make a determination as to the comparability of the foreign bank's 
capital in accordance with its longstanding approach to cross-border 
banking supervision and, in appropriate circumstances, defer to home 
country capital requirements and prudential supervision and (ii) 
responsibility for compliance with Dodd-Frank's mandatory clearing and 
execution, customer business conduct, margin, segregation, and record-
keeping requirements would lie with a Commission registrant. 
Furthermore, the Commissions have the legal authority to adopt this 
framework through interpretation of the extraterritorial application of 
Dodd-Frank in light of Sections 722 and 772 and, in some cases, through 
exercise of their definitional authority pursuant to Section 712(d).
    The Institute emphasizes that it is not suggesting that the 
Commissions adopt the proposed framework only for one of the below 
paradigms. Providing only one option for Swap Dealer and MSP 
registration and regulation fails to recognize the diversity of 
business models under which foreign banks operate and would require 
many foreign banks (and indeed some U.S. banks) to restructure their 
businesses significantly, which would entail material costs and reduced 
flexibility for both banks and corporate end-users and other 
counterparties. The Institute respectfully recommends that the 
Commissions recognize this diversity and, instead, accommodate multiple 
dealing structures under appropriate an appropriate regulatory 
framework so as to facilitate compliance with Dodd-Frank without 
causing undue disruption to the global derivatives markets.

A. Transactions Directly with a Foreign Bank
    There may be circumstances in which a foreign bank chooses to 
transact in swaps with U.S. customers (as opposed to U.S.-registered 
Swap Dealers) directly from abroad without U.S. intermediation. For 
instance, the foreign bank may make its personnel in non-U.S. markets 
available to execute swap transactions directly with U.S. customers, 
since those personnel may have more expertise in the relevant market. 
The foreign bank may also make its non-U.S. personnel available to 
execute swap transactions with U.S. customers outside U.S. trading 
hours. Less commonly, some foreign banks may not have qualified 
personnel at a U.S. branch, agency, or affiliate. In each case, if the 
foreign bank engages in swap ``dealing'' activity (i.e., holds itself 
out as a dealer, makes a market, regularly enters into swaps as a 
business, or engages in activity causing it to be commonly known as a 
dealer or market maker) directly into the U.S. from abroad, then it 
would be subject to Swap Dealer registration in the U.S.\29\
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    \29\ If personnel of a U.S. branch, agency, or affiliate of the 
foreign bank Swap Dealer also solicited or negotiated with U.S. 
customers on behalf of the foreign bank Swap Dealer, then that branch, 
agency or affiliate would be subject to introducing broker and/or 
broker-dealer registration, as and to the extent applicable. The 
branch, agency or affiliate should not separately be subject to Swap 
Dealer registration unless it acts other than in an agency capacity, 
such as in the paradigms described in Parts II.B and II.C below.
---------------------------------------------------------------------------
    It is imperative that the Commissions adopt an approach for foreign 
banks that choose to register as Swap Dealers which recognizes that, 
for reasons of international comity and the necessity of a realistic 
regulatory approach, U.S. regulators should only oversee those aspects 
of the foreign bank's swap business that directly affect U.S. 
counterparties and markets. This would facilitate establishment with 
the EU and other G20 jurisdictions of a framework for cross-border 
access by third country firms subject to home country supervision that 
is determined to be equivalent to that of the host jurisdiction(s).\30\
---------------------------------------------------------------------------
    \30\ See notes 17-19, supra, and accompanying text.
---------------------------------------------------------------------------
    The Institute notes that a foreign bank that registers with one or 
both of the Commissions as a Swap Dealer will have the Board as its 
prudential regulator.\31\ Accordingly, the Board will be in a position, 
in accordance with its longstanding approach to cross-border banking 
supervision, to assess the adequacy of the foreign bank's capital in 
cases where the Board determines that the foreign bank Swap Dealer's 
home country supervisory regime is consistent with the standards 
required under Dodd-Frank. In the case of other requirements that apply 
across a Swap Dealer's overall business--such as risk management 
systems, supervisory policies and procedures, and information 
barriers--the Institute suggests that the Commissions similarly defer 
to home country regulation and supervision, where comparable. This is 
particularly important given that risk management, capital adequacy and 
related supervisory processes must be implemented on a consolidated 
basis and structured in light of each other in order to be effective.
---------------------------------------------------------------------------
    \31\ Section 1a(39) of the CEA, as amended by Dodd-Frank (defining 
``prudential regulator'').
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    On the other hand, Dodd-Frank requirements that apply to a 
particular transaction, such as mandatory clearing, execution, 
counterparty business conduct, margin, and segregation requirements, 
should apply to the foreign bank Swap Dealer with respect to those 
swaps that involve an unaffiliated U.S. counterparty.\32\ The Swap 
Dealer should be permitted to outsource the performance, but not the 
responsibility for due performance, of those requirements to a U.S. 
branch, agency, or affiliate.
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    \32\ Although Dodd-Frank's margin requirements would apply, those 
requirements for non-cleared swaps will, for a foreign bank Swap 
Dealer, be applied by the Board. It would be consistent with the 
Board's long-standing approach to cross-border banking supervision for 
it to adopt an approach to margin that is based on deference to home 
county standards that it deems to be comparable. This approach would, 
in the Institute's view, also be consistent with the standards for 
margin requirements mandated by Sections 731 and 764 of Dodd-Frank for 
the reasons discussed in note 11, supra.
---------------------------------------------------------------------------
    Consistent with Sections 722 and 772 of Dodd-Frank, those 
transaction-specific requirements should not, however, apply to swaps 
by a foreign bank Swap Dealer conducted from outside the U.S. with 
counterparties located outside the U.S., since those transactions will 
be subject to non-U.S. regulatory requirements, and such counterparties 
will not be looking to U.S. regulatory protections in the context of 
such transactions. This approach is consistent with positions taken by 
the Commissions under the CEA and the Investment Advisers Act of 1940 
(the ``Advisers Act'').\33\ This should also be the case if U.S.-based 
personnel employed by a U.S. branch, agency, or affiliate of the 
foreign bank Swap Dealer are involved, as agents of the foreign bank, 
in soliciting or negotiating with the counterparty.\34\ The result 
should be the same if U.S. personnel of a U.S. branch, agency, or 
affiliate of that counterparty are involved in soliciting or 
negotiating with the foreign bank.
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    \33\ See CFTC Regulations  4.7(a)(2)(xi) (providing a non-U.S. 
registered commodity trading advisor with exemptions from certain CEA 
requirements with respect to its non-U.S. clients ) and Uniao de Bancos 
Brasileiros S.A. (avail. July 28, 1992) (concluding that the registered 
foreign advisory subsidiary of a foreign bank need not comply with U.S. 
requirements with respect to its non-U.S. clients).
    \34\ Those personnel would, however, need to comply with U.S. 
requirements applicable to introducing brokers or securities broker-
dealers to the extent that the U.S. branch, agency, or affiliate is so 
registered and those personnel are acting as employees or associated 
persons of the registered branch, agency, or affiliate.
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    In the case of record-keeping and related examination requirements, 
the Commissions should permit records for transactions with U.S. 
customers to be kept either in the U.S. or, if the Swap Dealer agrees 
to provide records to the Commissions upon request, outside the 
U.S.\35\ This approach would allow the Commissions to readily examine 
records for U.S.-related transactions. Records for other transactions 
should be permitted to be kept in accordance with comparable home 
country requirements, and the Commissions should examine such records 
through information sharing agreements, memoranda of understanding, and 
other similar arrangements with home country regulators. These 
arrangements should be designed to address concerns that Commission 
examination of such records might otherwise pose under non-U.S. privacy 
laws.\36\
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    \35\ This approach is consistent with the CFTC's proposal for 
record-keeping by Swap Dealers. See 75 Fed. Reg. 76666, 76669 (Dec. 9, 
2010). See also Rule 17a-7 under the Exchange Act (establishing a 
similar regime for non-U.S. broker-dealers) and Rule 204-2(j)(3) under 
the Advisers Act (establishing a similar regime for non-U.S. advisers).
    \36\ See, e.g., Article 29 of the EU's Data Protection Directive, 
Directive 95/46/EC (imposing restrictions on transfer of personal data 
to non-EU countries).
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    The Commissions should also establish a registration and regulatory 
framework for swap data repositories that limits the extent to which 
U.S. and non-U.S. market participants might be required to comply with 
duplicative or inconsistent swap reporting regimes in multiple 
jurisdictions or to report the same transactions to both U.S. and non-
U.S. data repositories.

B. Transactions Intermediated by a U.S. Branch, Agency, or Affiliate
    Perhaps more commonly, a foreign bank may transact in swaps as a 
dealer with U.S. customers through a separate U.S. branch, agency, or 
affiliate that intermediates the transactions as agent for the foreign 
bank. This is often because, to facilitate strong relationships with 
U.S. customers, the personnel who solicit and negotiate with U.S. 
customers and commit a foreign bank to swaps are located in the U.S. 
Local personnel may also have greater expertise in local markets.
    In this paradigm, the Swap Dealer registration analysis should turn 
on the status of the intermediating U.S. branch, agency, or affiliate. 
In cases where the U.S. branch, agency, or affiliate acting as agent is 
registered merely as an introducing broker and/or securities broker-
dealer--and there is no U.S.-resident registered Swap Dealer 
responsible for the transactions--then the foreign bank should be 
regarded as engaging in swap dealing activity directly into the U.S. 
from abroad, and should be subject to registration and regulation as 
discussed in Part II.A above.
    In contrast, the U.S. branch, agency, or affiliate acting as agent 
for the foreign bank may be registered as a Swap Dealer and hold itself 
out to U.S. customers as such. In such a case, if the U.S. branch, 
agency, or affiliate complies with Dodd-Frank's transaction-specific 
mandatory clearing, execution, counterparty business conduct, margin, 
segregation, and record-keeping requirements as though it were the swap 
counterparty,\37\ then the Commissions should not regard the foreign 
bank--which would merely be an offshore ``booking'' center for the swap 
transactions--to be acting as a Swap Dealer in the U.S. Accordingly, 
the foreign bank should not be required, under these circumstances, to 
register with the Commissions as a Swap Dealer.\38\
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    \37\ Because the U.S. branch, agency, or affiliate would be acting 
solely in an agency capacity, it would not be required to hold capital 
against the swap positions. Also, where the intermediating Swap Dealer 
registrant is a U.S. branch or agency of the foreign bank, the Board 
should defer to comparable home country margin requirements for non-
cleared swaps, as discussed in note 32, supra.
    \38\ The Institute notes that this approach would be consistent 
with the CFTC's interpretive position that a foreign futures commission 
merchant (``FCM'') may, without registration as an FCM or exemption 
under CFTC Regulations Part 30, carry customer omnibus accounts for 
U.S. customers intermediated through a U.S.-registered FCM. See CFTC 
Interpretive Letter 87-7 (Nov. 17, 1987). It would also be consistent 
with the SEC's territorial approach to broker-dealer registration. See 
SEC Release No. 34-27017 (Jul. 11, 1989).
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    As a policy matter, this approach would address the objectives of 
Dodd-Frank. Because a U.S.-registered Swap Dealer would take part in 
the swap and be responsible for compliance with Dodd-Frank and CFTC/SEC 
rules, the transaction would be subject to oversight by the Commissions 
and the U.S. customer would be protected by Dodd-Frank's business 
conduct requirements and anti-fraud and anti-manipulation provisions.
    With respect to counterparty credit risk, there would be no risk as 
between the U.S. customer and the foreign bank for a cleared swap 
because the U.S. customer would face the CFTC-registered FCM or SEC-
registered broker-dealer acting as clearing member of the derivatives 
clearing organization or securities clearing agency, not the foreign 
bank. The foreign bank would be required to post margin as and to the 
extent required by the rules of the relevant derivatives clearing 
organization or clearing agency. Also, for swaps cleared in the U.S., 
the U.S. customer's margin would be protected by a CFTC-registered FCM 
or SEC-registered broker-dealer or security-based swap dealer, as 
appropriate.\39\
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    \39\ The Institute also recommends that the Commissions adopt an 
approach to cross-border swap clearing that is consistent with the 
CFTC's approach for foreign FCMs in the futures markets. See, e.g., 
CFTC Interpretive Letter 87-7, supra note 38 (providing a framework for 
intermediation by a U.S.-registered FCM) and CFTC Regulations  30.10 
(providing a framework for exempting a foreign FCM subject to 
comparable home country regulation).
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    In the case of a non-cleared swap, the U.S.-registered Swap Dealer 
would, as noted above, comply with Dodd-Frank's margin and segregation 
requirements, which would mitigate some measure of credit risk between 
the U.S. customer and the foreign bank. Although the Institute 
recognizes that the U.S. customer would still have some residual 
uncollateralized credit exposure to the foreign bank, the Commissions 
should address that risk by requiring the U.S.-registered Swap Dealer, 
as a condition for intermediating non-cleared swaps with U.S. customers 
as agent for an unregistered foreign bank, to obtain a determination 
from the Board that the foreign bank is subject to home country capital 
standards that are consistent with the standards required under Dodd-
Frank.\40\ Indeed, in a case where the U.S. registered entity 
intermediating the transaction is a U.S. branch or agency of the 
foreign bank, then, as a practical matter, the Board will have already 
made that determination because the Board assesses the capital of a 
U.S. branch or agency by reference to the capital of the foreign bank 
itself.\41\
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    \40\ The Commissions could adopt this requirement pursuant to their 
respective general authorities under Section 4s(b)(4) of the CEA and 
Section 15F(b)(4) of the Exchange Act, each as amended by Dodd-Frank, 
to adopt rules regarding Swap Dealers and MSPs, including limitations 
on activity. Alternatively, they could adopt this requirement pursuant 
to their definition authority under Section 712(d) of Dodd-Frank as a 
condition to an exclusion from the Swap Dealer and MSP definitions for 
the foreign bank.
    \41\ See note 8, supra.
---------------------------------------------------------------------------
    This framework would ensure that a U.S. customer that transacts in 
swaps with an unregistered foreign bank would be in the same position 
with respect to its residual uncollateralized credit risk to the 
foreign bank it would have been in if the foreign bank were registered. 
This is because, under the framework suggested above, the foreign bank 
that is the swap counterparty to the U.S. customer would be subject to 
capital requirements and prudential supervision that the Board has 
determined to be appropriate, which is all that Dodd-Frank requires or 
seeks to achieve.\42\
---------------------------------------------------------------------------
    \42\ The Institute notes that Title VII of Dodd-Frank anticipates 
that some degree of non-cleared swap activity will continue to take 
place, and so it is implicit that Dodd-Frank does not require the 
elimination of all credit risk of U.S. swap customers to Swap Dealers. 
Rather, Dodd-Frank addresses that risk by requiring that Swap Dealers 
be subject to capital requirements and prudential supervision.
---------------------------------------------------------------------------
    Additionally, applying the same analysis, where (a) a U.S.-
registered Swap Dealer intermediates transactions with U.S. customers 
as agent for the foreign bank and complies with Dodd-Frank's 
transaction-level requirements as though it were the swap counterparty 
and (b) the foreign bank is subject to home country capital 
requirements determined by the Board to be consistent with Dodd-Frank, 
the swap positions of the foreign bank with those U.S. customers and 
the related credit exposures to which they give rise would not, in the 
Institute's view, pose the exceptional risks to the U.S. financial 
system that are the basis for the MSP definitions. Accordingly, a 
foreign bank should not be subject to MSP registration in these 
circumstances.
    As a legal matter, the Commissions could adopt this approach as an 
interpretation of the limited extraterritorial application of the Swap 
Dealer and MSP registration requirements contained in Sections 731 and 
764 and use their general rulemaking authority for Swap Dealers and 
MSPs to apply any additional conditions to the U.S.-registered Swap 
Dealer acting as agent for the unregistered foreign bank. 
Alternatively, the Commissions could use the broad authority granted to 
them by Section 712(d) to adopt rules regarding the Swap Dealer and MSP 
definitions that would conditionally exclude a foreign bank subject to 
home country capital standards deemed comparable by the Board from 
those definitions if its only swaps with U.S. customers are executed 
through a U.S.-registered Swap Dealer acting as agent. Indeed, in the 
context of the MSP definitions, the Commissions have already suggested 
that Section 712(d) gives them the flexibility to adopt conditional or 
unconditional exclusions.\43\
---------------------------------------------------------------------------
    \43\ Joint Definitions Proposal at 80202-03.
---------------------------------------------------------------------------

C. Transactions with a U.S. Branch, Agency, or Affiliate Acting as 
        Principal in a Dealer Capacity
    There are also circumstances under which a U.S. branch, agency, or 
affiliate of a foreign bank may choose to transact in swaps as a dealer 
with counterparties located within and outside the U.S. as principal 
and acting in a dealer capacity, such as when it has existing, 
documented relationships with those counterparties or when those 
customers prefer, for insolvency, tax or other reasons, to transact 
with a U.S. branch, agency, or affiliate. In those cases, the U.S. 
branch, agency, or affiliate would register with the Commission(s) as a 
Swap Dealer and comply with Dodd-Frank's business conduct and other 
regulatory standards in connection with all of its swap activity 
conducted from the U.S.\44\ However, consistent with Sections 722 and 
772 of Dodd-Frank, the foreign bank itself should not be subject to 
registration or regulation as a Swap Dealer or MSP simply by virtue of 
its relationship with the registered U.S. branch, agency, or affiliate.
---------------------------------------------------------------------------
    \44\ In the case of a U.S. branch or agency that registers as a 
Swap Dealer, the Board or the OCC, as applicable, should look to the 
capital adequacy of the foreign bank in determining whether the branch 
satisfies Dodd-Frank's capital requirements.
---------------------------------------------------------------------------
D. Inter-affiliate or Inter-branch Transactions
    In order to centralize risk management, a foreign bank's U.S. 
branch, agency, or affiliate that is registered as a Swap Dealer may 
use swap transactions to allocate some or all of the market risk 
arising from its swap dealing activities to the foreign bank through 
back-to-back transactions or other similar arrangements. Similarly, a 
foreign bank that is registered as a Swap Dealer may use swap 
transactions to allocate the market risk arising from its swap dealing 
activities to an unregistered U.S. branch, agency, or affiliate so that 
personnel employed by that U.S. branch, agency, or affiliate can manage 
that risk. By way of example, such arrangements can be used so that a 
foreign bank's U.S. dollar interest rate portfolio is managed centrally 
by expert personnel in the U.S. In each case, the participating 
unregistered entity should not be required to register as a Swap Dealer 
or MSP.
    As noted by the Commissions in the Joint Definition Proposal, swaps 
between persons under common control simply represent an allocation of 
risk within a corporate group, and may not involve the interaction with 
unaffiliated persons that is a hallmark of the elements of the Swap 
Dealer definitions that refer to holding oneself out as a dealer or 
being commonly known as a dealer.\45\ The Commissions also recognized 
that such swaps may not pose the exceptional risks to the U.S. 
financial system that are the basis for the MSP definitions.\46\ This 
is particularly the case where, as here, there are bona fide commercial 
reasons for the registered U.S. branch, agency, or affiliate or 
registered foreign bank to structure transactions through back-to-back 
or similar inter-affiliate or inter-branch arrangements. Since those 
arrangements would, in each case, involve a registered entity, there 
should be no concern that they could be used to evade Swap Dealer or 
MSP requirements.\47\ Accordingly, such transactions should not give 
rise to Swap Dealer or MSP registration requirements.\48\
---------------------------------------------------------------------------
    \45\ Joint Definitions Proposal at 80183.
    \46\ Id. at 80202.
    \47\ Transactions between persons under common control that are 
designed to evade Swap Dealer or MSP requirements should, if necessary, 
be addressed by appropriate Commission anti-evasion rules.
    \48\ In the Institute's view, the MSP definition should not be 
interpreted to encompass an affiliate of a named counterparty to a swap 
that provides a guarantee of the named counterparty's obligations. This 
is particularly the case where the affiliate providing the guarantee is 
a foreign bank or other non-U.S. entity, since risk held by a non-U.S. 
entity is more properly the subject of regulation by non-U.S. 
authorities.
---------------------------------------------------------------------------
    Additionally, the Institute urges the Commissions to consider 
which, if any, of Dodd-Frank's other swap-related requirements should 
be applicable to such inter-affiliate or inter-branch risk management 
transactions. Application of Dodd-Frank's mandatory clearing, 
execution, or margin requirements to such transactions would in some 
instances completely prevent, and in others seriously reduce the 
efficiency of, those transactions--thereby undermining Dodd-Frank's 
objective of mitigating systemic risk. Additionally, requirements 
intended to protect customers, such as Dodd-Frank's business conduct 
requirements, also plainly are not necessary in the case of inter-
affiliate or inter-branch transactions.
          * * * * *
    The Institute appreciates the opportunity to submit these comments 
in connection with the Commissions' Proposed Rules. Please do not 
hesitate to contact the undersigned at [Redacted] with any questions or 
if we can be of assistance to the Commissions.
            Sincerely,
            
            
Sarah A. Miller,
Chief Executive Officer,
Institute of International Bankers.

CC:

Jennifer J. Johnson,
Secretary,
Board of Governors of the Federal Reserve System.

                                                                      ATTACHMENT 1







                                                           Institute of International Bankers:
                                             Proposed Framework for Swap Dealer Registration and Regulation
--------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------
    In order to assist the agencies in structuring their swap dealer registration and regulatory frameworks for foreign banks, and to ensure that the
 agencies' frameworks do not give rise to market disruption by failing to accommodate the structuring alternatives that must be available to foreign
 firms, we have summarized below a registration and regulatory framework that we believe appropriately applies sound principles of home/host country
 regulation in the context of Title VII of the Dodd-Frank Act.1
    The paradigms outlined in this matrix represent the principal (although not the only) structuring paradigms that foreign firms employ to structure
 their cross-border swap and security-based swap (hereinafter, ``swap'') business with U.S.-domiciled counterparties. Individual banks often use
 different structural paradigms for swaps involving different asset categories, and individual variations on these pure paradigms are not uncommon. No
 single paradigm would suffice to meet the needs and circumstances of all foreign banks and we do not believe that it is necessary or desirable to
 impose any single paradigm on foreign banks-whether the bank is ultimately U.S. owned or non-U.S. owned. This matrix illustrates how supervision and
 oversight of swap dealers can be established under each of the paradigms in a manner that is compliant with the provisions and objectives of Title VII.
    We also note that, as an integral part of this framework, it is critical that the relevant U.S. and home country regulators agree upon an
 appropriate framework for examination, direct supervisory responsibility and access to information that is consistent with the allocation of applicable
 host/home country law.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Direct Contacts by Foreign  U.S. Branch Personnel, on   U.S. FCM/Broker-Dealer      U.S. Swap Dealer           U.S. Affiliate Deals in
                 Bank Personnel              an Agency Basis, Solicit,   Affiliate Personnel, on     Affiliate Personnel, on    Swaps as Principal
                                             Negotiate and Commit to     an Agency Basis, Solicit,   an Agency Basis,
                                             Swaps that are ``Booked''   Negotiate and Commit to     Solicit, Negotiate and
                                             to the Foreign Bank         Swaps that are ``Booked''   Commit to Swaps that are
                                                                         to the Foreign Bank         ``Booked'' to the
                                                                                                     Foreign Bank
--------------------------------------------------------------------------------------------------------------------------------------------------------
Facts           Employees of the foreign    Employees of a U.S.         Employees of a U.S.         Employees of a U.S. swap   Personnel employed by a
                 bank resident outside the   branch, acting as agent     futures commission          dealer affiliate, acting   U.S. affiliate contact
                 U.S. contact U.S. persons   for the foreign bank        merchant (``FCM'')/broker-  as agent for the foreign   U.S. persons to deal in
                 to deal in swaps that the   principal, solicit,         dealer affiliate, acting    bank principal, solicit,   swaps for the account of
                 foreign bank enters into    negotiate and commit to     as agent for the foreign    negotiate and commit to    the U.S. affiliate. Some
                 as principal. Certain       swaps that are booked to    bank principal, solicit,    swaps that are booked to   or all of the risk
                 market risks, such as       the foreign bank. Certain   negotiate and commit to     the foreign bank.          arising from this swap
                 risks relating to swaps     market risks, such as       swaps that are booked to    Certain market risks,      activity might be backed-
                 involving U.S.              risks relating to swaps     the foreign bank. Certain   such as risks relating     to-back to the foreign
                 underliers, may be risk     involving U.S.              market risks, such as       to swaps involving U.S.    bank.
                 managed on an agency        underliers, may be risk     risks relating to swaps     underliers, may be risk
                 basis (subject to           managed on an agency        involving U.S.              managed on an agency
                 specified parameters) by    basis (subject to           underliers, may be risk     basis (subject to
                 personnel of an affiliate   specified parameters) by    managed on an agency        specified parameters) by
                 or branch located in the    personnel of an affiliate   basis (subject to           personnel of an
                 U.S., or certain market     or branch located in the    specified parameters) by    affiliate or branch
                 risks may be hedged         U.S., or certain market     personnel of an affiliate   located in the U.S., or
                 through inter-branch or     risks may be hedged         or branch located in the    certain market risks may
                 inter-affiliate swaps.      through inter-branch or     U.S., or certain market     be hedged through inter-
                                             inter-affiliate swaps.      risks may be hedged         branch or inter-
                                                                         through inter-branch or     affiliate swaps.
                                                                         inter-affiliate swaps.
Registration    The foreign bank would      The foreign bank would      The U.S. affiliate, since   The U.S. affiliate would   The U.S. affiliate would
  (Commodity     register in the U.S. as a   register in the U.S. as a   it is engaged in            register as a swap         register as a swap
 Exchange Act    swap dealer, but            swap dealer, but            soliciting and accepting    dealer.                    dealer.
 (``CEA'')      registration and            registration and            orders for swaps on        The foreign bank           The foreign bank
 4s(a)(1)/       regulation (other than      regulation (other than      behalf of the foreign       ``booking entity'' would   affiliated with the U.S.
 Securities      with respect to entity-     with respect to entity-     bank, would register as     either register in the     swap dealer would not be
 Exchange Act    wide prudential             wide prudential             an introducing broker or    U.S. as a swap dealer      subject to U.S.
 of 1934         regulation requirements     regulation requirements     securities broker (or, if   solely with respect to     regulation, including in
 (``SEA'')      identified below) would     identified below) would     it is registered as an      its role as the            cases where:
 15F(a)(1))      be limited to the U.S.-     be limited to the U.S.      FCM/broker-dealer,          contractual counterparty
                 facing activities of the    branch activities.          otherwise qualify).         on U.S. customer-facing
                 branch/separately           Foreign branches would     The foreign bank would       swaps or, as a condition
                 identifiable department     not be subject to U.S.      register in the U.S. as a   to not registering, be
                 or division that is         regulation.                 swap dealer, but            required to be subject
                 involved in the execution                               registration and            to and comply with home
                 of swaps with U.S.                                      regulation (other than      country standards
                 persons. Other branches/                                with respect to entity-     determined by the FRB
                 divisions would not be                                  wide prudential             and the Commissions, as
                 subject to U.S.                                         regulation requirements     applicable, to be
                 regulation.                                             identified below) would     comparable to U.S.
                                                                         be limited to the U.S.-     capital, risk
                                                                         facing activities.          management, and other
                                                                                                     prudential requirements
                                                                                                     (in which case the
                                                                                                     foreign bank would
                                                                                                     undertake to notify the
                                                                                                     FRB and the Commissions
                                                                                                     of any violations of or
                                                                                                     material changes to
                                                                                                     those home country
                                                                                                     standards, which could
                                                                                                     constitute a basis for
                                                                                                     revoking the exception
                                                                                                     from registration).


Capital         The FRB would be            The FRB would be            The FRB would be            The U.S. swap dealer
  (CEA  4s(e)/  responsible for the         responsible for the         responsible for the         affiliate would comply
 SEA  15F(e))   foreign bank's capital,     foreign bank's capital,     foreign bank's capital,     with U.S. capital
                 but would defer to          but would defer to          but would defer to          requirements, as
                 comparable home country     comparable home country     comparable home country     established by the
                 standards.                  standards.                  standards.                  Commissions. Under these
                Failure to comply with      Failure to comply with      Failure to comply with       requirements, the U.S.
                 home country standards      home country standards      home country standards      swap dealer affiliate
                 would constitute a          would constitute a          would constitute a          would not be required to
                 violation of FRB            violation of FRB            violation of FRB            hold capital against the
                 requirements by the         requirements by the         requirements by the         market and credit risk
                 foreign bank.               foreign bank.               foreign bank.               arising from positions
                                                                                                     booked in the foreign
                                                                                                     bank so long as either:

                                                                                                                               The U.S. swap dealer
Margin          The FRB would be            The FRB would be            The FRB would be            Foreign banks would agree  The U.S. swap dealer
  (CEA  4s(e)/  responsible for the         responsible for the         responsible for the         to comply with U.S.        affiliate would comply
 SEA  15F(e))   foreign bank's margin       foreign bank's margin       foreign bank's margin       requirements applicable    with U.S. margin
                 requirements, but would     requirements, but would     requirements, but would     to the affiliate for       requirements, as
                 defer to comparable home    defer to comparable home    defer to comparable home    transactions               established by the
                 country standards.          country standards.          country standards.          intermediated by the       Commissions or the
                Failure to comply with      Failure to comply with      Failure to comply with       affiliate.                 relevant prudential
                 home country standards      home country standards      home country standards                                 regulator.
                 would constitute a          would constitute a          would constitute a
                 violation of FRB            violation of FRB            violation of FRB
                 requirements by the         requirements by the         requirements by the
                 foreign bank.               foreign bank.               foreign bank.
                                                                        With respect to the FCM/
                                                                         broker-dealer, Commission
                                                                         rules for FCMs/broker-
                                                                         dealers would apply.
Financial and   Since these requirements    Since these requirements    Since these requirements    The U.S. swap dealer       The U.S. swap dealer
 Operational     are integrally related to   are integrally related to   are integrally related to   affiliate would comply     affiliate would comply
 Records         capital adequacy and        capital adequacy and        capital adequacy and        with Commission            with Commission
  (CEA          overall safety and          overall safety and          overall safety and          requirements.              requirements.
 4s(f)(1)/SEA    soundness, the              soundness, the              soundness, the             For the limited
  15F(f)(1))    Commissions would defer     Commissions would defer     Commissions would defer     registration foreign
 2               to comparable home          to comparable home          to comparable home          bank swap dealer, if
                 country standards.          country standards.          country standards.          any, the Commissions
                Failure to comply with      Failure to comply with      Failure to comply with       would defer to
                 home country standards      home country standards      home country standards      comparable home country
                 would constitute a          would constitute a          would constitute a          standards, and failure
                 violation of Commission     violation of Commission     violation of Commission     to comply with home
                 rules by the foreign        rules by the foreign        rules by the foreign        country standards would
                 bank.                       bank.                       bank.                       constitute a violation
                                                                        With respect to the FCM/     of Commission rules by
                                                                         broker-dealer, Commission   the foreign bank.
                                                                         rules for FCMs/broker-
                                                                         dealers would apply.
Risk            Since these requirements    Since these requirements    Since these requirements    The U.S. swap dealer       The U.S. swap dealer
 Management      are integrally related to   are integrally related to   are integrally related to   affiliate would comply     affiliate would comply
 Procedures      capital adequacy and        capital adequacy and        capital adequacy and        with Commission            with Commission
 (including      overall safety and          overall safety and          overall safety and          requirements, but these    requirements, which
 Business        soundness, the              soundness, the              soundness, the              should be flexible         should be flexible
 Continuity/     Commissions would defer     Commissions would defer     Commissions would defer     enough to accommodate      enough to accommodate
 Disaster        to comparable home          to comparable home          to comparable home          group-structured           group-structured
 Recovery)       country standards.          country standards.          country standards.          systems, policies and      systems, policies and
  (CEA         Failure to comply with      Failure to comply with      Failure to comply with       procedures and different   procedures and different
 4s(j)(2)/SEA    home country standards      home country standards      home country standards      organizational             organizational
  15F(j)(2))    would constitute a          would constitute a          would constitute a          structures that comport    structures that comport
                 violation of Commission     violation of Commission     violation of Commission     with home country          with home country
                 rules by the foreign        rules by the foreign        rules by the foreign        standards that are         standards that are
                 bank.                       bank.                       bank.                       comparable in objective    comparable in objective
                                                                        With respect to the FCM/     to U.S. standards.         to U.S. standards.
                                                                         broker-dealer, Commission  For the limited
                                                                         rules for FCMs/broker-      registration foreign
                                                                         dealers would apply.        bank swap dealer, if
                                                                                                     any, the Commissions
                                                                                                     would defer to
                                                                                                     comparable home country
                                                                                                     standards, and failure
                                                                                                     to comply with home
                                                                                                     country standards would
                                                                                                     constitute a violation
                                                                                                     of Commission rules by
                                                                                                     the foreign bank.
Conflicts of    Where comparable (i.e.,     Where comparable (i.e.,     Where comparable (i.e.,     The U.S. swap dealer       The U.S. swap dealer
 Interest        reasonably designed to      reasonably designed to      reasonably designed to      affiliate would comply     affiliate would comply
 (including      achieve the same            achieve the same            achieve the same            with Commission            with Commission
 Information     objectives), the            objectives), the            objectives), the            requirements, which        requirements, which
 Barriers)       Commissions would defer     Commissions would defer     Commissions would defer     should be flexible         should be flexible
  (CEA          to home country             to home country             to home country             enough to accommodate      enough to accommodate
 4s(j)(5)/SEA    standards.                  standards.                  standards.                  group-structured           group-structured
  15F(j)(5))   Failure to comply with      Failure to comply with      Failure to comply with       systems, policies and      systems, policies and
                 home country standards      home country standards      home country standards      procedures and different   procedures and different
                 would constitute a          would constitute a          would constitute a          organizational             organizational
                 violation of Commission     violation of Commission     violation of Commission     structures that comport    structures that comport
                 rules by the foreign        rules by the foreign        rules by the foreign        with home country          with home country
                 bank.                       bank.                       bank.                       standards that are         standards that are
                                                                                                     comparable in objective    comparable in objective
                                                                                                     to U.S. standards.         to U.S. standards.
Position        The foreign bank would      The foreign bank would      The foreign bank would      The foreign bank would     The U.S. swap dealer
 Limits/         comply with Commission      comply with Commission      comply with Commission      comply with Commission     affiliate would comply
 Monitoring of   requirements, but these     requirements, but these     requirements, but these     requirements, but these    with Commission
 Trading         should be flexible enough   should be flexible enough   should be flexible enough   should be flexible         requirements, which
  (CEA         to accommodate group-       to accommodate group-       to accommodate group-       enough to accommodate      should be flexible
 4s(h)(1)(C)     structured systems,         structured systems,         structured systems,         group-structured           enough to accommodate
 and (j)(1)/     policies and procedures     policies and procedures     policies and procedures     systems, policies and      group-structured
 SEA           and different               and different               and different               procedures and different   systems, policies and
 15F(h)(1)(C)    organizational structures   organizational structures   organizational structures   organizational             procedures and different
 and (j)(1))     that comport with home      that comport with home      that comport with home      structures that comport    organizational
                 country standards that      country standards that      country standards that      with home country          structures that comport
                 are comparable in           are comparable in           are comparable in           standards that are         with home country
                 objective to U.S.           objective to U.S.           objective to U.S.           comparable in objective    standards that are
                 standards.                  standards.                  standards.                  to U.S. standards.         comparable in objective
                                                                                                                                to U.S. standards.
Diligent        The branch/division that    The U.S. branch would       The foreign bank, in        The U.S. swap dealer       The U.S. swap dealer
 Supervision     is involved in the          establish a system for      conjunction with the U.S.   affiliate would            affiliate would
  (CEA          execution of swaps with     supervision of compliance   FCM/Broker-dealer           establish a system for     establish a system for
 4s(h)(1)(B)/    U.S. persons would          with applicable U.S.        affiliate, would            supervision of             supervision of
 SEA            establish a system for      requirements, including     establish an integrated     compliance with            compliance with
 15F(h)(1)(B))/  supervision of compliance   designation of              system for supervision of   applicable U.S.            applicable U.S.
 Chief           with applicable U.S.        supervisory personnel,      compliance with             requirements, including    requirements, including
 Compliance      requirements, including     but requirements should     applicable U.S.             designation of             designation of
 Officer (CEA    designation of              be flexible enough to       requirements, including     supervisory personnel,     supervisory personnel,
  4s(k)/SEA    supervisory personnel,      accommodate group-          designation of              but requirements should    but requirements should
 15F(k))         but requirements should     structured systems,         supervisory personnel at    be flexible enough to      be flexible enough to
                 be flexible enough to       policies and procedures     the foreign bank, but       accommodate group-         accommodate group-
                 accommodate group-          and different               requirements should be      structured systems,        structured systems,
                 structured systems,         organizational structures   flexible enough to          policies and procedures    policies and procedures
                 policies and procedures     that comport with home      accommodate group-          and different              and different
                 and different               country standards that      structured systems,         organizational             organizational
                 organizational structures   are comparable in           policies and procedures     structures that comport    structures that comport
                 that comport with home      objective to U.S.           and different               with home country          with home country
                 country standards that      standards.                  organizational structures   standards that are         standards that are
                 are comparable in          The foreign bank would       that comport with home      comparable in objective    comparable in objective
                 objective to U.S.           designate the U.S. branch   country standards that      to U.S. standards.         to U.S. standards.
                 standards.                  as responsible for          are comparable in
                The foreign bank would       complying with these        objective to U.S.
                 designate the branch/       requirements. Examination   standards.
                 division involved in the    for compliance would
                 execution of swaps with     occur at the U.S. branch
                 U.S. persons as             where the relevant
                 responsible for complying   customer-facing activity
                 with these requirements.    occurs.
                 Examination for
                 compliance would occur at
                 the branch/division where
                 the relevant customer-
                 facing activity occurs.
Business        U.S. requirements would     U.S. requirements would     U.S. requirements would     The U.S. swap dealer       U.S. requirements would
 Conduct         apply directly to           apply to all transactions   apply directly to           affiliate would comply     apply to all
 Standards       transactions with U.S.      (with U.S. and non-U.S.     transactions with U.S.      with, and be responsible   transactions (with U.S.
 with            persons, but would not      persons) executed by U.S.   persons, but would not      for, U.S. requirements     and non-U.S. persons)
 Counterpartie   apply to transactions       branch personnel, and       apply to transactions       as though it were the      executed by the U.S.
 s               with persons domiciled      would not apply to          with persons domiciled      counterparty.              swap dealer affiliate.
  (CEA         abroad.                     transactions executed       abroad.                    Examination for
 4s(h)(3), (4)  The foreign bank would       with non-U.S. persons by   The foreign bank would       compliance would occur
 and (5)/SEA     designate the branch/       foreign bank personnel      outsource the               at the U.S. affiliate
  15F(h)(3),   division involved in the    located outside the U.S.    performance, but not        where the relevant
 (4) and (5))    execution of swaps with    The foreign bank would       responsibility for due      customer-facing activity
                 U.S. persons as             designate the U.S. branch   performance, of those       occurs.
                 responsible for complying   as responsible for          requirements to the U.S.
                 with such U.S.              complying with such U.S.    FCM/broker-dealer
                 regulations applicable to   regulations applicable to   affiliate. Examination
                 its transactions with       its transactions with       for compliance would
                 U.S. persons. Examination   U.S. persons. Examination   occur at the U.S.
                 for compliance would        for compliance would        affiliate where the
                 occur at the branch/        occur at the U.S. branch    relevant customer-facing
                 division where the          where the relevant          activity occurs.
                 relevant customer-facing    customer-facing activity   With respect to the FCM/
                 activity occurs. No U.S.    occurs.                     broker-dealer, Commission
                 examination of or                                       rules for FCMs/broker-
                 enforcement relating to                                 dealers would apply.
                 conduct associated with
                 non-U.S. transactions.
Back Office/    U.S. requirements that      U.S. requirements that      U.S. requirements that      The U.S. swap dealer       The U.S. swap dealer
 Documentation   apply to particular         apply to particular         apply to particular         affiliate would comply     affiliate would comply
 Standards       transactions/               transactions/               transactions/               with Commission            with Commission
  (CEA  4s(i)/  counterparties (e.g.,       counterparties (e.g.,       counterparties (e.g.,       requirements, which        requirements, which
 SEA  15F(i))   acknowledgement,            acknowledgement,            acknowledgement,            should be flexible         should be flexible
 3               confirmation, trading       confirmation, trading       confirmation, trading       enough to accommodate      enough to accommodate
                 relationship                relationship                relationship                group-structured           group-structured
                 documentation) would        documentation) would        documentation) would        systems, policies and      systems, policies and
                 apply to transactions       apply to transactions       apply to transactions       procedures and different   procedures and different
                 with U.S. persons, but      with U.S. persons, but      with U.S. persons, but      organizational             organizational
                 should be flexible enough   should be flexible enough   should be flexible enough   structures that comport    structures that comport
                 to accommodate group-       to accommodate group-       to accommodate group-       with home country          with home country
                 structured systems,         structured systems,         structured systems,         standards that are         standards that are
                 policies and procedures     policies and procedures     policies and procedures     comparable in objective    comparable in objective
                 and different               and different               and different               to U.S. standards.         to U.S. standards.
                 organizational structures   organizational structures   organizational structures
                 that comport with home      that comport with home      that comport with home
                 country standards that      country standards that      country standards that
                 are comparable in           are comparable in           are comparable in
                 objective to U.S.           objective to U.S.           objective to U.S.
                 standards.                  standards.                  standards.
                The foreign bank would      The foreign bank would      The foreign bank would
                 designate the branch/       designate the U.S. branch   outsource the
                 division involved in the    as responsible for          performance, but not
                 execution of swaps with     complying with these        responsibility for due
                 U.S. persons as             requirements. Examination   performance, of those
                 responsible for complying   for compliance would        requirements to the U.S.
                 with these requirements.    occur at the U.S. branch    FCM/broker-dealer
                 Examination for             where the relevant          affiliate. Examination
                 compliance would occur at   customer-facing activity    for compliance would
                 the branch/division where   occurs.                     occur at the U.S.
                 the relevant customer-                                  affiliate where the
                 facing activity occurs.                                 relevant customer-facing
                 No U.S. examination of or                               activity occurs.
                 enforcement relating to
                 conduct associated with
                 non-U.S. transactions.
Trading         U.S. requirements would     U.S. requirements would     U.S. requirements would     The U.S. swap dealer       U.S. requirements would
 Records         apply directly to           apply to all transactions   apply directly to           affiliate would comply     apply to all
  (CEA  4s(g)/  transactions with U.S.      (with U.S. and non-U.S.     transactions with U.S.      with, and be responsible   transactions (with U.S.
 SEA  15F(g))   persons, but would not      persons) executed by U.S.   persons, but would not      for, U.S. requirements     and non-U.S. persons)
                 apply to transactions       branch personnel, and       apply to transactions       as though it were the      executed by the U.S.
                 with persons domiciled      would not apply to          with persons domiciled      counterparty.              swap dealer affiliate.
                 abroad.                     transactions executed       abroad.                    Examination for
                The foreign bank would       with non-U.S. persons by   The foreign bank would       compliance would occur
                 designate the branch/       foreign bank personnel      outsource the               at the U.S. affiliate
                 division involved in the    located outside the U.S.    performance, but not        where the relevant
                 execution of swaps with    The foreign bank would       responsibility for due      customer-facing activity
                 U.S. persons as             designate the U.S. branch   performance, of those       occurs.
                 responsible for complying   as responsible for          requirements to the U.S.
                 with such U.S.              complying with such U.S.    FCM/broker-dealer
                 regulations applicable to   regulations applicable to   affiliate. Examination
                 its transactions with       its transactions with       for compliance would
                 U.S. persons. Examination   U.S. persons. Examination   occur at the U.S.
                 for compliance would        for compliance would        affiliate where the
                 occur at the branch/        occur at the U.S. branch    relevant customer-facing
                 division where the          where the relevant          activity occurs. Books
                 relevant customer-facing    customer-facing activity    and records relevant to
                 activity occurs. No U.S.    occurs.                     compliance with respect
                 examination of or                                       to all activities
                 enforcement relating to                                 conducted by the U.S.
                 conduct associated with                                 affiliate on behalf of
                 non-U.S. transactions.                                  the foreign bank swap
                                                                         dealer would be
                                                                         accessible in the U.S.
                                                                        With respect to the FCM/
                                                                         broker-dealer, Commission
                                                                         rules for FCMs/broker-
                                                                         dealers would apply.
Segregation     U.S. requirements would     U.S. requirements would     U.S. requirements would     The U.S. swap dealer       U.S. requirements would
 Requirements    apply directly to           apply to all transactions   apply directly to           affiliate would comply     apply to all
  (CEA  4s(l)/  transactions with U.S.      (with U.S. and non-U.S.     transactions with U.S.      with, and be responsible   transactions (with U.S.
 SEA  3E(f))    persons, but would not      persons) executed by U.S.   persons, but would not      for, U.S. requirements     and non-U.S. persons)
                 apply to transactions       branch personnel, and       apply to transactions       as though it were the      executed by the U.S.
                 with persons domiciled      would not apply to          with persons domiciled      counterparty.              swap dealer affiliate.
                 abroad.                     transactions executed       abroad.                    Examination for
                The foreign bank would       with non-U.S. persons by   The foreign bank would       compliance would occur
                 designate the branch/       foreign bank personnel      outsource the               at the U.S. affiliate
                 division involved in the    located outside the U.S.    performance, but not        where the relevant
                 execution of swaps with    The foreign bank would       responsibility for due      customer- facing
                 U.S. persons as             designate the U.S. branch   performance, of those       activity occurs.
                 responsible for complying   as responsible for          requirements to the U.S.
                 with such U.S.              complying with such U.S.    FCM/broker-dealer
                 regulations applicable to   regulations applicable to   affiliate. Examination
                 its transactions with       its transactions with       for compliance would
                 U.S. persons. Examination   U.S. persons. Examination   occur at the U.S.
                 for compliance would        for compliance would        affiliate where the
                 occur at the branch/        occur at the U.S. branch    relevant customer-facing
                 division where the          where the relevant          activity occurs.4
                 relevant customer-facing    customer-facing activity
                 activity occurs. No U.S.    occurs.
                 examination of or
                 enforcement relating to
                 conduct associated with
                 non-U.S. transactions.
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 While this framework is, for convenience, described with reference to a foreign bank, the same framework would also apply to a foreign, non-bank
  financial institution, except that the Commodity Futures Trading Commission (``CFTC'') and the Securities and the Exchange Commission (the ``SEC''
  and, together with the CFTC, the ``Commissions''), rather than the Board of Governors of the Federal Reserve System (the ``FRB''), would be
  responsible for capital and margin requirements.
2 U.S. regulators would, in consultation with home country regulators, establish an allocation for the exercise of examination authority and access to
  financial, operational, and other supervisory information.
3 To the extent that the Commissions adopt portfolio compression requirements pursuant to these provisions, we would regard those requirements, like
  risk management requirements, as integrally related to capital adequacy and overall safety and soundness. Accordingly, under this framework, the
  Commissions would defer to comparable home country standards designed to address the same objectives as the Commissions' portfolio compression
  requirements, and failure to comply with home country standards would constitute a violation of Commission rules.
4 As discussed above, books and records relevant to compliance with respect to all activities conducted by the U.S. affiliate on behalf of the foreign
  bank swap dealer would be accessible in the U.S.

                              ATTACHMENT 2

April 11, 2011
Regulation and Supervision of U.S. Branches and Agencies of Foreign 
        Banks by U.S. Banking Authorities and the Application of U.S. 
        Regulatory Capital Requirements to Such Banks
    Banking organizations headquartered outside the United States 
(``foreign banks'') conduct a substantial portion of their banking 
activities in the United States through branch offices of the bank \1\ 
pursuant to licenses granted either by New York or one of the other 
states or, if the foreign bank so chooses, by the Office of the 
Comptroller of the Currency (``OCC'').\2\ In the aggregate, U.S. 
branches of foreign banks hold over $2 trillion of assets, accounting 
for approximately 15% of total banking assets in the United States.\3\
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    \1\ Strictly speaking, foreign banks may establish ``branches'' and 
``agencies'' in the United States, the principal difference between the 
two types of offices being that a ``branch'' is authorized to accept 
deposits from U.S. persons but an ``agency'' is not. Foreign banks 
conduct principally wholesale banking activities through their branches 
and agencies. The deposits of branches are not insured by the FDIC 
(with the exception of eight foreign banks that are permitted, pursuant 
to ``grandfather'' authority granted under Federal banking law, to 
maintain FDIC-insured branches subject to the same limits on deposit 
insurance coverage applicable to all other FDIC-insured depository 
institutions (according to the Federal Reserve data referenced in note 
2 below, these grandfathered insured branches have less than $30 
billion total assets in the aggregate)).
    \2\ According to the information most recently published by the 
Federal Reserve (reported as of September 30, 2010), there are 199 
state-licensed foreign bank branches and agencies, 106 of which are 
licensed by the New York State Banking Department. According to 
information most recently published by the OCC (reported as of February 
28, 2011), there are 51 Federal branches and agencies, 35 of which are 
located in New York.
    \3\ According to the Federal Reserve data, state-licensed branches 
and agencies in the aggregate have total assets of approximately $1.89 
trillion (of which $1.81 trillion is held by branches), and Federal 
branches and agencies have total assets of approximately $140 billion 
(almost all of which is held by branches).
---------------------------------------------------------------------------
    The discussion below summarizes key aspects of how U.S. branches of 
foreign banks are regulated and supervised in the United States as 
separately licensed offices of the banks, focusing in particular on the 
key role the Federal Reserve plays in this process. This brief review 
is followed by a discussion of how the Federal Reserve, in applying 
U.S. capital requirements to foreign banks that maintain U.S. branches, 
gives appropriate deference to home country standards while providing 
sufficient flexibility to ensure compliance with U.S. regulatory 
capital requirements in a manner that is consistent with national 
treatment.
The U.S. Bank Regulatory Approach to U.S. Branches as Separately 
        Licensed Offices of Foreign Banks
    U.S. branches are not separately capitalized entities, but their 
operations are separately examined by U.S. banking authorities and 
assigned supervisory ``ROCA'' ratings.\4\ In addition, U.S. branches 
maintain separate books and records in accordance with U.S. regulatory 
requirements and file with U.S. regulators quarterly reports of their 
assets and liabilities (``Call Reports'').
---------------------------------------------------------------------------
    \4\ The ``ROCA'' rating system consists of separate assessments of 
a branch's risk management, operations, compliance and asset quality, 
as well as an overall composite assessment of the branch.
---------------------------------------------------------------------------
    In general, U.S. branches are limited to the same types of 
activities as are permissible for their U.S. domestic bank 
counterparts. Inasmuch as foreign banks' U.S. branches do not have 
their own capital, restrictions on such activities that are based on 
capital (for example, lending limits) are applied to branches by 
reference to the foreign bank's capital, as calculated under its home 
country standards.
    U.S. regulators have the authority to take over and oversee the 
liquidation of the operations of U.S. branches. These proceedings are 
undertaken pursuant to so-called ``ring-fencing'' provisions whereby 
the assets of the branch are distributed first to satisfy the claims of 
creditors that have done business with the branch, with the balance, if 
any, then distributed to the appropriate authority in the foreign 
bank's home country.
Federal Reserve Regulation and Oversight of U.S. Branches of Foreign 
        Banks
    The Federal Reserve plays an especially important role in the 
regulation and oversight of foreign banks and their U.S. branches. 
Foreign banks seeking to enter the U.S. market through a branch are 
required to obtain the Federal Reserve's prior approval (as well as 
approval from the appropriate Federal or state licensing authority). In 
reviewing an application to establish a branch, the Federal Reserve 
takes into account, among other considerations, the financial and 
managerial resources of the foreign bank, and the Federal Reserve may 
impose such conditions on its approval as it deems necessary.\5\
---------------------------------------------------------------------------
    \5\ See generally, 12 U.S.C. 3105(d).
---------------------------------------------------------------------------
    A key consideration in acting on an application to establish a U.S. 
branch is whether the foreign bank is subject to ``comprehensive 
supervision or regulation on a consolidated basis by the appropriate 
authorities in its home country.'' \6\ In addition, in the case of an 
application by a foreign bank that ``presents a risk to the stability 
of the United States financial system,'' the Federal Reserve may 
consider ``whether the home country of the foreign bank has adopted, or 
is making demonstrable progress toward adopting, an appropriate system 
of financial regulation for the financial system of such home country 
to mitigate such risk.'' \7\
---------------------------------------------------------------------------
    \6\ See 12 U.S.C. 3105(d)(2)(A).
    \7\ This factor was added by Section 173(a) of the Dodd-Frank Act, 
codified at 12 U.S.C. 3105(d)(3)(E).
---------------------------------------------------------------------------
    The Federal Reserve considers a variety of factors in determining 
whether a foreign bank satisfies the ``comprehensive consolidated 
supervision'' (``CCS'') requirement.\8\ In the event the Federal 
Reserve is unable to find that a foreign bank meets the CCS 
requirement, the Federal Reserve nevertheless may permit the bank to 
establish a U.S. branch if it determines that ``the appropriate 
authorities in the home country of the foreign bank are actively 
working to establish arrangements for the consolidated supervision of 
such bank.'' \9\
---------------------------------------------------------------------------
    \8\ The relevant provisions of the Federal Reserve's Regulation K 
(12 CFR 211.24(c)(1)(ii)) provides that in making a CCS determination, 
the Federal Reserve shall assess, among other factors, the extent to 
which the foreign bank's home country supervisor:

    (A) Ensures that the foreign bank has adequate procedures for 
monitoring and controlling its
  activities worldwide;

    (B) Obtains information on the condition of the foreign bank and 
its subsidiaries and offices 
  outside the home country through regular reports of examination, 
audit reports, or otherwise;

    (C) Obtains information on the dealings and relationship between 
the foreign bank and its
  affiliates, both foreign and domestic;

    (D) Receives from the foreign bank financial reports that are 
consolidated on a worldwide
  basis, or comparable information that permits analysis of the foreign 
bank's financial condi-
  tion on a worldwide, consolidated basis;

    (E) Evaluates prudential standards, such as capital adequacy and 
risk asset exposure, on a
  worldwide basis.

    \9\ See 12 U.S.C. 3105(d)(6)(A)(i)).
---------------------------------------------------------------------------
    The Federal Reserve has the authority to examine each foreign 
bank's U.S. branch. In exercising this authority the Federal Reserve 
seeks to coordinate with the appropriate state or Federal authority to 
the extent possible to reduce burden and avoid unnecessary duplication 
of examinations, and it may request that its examination be conducted 
simultaneously with that of the other appropriate examining 
authority.\10\
---------------------------------------------------------------------------
    \10\ See generally, 12 U.S.C. 3105(c)(1).
---------------------------------------------------------------------------
    The Federal Reserve also has the authority to order a foreign bank 
to terminate the activities of its state-licensed branch upon its 
determination, after notice and an opportunity for a hearing and notice 
to the appropriate state bank supervisor, that there is reasonable 
cause to believe that the foreign bank, or any of its affiliates, has 
committed a violation of law or engaged in an unsafe or unsound banking 
practice in the United States.\11\
---------------------------------------------------------------------------
    \11\ See 12 U.S.C. 3105(e)(1)(B). In addition, in the case of a 
foreign bank that ``presents a risk to the stability of the United 
States financial system,'' the Federal Reserve may order the bank to 
terminate the activities of its state-licensed branch if the Federal 
Reserve finds that ``the home country of the foreign bank has not 
adopted, or made demonstrable progress toward adopting, an appropriate 
system of financial regulation for the financial system of such home 
country to mitigate such risk.'' (This latter authority was added by 
Section 173(b) of the Dodd-Frank Act, codified at 12 U.S. C. 
3105(e)(1)(C).) In the case of a Federal branch, the Federal Reserve is 
authorized to recommend to the OCC that it terminate the license of the 
Federal branch on the basis of the same types of concerns that can 
trigger termination of a state-licensed branch's activities.
---------------------------------------------------------------------------
Federal Reserve Regulation and Oversight of Foreign Banks' U.S. 
        Operations--Application of Capital Requirements to Foreign 
        Banks That Maintain U.S. Branches
    The Federal Reserve exercises broad regulatory and oversight 
authority over not only the operations of foreign banks' U.S. branches, 
but also their overall U.S. operations, both banking and non-
banking.\12\ Consistent with the international framework for the 
supervision of cross-border banking activities, this approach reflects 
the understanding that foreign banks are subject to primary supervision 
by their home country authorities, with the Federal Reserve, as a host 
country supervisor, exercising appropriate oversight of their U.S. 
operations.
---------------------------------------------------------------------------
    \12\ See, e.g., ``Consolidated Supervision of Bank Holding 
Companies and the Combined U.S. Operations of Foreign Banking 
Organizations,'' Federal Reserve Supervision and Regulation Letter 08-9 
(October 16, 2008).
---------------------------------------------------------------------------
    A foreign bank that maintains a U.S. branch is treated as a bank 
holding company and as such is subject to the requirements of the Bank 
Holding Company Act (``BHC Act''), including its activity restrictions, 
``in the same manner and to the same extent that bank holding companies 
are subject to such provisions.'' \13\ Dating to the International 
Banking Act of 1978, the policy of national treatment has been the 
guiding principle for implementing these requirements. This principle 
calls for ``parity of treatment between [foreign and U.S. banks] in 
like circumstances,'' \14\ but it is recognized that parity of 
treatment does not mean identical treatment. Instead, national 
treatment is accomplished by applying the requirements applicable to 
U.S. banking organizations in a manner that appropriately takes into 
account the differences resulting from foreign banks' operating in the 
United States through U.S. branches.
---------------------------------------------------------------------------
    \13\ See 12 U.S.C. 3106(a).
    \14\ S. Rep. No. 1073, 95th Cong. 2d Sess. 2, reprinted in 1978 
U.S. Code Cong. and Admin. News 1421, 1422.
---------------------------------------------------------------------------
    The practical consequences of implementing the national treatment 
principle are well illustrated by the approach taken by the Federal 
Reserve when applying U.S. regulatory capital requirements to foreign 
banks that maintain U.S. branches. This approach recognizes that (i) a 
U.S. branch does not maintain its own capital and (ii) the foreign bank 
itself is subject to capital requirements prescribed by its home 
country authority. In the case of a foreign bank whose home country 
applies capital standards consistent with those adopted by the Basel 
Committee on Banking Supervision (the ``Basel Committee''),\15\ the 
bank's capital as calculated under those standards is accepted as the 
starting point for the U.S. regulatory assessment.\16\ In the case of 
banks that are subject to Basel II's requirements, this assessment 
takes into account any transitional provisions implemented by the home 
country. If a foreign bank's home country has not adopted capital 
standards consistent with the Basel Committee's standards, then the 
foreign bank, rather than being able simply to utilize the ratios 
calculated under the home country standard as the basis for the U.S. 
regulatory assessment, is subject to a finding by the Federal Reserve 
that its capital is equivalent to the capital that would be required of 
a U.S. banking organization.\17\ That finding, however, is based on the 
assessment of the home country standards and does not call for the 
foreign bank to calculate its capital using U.S. standards.
---------------------------------------------------------------------------
    \15\ In its 2010 survey of countries around the world to measure 
the progress that has been made with respect to implementation of the 
revised international capital accords adopted by the Basel Committee in 
2006 (``Basel II'') the Financial Stability Institute found that 112 of 
the 133 countries responding to the survey have implemented or are 
currently planning to implement Basel II. See ``2010 FSI Survey on the 
Implementation of the New Capital Adequacy Framework,'' Occasional 
Paper No. 9 (August 2010).
    \16\ See, e.g., 12 CFR 225.2(r)(3)(i)(A).
    \17\ See, e.g., 12 CFR 225.2(r)(3)(i)(B).
---------------------------------------------------------------------------
    Thus, the analysis of a foreign bank's capital properly takes as 
its starting point the standards of the bank's home country and then 
undertakes to assess how those standards compare to the standards 
applicable to U.S. banking organizations under U.S. requirements. This 
approach neither gives complete deference to home country capital 
requirements nor requires a foreign bank strictly to abide by each of 
the U.S. requirements or to calculate its capital pursuant to U.S. 
rules.
    The purpose of the analysis is not to force the foreign bank to 
conform its capital to U.S. requirements, but instead to determine 
whether the foreign bank's capital as calculated under its home country 
requirements is sufficiently equivalent or comparable to that 
applicable to a similarly situated U.S. banking organization. 
Consistent with national treatment, this approach recognizes that for 
U.S. regulatory purposes there is no need to ascertain whether home 
country requirements are identical to those of the United States. This 
approach provides the Federal Reserve flexibility in making 
determinations regarding foreign banks' capital without imposing on 
foreign banks any requirement to apply U.S. standards in calculating 
their capital ratios.
    For example, one of the requirements applicable to a U.S. bank 
holding company that elects to operate as a financial holding company 
(``FHC''), and thereby engage in the expanded securities underwriting 
and dealing, merchant banking, insurance and other non-bank financial 
activities that are permissible for FHCs under the BHC Act (as amended 
by the Gramm-Leach-Bliley Act), is that each of its insured depository 
institution subsidiaries be maintained in a ``well capitalized'' 
condition.\18\ To be well capitalized, each such subsidiary must have 
risk-based tier I and total risk-based capital ratios equal to at least 
6% and 10%, respectively. In the case of determining whether a foreign 
bank that maintains a U.S. branch is well capitalized for FHC purposes, 
Section 4(l)(3) of the BHC Act requires the Federal Reserve to apply 
``comparable'' standards, ``giving due regard to the principle of 
national treatment and equality of competitive opportunity.'' \19\
---------------------------------------------------------------------------
    \18\ See 12 U.S.C. 1843(l)(1)(A). Section 606(a) of the Dodd-Frank 
Act added the new requirement that the bank holding company itself also 
satisfy the FHC ``well capitalized'' requirement. As discussed in the 
text below, in the case of a foreign bank that is treated as a bank 
holding company because it maintains a U.S. branch the FHC well 
capitalized requirement already applies to the foreign bank itself.
    \19\ See 12 U.S.C. 1843(l)(3).
---------------------------------------------------------------------------
    In implementing the provisions of Section 4(l)(3) with respect to a 
foreign bank whose home country has adopted risk-based capital 
standards consistent with those prescribed by the Basel Committee, the 
Federal Reserve requires the foreign bank to meet the 6%/10% minimum 
risk-based capital requirement applicable to domestic FHCs, but this 
determination is based on the bank's risk-based capital ratios as 
calculated under its home country standards.\20\ In addition, the 
foreign bank's capital must be comparable to the capital required for a 
U.S. bank owned by an FHC.\21\ If the foreign bank's home country has 
not adopted capital standards consistent with those of the Basel 
Committee, then the bank must obtain a determination from the Federal 
Reserve that its capital (as calculated under home country standards) 
is otherwise comparable to the capital that would be required of a U.S. 
bank owned by an FHC.\22\ For purposes of assessing comparability, the 
Federal Reserve may consider additional factors, including the 
composition of the foreign bank's capital, the ratio of the foreign 
bank's tier I capital to total assets (``leverage ratio''), home 
country accounting standards, the foreign bank's long-term debt 
ratings, its reliance on government support to meet capital 
requirements and whether it is subject to comprehensive supervision or 
regulation on a consolidated basis.\23\
---------------------------------------------------------------------------
    \20\ See 12 CFR 225.90(b)(1)(i) and (ii).
    \21\ See 12 CFR 225.90(b)(1)(iii).
    \22\ See 12 CFR 225.90(b)(2)
    \23\ See 12 CFR 225.92(e).
---------------------------------------------------------------------------
    Thus, consistent with national treatment, the approach taken by the 
Federal Reserve with respect to assessing the capital of foreign bank 
FHCs that maintain U.S. branches gives appropriate deference to home 
country standards while providing sufficient flexibility to ensure 
compliance with the U.S. ``well capitalized'' regulatory requirement.

    Mr. Neugebauer. Thank you and now Mr. O'Connor.

 STATEMENT OF STEPHEN O'CONNOR, CHAIRMAN, INTERNATIONAL SWAPS 
                  AND DERIVATIVES ASSOCIATION;
        MANAGING DIRECTOR, MORGAN STANLEY, NEW YORK, NY

    Mr. O'Connor. Thank you. Thank you, Chairman Conaway, 
Ranking Member Boswell, and Members of the Subcommittee for 
inviting me here today. The issues you are exploring are of 
vital interest and concern to financial institutions around the 
world and in particular U.S. institutions, the U.S. financial 
markets, and to the thousands of U.S. companies who use those 
markets to manage their risk and finance their growth.
    I would like to focus this morning on three key issues. The 
first concerns the applicability of the U.S. regulations to 
both U.S. companies and foreign companies. The second relates 
to the pace and scope of implementation of Dodd-Frank in the 
U.S., and the third centers on key policy differences emerging 
between the U.S. and Europe on derivatives regulation. Each of 
these issues gives rise to its own specific concerns and all 
three have the potential to create competitive disadvantages 
for U.S. firms and for the U.S. economy.
    Let me say very clearly at the outset, the institution that 
I represent today, the International Swaps and Derivatives 
Association squarely supports financial regulatory reform. 
ISDA's membership includes banks, investment managers, 
corporations, pension funds, and governmental entities. ISDA 
has worked hard to make the OTC derivatives market safe and 
efficient since its founding in 1985.
    In the years leading up to the passage of Dodd-Frank and 
since then, ISDA and other industry associations have worked 
hard to implement a structured improvements--structural 
improvements in the global OTC derivatives markets. These 
structural improvements have served to significantly decrease 
systemic risk in three key areas: reduce counterparty credit 
risk, increased transparency, and improved operational 
infrastructure. In these and other ways ISDA and market 
participants are demonstrating our commitment to build robust, 
stable, financial markets and a strong regulatory framework.
    So turning to my first point, the issue of 
extraterritoriality has become a topic of much concern to 
financial market participants. Extraterritoriality refers to 
the reach of one's jurisdiction's laws to activities conducted 
outside of that jurisdiction, and also to institutions 
operating within the jurisdiction but not based in it. To date, 
there has been a lack of clarity about how the provisions of 
the Dodd-Frank Act, and the rules subsequently issued by the 
CFTC and the SEC, pertain to foreign subsidiaries and branches 
of U.S. banks and to foreign banks and their subsidiaries in 
the U.S.
    Recently, U.S. regulators issued rules that included 
provisions requiring extraterritorial application of rules 
regarding margin requirements. If this expansive approach were 
adopted by U.S. regulators with regard to the broader rule sets 
it could create serious issues for U.S. competitiveness. In 
overseas markets, foreign clients of U.S. firms would be 
motivated to transact with foreign financial institutions to 
avoid the reach of Dodd-Frank.
    The extraterritoriality provisions are inconsistent with 
Congressional intent regarding the scope of the new regulatory 
framework for derivatives. The Congress included provisions in 
Dodd-Frank that explicitly require that regulators impose the 
regulations outside the U.S. only if there is a direct and 
significant connection with U.S. activities or commerce, or as 
necessary to avoid evasion of Dodd-Frank. These provisions were 
intended to appropriately balance the protection and safety of 
the financial system with the competitiveness of U.S. 
institutions which is also necessary for a healthy U.S. banking 
system. Clearly the extraterritoriality issue is one that 
requires careful and thoughtful deliberation.
    That leads me to my second point today. Such deliberation 
is extremely difficult to achieve given the scope and pace of 
the regulatory reform efforts that are currently underway. The 
Commissions have an enormous task on their hands. The volume of 
rulemaking is large, very complicated, and there are 
significant interdependencies among many of the rules. Many 
market participants do not know whether or how or when the new 
rules will apply to them. All of this creates great 
uncertainty.
    The speed of implementation also unintentionally creates 
competitive disadvantage for U.S. firms. The fact that U.S. 
firms will likely be subject to a new regulatory framework well 
before complimentary frameworks are established in other key 
jurisdictions is itself a cause for concern. Similarly, there 
is a significant amount of uncertainty for the many well-
regulated non-U.S. firms who are members of ISDA and who 
operate in U.S. markets.
    The Commissions have the flexibility to determine the 
effective dates for many of their finalized rules. ISDA has 
discussed with the Commissions suggested approaches that would 
phase in the implementation of the new rules, and ISDA's 
approach is based on a series of key principles that we believe 
should govern the implementation schedule. These principles are 
outlined in more detail in a letter that we have attached with 
our written testimony. We advocate an approach whereby rules 
that address systemic risk such as clearing and data 
repositories should be implemented first.
    My last comments on the scope and pace of implementation is 
that given the rush to get the rules out and the complexities 
and interactions between the various rules, there should be a 
final review of the rules once they are all completed. This 
would give market participants the ability to review and 
commentate on--comment on the whole rule set. Comments that 
were provided earlier in the process might be inappropriate in 
the light of later rule proposals.
    Turning now to my third and final point, OTC derivatives 
market participants are concerned by the potentially divergent 
approaches being taken in key regulatory jurisdictions. Much of 
the regulatory framework for the EU is still under discussion 
and there is significant concern that the EU's approach could 
differ significantly from the U.S. approach. Requirements for 
the use and structure of execution platforms, capital, and 
margin requirements together with business standard rules could 
differ substantially between regimes. It is too early to know 
for sure what frameworks will be adopted in the EU, but EU 
officials have indicated publicly that it is not their 
intention to change the structure of the OTC derivative 
markets. E.C. is focusing on key systemic issues arising from 
the financial crisis that have been identified by the G20 and 
the Financial Stability Board, namely credit, counterparty 
credit risk, regulatory transparency, and market 
infrastructure.
    In conclusion, while some differences between jurisdictions 
in terms of the details of the rules are inevitable, a far 
greater degree of convergence is essential to the long term 
health of the global financial system and to the relative 
standing of the U.S. financial system and financial systems 
globally. We ask the policymakers to avoid introducing rules in 
a way that leads to a significant level of divergence between 
markets.
    Chairman Conaway, Ranking Member Boswell, and Members of 
the Subcommittee, thank you for your time today. Let me close 
by reiterating ISDA's support for stronger, more robust 
financial regulatory frameworks, and safer, more efficient OTC 
derivative markets. I would be happy to answer any questions 
that you might have.
    [The prepared statement of Mr. O'Connor follows:]

 Prepared Statement of Stephen O'Connor, Chairman, International Swaps 
  and Derivatives Association; Managing Director, Morgan Stanley, New 
                                York, NY
    Chairman Conaway, Ranking Member Boswell, and Members of the 
Subcommittee:

    Thank you for the opportunity to testify today. The issues you are 
exploring are of vital interest and concern--not only to U.S. financial 
institutions, but more broadly to the U.S. financial markets, and to 
the thousands of U.S. companies who use those markets to fund their 
growth and manage their risks.
    In the time allotted to me this morning, I would like to focus in 
particular on three key issues:
    The first concerns the applicability of U.S. regulations to both 
U.S. companies and non-U.S. companies. The second relates to the pace 
and scope of the implementation of the Dodd-Frank Act in the U.S. And 
the third centers on key policy differences emerging between the U.S. 
and EU on derivatives regulation.
    Each of these issues gives rise to its own specific concerns, which 
I will discuss in more detail. But all three are also inter-related in 
that they have the potential to create competitive disadvantages for 
U.S. firms and for the U.S. economy.
    They could, in effect, create an uneven playing field and they 
would do so without making that playing field substantially safer or 
better or more robust. Finally, we at ISDA do not believe these issues 
address the public policy goals that gave rise to the Dodd-Frank Act 
and similar efforts in other jurisdictions.
          * * * * *
    Let me state very clearly at the outset: both the institution that 
I represent today--the International Swaps and Derivatives 
Association--and the firm where I have worked for some 23 years--Morgan 
Stanley--squarely support financial regulatory reform. What's more, we 
have worked actively and engaged constructively with policymakers in 
the U.S. and around the world to achieve this goal.
    ISDA, in fact, has worked to make over-the-counter (OTC) 
derivatives markets safe and efficient since its founding in 1985.
    Over the past 3 decades, ISDA has helped to significantly reduce 
credit and legal risk by developing the ISDA Master Agreement and a 
wide range of related documentation materials, and in ensuring the 
enforceability of their netting and collateral provisions. The 
Association has also been a leader in promoting sound risk management 
practices and processes.
    Today, ISDA has more than 800 members from 56 countries on six 
continents. These members include a broad range of OTC derivatives 
market participants: global, international and regional banks, asset 
managers, energy and commodities firms, government and supranational 
entities, insurers and diversified financial institutions, 
corporations, law firms, exchanges, clearinghouses and other service 
providers.
    In the years leading up to and since the passage of the Dodd-Frank 
Act, ISDA, the major dealers, buy-side institutions and other industry 
associations have worked collaboratively to deliver structural 
improvements to the global over-the-counter (OTC) derivatives markets.
    These structural improvements, which have helped to significantly 
decrease systemic risk, involve three key areas--reducing counterparty 
credit risk, increasing transparency, and improving the industry's 
operational infrastructure.
    To reduce counterparty credit risk, ISDA and the industry have 
embraced central clearing of derivatives transactions. Today, the 
industry has cleared approximately 50 percent of outstanding interest 
rate swaps volume and over $17 trillion of credit default swaps volume. 
OTC derivatives have been cleared since 2000, with clearing arising 
from the industry proactively working with clearing houses to develop a 
better way for managing counterparty.
    To improve regulatory transparency, ISDA and market participants 
have established trade repositories for interest rate, credit default 
and equity swaps and is in the process of doing so for commodity swaps. 
These repositories provide global regulators with unprecedented 
visibility into risk exposures in the OTC derivatives markets.
    To strengthen the industry's operational infrastructure, ISDA and 
market participants have worked to standardize and automate middle and 
back office processes.
    In these and other ways, ISDA and the industry are demonstrating 
our commitment to build robust, stable financial markets and a strong 
financial regulatory framework. Our work is not done yet. Further 
progress lies ahead, and in fact we recognize that there must be a 
process of continuous improvement in risk measurement and management.
          * * * * *
    Let me turn to address the issues that are the main focus of your 
hearing today.
    In the past few months, the issue of extraterritoriality has become 
a topic of much concern to U.S. financial markets participants.
    Extraterritoriality refers to the application of one jurisdiction's 
laws to activities conducted outside that particular jurisdiction, and 
to institutions operating within the jurisdiction but not based in it. 
It's about whether and how U.S. laws and regulations apply to non-U.S. 
companies doing business with non-U.S. firms, with U.S. banks and/or 
their non-U.S. subsidiaries. It is also about how U.S. laws and 
regulations apply to non-U.S. dealer firms doing business with U.S. 
firms and companies. Ensuring that non-U.S. firms can continue to 
provide new sources of capital, liquidity and risk management solutions 
for U.S. corporations and U.S. financial markets is an important 
consideration.
    To date, there has been a lack of clarity about how the provisions 
of the Dodd-Frank Act, and the rules subsequently issued by the CFTC 
and the SEC, pertain to non-U.S. banks, foreign subsidiaries and 
branches of U.S. banks or U.S. subsidiaries of foreign banks.
    Recently, though, U.S. Federal banking regulators issued rules on 
margin requirements that included provisions regarding extraterritorial 
application of the margin requirements, at least for swap dealers 
subject to prudential regulation. These rules appear to apply the 
margin requirements just to the U.S. activities of a non-U.S. swap 
dealer with a foreign parent on the one hand but to the global 
activities of a non-U.S. swap dealer with a U.S. parent on the other. 
By subjecting the non-U.S. activities of non-U.S. swap dealers of 
American banks to the margin requirements, these proposed rules 
potentially establish a framework that would create significant 
competitive issues for swap dealers affiliated with American holding 
companies.
    U.S. banks are global in nature. Large components of their 
businesses are based in foreign countries and generally operated 
through subsidiaries or branches. If the framework described above for 
margin rules were to be adopted more broadly by U.S. regulators that 
could create serious issues for U.S. competitiveness. For instance, if 
derivative transactions between an Italian company and the UK 
subsidiary of an American bank were subjected to transaction level 
Dodd-Frank rules, such as margin rules or rules requiring clearing or 
electronic execution, but similar transactions between that German 
company and a UK bank without a U.S. parent were not subject to those 
same rules, the end result would be that foreign companies would avoid 
doing business with swaps dealers affiliated with American companies. 
They would instead transact with non-U.S. financial institutions not 
covered by the scope of these margin requirements. It could put U.S. 
firms at a serious competitive disadvantage.
    The extraterritoriality proposals are inconsistent with 
Congressional intent regarding the territorial scope of the new 
regulatory framework for derivatives. The Congress included provisions 
in Dodd-Frank that explicitly instruct regulators to impose the 
regulations outside the U.S. only if there is a ``direct and 
significant connection'' with U.S. activities or commerce or as 
necessary to avoid evasion of Dodd-Frank. These provisions are intended 
to appropriately balance the protection of the safety of the financial 
system with the competitiveness of U.S. institutions, which is also 
necessary for a healthy U.S. banking system.
    Similarly disadvantaging foreign institutions and U.S. subsidiaries 
of such institutions, through divergent capital requirements or 
otherwise, discourages foreign investment in U.S. subsidiaries, which 
leads to less jobs and to less competition within our shores. Such 
divergent treatment also creates the potential for retaliatory measures 
abroad, thus limiting opportunities for U.S. firms to grow overseas.
          * * * * *
    Clearly, the extraterritoriality issue is one that requires careful 
and thoughtful consideration amongst a country's domestic regulators, 
as well as regulators and policymakers across jurisdictions.
    This leads me to my second point today: such deliberation is 
extremely difficult to achieve given the scope and pace of the 
regulatory reform efforts that are currently underway.
    The volume of rulemakings is very large, they are complicated, and 
there are significant interdependencies among many of the rules. Many 
market participants do not yet know whether or how or when the new 
rules will apply to them. The scale of change required in the swaps 
market by the Dodd-Frank Act, including new trading, reporting and 
clearing requirements, registrations, compliance regimes, and 
documentation requirements cannot be overstated.
    All of this creates a great deal of uncertainty. It may also 
unintentionally create competitive disadvantage for U.S. firms. The 
fact that U.S. firms will be subject to a new regulatory framework well 
before a complementary framework is established in other key 
jurisdictions is itself a cause for concern. The potential for that 
U.S. framework to inadvertently create an uneven playing field for U.S. 
firms adds to those concerns.
    Similarly, there is a significant amount of uncertainty for the 
many well-regulated non-U.S. firms who are members of ISDA and who 
operate in U.S. markets. The prospect of complying with two sets of 
regulatory regimes is unprecedented and could ultimately lead to 
increased costs, decreased liquidity and a reduction in the overall 
availability of capital in the U.S. markets.
    We believe the CFTC has taken a step toward addressing the need for 
market participants to assess the full mosaic of rules by reopening 
Title VII comment periods for 30 days. However, simply re-opening the 
comment period does not provide any insight on how the extensive prior 
comments on the original proposals may have influenced the Commission's 
thinking in crafting final rules. The comment period re-opening cannot 
replace the value of allowing consideration of how the over 14,000 
comments in the Commission's 2011 comment file will be incorporated 
into the rules. In order to ensure that the substance of the final 
rules work efficiently as a whole, it is essential that market 
participants have an opportunity for additional review and comment on 
the entire revised set of rules which the Commissions will publish 
after evaluating comments received.
    In addition to the need for a second or subsequent comment period 
on rule proposals, there is also a significant need for a rational, 
appropriate phase-in of implementation of the rules across markets and 
market participants. The former will be essential so that rules are 
appropriately tailored, work in tandem, and avoid unduly impairing 
market liquidity or adversely impacting investors. The latter is about 
enabling market participants to implement the changes most effectively. 
Both issues are, however inter-related: it is not enough to phase-in 
implementation if the final rules themselves are unworkable or in 
conflict.
    As we approach the July deadline for the Commissions to finalize 
these mandated rules, it has become increasingly clear to market 
participants and the Commissions, as well as legislators, that the 
process will require more time than had been contemplated by Dodd-
Frank. As a result, ISDA supports efforts to provide policymakers and 
market participants with additional time needed to weigh the individual 
and cumulative impact of the proposals, as well as their costs and 
benefits. This would help to ensure that U.S. firms are not 
unintentionally disadvantaged by any aspects of the proposed 
rulemakings.
    The Commissions have the flexibility to determine the effective 
dates for many of their finalized rules. However, many of the 
significant provisions of Title VII are self-executing. That is, they 
become automatically effective on July 16 without rulemaking. We have 
developed, and have discussed with the Commissions, suggested 
approaches that would phase in the implementation of new rules. Our 
approach is based on a series of key principles that we believe should 
govern the implementation schedule. Our six key principles (outlined in 
more detail in the attached letter) are:
    First, provide time for market infrastructure and business 
operations to implement the final rules to avoid disruption in the 
markets. New market infrastructure and technologies, including central 
clearing services, data reporting services and trading platforms, will 
be required under the new swaps regulatory regime. Unless sufficient 
time is allotted for these components to adequately develop, all market 
participants (and particularly end-users) will face interruptions in 
their ability to access markets.
    Second, swap data reporting to regulators should be the first 
priority for implementation in order to inform future rulemaking. The 
Commissions will have much visibility into all aspects of swap markets 
from the data collected by trade repositories. This knowledge will be 
essential in developing rules that meet Dodd-Frank's requirements while 
still allowing for active and liquid swap markets.
    Third, phase-in requirements by type of market participant and 
asset class. We believe the Commissions should require clearing, 
reporting and electronic execution for the ``better-prepared'' asset 
classes first and should provide ample time for the maturation of those 
asset classes and products that are not yet at that stage. Better 
prepared assets classes would include those with an establish clearing 
infrastructure, such as interest rate and credit products.
    Fourth, within each asset class and type of market participant, 
prioritize reduction of systemic risk. A principal objective of Title 
VII of Dodd-Frank is the reduction of systemic risk in the financial 
markets. As a result, the Commissions should, within each asset class 
and type of market participant, prioritize implementation of 
requirements that reduce systemic risk ahead of other requirements.
    As an example, Dodd-Frank requires central clearing of swaps to 
decrease systemic risk, so clearing should be prioritized in the phase-
in schedule. Other requirements of Title VII, such as electronic 
execution and public real-time reporting, should be implemented after 
clearing. In fact, implementing these provisions prematurely can 
increase systemic risk.
    Fifth, allow time for adequate testing by, outreach to and 
education of customers and for changes to customer relationships. A 
flexible approach to rulemaking and implementation will provide 
customers the necessary opportunity to understand these ongoing changes 
and their own regulatory obligations.
    Sixth, where different regulators will apply different rule sets to 
similar transactions, sequence implementation so that effectiveness of 
each rule set is coordinated across interrelated applicable rule sets. 
We believe that the Commissions and other U.S. regulatory agencies 
should anticipate where the rulemaking may overlap, and possibly 
conflict, and make every effort to actively coordinate with each other 
and with foreign regulators both as to harmonizing the substance of 
related regulations and the timing of their implementation.
          * * * * *
    Turning now to my third and final point: today, OTC derivatives 
market participants are concerned by the potentially divergent 
approaches being taken in key regulatory jurisdictions.
    Much of the derivatives regulatory framework for the EU is still 
under discussion. There is a significant concern that the EU's approach 
could differ significantly from the U.S. regulators' approach. 
Requirements for the use and structure of execution platforms, capital 
and margin requirements, and business conduct standards, to name but a 
few examples, could differ substantially between regimes. It is too 
early to know for sure what frameworks will be adopted in the EU, but 
E.C. officials have indicated publicly that it is not their intention 
to change the structure of the OTC derivatives markets. The E.C. has 
not, of course, completed its rule-making process so we cannot be sure 
of what other differences may lie ahead. It appears, however, that the 
E.C. is focusing on the key systemic risk issues arising from the 
financial crisis that have been identified by the G20 and the Financial 
Stability Board--counterparty credit risk, regulatory transparency and 
market infrastructure.
          * * * * *
    In conclusion, while some differences between jurisdictions in 
terms of detailed rules are inevitable, a far greater degree of 
convergence is essential to the long-term health of the global 
financial system and to the relative standing of individual financial 
systems.
    We ask policymakers to avoid introducing rules in a way that leads 
to a significant level of divergence between markets, or that leads to 
regulatory overlap or to regulatory conflict.
    Each of these approaches carries significant costs. If the U.S. and 
the E.C. continue to take divergent approaches, the potential exists 
for significant differences to develop in how our markets function and 
operate, and ultimately in how well customer needs are met in each. 
This could put American firms and American markets at a disadvantage, 
including by discouraging continued growth and participation by non 
U.S. firms in American financial markets, thereby concentrating risk 
and liquidity in far fewer dealers
    Duplicative rules will raise costs, ultimately impacting the real 
economy, while not serving any regulatory goal. Conflict between 
regulatory approaches will lead to regulatory arbitrage and competitive 
advantage based not on better strategic decisions or more effective 
resource allocation, but on government fiat.
    Chairman Conaway, Ranking Member Boswell and Members of the 
Subcommittee: Thank you for your time today. Let me close by 
reiterating ISDA's support for a stronger, more robust financial 
regulatory framework and safer, more efficient OTC derivatives markets. 
I would be happy to answer any questions that you might have.

                               Attachment
May 4, 2011




David A. Stawick,                    Elizabeth M. Murphy,
Secretary,                           Secretary,
Commodity Futures Trading            Securities and Exchange Commission,
 Commission,
Washington, D.C.;                    Washington, D.C.



Re: Phase-In Schedule for Requirements for Title VII of the Dodd-Frank 
Act

    Dear Mr. Stawick and Ms. Murphy:

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Title VII'' of ``Dodd-Frank'') will fundamentally 
transform the swap and security-based swap (collectively, ``Swap'') 
markets. As the Commodity Futures Trading Commission (the ``CFTC'') and 
the Securities and Exchange Commission (the ``SEC'' and, together with 
the CFTC, the ``Commissions'') are acutely aware, Congress sketched out 
broad parameters of this new regulatory regime but left to the 
Commissions the enormous and delicate task of filling in the details 
through rulemaking. Generally, Title VII requires the Commissions to 
finalize these mandated rules by July. As we approach that time, it has 
become increasingly clear to market participants and the Commissions, 
as well as legislators, that finalizing these rules will require more 
time than had been contemplated by Dodd-Frank. Fortunately, however, 
the Commissions have the flexibility to determine the effective dates 
for those finalized rules.
    In a series of recent meetings, representatives of the Futures 
Industry Association (the ``FIA''), the Financial Services Forum, the 
International Swaps and Derivatives Association (``ISDA'') and the 
Securities Industry and Financial Markets Association (``SIFMA'' and 
together, the ``Associations'') \1\ have discussed with CFTC Chairman 
Gensler, CFTC Commissioner Sommers, CFTC Commissioner Dunn and their 
staffs, as well as with the SEC staff, the significant practical 
hurdles to implementing this new regulatory structure for Swaps, the 
interdependencies of the key portions of that structure and the 
Associations' suggested approaches to a phased-in implementation 
schedule. Attached are two timelines we provided to the Commissions at 
these meetings. In light of those discussions, and at the CFTC's 
request, this letter lays out key principles for the development of a 
phase-in schedule.
---------------------------------------------------------------------------
    \1\ Further information on the Associations is available in 
Appendix A.
---------------------------------------------------------------------------
    Our six key principles are:

    1. Provide time for market infrastructure and business operations 
        to implement the final rules to avoid disruption in the Swap 
        markets. New market infrastructure and technologies, including 
        central clearing services, data reporting services and trading 
        platforms, will be required to give effect to the new Swap 
        regulatory regime. Unless sufficient time is allotted for these 
        components of market infrastructure and technologies to 
        adequately develop, all market participants (and particularly 
        end-users) will face interruptions in their ability to enter 
        into Swaps to hedge their business risks or manage investments 
        to meet client objectives.

    2. Prioritize data reporting to regulators to inform future 
        rulemaking. The Commissions should prioritize implementation of 
        data reporting, including registration of Swap data 
        repositories (``SDRs''), to regulators ahead of real-time 
        reporting and other requirements, including public reporting. 
        The Commissions will learn much about the full range of Swap 
        markets from the data collected by SDRs. This knowledge will be 
        essential in developing rules that meet Dodd-Frank's 
        requirements while still allowing for active and liquid Swap 
        markets.

    3. Phase-in requirements by type of market participant and asset 
        class. The Commissions should phase in requirements based on 
        the state of readiness of each particular asset class 
        (including, where applicable, by specific products within an 
        asset class) and market participant type. However, the 
        Commissions should allow and encourage the development of 
        necessary infrastructure on a voluntary basis for less-
        developed asset classes and any interested market participants, 
        regardless of size, even as these requirements are being phased 
        in on a mandatory basis for others.

    4. Within each asset class and type of market participant, 
        prioritize reduction of systemic risk. Within each asset class 
        and type of market participant, the Commissions' top priority 
        should be to implement requirements that reduce systemic risk, 
        such as the use of centralized Swap clearinghouses. 
        Implementation of requirements designed to achieve other goals, 
        such as trade execution, should be phased in only once clearing 
        has been successfully implemented. Other requirements for which 
        SDR-collected data is crucial, such as public real-time 
        reporting, should follow.

    5. Allow time for adequate testing by, outreach to and education of 
        customers and for changes to customer relationships. Dealers, 
        major Swap participants, asset managers, technology and systems 
        providers, and the Commissions will need to engage in a 
        concerted effort over a period of time to educate their clients 
        and the market about the changes in business and regulatory 
        practices that the new rules will require. The Commissions 
        should provide adequate time for these important tasks as part 
        of any implementation schedule.

    6. Where different regulators will apply different rule sets to 
        similar transactions, sequence implementation so that 
        effectiveness of each rule set is coordinated across 
        interrelated applicable rule sets. Application of provisions of 
        Title VII to the diversity of Swaps and market participants 
        will involve the interaction of rules relating to different 
        asset classes and products as well as differences among rules 
        imposed by different U.S. regulators and regulators in 
        different countries. Understanding these interactions and 
        sequencing implementation of the rules accordingly will create 
        a more robust regulatory structure.

    These principles have been informed by the experience of the firms 
represented by the Associations in implementing significant market 
reforms, including Europe's move to the Euro currency, development of 
new clearing systems, the implementation of MiFID I, changing capital 
requirements under Basel rules, equity decimalization, and the 
introduction of TRACE, to name a few. Our member firms' experiences in 
developing systems, technological connections, policies and procedures, 
documentation and other changes in response to these prior changes lead 
us to believe that the tasks involved in implementing Title VII are 
monumental.\2\
---------------------------------------------------------------------------
    \2\ Although not all rules have yet been proposed, it is essential 
to address implementation sequencing and phase-in schedules now. It is 
worth noting, however, that we and our members are also still focused 
on many critical issues raised by Title VII and the rules proposed by 
the Commissions so far. These include, by way of example, key 
definitions, extraterritorial application, segregation requirements for 
customer collateral, margin and capital requirements, and achieving 
consistency, to the extent appropriate, between the rules of the two 
Commissions and those of international regulators. We will continue to 
participate in the public rulemaking process with respect to these and 
other issues, even as we suggest appropriate implementation timing for 
those rules.
---------------------------------------------------------------------------
    As we discuss further in this letter, there are significant 
interdependencies among many of the rules, and many market participants 
do not yet know whether or how the new rules will apply to them. We 
believe the CFTC has taken a positive step toward addressing the need 
for market participants to assess the full mosaic of rules by reopening 
Title VII comment periods for 30 days.\3\ We are concerned, however, 
with the significant possibility that the final rules will differ 
substantively from the rules as proposed in ways that present, when 
viewed as a whole, important new issues. While these differences may 
not rise to the level that would require a re-proposal of the rules 
under the Administrative Procedures Act, we nonetheless are concerned 
that they may merit reconsideration by market participants and the 
public at the time that all rules have been put in final form.
---------------------------------------------------------------------------
    \3\ Reopening and Extension of Comment Periods for Rulemakings 
Implementing the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, 76 Fed. Reg. 25274 (May 4, 2011) (extending comment period for 
rule makings until June 3, 2011).
---------------------------------------------------------------------------
1. Provide time for market infrastructure and business operations to 
        implement the final rules to avoid disruption in the Swap 
        markets.
    Title VII requires the development of significant new Swap market 
infrastructure, including SDRs, clearinghouses and trade execution 
facilities. As a result of strenuous efforts in recent years, key 
building blocks for parts of this infrastructure exist for certain 
asset classes of Swaps. However, even this existing infrastructure will 
need to be significantly changed in response to the Title VII and the 
Commissions' final rules. For example, existing data repositories will 
need to update their data fields to conform to requirements in the 
final rules, and existing Swap clearinghouses will need to make 
significant modifications to their models to comply with rules 
regarding the protection of customer collateral. Title VII will also 
require the development of entirely new trading platforms, such as Swap 
execution facilities.
    In addition, Title VII requires enormous changes to the business 
operations of market participants. Swap dealers and major Swap 
participants (``Swap Entities'') will need to conform their reporting, 
clearing and trading processes to the final rules, as well as comply 
with complex rules relating to position limits, documentation and 
record-keeping. These requirements will affect the compliance, legal, 
technology, front-office, trading desk, human resources and other 
departments within Swap Entities. While some Swap Entities have begun 
to organize themselves for implementation of Title VII, such efforts 
are very preliminary as no rules have been finalized. The Commissions 
must provide sufficient time for all of these steps to proceed in an 
orderly manner. The amount of time this will take is highly dependent 
on the final form of the rules. In particular, if existing systems are 
not easily adaptable to the Commissions' ultimate requirements, more 
time will be needed.\4\ Clients will similarly need to make significant 
modifications to their businesses, including changes to the 
documentation that governs their relationships with Swap Entities. In 
many cases, these changes may require board authorization. Since boards 
may only meet periodically, this may result in further delay.
---------------------------------------------------------------------------
    \4\ Beyond this, the Title VII rules and other financial reform 
changes (such as the Basel III regulatory capital standards) are 
causing Swap Entities and the organizations of which they are a part to 
evaluate the corporate structures that will enable them to provide the 
highest degree of service and continuity to clients while effectively 
managing risk. Adapting such structures requires additional independent 
systems, compliance and documentation implications.
---------------------------------------------------------------------------
    These two types of changes--market infrastructure and business 
practices--are interdependent. In the area of clearing, for example, 
Swap clearinghouses will need to develop rules that meet the 
Commissions' requirements and obtain requisite approval of those rules. 
Potential clearing members will need to understand the new rules put 
into place by each Swap clearinghouse, determine which Swap 
clearinghouses to join as clearing members, negotiate appropriate 
documentation, set up technological connections and develop clearing 
offerings for their clients. Non-members, including many buy-side 
firms, will need to understand the rules put into place by each Swap 
clearinghouse, determine which Swap clearinghouses they are comfortable 
with, evaluate which Swap clearinghouses clear certain products, choose 
clearing members to clear through, negotiate documentation with 
clearing members, and create any necessary technological connections 
with clearing members. Legal documentation, treatment of collateral, 
margin requirements, account setup, and fee negotiations, for example, 
between the Swap clearinghouses and their clearing members will take 
significant time.
    In addition, the amount of time it will take to implement this 
infrastructure is highly dependent on market readiness. All end-users 
will need to clear their trades at a limited number of Swap 
clearinghouses through a limited number of dealers offering clearing 
services. If the Commissions do not provide sufficient time for this to 
occur, bottlenecks are sure to develop, with asset managers, for 
example, unable to process accounts at Swap clearinghouses overwhelmed 
with an influx of documentation and applications. The result will be 
disruption of trading as these money managers, or similar entities, 
will be unable to enter into Swaps that they legally would be required 
to clear but operationally cannot.
    Allowing sufficient time for infrastructure and business practices 
to develop will save unnecessary costs. For example, under Title VII, 
SDRs will be required to accept universal, unique identifiers for Swap 
market participants and products, and market participants will be 
required to incorporate these unique identifiers into their reporting 
systems. Systems will be more efficiently designed and implemented if 
universal identifiers are developed and instituted prior to the new SDR 
reporting requirements. The alternative would require Swap Entities to 
redesign reporting systems when unique identifiers were later required.

2. Swap data reporting to regulators should be the first priority for 
        implementation in order to inform future rulemaking.
    SDR reporting to regulators will significantly increase, in the 
near term, the information that the Commissions have at their disposal 
regarding the Swap markets. Armed with a larger set of data, the 
Commissions will be in a better position to adopt rules that achieve 
Dodd-Frank's goals while maintaining active and viable Swap markets. As 
a result, the Commissions should delay finalizing requirements that 
could benefit from the additional knowledge gained from this data until 
SDRs have been established and are operational, and enough time has 
passed to allow sufficient data collection and analysis.\5\
---------------------------------------------------------------------------
    \5\ To maximize the effectiveness of information gathered across 
asset classes from SDR recordation, the Commissions should strive to 
harmonize their reporting requirements. Inconsistencies between the 
CFTC and SEC reporting requirements will significantly complicate 
implementation because swaps and security-based swaps are transacted by 
the same business units of our member firms. For example, the same 
business unit may trade both single-name CDS, which would be subject to 
the SEC's reporting rules, and index CDS, which would be subject to the 
CFTC's. In addition, the Commissions should strive to align their 
reporting requirements with those of international regulators.
---------------------------------------------------------------------------
    For example, we believe that the rules defining block trades are 
extremely important and will have a significant impact on the liquidity 
of the Swap markets. Appropriate block trade thresholds, and therefore 
public real-time reporting requirements, can only be set after SDR 
reporting to regulators has been established and Swap market 
transaction data is carefully analyzed.\6\ Any determination of block 
trade thresholds before that market data is available to regulators 
would be inappropriate. Once the relevant information has been 
collected, the Commissions should begin phasing in real-time reporting 
requirements slowly, beginning with low block trade thresholds, and 
adjust the thresholds as necessary once the impact on the market can be 
assessed.
---------------------------------------------------------------------------
    \6\ The CFTC has proposed a two-part test for determining the block 
trade threshold, which is highly dependent on data about swap 
transactions. Because SDR reporting will increase the amount of 
information available to the Commissions across various markets and 
asset classes, we believe such a rule is premature and should not be 
adopted absent further data.
---------------------------------------------------------------------------
    In the interim, in order to provide the public transparency 
anticipated by Dodd-Frank without risking significantly decreased 
liquidity, the Commissions could require end of day reporting of Swap 
notional size to regulators early in the implementation schedule, 
provided that all trades above a certain notional threshold would be 
reported as ``$X or above.'' After more is known about the Swap markets 
through data collection by SDRs, the thresholds could be adjusted 
slowly while the effect on market liquidity is studied.
    Similarly, it is important for the Commissions to understand the 
Swap markets, through analytical data analysis, before adopting 
commodity position limits that restrict the Swap positions market 
participants can take. Otherwise, the Commissions might unwittingly set 
commodity position limits so low as to disallow legitimate and 
desirable activity and inadvertently decrease liquidity, thereby 
negatively impacting pricing.

3. Phase-in requirements by type of market participant and asset class.
    The term ``Swap'' encompasses a wide variety of products in a wide 
variety of asset classes. These products have different attributes, 
including differing levels of standardization, liquidity and existing 
market infrastructure. As a result, some products are more ready for 
centralized clearing and electronic execution than others. For example, 
certain commodity and interest rate products are already quite liquid 
and standardized and have been subject to inter-dealer clearing for 
several years. On the other hand, certain foreign exchange, credit and 
equity Swaps are less standardized and are generally transacted 
bilaterally. We believe that the Commissions should require clearing, 
reporting and electronic execution for the ``better-prepared'' asset 
classes first and should provide ample time for the maturation of those 
asset classes and products that are not yet at that stage.
    Sequencing that reflects these differences would allow the 
Commissions and market participants to understand and solve the 
problems that arise in these relatively less complex, more liquid 
products before moving on to more complex, less liquid products. For 
example, issues relating to client clearing can be more readily worked 
out in the interest rate swap market where inter-dealer clearing 
already exists; lessons learned there can then be applied to the 
clearing of other Swap categories, which will require new clearing 
methodologies even for the inter-dealer market.
    In addition, the Commissions' rules under Title VII will affect a 
wide variety of market participants, ranging from market makers, to 
financial end-users that use Swaps for portfolio risk-management 
purposes, to commercial enterprises that use Swaps to hedge business 
risks. These market participants vary dramatically in their resources, 
market sophistication and rationale for using Swaps. Swap Entities, in 
general, have greater resources, access to technology and clearing 
infrastructure than their end-user counterparties. Consequently, the 
inter-dealer market, which already uses central clearing extensively 
for interest rate and credit products, may be able to adjust more 
quickly than some other markets to new Title VII requirements.
    Much like phased implementation by product, phased implementation 
by type of market participant will allow the Commissions and market 
participants to use lessons learned from larger market participants 
when developing rules applicable to end-users. For example, inter-
dealer clearing within each asset class should be required before 
customer clearing, so that the lessons learned from the inter-dealer 
experience can be applied to customers before the additional 
complications that customer clearing brings, such as the protection of 
customer collateral, are fully tackled. This is not to say that the 
customer clearing systems should not be built in parallel; the 
Commissions should encourage a move to Title VII-compliant activity 
across all market participants and products and market participants 
should be permitted to clear prior to the required dates if they are 
ready and willing to do so. However, the Commissions, for example, 
should not require clearing by any end-users until the inter-dealer 
experience within each asset class is well-established and understood.

4. Within each asset class and type of market participant, prioritize 
        reduction of systemic risk.
    A principal objective of Title VII of Dodd-Frank is the reduction 
of systemic risk in the financial markets. As a result, the Commissions 
should, within each asset class and type of market participant, 
prioritize implementation of requirements that reduce systemic risk 
ahead of other requirements.
    As an example, Dodd-Frank requires central clearing of Swaps to 
decrease systemic risk. As a result, clearing should be prioritized in 
the phase-in schedule. In contrast, other requirements of Title VII, 
such as electronic execution and public real-time reporting, should be 
implemented after clearing. In fact, implementing these provisions 
prematurely can increase systemic risk. For example, implementing 
mandatory trade execution with overly narrow block exceptions that have 
not been informed by a sufficient amount of analytical data could 
significantly decrease Swap market liquidity, making it more difficult 
for end-users to manage their risks and potentially adding risk to the 
financial system.
    However, even systemic risk-reducing changes must be done 
carefully; simultaneous changes could lead to errors that 
unintentionally result in increased and concentrated systemic risks. 
For example, while central clearing has the potential to significantly 
reduce systemic risk, the fact that a clearinghouse is the counterparty 
to all Swaps it clears means that, if clearinghouse risk management and 
control processes are not sufficiently robust, systemic risk could 
increase in a cleared environment rather than decrease. As discussed 
above, the Commissions should strive to minimize such unintended 
consequences by sequencing effectiveness of requirements with ample 
time for thoughtful and careful implementation supported by sufficient 
analytical data.
    The existence of a robust set of cleared swaps is also a 
prerequisite for implementation of margin requirements. Initial margin 
requirements will be significantly higher for noncleared Swaps 
(proposed to cover 99% of movements over a 10 day window) than for 
cleared Swaps (which generally seek to cover 95% or 99% of movements 
over a 3-5 day range). Implementing these margin requirements for 
noncleared Swaps before Swap clearinghouses are operational would force 
market participants to post inappropriately high levels of margin to 
enter into Swaps that they would otherwise be interested in clearing.

5. Allow time for adequate education of customers and for modifications 
        to customer relationships, including documentation.
    Dealers, major Swap participants, asset managers and the 
Commissions will need to engage in a concerted effort over a period of 
time to assist customers and other market participants in understanding 
the changes in business and regulatory practices that the new rules 
will require. Furthermore, key market practices will further evolve as 
new market infrastructure is put into place. A flexible approach to 
rulemaking and implementation will provide customers the necessary 
opportunity to understand these ongoing changes and their own 
regulatory obligations.
    For example, while dealers and asset managers have been 
anticipating Title VII's changes in regulatory structure, they will 
face an enormous task of educating their clients that can only commence 
once final rules are known and forms of documentation are finalized. 
These entities may have thousands of clients with a wide range of 
sophistication. For example, asset manager clients include pension 
funds and other tax exempt entities. Dealers and asset managers will 
each play a role in helping inform their clients not only about Title 
VII and the Commissions' rules, but about the rules and changes to 
their transactions that will result from the use of new clearinghouses, 
trade execution platforms and SDRs.

6. Where different regulators will apply different rule sets to similar 
        transactions, sequence implementation so that effectiveness of 
        each rule set is coordinated across interrelated applicable 
        rule sets.
    Swap businesses will, in many cases, be subject to regulation by 
both Commissions. Infrastructure providers and market participants will 
need to develop systems and procedures to comply with rules from both 
Commissions. To the extent there are substantively different rules 
applied by the two Commissions, implementation and compliance systems 
will need to be designed to track and account for these differences.
    In addition, given the global nature of today's financial markets, 
it is unclear to what extent foreign regulation, in addition to 
regulation by the Commissions, may affect U.S. Swap market 
participants. In each case, it would be premature to implement any 
requirements where there remains uncertainty as to other potentially 
applicable requirements. For example, it is uncertain what would happen 
if one of the Commissions and its foreign counterpart both required 
that the same transaction be cleared but did not have common permitted 
clearinghouses.
    We believe that the Commissions and other U.S. regulatory agencies 
should anticipate where the rulemaking may overlap, and possibly 
conflict, and make every effort to actively coordinate with each other 
and with foreign regulators both as to harmonizing the substance of 
related regulations and the timing of their implementation. Otherwise, 
the development of the Swap markets will be vulnerable to false starts, 
significant revisions and inefficiencies, and possible regulatory 
arbitrage across, or the flight to, other jurisdictions.
    The Associations are grateful for the opportunity to comment to the 
Commissions regarding these important issues. Please feel free to 
contact the Associations should you wish to discuss this letter.
            Sincerely,

Financial Services Forum;
Futures Industry Association;
International Swaps and Derivatives Association;
Securities Industry and Financial Markets Association.

CC:

Hon. Gary Gensler, Chairman;
Hon. Bart Chilton, Commissioner;
Hon. Michael Dunn, Commissioner;
Hon. Scott O'Malia, Commissioner;
Hon. Jill E. Sommers, Commissioner;
Commodity Futures Trading Commission.

Hon. Mary L. Schapiro, Chairman;
Hon. Luis A. Aguilar, Commissioner;
Hon. Kathleen L. Casey, Commissioner;
Hon. Troy A. Paredes, Commissioner;
Hon. Elisse B. Walter, Commissioner;
Securities and Exchange Commission.
Credit







    Key:

      FEU = Financial End User
      SDR = Swap Data Repository
      CEU = Corporate End User
      EOD = End of Day
      RTR = Real Time Reporting

b The sequencing is illustrative and for discussion purposes only; it is
 dependent on many yet unsettled factors, including, but not limited, to
 the substance of final rules. The charts were prepared by the
 Associations in response to a request for discussions on approaches to
 phasing-in of implementation, not a specific timetable for
 implementation.


Interest Rates







    Key:

      FEU = Financial End User
      SDR = Swap Data Repository
      CEU = Corporate End User
      EOD = End of Day
      RTR = Real Time Reporting


b The sequencing is illustrative and for discussion purposes only; it is
 dependent on many yet unsettled factors, including, but not limited, to
 the substance of final rules. The charts were prepared by the
 Associations in response to a request for discussions on approaches to
 phasing-in of implementation, not a specific timetable for
 implementation.


                               APPENDIX A

    FIA is a principal spokesman for the commodity futures and options 
industry. FIA's regular membership is comprised of approximately 30 of 
the largest futures commission merchants in the United States. Among 
its associate members are representatives from virtually all other 
segments of the futures industry, both national and international. 
Reflecting the scope and diversity of its membership, FIA estimates 
that its members effect more than eighty percent of all customer 
transactions executed on United States designated contract markets. For 
more information, visit www.futuresindustry.org.
    The Financial Services Forum is a non-partisan financial and 
economic policy organization comprising the CEOs of 20 of the largest 
and most diversified financial services institutions doing business in 
the United States. The purpose of the Forum is to pursue policies that 
encourage savings and investment, promote an open and competitive 
global marketplace, and ensure the opportunity of people everywhere to 
participate fully and productively in the 21st-century global economy.
    ISDA was chartered in 1985 and has over 800 member institutions 
from 54 countries on six continents. Our members include most of the 
world's major institutions that deal in privately negotiated 
derivatives, as well as many of the businesses, governmental entities 
and other end-users that rely on over-the-counter derivatives to manage 
efficiently the risks inherent in their core economic activities. For 
more information, visit www.isda.org.
    SIFMA brings together the shared interests of hundreds of 
securities firms, banks and asset managers. SIFMA's mission is to 
support a strong financial industry, investor opportunity, capital 
formation, job creation and economic growth, while building trust and 
confidence in the financial markets. SIFMA, with offices in New York 
and Washington, D.C., is the U.S. regional member of the Global 
Financial Markets Association. For more information, visit 
www.sifma.org.

    Mr. Neugebauer. Thank you. And now Mr. Thompson.

 STATEMENT OF LARRY E. THOMPSON, MANAGING DIRECTOR AND GENERAL 
COUNSEL, THE DEPOSITORY TRUST & CLEARING CORPORATION, NEW YORK, 
                               NY

    Mr. Thompson. Chairman Conaway, Ranking Member Boswell, and 
Members of the Subcommittee, I am Larry Thompson, the General 
Counsel of The Depository Trust & Clearing Corporation, DTCC, a 
participant owned and governed utility that in 2010 settled 
approximately $1.7 quadrillion in securities transactions.
    Since 2006, DTCC has developed a Trade Information 
Warehouse, a global electronic database that has virtually all 
position data on credit default swaps constituting 
approximately 2.3 million contracts from around the world with 
a notional value of $29 trillion. We share Congress's goal of 
ensuring more transparent markets, global regulatory oversight, 
and systemic risk mitigation. Today I would like to make three 
points.
    First, transparent access to comprehensive consolidated 
market data for all regulators is the key to mitigate systemic 
risk in the global swaps markets. Second, providing 
transparency must be a cooperative effort among global 
regulators. Finally, the indemnification provisions in Dodd-
Frank could negatively impact global market transparency and 
regulatory harmonization.
    With respect to our first point, last year market 
participants and regulators worldwide agreed on a more 
structured and harmonized approach to the reporting and 
disclosure of this data under the auspices of the OTC 
Derivatives Regulators' Forum which is comprised of nearly 50 
regulators and other authorities worldwide including all of the 
major regulators and central banks in the U.S. and in Europe.
    The Warehouse provides regulators a model for how 
comprehensive global CDS data can be made available to offer 
greater transparency and more effective management of systemic 
risk. Aggregated market data is among the information now 
available to global regulators through the Warehouse's direct 
online portal. This information is available to regulators to 
review through either standard or customized reports to make 
the regulatory oversight role more robust and efficient. Today, 
over 25 regulators around the world have registered and are 
active on the portal.
    Our second point highlights the importance of global 
regulatory cooperation. The creation of an integrated warehouse 
of CDS data was only possible because of such cooperation. 
Going forward, it is an absolute necessity that the United 
States, the European Union and other major global markets align 
their regulatory regimes to limit arbitrage opportunities that 
distort markets.
    If the result of the global regulatory process does not 
ensure regulatory cooperation, data will be fragmented 
inevitably resulting in misleading reporting of exposures, 
uncertain risk concentration reports, and a decreased ability 
to identify systemic risk for both the regulators and 
marketplace generally.
    Last and most importantly, DTCC remains deeply concerned 
about the indemnification provisions of Dodd-Frank, which 
require that depositories obtain indemnification from foreign 
regulators before sharing information. We believe that this 
provision which was entered into the legislation late in the 
process without hearings or discussion will significantly 
impede global regulatory cooperation. The indemnity requirement 
creates the unintended consequence of giving foreign 
jurisdiction an incentive to create local repositories in order 
to avoid indemnification.
    Proliferation of local repositories around the world would 
make it difficult to obtain aggregated data for any particular 
asset class which in turn will impair market and regulatory 
oversight, create inconsistencies in the data, frustrate data 
analysis, and increase systemic risk. In addition, foreign 
regulators appear unlikely or unable to grant repositories 
indemnification in exchange for access to information.
    DTCC encourages thoughtful solutions to the potential 
negative consequences of the existing indemnification 
requirement. Risk mitigation is central to our mission. DTCC 
has a unique perspective to share and appreciates the 
opportunity to testify before you today. I look forward to 
answering any questions that the Subcommittee may have. Thank 
you.
    [The prepared statement of Mr. Thompson follows:]

Prepared Statement of Larry E. Thompson, Managing Director and General 
   Counsel, The Depository Trust & Clearing Corporation, New York, NY

    Chairman Conaway, Ranking Member Boswell, and Members of the 
Subcommittee:

    My name is Larry Thompson. I am General Counsel of The Depository 
Trust & Clearing Corporation (``DTCC''). DTCC is a participant-owned 
and governed ``utility'' supporting the financial services industry. 
Through its subsidiaries and affiliates, DTCC provides clearing, 
settlement and information services for virtually all U.S. transactions 
in equities, corporate and municipal bonds, U.S. Government securities 
and mortgage-backed securities and money market instruments, mutual 
funds and annuities. It also provides services for a significant 
portion of the global over-the-counter (``OTC'') derivatives market. To 
give you some idea of the magnitude of DTCC's involvement in U.S. 
capital markets, in 2010, the Depository Trust Company (``DTC'') 
settled more than $1.66 quadrillion in securities transactions.
    Since 2003, DTCC has been working with financial market 
participants and with regulators--our two core constituencies--to 
automate the trade confirmation process for credit default swaps 
(``CDS''), essentially replacing a manual error-prone process, where 
only 15% of all CDS trades were matched, with a process whereby 
virtually all CDS trades are matched through an automated system 
provided by DTCC.
    The result of that effort was DTCC's move in 2006 to create the 
Trade Information Warehouse (``TIW'' or ``Warehouse''). The Warehouse 
is a centralized, comprehensive global electronic data repository 
containing detailed trade information for the global CDS markets. The 
TIW database currently represents about 98% of all credit derivative 
transactions in the global marketplace. It holds approximately 2.3 
million separate contracts with a gross total notional value of $29 
trillion and has operations in both the U.S. and the European Union.
    I appreciate the opportunity to share DTCC's thoughts on the 
harmonization of global derivatives reform. In particular, my comments 
today will focus on issues raised by the Dodd-Frank Act's creation of a 
swap data repository (``SDR'') system and the international framework 
for information data sharing and connectivity among these repositories.
    Based on our experience in constructing and managing the world's 
first and most comprehensive global derivatives repository, DTCC is 
convinced that a properly constructed SDR system will play a 
fundamental role to promote more transparent markets for global 
regulatory oversight and systemic risk mitigation, protect the public 
and help ensure liquid and efficient capital markets.

Summary of Critical Points
    DTCC will highlight three points on harmonizing global derivative 
reform that focus on the Subcommittee's key agenda items today. Each 
point has a fundamental impact on U.S., and global, market 
competitiveness:

1. Transparent Access to Comprehensive, Consolidated Market Data for 
        All Regulators is the Key to Any Attempt to Mitigate Systemic 
        Risk in the Global Swap Markets
    It is critical that regulators worldwide be able to access the core 
infrastructure and consolidated asset class databases to protect 
against the build up of systemic risk.
    Last year, market participants and regulators worldwide agreed on a 
more structured and harmonized approach to the reporting and disclosure 
of this data under the auspices of the OTC Derivatives Regulators' 
Forum (``ODRF''). ODRF is comprised of nearly 50 regulators and other 
authorities worldwide including all of the major regulators and central 
banks in the U.S. and Europe. Today, through the development of the 
Warehouse, DTCC offers these regulators a model for how a comprehensive 
global CDS data set can be made available to offer greater transparency 
and more effective management of systemic risk. This model was designed 
by DTCC with direct input from global regulators through the 
cooperative efforts of the ODRF, with over 1,700 participants in the 
CDS market from over 50 member countries.
    The Warehouse provides comprehensive standard position risk reports 
to appropriate authorities worldwide (as well as responding to over 100 
ad hoc requests from such authorities last year). DTCC recently 
launched an automated portal to provide regulators worldwide with 
direct, on-line access to global CDS data registered in the TIW. The 
information available in the portal is precisely the aggregated, 
current, accurate information that regulators need to monitor and 
identify systemic risks to the financial markets, across jurisdictions.
    Over 25 regulators around the world have registered and are active 
on the portal. This is the first such global regulatory service of its 
kind in the financial market place. The portal allows for each 
registered regulator to access reports tailored to their specific 
entitlements as a market regulator, prudential or primary supervisor, 
or central bank. These detailed reports are created for each regulator 
to show only the CDS data relevant to the individual regulator's 
jurisdiction, regulated entities or currency.
    As an example, had the CDS Warehouse system for reporting and 
disclosure of data created through these cooperative efforts been 
operational in 2008, and applied over the complete global data set 
subsequently created, regulators would have had consolidated data and 
aggregate risk concentrations sufficient to have had an early warning 
of the build-up of American International Group's positions.
    To ensure that consolidated asset class data remains readily 
available for regulators and provides the information needed to make 
decisions about future entities, which acquire positions that are 
systemically risky, it is vital that rules are put in place that are 
consistent between jurisdictions. Equally as important, these rules 
must be implemented in such a way that ensures a consistent 
implementation time frame among jurisdictions to prevent potential 
arbitrage in inconsistent application of repository rules.
    For CDS, the comprehensive global market information that DTCC is 
now able to publish includes, among other things, net market-wide 
exposures to each CDS index and index tranche, as well as market-wide 
exposures to each of the top 1,000 individual corporate and 
governmental entities on which CDS are written (top 1,000 ranked by 
size of exposure). This allows market participants, regulators and the 
public to assess risks, in real-time, on the basis of comprehensive 
data to enable them to develop much more informed views. The published 
data also indicates which broad category of market participants holds 
what positions in relation to important areas of the market, such as 
overall exposure to sovereign debt, corporate debt and other broad 
categories, although not in such detail as would threaten to disclose 
the identity of position holders.
    Had this global and sector-based market information been available 
and published in the run-up to the 2008 crisis, much of the exposure 
uncertainty that contributed to market instability at the time, at 
least in the CDS market, might have been mitigated.

2. Providing Transparency is a Cooperative Effort Among Global 
        Regulators
    The creation of an integrated warehouse of CDS data would not have 
been possible without the substantial and unprecedented degree of 
global regulatory cooperation achieved through the ODRF and the OTC 
Derivatives Regulators Supervisors Group (``ODSG'').
    This process worked because the entity operating the repository, in 
this case DTCC, is not a traditional commercial entity. By removing 
commercial concerns from what is and should remain primarily a 
regulatory and supervisory utility support function, the Warehouse was 
to able provide a central place for data to be reported and for 
regulators to access it for both market surveillance and risk 
surveillance purposes, simultaneously helping both the regulators and 
market participants.
    DTCC believes it is an absolute necessity that the United States, 
the European Union and the other major global markets align their 
regulatory regimes to limit arbitrage opportunities that distort 
markets. As the Securities and Exchange Commission (``SEC'') and 
Commodity Futures Trading Commission (``CFTC'') continue to work 
through the Dodd-Frank Act rulemaking process, DTCC urges both 
Commissions, in their regulation of SDRs, to aim for regulatory comity 
as has already been achieved by the ODRF and as may be further agreed 
to by such other international bodies as the Committee on Payment and 
Settlement Systems (``CPSS'') and the International Organization of 
Securities Commission (``IOSCO'').
    As an industry-governed utility, with buy-side firms, sell-side 
firms and self-regulatory organizations as stakeholders, DTCC has been 
able to secure the cooperation of all relevant market participants, 
clearers, and trading platforms with any significant volume. This 
comprehensive base has made the Warehouse effective.
    As discussed at the recent SEC-CFTC joint roundtable on Dodd-Frank 
implementation, even representatives of buy-side firms recognize the 
importance for consolidated reporting of swap information to a central 
location for systemic risk oversight purposes over the life of a 
transaction. Participants from firms such as Loomis, Sayles & Company 
and The Vanguard Group, who represent investors around the world, have 
encouraged regulators to adopt globally consistent rules.
    The global SDR framework which emerges from the Dodd-Frank and 
European regulatory processes must ensure that this kind of 
comprehensive data, as maintained in the Warehouse for all derivatives 
markets on a global basis, is expanded.
    If the result of the global regulatory process does not ensure 
regulatory cooperation or the cooperation of market participants and 
their respective clearers and trading platforms, both the published and 
regulator-only accessible data would be fragmented, inevitably 
resulting in misleading reporting of exposures, uncertain risk 
concentration reports and a decreased ability to identify systemic risk 
for both the regulators and the marketplace generally.
    Fragmentation of data--either by asset class or jurisdiction--would 
leave to regulators the task of rebuilding in multiple instances the 
complex data aggregation and reporting mechanisms (including extra-
territorial trades on locally relevant underlyings). That task was one 
of the primary reasons that the industry and regulators themselves 
created a single place for the CDS data within the TIW.
    An important issue that U.S. and global regulators need to address, 
particularly as the implementation of the Dodd-Frank Act results in the 
growth of SDRs globally, is how to best handle data collected by an SDR 
where the trade would not be reportable to U.S. regulators under the 
statute, by virtue of where it took place or the counterparties 
involved.
    In this regard, DTCC points to the guidance in a letter from the 
ODRF membership \1\ related to global regulator access to TIW data.\2\ 
The ODRF letter contemplates a U.S. regulator (SEC or CFTC) receiving 
data from the TIW that goes beyond the scope of information proposed by 
the Dodd-Frank Act or the agencies' proposed rules, such as data 
related to overseas transactions entered into by non-U.S. persons on 
U.S. underlyings. Today, the TIW routinely provides this transaction 
data to U.S. regulators (and conversely, routinely provides data 
related to transactions in the U.S. by U.S. persons on European 
underlyings to European regulators), as contemplated by the ODRF 
regulatory standards. This spirit of cooperation and coordination 
between regulators around the world must be preserved and expanded. 
Without such cooperation, the SEC's or CFTC's ability to routinely 
receive details of purely European transactions written on U.S. 
underlyings would be frustrated.
---------------------------------------------------------------------------
    \1\ Authorities Currently Involved in the OTC Derivatives 
Regulators' Forum. Available at: http://www.otcdrf.org/about/
members.htm.
    \2\ See letter from OTC Derivatives Regulators' Forum to the 
Warehouse Trust Company, dated June 18, 2010. Available at: http://
www.dtcc.com/downloads/legal/imp_notices/2010/derivserv/tiw044.zip.
---------------------------------------------------------------------------
    The role of aggregating SDR information is critical in that it 
ensures regulators have efficient, streamlined access to consolidated 
data, reducing the strain on limited agency resources. International 
financial regulators have identified this approach as a valuable one, 
noting that:

        ``Authorities should ensure that [SDRs] are established that 
        provide aggregate global coverage of the global derivatives 
        market and that the data collected can be aggregated so as to 
        provide a comprehensive view of the market. The establishment 
        of uniform data standards and functional requirements for data 
        exchange will be a necessary condition for authorities to have 
        a timely and consistent global view for assessing and analyzing 
        the OTC derivatives markets. One beneficial solution would be 
        to establish a single global data source to aggregate the 
        information from [SDRs] [emphasis added].'' \3\
---------------------------------------------------------------------------
    \3\ Financial Stability Board, Implementing OTC Derivatives Market 
Reforms. October 25, 2010. Available at: http://
www.financialstabilityboard.org/publications/r_101025.pdf.

    Aggregated market data is among the information now available to 
global regulators through the Warehouse's direct, on-line portal. This 
information is available for regulators to review through either 
standard or customized reports to make the regulatory oversight role 
more robust and efficient.
    The challenge going forward is to bring similar regulatory and 
public transparency to other parts of the swap markets.\4\ Given the 
need to move expeditiously and to assure the continuation of the 
necessary cooperative attitude among multiple regulators, market 
participants, clearinghouses and trading platforms worldwide, DTCC 
urges that regulatory focus be on expanding the existing cooperative 
achievements of providing both regulatory and public transparency to 
the swap markets. Such cooperative efforts take some minimal amount of 
time to implement safely and soundly (experience suggests a minimum of 
24-36 weeks if all participants cooperate). If there is a lack of 
cooperation, it could take significantly longer.
---------------------------------------------------------------------------
    \4\ There are two other global swap repositories in existence 
today, one for OTC equity derivatives operated by DTCC in London and 
one for OTC interest rate derivatives operated by TriOptima in Sweden. 
These repositories, however, were designed solely as a means to 
facilitate certain high-level position reporting by the major global 
dealers and do not hold sufficient data to meet the regulatory needs 
specified by either the Dodd-Frank Act or the ODRF (including both 
market surveillance and risk surveillance), which have superseded the 
initial requirements set forth for these entities.
---------------------------------------------------------------------------
    As a user governed and regulated utility servicing most of the 
major regulators worldwide, DTCC believes that market participants and 
regulators are poised to undertake the significant cooperative effort 
necessary to provide complete transparency to these markets as 
contemplated by the Dodd-Frank Act.
    DTCC encourages the Subcommittee, in exercising its oversight 
responsibilities, to focus on removing obstacles to this regulatory 
process and to continue to use proven infrastructure in a manner that 
distinguishes the SDR function from purely commercial considerations 
and jurisdictional quarrels, which could hinder the cooperative 
attitude that has made progress possible thus far.

3. The Indemnification Provision in the Dodd-Frank Act Could Negatively 
        Impact Global Market Transparency and Regulatory Harmonization
    Consistent with the need for global regulatory cooperation in 
ensuring access to the data necessary to protect against systemic risk, 
DTCC is deeply concerned about the indemnification requirements in the 
data security provisions of Sections 728 and 763 of the Dodd-Frank Act, 
and DTCC has expressed these concerns throughout the regulatory 
process.
    The Dodd-Frank Act requires that repositories obtain 
indemnifications from foreign regulators before sharing information. 
There was no legislative history behind this provision, which was 
incorporated very late in the legislative process, nor was the 
indemnification requirement considered in the hearing process. The 
resulting language was not subject to the necessary extensive 
discussion and consideration prior to the enactment of the Dodd-Frank 
Act, and its negative ramifications were not made clear. DTCC believes 
that the indemnification provision will significantly impede global 
regulatory cooperation.
    The indemnity requirement creates the unintended consequence of 
giving foreign jurisdictions an incentive to create local repositories 
in order to avoid indemnification. Proliferation of local ``national'' 
repositories around the world would make it very difficult to obtain 
aggregated data for any particular asset class, impair market and 
regulatory oversight, create inconsistencies in data, frustrate data 
analysis and increase systemic risk.
    Foreign regulators appear unlikely or unable to grant DCOs or SDRs 
indemnification in exchange for access to information. Accordingly, 
regulators may be less willing to access the aggregated market data or 
establish the development of local repositories, resulting in a 
reduction of information consumption, domestically and internationally, 
which jeopardizes market stability.
    Perhaps unsurprisingly, the European Parliament is poised to adopt 
retaliatory legislation this week (24th May) as part of the European 
Commission's proposed Regulation on `OTC Derivatives, clearing houses 
and trade repositories,' known as ``EMIR'' (European Market 
Infrastructure Regulation). Should this amendment survive the 
``trialogue'' \5\ process, U.S. regulators, like the CFTC and the SEC, 
will be required to indemnify EU SDRs and EU regulators in order to 
access data held in EU-based repositories (e.g., equity derivatives and 
interest rates repositories).
---------------------------------------------------------------------------
    \5\ Trialogue is the three-way negotiation on the final form of the 
regulation undertaken between the European Parliament, the Council of 
the EU and the European Commission.
---------------------------------------------------------------------------
    The underlying legislative intent of the Dodd-Frank Act could 
therefore be subverted by the legislative language, preventing the 
exchange of information between regulators and frustrating efforts to 
identify and mitigate international financial risk and fragment 
regulatory oversight on a jurisdiction-by-jurisdiction basis.
    DTCC encourages thoughtful solutions to the potential negative 
consequences of the existing indemnification requirement. While 
``technical correction'' legislation would surely deal with this issue, 
given the pace at which swap data repositories will advance over the 
next several months around the world and the potential for retaliatory 
legislation in Europe, DTCC urges the Subcommittee to consider interim 
ways to address this situation including, for example, recognizing 
regulators who operate in a manner consistent with international 
agreements or regulatory forums such as the ODRF, which includes 
maintaining the confidentiality of data. Modification to Sections 728 
and 763 of the Dodd-Frank Act could include provisions that ``deem'' 
compliance with those international agreements or regulatory forums as 
consistent with the indemnification requirement.
    The issue of indemnification has recently gotten the attention of 
your counterparts on the Agriculture Appropriations Subcommittee. 
Congressman Jack Kingston (R-GA) recently remarked on the House floor 
that it is uncertain whether U.S. regulators even have the legal 
authority to indemnify EU trade repositories. Congressman Kingston said 
the indemnification requirement would likely create ``. . . 
fragmentation and information gaps that could meaningfully harm global 
safety and soundness. In light of the EU calendar on indemnification, 
swift action to prevent the unintended consequences of this 
inadequately considered provision of Dodd-Frank is needed.''
    Furthermore, Members of Congress are beginning a dialogue with 
European legislators, indicating that concerns about the 
indemnification provision are being taken seriously in the U.S. and 
that there is recognition in the U.S. that this issue must get resolved 
in order to avoid the resulting fragmentation of data.

Regulatory Status of Trade Repositories--Global Cooperation
    Derivatives markets are inherently cross-border, as participants in 
a transaction are often located in multiple jurisdictions. From the 
outset, DTCC has recognized that the TIW serves a global function and 
the information held by the Warehouse is relevant to regulators in many 
locations. DTCC believes it is important to support regulators around 
the world and has effectively done so since the end of 2008.
    The SDR regime established under the Dodd-Frank Act must recognize 
the global characteristics of OTC derivatives markets. For that reason, 
Congress rightly directed regulators to undertake international 
harmonization, a requirement that should apply fully to the SDR system 
and individual SDRs.
    DTCC has worked closely with the ODRF and agreed to criteria for 
the sharing of data, recognizing the need to have critical data on CDS 
accessible across geographic boundaries and regulatory jurisdictions. 
DTCC has implemented regulatory disclosure processes using those 
criteria and urges the same approach for other asset classes going 
forward.
    DTCC anticipates that global regulators will increasingly recognize 
the overwhelming advantage of identifying risks globally from a central 
vantage point, thereby avoiding data fragmentation, which seriously 
detracts from the management of systemic risk. As the system for the 
use of repositories is developed internationally, it is very important 
for the U.S. to facilitate a result that will place U.S. regulators and 
foreign regulators on an equal footing in their ability to obtain 
information from repositories quickly and without restriction. 
Currently, the international perception is that there is inequality to 
the benefit of U.S. regulatory agencies with respect to the Dodd-Frank 
Act's indemnity provisions, notification and direct access. This 
inequality needs resolution.
    To promote global market transparency, U.S. standards should be 
developed to be compatible with those standards still under development 
in other countries, meeting the needs of both U.S. and foreign 
regulators. Given that risks to the U.S. financial system can be 
impacted by transactions occurring virtually anywhere in the world, it 
is essential that the SEC and CFTC's final regulations create SDRs that 
meet the immediate needs of U.S. regulators and the long-term need of 
global harmonization with the requirements of regulators in Europe and 
other major financial markets. This will ensure that meaningful 
international data continues to be available to U.S. regulators.
    One philosophical and pragmatic question that arises with respect 
to global cooperation is whether market data should be collected and 
held by the private sector and made available to regulators on a pro-
active and as-requested basis or, alternatively, whether governments 
themselves should collect the data and disseminate under treaty and 
information-sharing agreements.
    The model of each government collecting data lacks some of the 
efficiencies of a private sector offering. The industry solution, for 
cost and customer connectivity reasons, will be driven to 
standardization across jurisdictions and the sharing of infrastructure 
to the maximum extent possible. These are not inconsiderable 
undertakings (for example the SEC estimate of costs for industry 
compliance in the first year was in excess of $1 billion). This 
standardization and sharing of infrastructure is positive from a public 
policy perspective as it will also support the aggregation of data for 
public and regulator use.
    The TIW has convincingly demonstrated that global offerings can be 
developed in the private sector, providing cost advantages to customers 
from a connectivity and common infrastructure perspective, across 
jurisdictions. Additionally, key to this model is a sense of 
international cooperation and equal footing for all regulators with 
respect to the data needed directly in relation to areas of their 
regulatory responsibility.

Repositories' Role in Promoting Transparency and Reducing Systemic Risk
    By aggregating information, repositories collect and compile all 
relevant data in order to assure appropriate market transparency and 
effective monitoring of systemic risk. Global repositories have been, 
or are being, established for each OTC derivatives asset class, which 
can provide regulators in the U.S. and around the world real-time 
access to the data necessary to monitor and safeguard financial 
markets.
    DTCC urges Congress, as well as regulators, to carefully consider 
the implications of implementing rules that result in the fragmentation 
of information on outstanding contracts into different repositories in 
different countries on different continents.
    For example, fragmentation of data in multiple national 
repositories would mean that if German regulators have to examine a 
dozen different trade repositories to determine the positions of 
different types of credit default swap contracts that may be 
outstanding on German companies, they may never find all of the 
contracts, certainly not quickly. Contract records could be scattered 
across repositories in the U.S., in Europe, in Japan, in Dubai, in Hong 
Kong and elsewhere. Nor is it likely to be apparent to the regulators 
what they are looking for, since the offsets to contracts residing in 
one database might be residing elsewhere. A contract could easily have 
been written between a Swiss financial institution and an Australian 
financial institution on an underlying German entity, only to be sold 
or assigned to another party located in Brazil. Even if all of the data 
is eventually located, an aggregation facility is required to omit 
duplicate records, verify and then analyze the disparate data.
    All of the information detailed in the above example is currently 
collected in the Warehouse globally. Data is published weekly on all of 
the contracts held, including a breakdown by currency. Moreover, DTCC 
has consistently stated that all interested regulators should have 
access to the data they are entitled to access. Accordingly, DTCC has 
made such data available as appropriate to the regulators involved in 
accordance with the global criteria adopted by the ODRF. All of this 
functional transparency will be undermined if regulators move forward 
with an approach that does not provide for globally consolidated data.
    Global regulators need consolidated reporting across international 
markets. International regulatory guidance for derivatives regulation 
has recognized that aggregated data is vital to provide a comprehensive 
view of derivatives markets. For example, last October, the Financial 
Stability Board suggested that a beneficial solution to the needs of 
regulators throughout the world would be the establishment of ``a 
single global data source to aggregate the information from [SDRs].''
    A system for SDR reporting around the world should be implemented 
promptly--but it must contain mechanisms to facilitate prompt 
consolidation and to avoid fragmentation if it is be effective in 
providing meaningful market surveillance for regulators and risk 
surveillance for markets.

Importance of Unique Legal Entity Identifier (``LEI'')
    DTCC believes that precise and accurate identification of legal 
entities engaged in financial transactions is critically important to 
private markets and government regulation.
    The need for a universal LEI is clear. The current inability of 
regulators to quickly, confidently and consistently identify parties to 
transactions across all markets hinders their ability to evaluate 
systemic risk and take appropriate corrective steps. Going forward, 
regulators will be charged with gathering data originating from markets 
and processing systems that are geographically dispersed, and assessing 
the risks to specific firms and to the financial markets more 
generally.
    There would be significant reporting benefits to the creation of a 
standardized, common system to identify legal entities across 
geographies and markets. In the view of DTCC, the universal 
standardized LEI is the most effective way--it may be the only 
practical way--to ensure data consistency across the industry and 
reduce the cost of systemic risk monitoring for regulators. LEI 
standardization will allow regulators to conduct analyses across 
markets, products, and regions, identifying trends and emerging risks.
    DTCC has been actively engaged with other financial industry 
participants and regulators in the U.S. and abroad to develop a series 
of proposals that have been enhanced in response to the feedback from 
these discussions. DTCC has also reached out to several potential 
collaborators that could play an important role in developing a global 
solution, and DTCC's Board of Directors has approved the commitment of 
resources toward the development of such a proposed solution.
    DTCC's Avox subsidiary has nearly 10 years of experience in 
collecting and validating legal entity information from over 200 
jurisdictions, and currently maintains a database of 800,000 legal 
entity records. The complexities of establishing and maintaining a 
database of this size are considerable, and the vast amount of 
knowledge and experience that DTCC can leverage to support the LEI 
Utility is unique in the industry.
    While DTCC, a participant-owned, at-cost utility, would leverage 
its core competencies to collect, validate and make available the LEI 
record, DTCC is not itself a registration authority of an international 
standard identifier. DTCC has had detailed discussions with the Society 
for Worldwide Interbank Financial Telecommunication (``SWIFT''). SWIFT, 
a trusted European-based utility, is a member-owned cooperative used by 
more than 9,000 banking organizations, securities institutions, and 
corporate customers, and regulators in 209 countries. As a global 
Registration Authority, SWIFT has assigned Business Identification 
Codes (``BICs''),\6\ an International Organization for Standardization 
(``ISO'') standard, to companies for more than 30 years while 
developing and refining a robust registration and maintenance process 
that is a cornerstone of SWIFT's operations.
---------------------------------------------------------------------------
    \6\ BIC is an established International Standard (ISO 9362) used by 
financial entities around the world as a network address and as an LEI.
---------------------------------------------------------------------------
    During the industry consultation conducted over the past several 
months, the industry has decided to adopt a new standard for a new LEI, 
and SWIFT has been named by ISO to be the Registration Authority for 
that identifier, meeting industry and OFR requirements.
    On June 3, DTCC and SWIFT will be submitting a joint response to 
the industry's Global LEI: Solicitation of Interest based on the 
industry's Requirements for a Global LEI Solution, issued earlier this 
month. The combination of DTCC and SWIFT would create a truly global 
solution responsive to the needs of global firms and regulators alike. 
For the heightened protection of data required to support the LEI 
Utility, DTCC and SWIFT can establish a governance structure that can 
provide the opportunity for regulators and financial institutions 
across jurisdictions to have input into how it is operated. DTCC's own 
governance offers an example of how this can be accomplished, with 
DTCC's Board comprised of both industry experts and non-industry 
members representing the interests of the public and the broader 
markets.

Conclusion
    Generally, the Dodd-Frank Act established an appropriate framework 
for the further development and use of repositories in the United 
States and internationally. DTCC recommends that regulators work 
closely with their global counterparts to ensure consolidated 
repositories can provide accurate and timely market information. 
Congress must review the Dodd-Frank Act's indemnification requirement 
and take corrective action as the existing language prevents the 
Commissions from reaching a global solution. The indemnification 
requirement could create substantial problems for U.S. regulators by 
giving foreign jurisdictions the incentive to establish separate 
repositories that operate on a local or national basis, rather than an 
international standard.
    International coordination and cooperation is critical to achieving 
the level of transparency necessary to mitigate systemic risk in swaps 
markets. DTCC urges that legislators and regulators focus on the use of 
consolidated repositories, or single repositories by asset class, to 
counter the risk of fragmentation. Finally, it is critical that in 
implementing the Dodd-Frank Act, regulators build on existing systems 
and processes to address the policy goals of the Act. Building on 
existing systems will result in the most cost-efficient, effective and 
immediate solutions.
    As stated at the beginning of this testimony, risk mitigation is 
central to DTCC's mission. As regulators and legislators across the 
globe write the rules under which the OTC derivatives markets will 
operate, DTCC is actively engaged in the dialogue. DTCC has a unique 
perspective to share and appreciates the opportunity to testify before 
you today.
    I look forward to answering any questions the Committee may have.

Overview of DTCC
    As stated above, DTCC is a user-owned market utility. Through its 
subsidiaries, it provides clearing, settlement and information services 
for virtually all U.S. transactions in equities, corporate and 
municipal bonds, U.S. Government securities and mortgage-backed 
securities transactions and money market instruments and for many OTC 
derivatives transactions. DTCC is also a leading processor of mutual 
funds and annuity transactions, linking funds and insurance carriers 
with their distribution networks. DTCC does not currently operate a 
clearing house for derivatives. However, DTCC owns a 50% equity 
interest in New York Portfolio Clearing, LLC (``NYPC''), which has been 
granted registration as a derivatives clearing organization (``DCO'') 
by the CFTC.
    DTCC has three wholly-owned subsidiaries which are registered 
clearing agencies under the Exchange Act, subject to regulation by the 
SEC. These three clearing agency subsidiaries are DTC, National 
Securities Clearing Corporation (``NSCC'') and Fixed Income Clearing 
Corporation (``FICC''). DTCC is owned by its users and operates as a 
not-for-profit utility with a fee structure based on cost recovery.
    DTC currently supports the launch of new securities issues and IPOs 
and provides custody and asset servicing for 3.6 million securities 
issues from the United States and 121 other countries and territories, 
valued at almost $36 trillion. In 2010, DTC settled more than $1.66 
quadrillion in securities transactions, which is equivalent to the full 
value of the annual U.S. Gross Domestic Product every 3 days. NSCC 
provides clearance and settlement, risk management, central 
counterparty trade guarantee services and the netting down (reducing 
the total number of trade obligations that require financial settlement 
by an average of 98% per day) for all cash equity transactions 
completed by the 50+ exchanges and alternative trading platforms 
(``ECNs'') operating in U.S. capital markets. FICC provides clearance 
and settlement, risk management and central counterparty trade 
guarantee services and netting (for most securities) in the U.S. 
Government securities markets and for agency-backed securities in the 
mortgage backed securities markets.
    Thus, DTCC, through its subsidiaries, processes huge volumes of 
transactions--more than 30 billion a year--on an at-cost basis.

Overview of the Trade Information Warehouse
    Since 2003, DTCC has been working with the industry--and with 
regulators--to automate the trade confirmation process for CDS, 
essentially replacing the manual error prone process where virtually 
none of the CDS trades were matched in an automated environment with a 
process where virtually all CDS trades are matched through a system 
that DTCC launched in 2004. The automated capture of initial trade 
details associated with a CDS contract or assignment was critical to 
the eventual creation of DTCC's Trade Information Warehouse.
    In November 2006, at the initiative of swap market participants, 
DTCC expanded further to launch the TIW to operate and maintain the 
centralized global electronic database for virtually all position data 
on CDS contracts outstanding in the marketplace. Since the life cycle 
for CDS contracts can extend over 5 years, in 2007, DTCC ``back-
loaded'' records in the Warehouse with information on over 2.2 million 
outstanding CDS contracts effected prior to the November 2006 date in 
which the Warehouse started collecting CDS data. As stated above, the 
Warehouse database currently represents about 98% of all credit 
derivative transactions in the global marketplace; constituting 
approximately 2.3 million contracts with a notional value of $29 
trillion ($25.3 trillion electronically confirmed ``gold'' records and 
$3.7 trillion paper-confirmed ``copper'' records).
    In addition to repository services, which include the acceptance 
and dissemination of data reported by reporting counterparties, the 
Warehouse provides legal record-keeping and central life cycle event 
processing for swaps registered therein. By agreement with its 17,000+ 
users worldwide, the Warehouse maintains the most current CDS contract 
details on the official legal or ``gold'' record for both cleared and 
bilaterally-executed CDS transactions. The repository also stores key 
information on market participants' more customized CDS swap contracts, 
in the form of single-sided, non-legally binding or ``copper'' records 
for these transactions, to help regulators and market participants gain 
a more clear and complete snapshot of the market's overall risk 
exposure to OTC credit derivatives instruments.
    DTCC's Warehouse is also the first and only centralized global 
provider of life cycle event processing for OTC credit derivatives 
contract positions throughout their multi-year terms. Various routine 
events, such as calculating payments due under contracts, bilaterally 
netting and settling those payments and less-common events, such as 
credit events, early terminations and company name changes and 
reorganizations, may occur, all requiring action on behalf of the 
parties to such CDS contracts. DTCC's Warehouse is equipped to automate 
the processing associated with those events and related actions. The 
performance of these functions by the Warehouse distinguishes it from 
any swap data repository that merely accepts and stores swap data 
information.

    Mr. Neugebauer. Thank you. I thank the panel. Mr. Thompson 
uses a little footnote here. You have let the cat out of the 
bag because there is a bumper sticker going around America now 
that says, ``Please don't tell Congress what comes after a 
trillion.'' You have just let them know that it is a 
quadrillion. Keep that a secret, would you?
    Mr. Thompson. We will keep it a secret, Congressman.
    Mr. Neugebauer. Thank you. Gosh, great panel. So many 
questions. Mr. Damgard, one of the things I think you said is 
something that I completely agree with and that is that we have 
seen all of the pieces to the mosaic, we just haven't seen the 
mosaic. And, particularly the volume of rulemaking that is 
coming out across all of these jurisdictions. But particularly 
I think the point that you made was after we get all of the 
pieces out and we get the mosaic, let's get the art critics to 
come in and tell us, you know what the mosaic, whether it is 
what we need or not. And I don't know how you harmonize even 
when you are having these discussions on these various pieces 
of legislation that you are working on--how you harmonize with 
these other marketplaces whether it is the Asian markets, the 
European markets. This is in a piecemeal basis, where they 
haven't seen the finished product, do you want to explain----
    Mr. Damgard. Or even with agencies within the United States 
Government. I mean, the typical number of comment letters that 
we write to proposed rules in a normal year is four or five and 
we have a lot of time to consider. And I have since the Dodd-
Frank Act, I think I have signed something in the neighborhood 
of 35 to 40 comment letters without a lot of confidence that we 
have really been able to anticipate what some of the unintended 
consequences are going to be. And I know that the stress is 
just as much on the agency.
    I think Chairman Gensler set up these, I called them silos, 
and he called me at home and said those aren't silos those are 
teams. But these silos are so busy with these teams grinding 
out proposed regs one after another they hardly have time to 
talk to other teams within the agency, much less talk to the 
teams that are writing similar rules at the SEC or coordinating 
with the Fed in my judgment. And I think that we are going to 
see an awful lot of these regs come out that are in conflict 
with each other.
    Then you bring into consideration whether or not foreign 
governments are going to be marching in line with us. I mean, I 
love listening to Mr. Chilton. You know Mr. Chilton talks about 
Kevin Costner in Field of Dreams and if we do it then everybody 
else is going to come our way. I mean, Kevin Costner never 
played Pollyanna. This is a really, really competitive world 
and if other jurisdictions see opportunities to attract capital 
and capital does show up, they are going to take advantage of 
that.
    I share with everyone here the concern that it is really 
important to get this done right, not done so quickly. And I 
think the idea of finding out what the Commission thinks makes 
the most sense before they go final with these regs. As I said 
in my testimony, if they would publish them in their entirety 
and give us 60 days which is minimal really. I mean, we did a 
cost-benefit analysis on just one. We did a cost-benefit 
analysis on account ownership and control which was sort of 
obscure comment and it cost us $100,000 which we didn't budget 
in our little nonprofit. We believe that the cost-benefit 
analysis on all of these things really ought to be looked at 
pretty seriously.
    Mr. Neugebauer. Well, and I have said to Mr. Gensler I 
think their agency ought to be doing a cost-benefit analysis, 
and to put that analysis out and letting people also comment on 
that to verify whether their assumptions are correct.
    Mr. Deas, I want to move to you and I think you made a very 
important point and I think it is something that other people 
may have brought up. But when you are talking about whether I 
am going to have to put up margin or not, what you said is the 
market price is the fact that I am not putting up margin. And 
so I am literally paying my margin in the contract, the 
negotiated price for the contract.
    Mr. Deas. That is right, Congressman, and it is a price 
that we have negotiated and it provides certainty so that we 
don't have to put up, make cash payments at the end of the 
trading day; or even according to how these rules may operate, 
and depending on price movements, potentially within the 
trading day. And so in order to make sure that we would always 
be able to meet a margin call, corporate treasurers would have 
to hold aside more than enough cash to meet those margin calls 
and that is more expensive than the price that we get built 
into the derivative contract with the bank. And it--and we get 
certainty through that arrangement with the bank.
    Mr. Neugebauer. And quickly, Mr. O'Connor, when we are 
looking at the extraterritorial issues are the regulations very 
clear as to what the triggers are, what each jurisdiction has 
for market certainty? Your comments on that.
    Mr. O'Connor. Yes. I think it is--there has to be absolute 
clarity between which jurisdiction has what and the main point 
I would make, as you know, U.S. banks have global franchises 
these days. A large portion of their earnings arise from 
overseas. And if I am a French corporation or an Italian 
corporation or a German corporation trading with the U.S. 
branch or subsidiary of a U.S.--the local London or Frankfurt 
branch of a U.S. bank. When I trade with that entity, the U.S. 
entity--my transaction would be subject to margin rules or 
clearing or execution on an electronic venue, but I can trade 
with a European bank and avoid all of that then that is where 
the risk is from an U.S. competitiveness point of view that 
those transactions might be missed. And U.S. foreign clients of 
U.S. banks might migrate to the overseas banks in those local 
jurisdictions.
    Mr. Neugebauer. Thank you. Mr. Kissell.
    Mr. Kissell. Thank you, Mr. Chairman, and I, too, was 
caught a little bit by quadrillions and so I will leave that 
one alone, but that was--that certainly brings about a lot of 
interest. I don't have, Mr. Chairman, so much a question as 
maybe just kind of a flowing observation that--and listening to 
the panelists and I do appreciate your expertise and your 
coming to us today. And I know we have been here for awhile and 
I appreciate your time. There seems to be a consensus that I 
didn't hear anyone say we absolutely don't need to do anything. 
There seems to be a consensus that we need some transparency, 
some reforms, and obviously there is not agreement across the 
board as to what that would be.
    I had found through kind of a steady stream throughout a 
lot of our hearings that we would consistently hear that we 
need to be careful because the markets, and the financial 
problems of 2008, these markets performed well. But yet we have 
a situation where some of my colleagues referred to earlier 
that there is a lot of concern that in the functioning of the 
markets while the players come out okay that maybe the 
consumers and the price function are affected by issues more 
than just simple supply and demand.
    So I think that what we are trying to find here is a good 
balance so that you guys can perform well and that the 
consumers can be protected. And what either Mr. Courtney or Mr. 
Welch referred to is trying to find that balance. And I think 
that is what we are looking for. One question, and when you 
have a large panel sometimes it is hard to pin it down to one 
person. A lot of you brought out certain points that need to be 
thought out more. Just curious if you presented those in 
comments to the right people and if you received any feedback 
that makes you think that these will be taken care of. And 
anybody if you got--if that is something you want to jump on 
that would be fine.
    Mr. Damgard. Yes, as the President of the trade association 
representing the futures industry, we work very carefully with, 
both the Senate and House throughout the deliberations of Dodd-
Frank. We weren't as successful as we wanted to be. But I would 
say that, I can imagine the kind of pressure that you must be 
in when you go home and people are paying $4.50 for gasoline. 
And the temptation of course is to demonize speculators, or the 
passive longs.
    And when you stop and consider that first of all the Middle 
East is out there and they know--they have economists knowing 
exactly if gasoline or crude oil gets to be over $110 demand 
over here drops off. We have seen the bicycle lanes going up 
and down Constitution Avenue. More and more people take public 
transportation. All the buses now are fueled by natural gas 
which is relatively cheap. And this is the market at work and 
the role of the CFTC.
    And I wish Mr. Welch was still here, the role of the CFTC 
is not to determine that prices should go up or that prices 
should go down. They are supposed to look at all the elements 
of the market to prevent fraud and manipulation in the market. 
And quite honestly they have done an excellent job. And I don't 
think anyone here would argue that they couldn't use more 
resources because they had been given a much larger mandate.
    I agree with Mr. Peterson, maybe the $25,000 stipulation on 
entertaining foreigners ought not to have been in the Act. But 
I probably wouldn't put that number one. I mean, I think that 
some of the--some of them--the concepts of position limits 
while they have worked in ag because they are pretty much a 
domestic market, it is not clear to anyone that a position 
limit in the financial futures market is going to do anything. 
And clearly outside the United States there is no appetite for 
position limits.
    And if you are a firm and you are a global firm and you are 
a bank and you are bringing customer business to an exchange 24 
hours a day, and one exchange or one environment is going to 
impose a big fine on you if you inadvertently increase, go 
beyond your position limit, and there are other exchanges out 
there and other jurisdictions that don't have that stipulation 
because they think they know just exactly how to manage 
manipulation in other ways, then quite honestly, as I said 
before, capital flows.
    Energy markets in London, in Dubai, in Singapore, in Hong 
Kong, in Sun, and Shanghai will be available to investors in 
the United States. And just because we call it the West Texas 
Intermediate, we know that the fuel, that is no longer the home 
of where all the fuel is coming from. It is coming from the 
Middle East.
    Mr. Kissell. Thank you, Mr.----
    Ms. Miller. Could I just share a little comment? You asked 
about have we met with some of the regulators on their 
proposals. We have actually in fact met with the CFTC staff and 
the Commissioners and they have been very generous with their 
time. And I think they found what was refreshing about our 
proposal is that we were not asking for an exemption from 
registration when we were dealing with U.S. customers.
    But they all admitted that the tough issue was this 
extraterritorial impact and we are 60 days out of the rules 
becoming effective and I think everybody on this panel would 
say we need to take the time to get this right, to look at 
comparability of foreign country regulations and let the CFTC 
and the SEC leverage the resources of foreign supervisors. So I 
think that that is what I would like to leave you with if you 
don't mind.
    Mr. Deas. And if I might just add a little bit to that. I 
mean, ISDA has been engaged with the CFTC and the SEC 
throughout this process. I would echo the comments made by my 
panel members that they have been open to meetings. Your 
question, part of your question was were they listening. I 
think the answer is yes generally. For instance, one position 
we have been advocating is a phased approach to implementation 
so certain asset classes may be more ready than others in terms 
of clearing or trade depositories. And there should be phasing 
by types of institution as well. So dealers are probably ready 
to go sooner than some of the money managers, for instance, who 
are members of ISDA who say that they have some of the biggest 
money managers in the world have thousands of accounts that 
they have to get through the door and fully up to speed in 
terms of making decisions or going after clearinghouses and 
FCM's, getting documentation in place, et cetera, and they need 
a longer time. And I think that that is not falling on deaf 
ears.
    Mr. Thompson. I would agree with all of the comments of my 
panel members. We have spoken to both the CFTC and the SEC as 
well as the Treasury about the indemnification issue along with 
phasing as well. And generally they agree that indemnification 
is a problem, but it is in the statue and they don't have the 
solution at this point. We need a solution.
    Mrs. Schmidt [presiding.] Thank you. Lively testimony. I 
have a question for Mr. Deas. I am going to go back to the 
regulation at hand. One justification the prudential regulators 
have provided for imposing margin requirements on end-users is 
that it simply requires the establishment of a credit support 
arrangement, which they claim most end-users already have. Is 
this the case? And what would be the impact of a new 
requirement that all end-users establish CSA's?
    Mr. Deas. Well----
    Mrs. Schmidt. We will start with you and anybody else that 
wants to answer it.
    Mr. Deas. Yes, well, as I mentioned, we do not post any 
cash margin. We do not have any credit support and access for 
the swap agreements we have entered into with our banks, and as 
I mentioned in my testimony, we operate in a world of finite 
limits. There is a certain amount of credit capacity that is 
available to us. And to use that credit capacity for this 
purpose, to put cash or committed credit, to hold it aside to 
meet a margin call would be a direct subtraction from funds 
that we otherwise employ in our business. And the amount of 
credit that we would have to hold aside to do this would be an 
amount that--so that--so as not to risk missing any--a margin 
all, defaulting on a margin call. It would--we would be very 
conservative about that. So it would take away capital from 
employment elsewhere in our business and ultimately that would 
contract jobs.
    Our company is a member of the Coalition for Derivatives 
End-Users. We did a study that estimated the amount for 
business round table companies, of which FMC is a member, it 
would be on average $269 million of cash or committed credit 
that the average non-financial member of the business round 
table would have to hold aside to meet these margin calls.
    And if we extrapolate that to the S&P 500 of which FMC is 
also a member, that would result in the loss of 100,000 to 
120,000 jobs. And we haven't done the extrapolation across the 
broader economy, but here we are on the verge of the biggest 
change in financial regulations since 1934 without any of this 
cost-benefit analysis being done. I have seen no analysis from 
any government department, agency, or Commission that answers 
your question.
    Mr. O'Connor. I can give some more comment on that and echo 
some of Mr. Deas's comments. And the CSA is effectively the 
part of the agreement that provides the collateral posting 
backwards and forwards, and I would say that generally between 
dealers and their clients and the financial end-users that the 
CSA is almost universally in place. Whereas, with corporate 
end-users I would say generally it was not the case that CSA's 
were in place in that market. Banks typically extended credit 
to those corporations.
    Mrs. Schmidt. Thank you. Ms. Miller, you noted in your 
testimony concerns with the push out provision in Dodd-Frank. 
How would you propose to resolve this issue?
    Ms. Miller. Well, there is a simple way and there is a--
sorry--the simple way would be just to give parity to the 
foreign banks and extend the language on insured depository 
institutions to foreign branches and agencies doing business 
here. But there is some thought that because of the idea of it 
would still require foreign banks doing business here as well 
as domestic banks to split apart their swaps dealer activity. 
And as we have talked--all talked about it, it makes sense to 
keep swaps activities in one central location. Another way to 
do it would be to completely get rid of section 716 and of 
course we would be supportive of that.
    Mrs. Schmidt. Thank you. Moving along, Mr. O'Connor, what 
expectations if any should there be from real time reporting 
requirements and is the EU considering similar real time 
reporting requirements as well?
    Mr. O'Connor. Thanks. So in terms of the expectations in 
the U.S., I think that the expectation is that for transactions 
printed between--in the OTC market those would be reported real 
time along through some form of tape mechanism like trades that 
exist in the bond markets. Those--that reporting would be 
applicable to all transactions that were not above a certain 
size. Those transactions would be--large transactions would be 
subject to block exemptions or block delays. There is 
uncertainty now as to where or the degree to which there has 
been enough thought about on setting those block levels. So if 
the block level is set at such that too many transactions are 
captured, that is--can be damaging to liquidity.
    With regard to the second part of the question, I think EU 
is looking at real time reporting as well. A material 
difference in the U.S. and the EU is that the block reporting 
delay, which is another aspect so there is a size of trade that 
gets you to the block delay and then the question of how long 
the delay is, and I think the CFTC has proposed a delay of 15 
minutes. In Europe it is a much longer delay. And what that 
means is that the liquidity provider, the dealer, can have more 
of a chance of hedging his risk before the trade is printed 
into the market and other market participants taking advantage 
of that information.
    Mrs. Schmidt. Thank you. And Mr. Thompson, can you please 
provide further explanation of the indemnification provision in 
Dodd-Frank and how it would work in a practical matter and why 
this is a significant change from current practice, sir?
    Mr. Thompson. At the moment, the Trade Information 
Warehouse works underneath the guidelines that were set in 
place by the OTC Derivatives Regulators' Forum, which 
essentially says that each one of the 50 regulators from across 
the globe is entitled to the information that they are entitled 
to based upon trades that either were done under a reference 
entity that they have, or a regulatee that they are 
particularly looking at if they--their market regulator. That 
would be--and at the moment that works. Those regulators come 
in, they make the appropriate statements as to what their 
rights are, and the Trade Information Warehouse gives them 
those information. And they also keep this information 
confidential. They agree to that.
    The indemnification provision would essentially have the 
regulators coming in and essentially saying to the CFTC and to 
the repository that if something happens from a confidentiality 
standpoint and you are sued in the U.S. we will stand behind 
that lawsuit. We don't believe that there is any foreign 
regulator who in fact would subject themselves to any kind of 
lawsuit here in the U.S. when they can get the same information 
by simply putting in place their own local repository.
    Mrs. Schmidt. Thank you. And my final question, Mr. 
Callahan, you noted in your testimony that CFTC's current 
approval process for foreign boards of trade to operate in the 
U.S. has worked well. You also note that this process is 
commonly known as no action relief which implies limited 
engagement by the CFTC. Can you briefly describe this approval 
process so that the Subcommittee may have a better 
understanding of what obtaining a ``no action relief'' actually 
involves?
    Mr. Callahan. Yes, and thank you for your question. Let me 
start by saying that I think that the no action relief regime 
is kind of poorly named and poorly branded because you are 
exactly right. It does imply by its name that there is no 
action being taken. Quite the opposite is true. There are over 
20 foreign boards of trade currently subject to the no action 
regime. It is comprehensive. Our exchange, the London 
International Financial Futures Exchange or Liffe went through 
this process in 1998. It is comprehensive. There is voluminous 
amounts of information and material and data that is sent to 
the CFTC.
    So between the CFTC and the regulated foreign board of 
trade it is a comprehensive process. But as a core part of the 
no action regime is the principle of comparability. The CFTC in 
their judgment decides that the jurisdiction of the foreign 
exchange is a comparable regulated entity. In our case that 
would be the DFSA in the UK and that has served I think U.S. 
market participants extremely well.
    On the Liffe exchange in Europe which is operated by NYSE 
Euronext about \1/3\ of the volume on those exchanges in which 
products such as Euribor, European Equity and DCE's, about \1/
3\ of the volume comes from U.S. customers so it is a great 
benefit to U.S. customers and U.S. investors to have that 
access to global markets. So we believe that it has been a 
success. Bart Chilton mentioned in his testimony the 
coordination with the ICE Exchange in Europe on the cash 
settled energy contracts. And I--there again is another great 
example of effective use of the no action regime.
    Our concern is that the CFTC is a relatively small agency 
and the demand on its time and its resources are massive and 
only increasing through Dodd-Frank. So to require the re-
registration of 20 foreign boards of trades and then whatever 
new ones come in the future, just the process of kind of 
redoing that whole exercise again is going to be massively time 
consuming and as Edmunds said in their letter to Chairman 
Gensler, it is unclear at the end of that huge piece of work 
that there is going to be any benefit to end-user customers or 
to the broader stability of markets. So sort of a question for 
us given scarce resources at CFTC is this really where they 
should be focusing their limited time and attention. Thank you.
    Mrs. Schmidt. Under the rules of the Committee, the record 
of today's hearing will remain open for 10 calendar days to 
receive additional material and supplementary written responses 
from the witnesses to any questions posed by a Member. This 
hearing of the Subcommittee on General Farm Commodities and 
Risk Management is adjourned. Thank you.
    [Whereupon, at 12:43 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
 Submitted Letter by Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma

Execution Copy
United States of America Before the Commodity Futures Trading 
        Commission
Petition by the Electric Trade Associations \1\ for Prompt 
        Reconsideration of Pending Petitions Under Section 723(c)(1) of 
        the Dodd-Frank Act
---------------------------------------------------------------------------
    \1\ The Electric Trade Associations include the National Rural 
Electric Cooperative Association (''NRECA``), the American Public Power 
Association (``APPA''), the Large Public Power Council (``LPPC''), the 
Edison Electric Institute (``EEI'') and the Electric Power Supply 
Association (``EPSA''). This Petition is submitted by the Electric 
Trade Associations, and may not represent the views of any particular 
member of any one or more of the Electric Trade Associations with 
respect to any issue. The Electric Trade Associations are grateful to 
the following organizations who have provided assistance and support in 
developing this Petition. We are authorized to note the involvement of 
these organizations and associated entities to the Commission, and to 
indicate their full support of this petition: the Transmission Access 
Policy Study Group (an association of transmission dependent electric 
utilities located in more than 30 states), ACES Power Marketing and The 
Energy Authority.
---------------------------------------------------------------------------
I. Requested Commission Action
    The ``Electric Trade Associations'' respectfully submit this 
petition (this ``Petition'') to the U.S. Commodity Futures Trading 
Commission (the ``Commission''). The Electric Trade Associations 
urgently request the Commission to reconsider the petitions submitted 
by the Electric Trade Associations in September of 2010 pursuant to 
Section 723(c) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the ``Dodd-Frank Act'') (the ``Section 
723(c)(1) Petitions''). The Section 723(c)(1) Petitions requested the 
Commission to allow the Electric Trade Association's members to 
continue to rely on the exemptions set forth in Section 2(h) of the 
Commodity Exchange Act (the ``CEA'') for a period of one year after the 
Effective Date \2\ of Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------
    \2\ The date of enactment is July 21, 2010 (the ``Enactment Date'') 
and the date of effectiveness is 360 days after the Enactment Date, or 
July 16, 2011 (the ``Effective Date'').
---------------------------------------------------------------------------
    The Electric Trade Associations request the Commission to 
reconsider such Section 723(c)(1) Petitions in a prompt manner (as 
required by Section 723(c)(2)(A). Concurrently, we request that the 
Commission promptly use its available exemptive authority under the CEA 
to prevent unnecessary disruptions to our members' ordinary business 
practices. The Commission is requested to assure that our members and 
all participants (our members' counterparties, without which the 
markets would not exist) in the over-the-counter (``OTC'') derivatives 
markets for all ``electric power and related commodity and commodity 
derivatives transactions'' \3\ can continue to operate under the 
existing exemptions and interpretations applicable to such 
transactions. The Commission should continue the existing market 
structure until such time as the Commission's rules establishing and 
regulating new ``swap'' markets in electric power and related commodity 
and commodity derivatives transactions are finalized, tested, and all 
implementation and transition periods have expired.\4\
---------------------------------------------------------------------------
    \3\ We use this term to mean (a) all non-cleared derivatives 
transactions referencing or derived on electric power or related 
commodities in which the Electric Trade Associations' members transact 
in the ordinary course of their core commercial activities, such as 
electric energy, natural gas, other fuels for electric generation 
(including coal and fuel oil, but excluding crude oil, gasoline or 
refined petroleum products other than fuel oil--these commodities are 
not germane to our members' core commercial activities, and the markets 
for these commodities and related derivatives are distinguishable from 
the markets in which our members participate), (b) those non-cleared 
derivative agreements, contracts or transactions referencing or derived 
on transmission, transportation, generation capacity or storage 
concepts or services related to the energy commodities described in 
(a), and (c) those non-cleared derivatives agreements, contracts or 
transactions referencing or derived on environmental or emissions 
regulations, or renewable energy or other environmental attributes, 
applicable to our members' commercial activities. All of these 
agreements, contracts and transactions reference or are derived on what 
the Electric Trade Associations consider ``non-financial commodities,'' 
are intrinsically related to our members' core commercial (or non-
financial) activities, and many are subject to the continuing 
jurisdiction of regulators other than the Commission.
    \4\ The Commission committed to ensure a smooth and seamless 
transition to the Dodd-Frank Act's regulatory scheme in its Notice 
Regarding the Treatment of Petitions Seeking Grandfather Relief for 
Trading Activity Done in Reliance Upon Sections 2(h)(1)-(2) of the 
Commodity Exchange Act, 75 Fed. Reg. 56512, on September 16, 2010 (the 
``Grandfather Notice'') and in its response(s) to the Electric Trade 
Association's Petitions under Section 723(c)(1) in early December of 
2010.
---------------------------------------------------------------------------
    The Electric Trade Associations' members regularly engage in 
electric power and related commodity and commodity derivatives 
transactions to manage the commercial risks associated with their non-
financial enterprise activities. These contracts, agreements and 
transactions in electric power and related ``exempt commodities'' may 
include, under the pre-Dodd-Frank Act regulatory scheme, ``forward 
contracts,'' ``trade options,'' ``swaps,'' transactions executed on 
``exempt commercial markets.'' Our members may be ``eligible contract 
participants,'' and all are ``eligible commercial entities'' in respect 
of the commodities related to the electric industry. Our members also 
engage in a wide variety of commercial contracts, agreements and 
transactions involving goods and services related to the electric 
industry in the various geographic regions of the United States. These 
transactions take place between non-financial entities and, in some 
cases, with financial entities as well. Some of these transactions have 
embedded optionality or ``swap-like'' economic terms.\5\
---------------------------------------------------------------------------
    \5\ Since September 2010, the Electric Trade Associations have 
requested the Commission to further define the term ``swap,'' as used 
in the Dodd-Frank Act, to clearly exclude or exempt by regulation the 
types of commercial energy and energy-related transactions in which the 
Electric Trade Associations' members engage every day: including 
forward transactions in non-financial commodities which by their terms 
settle physically, commercial (or ``trade'') options on non-financial 
commodities, generation capacity, transmission and transportation 
services contracts, full requirements contracts, tolling agreements and 
energy management agreements, emissions and renewable energy contracts, 
and many ``other specified electricity transactions.'' To date, the 
Commission has declined to do so. In fact, in the proposed rules on 
``Product Definitions,'' the Commission again asks questions about 
electric industry transactions, rather than providing by regulation the 
certainty the electric industry has been requesting since September 
2010.
---------------------------------------------------------------------------
    Many of our members' contracts, agreements and transactions are 
executed bilaterally in the OTC markets. Some are executed ``in,'' 
``on'' or ``through'' the regional transmission ``markets'' established 
in various geographic regions of the United States under the 
jurisdiction of the Federal Energy Regulatory Commission (``FERC''), 
rather than being executed on a designated contract market or on an 
exempt commercial market regulated by the Commission. Since September 
of 2010, the Electric Trade Associations and our members have filed 
comments in the Commission's rulemakings, and have met with the 
Commission and the staff on numerous occasions, to explain the unique 
aspects of our transactions and our markets.

II. Urgency of the Request for Reconsideration
    In September of 2010, the Electric Trade Associations and our 
members, and other market participants in the OTC energy derivatives 
markets, submitted hundreds of petitions to the Commission asking for 
``grandfather relief'' pursuant to Section 723(c)(1) of the Act. In 
December of 2010, the Commission responded to the petitioners and 
declined to grant the relief requested. The Commission indicated that 
it had not foreclosed the possibility of granting relief in the future 
and assured the electric industry and other petitioners of its 
commitment to ensure a smooth and seamless transition to the new 
regulatory scheme. Since it is now clear that final rules will not be 
in place by the July 16, 2011 Dodd-Frank effective date, the Electric 
Trade Associations request the Commission to promptly grant their 
Section 723(c)(1) Petitions to provide needed regulatory certainty as 
outlined below

A. The Commission Should Immediately Reconsider the Section 723(c)(1) 
        Petitions and Grant the Requested Extension, and Use Its 
        Exemptive Authority Under the Commodity Exchange Act To Allow 
        the OTC Markets for Electric Power and Related Commodity and 
        Commodity Derivatives To Continue Without Disruption
    When the Act was enacted in July of 2010, Congress assumed that the 
Commission (and other regulators) could have an entirely new market 
structure for all ``swaps'' in all asset classes up and running within 
360-365 days. In reliance on this unrealistic assumption, the Act 
automatically deletes the exclusions and exemptions from the CEA under 
which the current OTC derivatives markets operate as of July 16, 2011, 
the general effective date of Title VII of the Act (the ``Effective 
Date''). As of July 16, 2011, the Act will simply label certain of the 
transactions in which our members engage for commercial risk management 
purposes as ``unlawful.''
    Notwithstanding the efforts of regulators, their staffs, market 
infrastructure entities and financial and non-financial market 
participants, the comprehensive new market regulatory regime is not yet 
in place and will not be in place by July 16, 2011. However, the self-
executing Effective Date deadline looms less than 60 days from today, 
and is creating serious regulatory uncertainty.
    The Electric Trade Associations, on behalf of our members and all 
market participants in the OTC markets for electric power and related 
commodity and commodity derivatives, respectfully request that the 
Commission promptly grant the grandfather relief requested in the 
Section 723(c)(1) Petitions, and ``use its available exemptive 
authorities to address such a [now imminent] situation.'' Grandfather 
Notice, 75 Fed. Reg. at 56513.\6\ This will allow members of the 
Electric Trade Associations to continue their existing business 
practices which are focused on providing reliable, affordable power 
supply and which also take into account concerns related to price 
stability and predictability until such time as new rules are finalized 
and implemented. These practices are conducted in accordance with the 
requirements and expectations of Federal and state energy regulatory 
authorities, as well as existing law.
---------------------------------------------------------------------------
    \6\ The Act requires the Commission to act ``in a prompt manner'' 
to address the Section 723(c)(1) Petitions. See Section 723(c)(2)(A) of 
the Act. We respectfully note that the Petitions have now been pending 
for over 8 months.
---------------------------------------------------------------------------
B. Granting This Petition Does Not Conflict With the Intent of the 
        Dodd-Frank Act
    Allowing the 1 year extension for electric power and related 
commodity and commodity derivatives transactions does not contravene 
the intent of the Dodd-Frank Act. Rather, the extension is consistent 
with the Congressional intent to reduce systemic risk and increase 
market transparency for standardized ``swaps'' while preserving access 
to cost-effective risk management transactions for non-financial end-
users. The Commission and other regulators still face a monumental 
challenge to sequence the final rulemakings, and construct and 
implement its brand new ``swap'' markets in a manner that does not 
sacrifice the legitimate interests of non-financial ``end-users.''
    Section 723(c) of the Dodd-Frank Act, the ``grandfather 
provision,'' is a mechanism that offers market participants legal 
certainty during the period of implementation and transition to the new 
regulatory regime. Granting this petition for relatively minuscule 
portion of the global ``swap'' markets that may be represented by 
electric power and related commodity and commodity derivatives 
transactions will not impede the laudable goals of providing 
transparency and reducing risk to the financial system in the global 
derivatives markets.

III. Conclusion
    The Electric Trade Associations respectfully request that the 
Commission promptly reconsider and grant the pending Section 723(c)(1) 
Petitions for the period of one year following the Effective Date, and 
use its available exemptive authority to prevent disruption in the OTC 
markets for electric power and related commodity and commodity 
derivatives transactions. The Electric Trade Associations submit that 
the Commission should do so to carry out the intent of Section 723(c) 
of the Dodd-Frank Act, and to provide legal and regulatory certainty to 
our members and American businesses and consumers who rely on our 
members to deliver reliable and affordable electric power.

Request for Prompt Reconsideration of Section 723(c)(1) Petitions

            Respectfully yours,




National Rural Electric Cooperative  American Public Power Association
 Association


                                     
                                     




Russell Wasson, Director, Tax,       Susan N. Kelly, Senior Vice
 Finance and Accounting Policy        President of Policy Analysis and
                                      General Counsel

Large Public Power Council           Edison Electric Institute


                                     
                                     




Noreen Roche-Carter, Chair, Tax and  Richard F. McMahon, Executive
 Finance Task Force                   Director






                                     Electric Power Supply Association


                                     
                                     




                                     Daniel S.M. Dolan, Vice President,
                                      Policy Research & Communications



CC:

Hon. Gary Gensler, Chairman;
Hon. Michael Dunn, Commissioner;
Hon. Jill E. Sommers, Commissioner;
Hon. Bart Chilton, Commissioner;
Hon. Scott O'Malia, Commissioner;
Richard A. Shilts;
Daniel Berkowitz;
David P. Van Wagner;
Beverly E. Loew.
                                 ______
                                 
Submitted Letter by Hon. Bart Chilton, Commissioner, Commodity Futures 
                           Trading Commission
May 26, 2011

Hon. K. Michael Conaway,
Chairman,
Subcommittee on General Farm Commodities and Risk Management, House 
Committee on Agriculture,
Washington, D.C.

    Dear Chairman Conaway:

    It was a pleasure to testify before your Subcommittee on May 25. It 
is clear that, like you, Members of the Subcommittee have a keen 
interest in making sure our agency is deliberative and develops the 
best regulation regime possible under the expanded authority provided 
us by the Dodd-Frank Wall Street Reform and Consumer Protection Act. I 
share those ideals.
    In response to your question regarding speculative positions in 
energy markets raised at the end of our panel, I submit the attached 
document(s) for the record. As you'll see, between June of 2008 and 
January 2011, there was a tremendous increase in the number of futures 
equivalent contracts held by non-commercial, speculative traders such 
as hedge funds, mutual funds, exchange traded funds and swap dealers.
    I hope this answers your question. If I can be of further 
assistance, please don't hesitate to ask.
            Sincerely,

            
            
Hon. Bart Chilton,
Commissioner.
                               Attachment
Speculative Positions in Energy Markets



        Source: Office of Commissioner Chilton, CFTC.

                                  
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