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





             DERIVATIVES REFORM: THE VIEW FROM MAIN STREET

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 21, 2011

                               __________

                           Serial No. 112-22










          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
KRISTI L. NOEM, South Dakota

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                  (ii)










                             C O N T E N T S

                              ----------                              
                                                                   Page
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     1
    Prepared statement...........................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     4
    Prepared statement...........................................     6

                               Witnesses

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, D.C....................................     7
    Prepared statement...........................................     9
    Submitted questions..........................................    75
English, Hon. Glenn, Chief Executive Officer, National Rural 
  Electric Cooperative Association, Arlington, VA................    26
    Prepared statement...........................................    28
Howard, Randy S., Director of Power System Planning and 
  Development and Chief Compliance Officer, Power System 
  Executive Office, Los Angeles Department of Water and Power, 
  Los Angeles, CA; on behalf of Large Public Power Council.......    33
    Prepared statement...........................................    34
Schloss, Neil M., Vice President--Treasurer, Ford Motor Company, 
  Dearborn, MI...................................................    36
    Prepared statement...........................................    38
Hall, Denise B., Senior Vice President, Treasury Sales Manager, 
  Webster Bank, Hartford, CT.....................................    44
    Prepared statement...........................................    46
    Suplementary letter..........................................    71
Peterson, Sam, Senior Advisor, Derivatives Regulatory Advisory 
  Group, Chatham Financial, Kennett Square, PA...................    52
    Prepared statement...........................................    53
Fraley, David, President, Fraley and Company, Inc., Cortez, CO; 
  on behalf of Petroleum Marketers Association of America; The 
  New England Fuel Institute; Colorado Petroleum Marketers and 
  Convenience Store Association..................................    55
    Prepared statement...........................................    57
    Retained in Committee file: 91 articles, reports, speeches 
        and statements concerning derivatives speculation

                           Submitted Material

American Bankers Association, submitted statement................    72
O'Malia, Hon. Scott D., Commissioner, Commodity Futures Trading 
  Commission, submitted statement................................    71

 
             DERIVATIVES REFORM: THE VIEW FROM MAIN STREET

                              ----------                              


                        THURSDAY, JULY 21, 2011

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:03 p.m., in room 
1300, Longworth House Office Building, Hon. Frank D. Lucas 
[Chairman of the Committee] presiding.
    Members present: Representatives Lucas, Goodlatte, Johnson, 
King, Neugebauer, Conaway, Schmidt, Thompson, Stutzman, Gibbs, 
Tipton, Crawford, Roby, Huelskamp, DesJarlais, Ellmers, Gibson, 
Hultgren, Hartzler, Schilling, Ribble, Noem, Peterson, Holden, 
McIntyre, Boswell, Baca, Walz, Kissell, Owens, Courtney, Welch, 
Fudge, Sewell, and McGovern.
    Staff present: Tamara Hinton, Kevin Kramp, Ryan McKee, Matt 
Schertz, Debbie Smith, Lauren Sturgeon, Heather Vaughan, 
Suzanne Watson, John Konya, Liz Friedlander, Lisa Shelton, and 
Jamie Mitchell.

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

    The Chairman. This hearing of the Committee on Agriculture 
entitled, Derivatives Reform: The View from Main Street, will 
come to order. I want to thank all of you for being here today 
and I would especially like to thank Chairman Gensler for 
joining us today on our first panel. I am grateful for all the 
witnesses on the second panel for taking time away from their 
businesses to be here also.
    This is our sixth hearing on the Dodd-Frank implementation 
process. And we have heard from over 30 witnesses, including 
Chairman Gensler, on three different occasions. We have 
explored about every issue under our jurisdiction, and Members 
of the Committee from both sides of the aisle have raised 
concerns regarding the direction of many of the rules. We have 
listened carefully to the concerns from small banks and small 
businesses. We have learned how businesses on Main Street, the 
end-users of derivatives, could be affected by proposed 
regulations. We have heard how organizations that played no 
role in the financial crisis could be subject to significant 
new regulations designed for the largest financial 
institutions.
    And Chairman Gensler, we have used these hearings to put 
issues in front of you that are very important to our 
constituents and constituencies. So as you prepare the rules in 
final form, I hope you have been listening. I hope you will 
listen today to the issues that will be raised, and I urge you 
to respond honestly and directly, as I know you will. Congress 
has given you an extraordinary amount of authority and ability 
to write rules to govern these markets. But with that authority 
comes the responsibility and the expectation that you will keep 
at the forefront the prevailing issue facing the country--
economic growth and job creation.
    We can achieve a robust regulatory regime without imposing 
undue or ill-fitting regulations on businesses across the 
country. The Commodity Futures Trading Commission, CFTC, has 
acted on some issues that this Committee has raised. In light 
of the unrealistic timeline established by Dodd-Frank, the 
Commission has finalized an order to extend the effective 
dates, providing much-needed certainty to market participants, 
and additional time for rulemaking.
    Unfortunately, we have not seen similar responses on most 
of the concerns that have been raised in this hearing room. The 
Commission has given us little reason to believe that the 
clarity and scope of the regulations will improve. Nor is there 
any indication that proposed regulations, which are overly 
burdensome or counterproductive in their current form, will 
change substantially or that they will not bring economic harm.
    And, frankly, I don't believe anyone in this Administration 
can provide an honest assessment of what the cumulative impact 
of these regulations will be for the end-users, for liquidity 
in our financial system or for our competitive position 
globally.
    With unemployment stagnating at more than nine percent, we 
need greater accountability from you, Chairman Gensler, and 
from the Administration that you at least have a handle on what 
impact these regulations will have on our economy and the 
functioning of our financial markets. If you don't think the 
statute gives you the flexibility to address the concerns 
raised today, I urge you to indicate that clearly. And I urge 
you to balance the need for modern regulations with common 
sense policy that differentiates between farmer cooperatives 
and Wall Street firms. And as many of you know, the CFTC has 
turned the corner in the implementation of Title VII. They have 
moved from proposing rules to implementing the Dodd-Frank Act 
to finalizing regulations.
    So it stands to reason that the moving parts of these 
regulations are starting to settle into place. Parties that 
will likely be regulated should know where they stand. Yet, our 
Committee continues to hear from stakeholders that say they 
have received little or no guidance on what the final rules 
will look like, or how they will be affected by them.
    We are hearing that despite the fact that these 
stakeholders are regularly meeting with you and your staff and 
instead of the confusion clearing, that as rules become final, 
stakeholders seem even less sure of where they stand now than 
they were 3 months ago.
    The title of today's hearing is, The View from Main Street. 
Our witnesses bring a valuable perspective on how financial 
regulation will stretch well beyond Wall Street to the Main 
Streets of towns across America and from water departments in 
California to rural electric cooperatives in our Congressional 
districts.
    I would like to thank our witnesses once again for being 
here and bringing and sharing their testimony. I look forward 
to learning more about how your organizations will be affected 
by Dodd-Frank and I hope that this hearing guides Mr. Gensler 
and his colleagues towards a balanced approach to the 
regulation.
    [The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Thank you all for being here today. I'd especially like to thank 
Chairman Gensler for joining us on our first panel, and I'm grateful to 
all the witnesses on our second panel for taking time away from your 
businesses to be here.
    This is our sixth hearing on the Dodd-Frank implementation process. 
We've heard from over 30 witnesses, including Chairman Gensler on three 
different occasions.
    We've explored just about every issue under our jurisdiction. And 
Members of the Committee, from both sides of the aisle, have raised 
concerns regarding the direction of many of the rules.
    We have listened carefully to concerns from small banks and small 
businesses. We've learned how businesses on Main Street--the end-users 
of derivatives--could be affected by proposed regulations.
    We've heard how organizations that played no role in the financial 
crisis could be subject to significant new regulations designed for the 
largest financial institutions.
    And Chairman Gensler, we've used these hearings to put issues in 
front of you that are very important to our constituencies. So, as you 
prepare the rules in final form, I hope you've been listening. And I 
hope you will listen today to the issues that will be raised.
    I urge you to respond honestly and directly.
    Congress has given you an extraordinary amount of authority and 
responsibility to write rules to govern these markets.
    But with that authority comes the responsibility and expectation 
that you will keep at the forefront the prevailing issue facing the 
country--economic growth and job creation.
    We can achieve a robust regulatory regime without imposing undue or 
ill-fitting regulations on businesses across the country.
    The Commodity Futures Trading Commission, or CFTC, has acted on 
some issues that this Committee has raised. In light of the unrealistic 
timeline established by Dodd-Frank, the Commission has finalized an 
Order to extend the effective dates, providing much-needed certainty to 
market participants and additional time for rulemaking.
    Unfortunately, we have not seen similar responses on most of the 
concerns that have been raised in this hearing room. The Commission has 
given us little reason to believe that the clarity and scope of these 
regulations will improve.
    Nor is there any indication that proposed regulations which are 
overly burdensome or counterproductive in their current form will 
change substantially or that they will not bring economic harm.
    And frankly, I don't believe anyone in this Administration can 
provide an honest assessment of what the cumulative impact of these 
regulations will be--for end-users, for liquidity in our financial 
system, for our competitive position globally.
    With unemployment stagnating at more than 9%, we need greater 
accountability from you, Chairman Gensler, and from the Administration, 
that you at least have a handle on the impact these regulations will 
have on our economy and the functioning of our financial markets.
    If you don't think the statute gives you the flexibility to address 
the concerns that are raised today, I urge you to indicate that 
clearly.
    And, I urge you to balance the need for modern regulations with 
common sense policy that differentiates between farmer cooperatives and 
Wall Street firms.
    As many of you know, the CFTC has turned the corner in its 
implementation of Title VII. They have moved from proposing rules to 
implement the Dodd-Frank Act to finalizing regulations.
    So it stands to reason that the moving parts of these regulations 
are starting to settle into place. Parties that will likely be 
regulated should know where they stand.
    But our Committee continues to hear from stakeholders that say they 
have received little to no guidance on what the final rules will look 
like, or how they will be affected by them.
    We're hearing this despite the fact that these stakeholders are 
regularly meeting with you or your staff. And instead of the confusion 
clearing as rules become final, stakeholders seem even less sure of 
where they stand now than they were 3 months ago.
    The title of today's hearing is ``The View from Main Street.'' Our 
witnesses bring a valuable perspective on how financial regulations 
will stretch well beyond Wall Street to the Main Streets of towns 
across America--from water departments in California to rural electric 
cooperatives in our Congressional districts.
    I'd like to thank our witnesses once again for being here and 
sharing your testimony.
    I look forward to learning more about how your organizations will 
be affected by Dodd-Frank, and I hope that this hearing guides Mr. 
Gensler and his colleagues towards a balanced approach to regulation.

    The Chairman. I will now turn to the Ranking Member for his 
opening comments.

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

    Mr. Peterson. Thank you Mr. Chairman. And you said today is 
the sixth oversight hearing we have held on Dodd-Frank, and I 
welcome again Chairman Gensler to the Committee. I think this 
is his third appearance before the Committee this year.
    As we begin today's oversight hearing, I want to express my 
concern that the Committee is ignoring some of its important 
oversight responsibilities. Two-and-a-half months ago, the 
General Farm Commodities and Risk Management Subcommittee 
Ranking Member, Mr. Boswell, along with several other Members 
requested a hearing on rising energy prices, stressing the 
importance of making sure that prices are based on market 
forces and not excess speculation.
    And I know that a lot of people dismiss this idea that 
speculation affects prices. But I would remind Members that 
Goldman Sachs said publicly that they thought speculators at 
one time were boosting crude oil prices by as much as $27 a 
barrel. So I don't see how anybody can dismiss this out of hand 
if one of the major traders is making those kind of statements.
    The Committee should, I believe, act on Mr. Boswell's 
request and hold a hearing on this issue and see if we can shed 
some light on it.
    Additionally, the Committee has not brought any of the 
prudential regulators to testify so Members can address their 
concerns directly with them. People forget that the CFTC is not 
the only responsible party in implementing the derivatives 
title of this legislation. Last April, the prudential 
regulators put forth their proposed rule on margin requirements 
for swaps with dealers they regulate. As we will hear today, 
this proposal has caused some consternation among end-users who 
see in that proposal the threat of possible margin requirements 
on end-users.
    When are we going to bring the prudential regulators in to 
answer questions about this proposed rule?
    Additionally, we have not had the Federal Reserve appear to 
update the Committee on the implementation of Title VIII of the 
Dodd-Frank law which gave the Federal Reserve authority over 
clearinghouses, and which I remind the Chairman remains within 
our jurisdiction. I also remind people it was something I did 
not support, along with a lot of other things in the Dodd-Frank 
law that I had to compromise on.
    We have also heard concerns regarding the consistency of 
rules between regulators, particularly the CFTC and the SEC. I 
believe we should hear from all of the regulators charged with 
implementing the derivative titles, not just the CFTC.
    Many of the definitions that today's witnesses are 
concerned about must be developed jointly between the SEC and 
the CFTC. I believe the joint rulemaking requirements, which 
were added in conference, I remind you, right at the end, and I 
also opposed, are one of the reasons why the proposed rules 
regarding important definitions have come later in the process. 
Unfortunately, the Committee has not brought in the SEC so 
Members can ask about this. I do hope that we can hear directly 
from these other regulatory agencies in the near future so we 
can help clarify some of the issues that folks are bringing up.
    And I also believe that there is a rush to judgment by 
Members and by market participants with regard to the CFTC. The 
Commission has put forth about 50 proposed rules. At this 
point, most of them are only proposals, I think they have 
adopted eight rules in final form, they have been unanimous, so 
they are working through the process the way they should and 
taking their time. They have extended the legal certainty and 
extended the deadline and I think that all should be taken in 
good faith. Some people apparently still believe, based solely 
on these proposals, that we need to rewrite the Dodd-Frank law 
or to repeal it.
    As I have said before, I think this is premature. At this 
point these rules are proposals. I think the Commission has 
been listening. My opinion may be sometimes too much to some of 
these folks that are whining or complaining about these rules. 
And so far, the Commission has finalized a handful of rules, as 
I said, and they are doing a pretty good job considering 
everything.
    As I have said at every Dodd-Frank oversight hearing we 
have had, if regulators don't implement the law as we intended, 
if they screw things up, I stand ready to help with the 
legislative fixes. However, we need to give the regulators the 
opportunity to get things right. Dodd-Frank is not a perfect 
law, particularly if you look at some of the provisions outside 
of the derivatives title, people seem to forget that I opposed 
Title VIII. I thought the Consumer Protection Bureau was 
ideology run amok and I ultimately voted for the bill because 
we needed to respond to the economic crisis of 2008 and I 
along, with others, had to accept compromises.
    So if Congress is going to act on legislation to change 
Dodd-Frank, it should meet some tests. First regarding the 
CFTC, it should address something they have actually done, not 
something they might do. And I don't want to waste time working 
on a solution to a problem that could disappear in the coming 
months when the regulators hopefully get these rules right.
    And the other thing, I don't think anything is going to 
happen in the Senate, even if we move something over here.
    Second, it shouldn't be done in a piecemeal approach. If we 
truly need to fix Dodd-Frank because of however the regulators 
are implementing it, then we should take a comprehensive 
approach that addresses all of our problems, not just those in 
one title or one small provision.
    And finally, it should be developed in a bipartisan 
cooperative fashion, not handed down in a ``take it or leave 
it'' approach.
    When I was Chairman and drafting the derivatives title, I 
worked with Mr. Lucas and others and the staff to develop a 
package that won bipartisan support. There were things, as I 
said, that I thought should have been included that weren't, 
but I sacrificed those to keep bipartisan support for our 
primary objective, which was bringing greater transparency and 
accountability to these opaque markets.
    Ultimately, I believe that CFTC is taking their time to get 
this right, and perhaps that is what some people are afraid of, 
that the regulator can actually listen to the public and 
respond appropriately. And maybe that is what many on the other 
side that still seem dedicated to repealing Dodd-Frank are 
afraid of. But I guess time will ultimately tell, and I am 
holding out hope that we are going to get the right outcome.
    So I welcome Chairman Gensler back to the Committee. I look 
forward to his testimony and I know that we will have a 
thorough and candid update as we have in the past. So, Mr. 
Chairman, I yield back.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you Mr. Chairman. Today is the sixth oversight hearing this 
Committee has held to review the Dodd-Frank Act. I want to welcome CFTC 
Chairman Gensler back for his third appearance before Members of the 
Committee this year.
    As we begin today's oversight hearing, I want to express my concern 
that the Committee is ignoring some of its important oversight 
responsibilities. Two and a half months ago, the General Farm 
Commodities and Risk Management Subcommittee Ranking Member, Mr. 
Boswell, along with several other Members, requested a hearing on 
rising energy prices, stressing the importance of making sure that 
prices are based on market forces and not excessive speculation.
    While some dismiss the idea of speculation affecting prices, 
Goldman Sachs has said that speculators are boosting crude oil prices 
by as much as $27 a barrel. I don't see how anyone can dismiss that 
statement out of hand. The Committee should act on Mr. Boswell's 
request and hold a hearing on energy prices.
    Additionally, the Committee has not brought in any of the 
prudential regulators to testify so Members can address their concerns 
directly with them. People forget that the CFTC is not the only 
responsible party in implementing the derivatives title. Last April, 
the prudential regulators put forth their proposed rule on margin 
requirements for swaps with dealers they regulate.
    As we will hear today, this proposal has caused some consternation 
among end-users who see in that proposal the threat of possible margin 
requirements on end-users. When are we bringing the prudential 
regulators in to answer questions about this proposed rule?
    Additionally, we have not had the Federal Reserve appear to update 
the Committee on implementation of Title VIII of Dodd-Frank, which gave 
the Federal Reserve authority over clearinghouses and which, I remind 
the Chairman, remains within our Committee's jurisdiction.
    We have also heard concerns regarding the consistency of rules 
between regulators, particularly the CFTC and SEC. I believe we should 
hear from all of the regulators charged with implementing the 
derivatives title, not just the CFTC. Many of the definitions that 
today's witnesses are concerned about must be developed jointly between 
the SEC and the CFTC.
    I believe the joint rulemaking requirements, which were added to 
the conference report at the end, are one of the reasons why proposed 
rules regarding important definitions came later in the process. 
Unfortunately, the Committee has not brought in the SEC so Members can 
ask about this. I do hope that we can hear directly from these other 
regulatory agencies in the near future.
    I believe there is a rush to judgment by Members and by market 
participants with regard to the CFTC. The Commission has put forth 
about 50 proposed rules--only proposals. Some people believe that based 
solely on these proposals, we need to rewrite Dodd-Frank or repeal it. 
I think that is premature. So far, the Commission has finalized a 
handful of rules and all of them were approved unanimously by the 
Commission.
    As I have said at every Dodd-Frank oversight hearing we have had, 
if regulators don't implement the law as we intended, if they screw 
things up, I stand ready to help with legislative fixes. However, we 
need to give the regulators the opportunity to get things right.
    Dodd-Frank is not a perfect law, particularly if you look at some 
of the provisions outside of the derivatives title. People seem to 
forget that I opposed Title VIII. I thought the Consumer Protection 
Bureau was ideology run amuck. I ultimately voted for the bill because 
we needed to respond to the economic crisis of 2008 and I had to accept 
compromises.
    If Congress is going to act on legislation to change Dodd-Frank, it 
should meet some tests.
    First, regarding the CFTC, it should address something they 
actually have done, not something they might do. I don't want to waste 
time working on a solution to a problem that could disappear in the 
coming months when the regulators get the rule right.
    Second, it shouldn't be done in a piece-meal approach. If we truly 
need to fix Dodd-Frank because of how all the regulators are 
implementing it, then we should take a comprehensive approach that 
addresses all our problems, not just those in one title or one small 
provision.
    And finally, it should be developed in a bipartisan, cooperative 
fashion, not handed down in a take it or leave it approach. When I was 
Chairman and drafting the derivatives title, I worked with Mr. Lucas 
and his staff to develop a package that won bipartisan support. There 
were things I thought should have been included, but sacrificed to 
preserve bipartisan support for our primary objective--bringing greater 
transparency and accountability to these opaque markets.
    Ultimately, I believe the CFTC is taking their time to get this 
right. And perhaps that is what some people are afraid of, that a 
regulator can listen to the public and respond appropriately. Maybe 
that is why many in the Republican Congressional leadership still seem 
dedicated to a total repeal of Dodd-Frank. They are afraid it could 
succeed. Time will ultimately tell, but I'm holding out hope.
    Chairman Gensler, again welcome back to the Committee. I know you 
will provide a thorough and candid update as you have in the past. With 
that Mr. Chairman, I yield back.

    The Chairman. I thank the Ranking Member for his opening 
statement. And the chair would request that other Members 
submit their opening statements for the record so the witness 
may begin testimony and ensure there is ample time for 
questions.
    With that, I would like to welcome our first witness to the 
table, the Honorable Gary Gensler, Chairman, Commodity Futures 
Trading Commission, Washington, D.C.
    You may proceed, Mr. Chairman, whenever you are ready.

           STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Gensler. Good afternoon Chairman Lucas, Ranking Member 
Peterson, and Members of the Committee. It is good to be back 
before you today. I had the honor to testify in front of the 
Senate Banking Committee this morning but it is good to be with 
our authorizing Committee here in the House. And I am pleased 
to testify on behalf of the Commission, the CFTC itself.
    On this anniversary of the Dodd-Frank Act, it is important 
to remember why the law's derivatives reforms were necessary. 
When AIG and Lehman Brothers failed, we all paid the price, 
your constituents and everybody in this room. And what is more, 
the effects of that crisis continue to be very real, very 
significant, uncertainty is still in the economy and millions 
of Americans are still out of work.
    The CFTC is working along with other regulators, 
particularly the SEC, to efficiently and transparently write 
rules to implement the provisions of the Dodd-Frank Act. And 
among the rules we have proposed are specific exceptions for 
commercial end-users consistent with Congressional intent. For 
instance, we have published proposed rules that do not require 
dealers to collect margin from end-users.
    This spring we substantially completed the proposal phase 
of our rulemaking and provided an additional 30 day period of 
comment to look at the whole mosaic, that period closed June 3. 
Now the staff and Commissioners have turned to final rules and 
approved eight of them so far.
    In August, we hope to consider a final rule on swap data 
repositories, something that many market participants asked us 
to take a look at first. In early fall we are likely to take up 
rules--I say ``likely'' because schedules can sometimes 
change--but likely to take up rules relating to clearinghouse 
core principles, position limits, business conduct, and the 
entity definition related to this swap dealer definition that I 
know many Members are interested in here.
    Later in the fall, we hope to consider rules relating to 
trading, real-time reporting, data reporting, and the end-user 
exception.
    There are some rules that we proposed a little later and 
they only closed comment periods in the last month. And so by 
necessity, we will probably take them up later. But one of them 
I would like to mention is a comment period closing tomorrow on 
the product definition and we look to work with the SEC to take 
that up as soon as practicable, but we don't know how many 
comments there will be as of yet.
    We are taking great care to provide the public with 
meaningful notice and opportunity to comment on those proposed 
rules before it becomes final. And sometimes we may even take, 
or determine it is appropriate to re-propose a rule as we did 
earlier this week, we re-proposed one rule on something called 
straight-through processing at the clearinghouses.
    We have also reached out broadly to market participants 
including three roundtables, a 60 day public comment period, 
and so forth, to consider how best to phase the compliance with 
the rules themselves. Phased implementation, I believe, of the 
compliance will help lower costs and lower risks across the 
board.
    And we are planning to request additional public comment on 
a critical aspect of this phasing. We have a lot of public 
comment already that has been very helpful, but there is one 
piece that is really important: the requirements related to the 
transactions themselves that might affect the broader market. 
These requirements, like the clearing mandate, the trading 
mandate, even some of the documentation and margin 
requirements, we have to get more input from the public about 
how to best phase that and phase it by market participant and 
category of participant.
    Before I close, I would like to just note that the CFTC is 
taking on a significantly expanded scope and mission, a market 
seven times that which we already are regulating, and to do so 
the Commission must adequately be resourced to effectively 
police the markets and protect the public.
    And without sufficient funds, there will be fewer cops on 
the beat, but possibly even more interesting to many here, it 
is also we need enough staff to actually answer the basic 
questions of market participants. And there are many market 
participants that have uncertainty about the law, the rules as 
they finalize, and will want interpretation and guidance.
    In conclusion, we are working thoroughly at the Commission 
to get these rules right, based on significant public comment. 
We have already received more than 20,000 public comments.
    It is more important to get it right than to work against 
the clock, and we have extended the time frame to do that. But 
until the CFTC completes its rule-writing process and 
implements and actually gets funding to be able to oversee the 
markets, the public remains unprotected.
    I thank you, and I look forward to the questions.
    [The prepared statement of Mr. Gensler follows:]

 Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures 
                  Trading Commission, Washington, D.C.
    Good afternoon, Chairman Lucas, Ranking Member Peterson, and 
Members of the Committee. I thank you for inviting me to today's 
hearing on the implementation of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act). I am pleased to testify on 
behalf of the Commodity Futures Trading Commission (CFTC). I also thank 
my fellow Commissioners and CFTC staff for their hard work and 
commitment on implementing the legislation.
Financial Crisis
    One year ago, the President signed the Dodd-Frank Act into law. And 
on this anniversary, it is important to remember why the law's 
derivatives reforms are necessary.
    The 2008 financial crisis occurred because the financial system 
failed the American public. The financial regulatory system failed as 
well. When AIG and Lehman Brothers faltered, we all paid the price. The 
effects of the crisis remain, and there continues to be significant 
uncertainty in the economy.
    Though the crisis had many causes, it is clear that the derivatives 
or swaps market played a central role. Swaps added leverage to the 
financial system with more risk being backed by less capital. They 
contributed, particularly through credit default swaps, to the bubble 
in the housing market and helped to accelerate the financial crisis. 
They contributed to a system where large financial institutions were 
thought to be not only too big to fail, but too interconnected to fail. 
Swaps--developed to help manage and lower risk for end-users--also 
concentrated and heightened risk in the financial system and to the 
public.
Derivatives Markets
    Each part of our nation's economy relies on a well-functioning 
derivatives marketplace. The derivatives market--including both the 
historically regulated futures market and the heretofore unregulated 
swaps market--is essential so that producers, merchants and end-users 
can manage their risks and lock in prices for the future. Derivatives 
help these entities focus on what they know best--innovation, 
investment and producing goods and selling and services--while finding 
others in a marketplace willing to bear the uncertain risks of changes 
in prices or rates.
    With notional values of more than $300 trillion in the United 
States--that's more than $20 of swaps for every dollar of goods and 
services produced in the U.S. economy--derivatives markets must work 
for the benefit of the American public. Members of the public keep 
their savings with banks and pension funds that use swaps to manage 
interest rate risks. The public buys gasoline and groceries from 
companies that rely upon futures and swaps to hedge swings in commodity 
prices.
    That's why oversight must ensure that these markets function with 
integrity, transparency, openness and competition, free from fraud, 
manipulation and other abuses. Though the CFTC is not a price-setting 
agency, recent volatility in prices for basic commodities--agricultural 
and energy--are very real reminders of the need for common sense rules 
in all of the derivatives markets.
The Dodd-Frank Act
    To address the real weaknesses in swaps market oversight exposed by 
the financial crisis, the CFTC is working to implement the Dodd-Frank 
Act's swaps oversight reforms.
Broadening the Scope
    Foremost, the Dodd-Frank Act broadened the scope of oversight. The 
CFTC and the Securities and Exchange Commission (SEC) will, for the 
first time, have oversight of the swaps and security-based swaps 
markets.
Promoting Transparency
    Importantly, the Dodd-Frank Act brings transparency to the swaps 
marketplace. Economists and policymakers for decades have recognized 
that market transparency benefits the public.
    The more transparent a marketplace is, the more liquid it is, the 
more competitive it is and the lower the costs for hedgers, which 
ultimately leads to lower costs for borrowers and the public.
    The Dodd-Frank Act brings transparency to the three phases of a 
transaction.
    First, it brings pre-trade transparency by requiring standardized 
swaps--those that are cleared, made available for trading and not 
blocks--to be traded on exchanges or swap execution facilities.
    Second, it brings real-time post-trade transparency to the swaps 
markets. This provides all market participants with important pricing 
information as they consider their investments and whether to lower 
their risk through similar transactions.
    Third, it brings transparency to swaps over the lifetime of the 
contracts. If the contract is cleared, the clearinghouse will be 
required to publicly disclose the pricing of the swap. If the contract 
is bilateral, swap dealers will be required to share mid-market pricing 
with their counterparties.
    The Dodd-Frank Act also includes robust record-keeping and 
reporting requirements for all swaps transactions so that regulators 
can have a window into the risks posed to the system and can police the 
markets for fraud, manipulation and other abuses.
    On July 7, the Commission voted for a significant final rule 
establishing that clearinghouses and swaps dealers must report to the 
CFTC information about the swaps activities of large traders in the 
commodity swaps markets. For decades, the American public has benefited 
from the Commission's gathering of large trader data in the futures 
market, and now will benefit from this additional information to police 
the commodity swaps markets.
Lowering Risk
    Other key reforms of the Dodd-Frank Act will lower the risk of the 
swaps marketplace to the overall economy by directly regulating dealers 
for their swaps activities and by moving standardized swaps into 
central clearing.
    Oversight of swap dealers, including capital and margin 
requirements, business conduct standards and record-keeping and 
reporting requirements will reduce the risk these dealers pose to the 
economy.
    The Dodd-Frank Act's clearing requirement directly lowers 
interconnectedness in the swaps markets by requiring standardized swaps 
between financial institutions to be brought to central clearing.
    This week, the Commission voted for a final rule establishing a 
process for the review by the Commission of swaps for mandatory 
clearing. The process provides an opportunity for public input before 
the Commission issues a determination that a swap is subject to 
mandatory clearing. The Commission will start with those swaps 
currently being cleared and submitted to us for review by a derivatives 
clearing organization.
Enforcement
    Effective regulation requires an effective enforcement program. The 
Dodd-Frank Act enhances the Commission's enforcement authorities in the 
futures markets and expands them to the swaps markets. The Act also 
provides the Commission with important new anti-fraud and anti-
manipulation authority.
    This month, the Commission voted for a final rule giving the CFTC 
authority to police against fraud and fraud-based manipulative schemes, 
based upon similar authority that the Securities and Exchange 
Commission, Federal Energy Regulatory Commission and Federal Trade 
Commission have for securities and certain energy commodities. Under 
the new rule, the Commission's anti-manipulation reach is extended to 
prohibit the reckless use of fraud-based manipulative schemes. It 
closes a significant gap as it will broaden the types of cases we can 
pursue and improve the chances of prevailing over wrongdoers.
    Dodd-Frank expands the CFTC's arsenal of enforcement tools. We will 
use these tools to be a more effective cop on the beat, to promote 
market integrity and to protect market participants.
Position Limits
    Another critical reform of the Dodd-Frank Act relates to position 
limits. Position limits have been in place since the Commodity Exchange 
Act passed in 1936 to curb or prevent excessive speculation that may 
burden interstate commerce.
    In the Dodd-Frank Act, Congress mandated that the CFTC set 
aggregate position limits for certain physical commodity derivatives. 
The law broadened the CFTC's position limits authority to include 
aggregate position limits on certain swaps and certain linked contracts 
traded on foreign boards of trade, in addition to U.S. futures and 
options on futures. Congress also narrowed the exemptions for position 
limits by modifying the definition of a bona fide hedge transaction.
    When the CFTC set position limits in the past, the purpose was to 
ensure that the markets were made up of a broad group of market 
participants with a diversity of views. Market integrity is enhanced 
when participation is broad and the market is not overly concentrated.
Commercial End-User Exceptions
    The Dodd-Frank Act included specific exceptions for commercial end-
users, and the CFTC is writing rules that are consistent with this 
Congressional intent.
    First, the Act does not require non-financial end-users that are 
using swaps to hedge or mitigate commercial risk to bring their swaps 
into central clearing. The Act leaves that decision up to the 
individual end-users.
    Second, there was a related question about whether corporate end-
users would be required to post margin for their uncleared swaps. The 
CFTC has published proposed rules that do not require such margin.
    And third, the Dodd-Frank Act maintains the ability of non-
financial end-users to enter into bilateral swap contracts with swap 
dealers. Companies can still hedge their particularized risk through 
customized transactions.
Rule-Writing Process
    The CFTC is working deliberatively, efficiently and transparently 
to write rules to implement the Dodd-Frank Act. Our goal has been to 
provide the public with opportunities to inform the Commission on 
rulemakings, even before official public comment periods.
    We began soliciting views from the public immediately after the Act 
was signed into law and during the development of proposed rulemakings. 
We sought and received input before the pens hit the paper. We have 
hosted 13 public roundtables to hear ideas from the public prior to 
considering rulemakings. On August 1, we will host another public 
roundtable to gather input on international issues related to the 
implementation of the law. Staff and commissioners have held more than 
900 meetings with the public, and information on these meetings is 
available at cftc.gov.
    We have engaged in significant outreach with other regulators--both 
foreign and domestic--to seek input on each rulemaking, including 
sharing many of our memos, term sheets and draft work product. CFTC 
staff has had about 600 meetings with other regulators on Dodd-Frank 
implementation.
    The Commission holds public meetings, which are also webcast live 
and open to the press, to consider rulemakings. For the vast majority 
of proposed rulemakings, we have solicited public comments for 60 days. 
In April, we approved extending the comment periods for most of our 
proposed rules for an additional 30 days, giving the public more 
opportunity to review the whole mosaic of rules at once.
    We also set up a rulemaking team tasked with developing conforming 
rules to update the CFTC's existing regulations to take into account 
the provisions of the Dodd-Frank Act. This is consistent with a 
requirement included in the President's January Executive Order. In 
addition, we will be examining the remainder of our rule book 
consistent with the Executive Order's principles to review existing 
regulations. The public has been invited to comment by August 29 on the 
CFTC's plan to evaluate our existing rules.
    This spring, we substantially completed the proposal phase of rule-
writing. Now, the staff and commissioners have turned toward finalizing 
these rules. To date, we held two public Commission meetings this month 
and approved eight final rules. In the coming months, we will hold 
additional public meetings to continue to consider finalizing rules, a 
number of which I will highlight. In August, we hope to consider a 
final rule on swap data repository registration. In the early fall, we 
are likely to take up rules relating to clearinghouse core principles, 
position limits, business conduct and entity definition. Later in the 
fall, we hope to consider rules relating to trading, real-time 
reporting, data reporting and the end-user exemption. We will consider 
most of the rules with comment periods that have yet to close, 
including capital and margin requirements for swap dealers and 
segregation for cleared swaps, sometime in subsequent Commission 
meetings. The comment period for product definitions closes tomorrow, 
and working with the SEC, we will take them up as soon as it is 
practical.
    As the Commission continues with its rulemaking process, the 
Commission is taking great care to adhere to the requirement that the 
public be provided meaningful notice and opportunity to comment on a 
proposed rule before it becomes final. Therefore, depending on the 
circumstance--such as when the Commission may be considering whether to 
adopt a particular aspect of a final rule that might not be considered 
to be the logical outgrowth of the proposed rule--the Commission may 
determine that it would be appropriate to seek further notice and 
comment with respect to certain aspects of proposed rules. For example, 
in response to comments received on a proposed rule regarding the 
processing of cleared swaps, the Commission this week re-proposed 
aspects of this rule regarding the prompt, efficient and accurate 
processing of trades.
    The Dodd-Frank Act set a deadline of 360 days for the CFTC to 
complete the bulk of our rulemakings, which was July 16, 2011.
    Last week, the Commission granted temporary relief from certain 
provisions that would otherwise apply to swaps or swap dealers on July 
16. This order provides time for the Commission to continue its 
progress in finalizing rules.
Phasing of Implementation
    The Dodd-Frank Act gives the CFTC flexibility to set effective 
dates and a schedule for compliance with rules implementing Title VII 
of the Act, consistent with the overall deadlines in the Act. The order 
in which the Commission finalizes the rules does not determine the 
order of the rules' effective dates or applicable compliance dates. 
Phasing the effective dates of the Act's provisions will give market 
participants time to develop policies, procedures, systems and the 
infrastructure needed to comply with the new regulatory requirements.
    In May, CFTC and SEC staff held a roundtable to hear directly from 
the public about the timing of implementation dates of Dodd-Frank 
rulemakings. Prior to the roundtable, CFTC staff released a document 
that set forth concepts that the Commission may consider with regard to 
the effective dates of final rules for swaps under the Dodd-Frank Act. 
We also offered a 60 day public comment file to hear specifically on 
this issue. The roundtable and resulting public comment letters will 
help inform the Commission as to what requirements can be met sooner 
and which ones will take a bit more time. This public input has been 
very helpful to staff as we move forward in considering final rules.
    We are planning to request additional public comment on a critical 
aspect of phasing implementation--requirements related to swap 
transactions that affect the broad array of market participants. Market 
participants that are not swap dealers or major swap participants may 
require more time for the new regulatory requirements that apply to 
their transactions. There may be different characteristics amongst 
market participants that would suggest phasing transaction compliance 
by type of market participant. In particular, such phasing compliance 
may relate to: the clearing mandate; the trading requirement; and 
compliance with documentation standards, confirmation and margining of 
swaps.
    Our international counterparts also are working to implement needed 
reform. We are actively consulting and coordinating with international 
regulators to promote robust and consistent standards and to attempt to 
avoid conflicting requirements in swaps oversight. Section 722(d) of 
the Dodd-Frank Act states that the provisions of the Act relating to 
swaps shall not apply to activities outside the U.S. unless those 
activities have ``a direct and significant connection with activities 
in, or effect on, commerce'' of the U.S. We are developing a plan for 
application of 722(d) and will seek public input on that plan in the 
fall.
Conclusion
    Only with reform can the public get the benefit of transparent, 
open and competitive swaps markets. Only with reform can we reduce risk 
in the swaps market--risk that contributed to the 2008 financial 
crisis. Only with reform can users of derivatives and the broader 
public be confident in the integrity of futures and swaps markets.
    The CFTC is taking on a significantly expanded scope and mission. 
By way of analogy, it is as if the agency previously had the role to 
oversee the markets in the state of Louisiana and was just mandated by 
Congress to extend oversight to Alabama, Kentucky, Mississippi, 
Missouri, Oklahoma, South Carolina, and Tennessee--we now have seven 
times the population to police.
    Without sufficient funds, there will be fewer cops on the beat. The 
agency must be adequately resourced to assure our nation that new rules 
in the swaps market will be strictly enforced--rules that promote 
transparency, lower risk and protect against another crisis.
    Until the CFTC completes its rule-writing process and implements 
and enforces those new rules, the public remains unprotected.
    Thank you, and I'd be happy to take questions.

    The Chairman. Thank you, Chairman, for your testimony.
    The chair would like to remind Members they will be 
recognized for questioning in the order of seniority for the 
Members who were here at the start of the hearing. And after 
that, Members will be recognized in order of arrival, and I 
appreciate the Members understanding.
    And with that I recognize myself for 5 minutes.
    Mr. Chairman, this afternoon we are going to hear from the 
Los Angeles Department of Water and Power as well as Ford Motor 
Company. And, it is safe to say that neither of these entities 
caused the financial crisis. Yet the L.A. Department of Water 
and Power will testify that in addition to concerns regarding 
margin and capital costs under your rules, they may be deemed 
swap dealers. They may be unable to find counterparties due to 
the business conduct standards, and the new reporting 
requirements may impose significant new costs and 
infrastructure challenges.
    As for Ford, not only are they concerned about margin and 
capital costs, they are concerned about the ability of their 
pension fund to continue hedging, the treatment of their 
captive financial unit, and the continued viability and 
efficiency of their centralized hedging affiliate.
    Mr. Chairman, are you able to describe the cumulative 
impact of all of these regulations for individual entities like 
Ford or the L.A. Water Department, let alone the whole economy?
    Mr. Gensler. Well, the cumulative effect, Mr. Chairman, is 
a net positive. I think that transparency and the openness and 
the competitiveness that this Committee worked so hard to get 
into Title VII is a key to lowering costs of the derivatives 
market and lowering risks to the public.
    On the specific issues, issue by issue, we take up the 
cost-benefit analysis in each of the rules. And I will be glad 
to address each one of the issues you raised in that question.
    The Chairman. But it is fair to say they have legitimate 
points there in the way the rules are coming together, isn't it 
Chairman?
    Mr. Gensler. I think that if I can, taking the pension 
point, we think it is a clear intent that pension funds, and 
all, really, participants in this market, be able to use these 
products to hedge a risk so they can focus on that which they 
do best and then lock in a price array. That is the core of 
this market, just as a farmer locks in the price of corn or 
wheat at harvest time. And so pension funds need to do to do 
that.
    We are working very closely with the Department of Labor 
because the specific issue there is just how some rules they 
have and these rules come together so that a counterparty is 
not necessarily a fiduciary under the Department of Labor 
rules. I think that we have a path forward with the Department 
of Labor on that issue.
    The Chairman. But at the present moment it is a legitimate 
concern.
    Mr. Gensler. Of the 20,000+ comments most are legitimate 
concerns, and we are taking them in, and I think that when the 
business conduct rules with regard to pension funds, we will 
take up those in the final rule.
    The Chairman. Let's for a moment focus on the issue of 
being defined as swap dealers, these entities.
    Mr. Gensler. Swap dealer in the statute had--it was four 
different definitions. And then Congress asked us to, ``further 
define it beyond these four definitions,'' which we are doing. 
It also gave us some ability to define de minimis. So some 
entities like agriculture cooperatives we have been working 
with and meeting with actively, I think we will be able to find 
a path forward that agricultural cooperatives, if they are 
offering swaps, agricultural swaps and related swaps to their 
members, and they are under Capper-Volstead, an agricultural 
cooperative for instance will find a path forward that they are 
not a dealer.
    We have some similar dialogues going with municipal 
cooperatives like I know you have later today, I saw earlier 
from the L.A. Municipal Cooperative.
    The Chairman. But, Mr. Chairman, is it fair to say that in 
the way the rules are evolving right now, the Water Department 
and Ford Motor Company's concerns about their being defined as 
swaps dealers, that is a legitimate concern at this point.
    Mr. Gensler. I actually think they know more about their 
business than we do. If they are dealing in swaps, then it is 
possible. But, most of them, the Ford Motor Company to my 
knowledge, or the Municipal Cooperative in L.A., may not 
actually even be dealing in swaps. So we have had very good 
dialogues with them and we are trying to clarify the rules to 
lessen any uncertainty.
    The Chairman. The next panel will be fascinating.
    In speeches and statements, your focus remains on the need 
to reduce risks to the financial system, increase transparency, 
and every Member of this Committee agrees with those efforts. 
But we are here to tell you, Mr. Gensler, looking at our 
industry panel, the folks who will come next, this is much 
bigger than Wall Street. It seems as though you are unwilling 
to acknowledge the breadth of your own proposals. And there are 
simple and direct steps that you could take to improve your 
process and the outcome of your rules. And those steps will not 
undermine the creation of an effective or modern regulatory 
regime for derivatives.
    For example, why did you choose to extend the exemptive 
order only until December, the exemptive order, whereas the SEC 
chose a route so that they basically extend the exemption until 
the rules are in place?
    Mr. Gensler. Well, there are actually a number of other 
differences with the SEC.
    The Chairman. But just on that one, just for curiosity's 
sake.
    Mr. Gensler. If a rule is mandated by Dodd-Frank, it is 
extended until that rule is in place. And that is even beyond 
the 6 months, Mr. Chairman. There are some things that were not 
dependent upon a rule and we are just dependent upon the 
definition of swap, and swap dealer, and so forth. So we chose 
to extend it for 6 months with an anticipation that we would, 
before that time, get to the definitions of swap dealer and 
swap. If for some reason we have not, we will take up in 
November and we will tailor relief at that point to give 
additional relief.
    The Chairman. But you do see why this would cause angst, as 
an example this particular case, why it would cause angst and 
concern out there?
    With that, my time has expired I now turn to the Ranking 
Member, and recognize Mr. Peterson for 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman.
    Chairman Gensler, the Commission and the prudential 
regulators have both put forth their proposed rules regarding 
the margin requirements for the uncleared swaps traded by swap 
dealers and major swap participants under their jurisdiction.
    Can you explain the differences between these proposals 
with regard to margin requirements that could be required of 
non-financial end-users, low-risk financial entities and high-
risk financial entities?
    Mr. Gensler. We worked very closely, as Dodd-Frank asked us 
to, with the prudential regulators and we proposed a rule that 
these non-financial end-users would not be subject to margin. I 
believe that is what the prudential regulators did as well. 
They did add something because we cover banks. It is not our 
rule but they said that banks had to extend credit consistent 
with their credit policies. But, we each have proposals out 
there where the non-financial end-users would not be subject to 
any margin requirement from the CFTC's rules.
    Mr. Peterson. It was suggested at a previous hearing that 
the CFTC should delegate some of its Dodd-Frank 
responsibilities to the National Futures Association which is 
funded entirely by its participants.
    Given that the CFTC is not funded directly by participants 
in the market it oversees, but by Congress, wouldn't more NFA 
responsibility place a greater cost on the industry than direct 
CFTC oversight?
    Mr. Gensler. They would raise their fees and they are going 
to take up some rules later this fall so that they would--all 
the dealers would register with the NFA. We are working with 
the NFA that they would be the examination front and go into 
these entities on some regular basis and then they would, of 
course, as you say, charge fees.
    Mr. Peterson. Do you have any idea----
    Mr. Gensler. I would like to try to get back to you and 
work with the NFA to see, but I haven't seen a cost estimate of 
what they are doing yet. But they are planning to propose some 
rules and then have an examination staff starting, with about 
50 people, January, but then growing after that.
    Mr. Peterson. A few days ago, Representative Garrett 
introduced legislation to limit the CFTC in its ability to set 
rules for operation of swap execution facilities. And it 
appears to be particularly targeted, appears to target you, the 
Commission's proposed rules regarding these SEFs. Do you 
believe--are you familiar with this legislation?
    Mr. Gensler. Not the details of it. I must apologize. With 
two Congressional hearings, I didn't read the legislation.
    Mr. Peterson. So maybe you can't just, it limits your 
authority to set these up. But the question I had was whether 
you believe these limitations are warranted. I assume you don't 
but----
    Mr. Gensler. I can't speak to the specific legislation, but 
these facilities will help end-users because they will get 
transparency. If they are commercial end-users, they have no 
requirement to use them. Congress is clear and we will follow 
that intent. But it does require the dealers and the financial 
insurance companies and hedge funds to use them, and so there 
will be a great deal more transparency. And economists for 
decades have said when you bring things into the open, when you 
shine a light on it, you narrow the costs. You do tip some of 
the information advantage from Wall Street to Main Street, and 
some of the opposition is from that.
    Mr. Peterson. The next panel, Mr. Peterson with Chatham 
Financial states that Chatham supports the CFTC's position that 
it is not required to impose margin requirements on non-
financial end-users. However, Mr. Schloss with Ford states that 
your proposed rules require swaps dealers to collect margin 
from non-financial end-users if the thresholds were to be 
exceeded. Can you tell us who is right?
    Mr. Gensler. Our rule as proposed does not require a dealer 
to collect margin from any non-financial end-user but we will 
take his testimony into our comment file and consider it as a 
comment so that we can take----
    Mr. Peterson. Under the proposed rule, the only time the 
CFTC-regulated swap dealer would require a non-commercial end-
user to post margin is if it wanted to do that on its own 
accord.
    Mr. Gensler. It would be a matter of a private contract.
    Mr. Peterson. Thank you. Thank you, Mr. Chairman.
    The Chairman. The chair now recognizes the gentleman from 
Illinois for 5 minutes.
    Mr. Johnson. Thank you Mr. Chairman. I would echo the 
comments earlier in the week that the chair made. Mr. Gensler, 
I don't think Members of this Committee are trying to dismantle 
Dodd-Frank. We are trying to make it work better. And with that 
premise and with also the understanding that I only have 4 
minutes and 43 seconds on the time clock, I am going to make a 
couple statements and ask a couple questions and hope you take 
them in the respectful light that they are given.
    I have found in the time that you have come here before, 
that you are very skillful in not answering questions. So I am 
not going to pose some questions to you, although I may have a 
couple, and just make a couple of statements that I think are 
applicable. And I say that with all due respect, and that is 
the experience I have had and that is what I am going to act 
on.
    I guess the first comment I would have is it seems as 
though your proposals and the various others in the regulatory 
scheme, specifically the SEC, have obvious conflicts, and I 
think that the definitions that you have given us with respect 
to swaps and swap dealers are somewhat less than clear.
    Do you have any response to what you are doing vis-a-vis 
the SEC and how much more specific you can or are willing to be 
with respect to some of these definitions?
    Mr. Gensler. The SEC and CFTC have worked jointly on those 
definition rules. So in that case we are actually aligned.
    Mr. Johnson. But you will concede there are 
inconsistencies, there are clearly inconsistencies. I don't 
think you can deny that, can you?
    Mr. Gensler. In other rules. In other rules. Because the 
joint rule is a joint rule, but in the----
    Mr. Johnson. I am talking about your entity and SEC as it 
applies to two different regulatory schemes dealing with 
economically comparable products and having schizophrenia, so 
to speak, in terms of which set of rules are going to apply. I 
think it is clear, and I wonder what you are going to do to try 
to get us out of that dilemma.
    Mr. Gensler. I do. I am trying my hardest to answer the 
question. With some rules, whether it is about swap execution 
facilities or some of the clearinghouse rules, there are some 
differences, as we are a regulator that also regulates futures, 
and we are trying not to have too much regulatory gap or 
differences between futures and this.
    On the definitions, we are aligned because it is a joint 
rule and it has to have the same words.
    Mr. Johnson. Let me, since we have limited time, and 
respectful not only to the chair and Ranking Member but to 
other Members of the Committee, just make a couple of comments 
that are apparent from your testimony and from the history of 
what we have dealt with so far. I think other Members of the 
Committee and certainly I have heard from various pension plans 
which we are all vitally concerned about in these economic 
times and various states and their ``attack'' on pension plans, 
a lot of the pension plans believe that the rules that you are 
in the process of implementing and the underlying legislation 
are harming them. They harm their ability to operate and act on 
behalf of the people who have paid into them. I am concerned 
about that and simply want to posit that.
    I am also concerned--really concerned--representing an area 
as a lot of us do where rural electric cooperatives, 
agricultural cooperatives and all that are an essential part of 
our being, critical positive entities that really do a whole 
lot for the infrastructure of this country. For people living 
in big cities you probably know it too, but we know it in a 
very specific way. And I am very concerned that we are treating 
in many ways, and you are, those cooperatives in a way almost 
identical to Goldman Sachs, and I think that is, frankly--that 
falls of its own weight.
    I am also concerned about the definition of swap dealers. I 
consider that in the agriculture sector and in the energy 
sector, which are two really critical sectors, that those 
definitions are overly broad and really don't serve well the 
interests of either the agriculture sector or the energy 
sector. And I hope in the course of your further rule 
implementation you will be aware of that.
    Let me just finish by asking you one question and then we 
can go from there. I do appreciate your receiving these 
questions, and they are given really in the most respectful 
light, but I also want to be candid with you.
    Do you believe that you are on track, both substantively 
and time wise, to do what the underlying legislation, this 
Committee and other oversight committees expect you to do, or 
have you had an unexpected amount of delays and snafus in the 
process that have resulted in what is, at least appears to be, 
a very perplexing final product?
    Mr. Gensler. I think we are on track to do what Congress 
intended us to do, but we are delayed. We are delayed because 
we didn't do it in 360 days as Congress had mandated us to do 
it, but that is because we are going to get it right. We are 
going to take all these comments in, the pension fund, the 
agricultural cooperative, the definitions as you say, and the 
final rules will be different than the proposals. If they are a 
logical outgrowth we will finalize. If we need to repropose----
    Mr. Johnson. I am out of time. You are out of time, Mr. 
Chairman. I appreciate this very much. I think this is an 
ongoing dialogue that really needs to continue. And I am 
hopeful that you will be able to get back to us and see some 
improvement in what I think has been a failed process so far.
    The Chairman. The gentleman's time has expired. The chair 
now turns to the gentleman from Pennsylvania to be recognized 
for 5 minutes.
    Mr. Holden. Chairman Gensler, you mentioned you had the 
ongoing conversation the with the co-ops. I am wondering if you 
are having the same conversation with the Farm Credit System, 
and where are we with their concerns about mandatory clearing?
    Mr. Gensler. We have--we have had them with them and with 
the Farm Credit Administration. And we are looking at, for, as 
Congress had mandated for institutions, small, financial 
institutions, banks, farm co-ops and credit unions and the 
statute says less than $10 billion. We are working with all the 
regulators as to how to address that, that we shall consider 
exempting those groups. We have not yet published something 
just because of the breadth of all the things that we are 
focused on.
    Mr. Holden. Are you looking just, does the statute only 
allow you to look at the assets or do you look at the 
percentage, like with the system it is \1/10\ of 1 percent of 
the system's total loan volume. That doesn't seem to be 
systemic risk. Does the statute allow you to look at that?
    Mr. Gensler. We are looking at a number of alternatives 
with regard to, the group that Congress said to look at, these 
small institutions and how to exempt them. And one of the 
things is within that, as you say, percentage of capital, 
percentage of other ratios.
    Mr. Holden. And one final question on the system. I guess 
in looking at a bank to determine if it is a swap dealer, Dodd-
Frank gives insured depository institutions a broad exemption 
from the swap dealer definition so long as the swaps they 
provide customers are related to providing that customer alone. 
Would the Farm Credit System be eligible for the same 
exemption?
    Mr. Gensler. I am familiar with the issue, as Members might 
recall and as the Congressman said, a bank or what is called an 
insured depository institution, can originate--do a swap in 
connection with originating a loan, and it doesn't become a 
swap dealer and so forth.
    The statutory language uses those words, and so the lawyers 
are looking at whether that insured depository institution, 
words I am led to believe may not cover the Farm Credit 
System--and that may be a limitation that was in those words, 
but we are looking at that closely. I know the lawyers and 
others have looked at that.
    Mr. Holden. You said it may not cover, I thought you said, 
right?
    Mr. Gensler. That is what the comment letters are concerned 
with. That is right.
    Mr. Holden. Thank you. I yield back, Mr. Chairman.
    The Chairman. Would the gentleman yield for just a moment 
before he yields back?
    Chairman, we were talking a moment ago about the swap 
dealers and margin requirements. If you are a captive 
enterprise, for instance say Ford, you would be exempt it would 
appear. But what about Ford Credit and all of the other 
enterprises underneath that? Would they also be exempt from the 
swap dealer definition or the margin requirements, those 
issues?
    Mr. Gensler. Two questions: From our understanding--and, 
again, it may be we don't have enough of the facts, it is case 
by case--they are not making markets and they are not 
accommodating other parties. They are not helping others with 
risk management, doing what dealers normally do.
    So I haven't heard from whether it is Ford Credit or other 
credit companies about the dealer.
    On the second question about margin, that comes to a 
question of how Congress defined what is a financial entity, 
and captive finance companies are meant to be out, but there is 
a statistical test that is in the statute for that. So there 
are probably out as long as they meet the Dodd-Frank provisions 
of a captive finance company.
    The Chairman. So they may or may not be in this example, 
and the test is clearly defined in law or will be defined in 
rule?
    Mr. Gensler. The test for clearing is clearly defined in 
law. It has two 90 percent tests that I am glad to meet with 
you and chat with you about. But it is clearly defined in the 
statute. Our rule didn't define it. The statute did.
    The Chairman. I thank the gentleman for yielding.
    And I recognize the gentleman from Texas, Mr. Conaway, for 
5 minutes.
    Mr. Conaway. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for being here.
    Transparency has been a recurrent theme throughout your 
testimony and I didn't count today's testimony but you have 
used the word transparent or and/or transparency a lot. Under 
that heading, would you consider on future final rules a 3 to 7 
day advanced posting of the rule that your Commission is going 
to vote on? We do that here with respect to laws that we are 
going to vote on the floor. Would you consider that for your 
team?
    Mr. Gensler. Congressman, this has been raised even by one 
of our Commissioners. And as thoughtful as the suggestion is, 
it runs right smack into the Administrative Procedures Act 
which Congress doesn't have to comply with but we do. And so 
our General Counsel has reviewed other regulatory agents, too. 
To post a final rule that is different than a proposal would 
run into serious concerns with the Administrative Procedures 
Act.
    Would that be a re-proposal? Would 7 days or 3 days be 
sufficient when we are putting things out for 60 days and the 
Administrative Procedures Act says there is a minimum of 30 
days to comment?
    Mr. Conaway. So the idea is that the Administrative 
Procedures Act works against transparency, or at least the 
interpretation by your team is that----
    Mr. Gensler. And we are not aware of other regulators that 
do here in the U.S.
    Mr. Conaway. I looked at the rules that you went final on 
last week, they are all 5-0. A particular concern to this 
Committee has been the cost-benefit analysis. And earlier 
testimony from a couple of the folks from the Commission had 
said that you would redo cost-benefit analysis on final rules.
    I was particularly troubled by how cavalier that your 
decisions are with respect to the costs. Is it going to be your 
interpretation that there is no rule that is so unimportant 
that there aren't--that the costs exceed the benefits and 
therefore you wouldn't do the rule? Is every single rule that 
you proposed of such vital impact on the regulatory scheme that 
it really doesn't matter what the costs are to the industry to 
comply?
    Mr. Gensler. The costs are very important. I would say 
there is almost not a meeting that goes on in my office that we 
are not weighing costs and the benefits, because there are a 
lot of choices within those rules. And so when the commenters 
come in, if we can find a lower-cost approach, or just one 
that--we will accept the comment and change the final rule to 
try to lower these things.
    Mr. Conaway. That is helpful to hear, because if you just 
read through the one that I was looking at it just seemed to 
be, well, we know there are going to be a lot of costs and we 
will keep dividing them by some bigger number so they get down 
to a smaller number per entity or whatever, and that is fine. 
That is in effect a tax that you are levying on the system, or 
equivalent to a tax on the system when you, through your 
rulemaking, raise their costs.
    Swap dealers under the business standard of conduct, 
business conduct standards, you are a swap dealer, you have to 
look at your counterparties and decide whether or not they have 
the sophistication, I guess, to deal with you. But if they have 
an independent adviser--Mr. Hultgren will pick sides when you 
are Chairman, Mr. Hultgren, I am trying to swap back and forth.
    Mr. Gensler. He is swapping.
    Mr. Conaway. The swap dealer then gets a veto on the 
independent adviser, which seems a bit of a conflict of 
interest in this system. Are you going to change that in the 
final rule?
    Mr. Gensler. Just so Members--this has been dealing with 
pension funds and municipalities. It goes back to one of the 
earlier questions about pension funds. Yes, it has been raised 
by a number of comments. I think it is a very thoughtful--I 
can't tell you how we are going to come out on it but there is 
an easy fix to make sure that the pension fund can pick their 
adviser and it is not a check, as you say, on them picking that 
adviser.
    Mr. Conaway. And flipping to commodity pool operators and 
commodity trading advisers, not really required under Dodd-
Frank, as I understand it, but we have new rules with respect 
to those folks. Obvious question, why add to your burden of 
rulemaking with something that appears to be elective versus 
all the stuff that you have to do under Dodd-Frank, and are you 
sure, based on the cost-benefit analysis that you have done on 
these proposed rules that the reach of these registration rules 
or whatever you want to do with respect to these folks is 
warranted in these circumstances?
    Mr. Gensler. We addressed ourselves to commodity pool 
operators--some in the public we call money managers or hedge 
funds--because we are mandated jointly with the SEC to do rules 
on information and providing information particularly for those 
who have over $150 million in assets. And so it was in that 
context that the staff looked and said there are some 
exemptions from 2002 or 2003, that we didn't even know the 
whole inventory, and these proposals came out of that.
    We had a public roundtable since then. I don't know where 
we will come out. It is not on our agenda to take up in August. 
It would probably be later in the fall or even later than that 
because, as you know, it is not one of the swap rules. So it 
may be quite later in the agenda.
    Mr. Conaway. Thank you, Mr. Chairman. I appreciate it.
    The Chairman. The gentleman's time has expired. The chair 
recognizes the gentleman from Connecticut for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman. Thank you for 
holding this hearing. When you look at the title of this 
hearing, The View from Main Street, Mr. Chairman, I want to 
thank you first of all on page three of your testimony that you 
are reminding the Committee that when we talk about Main 
Street, that the public buys gasoline and groceries from 
companies that rely on futures and swaps to hedge swings in 
commodity prices. On my Main Street, that is what people are 
thinking about when they think about this issue.
    And there was a hearing in the Senate in May where the CEO 
of ExxonMobil, Mr. Tillerson, testified about what the 
traditional real price of oil should be. At that point it was 
about $115 a barrel. He said under oath in front of the Senate 
Committee that it should be $60-$70 a barrel. And he went on to 
say that it was speculation that is engineered by the high-
frequency trading of quantitative hedge funds that explained 
this increase, which again Mr. Peterson mentioned in his 
opening comments about the impact of speculation.
    That is what my public from Main Street is looking for from 
Washington, is trying to get some sanity in these prices which, 
again, is causing great damage in the economy. Those 
unemployment numbers that came out earlier this month for June, 
every single analyst, public sector, private sector, indicated 
that it was energy prices that was sapping consumer confidence 
and it was really suppressing businesses in terms of feeling 
confident to expand. And that is really what is at stake here 
in terms of getting these rules out from Main Street's 
perspective, in my opinion.
    And this Committee produced a bill which basically pushed 
back your authority into 2012. We tried to amend it, at least 
to carve-out one in Title VII for the position limits rules, 
which failed in a close vote. But, again, from Main Street 
right now, that is what people are waking up in the morning and 
thinking about, which is what it is going to cost to fill up 
their car.
    Connecticut now has the distinction of being number one in 
the country in terms of gasoline prices so maybe it is a little 
more acute there. But maybe you can help us in terms of 
updating us with regard to where we are with the position 
limits rule in terms of your deliberations.
    Mr. Gensler. Thank you. I think a critical piece of the Act 
and a critical piece of the hearing record of this Committee 
was related to aggregate position limits. And it is part of 
promoting integrity in the markets that no one player is, no 
one speculator is so large in the market that they have some 
dominance, and you have diversity in the marketplace.
    So we proposed a rule in January of this year, we received 
12,000 comments. It does suggest the public--this was the most 
comments--over \1/2\ of our comments are on one rule, and it is 
about energy prices and agricultural limits and silver and 
gold.
    We have now successfully summarized those comments. It is 
our hope to put a staff recommendation in front of the five 
Commissioners shortly and try to take it up after Labor Day. I 
don't know if that will be September or October. The 
Commissioners, five Commissioners, have to weigh in on the 
staff recommendation. But, it is critical.
    We are not an agency that sets prices. But our markets 
right now are 85 to 90 percent electronically traded, and 
probably somewhere between 80 and 95 percent of different 
markets are day trading and spread trading with only--it 
depends on which market, but the oil market right now is about 
five percent of the position changes on a day or traders that 
are trying to change a position overnight.
    Most of the rest of it is sort of day trading. It doesn't 
relate to position limits, but it gives you a sense. The 
markets have changed over the last 30 years.
    Mr. Courtney. Well, again, that effort in my opinion is 
critical for this recovery. And that is really, again, where 
Main Street is most focused right now.
    And last, I would just say in terms of your budget which 
you referred to earlier, again the unfortunate reductions in 
terms of resourcing your staff, I have said this before in the 
Committee and I say it again, every $10 a barrel increase in 
oil prices costs the Navy hundreds of millions of dollars. And 
from the taxpayer standpoint, getting a market which is at 
least somewhat aligned to real supply-and-demand forces is 
going to be helpful in terms of reducing what we are spending 
in D.C.
    Mr. Gensler. I couldn't agree with you more.
    I think this agency is a good investment. We are only about 
700 people; less, and they would call it a battalion in the 
military. And we think that taking on a market this large, we 
should grow to about 1,000 people. I know that is hard because 
we have a terrible budget deficit problem. But, it is a good 
investment to police the markets.
    The Chairman. The gentleman's time has expired, and I would 
note that the Commission is definitely swinging above its 
weight so far. With that, the chair would announce we are in 
the process of two recorded votes on the House floor. The chair 
would ask the indulgence of the Chairman to remain with us 
while we stand at the call of the chair and announce to other 
panelists that we will continue as soon as the series is over 
with. Members, please return promptly.
    With that we stand at ease.
    [Recess.]
    The Chairman. The hearing will reconvene. And the chair 
wishes to thank the Chairman of CFTC for his indulgence on 
time.
    And, with that, I would now recognize the gentleman from 
Pennsylvania for 5 minutes.
    Mr. Thompson. Thank you, Mr. Chairman.
    Chairman, thanks again for being here.
    I want to take a look in relation to impact on farm credit. 
You know, farm credit banks engage in swaps in connection with 
loans, just as commercial banks do. Do you have the authority 
to extend that exemption to farm credit institutions?
    Mr. Gensler. I am familiar with the issue. The question is 
because Congress in the statute says it is--two parts to your 
question maybe.
    I think that we do have the ability to exempt the small 
ones from clearing, similar to credit unions and other banks. 
And we are trying to bring together some statistics and try to 
do that in a thoughtful way.
    There is a separate question that you may be asking about 
this, whether some of their activity would be caught up in swap 
dealer definition. And there, there may be some limitations 
just because of how the statute is written about insured 
depository institutions, and we are taking a close look at 
that.
    But I don't know which part of the question, but in the 
second one, there is a little bit of a limitation in the 
statute.
    Mr. Thompson. So it sounds like from both parts of those, 
neither of those is something you have determined at this 
point, but you are looking at----
    Mr. Gensler. Oh, absolutely.
    Mr. Thompson.--the impact on farm credit?
    Mr. Gensler. Absolutely.
    Mr. Thompson. Any idea at what point there would be some 
certainty in determination?
    Mr. Gensler. It is our hope to finalize the entity 
definition rule, which includes the definition of swap dealer 
in this fall. It is joint with the Securities and Exchange 
Commission, so there is a lot of movement together. And 
Chairman Schapiro and I had a pretty constructive conversation 
about 3 hours ago on this. But it seems that we will be looking 
at that period of time.
    On the earlier point about the small bank and small 
financial institution exemption, we still would have to propose 
something before finalizing it, so that would take a little bit 
longer. But hopefully we could propose something again in this 
fall.
    Mr. Thompson. Okay. In terms of the swap dealer definition, 
I have some concerns with that. It seems that the two sectors 
that are most impacted by the overly broad definition are 
agriculture and energy. And those are two sectors where we 
should do everything we can, obviously, to promote the use of 
responsible mitigation tools, risk-mitigation tools, so that 
consumers, in turn, benefit from more stable prices for food 
and for power.
    How do you respond to the disproportionate impact a broad 
swap dealer definition will have for agriculture and energy 
end-users and, subsequently, the customers, where all costs 
always get passed along to?
    Mr. Gensler. Well, I think that agriculture and energy 
users will benefit from this rule. I think they will get 
greater transparency. I think they will get lower costs from 
that transparency. And all of these energy and agricultural 
interests, if their end-users would have a choice to not be in 
the clearinghouse, not have margin, and yet get a benefit of 
transparency.
    On a very small number of them, they are interested in the 
swap dealer definition. And as I mentioned earlier, we have had 
very constructive dialogue and discussions with agricultural 
cooperatives. If they are a Capper-Volstead cooperative and 
they are offering agricultural swaps to their members, we are 
working toward how to, in essence, fit them out through the de 
minimis rule. Because they are really targeted in what they are 
doing with their members in the agricultural world.
    Mr. Thompson. Okay. Thank you, Chairman.
    Mr. Chairman, I yield back.
    The Chairman. The gentleman yields back the balance of his 
time.
    The chair now recognizes the gentlelady from Ohio for 5 
minutes.
    Ms. Fudge. Thank you very much, Mr. Chairman.
    And thank you, Chairman Gensler.
    Market participants really need some clarity on how inter-
affiliate transactions will be regulated, as well as on how the 
Commission plans to define what they are. So could you explain 
to me how the CFTC is planning to identify and define inter-
affiliate transactions so that as many truly inter-affiliate 
transactions are captured in the definition and American 
companies are not burdened with an unnecessary regulation for 
their internal risk allocating transactions?
    Mr. Gensler. It is something that we have not yet taken up 
publicly. And we have had a lot of meetings with market 
participants, and we would be glad to meet with you and your 
staff to get further input.
    The issue that comes about is whether a transaction between 
two wholly owned affiliates comes under this clearing 
requirement. It does not come under the clearing requirement if 
one of them is non-financial. This is really just a question 
between affiliates of two financial companies. We think it is 
pretty clear: If it is non-financial, it is out.
    And we have been meeting with market participants and 
really trying to see what statutory authorities and where they 
are and how to address it. Europe also is addressing this, and 
we try to stay aligned with how Europe is looking at the inter-
affiliate situation as well.
    Ms. Fudge. So we don't really--we are not there yet?
    Mr. Gensler. We are not there yet. That is correct. Partly 
because we are looking a lot about how Europe is doing it. This 
is one where they have actually been a little bit ahead of us.
    The Dodd-Frank Act itself did not explicitly address this 
wholly owned affiliate to wholly owned affiliate. It did 
address, and I think constructively, the credit, if there is an 
affiliate that is doing finance credit, like the Ford Credit 
situation the Chairman raised earlier.
    Ms. Fudge. Okay. Thank you.
    Speaking of the Dodd-Frank, the law would require quite a 
bit from the Commission, obviously, in terms of 
responsibilities. If your agency does not receive sufficient 
funding, businesses could see delays in reviewing applications 
and requests.
    Can you talk just a bit about how inadequate funding of 
your agency could slow down your review process, which could 
adversely affect American businesses?
    Mr. Gensler. I think, Congresswoman, you are right. We have 
rededicated some of our staff. We are just a little bit larger 
than we were in the 1990s. And a lot of them are working on 
rules right now. We don't actually know how many people will 
try to file as dealers and swap execution facilities, but as 
they file their paperwork, as they file for review, we do not 
have adequate staff right now to put those papers through, and 
up to the five-member Commission to review them, vote on them, 
and so forth.
    We are going to use the NFA as much as we can for the 
registration. I think that is a helpful--is very helpful. But, 
we will be slower than we should be. I think we should be a 
responsive agency, and I fear we will be slower than we should 
be on many of those applications.
    Ms. Fudge. Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentlelady's time--she yields back her 
time.
    One of the few advantages left anymore to being a Chairman 
of a standing committee is the ability to control the time. So 
if you would indulge me, Mr. Chairman, I am going to yield 
myself time for one last question.
    On Tuesday, the Commission finalized the rule, the process 
review of swaps for mandatory clearing. And in the rule, the 
Commission states that it does not--does not foresee that it 
would take actions to impose margin or capital requirements on 
end-users.
    The wording of that, does that imply that you believe you 
have the authority to impose margin requirements on end-users 
in the future sometime?
    Mr. Gensler. The word foresee might have even been the 
Chairman's choice, so I will describe it. It said that we had 
not finalized the rule, so I didn't want to, in essence, front 
run the Administrative Procedures Act that we hadn't finalized. 
But we have proposed that we would not require swap dealers to 
collect margin from these end-users. It would be--certainly, 
where my thinking is, is that is where the final rule will 
certainly be, as well.
    The Chairman. But do you believe the statute gives 
authority to the Commission to impose such requirements if the 
Commission chooses to in the future?
    Mr. Gensler. As I have been informed by General Counsel, it 
does not deny us that authority. I think it is consistent with 
Congress that we do not pursue that. I think Congress has been 
very clear, and it is consistent with the intent of Congress 
that it is not going to apply to clearing and not to margin.
    The Chairman. I am going to assume that that means the 
answer is, yes, you believe the Commission could in the future 
under the rule. But I appreciate the way you answered the 
question, Chairman.
    Mr. Gensler. I am trying to be careful.
    The Chairman. You and I both, sir.
    With that, the Committee thanks Chairman Gensler for his 
testimony today before the panel and would like to welcome our 
second panel to the dais.
    Mr. Gensler. Thank you very much.
    The Chairman. Thank you, Chairman.
    As our witnesses are moving to the table, I would like to 
welcome the second panel: The Honorable Glenn English, Chief 
Executive Officer, National Rural Electric Cooperative 
Association, Arlington, Virginia; Mr. Randy Howard, Director of 
Power System Planning and Development, Power System Executive 
Office, Department of Water and Power, Los Angeles, California; 
Mr. Neil Schloss, Vice President--Treasurer, Ford Motor 
Company, Dearborn, Michigan; Ms. Denise Hall, Senior Vice 
President, Treasury Sales Manager, Webster Bank, Hartford, 
Connecticut; Mr. Sam Peterson, Senior Advisor, Derivatives 
Regulatory Advisory Group; Mr. David Fraley, President, Fraley 
and Company of Cortez, Colorado.
    Being no stranger to this room, Mr. English, and having 
observed how necessary it is to display patience in working 
through the vote and hearing schedule, I now call upon you to 
begin whenever you are ready, sir.

        STATEMENT OF HON. GLENN ENGLISH, CHIEF EXECUTIVE
          OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE
                   ASSOCIATION, ARLINGTON, VA

    Mr. English. Well, thank you very much, Mr. Chairman, and I 
appreciate that.
    First of all, I want to express to you and the Members of 
the Committee and to the world here today how proud those of us 
from western Oklahoma are to see you as Chairman. I believe you 
are the first Chairman from western Oklahoma in the history of 
the House of Representatives, and so we take great pride in 
that and appreciate it very much.
    The Chairman. I appreciate that, Mr. English. When you 
consider the fact that I am Chairman at a time when there is 
not only no new money to work with but no old money, it is a 
challenging time. Thank you very much for those kind words.
    Mr. English. All right. Thank you, Mr. Chairman.
    As you know, I spent about 20 years in this room, and 
throughout that time I was a champion of the CFTC. It was born 
shortly before I took office. Throughout the entire period I 
was on the subcommittee that dealt with the CFTC, I chaired 
that subcommittee and certainly championed day-in and day-out 
the need for more resources, as the Chairman was here today 
recognizing the fact. And I was trying to recall how many 
members of the staff that they had during most of that time, 
and I am not sure it ever got above a hundred members of the 
staff. It was anemic.
    And this was during a period, if you will recall, in which 
we were enthusiasts of deregulation, and, certainly, we were 
following that. And we got to the point that, my last tenure in 
chairing that subcommittee, we had a Chairman of the CFTC who 
made the decision that a derivative was not a future--even 
though the only difference between the two, I believe, is the 
word, a ``derivative,'' and by any other name it is a futures--
and, at that point, declared that it was not subject to 
regulation under the CFTC and under the legislation, therefore. 
And that went on to free up and create Enron, and we all know 
what happened to Enron. And then we went on now to 2008, the 
problems and challenges we have there.
    As so often happens, Mr. Chairman, it seems like we have 
this tendency for the pendulum to swing from one extreme to the 
other. And we are very concerned about the reaction as people 
respond, though we are way past Enron, to what happened in 2008 
and swing to the other extreme. I think, without question, the 
CFTC certainly needs to recognize and understand their 
responsibilities under Dodd-Frank. And we are delighted to see 
the transparency, the openness that it brings about. And it 
feels like that is a good, strong piece of legislation. 
However, that legislation can be discredited, and certainly 
this Committee can find that they have a very violent response 
from the public if it begins to cause damage because of the 
fact that it reaches beyond what the intent of the law was.
    And, Mr. Chairman, I would suggest that it was not the 
intention of this Committee or the Congress, whenever they 
passed this legislation, that Norfolk Electric Cooperative be 
declared a swaps dealer. But under some of the discussion that 
we have been hearing down at the CFTC and given the broad scope 
in which they don't seem to be distinguishing between those 
people who, in fact, are focused on trying to hedge risk and to 
protect the members of those electric cooperatives, including 
the Chairman, we are in danger of the fact that this overreach 
could, in fact, be something that goes far beyond what the 
Congress had in mind and certainly would bring about the kind 
of negative reaction that I am sure we don't want to see.
    At the heart of the issue that we are facing, Mr. 
Chairman--and I forgot to say I hope that my entire written 
testimony would be made a part of the record, Mr. Chairman.
    The Chairman. So ordered.
    Mr. English.--is this definition of swap and swap dealer. 
That is really at the heart of the issue. That is what we are 
talking about. And how the CFTC recognizes that and deals with 
that and where they draw the line is going to be the critical 
point as to how successful this legislation is in moving 
forward. And, for that reason, I want to commend you and 
commend the Committee for doing this oversight work to bring 
this to the attention.
    I would also point out, Mr. Chairman, as you know, there 
are provisions for exemptions but no one has applied for them. 
The reason is because everyone is waiting for this definition.
    So with this in mind, I would hope, Mr. Chairman, that this 
Committee would continue to have a rigorous and vigorous focus 
on oversight in this law. I hope that we do get the 
transparency, the standardization of trading products, and the 
continued cost-effective access to over-the-counter commodity 
transactions for those people who legitimately want to hedge.
    And I hope very sincerely, Mr. Chairman, that we recognize 
and understand that those non-financial-products people who are 
not looking to trade but to take care of their risk are exempt 
from these very burdensome costs that traders on Wall Street 
may be subject to. Let's look after electric cooperatives not 
only in Norfolk but all the electric cooperatives here on this 
Committee.
    [The prepared statement of Mr. English follows:]

  Prepared Statement of Hon. Glenn English, Chief Executive Officer, 
     National Rural Electric Cooperative Association, Arlington, VA
    Mr. Chairman, Mr. Peterson, and Members of the Committee, thank you 
for holding this hearing on Derivatives Reform: The View from Main 
Street. We appreciate the opportunity to discuss how the implementation 
of the Dodd Frank Act could negatively impact the rural electric 
cooperatives' ability to keep electric bills affordable for our 
consumer-members on Main Street, and on the farm. Any costs for the 
rural electric cooperatives resulting from regulatory overreach by the 
Commodity Futures Trading Commission (CFTC) will come out of the 
pockets of our consumer-members who live in some of the poorest areas 
in the country.
    The National Rural Electric Cooperative Association (NRECA) is the 
not-for-profit, national service organization representing over 900 
not-for-profit, member-owned, rural electric utilities, which serve 42 
million customers in 47 states. NRECA estimates that cooperatives own 
and maintain 2.5 million miles or 42 percent of the nation's electric 
distribution lines covering \3/4\ of the nation's landmass. 
Cooperatives serve approximately 18 million businesses, homes, farms, 
schools (and other establishments) in 2,500 of the nation's 3,141 
counties.
    Our member cooperatives serve over seven million member owners in 
Congressional Districts represented on this Committee.
    Cooperatives still average just seven customers per mile of 
electrical distribution line, by far the lowest density in the 
industry. These low population densities, the challenge of traversing 
vast, remote stretches of often rugged topography, and the increasing 
volatility in the electric marketplace pose a daily challenge to our 
mission: to provide a stable, reliable supply of affordable power to 
our members--including constituents of many Members of the Committee. 
That challenge is critical when you consider that the average household 
income in the service territories of our member co-ops lags the 
national average income by over 14%.
    Mr. Chairman, the issue of commodity derivatives and how they 
should be regulated is something with which I have a bit of personal 
history going back twenty years when I served on this Committee. 
Accordingly, I am grateful for your leadership in pursuing the reforms 
necessary to increase transparency and prevent manipulation in this 
complex global marketplace.
    NRECA's electric cooperative members, primarily generation and 
transmission cooperatives, need predictability in the price for power, 
fuel, transmission, financing, and other supply inputs if they are to 
provide stable, affordable rates to their members, including farmers in 
your Districts. As not-for-profit entities, we are not in the business 
of making money or trading financial instruments. Rural electric 
cooperatives use a range of energy and capacity contracts to keep costs 
down by reducing the commercial risks associated with electricity, 
capacity, and necessary electricity production inputs. These contracts 
include both traditional commercial transactions and commodity 
derivatives. Some number of those contracts may be considered ``swaps'' 
under Dodd-Frank, but we don't know yet which ones because--a full year 
later--the CFTC has not yet defined the most basic term in the statute. 
How those contracts are ultimately labeled could have dramatic impacts 
for cooperative consumers.
    Regardless of labels, it is important to understand that electric 
co-ops are engaged in activities that are pure hedging, or commercial 
risk management. We DO NOT use commercial transactions, commodity 
derivatives or swaps for speculation or other non-hedging purposes.\1\ 
We are in difficult economic times, making it more important than ever 
for cooperatives to be able to use whatever tools may be available for 
managing commercial risk on behalf of our members.
---------------------------------------------------------------------------
    \1\ For convenience, the remainder of the testimony will refer to 
commodity derivatives, but it is important to remember that those 
cooperative hedges that could ultimately be regulated as ``swaps'' 
include both commercial derivatives and traditional commercial 
contracts that were never before treated as derivative products, such 
as capacity contracts, reserve sharing agreements, and the all-
requirements contracts that have traditionally provided financial 
backing to loans from the Rural Utilities Service.
---------------------------------------------------------------------------
    Most of our hedges are bilateral commercial transactions in the OTC 
market. Many of these transactions are entered into by cooperatives 
using as their agent a risk management provider called the Alliance for 
Cooperative Energy Services Power Marketing or ACES Power Marketing. 
ACES was founded a decade ago by many of the electric co-ops that still 
own this business today. Through diligent credit risk-management 
practices, ACES and our members make sure that the counterparty taking 
the other side of a hedge transaction is financially strong and 
secure--whether that counterparty is a financial institution, a natural 
gas producer or an investor-owned electric utility.
    Even though the financial stakes are serious for us, rural electric 
co-ops are not big participants in the global derivatives market, which 
is estimated at $600 trillion. Our members participate in only a 
fraction of that market, and are simply looking for an affordable way 
to manage commercial risk and price volatility for our consumers. 
Because many of our co-op members are so small, and because energy 
markets are so volatile, legislative or regulatory changes that would 
dramatically increase the cost of hedging or prevent us from hedging 
all-together would impose a real burden. If commodity derivatives are 
unaffordable, then these price risks will be left unhedged and 
resulting cost increases will be passed on dollar-for-dollar to the 
consumer, where these risks would be unmanageable.
    Electric cooperatives are owned by their consumers. Those consumers 
expect us, on their behalf, to protect them against volatility in the 
energy markets that can jeopardize their small businesses and adversely 
impact their family budgets. The families and small businesses we serve 
do not have a professional energy manager. Electric co-ops perform that 
role for them and should be able to do so in a cost effective way.
Our Concerns With Implementation of the Dodd-Frank Act Are As Follows
The July 16, 2011 Order
    As this Committee is aware, the effective date of the Dodd-Frank 
Act came and went on July 16, 2011, without final rules being in place 
for a definitive new market structure for ``swaps.'' Congress made some 
of the provisions of the Dodd-Frank Act automatically effective on the 
unrealistic assumption that the new market structure for the diverse 
global swaps markets would take shape within a 1 year time frame. 
Several of those automatically effective provisions deleted the 
exclusions and exemptions upon which commercial entities rely to 
transact in the OTC markets for non-financial commodities like power, 
natural gas, electric transmission and other common commercial risk 
transactions. In an attempt to prevent a possible disruption of 
commodity and derivatives markets, including power supply and fuel 
supply contracting, on July 14, 2011, the CFTC issued the ``Effective 
Date Order''. Although the rural electric cooperatives, as part of the 
Not-for-Profit Electric Trade Associations Coalition, made a request 
for certain ``grandfather relief'' to the CFTC in September 2010 and 
again in May 2011, the CFTC has not addressed those requests.
    The CFTC has extended until December 31, 2011 the timeline during 
which it intends to propose and finalize rules to establish the new 
regulatory market structure for ``swaps.'' The CFTC has also granted 
``temporary exemptions'' from the current Commodity Exchange Act 
provisions to allow parties to transact in commodities and related 
derivatives during this interim period. This temporary relief 
automatically expires as of the earlier of December 31, 2011 or the 
date on which the final CFTC rule is effective in respect of any Dodd-
Frank Act provision. This means a busy fall for CFTC rulemakings and 
the potential for further uncertainty as to whether (and when) the CFTC 
will again address these expiring temporary exemptions.
    It is our hope that Chairman Gensler has addressed these issues 
before the Committee today to provide more guidance for energy end-
users who need legal certainty and the ability to continue to use OTC 
derivatives to provide affordable and reliable power for American 
consumers while the regulators finalize their new markets. Our members 
enter into long term contracts to hedge our public service commitments 
and our infrastructure project costs. We remain concerned that 
temporary 6 month exemptions may not give our counterparties and 
financing sources much comfort in these long-term commercial hedging 
transactions.
The Definition of ``Swap''
    The most important term in the Dodd-Frank Act--because it defines 
the scope of the CFTC's regulatory authority--is ``swap.'' NRECA is 
concerned that if the CFTC defines that term too broadly, it could 
bring under the CFTC's jurisdiction commercial transactions that 
cooperatives and others in the energy industry have long used to manage 
electric grid reliability and to provide long-term price certainty for 
electric consumers. It is our belief that the CFTC must draw clear 
lines between ``swaps,'' which are subject to the CFTC's jurisdiction 
and non-financial commodity forward contracts. The CFTC should make it 
clear in its rules that ``swap'' does not include commercial trade 
options that settle physically, or commercial commodity contracts that 
contain option-like provisions, including the full requirement 
contracts that even the smallest cooperatives use to hedge their needs 
for physical power and natural gas generation. Further, CFTC should 
draw clear lines in its rules between ``swaps'' and those long-term 
power supply and generation capacity contracts, reserve sharing 
agreements, transmission contracts, emissions contracts and other 
transactions that are subject to FERC, EPA, or state energy or 
environmental regulation.
    These non-financial transactions between non-financial entities 
have never been considered ``products'' or ``instruments'' or been 
traded with or between financial institutions for speculative purposes. 
They were not created to ``trade'', they were developed to protect the 
reliability of the grid by ensuring that adequate generation resources 
will be available to meet the needs of consumers. These transactions do 
not pose any systemic risk to the financial system, nor should they 
cause concern to a regulator that is focused on fair, liquid and secure 
trading markets for standardized products. These are commercial 
contracts.
    The CFTC must show restraint and interpret the term ``swap'' 
narrowly, as intended by Congress. If these commercial contracts were 
to be regulated by the CFTC as ``swaps,'' such regulation could impose 
enormous new costs on electric consumers and could undermine 
reliability of electric service.
    The CFTC must also write clear rules that plainly explain which 
transactions will and will not be subject to regulation as ``swaps.'' 
Cooperatives and other non-financial commercial end-users cannot be 
left in the dark, uncertain which transactions will subject them to 
increased regulatory burdens. That uncertainty can be as damaging as 
rules that clearly overreach.
    In the Dodd-Frank Act, Congress excluded from the definition of 
``swap,'' the ``sale of a non-financial commodity . . . so long as the 
transaction is intended to be physically settled.'' NRECA asks Congress 
to insist that the CFTC read this language as it was intended--to 
exclude from regulation these kinds of commercial transactions that 
utilities use in the normal course of business to hedge commercial 
risks and meet the needs of electric consumers reliably and affordably.
Margin and Clearing Requirements
    In general, co-ops are capital constrained. We and our members 
would prefer that cash remain in our members' pockets rather than 
sitting idle in large reserve accounts to pay margin or capital costs 
of our counterparties. At the same time, we have significant capital 
investment demands, such as building new generation and transmission 
infrastructure to meet load growth, installing equipment to comply with 
clean air standards, and maintaining fuel supply inventories. 
Maintaining 42% of the nation's electrical distribution lines requires 
considerable and continuous investment.
    Congress respected those constraints in Dodd-Frank by establishing 
an ``end-user exemption'' that exempted those entities--like 
cooperatives--that use swaps solely to hedge commercial risk 
obligations. End-users may choose to forgo the requirements to trade 
their swaps on regulated exchanges, which would require paying 
``margin'' (posting collateral) to a dealer or clearing entity for 
those swaps. If properly implemented by regulation, that exemption 
would leave millions of dollars in electric consumers' pockets that 
might otherwise sit in margin accounts or be paid in capital fees to 
financial institutions.
    I want to remind you that we are NOT looking to hedge in an 
unregulated market for standardized swaps. NRECA DOES want swaps 
markets to be transparent and free of manipulation.
    The problem is that requiring cooperatives' hedges to be centrally 
cleared or, if they are not cleared, still subjected to margin 
requirements would be unaffordable for most co-ops and would provide no 
value to the markets or to the nation. Our hedging transactions do not 
impose any of the systemic risk Dodd-Frank was intended to address. Yet 
any ``initial margin'' or ``variance'' margin requirements on our 
transactions under broad CFTC rules could force our members to post 
hundreds-of-millions of dollars in idle collateral that our consumers 
cannot afford to provide.
    If the CFTC implements Dodd-Frank's end-user exemption too 
narrowly, the resulting clearing and margining requirements could force 
cooperatives to postpone or cancel needed investment in our 
infrastructure, borrow to fund margin postings, abandon hedging, or 
dramatically raise rates to consumers to raise the required cash to 
post as margin. Of course, whatever choice co-ops made would lead to 
the same result: increased electric bills for 42 million cooperative 
members.
Reporting Requirements
    Mr. Chairman, the Dodd-Frank Act quite properly allows the CFTC to 
require reporting of those swaps traded on regulated exchanges, and 
those swaps involving swap dealers or other financial entities. That 
information is critical to providing transparency to those markets. 
Unfortunately, the CFTC is proposing to move far beyond the reporting 
requirements in the Act to also require utilities to report a 
significant volume of information for those end-user transactions that 
Congress exempted from Dodd-Frank's central clearing requirements. And, 
if no dealer is involved (as is the case in a lot of our transactions 
with other energy companies), the CFTC's rules will require one of the 
non-financial counterparties to report--perhaps ``in real time.'' In 
our energy markets, many utility-to-utility transactions are entered 
into between two end-users, and there are no swap dealers or major swap 
participants to bear the reporting burdens that these types of dealer 
entities are accustomed to.
    I encourage the Committee to urge the CFTC to reduce this reporting 
process burden, as permitted by the law. We are requesting that the 
CFTC adopt a ``CFTC-lite'' form of regulation for non-financial 
entities like the cooperatives. The CFTC should let us register, keep 
records and report in a less burdensome and less frequent way--not as 
if we were swap dealers or hedge funds. For example, it should be 
sufficient to require end-users to make a single representation that 
they will rely on the end-user exemption (and are bona fide hedgers) 
using swaps exclusively to hedge commercial risk. Once they have made 
that representation, they should not have to report those transactions 
any more frequently than is now required by the Federal Energy 
Regulatory Commission.
    As explained above, these transactions represent a minuscule 
fraction of the global swap market and pose no systemic risk to the 
financial markets, making more frequent reporting unnecessarily 
expensive.
Exemptions for FERC-Regulated and 201(f) transactions
    Congress recognized in the Dodd-Frank Act that elimination of the 
Commodity Exchange Act's exemption for energy transactions could lead 
to duplicative and potentially conflicting regulation of transactions 
now subject to FERC regulation, and could lead to unnecessary and 
expensive regulation of transactions between cooperative and 
government-owned utilities. Accordingly, it directed the CFTC to grant 
those transactions a ``public interest waiver'' from its regulation if 
it found such a waiver to be in the public interest.
    No entity has yet sought such an exemption because the rules from 
which they would be seeking exemption have not yet been written. The 
CFTC can initiate the public interest waiver process, but it has not 
done so. Because the industry does not yet know what the CFTC will 
consider to be a ``swap'' or whether utility hedging efforts will be 
exempted from central clearing and margining requirements as end-user 
transactions, it does not yet know how critical it will be to pursue 
these additional avenues for relief. We certainly hope that the CFTC 
will choose to write its rules in a manner that minimizes potential 
conflicts with FERC regulation and that minimizes potential costs for 
transactions between cooperatives or government owned utilities. We 
further urge the CFTC not to impose a regulatory regime on individuals 
for commercial transactions involving non-financial energy commodities.
    Nevertheless, should it become necessary to pursue additional 
exemptions or public interest waivers, NRECA hopes that the CFTC will 
recognize that Congress intended in Dodd-Frank to address systemic risk 
in financial markets without disrupting existing markets for 
electricity, and that the CFTC will entertain the industry's 
applications for further exemptions and public interest waivers if and 
or when they are submitted.
The Definition of ``Swap Dealer''
    The definition of ``swap dealer'' has just recently become a 
concern for the rural electric cooperatives. The regulators have 
suggested they might interpret this definition broadly enough to sweep 
in our not-for-profit members. If so, such an interpretation has the 
potential to be one of the more damaging unintended consequences of the 
Dodd-Frank Act. If our members were considered ``swap dealers,'' those 
cooperatives would be subject to a slew of new capital-draining 
requirements, business practices, and financial markets regulations 
that Congress intended to impose on Wall Street derivatives dealers. To 
put it bluntly--it would be an incredible regulatory overreach for the 
CFTC to apply the definition of ``swap dealer'' to rural electric 
cooperatives--who are obviously not in the business of derivatives 
dealing, but instead are not-for-profit end-users of non-financial 
energy derivatives to hedge commercial risk and protect consumers from 
price volatility in wholesale power markets. The rural electric 
cooperatives' core mission is keeping the lights on for farmers, 
families and small businesses in rural America, not dealing in the 
global swaps markets. There are no ``Wall Street derivatives dealers'' 
in our membership. We believe it should be obvious to the CFTC that 
Congress did not intend for end-users, particularly not-for-profit end-
users, to be regulated as ``swaps dealers.'' We are happy to continue 
to explain our business to the regulatory staff, but we urge the CFTC 
to keep a clear focus on legislative intent.
Treatment of Cooperative Lenders
    Rural electric cooperatives banded together 4 decades ago to form 
their own financing cooperative to provide private financing to 
supplement the loan programs of the U.S. Department of Agriculture's 
Rural Utilities Service (RUS). Today, this nonprofit cooperative 
association, the National Rural Utilities Cooperative Finance 
Corporation (CFC), provides electric cooperatives with private 
financing for generating stations and other facilities to deliver 
electricity to residents of rural America, and to keep rates 
affordable. In this context, CFC, which is owned and controlled by 
electric cooperatives, uses OTC derivatives to mitigate interest rate 
risks, and to tailor loans to meet electric cooperative needs. CFC does 
not enter into derivative transactions for speculative purposes, nor is 
it a broker or a dealer. CFC only enters into derivatives necessary to 
hedge the risks associated with lending to electric cooperatives. If 
CFC is unnecessarily swept up in onerous new margining and clearing 
requirements, electric cooperatives will likely have to pay higher 
rates and fees on their loans, and those costs will be passed on to 
rural consumers.
    We ask that CFC's unique nature as a nonprofit cooperative 
association owned and controlled by America's consumer-owned electric 
cooperatives be appropriately recognized. Electric cooperatives should 
not be burdened with additional costs that would result by subjecting 
their financing cooperative, CFC, to margining and clearing 
requirements.
Conclusion
    Mr. Chairman, at the end of the day, we are looking for a 
transparent market for standardized trading products, and continued 
cost-effective access to the OTC commodity transactions which allow 
cooperatives to hedge commercial risk and price volatility for our 
members. If we are to do that, the CFTC must define ``swap'' in clear 
terms to exclude those pure hedging transactions in non-financial 
commodities that the industry uses to preserve reliability and manage 
long-term power supply costs; must give real meaning to Dodd-Frank's 
end-user exemption; must limit unnecessary record-keeping and reporting 
costs for end-users; and must limit duplicative and unnecessary 
regulation of cooperatives and other electric utilities.
    Rural electric cooperatives are not financial entities, and 
therefore should not be burdened by new regulation or associated costs 
as if we were financial entities. We believe the CFTC should preserve 
cost-effective access to swap markets for non-financial entities like 
the co-ops who simply want to hedge commercial risks inherent in our 
non-financial business--our mission is to provide reliable and 
affordable power to American consumers and businesses.
    I thank you for your leadership on this important issue. I know 
that you and your Committee are working hard to ensure these markets 
function effectively. The rural electric co-ops hope that at the end of 
the day, there is an affordable way for the little guy to effectively 
manage risk.
    Thank you.

    The Chairman. Thank you, Mr. English.
    The chair would like to recognize Mr. Howard.

STATEMENT OF RANDY S. HOWARD, DIRECTOR OF POWER SYSTEM PLANNING 
                   AND DEVELOPMENT AND CHIEF
           COMPLIANCE OFFICER, POWER SYSTEM EXECUTIVE
OFFICE, LOS ANGELES DEPARTMENT OF WATER AND POWER, LOS ANGELES, 
          CA; ON BEHALF OF LARGE PUBLIC POWER COUNCIL

    Mr. Howard. Good afternoon, Chairman Lucas and Members of 
the Committee. Thank you for the opportunity to discuss the 
operational and economic impacts to the Los Angeles Department 
of Water and Power specifically, and to the electric utilities 
in general, related to the proposed rules implementing the 
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    I am Randy Howard, Director of Power System Planning and 
Development and Chief Compliance Officer for LADWP. LADWP is a 
department of the City of Los Angeles and the largest municipal 
utility in the nation, serving approximately four million 
people.
    I am also testifying on behalf of the Large Public Power 
Council. Large Public Power Council consists of roughly two 
dozen large public power systems that own and operate over 
75,000 megawatts of generation capacity and over 35,000 miles 
of transmission lines. Our members are located in 11 states, 
including Texas, Georgia, Colorado, Florida, North Carolina, 
New York, Washington, and California.
    As a group of not-for-profits, we have been actively 
participating in the Commodity Futures Trading Commission 
rulemaking process, submitting written comments, participating 
in the roundtables, and meeting with CFTC staff. Similar to my 
friends serving the rural parts of America at the National 
Rural Electric Cooperative Association and the American Public 
Power Association, our mission and our business is plain and 
simple. It is to keep the lights on 24 hours a day, 365 days a 
year, and, as you know today, the air conditioners running for 
all of our customers.
    For days like today, where the temperatures across the 
nation exceed 100, many electric utility staffs are struggling 
just to keep enough power flowing to meet the demand. But for 
many utilities, the planning and the preparation for this 
extreme heat event started months ago, with hedges and options 
just in case we would have a day like today. This is one of the 
important reasons we hedge. In addition to keeping our rates 
low and stable for customers, it is not just about our costs, 
but about the health and the safety concerns of our ratepayers 
and to keep the power systems operating.
    It is important that derivative regulators consider some of 
the business issues impacting non-financial businesses like 
electric utilities. We need to avoid putting current risk-
management practices in jeopardy.
    I would like my written testimony to also be part of the 
record. I have tried to highlight in there some specific 
concerns and recommendations.
    So, at the core, we do not believe we contribute to the 
systemic risk. Several LPPC utilities have estimated the cost 
impacts into the hundreds of millions of dollars when looking 
at the added collateral and operating costs that could be 
imposed. As public, not-for-profit utilities, we don't have 
shareholders. We can only turn to our ratepayers to absorb the 
risk if we are unable to hedge, going forward, or we must pay 
additional costs.
    Once again, thank you for your work on these issues and for 
the opportunity to testify before you today. I look forward to 
responding to any questions you might have.
    [The prepared statement of Mr. Howard follows:]

    Prepared Statement of Randy S. Howard, Director of Power System
  Planning and Development and Chief Compliance Officer, Power System 
    Executive Office, Los Angeles Department of Water and Power, Los
          Angeles, CA; on Behalf of Large Public Power Council
    Chairman Lucas, and Members of the Committee, thank you for this 
opportunity to discuss the operational and economic impacts to the Los 
Angeles Department of Water and Power (LADWP) specifically and to 
electric utilities in general related to the proposed rules 
implementing the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank).
    I am Randy S. Howard, Director of Power System Planning and 
Development and Chief Compliance Officer for LADWP. LADWP is a 
Department of the City of Los Angeles and the largest municipal utility 
in the country serving approximately 4.0 million people.
    I also am testifying on behalf of the Large Public Power Council 
(LPPC). LPPC consists of roughly two dozen large public power systems 
that have actively participated in the Commodity Futures Trading 
Commission (CFTC) rulemaking process, submitting written comments, 
participating in roundtables, and meeting with CFTC staff.
Electric Utilities Use Hedges To Keep the Lights on at Reasonable Rates
    Our business is to keep the lights on for customers. To accomplish 
this, we manage a range of operational and commodity market risks every 
day to provide power to the residents and businesses we serve.
    LADWP, like many utilities, controls operational risks by producing 
power from a mix of natural gas, coal, nuclear, hydro-electric, 
biofuels, and renewable energy resources. In addition to diversifying 
our power generation resources, LADWP strategically diversifies the 
locations of our generating facilities. LADWP owns, operates, and/or 
contracts generation in seven different western states to provide Los 
Angeles with reliable electricity service 24 hours a day, 365 days a 
year. For example, LADWP has wind farm resources in the Southern 
California Tehachapi mountains, in Utah and Wyoming, and in Oregon and 
Washington State, that have different wind profiles and at any one 
time, at least one location should be producing energy.
    These physical diversification activities are not enough alone to 
provide our customers with reliable service at affordable and stable 
prices. Therefore, it is essential to manage the price volatility 
inherent in commodity markets such as natural gas and electric power 
through the use of bilateral contracts, hedges, and options. LADWP, as 
well as other utilities purchase fuel to generate electricity and buy 
and sell wholesale power at multiple delivery points. We enter into 
hedging contracts to control the costs our customers ultimately pay for 
energy commodities. Many of these transactions are between LADWP and 
another commodity end-user and not part of an organized trading market. 
These transactions have proven to be an extremely effective tool in 
keeping the lights on and insulating our customers from the energy 
market risks of price volatility.
    As electric utilities, such as LADWP, transition into a higher 
resource level of renewable energy and proceed with significant 
reductions in fossil fuel emissions output, the operation and economic 
risks will increase.
    As you know, the inability to predict the weather many months ahead 
impacts many decisions in the agricultural community, including the 
desire to hedge price swings. The electric industry is similar in this 
respect. It is not just the inability to predict weather, but the 
extreme weather events and the risks of the wind not blowing, the 
multi-year drought scenarios, the cloudy days when the sun is not 
shining for the solar systems, or wildfires burning under the 
transmission lines creating outages that make hedging and options 
critical to our businesses. These types of hedges and options 
physically or financially settle. But, all still to hedge commercial 
risks.
Specific Concerns With Frank-Dodd Implementation
    There are four main areas of concern with the ongoing 
implementation of the Frank-Dodd Act: definitions and sequencing, 
margining and capital requirements, reporting requirements and business 
conduct rules for special entities.
Definitions and Sequencing
    Several important definitions are still being drafted by CFTC and 
will impact LADWP and other utilities. In particular, we are concerned 
that individual LPPC members could be considered a ``swap dealer'' due 
to certain transactions we use to hedge our costs. LADWP and the 
members of LPPC do not belong within this definition, as we hedge 
strictly to minimize commercial risk and do not contribute to systemic 
risk of the market. If our utility systems were regulated as swap 
dealers, our ratepayers--the residents and businesses which we are 
obligated to serve--would be swept into the same regulatory regime 
meant to target financial speculation.
    Notwithstanding the recent CFTC Effective Date Order, as a result 
of continuing uncertainty about how long the ``temporary relief'' will 
continue, and about what happens to outstanding longer-term 
transactions that may fall within the definition of ``swap'' once the 
CFTC's Dodd-Frank Act rulemakings are finalized (under the new 
regulatory regime for ``swaps''), some expect that there will be fewer 
counterparties willing to enter into transactions with delivery dates 
or maturities that would extend past that temporary exemptive relief 
expiration date of December 31, 2011 in the Effective Date Order. In 
order to execute such longer-term transactions, there may also be 
additional credit support or collateralization requirements, new 
qualifications in legal opinions, and new representations and 
warranties.
Margining and Capital Requirements
    Generally, our hedges are not standardized transactions suitable 
for clearing through financial intermediaries. Instead, our hedges are 
negotiated directly with counterparties with whom we have longstanding 
relationships. In particular, this enables us to customize the terms of 
our hedges, reducing or eliminating the need for collateral posting 
except where one of the party's credit deteriorates. All over-the-
counter transactions do not share the same risk profile. End-users like 
electric and gas utilities, rural electric cooperatives, and 
municipalities often rely on their strong credit quality to structure 
transactions. A one-size-fits-all approach for determining credit risk 
would punish more prudent risk managers and holders of strong balance 
sheets. Accordingly, we think the CFTC should reconsider its 
counterparty exposure charge in its proposed capital requirements 
rulemaking. An effective and meaningful end-user exemption is called 
for in the law and should be reflected in the regulations.
    Congress has repeatedly indicated that it did not intend to reduce 
hedging options for end-users or to impose additional costs on end-
users hedging traditional commercial risks. We are concerned that our 
customers will experience rate instability and cost increases if 
Congress' intent is not effectuated through proper implementation of 
the Dodd-Frank Act. While the Dodd-Frank Act contains provisions 
exempting end-users from margin and clearing requirements, the CFTC, in 
issuing its regulations, threatens to render meaningless this statutory 
protection for end-users.
Record-keeping and Reporting
    We are also concerned that the extent of the reporting requirements 
proposed by the CFTC, if coupled with onerous penalties for 
noncompliance, will unnecessarily add significant costs to our hedging 
transactions and are excessive in light of our relatively modest share 
of the derivatives market. We have encouraged the CFTC to carefully 
consider the cost impacts of proposed transaction documentation and 
reporting mandates on end-users like electric and gas utilities, rural 
electric cooperatives, and municipalities. These kinds of entities do 
not generally have large back-office operations dedicated to dealing 
with swap transactions, and many of the proposed rules will impose 
completely new requirements on some of these energy end-users. A better 
analysis of the costs and benefits of these proposed documentation and 
reporting requirements should be undertaken, in consideration of the 
low systemic risk associated with end-users like electric and gas 
utilities, rural electric cooperatives, and municipalities. Further, an 
adequate amount of time should be provided to these kinds of entities 
to adjust and transition to a new regime of reporting and 
documentation.
Business Conduct of Special Entities
    Although LADWP and LPPC support the establishment of business 
conduct standards for counterparties to special entities, we are 
concerned that the CFTC's regulatory approach imposes excessive burdens 
on swap counterparties in determining whether special entities have 
``independent advisors'' and uses an overly broad definition of 
``advisor.'' We believe that this approach will unnecessarily increase 
the costs of hedging and cause counterparties to be less willing to 
enter into swaps with special entities. The CFTC's regulations should 
minimize the burdens and potential liabilities for counterparties 
trading with ``special entities.'' Rules that make it more difficult or 
risky to do business with ``special entities'' discourage 
counterparties from conducting trades with end-users that are special 
entities, undermining Congress' intent to protect legitimate hedging of 
risks by end-users such as electric utilities. Simple, practical 
regulations are needed.
    Although we are still digesting them, the proposed rules issued by 
the SEC seem to be more in line with what is needed: dealers can 
disclaim ``advisor'' status and dealers can rely on representations to 
determine that an entity has an independent swap advisor.
Recommendations
    CFTC should not impose collateral posting requirements on either 
party to hedges in which an end-user is a counterparty. LPPC members 
and their counterparties have historically relied on individually-
negotiated credit support and collateral arrangements. Our transactions 
do not create systemic risk to the U.S. financial system, which is what 
Dodd-Frank Act seeks to mitigate. While the CFTC has made recent 
positive statements on this issue, we would hope to see regulations 
that protect the continued use of hedges that involve end-users such as 
our utilities.
    The Commodity Exchange Act has recognized such an exemption from 
margin requirements since the 1970's.
    Regulations should minimize the burdens and liabilities for 
counterparties trading with ``special entities''. Rules that make it 
more difficult or risky to do business with ``special entities'' 
discourage counterparties from conducting trades with end-users such as 
LPPC members, undermining Congress' intent to protect legitimate 
hedging of risks by end-users such as electric utilities.
    Record-keeping and reporting rules should be crafted to provide 
transparency in the derivatives markets without interfering with the 
daily operations of businesses. Rules that allow businesses to report 
data on reasonable timeframes, including a ``CFTC-lite'' method of 
registration, will foster Dodd-Frank's market transparency goals 
without imposing unnecessary, and costly instantaneous information 
reporting mandates.

    a. Energy end-users and public power doesn't contribute to systemic 
        risk and it is critical that we do not fall under margining 
        rules.

    b. Transparency is not a concern, as public power entities, most 
        entities have very open policies. Quarterly Reporting would 
        accomplish this goal without being overly burdensome--CFTC-
        lite.

    c. Business Conduct--allow counter parties to rely on 
        representation of utility that they have internal expertise 
        sufficient to enter into trades.

    The Chairman. Thank you.
    And the written testimony of all the witnesses will be 
incorporated in the record.
    Mr. Schloss, you may begin whenever you are ready.

 STATEMENT OF NEIL M. SCHLOSS, VICE PRESIDENT--TREASURER, FORD 
                  MOTOR COMPANY, DEARBORN, MI

    Mr. Schloss. Great. Thanks very much. And good afternoon, 
everyone.
    Chairman Lucas and Members of the Committee, Ford Motor 
Company appreciates the opportunity to share Ford's view on 
derivative regulation under the Dodd-Frank Act.
    Ford Motor Company is a global vehicle manufacturer with a 
captive finance company. Derivatives allow us to manage market 
risks in our business and our pension plans around the world 
relating to foreign exchange, commodities, and interest rates. 
We are not market makers, and we do not use derivatives to 
speculate.
    We support Congress' intention in the Dodd-Frank Act to 
strengthen over-the-counter derivatives regulation, promoting 
transparency and facilitating Federal oversight of these 
critical markets. However, it is important that, as regulations 
are being developed and implemented, that Congressional intent 
is clearly reflected in the regulation.
    Congressional intent is evident not only in the Dodd-Frank 
Act but also in the many other forms of communication, 
including, Mr. Chairman, your most recent letter, along with 
Chairman Stabenow, to the prudential regulators at CFTC which 
supported our concerns. We strongly support your efforts. There 
are two unintended consequences I would like to cover today, 
and both of these were included in the notices of proposed 
rules and are inconsistent with Congress' intent.
    Our first concern is a potential mandatory margin 
requirement on derivatives for commercial end-users' captive 
finance companies. A margin requirement not only negates Dodd-
Frank exemption and Congressional intent but would result in a 
contradiction with the regulations themselves, whereby Ford 
Credit would be exempt from clearing but subject to the most 
onerous margin requirements.
    The consequence of such margin requirements is an increase 
in the cost of our risk management. Unlike swap dealers and 
major swap participants, most end-users' captive finance 
companies do not have ready access to low-cost liquidity such 
as the Fed discount window or FDIC-insured deposits. Such costs 
also potentially put end-users and the broader U.S. market at a 
competitive disadvantage to our foreign competition.
    A key concern specific to Ford Credit is the potential 
disruption in the access to the asset-backed securitization 
market. Mandating margin requirements for securitization 
derivatives will force major structural changes to our programs 
and result in substantial additional cost and complexity. 
Ultimately, this could impact our ability to efficiently access 
the securitization market or our backstop bank capacity.
    Another disruption in the auto securitization market is 
something neither the U.S. economy nor our industry can 
withstand while trying to grow and add jobs. During the recent 
credit crisis, when many financial institutions were curtailing 
credit availability, Ford Credit, supported by its 
securitization funding, consistently supported our dealers and 
retail customers with their financing needs. We support 
continued dialogue between regulators and legislators 
throughout the implementation process to ensure the final 
regulations clearly reflect the legislative intent to exempt 
commercial end-users' captive finance arms from margin 
requirements.
    Our second concern involves limitation of our pension 
plan's ability to use derivatives to protect Ford's balance 
sheet and, just as importantly, pensions of our employees and 
our retirees. We are very concerned that the inadvertent 
conflict between Department of Labor proposed regulation and 
CFTC's business conduct standards may result in counterparties 
refusing to trade with pension plans because they would be 
treated as fiduciaries or plan advisors.
    Pension plans use derivatives to manage interest-rate risks 
and other risks to reduce volatility with respect to funding 
obligations. If derivatives were not available in pension 
plans, plan costs and funding volatility would significantly 
increase. This would undermine retirement security and create 
large uncertainties regarding company cash contributions. Such 
an outcome would put American end-user manufacturers with their 
defined benefit plans at further competitive disadvantage to 
our foreign competitors.
    Ford strongly recommends that Congress continue to urge DOL 
and CFTC to coordinate their efforts in areas where regulations 
are conflicting, to ensure pension plans are not inadvertently 
limited from using derivatives to manage risk on behalf of 
pension plan beneficiaries.
    I appreciate you listening to our concerns. In my written 
testimony, I provide more detailed recommendations to address 
these concerns and would be pleased to discuss these further at 
your convenience.
    In closing, we thank this Committee and your recent letter 
to the CFTC and prudential regulators and for giving derivative 
market reform the serious attention and the dialogue it 
deserves. We also greatly appreciate the Chairman and Ranking 
Member and the Committee Members for your help today in 
clarifying several of these issues with Chairman Gensler. And 
we look forward to having the regulation express the same 
clarity that was expressed today in the prior panel.
    Thank you very much.
    [The prepared statement of Mr. Schloss follows:]

Prepared Statement of Neil M. Schloss, Vice President--Treasurer, Ford 
                      Motor Company, Dearborn, MI
    Chairman Lucas, Ranking Member Peterson, and Members of the 
Committee, Ford Motor Company appreciates the opportunity to share our 
views on the important role of financial derivatives and their 
regulation under the Dodd-Frank Act. As you are aware, Ford Motor 
Company is a global automotive industry leader with about 166,000 
employees and about 70 plants worldwide. In the U.S., about 320,000 
present and past employees depend on Ford for their pension and 
retirement. Through our captive finance arm, Ford Motor Credit Company 
(``Ford Credit''), we also provide financial services to about 3,000 
dealers and about three million retail consumers in the U.S. alone.
    Derivatives are integral to allowing us to manage market risk and 
help ensure that we can continue to focus on the things that really 
matter--manufacturing, selling, and financing vehicles globally. We do 
not use derivatives to speculate or take a view on the market.
    We support Congress' intention in the Dodd-Frank Act to strengthen 
over-the-counter derivatives regulations, promote transparency and 
facilitate Federal oversight of these critical markets. However, we 
want to urge that as regulations are being developed, proposed, and 
implemented, that Congress' clear intent to allow end-users to continue 
to use derivatives to reduce risk be reflected. We are especially 
concerned about two potential unintended consequences that could negate 
Congress' intent and have significant adverse implications for our 
business--(1) mandatory margin requirement on derivatives that we use 
solely to hedge legitimate business risks; and (2) limitations on our 
pension plans' ability to use derivatives to protect our pension 
obligations to our employees and retirees.
    While the recent financial crisis certainly impacted our company, 
our employees, customers, and dealers, we managed through these 
difficult economic conditions and our underlying business continues to 
improve. Despite continued weakness in the economy, we have been able 
to not only fund our business, but also hedge our risks with 
derivatives at a cost that is both acceptable and sustainable. 
Derivatives are a key tool for risk mitigation as Ford continues to 
work toward improving its balance sheet and financing its plan. In the 
first quarter of 2011, Ford Motor Company earned a pre-tax operating 
profit of $2.8 billion and generated $2.2 billion of Automotive 
operating cash flow. This is after a very good 2010 with $8.3 billion 
of pre-tax operating profits and $4.4 billion of positive Automotive 
operating cash flow. Our One Ford plan is working and remains 
unchanged, focusing on delivering great products, a strong business, 
and a better world.
Background
    Ford uses derivatives to manage market risks (i.e., foreign 
exchange, commodity and interest rate risks) resulting from the design, 
manufacture, sales and financing of our vehicles. Derivatives are also 
a key risk mitigation tool for our pension plans as we seek to match 
the duration of plan assets with the duration of plan liabilities 
(which at year-end 2010 were $70 billion globally).
    As of March 31, 2011, our total automotive manufacturing and 
financial services derivative notional outstanding was about $75 
billion: $62 billion hedging interest rate risk; $11.5 billion hedging 
foreign exchange risk; and $1.5 billion hedging commodity price risk. 
The market value of our derivatives was over $800 million and was a 
receivable to Ford and its subsidiaries--this is the amount the banks 
would owe us if we needed to terminate the derivatives. A substantial 
portion of our derivatives (about $68 billion) are hedging exposures 
from our financial services business.
    All of these derivatives are over-the-counter (``OTC'') customized 
derivatives. Only a small fraction of our foreign exchange and 
commodity derivative trading relationships at Ford require us to post 
margin. We have no such posting requirements at Ford Credit. Instead, 
we pay an upfront credit charge commensurate with the risk of the 
underlying transaction, which is a common industry practice. The credit 
charges we pay have reduced significantly since the late 2008 financial 
crisis as market conditions and Ford's credit profile have improved.
    The derivative notional within Ford's pension funds is also 
significant. Our pension funds use both exchange-traded and OTC 
derivatives. On OTC derivatives, our pension funds post and receive 
variation margin but do not post or receive initial margin.
Automotive Manufacturing Operations
    In our manufacturing operations, Ford uses derivatives to hedge 
currencies and commodities to lock in some near-term certainty for both 
revenues and costs from global vehicle production. Without hedging we 
expose ourselves, our customers and our investors to significant 
volatility risk. That translates into higher costs, lost sales, and 
fewer jobs.
    We are a capital intensive business with facilities that 
manufacture vehicles that we sell globally. For example, the Ford 
Explorer SUVs manufactured in Chicago, Illinois, are not only shipped 
to various states within the U.S., but are also exported to Canada, 
Mexico, and many other countries. Currency exposure that arises from 
Explorer's production costs being in U.S. Dollars and revenues in 
Canadian Dollars and Mexican Pesos is hedged using foreign currency 
swaps, forwards, and option contracts. This assures we have more 
certainty around our vehicle profits.
    Similar exposures exist throughout Ford's worldwide operations 
related to finished vehicles, components, and raw material. We also use 
over-the-counter derivatives to hedge commodities such as aluminum and 
copper, while opting for long-term supply arrangements for some 
commodities that do not have a deep and liquid financial market. Many 
product and sourcing decisions are made years in advance of delivery.
    We execute the majority of our global foreign exchange and all of 
our commodity swap transactions through a wholly owned hedging 
subsidiary in the U.S. This centralized entity acts as the primary 
external-facing counterparty for these transactions. It executes 
transactions with banks after having compiled a net position 
representing the sum total of a given day's affiliate transactions. A 
centralized hedging model not only serves to concentrate expertise, 
controls, and execution, but it also provides the benefit of being able 
to net positions across an entire company, which results in more 
efficient execution thereby lowering the overall cost and counterparty 
exposure to Ford, and reducing the corporate credit risk we pose to the 
market.
Financial Services Operations (Ford Credit)
    Ford Credit uses derivatives to manage its interest rate and 
currency exposure resulting from financing sales and leases of vehicles 
manufactured by Ford. A large majority of Ford Credit's derivatives 
(about $62 billion of our total $68 billion in derivatives notional) 
are used to manage its interest rate exposure.
    Interest rate risk at Ford Credit results from differences in terms 
of interest rates on the loans we extend to dealers and consumers 
versus the rates on the funding we raise in the capital markets. For 
example in the U.S., we offer our retail customers fixed payments at 
fixed interest rates. However, much of our funding is driven by 
investor preferences, which could be floating rate notes and bonds. As 
a result, we must rely on derivatives to manage this mismatch.
    Apart from managing the overall interest rate risk, Ford Credit 
also uses interest rate derivatives to hedge its asset-backed 
securitization transactions. Today, over 60% of Ford Credit's interest 
rate derivatives are being utilized to hedge securitization 
transactions. Securitization transactions use derivatives to protect 
investors from market risks and are required to support the triple-A 
ratings demanded in these markets. As of March 31, 2011, Ford Credit's 
securitization transactions funded more than 50% of our managed 
receivables. The securitization and other funding Ford Credit attains 
from the market enables it to provide financing to the vast majority of 
Ford's dealers and customers, providing financing to about 3,000 Ford 
dealers with about three million active consumer accounts in the U.S. 
To the extent our structures are compromised it would likely impact the 
cost of credit to the small businesses (i.e., Ford dealers) and 
consumers.
    Ford Credit also uses derivatives to hedge currency exposure 
resulting from accessing the debt and capital markets globally. Cross-
border transactions are an essential part of Ford Credit's funding 
toolkit--providing access to a more diverse group of investors, which 
reduces our overall borrowing costs.
Pension Plans
    Ford Motor Company has about 65,000 active participants and 257,000 
retired and deferred participants in the U.S. who depend on Ford's U.S. 
pension fund for their retirement. Ford's U.S. pension fund uses 
derivatives to manage risk and mitigate funded status volatility that 
would be harmful to participants in the pension plans and to the 
company. For example, one of the biggest risks faced by pension funds 
is interest-rate risk. In Ford's case, a one percentage point drop in 
interest rates causes U.S. pension liabilities to increase by $5.6 
billion, offset partially by an increase in pension assets. The net 
impact would be a substantial funding shortfall. For our pension 
participants, this means their pensions would be less well-funded and 
potentially less secure. For the company, making up the funding 
shortfall would mean eliminating new car programs, and the thousands of 
jobs they would support.
    However, this interest-rate risk can be managed by using interest-
rate swaps which reduce the volatility of our funding obligations. 
Ford's pension fund used swaps from 2007 to 2009 to hedge interest-rate 
risk. As a result, we were able to mitigate the deterioration in our 
plans' funded status during this critical economic period, saving over 
seven percentage points of funded status and over $3 billion in 
contributions.
Ford's Position
    As an end-user of derivatives, Ford Motor Company recognizes that 
well-functioning derivatives markets are important. We fully support 
legislation to strengthen the OTC derivatives regulations that would 
promote transparency to facilitate oversight of markets and activities 
of participants.
    We are pleased with Congress' intent to grant exemptions in the 
Dodd-Frank Act to commercial end-users and their captive finance arms. 
These end-user exemptions ensure companies like Ford can continue to 
hedge their manufacturing and financing risks as they do today. As 
policymakers continue to look for job growth and investment in the U.S. 
economy, it should be very clear that diverting capital, jobs, and 
investment away from businesses focused on Main Street is not the kind 
of unintended consequence the U.S. economy can afford. It is our 
expectation that the implementation of the Dodd-Frank Act will reflect 
Congressional intent to clearly distinguish between areas that do and 
do not present risk to the stability of the U.S. financial markets. It 
is critical that we avoid any potential unintended consequences that 
would introduce risk or potentially hinder the economic recovery.
    We believe Congressional intent is reflected in U.S. Treasury's 
proposed rule that foreign exchange swaps and forwards should be 
excluded from the definition of ``swap'' in the Dodd-Frank Act and, 
therefore, be exempt from central clearing and exchange trading 
requirements. Unlike other derivatives, foreign exchange swaps and 
forwards are short-term instruments and have been trading in a liquid, 
efficient, and highly transparent market for many years. We support 
this proposed rule.
    However, we also believe there are couple of areas where 
Congressional intent is in jeopardy. These most notably include 
mandatory margin requirements and fiduciary standards imposed on swap 
dealers that trade with pension plans.
Margin Requirements for Commercial End-Users and Their Captive Finance 
        Arms
    Our first concern is on the Notices of Proposed Rulemaking 
(``NPRs'') from the prudential regulators and Commodity Futures Trading 
Commission (``CFTC'') related to margin requirements on derivatives 
that are not cleared through a clearinghouse. As presently written, 
they would require commercial end-users (Ford) and their captive 
finance arms (Ford Credit) to post both initial and variation margin.
    A margin requirement would not only negate the exemption from the 
Major Swap Participant definition provided by the Dodd-Frank Act, but 
it is also contrary to Congressional intent to exempt commercial end-
users and their captive finance arms from both clearing and margin 
requirements. It would also result in a contradiction within the 
regulations themselves, whereby Ford and Ford Credit are exempt from 
clearing but then subject to the most onerous margin requirements. 
Similar to other end-user corporations and manufacturers, we are 
concerned that imposing margin requirements would significantly 
increase our cash requirements and costs, and provide a disincentive to 
hedge legitimate business risks, which would seemingly increase 
systemic risk.
    The unintended consequence of margin requirements on commercial 
end-users is the increased cost of risk management for U.S. companies. 
This higher cost potentially puts participants and the broader U.S. 
market at a competitive disadvantage to its foreign competition. In an 
already competitive automobile industry, any added required costs are a 
material issue. We therefore urge the prudential regulators and the 
CFTC to exempt commercial end-users and their captive finance arms from 
margin requirements to avoid putting the U.S. market, and the U.S. 
companies that are dependent on them, at a competitive disadvantage.

    Commercial End-Users

    Although the regulators note their intent to be consistent with 
current market practices, the proposed rules require swap dealers to 
collect initial and variation margin from commercial end-user 
counterparties.

        Section _.1(2) of the prudential regulators' NPR requires banks 
        to collect margin above an exposure threshold adopted by the 
        banks. Similarly, sections 23.151 and 23.154 of the CFTC NPR 
        require swap dealers to execute credit support arrangements 
        specifying exposure thresholds and margin requirements and 
        require swap dealers to collect margin from non-financial end-
        users if thresholds were to be exceeded.

    We agree that trading derivatives is a credit decision for dealers 
and that their credit exposure should be appropriately managed. 
However, posting margin or having a credit support agreement is not a 
universal practice followed by all market participants today. Swap 
dealers execute master netting agreements with their end-user 
counterparties and manage net credit exposure on a portfolio basis 
rather than managing credit exposure on a transaction-by-transaction 
basis. In many cases, as an alternative to requiring margin, the 
dealers buy credit protection to reduce their credit exposure and 
transfer the cost to the end-user counterparty as credit charges on the 
transaction.
    Mandatory margin requirements would necessitate new and costly 
incremental funding requirements on end-users. Unlike swap dealers and 
major swap participants, most end-users do not have expedient and low-
cost access to liquidity sources such as the Federal Reserve discount 
window and FDIC-insured consumer deposits. In our case, raising 
additional capital requires lead time, is normally done for a longer 
tenor, and is relatively more expensive. Additionally, given that the 
nature of our derivative requirements is generally driven by one-sided 
exposures, we are disadvantaged in being able to manage margin compared 
to swap dealers, who generally see more trading flow with offsets and 
have a broader base of counterparties to allow for lower margin 
requirements. Again, while unintended, the impact would be 
disproportionately high to manufacturing end-users.

    Captive Finance Companies

    Another important issue is that the margin rules need to be 
consistent with the Dodd-Frank Act and Congressional intent to exclude 
certain captive finance companies from the definition of financial 
entity, thereby exempting them from clearing and margin requirements.
    As evidenced by the following references, both NPRs acknowledge 
that captive finance companies should be excluded from margin and 
clearing requirements:

        Footnote 41 in section _.2(1)(b) of the prudential regulators' 
        NPR states that ``This definition of `financial end-user' is 
        based upon, and substantially similar to, the definition of a 
        `financial entity' that is ineligible to use the end-user 
        exemption from the mandatory clearing requirements of sections 
        723 and 763 of the Dodd-Frank Act.''

        The CFTC, in its NPR, states that its definition of financial 
        entity ``tracks the definition in section 2(h)(7)(C) of the Act 
        that is used in connection with an exception from any 
        applicable clearing mandate.''

    Although the goal to be consistent with the Dodd-Frank Act is 
evident in the NPRs, neither the financial end-user definition in 
section _.2(1)(b) of the prudential regulators' NPR, nor the financial 
entity definition in section 23.150 of the CFTC NPR explicitly exclude 
captive finance companies. Moreover, the definitions of financial end-
user and financial entity in the NPRs could be interpreted as 
categorizing captive finance companies of commercial end-users as a 
``high risk financial end-user'' because they are not subject to 
capital requirements established by a prudential regulator or state 
insurance regulator. This subjects them to the strictest margin 
requirements. Clearly, this would be very problematic for us.
    Our key concern related to margin requirements for Ford's captive 
finance arm, Ford Credit, is the potential disruption in accessing the 
asset-backed securitization markets. Mandating a margin requirement for 
securitization derivatives will force major structural changes to many 
of our programs and result in substantial additional cost as well as 
legal and administrative complexity. Consistent with present market 
practice, Ford Credit's securitization transactions are not structured 
to post margin. An initial margin could theoretically be posted by 
diverting some of the proceeds from the issuance of the transaction, 
which would reduce the funding received from the issuance, lowering 
transaction efficiency and increasing cost. Variation margin is even 
more problematic as our bankruptcy remote structures do not presently 
have a mechanism allowing them to post cash collateral on an ongoing 
basis, and we are unaware of any structure in the market that has such 
a feature. Alternate hedging solutions that do not require margin would 
be very expensive and, as a result, would reduce liquidity for Ford 
Credit.
    Going forward, these provisions could prevent Ford Credit and many 
other end-users that use securitization from efficiently accessing 
these markets or from having the backstop liquidity that is so 
important for an economic downturn. (Ford Credit has over $30 billion 
of committed funding credit lines from banks and their conduits.) 
Limiting investor demand or bank support for Ford Credit would directly 
impact the amount of financing that could be made available to our 
dealers and customers.
    During the recent credit crisis, when many financial institutions 
were curtailing credit availability, Ford Credit continued to 
consistently support Ford's dealers and customers, now providing 
financing to about 3,000 dealers with a portfolio of about three 
million retail customers. Unlike other asset classes in the 
securitization markets, auto ABS is back to pre-crisis market liquidity 
levels with borrowing spreads that are nearly back to pre-crisis 
levels. Another disruption to the auto securitization markets is 
something neither the U.S. economy nor our industry can withstand while 
trying to recover and add jobs.
    Throughout the process of drafting, passing, and implementing the 
Dodd-Frank Act, Congress has repeatedly expressed its intent to exempt 
commercial end-users, including certain captive finance companies from 
margin requirements. This is evident not only in the Dodd-Frank Act but 
also in records of Congressional proceedings, colloquies, and letters. 
The most recent of these is a particularly helpful letter dated June 
20, 2011, submitted by Chairman Lucas and Chairman Stabenow to the 
prudential regulators and CFTC in response to the proposed margin 
rules.
    This letter not only asks for clarification that certain captive 
finance affiliates of manufacturing companies (``whose primary business 
is providing financing, and uses derivatives for the purpose of hedging 
underlying commercial risks related to interest rate and foreign 
currency exposures, 90 percent or more of which arise from financing 
that facilitates the purchase or lease of products, 90 percent or more 
of which are manufactured by the parent company or another subsidiary 
of the parent company'') be classified as non-financial (or commercial) 
end-users, but also expresses concern that the proposed margin rules 
undermine the exemption granted by the Dodd-Frank Act to the commercial 
end-users.

    Recommendation

    Since Ford's last testimony on derivatives before the Senate 
Agriculture Committee in late 2009, we certainly appreciate that the 
Dodd-Frank Act specifically recognized the low-risk nature of how 
derivatives are used by commercial end-users and their captive finance 
arms. Ford strongly commends this Committee and Congress for this. We 
also ask that you continue to urge regulators to match their rulemaking 
to Congress' clear intent expressed in the Dodd-Frank Act and numerous 
other ways. Specifically, we would recommend the following related to 
margin requirements on derivatives that are not cleared through a 
clearinghouse to implement section 4s(e) of the Commodity Exchange Act 
(``CEA''), as amended by section 731 of the Dodd-Frank Act:

  u Captive finance companies and their securitization entities as 
        described in the CEA section 2(h)(7)(C)(iii) as amended by 
        section 723 of the Dodd-Frank Act that are excluded from 
        financial entity definition in the CEA section 2(h)(7)(C) and 
        therefore exempt from clearing requirements per CEA section 
        2(h)(7)(A) should also be excluded from prudential regulators' 
        and CFTC's definition of financial end-user and financial 
        entity, respectively, and therefore be exempt from margin 
        requirements.

  u Commercial (or non-financial) end-users who are exempt from 
        clearing requirements per CEA section 2(h)(7)(A) as amended by 
        section 723 of the Dodd-Frank Act should not be required to 
        post margin on their un-cleared derivative transactions with 
        swap dealers.

  u End-user affiliates of commercial end-users including centralized 
        hedging entities wholly owned by commercial end-users who are 
        exempt from clearing requirements per CEA section 2(h)(7)(A) as 
        amended by section 723 of the Dodd-Frank Act should also be 
        exempt from clearing and margin requirements.

  u Consistent with Treasury's proposed determination, all foreign 
        exchange swaps and forwards should be excluded from the 
        definition of ``Swaps'' in section 721 of the Dodd-Frank Act 
        and therefore be exempt from clearing and margin requirements.
Business Conduct Requirements for Swap Dealers Trading Derivatives With 
        Pension Plans
    Our second major issue is regarding derivatives used by pension 
plans, specifically the business conduct standards for swap dealers and 
major swap participants (``MSPs''). As part of the Dodd-Frank Act, 
Congress adopted the business conduct standards to ensure that swap 
dealers and MSPs deal fairly with pension plans. However, the proposed 
regulations issued by the CFTC could actually have serious adverse 
effects on pension plans.
    Pension plans use swaps to manage interest-rate risk and other 
risks, in order to reduce volatility with respect to funding 
obligations. If swaps were to become materially less available to 
pension plans, plan costs and funding volatility would rise sharply. We 
are very concerned that an inadvertent disconnect in proposed 
regulations between the Department of Labor (``DOL'') and the CFTC 
business conduct standards, as well as other issues in the business 
conduct standards, may have several unintended consequences resulting 
in counterparties being unwilling to trade with pension plans.
    The proposed CFTC business conduct standards require swap dealers 
and MSPs that enter into swaps with pension plans to provide certain 
services (for example, provide information regarding the risks of 
entering into a swap, provide valuation services, and review whether 
the plan's advisor is qualified to advise the plan with respect to the 
swap). These required services could make the swap dealer a plan 
fiduciary under DOL regulations. If a swap dealer or MSP is a plan 
fiduciary, it would be a prohibited transaction under ERISA for the 
swap dealer or MSP to enter into a swap with the plan; swaps dealers 
would thus be precluded from entering into swap transactions with 
pension plans.
    In addition, the proposed business conduct standards define so 
broadly the terms under which a swap dealer is an ``advisor'' that swap 
dealers would effectively function as advisors to plans, triggering a 
duty to act in the best interests of the plan. This creates a conflict 
of interest that would also, pending further clarification, prevent 
dealers from entering into swaps with a plan.
    Finally, the business conduct standards require the swap dealer to 
review the qualifications of the plan's advisor, which would give the 
dealers the right to veto plan advisors. Congressional intent 
underlying the business conduct standards was to protect entities such 
as pension plans. However, if swap dealers or MSPs can veto plan 
advisors, concerns about being vetoed by dealers could make plan 
advisors more reluctant to negotiate in a zealous manner with dealers, 
and less inclined to vigorously defend the plan's best interests by 
challenging dealers.
    If Ford's U.S. pension fund is unable to use swaps to manage its 
interest-rate risk, its pension fund participants would be affected, 
and the company's own balance sheet risk profile and potential cash 
contributions could increase significantly because of increased 
volatility. Concern about the uncertainties regarding cash 
contributions in any given year would cause Ford to hold large 
contingency reserves of cash. This is money that would not be available 
for investment in research and development, new car programs, and jobs.
    Such an outcome would also put us and other American end-user 
manufacturers with defined benefit plans at an enormous competitive 
disadvantage to foreign competitors who do not have large defined 
benefit pension plans. This increased volatility and its enormous 
potential cost would be solely focused on those American end-users who 
are seeking to offer company sponsored and funded retirement security 
to their retirees and workers.

    Recommendation

    Ford strongly recommends that Congress continue to urge regulators 
to coordinate efforts in areas where their regulations overlap and to 
address other issues in their regulations; so that pension plans are 
not inadvertently precluded from using derivatives that help them 
manage risk on behalf of the pension plans' beneficiaries.
    We and other large defined benefit plan sponsors have been working 
with industry groups, including the Committee on Investment of Employee 
Benefit Assets (``CIEBA'') and American Benefits Council (``ABC'') on 
the issues affecting pension plans. CIEBA and ABC have provided a 
number of comment letters and proposed solutions addressing these 
issues. Among their proposals to the DOL and CFTC are:

    1. Preferred solution--that the CFTC Business Conduct Standards NOT 
        be applied to swaps transacted with pension plans, or as an,

    2. Alternate Solution--(i) clarification by the DOL and CFTC that 
        no action of a swap dealer that is required solely by reason of 
        the CFTC Business Standards will result in the swap dealer 
        becoming a fiduciary, (ii) statement by the CFTC that a swap 
        dealer will not be considered as an advisor if it explicitly 
        states that it is acting only as a counterparty, and (iii) 
        removal or limitation of the CFTC dealer requirement to approve 
        the plan's advisor.

    We support these proposals, and urge the regulators to take these 
recommendations into consideration as they finalize their regulations.
Closing
    We appreciate Congress' and this Committee's recognition that 
margin requirements should not apply to end-users such as Ford and Ford 
Credit that only use derivatives to manage legitimate business risks. 
Our concern focuses on two areas of proposed regulations, which, if not 
addressed, could have major unintended adverse ramifications for our 
business. We thank you for the opportunity to share our concerns. In 
summary, we are focused on primarily two issues as derivative 
regulations become finalized:

        Commercial end-users and their captive finance arms including 
        their securitization entities should be exempt from margin 
        requirements on their un-cleared derivatives--Congressional 
        intent is evident in the Dodd-Frank Act, records of 
        Congressional proceedings, colloquies, and letters.

        Coordinated efforts by the CFTC and DOL to ensure that pension 
        plans are not inadvertently precluded from using derivatives 
        that help companies protect pension plan beneficiaries and 
        manage their own balance sheet risk.

    We thank the Committee for maintaining this dialogue--through the 
Chairman's recent letter and your invitation to appear here today--and 
for giving derivatives market reforms the serious attention they 
deserves. We are happy to continue to provide our support in whatever 
way possible and answer any questions the Committee may have.

    The Chairman. Thank you.
    Ms. Hall, you may begin whenever you are ready, please.

 STATEMENT OF DENISE B. HALL, SENIOR VICE PRESIDENT, TREASURY 
           SALES MANAGER, WEBSTER BANK, HARTFORD, CT

    Ms. Hall. Chairman Lucas and Members of the Committee, I 
appreciate the opportunity to testify today on the 
implementation of Title VII of the Dodd-Frank Act.
    My name is Denise Hall, and I am a Senior Vice President at 
Webster Bank and manage the department that executes all 
interest-rate derivatives. Webster Bank is an $18 billion full-
service commercial bank headquartered in Waterbury, 
Connecticut, with 176 branches stretching from Boston to New 
York. In our 76 years, we have only had two CEOs: our founder, 
Harold Webster Smith, and his son Jim, our current CEO. 
Throughout our history and growth, we have never lost sight of 
whom we serve and why we exist. I want to share with you how we 
have conducted ourselves during the residential mortgage 
crisis.
    Since 2008, Webster has modified the payment terms of 
mortgages with balances totaling more than $187 million and 
kept more than 1,000 families in their homes. In that time, 
Webster has not had a single adversarial mortgage foreclosure 
where we were able to contact the borrower. What distinguishes 
Webster is that we have addressed head-on the issue of 
affordability for borrowers who have encountered difficulties 
through no fault of their own; we have not just postponed the 
day of reckoning. Our mortgage modification program was 
profiled in the Hartford Courant, and I am leaving the 
Committee with a copy of that article.
    Although the topic of the hearing today is derivatives, not 
mortgages, Webster believes Members of Congress need to know 
that there are community-minded banks that are trying to do the 
right thing by customers every day, whether it is a business 
that wants to hedge floating-rate risk or a homeowner who has 
lost their job. Webster does not use credit default swaps or 
use derivatives for speculation. We use them to reduce risks 
that naturally arise from making loans and taking in deposits 
and to meet customer needs.
    In 1999, Webster Bank loan officers approached me to 
request that we develop the ability to offer swaps in 
conjunction with loans that we underwrite. We were losing deals 
to larger banks that were able to offer borrowers the risk-
mitigation benefits associated with a swap. Swaps would allow 
us to compete.
    We have offered these products responsibly to our customers 
for over 10 years, and I am concerned that the unintended 
consequence of the legislation would be that it becomes cost-
prohibitive to continue to do so. Borrowers would have fewer 
choices, and the lack of competition drives their cost of 
credit higher.
    I would like to address three concerns about the impact of 
certain rules the CFTC has proposed: the potential exemption 
from central clearing for small banks, the small dealer 
definition, and the eligible contract participant definition.
    Congress recognized the low risk posed to the system by 
small banks when it granted regulators authority to exempt them 
from clearing. Subjecting us to such requirements will be 
costly and will offer little or no risk-reducing benefits to 
the financial system. The fixed costs inherent in establishing 
these systems will make it uneconomical for us to continue to 
offer these products.
    The Commission should also consider the parameters for 
identifying which banks are eligible to qualify for the small-
bank exemption. We recommend the Commission focus on the risk 
of its derivatives portfolio, which could be defined by a 
bank's net uncollateralized derivatives exposure.
    The swap dealer definition in the proposed rule could 
inadvertently encompass banks like us that offer swaps to 
commercial customers. Executing more than 20 trades with 
customers in 1 year would require a bank to register as a 
dealer. The volume of our swaps would not justify the 
substantial compliance burden.
    Title VII included an exemption from the swap dealer 
definition for a swap offered in conjunction with originating 
loan. The exemption is too narrowly defined as it is restricted 
to the loans contemporaneous with a swap. It is very common for 
a borrower to enter into a swap before or after the origination 
of the loan.
    Finally, Title VII prohibits a firm that is not an eligible 
contract participant from entering into OTC derivatives. This 
creates uncertainty for small businesses that have been able to 
utilize uncleared OTC derivatives for the past 20 years to 
manage their interest-rate risk in accordance with the criteria 
previously established by the CFTC.
    Regulatory approaches that fail to properly distinguish 
banks like Webster from major derivatives players like AIG 
could jeopardize the ability of small banks to efficiently 
mitigate risk, to compete, and to provide customers with 
competitively priced alternatives.
    Thank you for the opportunity to testify today, and I am 
happy to answer any questions you may have.
    [The prepared statement of Ms. Hall follows:]

 Prepared Statement of Denise B. Hall, Senior Vice President, Treasury 
               Sales Manager, Webster Bank, Hartford, CT
    Chairman Lucas, Ranking Member Peterson and Members of the 
Committee, I appreciate the opportunity to testify today on the 
implementation of Title VII of the Dodd-Frank Act. My name is Denise 
Hall and I am a Senior Vice President at Webster Bank (``Webster''). I 
have been employed by Webster for 15 years and manage the department 
that executes all interest rate and foreign exchange derivative 
products.
    Webster Bank is an $18 billion full-service commercial bank 
headquartered in Waterbury, Conn., with 176 branches stretching from 
Boston to Westchester County, NY. We are a major provider of banking 
products and services to middle market companies, small businesses and 
families in our region. For 3 consecutive years, Webster has written 
more SBA loans than any other bank in our home market of Connecticut. 
In our 76 years, we have only had two CEOs--our founder, Harold Webster 
Smith, and his son, Jim Smith, who has held that title since 1987. 
Throughout our history and growth, we have never lost sight of whom we 
serve and why we exist, something we call the Webster Way. To give the 
Committee Members a better idea of what this means, I want to share 
with you how we have conducted ourselves during the residential 
mortgage crisis. Since 2008, Webster has modified the payment terms of 
mortgages with balances totaling more than $187 million. These 
modifications have saved homeowners an average of more than $300 a 
month and kept more than 1,000 families in their homes. In that time, 
Webster has not had a single adversarial mortgage foreclosure where we 
were able to contact the borrower. What distinguishes Webster is that 
we have addressed head-on the issue of affordability for borrowers who 
have encountered difficulties through no fault of their own; we have 
not just postponed the day of reckoning. The proof of this is that our 
re-default rate on modified mortgages is about 13 percent, less than a 
third of the industry average. Our mortgage modification program was 
profiled in the Hartford Courant, and I'm leaving the Committee with a 
copy of that article. Although the topic of the hearing today is 
derivatives, not mortgages, Webster believes Members of Congress need 
to know that there are community-minded banks that are trying to do the 
right thing by customers every day, whether it's an exporter that wants 
to hedge currency risk or a homeowner who has lost a job.
    Webster, like many other community and regional banks, depends on 
interest rate derivatives to prudently manage risks inherent to the 
business of commercial banking. We do not use credit default swaps or 
use derivatives for speculative purposes. Rather, Webster uses 
derivatives to increase certainty with respect to its net interest 
margin and to reduce risks that naturally arise from making loans and 
taking in deposits.
    Additionally, Webster provides a relatively small amount of 
interest rate and foreign exchange derivatives to our commercial 
banking customers to assist them in managing their own risks. By way of 
background, in 1999 Webster Bank loan officers approached me to request 
that we develop the ability to offer interest rate swaps in conjunction 
with loans that we would underwrite. In Connecticut, we face 
competition from many of the large New York banks and they found that 
we were losing deals to those banks that were able to offer borrowers 
the risk mitigation benefits associated with an interest rate swap. 
Interest rate swaps would allow us to offer borrowers competitive long-
term financing in a manner that does not require Webster to take on 
unwanted interest rate exposure. In addition, we offer foreign exchange 
forwards to assist our customers in managing exposure from fluctuating 
currency rates that results from selling products or buying raw 
materials abroad. Again, we are helping our clients to mitigate risk.
    We have offered these products responsibly to our customers for the 
past twelve years, and I am concerned that an unintended consequence of 
the legislation would be that it becomes cost prohibitive to continue 
to do so, borrowers would have fewer choices, and the lack of 
competition from small and mid sized banks drives their cost of credit 
higher.
    Today I would like to address several concerns about the impact of 
certain rules the Commodity Futures Trading Commission (``CFTC'') has 
proposed that affect smaller banks like Webster.
    These proposed rules could unnecessarily jeopardize the ability of 
smaller banks to manage risk, meet our customers' risk management needs 
and compete with large dealer banks.
    In particular, I will focus today on three issues: the potential 
exemption from central clearing for small banks, the swap dealer 
definition, and the eligible contract participant definition.
(1) Potential Exemption for Small Banks
    Congress recognized the low risk posed to the system by small banks 
when it granted regulators authority to exempt them from clearing 
requirements. It is important that the Commission exercise this 
authority. Subjecting small banks to such requirements will be costly 
and will offer little or no risk-reducing benefit to the financial 
system. The time and expense associated with clearing for small banks 
could serve to deter some community and regional banks from using swaps 
to hedge risk.
    Small banks use derivatives to a much more limited degree than 
larger banks. As a result, Webster and its customers' derivatives use 
pose no risk to financial stability. Rather, such risk is concentrated 
among a few very large and interconnected financial institutions. In 
fact, while more than 1,000 banks in the U.S. utilize derivatives, 96% 
of the notional and 86% of the credit exposure is held at the top five 
banks in the U.S.\1\ Importantly, the limited use of OTC derivatives by 
small banks means they are unable to meaningfully contribute to risks 
in the financial system. The derivatives losses that result from a 
small bank's failure could not cause a large bank to fail. And 
regulators would have little or no motivation to forestall the 
resolution of a major swap dealer on account of its swap positions with 
small banks.
---------------------------------------------------------------------------
    \1\ Please refer to page 1 of the report at: http://
www.occ.treas.gov/topics/capital-markets/financial-markets/trading/
derivatives/dq410.pdf.
---------------------------------------------------------------------------
    Much of the limited risk posed by small banks is already addressed 
through bilateral margin arrangements, especially those customarily 
entered into with large dealer banks. Additionally, capital 
requirements also serve to ensure banks adequately protect against 
counterparty credit risks.
    Relatively small derivative transaction volume can make clearing 
uneconomic for many banks. This is because lower transaction volumes 
make it difficult for small banks to absorb the fixed costs inherent in 
establishing and maintaining clearing arrangements. By contrast, large 
dealer banks can amortize the cost of establishing and maintaining 
clearing arrangements over hundreds of thousands of transactions. In 
preparation for the clearing requirements I have begun the process of 
evaluating different proposals, and will be faced with determining how 
the additional costs will be allocated.
    In addition to exercising its authority to exempt small banks from 
clearing requirements, the Commission should also consider the 
parameters for identifying which banks are eligible to qualify for the 
exemption. Rather than focusing on a bank's asset size, the Commission 
should focus on the risk of a bank's derivatives portfolio. This risk 
could be defined by a bank's net uncollateralized derivatives exposure. 
We agree with recommendations that banks whose net uncollateralized 
exposure is less than $1 billion be exempt from clearing requirements. 
If the Commission opts to focus solely on a bank's asset size, we 
believe it would be appropriate to allow banks with less than $50 
billion in assets to qualify for the exemption. Even so, we feel that 
it is conceivable that we could have $55 billion in assets, and still 
have very little in uncollateralized risk due to our bilateral netting 
arrangements, and relatively few transactions. Uncollateralized 
exposure is a far better metric.
(2) Swap Dealer Definition
    Webster Bank shares concerns expressed by a wide range of community 
and regional banks that the swap dealer definition in the CFTC's 
proposed rule could inadvertently encompass hundreds of community and 
regional banks that offer risk management products to commercial 
customers. Such a broad swap dealer definition would result in many 
small banks ceasing to offer derivatives products to customers. This is 
because the volume of swaps many small banks offer would not justify 
the substantial compliance burden imposed on swap dealers. Such an 
outcome could significantly harm community and regional banks, by 
making it more difficult for them to compete with larger banks for 
loans. The diminished competition that would result from smaller banks' 
withdrawals from the swaps market would ultimately result in customers 
paying more.
    Title VII included an exemption from the swap dealer definition for 
any swap offered by a bank to a customer in connection with originating 
a loan with that customer. This exemption reveals that customer hedging 
activity carried out by small banks does not pose the risks the Act is 
intended to address. However, the CFTC's proposed rule interpreting 
this exemption is unnecessarily narrow. While not required by Title 
VII, the CFTC is considering whether to limit the exemption to swaps 
offered contemporaneously with origination of the loan. As it is very 
common for a borrower to enter into an interest rate swap before or 
after origination of the corresponding loan, the exemption should not 
be limited to any swap entered into contemporaneously with a loan. 
Indeed, the flexibility to execute a swap after the loan closing is one 
of the features that borrowers employ to manage their risk. In 
addition, we urge the CFTC to consider excluding from the swap dealer 
definition swaps offered by a bank in connection with syndications, 
participations and bond issuances that are facilitated by the bank.\2\
---------------------------------------------------------------------------
    \2\ Please refer to pages 3-4 of the comment letter submitted by 
Webster Bank and 18 other community and regional banks to the CFTC for 
examples.
---------------------------------------------------------------------------
    Additionally, the CFTC's proposed thresholds for the ``de minimis 
exception'' from the swap dealer definition are extremely low and 
should be increased. If a bank were to offer just 21 foreign exchange 
options \3\ to customers in one year, they would be subject to the full 
panoply of regulation applicable to swap dealers. As noted, many small 
banks would simply cease offering certain risk management services to 
customers, rather than face such a regulatory burden.
---------------------------------------------------------------------------
    \3\ Note that the Secretary of the Department of the Treasury has 
the authority to make a written determination exempting certain FX 
derivatives from certain regulatory requirements. Such a determination 
has not been made as of the writing of this statement.
---------------------------------------------------------------------------
    In its economic analysis of the proposed margin rule,\4\ the Office 
of the Comptroller of the Currency evaluated the impact of reducing the 
number of institutions that are classified as ``swap entities'' (e.g., 
OCC regulated swap dealers). The analysis considers the impact of 
increasing the notional test set forth in the de minimis exception from 
$100 million to $10 billion. Such an adjustment would reduce the number 
of OCC regulated swap entities from 74 to 22.
---------------------------------------------------------------------------
    \4\ Office of the Comptroller of the Currency, Economics 
Department, Unfunded Mandates Reform Act Impact Analysis for Swaps 
Margin and Capital Rule (April 15, 2011).
---------------------------------------------------------------------------
    Importantly, such an adjustment has virtually no impact on the 
notional amount of swaps covered by the proposed rule.\5\
---------------------------------------------------------------------------
    \5\ The notional amount at a swap entity threshold of $100 million 
covers $1.7949 trillion in notional for 74 banks. The notional amount 
at a swap entity threshold of $10 billion covers $1.74941 trillion in 
notional for 22 banks. The OCC notes, ``Because total swap amounts are 
concentrated in a relatively small number of institutions, varying this 
threshold has little impact on the dollar amount of swaps affected by 
the proposed rule.''
---------------------------------------------------------------------------
    Regulators have ample authority to address this concern while still 
faithfully interpreting Title VII.\6\ We urge regulators to compare the 
thresholds for the de minimis exception against the volume of dealing 
done by the large financial institutions. For example, while executing 
more than 20 trades with customers in one year would require a bank to 
register as a swap dealer, it is known that Lehman Brothers had 900,000 
trades in place at the time of its bankruptcy. It would take Webster a 
century to generate that volume of transactions!
---------------------------------------------------------------------------
    \6\ Please refer to pages 5 and 6 of the comment letter submitted 
by Webster Bank and 18 other community and regional banks to the CFTC 
for additional comparative data: http://www.chathamfinancial.com/wp-
content/uploads/2011/02/Coalition-Comments-Small-Banks.pdf.
---------------------------------------------------------------------------
    Expanding this exception will have little or no impact on the 
mitigation of systemic risk, while significantly reducing the 
regulatory burden on small banks.
(3) Eligible Contract Participant Definition
    Section 723 of Title VII prohibits a firm that is not an ``eligible 
contract participant'' from entering into an OTC derivative.\7\ This 
provision creates uncertainty for certain small businesses that have 
previously been able to utilize uncleared OTC derivatives. 
Additionally, absent clarification from the CFTC, even large firms that 
make investments through smaller subsidiaries may be precluded from 
hedging the commercial risks associated with those subsidiaries. We 
urge the CFTC to clarify that such smaller firms can continue to 
utilize uncleared OTC derivatives, so long as they meet specific 
criteria already established by the CFTC more than 2 decades ago and 
relied upon ever since by numerous market participants.\8\
---------------------------------------------------------------------------
    \7\ Firms that are not eligible contract participants will only be 
permitted to enter into derivatives on regulated exchanges. In addition 
to other criteria, corporations and partnerships that have at least $10 
million in assets or are hedging and have $1 million in net worth 
qualify as eligible contract participants under the Commodity Exchange 
Act.
    \8\ Certain firms have been able to enter into over-the-counter 
hedges if they meet the criteria set forth in the CFTC's 1989 Policy 
Statement Concerning Swaps Transactions.
---------------------------------------------------------------------------
Conclusion
    Community and regional banks depend on customized OTC derivatives 
to mitigate risk and to help small and mid-sized businesses grow and 
prosper. Regulation intended to protect against systemic failures 
should not burden those who are incapable of causing such failures in 
the future. Broad-stroke regulatory approaches that fail to properly 
distinguish banks like Webster from major derivatives players like AIG 
could jeopardize the ability of small banks to efficiently mitigate 
risk, to compete for lending business against large-bank competitors, 
and to provide customers with competitively priced alternatives.
    Thank you for the opportunity to testify today, and I am happy to 
answer any questions that you may have.
                               Attachment




    The Chairman. Thank you.
    Mr. Peterson, you may begin whenever you are prepared.

           STATEMENT OF SAM PETERSON, SENIOR ADVISOR,
   DERIVATIVES REGULATORY ADVISORY GROUP, CHATHAM FINANCIAL, 
                       KENNETT SQUARE, PA

    Mr. Sam Peterson. Good afternoon, Chairman Lucas and 
Members of the Committee. Thank you for opportunity to testify 
today regarding the impact of derivatives regulation on Main 
Street businesses.
    My name is Sam Peterson, and I am a Senior Advisor at 
Chatham Financial. Chatham is a global consulting firm based in 
Pennsylvania that serves more than 1,000 end-users of 
derivatives, including clients with operations in all 50 
states. Our clients range from Fortune 100 companies to small 
businesses and include firms from virtually every sector of the 
economy.
    What is common to all of our clients is that each uses 
over-the-counter derivatives to reduce business risk, not to 
take on risk through speculation. Throughout the debate 
surrounding derivatives regulation, Chatham supported policy 
that strikes a balance between reducing systemic risk and 
preserving efficient access for thousands of firms that rely on 
over-the-counter derivatives for critical risk management.
    On the anniversary of the enactment of the Dodd-Frank Act, 
it is important to consider rulemaking efforts in light of the 
primary objective of Title VII. The primary objective of Title 
VII was to reduce and contain systemic risk in order to ensure 
that American taxpayers never again would have to step in and 
subsidize the reckless behavior of major players in the 
derivatives market.
    In pursuing this end, Congress appropriately distinguished 
between major players with exposures large enough to threaten 
the financial system and the firms that do not pose systemic 
risk and who use over-the-counter derivatives prudently to 
manage ordinary business risks. Now the regulators are tasked 
with implementing Title VII in a manner that is consistent with 
Congressional intent.
    As the regulators work toward completing this monumental 
task, I would like to highlight a few key areas of concern for 
end-users.
    First, I will discuss margin. The principal authors of 
Title VII stated clearly that end-users should be exempt from 
clearing and margin mandates. However, end-users remain 
concerned that recently proposed rules could subject them to 
margin requirements. Imposing margin on end-users is neither 
consistent with Congressional intent nor a holistic reading of 
Title VII. However, setting aside the question of statutory 
authority, there are important differences with respect to the 
margin rules proposed by the CFTC and the prudential 
regulators.
    The prudential regulators' proposed rule would require all 
end-users, even non-financial end-users, to have in place new 
credit support arrangements with margin-posting thresholds. If 
exposure exceeded the thresholds, end-users would be required 
to post margin. The CFTC's proposed rule also requires credit 
support arrangements, but thresholds are not required for non-
financial end-users and existing documentation could suffice.
    Chatham supports the CFTC's position that it is not 
required to impose margin on non-financial end-users. The 
majority of end-user transactions, however, would be subject to 
the prudential regulators' rule.
    The aggregate impact of margin requirements will depend on 
how the rules are implemented. However, depending on 
implementation, it is clear that hundreds of billions of 
dollars in capital could be diverted from productive investment 
to sit idle as collateral.
    In a recent paper, the Progressive Policy Institute warned 
of unintended consequences associated with imposing margin on 
end-users, stating the following: ``While margin requirements 
make sense in many contexts to reduce the threat of systemic 
risk, putting margin requirements on companies that use 
derivatives to manage risks in the ordinary course of business, 
i.e., end-users, is both onerous and unnecessary.''
    Capital: Title VII requires capital requirements for non-
cleared derivatives to be set at levels that are appropriate 
for the risk of the trades. However, end-users are concerned 
that capital requirements could be set at punitive levels that 
are disproportionate to risk, appear aimed at reshaping market 
structure, and that could render the end-user exemption moot.
    Just as Title VII reflected Congress' view that end-users 
do not create systemic risk, it is essential that capital 
requirements also reflect the lower risk posed to the system by 
end-user transactions. Taken together, the margin and capital 
requirements could have the effect of making customized, non-
cleared derivatives prohibitively expensive.
    Margin and capital requirements appearing tended to create 
incentives for firms to use exchange-traded and cleared 
products. Any such incentive should be based on actual risk and 
not on a regulatory predisposition in favor of a certain type 
of market structure.
    It is unnecessary to force end-users to choose between 
efficiently managing risks and investing in their businesses. 
With a sputtering economy, unprecedented uncertainty, and 
unemployment above nine percent, it is critical that we work to 
prevent such an outcome.
    We look forward to working with the Committee throughout 
the rulemaking process. I thank you for the opportunity to 
testify, and I am happy to answer any questions you may have.
    [The prepared statement of Mr. Sam Peterson follows:]

    Prepared Statement of Sam Peterson, Senior Advisor, Derivatives 
    Regulatory Advisory Group, Chatham Financial, Kennett Square, PA
    Good afternoon, Chairman Lucas, Ranking Member Peterson, and 
Members of the Committee. Thank you for the opportunity to testify 
today regarding the impact of derivatives regulation on Main Street 
businesses. My name is Sam Peterson, and I am a Senior Advisor at 
Chatham Financial (``Chatham'').
    Chatham is a global consulting firm based in Pennsylvania that 
serves as an advisor to more than 1,000 end-users of derivatives, 
including clients with operations in all 50 states. Our clients range 
from Fortune 100 companies to small businesses, and include 
manufacturers, community and regional banks, technology firms, health 
care companies, real estate companies and businesses from virtually 
every sector of the economy. What is common to all of our clients is 
that each uses over-the-counter (``OTC'') derivatives to reduce 
business risk--not to take on risk through speculation.
    Throughout the policy debate surrounding effective regulation of 
the derivatives market, Chatham supported the efforts of Congress to 
pass legislation that strikes a balance between reducing systemic risk 
and preserving safe and efficient access for thousands of firms that 
rely on over-the-counter derivatives for critical risk management. On 
the anniversary of the enactment of the Dodd-Frank Act, it is important 
to consider the current rulemaking efforts in light of the primary 
objective of Title VII.
    The primary objective of Title VII was to reduce and contain 
systemic risk in the over-the-counter derivatives market in order to 
ensure that American taxpayers never again would have to step in and 
subsidize the reckless behavior of major players in the derivatives 
market. In pursuing this end, Congress appropriately distinguished 
between the major market players with derivatives exposures large 
enough to threaten the financial system and the firms that do not pose 
systemic risk and who use over-the-counter derivatives prudently to 
manage ordinary business risks. Now the regulators are tasked with 
implementing Title VII in a manner that is consistent with 
Congressional intent, and must craft the rules that will govern this 
important market for years to come. As the regulators work toward 
completing this monumental task, I would like to highlight a few key 
areas of concern for end-users:
Margin
    Despite the considerable efforts taken by the principal authors of 
Title VII to clarify that end-users should be exempt from clearing and 
margin mandates, end-users remain concerned that recently proposed 
rules could subject them to margin requirements for non-cleared trades.
    Imposing margin requirements on end-users is neither consistent 
with Congressional intent nor a holistic reading of Title VII; however, 
setting aside the question of whether regulators have the authority to 
impose margin requirements on end-users, there are important 
differences with respect to the margin rules proposed by the CFTC and 
the prudential regulators.
    The CFTC will finalize rules for trades done with non-bank swap 
dealers and the prudential regulators will finalize rules for trades 
done with bank swap dealers. The prudential regulators' proposed rule 
would require all end-users--even non-financial end-users--to have in 
place credit support arrangements with specific margin-posting 
thresholds. If exposure for their trades exceeded the thresholds, end-
users would be required to post margin. The CFTC's proposed rule would 
require all end-users to have credit support arrangements in place, but 
specific margin-posting thresholds are not required, and we are hopeful 
that existing documentation would suffice. Chatham supports the CFTC's 
position that it is not required to impose margin requirements on non-
financial end-users. The majority of end-users, however, enter into 
their hedges with bank swap dealers and, as such, would be subject to 
the prudential regulators' rule.
    A precise estimate as to the aggregate impact of the regulators' 
decision to impose margin requirements on end-users is not possible, 
since it will depend on how the rules are implemented; however, 
depending on implementation, it is clear that hundreds of billions of 
dollars in capital could be diverted from productive economic 
investment to sit idle as collateral.\1\
---------------------------------------------------------------------------
    \1\ The National Corn Growers Association and the National Gas 
Supply Association estimated the collateral requirements could run as 
high as $700 billion. (http://www.ngsa.org/Assets/docs/
2010%20press%20releases/21-ngsa%20urges%20fix%20for%20derivs%20
title%20in%20conference.pdf; (Editor's note: the weblink was incomplete 
in the submitted document) corn%20growers%20 
join%20drumbeat%20against%20mandatory%20clearing.pdf); The Tabb Group 
estimated that $2.2 trillion in capital would be required globally to 
satisfy levels of margin required by clearinghouses (http://
www.tabbgroup.com/PageDetail.aspx?
PageID=16&ItemID=972); a study by ISDA estimated that collateral 
requirements under Title VII of Dodd-Frank could result in $1 trillion 
in capital being diverted to satisfy bilateral and clearinghouse margin 
calls in the U.S. (http://www.isda.org/media/press/2010/
press062910.html); and, an analysis by Keybridge Research that was 
based on survey by the Business Roundtable estimated that the non-
financial S&P 500 companies alone would have to post approximately $33 
billion alone if subject to a fixed initial margin requirement of 3%. 
[http://businessroundtable.org/uploads/studiesreports/downloads/
An_Analysis_of_the_
Business_Roundtables_Survey_on_Over-the-Counter_Derivatives.pdf].
---------------------------------------------------------------------------
    In a recent policy brief, the Progressive Policy Institute warned 
of unintended consequences associated with imposing margin requirements 
on end-users, stating, ``While margin requirements make sense in many 
contexts to reduce the threat of systemic risk, putting margin 
requirements on companies that use derivatives to manage risks in the 
ordinary course of business--i.e., end-users--is both onerous and 
unnecessary.''
Capital
    Title VII requires regulators to set capital requirements for non-
cleared derivatives at levels that are appropriate for the risk of the 
trades; however, end-users are concerned that capital requirements 
could be set at punitive levels that are disproportionate to risk and 
appear aimed at re-shaping market structure. Punitive capital 
requirements could make non-cleared derivatives prohibitively 
expensive, potentially rendering the end-user exemption moot. Such an 
approach is not necessary to achieve the aims of Title VII and could 
work at cross-purposes to the objectives of the Act. Just as Title VII 
reflected Congress's view that end-users do not meaningfully contribute 
to systemic risk, it is essential that capital requirements also 
reflect the lower risk posed to the system by end-user transactions.
    Taken together, the margin and capital requirements could have the 
effect of making customized, non-cleared derivatives prohibitively 
expensive, despite the fact that these are exactly the types of trades 
that end-users require for sound risk management. Margin and capital 
requirements appear intended to create incentives for firms to use 
exchange-traded and cleared products. Any such incentives should be 
based on actual risk, and not on a regulatory predisposition in favor 
of a certain type of market structure.
    It is unnecessary to force end-users to choose between efficiently 
managing risks and investing in their businesses. With a sputtering 
economy, unprecedented uncertainty and unemployment above 9%, it is 
critical that we work to prevent such an outcome.
Implementation
    Chatham appreciates the hard work of the CFTC, SEC and prudential 
regulators in proposing dozens of new rules. We have been impressed by 
the open and transparent process run by the agencies and by the skill 
and diligence of regulatory staff. However, as a firm that is working 
with hundreds of businesses that will be impacted by new rules, we have 
first-hand knowledge of the frustration felt by executives struggling 
to decide when to commit scarce resources toward preparing for 
compliance. Chatham supports the recommendation of Members of this 
Committee that the CFTC issue for public comment a proposed schedule 
for completion of final rules and a comprehensive plan for 
implementation of the rules.
Conclusion
    As regulators go about the important work of finalizing rules 
intended to address problems revealed by the financial crisis, it is 
critical that well-functioning aspects of these markets not be harmed. 
It is essential to preserve Main Street businesses' efficient access to 
these important risk management tools. We appreciate your attention to 
these concerns and look forward to working with the Committee in order 
to ensure that derivatives regulations do not unnecessarily burden 
American businesses, harm job creation or jeopardize economic growth.
    I thank you for the opportunity to testify today, and I am happy to 
answer any questions you may have.

    The Chairman. Thank you.
    And, Mr. Fraley, you may begin whenever you are ready.

STATEMENT OF DAVID FRALEY, PRESIDENT, FRALEY AND COMPANY, INC., 
  CORTEZ, CO; ON BEHALF OF PETROLEUM MARKETERS ASSOCIATION OF 
                        AMERICA; THE NEW
           ENGLAND FUEL INSTITUTE; COLORADO PETROLEUM
          MARKETERS AND CONVENIENCE STORE ASSOCIATION

    Mr. Fraley. Thank you, Chairman Lucas, Members of the 
Committee, for the invitation to testify today. My name is 
David Fraley. I am with Fraley and Company, Inc., in Cortez, 
Colorado. I am also speaking on behalf of the Petroleum 
Marketers Association of America, The New England Fuel 
Institute, and the Colorado Petroleum Marketers and Convenience 
Store Association.
    I am the third-generation owner of Fraley and Company, 
which operates in Colorado, New Mexico, Utah, and Arizona. I 
employ 30 people and have offices and bulk plants in Cortez, 
Colorado, and Farmington, New Mexico. I have hedged petroleum 
products every year since 1995 and use those hedges to support 
a marketing program to reduce price risk for my customers, 
mostly homeowners.
    Our industry has been communicating strong concern about 
excessive speculation and the lack of transparency in the 
commodity derivatives markets to the Congress for the past 7 
years. Last year's Wall Street Reform Act was a vital first 
step toward correction of the market, and we thank the 
Committee for its leadership in passing it. The CFTC is clearly 
dedicated to getting these rules right.
    As a businessman, until 2007 I was opposed to derivatives 
market reform and curbs on speculation. I was on the complete 
opposite side of the issue, and this was after hedging 
consistently since 1995. It has only been since then, 
discovering that our investment banks develop strategies that 
would enable them to paper themselves over as hedgers while 
performing ever more egregiously on their own behalf by 
employing more attorneys, lobbyists, quantitative and other 
financial engineers, faster computers, and more sophisticated 
algorithms, taking the opposite side of the trades they 
recommended to their clients, sinking municipalities with 
derivative deals, not to mention the housing debacle since 
2008, that I have come to understand the broken nature of 
today's markets and the culpability of our political class over 
the last decade.
    Financial speculation in commodities is necessary. 
Speculation provides the markets with the liquidity needed to 
facilitate price discovery and allows for appropriate risk 
mitigation for hedgers. But these markets were not created 
primarily to serve speculators alone. They were created to 
serve businesses like mine and other hedgers and end-users of 
physical commodities. Opaque rigged markets are not free 
markets. And they are not hedging platforms; they are casinos.
    The reforms included in the Dodd-Frank Act were meant to 
address these concerns, including new clearing requirements for 
off-exchange swaps and mandatory position limits for 
speculative traders. Concerning the latter, the CFTC is 6 
months delayed in implementing the final rule. Because reform 
is bottled up, our markets continue to be highly leveraged and 
dominated by financial players.
    Here are the consequences of that delay in implementing 
Dodd-Frank. It is more expensive to hedge because the markets 
continue to be volatile and highly leveraged. Hedging in energy 
markets is done in part via commodity options, and the option 
price is the purest measure of volatility. Reduce volatility, 
and you will reduce hedging costs. Because of the delays in 
reform, it is more risky for my company to hedge. The risk 
can't be passed on to the speculator as well anymore because 
the price discovery mechanism is wrecked, and I can't match 
Wall Street's advantage in lobbying dollars, political 
contributions, access to information, paid talent, or computer 
speed. So when I hedge now, I am taking my risk off my customer 
and laying it on me.
    The consequences are coming from the market and from 
events. Up to now, there are no positive consequences from 
reform because reform is bottled up. In order to see change on 
Main Street, Congress must also provide CFTC with appropriate 
funding increases for comprehensive implementation and 
enforcement of Title VII reforms. The House was wrong in its 
decision to approve a funding level that is 44 percent below 
the amount needed for the Commission to fulfill its mission. 
You can't police the streets without paying the cops.
    As a board member of a community bank, I have been witness, 
as well, to the credit crunch since 2008 and the effect not 
only on businesses and consumers but on the reduced ability of 
community banks to serve their customers due to the tilted 
field in favor of the same players, the too-big-to-fails and 
the crazy swings of the regulatory environment and the banking 
industry. The community banks are in the same boat in their 
world as I am in mine.
    This is one factor of an enormous wave of economic chaos, 
and I have been afraid for 3 years that it is just the warm-up. 
The taxpaying voters in America, whether Republicans or 
Democrats, the small and medium-sized businesses, whether 
Republicans or Democrats, are being swamped from multiple 
directions. The full faith and credit of the U.S. Government is 
about to be tested and may be found wanting, but from outside I 
watch what looks like our elected representatives trying to 
kick the can down the road just far enough to get to the next 
election.
    People are suffering out in the districts--not the people 
who fill the campaign coffers, but the people who cast the 
votes for each of you. Now is a good time for this Committee to 
send a message to citizens who show up to local caucuses and 
cast their vote in elections that they still matter. If this 
Committee would move forward with reform instead of being an 
impediment, with new attempts to further delay reform, plugging 
this particular hole in the economic dike would alleviate some 
of the suffering of all of those voters in a real way.
    We are not alone in our perspective. Submitted with my 
testimony are dozens of academic, governmental, and private 
studies, reports and analyses from recent years showing the 
market disruptions caused by excessive financial speculation.
    As our representatives, we need you to decide: Are you 
going to support the heavy campaign contributors or are you 
going to support most of America--all of us who can't match 
those kinds of contributions to Congressional campaigns, all of 
us on Main Street?
    The large financial institutions communicate the issues----
    The Chairman. The gentleman needs to wrap it up.
    Mr. Fraley.--in ways that complicate and confuse, but the 
bottom line is simple, and it is not rhetorical. Wall Street 
has exploited America, and it is up to you to defend her.
    Thank you very much for your time.
    [The prepared statement of Mr. Fraley follows:]

  Prepared Statement of David Fraley, President, Fraley and Company, 
   Inc., Cortez, CO; on Behalf of Petroleum Marketers Association of 
 America; The New England Fuel Institute; Colorado Petroleum Marketers 
                   and Convenience Store Association
    Thank you, Chairman Lucas, and Ranking Member Peterson for the 
invitation to testify before you today on the importance of derivatives 
reform to Main Street businesses and consumers. My name is David Fraley 
of Fraley and Company, Inc. in Cortez, Colorado. I am also speaking 
today on behalf of the Petroleum Marketers Association of America, the 
New England Fuel Institute and the Colorado Petroleum Marketers and 
Convenience Store Association.
    The Petroleum Marketers Association of America (PMAA) is a 
federation of 49 state and regional trade associations representing 
8,000 mostly small business petroleum marketers. Petroleum marketers 
are engaged in the transport, storage and sale of petroleum products on 
the wholesale and retail levels. These products include gasoline, 
diesel fuel, biofuel blends, kerosene, jet fuel, aviation gasoline, 
racing fuel, lubricating oils, propane, home heating oil as well as 
ethanol and biodiesel motor fuel blend stocks. Among the customers 
served by petroleum marketers are retail gasoline stations, commercial 
transportation fleets, manufacturers, construction companies, Federal, 
state and local governments, farmers, airports, railroads, marinas and 
homeowners. Small business petroleum marketers own and operate 
approximately 60 percent of all retail gasoline stations operating 
nationwide.
    The New England Fuel Institute (NEFI) is an independent trade 
association based in Massachusetts that represents approximately 1,200 
home heating businesses including heating oil, kerosene and propane 
dealers and related services companies, most of which are small, multi-
generational family owned- and operated-businesses.
    The Colorado Petroleum Marketers and Convenience Store Association 
(CPMCSA) is . . .
    I am a third generation owner of Fraley and Company, Inc. which 
operates in several states (PLEASE LIST THE STATES). I have utilized 
the commodities market over the years to hedge on propane pricing in 
the winter and I have a customer program as well. My focus with you 
today is to report what is happening on the street and to petroleum 
marketers.
    We'd like to thank this Committee for its leadership in passing 
derivatives market reforms included Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Pub. L.111-203) last year. 
We also commend Commodity Futures Trading Commission (CFTC) Chairman 
Gary Gensler, his fellow Commissioners and their staff for their hard 
work and dedication to what has been one of the most open and 
transparent rulemakings in memory.
    Mr. Chairman and Members of the Committee, as you are fully aware, 
petroleum marketers and heating oil and propane dealers have been 
communicating our strong concerns about the lack of transparency and 
excess speculation in the commodity markets to the Congress for the 
past 7 years. We greatly appreciate that this Committee heard our 
concerns and moved forward with strong legislation designed to bring 
the commodity market back to the physical players to use as a tool to 
manage their costs.
    The inclusion of derivative market reforms in last year's Wall 
Street Reform Act was a vital first step toward correction of the 
market. Unfortunately, delays in final implementation of the 
regulations leaves Main Street petroleum retailers and home heating 
providers with no positive change. Excessive speculation continues to 
create extreme price swings and market volatility, creating an 
environment where businesses like mine find it difficult to hedge, 
invest in my business, expand and hire new employees, and maintain 
healthy lines of credit. And the extreme volatility that is caused by 
the excess speculation stymies consumer confidence. Also shaken is our 
confidence in these markets as a legitimate price discovery tool that 
is reflective of supply and demand fundamentals. We believe the lack of 
transparency and unprecedented level of speculative activity has 
disrupted and distorted this function of the markets.
    We are not alone. Submitted with my testimony for inclusion in the 
record are dozens of academic, governmental and private studies reports 
and analyses from recent years showing the market disruption caused by 
excessive financial speculation.* Also, earlier this month the CFTC 
reported that nine in ten traders in the most heavily traded 
commodities, including crude oil, are financial speculators betting up 
the price.
---------------------------------------------------------------------------
    * The documents referred to are retained in Committee file.
---------------------------------------------------------------------------
    Make no mistake, financial speculation in commodities is necessary. 
Speculation provides the commodity markets with the liquidity needed to 
facilitate price discovery and appropriate risk mitigation for hedgers. 
But these markets were not created to serve speculators they were 
created to serve businesses like mine, and other hedgers and end-users 
of physical commodities, from wheat growers to corn farmers, oil 
producers to airlines. And at some point over the last few years, all 
of these industries have expressed to the Congress and to this 
Committee concern over the affects that too much speculation and 
general lack of transparency and oversight was having on their 
businesses.
    The reforms included in Title VII of the Dodd-Frank Act were meant 
to address these concerns, including new clearing requirements for off-
exchange swaps and mandatory position limits for speculative traders. 
Concerning the latter, the CFTC is 6 months delayed in implementing a 
final rule. We are hopeful that the Commission will act soon to finish 
work on this important rule, and we urge Congress' support in this 
regard.
    Additionally, in order to see real change on Main Street, Congress 
must provide the CFTC with appropriate funding increases for 
comprehensive implementation and enforcement of Title VII reforms, to 
respond to emerging market trends and trading practices, and to insure 
orderly and functional commodities markets. We were disappointed that 
the House of Representatives approved a funding level that is 44 
percent below the amount requested by the Commission as necessary in 
order to fulfill this mission.
    We hope the Senate will fully fund the CFTC at $308 million as 
requested, and that the House will ultimately side with Main Street 
over Wall Street. As all parties know, without adequate funding, 
derivatives reform may not be fully enacted and cannot be vigorously 
enforced. Inadequate funding or the lack Congressional support for 
comprehensive implementation and vigorous enforcement of needed reforms 
will further jeopardize security, stability and confidence in the 
commodity markets.
    Therefore, we also urge Congress to resist calls to water-down, 
delay or repeal Title VII reforms. This would not benefit Main Street 
businesses and consumers. Rather, it would benefit financial entities 
and speculative investors on Wall Street and LaSalle Street who are 
desperate for opportunities to derail needed reforms, preserve the 
status quo and continue their speculative profits.

    You as our Representatives, you have to decide. Are you going to 
support the heavy campaign contributors--Wall Street and the Banks, or 
are you going to support those who have less to contribute to 
Congressional campaigns financially--Main Street? Representatives of 
financial institutions communicate to Congress in ways to complicate 
and to confuse the issue. But the bottom line is simple. Wall Street 
has exploited America and it is up to you to defend her.

    Thank you for your time. I am available to answer any questions you 
might have.

    The Chairman. Thank you, Mr. Fraley.
    The chair now recognizes himself for 5 minutes for 
questions.
    Mr. English, having been around in this process and watched 
this evolve over the decades--fewer, not many decades, that 
is--I simply offer the observation to you that one of my 
concerns throughout this process has been the scope and the 
volume of the proposals trying to move by rule in a very short 
period of time--very massive amounts of rules that have 
potentially tremendous unintended consequences.
    Now, in your testimony, you stated that you are concerned 
that the National Rural Utilities Cooperative Finance 
Corporation may be subject to the clearing requirement. Is that 
because they would be defined as a--or deemed a financial 
entity, Mr. English?
    Mr. English. Well, I think what it really comes down to is 
this question of whether or not they are a threat; whether they 
are hedging, and whether they are trying to reduce risks for 
the electric cooperatives.
    As you know, that organization was set up by the rural 
electric cooperatives to provide for additional financing of 
electric cooperatives across the country. It is a not-for-
profit. It is owned by the electric cooperatives themselves. 
And it uses legitimate hedging practices in trying to reduce 
their risk.
    The Chairman. Can you give us a sense of how a clearing 
mandate imposed on NRUCFC would impact not just the 
cooperatives but, most importantly, their member-owners?
    Mr. English. Well, it all comes down to cost of the 
electric bill, on all this stuff. And I know, in working with 
the other body, for instance--I shouldn't say the other body--
another committee, in dealing with the Federal Energy 
Regulatory Commission, they recognize the fact that there are 
differences between entities such as electric cooperatives and 
some of the larger electric utilities in this country.
    They chose to go at that from a regulatory standpoint in 
what is known as a ``FERC-lite,'' as far as the regulation is 
concerned. In other words, basically, the approach that they 
were taking is, if we weren't causing a problem, if there 
wasn't an issue there, if there wasn't a threat, then obviously 
there shouldn't have these requirements of huge amounts of 
regulation that you have to comply with that some of the bigger 
entities did.
    And I suppose that we would suggest that this is something 
that we would hope the CFTC would look to for those who didn't 
have the systemic risk, that they should take a similar 
approach.
    The Chairman. Mr. Peterson, Ms. Hall, at some point during 
the legislative process, the authors decided to focus less on 
the type of activity--for example, hedges versus speculating--
and more on the type of entity. As a result, the end-user 
exemption splits non-financial end-users and financial end-
users and places them in different regulatory buckets.
    What do you see as the long-term impacts of this policy? 
What is going to happen down the road if it is implemented in 
this fashion?
    Mr. Sam Peterson. Sure. I will go first, Mr. Chairman.
    The Chairman. Please.
    Mr. Sam Peterson. I think when we are talking about the 
split between non-financial and financial end-users, in this 
case, we are talking in either case about firms that are not 
major dealers and they are not firms that pose a systemic 
threat. So, then, we are really, with respect to financial end-
users, deciding possibly to impose pretty substantial amounts 
of regulation, including clearing and margin mandates and other 
requirements, on a firm that is, by the definitions in Title 
VII and in the proposed rules, not systemically risky.
    So what I worry about is, going forward, a case where we 
have either a lot of capital sidelined unnecessarily because of 
that or less hedging because of that. I think we can all agree 
that neither of those is a good outcome.
    Ms. Hall. I would agree with Mr. Peterson. And as a bank, 
the more capital that we have to put aside for things like 
margin agreements basically is less capital that we have to 
make loans. So, at the end of the day, it would inhibit our 
ability to put our money where we want to, which is in the 
community.
    The Chairman. So, then, you either are compelled to put up 
the capital in this scenario to provide the products which 
benefit your customers, or if you choose not to engage in the 
product, then the customer potentially doesn't have the access 
to the tool?
    Ms. Hall. If it became so expensive for us--we have a very 
limited amount of activity. Offering this product to our 
customer is just one small aspect of the entire relationship 
that we have with a customer--their deposit, their credit 
needs. And if we find that this is just too expensive from the 
cost to set up and maintain clearing, the costs for the margin, 
if we were to be defined as a swap dealer we would take a 
serious look at whether we would want to continue in this 
business. And if we then withdraw from it, then those customers 
may turn to a larger organization, a larger bank that can 
provide this product along with all of their other needs.
    If I have a minute, we had a situation a few years back 
where, even though it was very needed in the municipal 
securities world, they enacted a real-time transaction 
reporting rule of 15 minutes. We had been a municipal 
securities dealer; that came under our Bank Powers Act. But the 
IT that would have been required for us to install in order to 
meet that 15 minute rule precluded us from continuing to offer 
that product, and we ended up withdrawing from the market.
    And that is why I am here today, and it is why it concerns 
me so, that just a narrow definition of some of these rules can 
catch us up in this and make it so it is untenable for us.
    The Chairman. My time has expired. I now turn to, I guess, 
my Ranking Member pro tempore, the gentleman from Vermont, for 
5 minutes.
    Mr. Welch. Well, until Mr. Courtney from Connecticut claims 
my seat. Thank you.
    I want to thank the panel. Let me just quickly ask a few 
questions. I only have 5 minutes, so try to keep your answers 
short, if you could.
    Mr. English, in your written testimony, you stated that 
your organization wants swap markets to be free of 
manipulation. But your organization, as I understand it, 
supports H.R. 1573, which would have delayed a new, strong 
anti-fraud, anti-manipulation rule, the rules included in Dodd-
Frank, until December 2012. And I wondered if, briefly, you 
could reconcile those two positions.
    Mr. English. Well, it is rather simple. We would like to 
get it right. That is what this hearing, as I understood it, is 
all about.
    Mr. Welch. So have you laid out concretely what it is you 
would regard as right?
    Mr. English. Yes. The concern, again, as I mentioned in my 
testimony earlier, focuses strictly on this definition of swap. 
We were very disappointed that, basically, the CFTC has waited 
until the last to define what a swaps or swap dealer is and, 
therefore, including all 900 electric cooperatives as 
potentially being declared swap dealers.
    Now, we have spent a considerable amount of expense as a 
result of this in filings with the CFTC, a considerable amount, 
which obviously goes to the electric bills of all of our 
members.
    The concern that we have here is, yes, we would like to see 
this implemented from the standpoint of transparency to try to 
make sure that we get rid of manipulation as quick as we could. 
As I mentioned earlier, we would like to get----
    Mr. Welch. All right.
    Mr. English.--involved in moving forward on this. But the 
fact of the matter is, we have to make sure this is right, 
because----
    Mr. Welch. Yes, I get it. Let me move on.
    Mr. English.--unless you want to come back and try to 
revise the law. And I don't think you want to do that.
    Mr. Welch. Thank you. Thank you very much.
    Ms. Hall, I was impressed with the record of your bank. I 
think the community banks are an awful lot different than the 
Wall Street financial institutions that got us into a lot of 
this trouble.
    But if the CFTC adopted the recommendation, which I think 
you agree with, that only banks with a net uncollateralized 
derivatives exposure of $1 billion or more should be required 
to clear their swaps, how many banks would be subject to the 
mandatory clearing requirement? Do you know? Not many.
    Ms. Hall. I don't know the answer to that offhand. I would 
be happy to research that and get back to you.
    I know we have put into place bilateral netting agreements 
and----
    Mr. Welch. Okay, you will get back to me with that.
    Mr. Howard and Mr. English, both of you, in your written 
testimonies, advocate for what I guess could be called a 
``CFTC-lite'' regulation. I understand you want to get it right 
for your organizations, all right? There is nothing meant by 
that, anything other than that.
    If you believe that real-time reporting is too expensive 
for your institutions and unnecessary for the swaps that your 
entities engage in, how long should the regulators have to wait 
for your members to report their swap activities?
    Mr. English first, and then Ms. Hall.
    Mr. English. Very quickly, as I pointed out when I was 
talking about it earlier, something along the lines of what 
FERC is doing. Basically, if FERC comes up to--if you are not 
causing a problem, we are not going to spend a lot of 
resources, as far as a regulatory agency is concerned, to deal 
with you. If you become a problem, then you have the full 
attention of FERC. Something along that line, we think, makes 
sense in this area.
    Mr. Welch. Okay.
    Mr. English. If there is no systemic problem, why in the 
world would you want to spend resources requiring us to and for 
them to?
    Mr. Welch. Ms. Hall?
    Thank you, Mr. English.
    Ms. Hall. I agree that there is a need for transparency, 
and real-time reporting is something to be desired. Many of the 
transactions that we do are very customized. They are 
amortizing right along with----
    Mr. Welch. So should those be reported in how much time?
    Ms. Hall. I think by end of day is not unreasonable.
    Mr. Welch. Okay.
    Ms. Hall. My concern, again, though, is the cost to 
implement that.
    Mr. Welch. Let me ask my last question. Mr. Fraley, you are 
a great advocate for greater transparency in these derivatives 
markets. How would the greater transparency benefit Main Street 
businesses like yours?
    Mr. Fraley. By reducing volatility that currently keeps 
prices higher than they should be. It is as simple as that.
    Mr. Welch. Okay, great. Thank you.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back the balance of his 
time.
    The chair now recognizes the gentleman from Illinois for 5 
minutes.
    Mr. Johnson. Thank you, Mr. Chairman.
    Let me just address the first questions to the whole panel 
and take, kind of, a miscellaneous response.
    Do you have a sense for whether there is a risk to be 
realized by not acting to approve the rules before they are 
final, so to speak? If your concerns aren't addressed once the 
final rules are issued, what are you going to do? Are you going 
to start to change your practices immediately, to wait to see 
if Congress provides the relief? In other words, how does this 
create a level, if at all, of instability?
    Congressman?
    Mr. English. I will start that off. We are going to come 
see you the next day. That is going to be the first step. Quite 
frankly, that is the only relief we have. These co-ops are too 
darn small to be out there trying to put together the kind of 
instant reporting system that is being talked about at the 
CFTC.
    The only thing that makes any sense is to recognize that 
common sense must come into play, and you have to weigh risks 
against resources. The Chairman was here talking about he 
didn't have enough resources. Well, if you are spending on 
places where there is no risk, that doesn't make a whole lot of 
sense.
    So I would hope that that--well, that would be our 
response. We will come see you.
    Mr. Johnson. This is a little bit of a rhetorical question, 
but let me just ask you this, Congressman English.
    Mr. English. Sure.
    Mr. Johnson. I guess, knowing that areas that you serve 
have a higher poverty rate than urban areas do, and with the 
background that you have and having represented areas that your 
constituents serve, could you ever have conceived, at any point 
in your legislative history or at least over the last 2 years, 
that you would be subject as cooperatives to the same 
jurisdiction as Goldman Sachs or other entities? Would that be 
something that you would even have conceived of at any point?
    Mr. English. I could never have conceived of such a thing. 
And the fact that Kiwash Electric, my home electric cooperative 
in Oklahoma, could ever be considered a swaps dealer or in 
danger of being labeled as a swaps dealer I thought was nuts.
    Mr. Johnson. To all of you, has there been, or to what 
extent is there, an impact of all these proposed rules and the 
Act in your bottom line? And, ultimately, not just to your 
bottom line; to the consumers, shareholders, and individuals 
that make up your collective or individual entities? Just maybe 
a couple of miscellaneous responses.
    Mr. Howard. Randy Howard. I will just jump in here.
    Probably one of our biggest concerns in having this lack of 
clarity in this period of time and having this potential 
effective date of December 31, 2011 for the final rules. As I 
indicated in my testimony, well before the heat wave that is 
taking place today, the utilities had planned and attempted to 
hedge to cover extreme weather events. We are making positions 
now well past December.
    Mr. Johnson. Right, right.
    Mr. Schloss, do you think there would be, and if so what, 
what is the size of the impact on Ford retirees of your pension 
fund's inability to engage in swaps or if its savings capacity 
is cut down?
    Mr. Schloss. Thank you for the question. I think from the 
perspective of our pensioners and our corporate balance sheet, 
the inability to hedge our interest rate exposure in our 
pension fund really is--will be a reflection of what interest 
rates do as we go forward. And I can't predict, nor do I try to 
predict where interest rates are going. Historically when we 
have used derivatives, we have saved multi-billions of dollars 
of funded status by hedging that interest rate exposure, and 
that goes directly to the bottom line.
    Mr. Johnson. Last question. And as I said with the Chairman 
before, I really don't mean these questions or this question to 
sound adversarial, but I guess it is.
    Mr. Fraley, I listened to the other five witnesses here all 
talk about facts concerning this legislation's impact on their 
industry, what the ramifications will be in the rules. And I 
gleaned from your testimony somehow a belief that either 
Members of Congress, or the Committee, or somewhere else are 
bought and sold by American industry, or that somehow--your 
testimony is completely at odds, not necessarily at odds, but 
entirely different from these other five. I don't know whether 
to resent it or whether to simply ask you what you meant. But 
quite frankly, it really occurred to me that you were making an 
onslaught a little bit on your colleagues and certainly on 
Members of this Committee and otherwise, and I hope that wasn't 
the case.
    Mr. Fraley. That was not my intent and I apologize if that 
was the way it was received.
    Mr. Johnson. I guess we will look at the testimony and have 
it transcribed and read it back, but I have to say I was a 
little troubled by your belief that somehow big industry and 
big business has bought and sold the Members of this Committee 
or otherwise. Maybe you want to reexamine what you said.
    The Chairman. The gentleman's time has expired. The chair 
now turns to the gentleman from Connecticut for his 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman.
    Let me just say, Mr. Fraley, I am a big boy and I can 
handle it, and what you expressed is something that frankly is 
really what Main Street is talking about. When you go to Main 
Street and you see the challenges that people are facing to 
survive these days in terms of basic commodities like food and 
fuel, and they just don't have any confidence in markets that, 
as you described are opaque and accessible and volatile, that 
is what is driving the anger and cynicism that is out there 
every single day.
    In southeastern Connecticut the oil dealers that I talk to 
who--as Ms. Hall knows, in Connecticut we have cold winters and 
people lock in their home heating contracts year in and year 
out, you have to hedge in order to really design a system, a 
pricing system, for your customers to make that work. This year 
in southeastern Connecticut, oil fuel dealers have just 
completely abandoned the market. They will not sell a lock-in 
contract for next winter.
    And to me that is the canary in the coal mine. If we have 
markets that are designed for end-users to be able to hedge 
risk so that they can actually do what commodities markets are 
supposed to do, and people are just heading for the exits, then 
we have a broken system. And that is just something that people 
feel in their bones right now, and that is really the 
disappointment that they feel about what is going on out there.
    And I guess you represent The New England Fuel Institute. I 
suspect southeastern Connecticut is not the only place where 
people have just given up in terms of the commodities markets.
    Mr. Fraley. That is true.
    Mr. Courtney. You are seeing that through your trade 
association?
    Mr. Fraley. Both in our associations and in my individual 
conversation with marketers all over the nation. The last 3 
years, especially since the crash, all of us are operating in 
the dark. Very many of us in 2009, after oil came off at $147 a 
barrel and all the way back to $30, we were crushed in our 
hedging programs that year. And one of the reasons that you see 
marketers all over the country now being shy to come back in 
and offer those programs, which are intended to--and the best 
we can do is delay the impact of the ongoing increase in energy 
prices by about a year at a time to our customers. And that is 
what these price protection programs that we come up with and 
hedge for accomplish, is that we delay that increase by about 1 
year at a time to our customers.
    So many people were hammered so badly, so many dealers and 
marketers were hammered so badly in 2009, that now we have 
again Brent Crude Oil pushing $120 a barrel a day, close to it; 
WTI, going back to $100 today. And we are all concerned that we 
are looking at 2008 and 2009 all over again.
    Many companies can't financially afford to take that hit 
one more time. They will be out of business.
    Mr. Courtney. Well, what I hear when I go home is that 
Dodd-Frank which, as Mr. Gensler testified earlier today, was 
really--the language says it is just to set appropriate limits 
on non-commercial interests in terms of positions in the energy 
markets. What I hear is, why do they have any right to 
participate in the market? It should only be people who take 
delivery of the product that should be able to participate in 
that market, which obviously is a much more extreme position 
than the legislation that is out there.
    But I just think the Chairman is doing a great job holding 
these hearings. It has been just great to flush out these 
issues and to raise the red flag, which has been done here by 
many witnesses. But, at some point, people also have to put in 
perspective that the public out there just feels completely 
unprotected still, since 2008. And we just cannot delay in a 
dilatory fashion implementation of rules that will set up--that 
should create a functioning market. You need rules.
    That is what they taught us in law school to regulate the 
sale of property in the functioning markets. It is just not 
chaos. You have rules, and we need rules. And hopefully that is 
something that these witnesses will help the Commissioner and 
the Chairman get right with your input.
    And again, these hearings have done a terrific job in terms 
of getting it out in the public and I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back and the chair now 
recognizes the gentleman from Pennsylvania for 5 minutes.
    Mr. Thompson. Thank you, Mr. Chairman. Thank you to the 
witnesses for bringing your experience and expertise on this 
important issue that we are taking a look at.
    Congressman English, it is good to see you again. I wanted 
to start with you in terms of your history certainly as a part 
of and before this Committee and with NRECA. Could you have 
imagined that rural electric cooperatives would be the subject 
of such broad CFTC jurisdiction?
    Mr. English. Well, I never would have, just simply because 
of the fact that we are looking to hedge our risk. We try to 
keep electric bills affordable for our membership. We have to 
figure out some way we can do that and do it as cheaply as we 
possibly can. I fully recognize and understand that we were 
remiss through the years, the CFTC was remiss through the years 
in not vigorously pursuing a good deal of oversight and effort 
with regard to some of these markets. But the overreaction 
going the other way is just as big a problem.
    And what I am concerned about is what I keep hearing out of 
the CFTC particularly, not nailing down this issue of drawing a 
nice bright line of what is a swap and what is not, and what is 
a swap dealer and what is not. And the fact that our membership 
would even be in the mix astounds me, I have to say.
    So that is one of the reasons I am very delighted to see 
that this Committee is holding these hearings and giving us an 
opportunity to raise that flag and wave it big-time, but for 
goodness' sake this thing is too important not to get right. So 
these definitions have to be right and I hope the CFTC gets 
them right.
    Mr. Thompson. My observation is what we are dealing with 
today on this issue is like most solutions that come out of 
Washington. Somebody a lot smarter than me I heard once say--
and it fits--a solution in search of a problem when it comes to 
how it impacts some of our end-users, these regulations.
    Obviously, the members you represent by definition 
represent rural America, are our breadbasket, agriculture. Do 
you think these regulations help or hurt agriculture, and in 
what ways?
    Mr. English. Well the problem that we have here is like 
anything else. If it is done in moderation and in proportion to 
what the problem is, then that is good. But these things have a 
tendency it seems to sometimes get out of balance, and that 
appears to be what we are being threatened with here today.
    I am hopeful that the CFTC will get this right and will be 
very sensitive about how they do it. But there is a big 
difference between trading on financial instruments with people 
who are dealing with this day in and day out and speculators, 
as opposed to folks who are trying to hedge risk and to 
minimize risk, who are such a minuscule portion of what this 
market will ever be. It can never have an impact one way or the 
other as to what direction the markets go. I think the CFTC 
should focus their resources on where the problem is and not on 
those people who are simply trying to hedge risk.
    Mr. Thompson. One of the premises I live my life by is the 
best predictor of future performance is past performance. And 
so I wanted to see if you could just reflect briefly on how has 
the volume of regulations impacted rural electric cooperatives 
in the past?
    Mr. English. Well, obviously, anytime you get into 
regulations they are costly, and that always has an impact on 
our membership. And you were talking about the very fact about 
rural America, we have more people below the poverty line than 
they do in urban America. So that falls heavier on our members 
perhaps than it does on people who are receiving electric power 
in urban areas of this country.
    So it is not just the impact that it has on rural America 
in general, it falls heavier on rural America than it does on 
urban America.
    Mr. Thompson. Thanks.
    Mr. Peterson, it is good to be joined by someone else from 
the Keystone State here. When you say that end-users don't pose 
systematic risk, what data are you basing that assertion on.
    Mr. Sam Peterson. Thanks for the question. There is limited 
data on end-user transactions, but the Bank for International 
Settlements does put out a report on volumes of trades and 
breaks down different categories. And if you look at that 
report, non-financial end-users comprise less than ten percent 
of the overall market by notional.
    On the other side of the market we know that there is great 
concentration at the higher end. So among banks, for instance, 
out of all the banks in the U.S. that use derivatives, five 
banks, the top five, control 96 percent of the notional and 86 
percent of the credit exposure, and credit exposure is really 
the metric we should look at here.
    Mr. Thompson. When you talk about number of banks, any idea 
of what percentage or how many small banks are--provide swaps 
to their customers?
    Mr. Sam Peterson. Correct me if I'm off, and this is just 
an estimate, but my firm works with about 90 community and 
regional banks and about 50 of those banks offer swaps to 
customers in exactly the way that Ms. Hall described. I would 
guess, based on just knowing how many banks there are and their 
sizes, that the number might be somewhere between 150 and 400, 
but that is a guess.
    Mr. Thompson. Is that consistent, Ms. Hall, with your 
thoughts?
    Ms. Hall. Yes.
    The Chairman. The chair now turns to the gentleman from 
Colorado.
    Mr. Tipton. Thank you, Mr. Chairman. I would like to take 
just a moment to welcome a friend of mine and fellow 
Coloradoan, David Fraley, and appreciate your taking the time 
to be able to come here. You and I are probably the only two 
people in this room that know where Egnar, Colorado is. So it 
is great to have another rural guy here.
    I will ask this, Mr. Fraley, and open it up on the rest of 
this panel as well. I am a small businessman. And one thing 
that I have always seen that is very frustrating, not being a 
career politician out of Washington, D.C., is when I see what 
is coming out, Congressman Thompson just alluded to it. Past 
performance will probably guarantee future results. Congress 
will pass broad-based legislation and then allow the 
bureaucracy to be able to fill in the blanks.
    We just had Chairman Gensler. He said he believes that they 
are on track to do what Congress intended us to. That is called 
legislative intent.
    Do you think that it would be appropriate before these 
rules go active, for them to bring the rules back to the 
authoritative body which empowered them to be able to write 
these rules and give them a last look-over to make sure that 
that legislative intent was truly being applied?
    Mr. Fraley, if you would like to start.
    Mr. Fraley. Congressman, I have absolutely no issue with 
that. I think part of what the CFTC is attempting to do right 
now is make sure that they don't get caught up in litigation 
later, 2 or 3 years from now, because something was missed. And 
I have no issue with the idea of them coming back and getting a 
review for that reason. No.
    Mr. Tipton. Thanks. Congressman.
    Mr. English. I think it is a fantastic idea, and I would 
love to see it take place. I think it makes a whole lot of 
sense and keeps us out of a whole lot of trouble. I hate to say 
it, we have already tried that. We did that, I believe it was 
1977, 1978, something like that, and we passed a one-house veto 
so that any rules and regulations carried out, that the 
Congress would have an opportunity to review that and if any 
one--and they were brought to the floor in an expeditious 
manner, I believe it was 10 days or something like that. Vote 
up or down, it either does or doesn't follow the intent. And we 
thought that we were solving the exact problem you are talking 
about. You are absolutely right.
    The problem was the Supreme Court said it was 
unconstitutional, and I believe it was Judge Scalia I believe 
that came out and said, well, a rule or regulation has the same 
force of law; therefore, it takes a law to repeal it.
    I don't agree with that, and it is unfortunate that we got 
that. But I think you are right on track, I would have loved to 
have seen that.
    Mr. Tipton. We are working on some legislation. I would 
like to be able to visit with you to be able to do that. That 
is one of my concerns. I have had the opportunity to be able to 
read through your testimony. I apologize, I was tied up and 
couldn't listen to it verbally as you delivered it. But one of 
the great concerns is, is we see the bureaucracy seeming to 
effectively almost rush to regulate.
    When we are talking--I believe it is Mr. Howard; can you 
tell me what are some of the costs? Do you have any projected 
costs on these new regulations for your communities?
    Mr. Howard. It is expected, depending on whether we are 
defined as a swap dealer or not. It changes pretty dramatically 
if we are defined as a swap dealer. And we have large 
collateral positions we have to post that could be in the 
several hundred million dollars range.
    Mr. Tipton. Who pays the bill? Who will pay that bill?
    Mr. Howard. Our ratepayers will pay that.
    Mr. Tipton. Are any of them struggling to be able to pay 
their bills right now? Can they afford any more expenses at the 
hands of Congress regulating?
    Mr. Howard. I know we have heard about the rural electrics 
and some of the poverty there. In the City of Los Angeles I 
have about 280,000 low-income customers that pay our bill 
monthly.
    Mr. Tipton. So the poor, struggling families, senior 
citizens, they will be the ones that will be paying the price 
for overzealous regulation.
    Mr. Howard. That is correct.
    Mr. Tipton. That is correct. I think that is something we 
all need to make sure we are keeping in mind.
    I would like--any one of you can take this question. Mr. 
Fraley, since you came so far I will ask you. Are you going to 
be subject to SEC regulations as well as CFTC regs?
    Mr. Fraley. No, I don't anticipate that I will.
    Mr. Tipton. Anybody else?
    Ms. Hall. We may, just in that we deal with municipalities 
and not directly under this, but if you are a swap adviser, 
then you would be regulated by the SEC.
    Mr. Tipton. And you are still going to have the CFTC 
involved as well?
    Ms. Hall. Yes.
    Mr. Tipton. Yes, sir.
    Congressman?
    Mr. English. Yes, we will have the utility industry, 
electric utility industry will have both Federal Energy 
Regulatory Commission as well as CFTC regulating us in this 
area.
    Mr. Tipton. Mr. Chairman, would you mind if I continue for 
just one moment please? Thank you for your indulgence.
    The Chairman. Proceed.
    Mr. Tipton. My concern--and this again gets back to the 
regulatory end of it. Congress establishes something, and in 
Mr. Fraley's case it is not an issue. But we have this 
integration financial services cross-over of interest that 
stretches through all of our communities through our different 
states as well, and we get the competing interests of two 
different bureaucracies. Which master do we serve? Do you have 
a solution for that? Who gets to make the call? Congressman, 
you just said the Supreme Court was going to allow Congress to 
be able to do its job.
    Mr. English. It would also be helpful if we--if you would 
get the two committees together. Here you have in one case 
Energy and Commerce Committee with Federal Energy Regulatory 
Commission, and with this Committee with CFTC. And there needs 
to be some way to work out in which there is an interface there 
where you don't try to respond to two masters.
    But unfortunately, the way we are moving forward now, we 
are likely, we are very likely to do that unless the two 
agencies themselves come together and work those differences 
out. But as you know, so often these agencies have a tendency 
to kind of get in these turf battles as to who is going to do 
what. And that is a problem and it is an extra cost, it is an 
extra burden, and it is a real challenge for us.
    Mr. Tipton. I guess just my final question, and it is just 
small-town--my business is plankton in the sea of business. But 
it just would be sensible to me, I would think, we are talking 
about swaps; if we are going to start to regulate, shouldn't we 
define what swap dealers are to begin with? Would that make 
sense to our panel?
    [Nonverbal response.]
    Mr. Tipton. It makes sense to me as well. So thank you, Mr. 
Chairman, for your indulgence.
    The Chairman. Thank you. And once again one privilege of 
the Chairman is to make sure that nobody on the panel escapes 
unscathed. And Mr. Schloss, you have come pretty close to being 
unscathed so far. I would note that I watched with great 
interest your facial expressions when the Chairman and I had 
our discussions about margin requirements and definitions.
    Would you expand for a moment on what the implications for 
Ford Motor Credit and Ford Motor in general would be if Ford 
Motor Credit is deemed a high-risk financial end-user for the 
purpose of margin requirements and other costs?
    Mr. Schloss. Thank you, Mr. Chairman. And I did appreciate 
a lot of the clarity that came out of the first panel 
discussion, because it is one area that we have had a lot of 
debate and a lot of discussions with many folks both on the 
Hill, but also with the Chairman himself.
    Our biggest concern with the credit company is, and it 
really centers around the way we fund our business. And first 
and foremost, more than \1/2\ of our funding comes through the 
securitization market, and within our securitization structures 
there are hedges to protect the underlying investor who buys 
those assets, who have a different interest rate component than 
the assets themselves. And as a result of that, with the 
structures not allowed to do margin, we would have to 
restructure somewhere between $15 and $20 billion worth of our 
capacity today. And that is a blow to the asset-backed market 
that I think puts a huge delay in our ability to fund, and that 
directly then correlates to our ability to support our 
customers and our dealers who support the sale of our cars, 
which is in the end what we are in the business of doing.
    And so the cost of that margin, the restructuring of that 
and then the cost to hold margin against the derivatives we do 
have, would add several billion dollars of margin, which is 
investment that could be lent to consumers, it could be paid to 
our parent company, who then can invest in products and jobs.
    The Chairman. Ultimately, the consumer has less competition 
and fewer options then?
    Mr. Schloss. Absolutely.
    The Chairman. Well, this has been a very worthwhile process 
today. And I would like to thank the panels, both panels, for 
their testimony and note that under the rules of the Committee, 
the record of today's hearing will remain open for 10 calendar 
days to receive additional material and supplemental written 
responses from the witnesses from any question posed by a 
Member.
    This hearing of the Committee on Agriculture is adjourned.
    [Whereupon, at 4:51 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
 Submitted Statement by Hon. Scott D. O'Malia, Commissioner, Commodity 
                       Futures Trading Commission
July 21, 2011

    I concur with the Chairman's testimony. However, I have repeatedly 
and strongly urged the Commission to publish in the Federal Register 
for notice and comment both a schedule outlining the order in which it 
will consider final rulemakings made pursuant to the Dodd-Frank Act and 
an implementation schedule for those rulemakings. I am disappointed 
that when the Commission recently issued a notice in the Federal 
Register providing for an additional 30 day comment period on most of 
the Dodd-Frank rule proposals it did not take the opportunity to be 
fully transparent with the market by providing a proposed schedule for 
final rule implementation. Making the process as transparent as 
possible will accelerate implementation because participants will be 
able to plan ahead and make the technology and staffing investments 
necessary to comply with the rules. As a result, I am once again 
requesting that the Commission provide participants with a complete 
implementation schedule that will be open for public comment.
                                 ______
                                 
     Supplementary Letter Submitted by Denise B. Hall, Senior Vice 
            President, Treasury Sales Manager, Webster Bank
July 29, 2011

Hon. Peter Welch,
Member,
House Committee on Agriculture,
Washington, D.C.

Reference: Derivatives Reform: The View from Main Street--Testimony 
from Denise B. Hall, Webster Bank

    Dear Representative Welch:

    Thank you again for the opportunity to testify in regard to the 
implementation of Title VII of the Dodd-Frank Act, and its implications 
for community banks such as Webster. During the question and answer 
period, you asked me how many banks have net uncollateralized 
derivative exposure less than $1 billion. I offered to research that 
question as I did not have the information. Thank you for the question 
and please accept this letter in response as part of the official 
testimony.
    I have been unable to find statistics that address your question 
directly. Uncollateralized versus total derivative exposure is not 
information required in a bank's financial Call Reports. There are, 
however, a number of statistics available that you may feel are 
pertinent, and highlight the difference in risk posed by the largest 
banks and the ``Main Street Banks.''

   The top 5 dealers hold 96 percent of the total banking 
        industry derivatives notional and 83 percent of the total net 
        current credit exposure held by all U.S. banks, according to 
        the OCC's quarterly report on derivatives.i
---------------------------------------------------------------------------
    \i\ Please refer to page 1 of report at: http://www.occ.treas.gov/
topics/capital-markets/financial-markets/trading/derivatives/dq111.pdf

   It follows that the exposure for all but the top 5 dealers 
        equals in total only 17% of the total credit exposure figure. 
        This 17 percent is dispersed among approximately 1,000 
---------------------------------------------------------------------------
        different banks.

   Banks and savings associations with $30 billion or less in 
        assets account for only 0.09 percent of the notional value of 
        the bank swaps market as of March 2011.

   For comparison purposes, Webster Bank is an $18 billion 
        commercial bank with branches in Connecticut, Massachusetts, 
        Rhode Island and New York. As of June 30, 2011 our parent 
        company Webster Financial was ranked No. 50 of the top 50 bank 
        holding companies by the National Information Center based on 
        data collected by the Federal Reserve System. (See the link 
        below.) http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx. 
        Webster would be ranked 35th in asset size if you were to 
        confine the list to the 50 largest banks (not thrifts) that are 
        publicly traded in the U.S. This would exclude the non-U.S. 
        entities in the above referenced link. As previously mentioned 
        in my written testimony, Webster utilizes derivatives to manage 
        the bank's interest rate risk, and to provide our commercial 
        clients with the ability to manage their interest rate risk. We 
        have been engaged in this activity for over 10 years, and have 
        risk policies in place to manage derivative exposure. As of 
        today, we have $3 million in uncollateralized net derivative 
        exposure and a total notional outstanding of $1.7 billion.

    In addition, I think that it is important to note that Congress 
already anticipated the need for the regulatory capture of the largest 
dealers in derivatives as well as the major market players that pose a 
threat to the financial system. Title VII of the Dodd-Frank Act 
requires dealers to register as regulated ``swap dealers'' or 
``security-based swap dealers.'' In addition, Congress created a 
separate category for ``major swap participants'' (``MSP'') and ``major 
security-based swap participants'' (``MSBSP'') to capture firms that 
are not dealers, but that have ``substantial positions'' derivatives or 
whose derivatives create ``substantial counterparty exposure'' that 
could harm the financial system. In further defining these terms, the 
Commodity Futures Trading Commission (``CFTC'') and the Securities and 
Exchange Commission (``SEC'') have issued a proposed rule which lists 
specific exposure levels at which a firm poses a potential systemic 
threat and therefore would be required to register as a MSPs or MSBSPs. 
The $1 billion exposure threshold I suggested during the hearing is \1/
5\ of the ``systemic'' threshold specified by the regulators in their 
proposed rule; if you were to include ``potential future exposure,'' a 
$1 billion exposure threshold is \1/8\ the level specified by the 
regulators.
    In sum, the large dealers and the major players in the derivatives 
market already will be subject to extensive regulatory supervision, 
including clearing, margin, capital, trading, business conduct and 
reporting requirements. Moreover, other banks that are very active in 
the swaps market will have to monitor their uncollateralized exposure 
and potential future exposure going forward in order to determine 
whether or not they are required to register as MSPs or MSBSPs. Through 
the comprehensive reporting requirements, the CFTC and SEC will have 
information about all banks and can take action to ensure that banks 
and other firms submit to any applicable registration and regulatory 
requirements.
    I hope that I have been able to provide useful information and that 
it gives credence to our belief that small banks should be exempt from 
clearing and that the parameters for qualifying for the small bank 
exemption should focus on our lack of risk to the financial system. I 
am very happy to answer any questions or provide further information. I 
can be reached at [Redacted.]
            Regards,


            



Denise B. Hall,
Senior Vice President, Treasury Sales Manager,
Webster Bank.
                                 ______
                                 
          Submitted Statement by American Bankers Association
    Chairman Lucas, Ranking Member Peterson, and Members of the 
Committee, the American Bankers Association (ABA) appreciates the 
opportunity to submit this statement for the record on derivatives 
rules and their impact on businesses--including banks. The ABA 
represents banks of all sizes and charters and is the voice of the 
nation's $13 trillion banking industry and its two million employees.
    ABA appreciates the efforts being made by this Committee to oversee 
the implementation of the Dodd-Frank Act with regards to derivatives 
regulation and to ensure that implementation agrees with the intent of 
the Congress. Indeed, ABA has consistently supported the objective of 
increasing transparency and appropriate supervision of credit default 
swaps and other financial products of systemic importance. However, it 
is critical that regulatory implementation preserves banks' ability to 
serve as engines for economic growth and job creation by providing 
credit to businesses and offsetting the customary risk these 
transactions create through internal risk management functions.
    ABA is very concerned about new rules being formulated to implement 
the Dodd-Frank Act that would add swap margin and clearing requirements 
for all banks unless the regulators provide an exemption. If not 
crafted properly, the new swaps rules could also discourage banks from 
offering customers the option to use swaps to hedge their loan-related 
risks. Our members and their customers use swaps to manage and mitigate 
the risks inherent in everyday business transactions. Banks underwrite 
all loans and swaps using the credit risk assessment standards that 
apply to the overall lending relationship with that customer. Loans and 
swaps may be collateralized by, among other things, real property, 
equipment, inventory, or accounts receivable. Alternatively, some loans 
and swaps may be cross-collateralized with another loan or may not be 
collateralized at all. This is the essence of commercial lending_banks 
assess credit and market risk of the borrower, negotiate loan terms, 
and accept the repayment and market risk.
    ABA has a diverse membership including banks of all sizes that use 
swaps in a variety of ways depending on the complexity of their 
business activities. Hundreds of our member banks use swaps to mitigate 
the risks of their ordinary business activities. Margin and clearing 
requirements would make it difficult or impossible for many banks to 
continue using swaps to hedge the interest rate, currency, and credit 
risks that arise from their loan, securities, and deposit portfolios. 
This would increase the risk in the system, not reduce risk, which is 
the primary purpose of hedging.
    There are three points we would like to make today:

  b Small banks should be exempt from new clearing requirements just as 
        other ``end-users'' are.

  b All common lending practices should be included in the exemption 
        from the swap dealer definition for swaps entered into in 
        connection with originating a loan.

  b End-users--including banks with limited swaps activities--should 
        not be subject to margin requirements.

    Before we explain these points in detail, we would like to address 
a separate but related concern. In prior testimony before this 
Committee, the $231 billion Federal Farm Credit System (FCS or System) 
argued that they should be exempted from an asset test regarding their 
derivatives activities. We urge this Committee to reject this request.
    The Federal Farm Credit System is a tax advantaged, retail lending, 
Government Sponsored Enterprise (GSE). The Federal Farm Credit System 
suggested to this Committee that regulators ``look through'' their 
corporate structure to the smallest entities that make up the System, 
the retail lending associations. Each of these entities are jointly and 
severally liable for each other's financial problems. The FCS would 
like this Committee to now ignore their joint and several liability to 
each other and would like to be treated as if they were a multitude of 
small entities. They are not.
    The Federal Farm Credit System presents the same kind of potential 
liability to the American taxpayer as other GSEs--taxpayers are the 
ultimate back stop should the Federal Farm Credit System develop 
financial problems. In fact, this has already happened. An earlier near 
collapse of the Federal Farm Credit System in the late 1980s as a 
result of irresponsible farm lending foreshadowed what taxpayers would 
confront more than twenty years later with the housing GSEs. At that 
time, the Federal Farm Credit System received $4 billion in financial 
assistance from the U.S. taxpayer. Therefore, due to its enormous size 
and the potential risk it poses to the economy, we urge this Committee 
to reject the Federal Farm Credit System's arguments for exemptions 
from the derivatives title of Dodd-Frank.
I. Small Banks Should Be Exempt from New Clearing Requirements Just as 
        Other ``End-Users'' Are
    The Dodd-Frank Act mandates new clearing requirements for swaps. If 
these requirements were applied equally to all financial institutions--
regardless of risk--the result would limit their ability to hedge or 
mitigate risk. Many banks would not be able to afford the additional 
burdens of such a broad application of the new law. This is why it is 
critical that regulators take into account the flexibility the Dodd-
Frank Act gives to provide a clearing exception for ``end-users'' that 
use swaps to hedge or mitigate risk. Indeed, the Dodd-Frank Act 
requires regulators to consider whether to exempt small banks from the 
new mandatory swaps clearing requirements.
    Absent an exemption, even small banks would be deemed ``financial 
entities,'' and would not be eligible for the exception from clearing 
requirements available to other end-users. Unless the regulators 
exercise their exemptive authority, banks that have limited swaps 
activities--including some of the smallest institutions in the 
country--will have to comply with the new clearing requirements even if 
they use swaps as a normal part of their business strategy to hedge or 
mitigate commercial risk.
    Many banks use swaps the same ways that other end-users do. For 
example, banks use swaps to hedge interest rate risk both on their own 
balance sheet and to provide long-term fixed rate financing to 
commercial borrowers. The SEC recognized this activity and stated that 
it believes that small banks should be exempt from clearing 
requirements as end-users.
    Small bank swap transactions account for a very small part of the 
overall swaps market. They generally transact in smaller notional 
amounts and need to customize swaps to loans that they originate. An 
appropriate risk-based approach to clearing requirements should take 
into account not just total assets, but also the risk that an 
institution's swaps activities pose for the overall swaps market and to 
that institution. Even banks and savings associations with $30 billion 
or less in assets account for only 0.09 percent of the notional value 
of the bank swaps market as of March 2011. Moreover, banks using swaps 
to hedge or mitigate commercial risk have standard risk management 
practices that set limits on exposure to swap dealers and also are 
subject to regulatory oversight. Banks engaging in these limited swaps 
activities should be exempt from the clearing requirements because they 
do not pose a risk to the swaps market nor do these swaps activities 
pose a risk to the safety and soundness of the banks.
    If appropriate exemptions from clearing requirements are not 
established, small banks would be discouraged from using swaps. The 
time and expense to establish a clearing agency relationship as well as 
the increased complexity and costs would be prohibitive for many 
institutions that use swaps sparingly. They are least able to afford 
the overhead costs required to establish a clearing relationship and 
pay the ongoing clearing fees. Further, they may need to establish 
multiple clearing relationships depending on their business model.
    If a bank with limited swaps activities could no longer afford to 
engage in swaps transactions, then it would not only increase costs and 
risk for its customers but also decrease the institution's ability to 
manage its own financial risk. It would also place these banks at a 
competitive disadvantage relative to larger financial entities. The 
result would be reduced credit options, which would adversely affect 
small businesses--and many other entities--at precisely the time when 
we need them to serve as an engine for economic growth and job 
creation.
II. All Common Lending Practices Should Be Included in the Exemption 
        from the Swap Dealer Definition for Swaps Entered Into in 
        Connection With Originating a Loan
    The Dodd-Frank Act exempts banks and other insured depository 
institutions from the definition of swap dealer if they enter into ``a 
swap with a customer in connection with originating a loan to that 
customer.'' Banks commonly enter into swaps with customers so that 
customers can hedge their interest rate or loan-related risks.
    The joint CFTC and SEC rule proposal on the swap dealer definition 
asks for comment on whether this exemption should be limited to a swap 
entered into contemporaneously with the loan. Limiting the exemption to 
swaps and loans entered into at the same time would be too narrow and 
would not capture common swap transactions used to hedge and mitigate 
loan-related risks. While some swaps are entered into simultaneously 
with loans, many swaps are entered into before or after a loan is made. 
For example, it is common for a customer to enter into a swap to lock 
in an interest rate in anticipation of a future loan. If a loan has a 
variable interest rate, it is also common for a customer to enter into 
a swap during the course of the loan to convert to fixed-rate payment 
obligations. A loan and swap may also be purchased by another lender or 
they may be assigned and novated if the lender stops lending. These are 
common loan transactions and should be exempt from the swap dealer 
definition.
    If these common lending practices are not taken into consideration, 
a bank that is not excluded from the swap dealer definition would have 
to create a separate entity to conduct swaps activities, because swap 
dealers are ineligible for ``Federal assistance,'' including FDIC 
insurance. Forming an affiliate to continue engaging in swaps would be 
expensive and require additional regulatory capital, so it would not be 
an option for most banks, particularly small ones. Instead, most banks 
would likely stop using swaps in connection with originating loans, 
which would raise costs for borrowers and discourage banks from making 
certain types of loans that are common today.
    Lending and financial risk management are vital to our economic 
stability and growth. Accordingly, the exemption from the swap dealer 
definition for swaps entered into in connection with originating a loan 
should be broad enough to ensure that banks are not hindered from 
engaging in common loan-related hedging transactions.
III. End-Users--Including Banks with Limited Swaps Activities--Should 
        Not Be Subject to Margin Requirements
    The Dodd-Frank Act mandates that the prudential regulators, CFTC, 
and SEC impose margin requirements on swap entities engaging in 
uncleared swaps transactions. Fortunately, the statute does not require 
regulators to impose the margin requirements on end-users that use 
swaps to hedge or mitigate commercial risk. Indeed, the CFTC has issued 
a rule proposal that would not impose margin on end-users, but rather 
would allow end-users to continue negotiating any collateral and margin 
on loans and swaps and even to continue participating in unsecured 
loans and swaps. This is consistent with the clearing exception for 
end-users, which was intended to ensure that end-users can continue to 
hedge market risk without incurring burdensome costs.
    The prudential banking regulators and the CFTC recently issued rule 
proposals that acknowledge that swaps with non-financial entities pose 
less risk to swap entities and the U.S. financial system than swaps 
with other types of entities. Even so, the prudential regulators' 
proposed margin rule would impose margin requirements on end-users 
despite a finding that they pose minimal risk. We believe that the 
CFTC's decision not to impose margin requirements on non-financial end-
users that use swaps to hedge or mitigate commercial risk is more 
consistent with statutory language and intent.
    As we note above, banks with limited swaps activities are end-users 
and use swaps to hedge interest rate risk on their balance sheet or 
loan exposure just as other end-users do to hedge or mitigate risk from 
their ordinary business activities. Adding both initial and variation 
margin requirements would make engaging in swaps prohibitive for banks 
with limited swaps activities just as requiring clearing would. If 
regulators do impose margin on bank end-users, then they should not 
impose any initial margin requirements but rather require only mark-to-
market margin on any collateral agreed upon by the swap counterparties.
    Regulators should take into account current market practice in 
establishing margin requirements and should allow all end-users--
including banks with limited swaps activities--to continue to negotiate 
any collateral or margin terms for uncleared swaps.
Conclusion
    ABA member banks use swaps to mitigate the risks of their ordinary 
business activities, just like their business counterparts. Banks that 
engage in swaps transactions that are substantially similar to the 
types of transactions used by other businesses should be included in 
the definition of ``end-user'' and exempted from clearing and margin 
requirements. Not doing so would make it prohibitively expensive to 
engage in these ordinary business activities and restrict banks from 
making certain types of loans at a time when lending is most needed.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Gary Gensler, Chairman, Commodity Futures Trading 
        Commission
Submitted Questions by Hon. Eric A. ``Rick'' Crawford, a Representative 
        in Congress from Arkansas
    Question 1. Many market participants have express concern that the 
current proposed rules related to the definition of ``swap dealer'' 
appear to cast a very wide net and will potentially capture a large 
number of institutions not generally recognized as ``swap dealers'' in 
the market. How is the Commission intending to address this concern?
    Answer. In December 2010, the CFTC (jointly with the SEC) issued a 
proposed rulemaking to further define the term ``swap dealer.'' The 
proposal noted that the Dodd-Frank Act defines a swap dealer in terms 
of whether a person engages in certain types of activities involving 
swaps. Specifically, the statutory definition encompasses an entity 
that holds itself out as a dealer in swaps, makes a market in swaps, 
regularly enters into swaps with counterparties as an ordinary course 
of business for its own account, or is commonly known in the trade as a 
dealer or market maker in swaps.
    The Dodd-Frank Act directs that the Commission exempt from the 
definition any entity that engages in a de minimis quantity of swap 
dealing. The proposed joint rule included a description of the factors 
and thresholds proposed to be used for determining the de minimis 
exemption to the swap dealer definition, and specifically requested 
that the public provide comments. Many commenters that responded to the 
proposal addressed the factors and thresholds that should be applied, 
as well as the application of the swap dealer definition. After taking 
the public's comments into account, the final rule will address the 
factors and thresholds for the de minimis exemption and the application 
of the swap dealer definition to affected entities.
    To date, there are more than 200 comments responding to the 
proposal. Many of the commenters addressed one or more prongs of the 
statutory definition of the term ``swap dealer,'' and discussed why the 
swap dealer definition should or should not encompass particular types 
of entities. The particular characteristics and activities that would 
require an entity to register as a swap dealer will be addressed in the 
final rulemaking relating to the swap dealer definition, after taking 
the comments into account.

    Question 2. Also related to the definition of swap dealer, does the 
Commission intend to increase the scope of the ``insured depository 
institution'' exception to the swap dealer definition to ensure that 
the exception relates not just to transactions executed with the Bank's 
lending clients, but to transactions (executed with dealers in the 
market) which in turn hedge those client transactions?
    Answer. The Dodd-Frank Act's definition of the term ``swap dealer'' 
provides that an insured depository institution is not to be considered 
a swap dealer to the extent if offers to enter into a swap with a 
customer in connection with originating a loan with that customer. The 
proposed rulemaking issued in December 2010 by the CFTC (jointly with 
the SEC) to further define the term ``swap dealer'' included a 
discussion of this exception. To date, there are more than 200 comments 
responding to the proposal, including comments regarding this 
exception. Some commenters addressed the issue of which types of 
transactions should be covered by the exception. The scope and 
interpretation of the statute's provisions will be addressed in the 
final rulemaking relating to the swap dealer definition, after taking 
the comments into account.

    Question 3. To the extent that the rule relating to swap dealers 
remains broadly drafted, and given the relative lack of resources, the 
need to outsource technology and to secure vendors which will be 
required for implementation, will the Commission address concerns 
raised by smaller swap dealers to allow for phased-in implementation 
for these smaller swap dealers?
    Answer. On September 8, 2011, the CFTC approved proposed rules that 
would establish a schedule to phase-in swap transaction compliance with 
the trade documentation, margin, clearing, and trade execution 
requirements. The proposed rules would provide swap dealers with at 
least an additional 90 days to come into compliance with these 
requirements. The CFTC is currently accepting comments on this phased 
implementation schedule, including whether the timeframes that it has 
proposed are appropriate.

    Question 4. The execution of swap transactions by small businesses 
that may not qualify as ``eligible contract participants'' is an 
important aspect of these small businesses' risk management strategy. 
Does the Commission intend to clarify that the ``line of business'' 
exemption will continue in effect under the new DFA rules?
    Answer. The proposed rulemaking on entity definitions issued in 
December 2010 by the CFTC (jointly with the SEC) included a proposal to 
further define the term ``eligible contract participant'' (ECP). The 
proposal requested comment on whether any additional categories of ECPs 
should be added to the statutory definition of the term, specifically 
including ``firms using swaps as hedges pursuant to the terms of the 
CFTC's Swap Policy Statement.'' To date, there are more than 200 
comments responding to the proposal, including comments regarding the 
ECP definition. Some of those comments suggested that the CFTC and SEC 
should define an ECP to encompass the ``line of business'' provision 
that was a part of the CFTC's Swap Policy Statement. The question of 
whether the ECP definition should incorporate a ``line of business'' 
element will be addressed in the final rulemaking relating to this 
definition, after taking the comments into account.

                                  
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