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


 
         HEARING TO REVIEW H.R. 3283, H.R. 1838, AND H.R. 4235 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 28, 2012

                               __________

                           Serial No. 112-33


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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

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                  K. MICHAEL CONAWAY, Texas, Chairman

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

               Matt Schertz, Subcommittee Staff Director

                                  (ii)



                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................    21
    Prepared statement...........................................    23
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     2
    Submitted legislation........................................     4

                               Witnesses

Vice, Charles A., President and Chief Operating Officer, 
  IntercontinentalExchange, Inc., Atlanta, GA....................    23
    Prepared statement...........................................    24
Saltzman, Paul, President, The Clearing House Association L.L.C.; 
  Executive Vice President and General Counsel, The Clearing 
  House Payments Company L.L.C., New York, NY....................    26
    Prepared statement...........................................    28
Bailey, Keith A., Managing Director, Fixed Income, Currencies and 
  Commodities Division, Barclays Capital, New York, NY; on behalf 
  of Institute of International Bankers..........................    33
    Prepared statement...........................................    36
Bodson, Michael C., Chief Operating Officer, Depository Trust & 
  Clearing Corporation, New York, NY.............................    40
    Prepared statement...........................................    42
    Submitted letter.............................................    61


         HEARING TO REVIEW H.R. 3283, H.R. 1838, AND H.R. 4235

                              ----------                              


                       WEDNESDAY, MARCH 28, 2012

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:30 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. K. 
Michael Conaway [Chairman of the Subcommittee] presiding.
    Members present: Representatives Conaway, Neugebauer, 
Crawford, Huelskamp, Ellmers, Hultgren, Hartzler, Schilling, 
Boswell, McGovern, Scott, Sewell, and Peterson (ex officio)
    Staff present: Tamara Hinton, Kevin Kramp, Ryan McKee, John 
Porter, Debbie Smith, Heather Vaughan, Suzanne Watson, Liz 
Friedlander, C. Clark Ogilvie, John Konya, and Jamie Mitchell.

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

    The Chairman. Good morning. I call this hearing of the 
Subcommittee on General Farm Commodities and Risk Management to 
review H.R. 3283, the Swap Jurisdiction Certainty Act, H.R. 
1838 to repeal section 716 of the Dodd-Frank, and H.R. 4235, 
the ``Swap Data Repository and Clearinghouse Indemnification 
Correction Act of 2012,'' to come to order.
    Well, good morning, and I want to thank all of you for 
joining us. I would like to extend a warm welcome to our 
panelists today, Mr. Chuck Vice of IntercontinentalExchange; 
Mr. Paul Saltzman of The Clearing House; Mr. Keith Bailey, 
Barclays Capital; and Michael Bodson, The Depository Trust & 
Clearing Corporation. Gentlemen, thank you for being here. I 
appreciate your time to come this morning and share your views 
with the Committee and have a chance to have your thumbs 
screwed to the table and grill you under hot lights. I am just 
kidding.
    Today's meeting of the General Farm Commodities and Risk 
Management Subcommittee continues a series of hearings aimed at 
examining and correcting some of the problems that have arisen 
as regulators have worked through the Dodd-Frank rulemaking 
process. To the surprise of almost no one in this room except 
perhaps us here on the dais, Congress passed an imperfect bill. 
That is right. You heard it here last. The Dodd-Frank bill has 
some mistakes in it. That is about as funny as this CPA is 
going to get so feel free to just have raucous laughter. There 
you go, I appreciate you sucking up to the chair.
    Fortunately, two of the bills we are going to examine today 
are bipartisan solutions that will strengthen the underlying 
bill and reduce the unintended consequences of poorly vetted 
provisions and a third will provide clarity regarding the reach 
of Dodd-Frank to activities that occur outside the United 
States.
    Our first bill, the ``Swap Data Repository and 
Clearinghouse Indemnification Act,'' will remove requirements 
from Dodd-Frank that foreign regulators indemnify U.S. swap 
data repositories for any losses arising from the misuse of 
information the regulator requests from the SDR. And I thank 
you to both Ms. Sewell and Mr. Crawford--they are not here--for 
leading on this important issue.
    Our second bill is the Swap Jurisdiction Certainty Act. 
This bill will provide clarity consistent with the 
Congressional intent regarding the territorial reach of Dodd-
Frank provided this certainty will not only help market 
participants prepare for the new regulations but it will 
support coordination and organization with our international 
counterparts.
    And finally, we will examine H.R. 1838, which modifies 
Section 718 of Dodd-Frank. Section 718 has the factor requiring 
banks to push some of their swap activities into separate 
standalone affiliates. H.R. 1838 would narrow the class of 
swaps covered by the rule to assure that the intent of 
segregating the riskiest swaps from a bank's balance sheet does 
not have the unintended consequence of needlessly diverting 
capital and introducing additional systemic risks.
    As has been said many times, getting Dodd-Frank right is 
more important than getting it done quickly. Part of that means 
that Congress can never become complacent with its own 
handiwork. Our work did not end when it was signed into law by 
the President. Examining the rulemaking process for errors, 
unfinished instructions, and unintended consequences, and then 
fixing the mistakes is an essential part of our job.
    I want to thank all Members of the Subcommittee on both 
sides of the aisle for their continued commitment to good 
oversight, support that Dodd-Frank, irrespective of our 
ideological differences, is implemented in a way that is 
logical, fair, and beneficial for the participants who depend 
on the financial markets. The three bills we are discussing 
today each improve Dodd-Frank in meaningful ways.
    Finally, I want to again thank today's witnesses for their 
time. We on the Committee appreciate the opportunity to 
understand the unique perspectives each bring to this financial 
reform process.
    [The prepared statement of Mr. Conaway follows:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Good morning, thank you all for joining us. I would like to extend 
a warm welcome to our panelists today: Mr. Charles Vice of 
IntercontinentalExchange; Mr. Paul Saltzman of The Clearing House; Mr. 
Keith Bailey of Barclays Capital; and Mr. Michael Bodson of the 
Depository Trust & Clearing Corporation.
    Thank you each for taking the time to come to our Committee, to 
share your views, and to answer our questions.
    Today's meeting of the General Farm Commodities and Risk Management 
Subcommittee continues a series of hearings aimed at examining and 
correcting some of the problems that have arisen as regulators have 
worked through the Dodd-Frank rulemaking process.
    To the surprise of almost no one in this room--except perhaps to us 
up here on the dais--Congress passed an imperfect bill. That's right, 
you heard it hear last, Dodd-Frank has some mistakes.
    Fortunately, two of the bills we are going to examine today are 
bipartisan solutions that will strengthen the underlying bill and 
reduce the unintended consequences of poorly vetted provisions; and a 
third will provide clarity regarding the reach of Dodd-Frank to 
activities that occur outside the U.S.
    Our first bill, the ``Swap Data Repository and Clearinghouse 
Indemnification Act,'' will remove requirements from Dodd-Frank that 
foreign regulators indemnify U.S. swap data repositories for any losses 
arising from the misuse of information the regulator requests from the 
SDR. Thank you to both Ms. Sewell and Mr. Crawford for leading on this 
important issue.
    Our second bill is the ``Swap Jurisdiction Certainty Act.'' This 
bill will provide clarity, consistent with Congressional intent, 
regarding the territorial reach of Dodd-Frank. Providing this certainty 
will not only help market participants prepare for the new regulations, 
but it will support coordination and harmonization with our 
international counterparts.
    Finally, we will examine H.R. 1838, which modifies Section 716 of 
Dodd-Frank. Section 716 has the effect of requiring banks to push some 
of their swap activities into separate, stand-alone affiliates. H.R. 
1838 would narrow the class of swaps covered by the rule, to ensure the 
intent of segregating the riskiest swaps from a bank's balance sheet 
does not have the unintended consequence of needlessly diverting 
capital or introducing additional systemic risk.
    As I have said many times, getting Dodd-Frank right is more 
important than getting it done quickly. Part of that means that 
Congress can never become complacent with its own handiwork; our work 
did not end when this law was signed by the President. Examining the 
rulemaking process for errors, unclear instructions, or unintended 
consequences, and then fixing the mistakes is an essential part of our 
job.
    I want to thank all the Members of this Subcommittee, on both sides 
of the aisle, for their continued commitment to good oversight. It is 
important that Dodd-Frank, irrespective of our ideological differences, 
is implemented in a way that is logical, fair, and beneficial for the 
participants who depend on the financial markets. The three bills we 
are discussing today each improve Dodd-Frank in meaningful ways.
    Finally, I would like to again thank today's witnesses for their 
time; we on the Committee appreciate the opportunity to understand the 
unique perspectives each of you have on financial reform.
    With that, I will turn to our Ranking Member, Mr. Boswell, for his 
opening remarks and then to our witnesses for their thoughts on how we 
can continue to improve Dodd-Frank.
                              Legislation
H.R. 3283, Swap Jurisdiction Certainty Act

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

H.R. 1838, To repeal a provision of the Dodd-Frank Wall Street Reform 
        and Consumer Protection Act prohibiting any Federal bailout of 
        swap dealers or participants. 

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
H.R. 4235, To amend the Securities Exchange Act of 1934 and the 
        Commodity Exchange Act to repeal the indemnification 
        requirements for regulatory authorities to obtain access to 
        swap data required to be provided by swaps entities under such 
        Acts.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

    The Chairman. I would like to turn to my Ranking Member and 
good friend, Mr. Boswell, for his opening remarks.

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

    Mr. Boswell. Well, thank you, Mr. Chairman.
    It is preliminary for my short remarks here, but we don't 
always agree. It is kind of interesting for us, the 
relationship, because I like you. That is my attempt at 
responding to humor but, no, it is true. I do like this man and 
I know something about where he comes from; I know something 
about the territory down there. I don't know if I have ever 
told you I was a roughneck in the oilfields just north of 
Monahans when I was a young man.
    The Chairman. Let me see all five fingers. You got them 
all?
    Mr. Boswell. I got them all.
    The Chairman. All right, good.
    Mr. Boswell. And I did lee tones, I did backups, I did the 
tower and it was an old standard tower where I got up there and 
I was a youngster, and the old driller had me up there and he 
said after--you know what I am talking about.
    The Chairman. Yes.
    Mr. Boswell. Yes. I bet you haven't done it but I bet you 
know what I am talking about.
    The Chairman. Au contraire.
    Mr. Boswell. Okay.
    The Chairman. I spent summers roughnecking for Parker 
Drilling Company and Sharpe Drilling Company----
    Mr. Boswell. Okay.
    The Chairman.--and I still have all my fingers.
    Mr. Boswell. Anyway, we are up in the tower and the well 
was about to come in. It was the old standard tower before the 
jackknives. I am kind of remembering the lingo here a little 
bit. And so I was substituting for people going on vacation. 
That was what my--the guy in the tower. I was a little nervous 
about it. I didn't mind heights and that kind of helped later 
on. I got into aviation, flying airplanes, and jumping out of 
airplanes. But there I was up in the standard tower way up 
there. And we were going to take the pipe out and change the 
bit, going to be up there a while and so I finally asked. I 
said what happens if there is a fire--because they kept telling 
us about safety. Oh, he said. I was going to tell you that just 
before I left and he showed me that little piece of cable with 
the handles on it and that cable went way out to a stake. He 
said if something happens, he said, your only escape is to wrap 
that thing around that cable, grab those handles, and you are 
going to slide down that and you are going to slow your speed 
down by putting pressure on it. He said we don't have time for 
you to practice. That was a sobering moment for a guy who was 
not quite 18 years old.
    The Chairman. Well, but you would have been motivated to do 
it. It was called the Geronimo line and it is politically 
incorrect today to call it that but----
    Mr. Boswell. Yes. Well, anyway. So I do thank you for the 
little dialogue there, but that is a little background.
    And I want to thank our witnesses and everyone for joining 
us today as we review the implementation of Dodd-Frank Wall 
Street Reform Act, global derivatives, and so on. I am proud to 
say that this Committee is genuinely the more bipartisan 
operation in the House of Representatives and I think you have 
just seen the reason why.
    In this effort, Chairman Conaway and I have introduced 
legislation not for today but legislation I hope makes it to 
the House floor for passage, H.R. 1840, which would improve 
cost-benefit analysis and operations of the CFTC.
    Agricultural and the financial markets have a unique 
relationship that we need to be reminded of more regularly. 
Since the passage of Dodd-Frank, I have been wanting the change 
in this bill and the regulations surrounding it to ensure that 
farmers, producers, and their communities are not hurt by 
another financial market crisis.
    I think it is clear to financiers that the hedging risk is 
a critical aspect of running a successful farm operation and 
doing so is good business for rural cooperatives and banks and 
producer communities. However, we must remind ourselves that 
not only does the integrity of our financial market impact our 
commodities but that our financial market relies on the 
commodities that hard-working Americans produce. Without them, 
there would be no basis for the derivatives traded among our 
banking institutions today.
    The market was created in the heartland to improve the 
commodity market and preserve the value of both commodities and 
seasonal goods in the face of unforeseeable risks such as 
drought and flooding. This reliance and the integrity of our 
markets are critical to our nation for jobs, a healthy economy, 
and affordable food. Distortions of commodity values in trading 
have a negative impact on our long-term economic outlook and 
often place unfair costs on commodity consumers such as the 
speculation on Wall Street that some of us think raises gas 
prices on consumers.
    I hope that we can have a healthy discussion of these 
issues and that your testimony here will improve functions in 
Congress and add to our understanding of the legislation before 
us. So I look forward to hearing the coming testimonies and 
working with you to ensure fair and practical implementation 
both at home and with our global partners on behalf of American 
taxpayers.
    And I would say in closing that Dodd-Frank is not perfect. 
I think we all knew that when we started out. And it wasn't 
done overnight. A lot of pressure was on and I watched closely 
as this Committee and the Finance Committee worked on that for 
months, just not perfect. And I thought we all would surely 
expect some tweaking as the rubber hits the road and we get out 
there and put it in force. And that is what I am very willing 
to do. Other major legislation has required that so why 
wouldn't we expect this? But we don't want the debacle that 
happened that caused us to do that extensive review to happen 
again if we can prevent it.
    So with that again, Mr. Chairman, thank you so much and I 
look forward to the hearing.
    [The prepared statement of Mr. Boswell follows:]

  Prepared Statement of Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa
    Thank you, Chairman Conaway. I would like to thank our witnesses 
and everyone for joining us today as we review implementation of the 
Dodd-Frank Wall Street Reform Act and global derivatives reform.
    I'm proud to say that this Committee is generally one of our more 
bipartisan operations in the House of Representatives. In this effort, 
Chairman Conaway and I have introduced legislation not before you 
today, but legislation that I hope makes it to the House floor for 
passage, H.R. 1840, which would improve cost-benefit analysis and 
operations at the CFTC.
    Agriculture and the financial markets have a unique relationship 
that we need to be reminded of more regularly. Since the passage of 
Dodd Frank, I have been monitoring the changes to this bill and the 
regulations surrounding it to ensure that farmers, producers, and their 
communities are not hurt by another financial market crisis.
    I think it is clear to financiers that the hedging risk is a 
critical aspect of running a successful farm operation, and doing so is 
good business for rural cooperatives and banks in producer communities.
    However, we must remind ourselves that, not only does the integrity 
of our financial market impact our commodities, but that our financial 
market relies on the commodities that hard working Americans produce. 
Without them, there would be no basis for the derivatives traded among 
our banking institutions today. The market was created in the heartland 
to improve the commodity market, and preserve the value of bulk 
commodities and seasonal goods in the face of unforeseeable risk such 
as drought and flooding.
    This reliance and the integrity of our markets are critical to our 
nation for jobs, a healthy economy, and affordable food. Distortions of 
commodity values in trading have a negative impact on our long term 
economic outlook, and often place unfair costs on commodity consumers--
such as the speculation on Wall Street that raises gas prices on 
consumers.
    I hope that we can have a healthy discussion on these issues and 
that your testimony here will improve functions in Congress and add to 
our understanding of the legislation before us.
    I look forward to hearing the coming testimonies and working with 
you to ensure fair and practical implementation both at home and with 
our global partners on behalf of American taxpayers.
    Thank you.

    The Chairman. I would like to thank the Ranking Member and 
remind that the chair has requested other Members to submit 
their opening statements for the record so the witnesses may 
begin their testimony to ensure that there is ample time for 
questions.
    I would like to introduce our panel now. First up will be 
Mr. Chuck Vice, President, Chief Operating Officer, 
IntercontinentalExchange, Atlanta, Georgia; Mr. Paul Saltzman, 
President of The Clearing House Association, L.L.C., Executive 
Vice President and General Counsel, The Clearing House Payments 
Company, L.L.C., New York, New York; Mr. Keith Bailey, Managing 
Director, Fixed Income, Currencies and Commodities Division, 
Barclays Capital, on behalf of the Institute of International 
Bankers, New York, New York; and Mr. Michael Bodson, COO of The 
Depository Trust & Clearing Corporation, New York, New York. 
Thank you, gentlemen.
    Mr. Vice, 5 minutes.

       STATEMENT OF CHARLES A. VICE, PRESIDENT AND CHIEF
       OPERATING OFFICER, IntercontinentalExchange, INC.,
                          ATLANTA, GA

    Mr. Vice. Chairman Conaway, Ranking Member Boswell, my name 
is Chuck Vice. I am President and Chief Operating Officer at 
ICE. I appreciate the opportunity to appear before you today to 
testify on the extraterritorial application of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, and in 
particular, the Swap Jurisdiction Certainty Act and ``Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 
2012.''
    Since the launch of our Atlanta-based electronic OTC energy 
marketplace in 2000, ICE has expanded both in the United States 
and internationally. Over the past 10 years, ICE has acquired 
or founded derivative exchanges and clearinghouses in the 
United States, the UK, and Canada. As such, ICE is uniquely 
impacted by the financial reform efforts in the United States 
and abroad.
    ICE has been supportive of the global financial reform 
efforts. Appropriate regulation of derivatives is of utmost 
importance to the financial system. However, the broad mandates 
of the Dodd-Frank Act create great uncertainty for 
international transactions and global businesses. While the 
CFTC and SEC have issued dozens of proposed and final 
regulations implementing the Dodd-Frank Act to date neither 
agency has defined what activity has a direct and significant 
impact on the United States. In particular, many of the CFTC's 
final rules require ICE to come into compliance without knowing 
whether our business is within the scope of Dodd-Frank.
    Therefore, ICE welcomes the introduction of H.R. 3283, the 
Swap Jurisdiction Certainty Act, which would make two important 
clarifications to Dodd-Frank by defining U.S. person and non-
U.S. person and by clarifying the applicability of Dodd-Frank 
requirements on international transactions. ICE believes that 
H.R. 3283 is an important step toward redefining what 
transactions and participants are subject to Dodd-Frank.
    In addition, I support the introduction of H.R. 4235, the 
``Swap Data Repository and Clearinghouse Indemnification Act.'' 
One of ICE's subsidiaries, Trade Vault, has applied for 
registration with the CFTC as a Swap Data Repository, or SDR. 
Section 728 of Dodd-Frank requires foreign regulators to 
indemnify an SDR for any expenses resulting from litigation for 
data provided by the SDR to the foreign regulator. ICE believes 
that this provision is an error as most foreign regulators 
would be legally unable to indemnify an SDR. This would result 
in forcing an SDR to create separate subsidiaries in other 
countries to provide swaps transparency to foreign regulators.
    ICE has always been and continues to be a strong proponent 
of open and competitive markets and appreciates the opportunity 
to work closely with Congress and regulators in the United 
States and abroad to address the evolving regulatory challenges 
presented by derivatives market.
    Mr. Chairman, thank you for the opportunity to share our 
views with you. I would be happy to answer any questions.
    [The prepared statement of Mr. Vice follows:]

 Prepared Statement of Charles A. Vice, President and Chief Operating 
          Officer, IntercontinentalExchange, Inc., Atlanta, GA
    Chairman Conaway, Ranking Member Boswell, I am Chuck Vice, 
President and Chief Operating Officer of IntercontinentalExchange, 
Inc., (ICE). I appreciate the opportunity to appear before you today to 
testify on the extraterritorial application of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act and in particular, the ``Swap 
Jurisdiction Certainty Act'' and the ``Swap Data Repository and 
Clearinghouse Indemnification Correction Act of 2012.''
Background
    Since the launch of its Atlanta, Georgia based electronic OTC 
energy marketplace in 2000, ICE has expanded both in the U.S. and 
internationally. Over the past 10 years, ICE has acquired or founded 
three derivatives exchanges and five clearing houses in the U.S., the 
UK, Brazil and Canada. Through our global operations, ICE's exchanges 
or clearing houses are directly regulated by the UK Financial Services 
Authority (FSA), the U.S. Commodity Futures Trading Commission (CFTC), 
the Securities and Exchange Commission (SEC) and the Manitoba 
Securities Commission. In addition, each exchange and clearing house is 
subject to lesser regulation or registration requirements with dozens 
of other jurisdictions. As such, ICE is uniquely impacted by the 
financial reforms efforts in the U.S. and abroad.
    ICE has been supportive of the global financial reform efforts. 
Appropriate regulation of derivatives is of utmost importance to the 
financial system. ICE believes that increased transparency and proper 
risk and capital management, coupled with legal and regulatory 
certainty, are central to reform and to restoring confidence to these 
vital markets.
    However, regulators need clear lines of jurisdiction. Regulators 
need certainty that they have the power to take actions to uphold the 
public good. Likewise, market participants need the certainty that 
their business transactions will not be held to conflicting standards 
of conduct. Further, regulatory certainty eliminates the possibility of 
regulatory arbitrage, or long-term damage to the competitiveness of the 
U.S. in a highly competitive global environment.
    The need for certainty extends beyond U.S. borders. It is vital to 
recognize that the derivatives markets are international: the majority 
of the large companies globally use derivatives, and they conduct these 
transactions with U.S. counterparties. Thus, U.S. regulators must work 
with international regulators from a common set of regulatory 
principles. With this comes the recognition that no single country can 
regulate the entire global derivatives market.
The Unclear Extraterritorial Application of Dodd-Frank Creates 
        Uncertainty
    Unfortunately, the broad mandates of the Dodd-Frank Act create 
great uncertainty for international transactions and global businesses. 
The sole recognition of applicability of Dodd-Frank to international 
transactions is in Section 722 of Dodd-Frank which states ``[t]he 
provisions of this Act relating to swaps that were enacted by the Wall 
Street Transparency and Accountability Act of 2010 . . . shall not 
apply to activities outside the United States unless those activities:

    (1) have a direct and significant connection with activities in, or 
        effect on, commerce of the United States, or

    (2) contravene such rules or regulations as the Commission may 
        prescribe . . . or to prevent the evasion of any provision of 
        this Act . . .''

    While the CFTC and SEC have issued dozens of proposed and final 
regulations implementing the Dodd-Frank Act, to date, neither agency 
has defined what activity has a direct and significant impact on the 
United States. In particular, many of the CFTC's final rules require 
ICE to come into compliance without ICE knowing whether our business is 
within the scope of Dodd-Frank. For example, our UK-based clearing 
house, ICE Clear Europe operates as a UK regulated Recognized Clearing 
House and a U.S. CFTC regulated Derivatives Clearing Organization and 
SEC regulated Clearing Agency. ICE Clear Europe clears European and 
Asian energy contracts which have little to no U.S. participation. 
However, it is unclear to ICE whether Dodd-Frank will apply to these 
transactions, even though the U.S. connection is negligible. Moreover, 
as an illustration of the complication of overlapping regulators, ICE 
Clear Europe is expected to seek approval for energy swaps from UK FSA, 
the CFTC and the SEC. Having to file approvals to clear swaps with 
three primary regulators, including one, the SEC, with no expertise in 
energy derivatives, hampers Dodd-Frank by making clearing swaps much 
more difficult for a clearing house.
    Before Dodd-Frank, this overlap in regulation was not the case. 
Since 1984, Section 4(b) of the Commodity Exchange Act expressly 
excluded foreign transactions from CFTC jurisdiction. The CFTC relied 
on foreign regulators to regulate foreign transactions and worked with 
regulators to adopt common principles that all regulated markets should 
adopt. This approach was very successful, as it led to greater 
harmonization of regulation, yet allowed foreign regulators to oversee 
their institutions. Importantly, many of the key goals of Dodd-Frank, 
such as swaps clearing and electronic trading, originally came from 
foreign markets.\1\
---------------------------------------------------------------------------
    \1\ EUREX pioneered electronic trading and the London Clearing 
House founded SwapsClear, an early clearing solution for OTC 
derivatives.
---------------------------------------------------------------------------
H.R. 3283, the Swap Jurisdiction Certainty Act
    ICE welcomes the introduction of H.R. 3283, the Swaps Jurisdiction 
Certainty Act, which would make two important clarifications to Dodd-
Frank by defining U.S. person and non-U.S. person and by clarifying the 
applicability of Dodd-Frank requirements on international transactions. 
ICE believes that H.R. 3283 is an important step forward to defining 
what transactions and participants are subject to Dodd-Frank.
``Swap Data Repository and Clearinghouse Indemnification Correction Act 
        of 2012''
    ICE also welcomes the introduction H.R. 4235, the ``Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 2012.'' 
One of ICE's subsidiaries, Trade Vault, has applied for registration 
with the CFTC as a Swap Data Repository (SDR). Section 728 of Dodd-
Frank requires foreign regulators to indemnify a SDR for any expenses 
resulting from litigation for data provided by the SDR to the foreign 
regulator. ICE believes that this provision is in error as most foreign 
regulators would be legally unable to indemnify a SDR. This would 
result in forcing an SDR to create separate subsidiaries in other 
countries to provide swaps transparency to foreign regulators. ICE 
believes the Swap Data Repository and Clearinghouse Indemnification 
Correction Act will correct this provision of Dodd-Frank and allow U.S. 
SDRs to provide transparency for international swaps transactions.
Conclusion
    ICE has always been and continues to be a strong proponent of open 
and competitive markets, and appreciates the opportunity to work 
closely with Congress and regulators in the U.S. and abroad to address 
the evolving regulatory challenges presented by derivatives market.
    Mr. Chairman, thank you for the opportunity to share our views with 
you. I would be happy to answer any questions you may have.

    The Chairman. Thank you, Mr. Vice.
    Mr. Saltzman, 5 minutes.

   STATEMENT OF PAUL SALTZMAN, PRESIDENT, THE CLEARING HOUSE 
   ASSOCIATION L.L.C.; EXECUTIVE VICE PRESIDENT AND GENERAL 
COUNSEL, THE CLEARING HOUSE PAYMENTS COMPANY L.L.C., NEW YORK, 
                               NY

    Mr. Saltzman. Chairman Conaway, Ranking Member Boswell, and 
Members of the Subcommittee, my name is Paul Saltzman and I am 
President of The Clearing House Association. I appreciate the 
invitation to appear before you this morning to share The 
Clearing House views on legislation currently pending before 
your Subcommittee.
    The Clearing House was founded in 1853 and today is the 
nation's oldest banking association. We are a nonpartisan 
advocacy group that represents the interest of our owner banks 
in a variety of legal, legislative, and regulatory issues. Our 
members include the largest U.S. commercial banking 
organizations including regional banks, as well as several 
leading non-U.S. domiciled banks.
    The Clearing House has been asked to testify on two of the 
three legislative proposals on this morning's hearing agenda, 
but before I do that, I would like to make clear that we are 
not here to advocate for fundamental changes to Title VII of 
Dodd-Frank nor do we take issue with the underlying policy 
goals in Title VII to increase transparency in the derivatives 
markets, identify and mitigate against risk in the financial 
system, and promote overall market integrity. We embrace those 
goals.
    I am here, however, to express our strong support for two 
thoughtful, targeted, balanced, and bipartisan bills neither of 
which would in any way undermine the protections afforded by 
the new regulatory regime established in Title VII.
    Let me start with H.R. 1838 and one clarification of my 
own. My comments today are addressed to the bipartisan 
substitute amendment adopted by voice vote last month in the 
House Financial Services Committee, not the original bill as 
introduced in the House. The legislation would essentially do 
four things. First, it would permit banks to engage in swap 
activity for hedging and other similar risk-mitigating 
activities that are directly related to the bank's activities. 
Second, it would allow banks to engage in a broader range of 
swap activity than currently permissible under Section 716 
other than structured finance swaps. Third, it would eliminate 
any ambiguity that bank exemptions to the push-out rule are 
also available to uninsured U.S. branches and agencies of non-
U.S. banks. And finally, the bill would clarify that the push-
out rule does not apply to swap activity conducted outside the 
United States between a non-U.S. swap entity which includes a 
non-U.S. branch of U.S. depository institution or a non-U.S. 
subsidiary and a non-U.S. counterparty.
    We believe these modifications to Section 716 would 
preserve benefits that are derived from centralizing swap 
activity in a single entity. The enactment of H.R. 1838 would 
also reduce the competitive disadvantages that U.S. banks 
currently face under Section 716 as compared to their non-U.S. 
bank counterparts that are not subject to the similar push-out 
requirement and likely never will be.
    Let me next turn to the Swap Jurisdiction Certainty Act, 
H.R. 3283. H.R. 3283 also involves the scope of certain Title 
VII requirements and is intended to provide clarity regarding 
the extraterritorial impact of Title VII. The statutory 
language itself makes it clear that the requirements of Title 
VII do not apply to activity outside the United States unless 
such activity has a direct and significant connection with 
activities in or effect on commerce in the United States or an 
entity seeking to evade U.S. law and regulation. We believe 
that the application of Title VII's requirements to U.S. 
banking organizations operations outside of the United States 
would run contrary to the statutory provision. Concerns have 
been raised that absent this statutory clarification, the CFTC 
or the SEC could apply Title VII broadly to U.S. banks non-U.S. 
operations in a manner that is inconsistent with Title VI.
    Specifically, the regulators could seek to apply these 
Title VII requirements both to non-U.S. subsidiaries of U.S. 
banks, as well as to non-U.S. branches of U.S. banks that 
register as swap dealers even when the activity conducted by 
such non-U.S. operations occurs outside the United States. An 
extraterritorial application of these requirements would create 
an unlevel playing field for U.S. banking organizations that 
compete outside the United States with non-U.S. banks that 
would be required to register as swap dealers under Title VII.
    Extending the scope of Title VII to non-U.S. transactions 
will also have a negative impact on commercial end-users and 
will make their hedging activities more costly and less 
efficient. Although the scope of extraterritorial application 
of Title VII remains uncertain and subject to final rulemaking 
and regulatory interpretation, H.R. 3283 would provide the 
legal certainty necessary for market participants and end-users 
and more clearly defining Title VII's intended extraterritorial 
scope.
    In summary, The Clearing House and its members strongly 
endorse swift passage and enactment of these two bipartisan 
bills. Thank you very much for your time and consideration, I 
appreciate the opportunity to testify and would be pleased to 
answer any questions you might have.
    [The prepared statement of Mr. Saltzman follows:]

   Prepared Statement of Paul Saltzman, President, The Clearing House
 Association L.L.C.; Executive Vice President and General Counsel, The 
          Clearing House Payments Company L.L.C., New York, NY
    Chairman Conaway, Ranking Member Boswell and Members of the 
Subcommittee, my name is Paul Saltzman, and I am President of The 
Clearing House Association L.L.C. (``The Clearing House''). I 
appreciate the invitation to appear before you this morning to share 
The Clearing House's views on the important legislation currently 
pending before your Subcommittee.
    Established in 1853, The Clearing House is the oldest banking 
association in the United States. We are a nonpartisan advocacy 
organization and represent our owner banks on a variety of legal, 
legislative, and regulatory issues. Our members include the largest 
U.S. commercial banking organizations, including large regional banks, 
as well as several leading non-U.S. domiciled banks. I am also 
Executive Vice President and General Counsel of our affiliate, The 
Clearing House Payments Company L.L.C., which provides payment, 
clearing, and settlement services to its member banks and other 
financial institutions. The Clearing House Payments Co. clears almost 
$2 trillion and 63 million transactions every day in automated-
clearing-house, funds-transfer, and check-image payments made in the 
United States.
    The Clearing House has been asked to testify today on two of the 
three legislative proposals on this morning's hearing agenda. But 
before I do that, I would like to make clear that we are not here today 
to advocate for any fundamental changes to the basic protections that 
are embodied in Title VII of the Dodd-Frank Act (``Dodd-Frank''). Nor 
does The Clearing House take issue with the overarching policy goals 
expressed by Congress in Title VII to increase transparency in the 
derivatives markets; identify and mitigate against risk in the 
financial system; and promote overall market integrity. On the 
contrary, we fully embrace those goals. Instead, I am here today, on 
behalf of The Clearing House and its members, to express our strong 
support for two thoughtful, targeted, balanced, and bipartisan bills, 
neither of which would in any way undermine the new regulatory regime 
established by Title VII. The two bills are H.R. 1838, which would 
amend the so-called bank derivatives ``push-out'' provisions of Section 
716 of Dodd-Frank; \1\ and H.R. 3283, the ``Swaps Jurisdiction 
Certainty Act.'' We strongly support both bills and urge their swift 
passage. These carefully crafted, bipartisan proposals would provide 
clarity and help avoid unintended consequences. The first bill, H.R. 
1838, would clarify the scope of swaps and security-based swaps 
activities that may be conducted in a bank and would clearly extend the 
exemptions to the push-out requirement in Section 716 to uninsured U.S. 
branches and agencies of non-U.S. banks. The second bill, H.R. 3283, 
would clarify the extent to which the requirements of Title VII 
applicable to swap and security-based swap transactions would apply 
extraterritorially and to inter-affiliate transactions. These bills 
will enhance the efficiency of the risk management services provided by 
banks to their commercial counterparties, and facilitate the banks' 
management of the risks to which they are exposed in their business 
activities.
---------------------------------------------------------------------------
    \1\ As requested, this testimony addresses the bipartisan 
substitute amendment to H.R. 1838, adopted in the Financial Services 
Committee on Feb. 16, 2012, not H.R. 1838 as originally introduced on 
May 11, 2011.
---------------------------------------------------------------------------
    Although some of the concerns targeted by these bills could 
potentially be addressed through appropriately tailored regulations and 
interpretations by the Commodity Futures Trading Commission (``CFTC''), 
the Securities and Exchange Commission (``SEC''), and the prudential 
bank supervisors, we strongly believe that enactment of these two 
bipartisan bills is a better approach, which will provide greater 
certainty and address any limitations on the authority of the 
regulators. Moreover, the bills would provide needed clarity regarding 
the scope of these particular Title VII provisions and the 
Congressional intent underlying them.
    In short, we believe these bills provide balanced and reasonable 
solutions to serious risks posed by the swaps push-out provision and 
the application of certain Title VII requirements to extraterritorial 
and inter-affiliate transactions, targeting, in each case, the most 
troublesome, and likely unintended, consequences.
Swaps Push-Out and H.R. 1838
Section 716
    In general, and unless amended prior to its effective date,\2\ Sec. 
716 will require that U.S. insured depository institutions and U.S. 
branches and agencies of non-U.S. banks ``push out'' certain types of 
swaps dealing activity from the bank (or the branch). Sec. 716 provides 
exemptions for ``insured depository institutions'' (but not explicitly 
for uninsured U.S. branches and agencies, as discussed below) that 
would permit them to engage in (i) hedging and risk-mitigating swaps 
activity; and (ii) swaps involving rates, currencies, and other 
underlying assets that are permissible for national banks, including 
cleared credit default swaps. However--and importantly for commercial 
and agricultural end-users throughout the country--most commodity swaps 
currently conducted by banks,\3\ both large and small, are subject to 
the push-out requirement in Sec. 716.
---------------------------------------------------------------------------
    \2\ Although there is some ambiguity regarding whether Sec. 716 is 
effective 2 years after the date of enactment of Dodd-Frank (which 
would be July 2012) or 2 years after the effective date of Title VII 
(which would be July 2013), we believe the better reading of the 
statutory language is that Sec. 716 is effective 2 years after the 
effective date of Title VII. That July 16, 2013 is the effective date 
is supported by the legislative history of the provision in which 
Senator Lincoln stated that the effective date of the provision is 2 
years from the effective date of the title. (Cong. Rec., July 15, 2010, 
S5922)
    \3\ As noted above, banks would not be prohibited from engaging in 
swap dealing activity with respect to swaps with bank-permissible 
commodity reference assets, such as precious metals, or with respect to 
hedging and risk-mitigating activities.
---------------------------------------------------------------------------
    H.R. 1838 would amend Section 716 to:

   permit banks to engage in swap activity for hedging and 
        other similar risk mitigating activities that are directly 
        related to the bank's activities;

   permit banks to engage in swaps and security-based swaps 
        activity other than most types of structured finance swaps;

   eliminate any ambiguity that the exemptions from the 
        requirement to push-out swaps activity that are clearly 
        available to insured depository institutions are also available 
        to uninsured U.S. branches and agencies of non-U.S. banks; and

   clarify that the push-out requirement does not apply to swap 
        or security-based swap activity outside the United States 
        between a non-U.S. swap entity, which includes a non-U.S. 
        branch of a U.S. depository institution or a non-U.S. 
        subsidiary, and a non-U.S. counterparty.
Benefits of H.R. 1838
    Because H.R. 1838 would permit banks to continue to engage in a 
wider range of swaps and security-based swaps activity without creating 
safety and soundness risk, it would be a significant step towards 
addressing concerns that have been raised regarding the negative 
unintended consequences of Sec. 716. Indeed, U.S. bank regulators have 
raised concerns about the potential harm the push-out requirement could 
have on the safety and soundness of institutions that are subject to 
its prohibition, as well as its potential to increase systemic risk. 
For example, in a May 12, 2010, letter to the Chairman of the Senate 
Banking Committee, Chairman Bernanke wrote the following: ``Section 716 
would force derivatives activities out of banks and potentially into 
less regulated entities . . . The movement of derivatives to entities 
outside the reach of the Federal supervisory agencies would increase, 
rather than reduce the risk to the financial system.'' Similarly, then-
Chairman of the Federal Deposit Insurance Corporation (``FDIC'') Sheila 
Bair, in an April 30, 2010, letter to then-Senators Dodd and Lincoln, 
took issue with the entire concept of pushing derivatives activities 
out of the bank and warned that ``one unintended outcome of this 
provision would be weakened, not strengthened, protection of the 
insured bank and the Deposit Insurance Fund.''
Promotes Efficient Risk Management
    As a general matter, customers prefer to engage in derivatives 
transactions with banks, rather than their non-bank affiliates, because 
banks are typically more comprehensively regulated and more highly-
rated entities with stronger credit than their non-bank counterparts 
and can therefore offer lending and derivative products at reduced cost 
and with greater security. In addition, end-users typically establish 
relationships with one or a limited number of banks and then depend on 
those banks to service their hedging and other derivatives needs. This 
approach has the advantages of allowing end-users to work with banks 
that understand their businesses, needs and objectives, and have 
previously reviewed and made determinations with respect to the end-
user's credit. In addition, end-users are able to execute transactions 
based on agreements and documentation already in place with their 
banks, without the need for separate review and negotiation of new 
documentation. To the extent that end-users would be required to 
establish relationships with additional banks for one-off transactions, 
or for transactions in particular product categories, the process will 
become slower, more costly and less efficient and will impede the end-
users' ability to engage in necessary hedging activities.
    H.R. 1838 would avoid this result by allowing U.S. banking 
organizations to provide their customers with a wider range of products 
and services and maintain the scope of banks' lending opportunities. By 
permitting a greater range of swaps activity in the bank, H.R. 1838 
would also help maintain other benefits that are derived from 
centralizing the activity in a single entity. In particular, these 
additional benefits include the ability to set-off in the event of a 
default where lending and derivatives activities are conducted in the 
same entity and the cost savings to customers by restoring certain 
netting opportunities, which can reduce their collateral obligations 
without increasing risks to the bank or systemic risks. This in turn, 
as noted above, facilitates more efficient and effective risk 
management by banks and their counterparties. For example, a commercial 
agricultural producer might enter into swaps on agricultural 
commodities with its bank counterparty in order to hedge its price risk 
to agricultural commodities arising from its production of such 
commodities. If that activity is subject to push-out, as it would be 
under Section 716, and the agricultural entity is also entering into 
interest rate swaps with the bank to hedge its financing risks, it will 
no longer be able to net the exposures arising in connection with the 
two types of transactions. The agricultural entity will therefore not 
be able to net its agricultural swaps against its interest rate swaps, 
which will increase its margin requirements, thereby making its hedging 
more costly--and potentially not cost-effective at all--and exposing it 
to greater risk in the event of a default by the bank. These results 
would increase systemic risk, reduce hedging opportunities (or make 
them more costly) and serve no purpose in providing greater protection 
to the markets or market participants.
Promotes U.S. Bank Competitiveness
    Enactment of H.R. 1838 would also be a key step towards lessening 
the competitive disadvantage that U.S. banks would face under Sec. 716, 
as compared to their non-U.S. bank counterparts that are not subject to 
similar requirements--and likely never will be. Indeed, there is a 
general and growing recognition that the swaps push-out provision is 
highly unlikely to be adopted in any other jurisdiction in any form, as 
Federal Reserve Board Governor Tarullo recently acknowledged in 
testimony before the Senate Banking Committee. Similarly, nearly 2 
years ago, Chairman Bernanke warned Congress that ``foreign 
jurisdictions are highly unlikely to push derivatives out of their 
banks.'' \4\ In light of this practical reality, the broadening of the 
scope of swap activities that a bank may continue to engage in 
reflected in H.R. 1838 is even more critical, especially relative to 
the lending business. In this regard, U.S. banks could be placed at a 
serious competitive disadvantage in their traditional lending 
businesses if borrowers migrate their loans to non-U.S. banks in order 
to realize the benefits of set-off between their loans and their swaps 
exposure. Set-off and netting are just as important to customers as 
they are to banks.
---------------------------------------------------------------------------
    \4\ In fact, some non-U.S. jurisdictions actually require that 
derivatives transactions be conducted in the bank, as opposed to an 
affiliate, in part because of the supervisory benefits cited by Sheila 
Bair, among others.
---------------------------------------------------------------------------
Clarifies Treatment of U.S. Banks' Non-U.S. Operations
    H.R. 1838 would also appropriately clarify that Sec. 716 does not 
limit the swaps activities of foreign branches of U.S. banking 
organizations. We believe this clarification to be wholly consistent 
with the Congressional intent underlying Sec. 716. Indeed, the 
legislative history of Sec. 716 is focused exclusively on domestic 
application and demonstrates no intent by Congress to extend the push-
out requirement to the overseas branches of U.S. banks. Moreover, this 
clarification is consistent with longstanding precedent in U.S. banking 
law allowing U.S. banks to engage in a wider range of activities in 
their overseas branches than is permissible in their U.S. offices. Most 
importantly, however, extending the extraterritorial reach of Sec. 716 
in this way would create undue and unnecessary competitive 
disadvantages for U.S. banks operating abroad, by limiting their 
ability to provide a full range of swaps to their overseas customers, 
which include overseas affiliates of their U.S. customers.
Clarifies Treatment of Non-U.S. Banks' U.S. Operations
    Without the technical correction in H.R. 1838, the swaps push-out 
provision could also have a very negative impact on non-U.S. banking 
organizations with U.S. operations. As the result of an acknowledged 
drafting error in the statute,\5\ certain exemptions from Section 716 
that permit banks to continue to engage in certain swaps activity may 
be available only to ``insured depository institutions,'' a term that 
could be read to exclude the uninsured U.S. branches and agencies of 
non-U.S. banks. Accordingly, these exemptions may not apply to swaps 
activities conducted in these U.S. branches and agencies, which would 
leave all of their swaps activity potentially subject to the push-out 
requirement. This result would violate longstanding principles of 
national treatment and international comity and could, eventually, 
expose U.S. banks operating abroad to reprisals by foreign regulators. 
This issue is of most critical concern to The Clearing House member 
banks that are headquartered outside the United States, but it is an 
issue of concern for all of our members.
---------------------------------------------------------------------------
    \5\ In a colloquy with Senate Banking Committee Chairman Dodd 
shortly after Senate passage of Dodd-Frank, Senator Blanche Lincoln, 
who was the principal author of Sec. 716, acknowledged a ``significant 
oversight'' in the technical drafting of Sec. 716 but stated 
unequivocally that Congress intended the exemptions for ``insured 
depository institutions'' to be available also to the U.S. branches of 
non-U.S. banks. (156 Cong. Rec., S5869, 5903-5904 (daily ed. July 15, 
2010))
---------------------------------------------------------------------------
          * * * * *
    As noted above, we believe H.R. 1838, as reported in overwhelmingly 
bipartisan fashion by the Financial Services Committee, is a balanced 
and reasonable approach to addressing the unintended consequences of 
Section 716. It is also an important step towards competitive equity-
extending exemptions to the push-out requirement to uninsured U.S. 
branches of non-U.S. banks and clarifying that the push-out prohibition 
does not apply to the non-U.S. operations of U.S. banking 
organizations. This would be reinforced by the clarification of the 
extraterritorial application of Title VII in H.R. 3283, described 
below. Moreover, as noted earlier, enactment of this legislation would 
in no way undermine Title VII's enhanced regulatory scrutiny of 
derivatives or compromise bank safety and soundness.\6\ These 
modifications to Sec. 716 are critically important, both to the banking 
industry, end-users, and our overall economy, and we strongly support 
their enactment.
---------------------------------------------------------------------------
    \6\ Congressman Barney Frank strongly backed this bipartisan 
substitute in the Financial Services Committee and had this to say 
during the full Committee markup last month: ``passing this bill . . . 
will not in any way, shape or form reduce sensible regulation of 
derivatives. It will not increase any exposure to the financial system 
from derivatives. [Sec. 716] was an unnecessary and, I think, somewhat 
unwise amendment. The bill before us . . . will restore this to what I 
think is the appropriate balance.'' Congressman Frank also noted that 
the legislation would in no way alter the application of the basic 
substantive regulatory requirements of Title VII (i.e., swap dealer 
registration, capital and margin requirements, and execution and 
clearing).
---------------------------------------------------------------------------
Extraterritorial Application of Title VII and H.R. 3283
Effect of H.R. 3283
    H.R. 3283 \7\ would provide clarity regarding the scope of Title 
VII's requirements by:
---------------------------------------------------------------------------
    \7\ This testimony addresses the text of H.R. 3283, as introduced 
on Oct. 31, 2011.

   Clearly defining who is a U.S. person and subjecting only 
        those transactions that involve U.S. persons to the 
        transaction-level requirements of Title VII. Importantly, 
        agencies or branches of a U.S. person located outside the 
        United States would be non-U.S. persons provided that they are 
        established for valid business reasons and subject to 
---------------------------------------------------------------------------
        substantive regulation in the local jurisdiction;

   Permit a non-U.S. swap dealer or security-based swap dealer 
        to meet Title VII's capital requirements by complying with 
        comparable home country standards; and

   Clarify that the transaction-level requirements of Title VII 
        do not apply to inter-affiliate transactions.
Extraterritorial Application
    H.R. 3283 provides important clarity regarding the extent to which 
Title VII may be applied to activities conducted outside the United 
States--a critical issue for U.S. and non-U.S. banking organizations 
alike, and one that has raised concerns in the banking industry, on 
both sides of the aisle in Congress, and among U.S. and non-U.S. 
regulators. Although Title VII's extraterritorial impact on U.S. and 
non-U.S. banking organizations would differ, the effects would be felt 
across all banking organizations and would have a negative impact on 
the U.S. financial markets.
    The statute itself makes clear that the requirements of Title VII 
do not apply to activity outside the United States unless such activity 
has a ``direct and significant connection with activities in, or effect 
on, commerce of the United States'' or to prevent evasion of U.S. law 
and regulation. Application of Title VII's requirements to U.S. banking 
organizations' operations outside of the U.S. would run contrary to 
this statutory prohibition and would place U.S. banks at a significant 
competitive disadvantage to their non-U.S. counterparts in the global 
markets. In addition, broad extraterritorial application of Title VII 
could very well result in non-U.S. banking organizations pulling this 
activity, and potentially their banking activities as well, out of the 
United States.
    Absent the statutory clarification provided in this legislation, 
the CFTC or SEC could apply Title VII broadly to U.S. banks' non-U.S. 
operations in a manner inconsistent with the statutory limitations set 
out in Title VII. Specifically, certain statements by the CFTC indicate 
an intent to apply the Title VII requirements both to non-U.S. 
subsidiaries of U.S. financial institutions, as well as to non-U.S. 
branches of U.S. banks that register as swap dealers, even when the 
activity conducted by such non-U.S. operations occurs entirely outside 
of the United States. For example, with respect to a U.S. banking 
organization registered as a swap dealer, this could mean that even 
transactions entered into by a non-U.S. branch of such U.S. bank with a 
non-U.S. person may be subject to all the transaction-level 
requirements of Title VII (including, most significantly, margin 
requirements) even when the transactions take place entirely outside 
the United States. Moreover, these non-U.S. transactions could 
potentially become subject to U.S. execution and clearing requirements, 
which is impractical and would not advance U.S. policy interests. For 
non-U.S. banking organizations, Title VII requirements, if applied 
broadly, may be imposed on their overseas transactions. These results 
are particularly inappropriate given the fact that activities of non-
U.S. branches of U.S. banks are subject to the jurisdiction of, and 
robust prudential supervision by, U.S. bank regulators.
    An extraterritorial application of these requirements would create 
an unlevel playing field for U.S. banking organizations that compete 
outside the United States with non-U.S. banks that would not be 
required to register as swap dealers under Title VII or would not be 
subject to all of Title VII's requirements. The competitive 
disadvantage that U.S. banking organizations would likely face would be 
particularly pronounced through the application of Title VII margin 
requirements to swaps conducted between two non-U.S. counterparties. An 
example of the adverse impact the uneven application of margin 
requirements could have is evident in the prudential regulators' 
proposed rules regarding margin requirements for uncleared swaps. Those 
proposed rules provide for an exemption from margin requirements that 
would otherwise apply to a swap conducted between a non-U.S. swap 
dealer and a non-U.S. counterparty, subject to certain conditions. 
However, non-U.S. subsidiaries of U.S. financial institutions may not 
avail themselves of this exemption. The competitive disadvantages 
raised by such a limited exemption are obvious: if non-U.S. 
counterparties are required to post margin on their derivatives 
transactions with the non-U.S. branches and subsidiaries of U.S. 
banking organizations, these transactions are likely to migrate to non-
U.S. competitors that do not have the same margin requirements.
    Extending the scope of Title VII to non-U.S. transactions will also 
have a negative impact on commercial end-users and will make their 
hedging activities more costly and less efficient. For example, if the 
Title VII scope of application were to extend to a non-U.S. branch of a 
U.S. bank, or a non-U.S. bank operating outside the U.S., and an end-
user that is a non-U.S. subsidiary of a U.S. parent wishes to trade 
with that branch or bank, its transactions would become more costly, 
due to the associated compliance obligations. That, in turn, 
potentially makes the end-user's hedging less effective.
    Although the scope of extraterritorial application of Title VII 
remains uncertain, subject to final rulemaking and regulatory 
interpretation, H.R. 3283 would be helpful in more clearly defining 
Title VII's scope. Resolution of this issue is critical because today's 
swap markets are global, and conflicting or overlapping requirements 
across jurisdictions harm all market participants. We recognize and 
appreciate the ongoing efforts among regulators to work towards global 
harmonization of the OTC derivatives regimes. At this point, however, 
broad harmonization of requirements across all jurisdictions most 
active in these markets remains unlikely. Even if such international 
harmonization could be achieved, U.S. requirements are likely to become 
effective earlier, which would subject U.S. banking organizations to a 
substantial competitive disadvantage before comparable requirements 
emerge (if at all) in other jurisdictions. Once lost, experience 
suggests that these relationships will never return.
Inter-affiliate Transactions
    The treatment of inter-affiliate swaps transactions under Title VII 
is also of critical importance to all banking organizations. Title VII 
itself does not differentiate between affiliate and non-affiliate swap 
transactions and, as a result, it remains unclear whether the full 
range of requirements would apply to affiliate transactions.
    U.S. and non-U.S. banking organizations alike rely on inter-
affiliate swaps transactions for internal hedging and risk management 
purposes. Imposing requirements such as margin on these trades may 
increase operational and credit risk associated with the transactions 
with no offsetting benefits to the institutions themselves or U.S. 
financial stability, and imposing clearing and execution requirements 
on these transactions would effectively eliminate their utility. These 
inter-affiliate transactions do not threaten the safety and soundness 
of the individual institutions nor do they contribute to systemic risk.
    These amendments would in no way undermine the overarching goals of 
Title VII to increase transparency in the derivatives markets, to 
mitigate against systemic risk in the broader financial system, and to 
promote overall market integrity.
          * * * * *
Conclusion
    In summary, The Clearing House and its members strongly endorse 
swift passage and enactment of these two bipartisan bills, each of 
which is carefully crafted to address these specific but significant 
concerns in a manner that does not imperil financial stability, 
undermine the regulation of derivatives or the safety and soundness of 
our banks, or jeopardize the international competitiveness of our 
institutions and markets. Mr. Chairman, The Clearing House and its 
members stand ready to assist you in this endeavor in any way we can. 
Again, we appreciate your invitation to testify before you today and 
would be pleased to answer any questions you may have.

    The Chairman. Thank you, sir.
    Mr. Bailey for 5 minutes.

STATEMENT OF KEITH A. BAILEY, MANAGING DIRECTOR, FIXED INCOME, 
  CURRENCIES AND COMMODITIES DIVISION, BARCLAYS CAPITAL, NEW 
                     YORK, NY; ON BEHALF OF
               INSTITUTE OF INTERNATIONAL BANKERS

    Mr. Bailey. Chairman Conaway, Ranking Member Boswell, and 
Members of the Subcommittee, my name is Keith Bailey. I am a 
Managing Director in the Fixed Income, Currencies and 
Commodities Division of Barclays where I have responsibilities 
for evaluating and implementing the changes to our derivatives 
businesses globally resulting from the enactment of Dodd-Frank. 
I am very pleased to be here today to testify on behalf of the 
Institute of International Bankers, the IIB, in support of H.R. 
3283, H.R. 1838, and the ``Swap Data Repository and 
Clearinghouse Indemnification Correction Act of 2012.''
    The IIB represents internationally headquartered financial 
institutions from over 35 countries around the world. Its 
members include international banks that operate branches and 
agencies, bank and broker dealer subsidiaries in the United 
States. In the aggregate, our members' U.S. operations have 
approximately $5 trillion in assets, contribute to the depth 
and liquidity of U.S. financial markets, and provide 25 percent 
of all commercial and industrial bank loans made in this 
country, which includes agricultural lending.
    H.R. 3283, the Swaps Jurisdiction Certainty Act, introduced 
by Representatives Himes and Garrett was approved yesterday by 
the Financial House Services Committee. This bill provides 
certainty with respect to the extraterritorial application of 
the Dodd-Frank Act, allowing for the harmonization of 
derivative regulations and ensuring there is a level playing 
field between U.S. and foreign banks with respect to their 
cross-border swap activities.
    The swap markets are global markets that permit investors 
access to a range of risk-management products and investment 
opportunities across a range of international financial 
markets. Many countries are working to supplement their 
existing regimes to incorporate derivatives clearing and market 
transparency reforms similar to those of Dodd-Frank pursuant to 
the commitments made by the G20 leaders in September of 2009. 
The Dodd-Frank Act recognizes the need for international 
coordination of swaps regulations, as well as the need to limit 
the extraterritorial application of Title VII.
    The extraterritorial application of Title VII is a very 
real concern. For example, different regions may take different 
approaches regarding what products need to be cleared, what 
exemptions if any there will be for certain market sectors, and 
how collateral is to be protected by clearinghouses and 
clearing members.
    H.R. 3283 brings much-needed certainty to the question of 
extraterritorial reach of Title VII. The bill makes certain 
that internationally headquartered banks, non-U.S. swap and 
security-based swap transactions will not be subject to U.S. 
regulatory requirements. The bill also provides certainty for 
both U.S. banks and the U.S. operations of internationally 
headquartered banks with respect to their swap and security-
based swap transactions with non-U.S. persons.
    With respect to internationally headquartered banks that 
register as swap dealers under Title VII, the bill makes 
certain that such banks may satisfy the capital requirements of 
Title VII by relying on their home country capital requirements 
provided that such home country requirements are comparable to 
those expressed under Title VII and the bank's home country is 
a signatory to the Basel Capital Accords. In this way, the bill 
recognizes the resource constraints of U.S. regulators and that 
U.S. regulators should leverage rather than duplicate effective 
foreign supervision while still retaining their ability to 
apply U.S. regulations where inadequate protections exist.
    The bill recently approved by the House Financial Services 
Committee, H.R. 1838, was amended to modify rather than repeal 
Section 716. The IIB supported that amendment cosponsored by 
Representatives Himes and Maloney and the bill's sponsor, 
Representative Hayworth, as it provided U.S. branches and 
agencies of foreign banks parity with insured depository 
institutions. The bill was reported by the Committee on a voice 
vote. The bill fixes an unintended and acknowledged oversight 
in the drafting of Section 716 that has resulted in the 
disparate treatment of uninsured U.S. branches and agencies of 
foreign banks as compared to IDIs.
    The general prohibition under Section 716 relating to 
Federal assistance applies to both U.S. FDIC-insured banks and 
uninsured U.S. branches and agencies of foreign banks that are 
swap entities. The general prohibition is, however, subject to 
several important exclusions--grandfathering provisions and 
transition periods--but these apply only to IDIs. As a result, 
Section 716 IDIs can continue to engage in certain traditional 
swap dealing activities, including dealing in interest rate 
swap and foreign currency swaps and to use swaps for hedging 
and other similar risk-mitigating activities.
    Uninsured U.S. branches and agencies are facing a cliff 
come July 2013 by which time they must have pushed out all of 
their existing swap positions and ongoing swaps activities. 
This will be very disruptive to markets and end-users. Many 
swap dealers have thousands of clients that would be affected. 
The assignment or novation of these agreements would almost 
always require counterparty consent. Under that agreement, 
there is the prospect of litigation. Given that swap dealing is 
typically conducted as an integral part of a bank's overall 
lending and other non-swap business, the failure to rectify 
this situation could have a major impact on the commercial and 
industrial lending in the United States by international banks.
    Uninsured U.S. branches and agencies of foreign banks are 
subject to the same type of safety and soundness examination 
and oversight as U.S. banks, and there is no reason to treat 
them differently than U.S. banks. Indeed, doing so represents a 
significant departure from the longstanding U.S. policy that 
U.S. branches and foreign agencies and agencies of foreign 
banks are subject to the same rules, regulations, and 
oversight--i.e., national treatment as U.S. banks.
    In this connection, we would like to bring to the Committee 
Members' attention another instance in Dodd-Frank where the 
term insured depository institution is used unintentionally 
excluding the U.S. branches and agencies of foreign banks. The 
definition swap dealer in Section 721 provides that an IDI 
shall not be considered a swap dealer to the extent it offers 
to enter into a swap with a customer in connection with 
originating a loan with that customer. As a result, potentially 
any uninsured U.S. branch or agency of a foreign bank will have 
to register with the CFTC if it enters into a swap in 
connection with its lending activities. Requiring these 
uninsured U.S. branches and agencies to register would have an 
impact on their willingness to lend in this country and strain 
the supervisory resources of the CFTC
    In closing, I would like to express my support for the 
``Swap Data Repository and Clearinghouse Indemnification Act of 
2012,'' and I thank you for the opportunity to testify today on 
behalf of the IIB. We urge the Committee to consider and 
approve these important bills and I am happy to answer any 
questions.
    [The prepared statement of Mr. Bailey follows:]

Prepared Statement of Keith A. Bailey, Managing Director, Fixed Income,
Currencies and Commodities Division, Barclays Capital, New York, NY; on 
              Behalf of Institute of International Bankers
    Chairman Conaway, Ranking Member Boswell and Members of the 
Subcommittee:

    My name is Keith Bailey. I am a Managing Director in the Fixed 
Income, Currencies and Commodities Division of Barclays where I have 
responsibilities for evaluating and implementing the changes to our 
derivative businesses globally resulting from enactment of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). I 
have over twenty-five years of experience in the derivatives market 
both here in the U.S. and abroad. I am very pleased to be here today to 
testify on behalf of the Institute of International Bankers (IIB) in 
support of H.R. 3283, H.R. 1838, and ``the Swap Data Repository and 
Clearinghouse Indemnification Correction Act of 2012.'' H.R. 1838 
addresses a technical correction of critical importance to IIB's 
membership. The other two pieces of legislation will provide greater 
certainty with respect to the cross-border regulation of swaps, while 
preserving the protections put in place by Dodd-Frank and helping to 
insure that the global swaps market operates optimally for the benefit 
of both investors and end-users.
    The IIB represents internationally headquartered financial 
institutions from over 35 countries around the world; its members 
include international banks that operate branches and agencies, as well 
as bank, securities broker-dealer and futures commission merchant 
subsidiaries, in the United States. In the aggregate, our members' U.S. 
operations have approximately $5 trillion in assets and provide 25% of 
all commercial and industrial bank loans made in this country, which 
includes agriculture lending, and contribute to the depth and liquidity 
of U.S. financial markets. Our members also contribute more than $50 
billion each year to the economies of major cities across the country 
in the form of employee compensation, tax payments to local, state and 
Federal authorities, as well as other operating and capital 
expenditures.
    At the outset, let me say that the IIB and its members support 
Dodd-Frank's objectives of reducing systemic risk and increasing 
transparency in the financial markets. Many IIB members' home country 
jurisdictions are also working to supplement their existing regimes to 
incorporate derivatives clearing and market transparency reforms to 
achieve regulatory objectives similar to those in Dodd-Frank and to 
support the commitments of the G20 leaders to setting high, 
internationally consistent requirements for OTC derivatives (see 
below).
    The swap markets are liquid, global markets that permit investors 
access to a range of risk management products and investment 
opportunities across a wide range of international financial markets. 
Unlike the futures and securities markets, swap markets are not 
dominated by regional exchanges. The global nature of the swap markets 
brings important benefits to U.S. end-users and other market 
participants by increasing competition and liquidity.
H.R. 3283
    H.R. 3283, the Swaps Jurisdiction Certainty Act, introduced by 
Representative Himes and Garrett provides certainty with respect to the 
extraterritorial application of Title VII and will ensure there is a 
level playing field between U.S. and foreign banks with respect to 
their cross-border swap activities.
    While Title VII of Dodd-Frank lays the framework for the U.S. 
regulation of swaps, it also recognizes the need for international 
coordination of swaps regulations and, in Sections 722(d) and 772(c), 
the need to limit the extraterritorial application of Title VII. Many 
other countries have regulated swap dealers, including branches and 
affiliates of U.S. firms, for years under their existing regimes for 
regulation of market professionals. G20 leaders agreed to OTC 
derivatives regulatory objectives in September 2009, which called for: 
the trading of all standardized OTC derivative contracts on exchanges 
and their clearance through central counterparties; reporting of OTC 
derivatives contracts to trade repositories; and the imposition of 
higher capital requirements on OTC derivatives contracts that are not 
centrally cleared.
    Consistent with that agreement, the European Union (``EU''), for 
example, is undertaking regulatory reforms with respect to enhanced 
pre- and post-trade transparency requirements, clearing of OTC swaps, 
segregation of client collateral, and the use of organized trading 
venues. Existing and proposed EU legislation also broadly address 
business conduct by market professionals. Similar measures are being 
contemplated by the Commodity Futures Trading Commission (CFTC) and the 
Securities Exchange Commission (SEC).
    However, when these regulatory efforts are neither coordinated nor 
take into account their extraterritorial impact they can lead to 
conflicting requirements. For example, firms may be subject to an 
obligation to clear the same OTC swap as a matter of both U.S. and 
European regulation. We are hopeful that there will be an agreement 
between the CFTC and the SEC and regulators from other regions and 
countries, including the EU, Asia and Canada, to address this issue, as 
it is impossible to clear the same contract through two clearinghouses. 
Even with such agreement, issues of likely greater divergence may 
exist, such as when differing regions implement differing approaches to 
which products need to be cleared; what exemptions, if any, there will 
be for any sectors of the markets; and, how collateral is to be 
protected by clearinghouses and clearing members. Finally, there is no 
guarantee that the rules being drafted in the U.S. and the EU relating 
to the permitted execution venue for swaps will be sufficiently similar 
to allow mutual recognition.
    These conflicts, which can occur as a result of the 
extraterritorial application of swaps regulations, can result in a 
number of other harmful results. It is not disputed that 
internationally headquartered banks' transactions with U.S. persons 
from outside the United States may trigger the registration and 
regulatory requirements prescribed under Title VII. However, if 
internationally headquartered firms with U.S. operations are subject to 
U.S. regulation of business conducted with non-U.S. persons, they face 
the risk of operating at a competitive disadvantage relative to an 
international firm that lacks a sufficient U.S. nexus to be subject to 
such rules. As a result, international firms with operations in the 
U.S., many of which use a single internationally located ``central 
booking location'' to book swaps, may choose to establish separate 
subsidiaries in the U.S. to try to limit these conflicts. However, this 
would be capital inefficient, introduces risk management concerns, is 
disadvantageous to large clients (who themselves prefer to transact 
globally), and potentially leads to inconsistent prudential regulation. 
This ``silo'' or ``fragmented'' approach may also result in U.S. end-
users having difficulty accessing overseas markets directly.
    The extraterritorial application of Title VII is a very real 
concern. The industry has been engaged in ongoing dialogue with the 
CFTC, SEC and other regulators, and has sought guidance on the 
territorial scope of Dodd-Frank from the inception of the rulemaking 
process. Nevertheless, nearly every question on this topic and related 
issues, such as the treatment of inter-affiliate transactions, 
guarantees and branches, remains open.
    Against this backdrop, it is challenging that the CFTC finalized 
rules on January 11, 2012 requiring companies to register provisionally 
as swap dealers or major swap participants as soon as the definitional 
rules under Dodd-Frank go into effect. All indications are, however, 
that the CFTC will not have finalized its extraterritorial guidance by 
that time, and possibly without a sufficient transition period for 
companies to come into compliance. Other significant CFTC rules have 
yet to be finalized as well, making the business decision on how best 
to comply with the CFTC's provisional registration rules difficult.
    H.R 3283 brings much-needed certainty to the question of the 
extraterritorial reach of Title VII. The bill makes certain that 
internationally headquartered banks' non-U.S. swap and security-based 
swap transactions will not be subject to U.S. regulatory requirements. 
The bill also provides certainty for both U.S. banks and the U.S. 
operations of internationally headquartered banks with respect to their 
swap and security-based swap transactions with non-U.S. persons.
    With respect to internationally headquartered banks that register 
as swap entities under Title VII based on their transactions with U.S. 
persons, the bill makes certain that such banks may satisfy the capital 
requirements of Title VII by relying on their home country capital 
requirements, provided that such home country requirements are 
comparable to the requirements under Title VII and the bank's home 
country is a signatory to the Basel Capital Accords. This approach 
conforms to the approach that has been taken for many years by the 
banking regulators in assessing the capital of foreign banks for U.S. 
regulatory purposes. It also ensures that appropriate protections are 
in place with respect to transactions that involve U.S. persons.
H.R. 1838
    This bill, as introduced and referred to the Committee, would 
repeal Section 716 of Dodd-Frank, also known as the swaps ``push-out'' 
provision. Our principal concern with Section 716 is the unintended and 
acknowledged oversight in according significantly different and 
negative treatment for uninsured U.S. branches and agencies of foreign 
banks compared to that provided to insured depository institutions. 
Many foreign banks operate uninsured branches and agencies in the U.S. 
In the aggregate, these branches and agencies have more than $2 
trillion in assets. In addition to lending and engaging in certain 
securities, asset management and other similar activities, many such 
branches and agencies also engage in swap dealing. Dodd-Frank provides 
that branches and agencies engaged in swap dealing activity be required 
to register with the CFTC and/or the SEC with respect to their swap 
dealing activity. Accordingly, they will be ``swap entities'' under 
Section 716.
    Section 716 generally provides that no ``Federal assistance'' may 
be provided to any swaps entity with respect to any swap, security-
based swap or other activity of the swap entity. ``Federal assistance'' 
is defined to include advances from the discount window and FDIC 
insurance. Uninsured U.S. branches and agencies of foreign banks are 
licensed by a Federal or state banking authority; they are subject to 
the same type of safety and soundness examination and oversight as U.S. 
banks, and, like U.S. banks, they are eligible to borrow from the 
Federal Reserve discount window so long as the advance is secured by 
high quality collateral and subject to discount.\1\ From the Federal 
Reserve's perspective, maintaining U.S. branches' and agencies' access 
to the discount window is an important tool for maintaining a sound and 
orderly financial system.
---------------------------------------------------------------------------
    \1\ See Federal Reserve Regulation A, 12 CFR  201.1 (extending 
rules relating to eligibility for Federal Reserve Bank lending to 
``United States branches and agencies of foreign banks'').
---------------------------------------------------------------------------
    The general prohibition under Section 716 relating to Federal 
assistance applies to both U.S. FDIC-insured banks and uninsured U.S. 
branches and agencies of foreign banks that are swap entities. The 
general prohibition is, however, subject to several important 
exclusions, grandfathering provisions and transition periods, but these 
provisions apply only to ``insured depository institutions'' (IDIs). As 
a result, uninsured U.S. branches and agencies would appear not to be 
eligible for the exclusions, grandfathering and transition provisions 
applicable to IDIs.
    When Section 716 was enacted, Members of Congress acknowledged that 
this differential treatment of uninsured U.S. branches and agencies of 
foreign banks was ``clearly unintended'' and recognized the need ``to 
ensure that uninsured U.S. branches and agencies of foreign banks are 
treated the same as insured depository institutions,'' consistent with 
the U.S. policy of national treatment.\2\ However, as was explained at 
the time, in the rush to complete the conference and finalize Section 
716 there was no opportunity to rectify this ``significant oversight.'' 
\3\
---------------------------------------------------------------------------
    \2\ 156 Cong. Rec. S5903-S5904 (daily ed. July 15, 2010) (colloquy 
between Senator Dodd and Senator Lincoln).
    \3\ Id.
---------------------------------------------------------------------------
    As a result, the exclusion in Section 716(d) that permits IDIs to 
continue to engage in certain traditional swap dealing activities, 
including dealing in interest rate and foreign currency swaps, and to 
use swaps for hedging and other similar risk-mitigating activities, 
would appear not to be available to uninsured U.S. branches and 
agencies of foreign banks. If uninsured branches and agencies that are 
swap entities were ineligible for this exclusion, then their U.S. 
customers would lose the benefit of trading with them. These customers 
would have to establish new trading relationships away from the U.S. 
branch or agency in order to engage in traditional swap transactions, 
as well as those swap activities that are not covered by the Section 
716's exceptions. This would significantly reduce competition and 
worsen pricing in the U.S. swaps market, especially given that 8 of the 
14 largest global derivatives dealers are foreign banks.
    In addition, the resulting differential treatment relative to U.S. 
FDIC-insured banks would overtly discriminate against and competitively 
disadvantage foreign banks. This represents a significant departure 
from the long-standing U.S. policy that U.S. branches and agencies of 
foreign banks are subject to the same rules, regulations and oversight, 
i.e., national treatment, as U.S. banks. Finally, it would provide 
precedent for foreign jurisdictions to provide advantages to their 
local banks at the expense of the foreign operations of U.S. banks, if 
not in the context of swaps then potentially in other contexts.
    Section 716(b)(2)(B) also excludes from the scope of Section 716 an 
IDI that is a major swap participant or major security-based swap 
participant. This exclusion is important to those IIB members that may 
be deemed to be major swap or security-based swap participants. The 
definition of major swap participant encompasses not only persons 
engaged in ongoing swap activities but also potentially persons with 
only legacy positions. Thus, if uninsured branches and agencies were 
not treated as IDIs for this purpose, then they could be subject to 
Section 716 as a result of legacy positions in a way that a U.S. FDIC-
insured bank would not.
    Finally, Section 716(e) provides that Section 716's prohibition on 
Federal assistance ``shall only apply to swaps or security-based swaps 
entered into by an insured depository institution after the end of 
[Section 716's] transition period.'' Therefore, the existing swaps of 
IDIs are grandfathered from Section 716. Relatedly, Section 716(f) 
gives an IDI's appropriate Federal banking agency the authority to 
grant the institution a transition period of up to 3 additional years 
beyond Section 716's July 16, 2013 effective date before the 
institution must divest or cease its swap activities. The purpose of 
this transition period is to prevent the restructurings necessary to 
comply with Section 716 from adversely disrupting the institution's 
lending and other non-swaps activities. But this provision is available 
only to IDIs.
    The implications of these issues are potentially serious. There are 
approximately 16 months before uninsured U.S. branches and agencies 
that are swap entities must ``push out'' all their existing swap 
positions and ongoing swaps activities, which is precious little time, 
particularly relative to the longer period--up to more than 4 years--
before IDIs will have to make their transition. Moreover, the absence 
of any grandfathering of existing positions would mean that the 
transition for foreign banks and their counterparties would be much 
more disruptive, more similar to insolvency in many respects than to an 
orderly business restructuring. This is true because:

   Swap dealing is typically conducted as an integrated part of 
        a bank's lending and other non-swap businesses. Swap positions 
        often hedge loan and other non-swap positions, and risk 
        management and other systems are often shared across many 
        different types of trading activities, not just those involving 
        swaps. Winding down or restructuring swap dealing activities 
        will as a result tend to decrease lending and market-making 
        activity, with material adverse effects on the U.S. economy.

   A significant number of customers have master agreements 
        directly with the uninsured U.S. branches and agencies of 
        foreign banks, or have multi-branch netting agreements to which 
        one or more uninsured U.S. branches or agencies are parties. 
        The assignment or novation of these agreements, even to an 
        affiliate, almost always requires counterparty consent, forcing 
        customers and foreign banks to negotiate the terms for 
        assigning, novating or modifying agreements for swap portfolios 
        held with uninsured U.S. branches and agencies. Major swap 
        dealers have thousands of clients who would be affected.

   International banks and their customers may not always agree 
        to the terms of an assignment or novation, thereby forcing the 
        parties to litigate over whether Section 716 triggers 
        ``illegality'' and similar provisions in those agreements.

   Renegotiation and litigation will lead to delays in trading; 
        resulting in diminished liquidity and higher spreads for 
        customers.

   Assignment or novation could also potentially trigger other 
        requirements under Dodd-Frank, such as mandatory clearing and 
        trading requirements inasmuch as any such novated or assigned 
        swap potentially would constitute a new swap that would be 
        subject to those requirements.

   There are significant capital and technology costs 
        associated with using a new booking structure, and the 
        modification of existing systems to track new booking 
        structures will put a very heavy strain on information 
        technology resources that are already overwhelmed with the 
        other changes necessary because of Dodd-Frank.

    While the underlying bill deals with this disparate treatment of 
uninsured branches and agencies of foreign banks by striking Section 
716 in its entirety, the bill recently approved by the House Financial 
Services Committee modifies Section 716. The IIB supported this 
amendment, which was cosponsored by Representatives Himes and Maloney 
and the bill's sponsor Representative Hayworth, as it provided U.S. 
branches and agencies parity with insured depository institutions.
Swap Dealer Definition
    In this connection, we would like to thank Chairman Lucas for his 
attention to another instance in Dodd-Frank where uninsured U.S. 
branches and agencies of foreign banks are similarly harmed compared to 
insured depository institutions. Section 721 defines ``Swap Dealer'' 
(Section 1a(49) of the Commodity Exchange Act (CEA)) to exclude 
``insured depository institutions'' which ``enter into a swap with a 
customer in connection with originating a loan with that customer.'' 
Because the exclusion is limited to IDIs, any uninsured U.S. branch or 
agency of a foreign bank potentially will have to register with the 
CFTC if it enters into a swap in connection with its lending 
activities. Requiring these uninsured U.S. branches and agencies to 
register could have an impact on their willingness to lend in this 
country and strain the supervisory resources of the CFTC. We would urge 
Members to support a fix to this definition that would provide 
uninsured U.S. branches and agencies of foreign banks the same 
treatment accorded IDIs under Section 1a(49) of the CEA.
Swap Data Repository and Clearinghouse Indemnification Correction Act 
        of 2012
    Under Dodd-Frank, OTC derivatives transactions are required to be 
reported to swap data repositories and securities-based swap data 
repositories. Dodd-Frank contemplates that information reported to the 
CFTC by derivatives clearinghouses and information reported to data 
repositories can be accessed by U.S. and foreign regulators. However, 
access to such information is conditioned on the recipient agreeing to 
keep such information confidential and to indemnify the CFTC or data 
repository, as the case may be, for ``any expense arising from 
litigation relating to the information provided.'' This indemnification 
requirement is a significant barrier to foreign regulators and, in some 
instances, to U.S. regulators to obtaining this data. The Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 2012 
would eliminate this barrier. The IIB supports the bill and urges its 
approval by the Committee.
Conclusion
    Thank you for the opportunity to testify today on behalf of the 
IIB. We urge the Committee to consider and approve these important 
bills.

    The Chairman. Thank you, Mr. Bailey.
    Mr. Bodson?

        STATEMENT OF MICHAEL C. BODSON, CHIEF OPERATING
 OFFICER, DEPOSITORY TRUST & CLEARING CORPORATION, NEW YORK, NY

    Mr. Bodson. Thank you. Chairman Conaway, Ranking Member 
Boswell, and Members of the Subcommittee, my name is Michael 
Bodson and I am COO of the Depository Trust & Clearing 
Corporation. DTCC is creating global trade data repository 
system for all swap asset classes, including interest rates, 
credit default swaps, foreign exchange, and commodities. We 
applaud the leadership of this Subcommittee and the sponsors of 
the bills--Representatives Sewell and Crawford--for holding 
today's hearing on bipartisan legislation to ensure effective 
swap transaction reporting for monitoring systemic risk in 
global financial markets.
    DTCC has been working diligently with regulators in the 
United States and globally to address these issues, but it is 
clear that a legislative fix is needed. Today, I will address 
two technical provisions in the Dodd-Frank Act that make it 
more difficult for regulators around the world to share 
information. They are referred to as indemnification and 
plenary access and both may result in data fragmentation.
    The first issue, indemnification, is an immediate problem. 
Many regulators worldwide are unable or unwilling to provide an 
indemnity agreement. The concept of indemnification is 
unfamiliar to them and inconsistent with their traditions and 
legal structures. More plainly, though, foreign government 
agencies will not indemnify private, third-party entities such 
as SDRs. The indemnification provision is also not needed in 
light of the current international data sharing guidelines 
developed through the cooperative efforts of more than 40 
regulators worldwide, including the CFTC, SEC, and Federal 
Reserve.
    Without an indemnity agreement, U.S.-based repositories 
would be legally prohibited from providing regulators outside 
the United States with market data on OTC derivative 
transactions under their jurisdictions. The clear risk is that 
global supervisors will have no viable option other than to 
fragment data globally by creating local repositories to avoid 
indemnification.
    DTCC strongly supports H.R. 4235, which would remove the 
indemnification provisions from Dodd-Frank and make U.S. law 
consistent with existing international protocols. This 
legislation will go a long way to ensuring global regulators 
can effectively monitor systemic risk. However, resolving 
indemnification without addressing the second issue, plenary 
access over the data held within an SDR, still makes it likely 
that swap data will be fragmented by jurisdiction. Addressing 
both issues concurrently can preempt the future crisis for 
information sharing.
    Dodd-Frank gives U.S. regulators direct electronic access 
to data held by the SDR. This provision was intended to insure 
immediate access to swap data in machine-readable format. 
However, non-U.S. regulators are concerned that direct 
electronic access may be interpreted too broadly by the U.S. 
agencies to gain plenary access to all swap data they hold, 
including data for transactions with no identifiable nexus to 
U.S. regulation. This is unworkable because the scope of an SDR 
can be broader than just U.S. data and regulators should have 
access to only that data to which they have a material 
interest. Concerns over plenary access will again lead to data 
fragmentation.
    DTCC fully supports regulators having plenary access for 
SDR supervision activities related to the operation of the SDR 
and transactions held within it with a U.S. nexus. However, we 
oppose plenary access for other purposes because non-U.S. 
financial firms executing transactions without a U.S. nexus 
will avoid reporting their trade data to a global repository if 
that data could become subject to U.S. regulatory access.
    As an example, global data may be held in the United States 
for purposes of aggregation for public transparency and system 
risk oversight. However, if this leads to U.S. regulators 
claiming access to non-U.S. transactions, foreign participants 
and regulators will raise concerns over confidentiality and 
prevent the data from being aggregated. If data fragmentation 
occurs, regulators, including the SEC, CFTC, and Office of 
Financial Research will face the daunting and time-consuming 
challenge of having to aggregate data from multiple 
repositories for purposes of market oversight and systemic risk 
mitigation.
    Additionally, in meetings with regulators worldwide over 
the past year, these supervisors have said they will not permit 
the use of a U.S.-based trade repository for its domestic 
transactions if there are asymmetric access rights and no 
protection of confidentiality for the market participants.
    To illustrate the combined impact of these provisions, 
let's examine the case of two British banks executing an 
interest rate swap in the UK involving the Euro. There is no 
direct U.S. connection. Under plenary access, if the trade was 
reported to a European-based global repository but the 
transaction was sent to the United States for aggregation, U.S. 
regulators could claim a legal right to view data on this 
transaction even though the U.S. regulator has no material 
interest in it. Even worse, the indemnification provision could 
require the British regulator to indemnify the U.S.-registered 
SDR to access the same data despite the fact that the entirety 
of the trade falls within the British regulators' jurisdiction.
    Mr. Chairman, the issues of indemnification and plenary 
access must be dealt with together to prevent data 
fragmentation from occurring. Congress needs to address plenary 
access by clarifying the intent of the statute and reinforcing 
that regulators only have access to the data in which the 
regulator has a material interest. By amending and passing the 
H.R. 4235 to ensure technical corrections to both 
indemnification and plenary access, Congress will create the 
proper environment for the development of a global trade 
repository system to support systemic risk management and 
oversight.
    Thank you for your time this morning.
    [The prepared statement of Mr. Bodson follows:]

   Prepared Statement of Michael C. Bodson, Chief Operating Officer, 
         Depository Trust & Clearing Corporation, New York, NY
    Chairman Conaway and Ranking Member Boswell:

    Thank you for scheduling today's hearing on Representatives Rick 
Crawford (R-AR) and Terry Sewell's (D-AL) bipartisan legislation, 
introduced with Representatives Robert Dold (R-IL) and Gwen Moore (D-
MI), to address the indemnification provisions and modify the 
confidentiality requirements in the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (DFA). I appreciate the opportunity to testify 
and bring greater attention to the unintended consequences of these 
provisions, which have the potential to fragment the current global 
data set for over-the-counter (OTC) derivatives and derail efforts to 
increase transparency and help regulators mitigate risk in this 
marketplace.
    Over the past year, DTCC, among others, has been raising concerns 
over the impact of the DFA's broad extraterritorial reach, particularly 
as it relates to the confidentiality of market data and the 
indemnification agreement provisions of the law. These concerns have 
been echoed by regulatory officials and policymakers globally, 
including by Representatives of the European Parliament, European 
Commission and Council, by Asian governments and by both Republican and 
Democratic Members of the U.S. Congress.
    The House Agriculture Committee's leadership is vital as there is a 
clear need to shine a light on these technical provisions of the DFA--
provisions that, if not addressed, risk decreasing the current level of 
transparency into OTC derivatives markets. Having a bipartisan group of 
Members in both the House and Senate recognize the unintended 
consequences of these provisions and commit to working within Congress 
and with policymakers internationally to develop a mutually agreeable 
resolution is very promising.
Two Important DFA Extraterritorial Provisions Require Congressional 
        Action
    The two key extraterritorial provisions in the DFA that risk 
fragmenting global swap data are the confidentiality and 
indemnification provisions and the so-called ``plenary access'' duties 
imposed on swap data repositories (SDRs). These issues merit further 
examination by Congress and require legislative resolution.
    First, Sections 728 and 763 of the DFA require SDRs registered with 
the Commodity Futures Trading Commission (CFTC) or Securities and 
Exchange Commission (SEC) to receive a written agreement from ``third-
party'' non-U.S. regulators confirming that the supervisory agency 
requesting the information will abide by certain confidentiality 
requirements and indemnify the SDR and the regulating U.S. 
Commission(s) for any expenses arising from litigation relating to the 
information.
    Second, the duties imposed on a registered SDR--both with the CFTC 
and the SEC--require, among other things, that the SDR provide ``direct 
electronic access to the Commission (or any designee of the Commission, 
including another registered entity).'' The phrase ``direct electronic 
access'' has been identified by non-U.S. regulators as problematic 
because it creates an unnecessary degree of ambiguity and may be 
interpreted by the regulatory agencies and others as a requirement that 
a registered SDR must provide access to all swap data retained by the 
SDR--even when that SDR might maintain swap data for transactions with 
no identifiable nexus to U.S. regulation.
    The concern that a U.S. regulator might demand data that falls 
wholly outside its jurisdiction as part of its ``direct electronic 
access,'' coupled with the lack of clear extraterritorial guidance from 
the CFTC and the SEC, would functionally prevent non-U.S. SDRs from 
registering in the United States. If this occurs, swap data would 
fragment across jurisdictions and frustrate regulators' abilities to 
monitor global systemic risk.
Plenary Access & Indemnification in Dodd-Frank: Solving a Problem That 
        Does Not Exist
    The original indemnification and plenary access provisions, while 
well-intended, are unworkable as currently drafted and threaten to undo 
the existing system for data sharing that was developed through the 
cooperative efforts of more than 50 regulators worldwide under the 
auspices of the OTC Derivatives Regulators' Forum (ODRF) and, more 
recently, taken up by the Committee on Payment and Settlement Systems 
and the International Organization of Securities Commissions (CPSS 
IOSCO).
    For nearly 2 years, regulators globally have followed the ODRF 
guidelines to access the information they need for systemic risk 
oversight. It is the standard that DTCC uses to provide regulators 
around the world with access to global credit default swap (CDS) data 
in its Trade Information Warehouse (TIW), which holds more than 98% of 
all CDS trades globally. It is accurate to say that the plenary access 
and indemnification provisions attempt to solve a problem that does not 
exist--and, in doing so, create several new problems that heretofore 
did not exist.
    Asian and European regulators have identified indemnification and 
plenary access as among the most troubling extraterritorial provisions 
of the DFA because of their potential to fragment the current global 
data set for OTC derivatives. They recognize, as do many Members of the 
House and Senate here in the United States, that these provisions would 
reduce the level of transparency that currently exists in these 
markets.
    In an effort to avoid unintended consequences, European 
policymakers specifically considered and rejected an identical 
indemnification requirement in the European Market Infrastructure 
Regulation (EMIR). This was a positive development because, as the SEC 
noted in testimony before the House Financial Services Committee last 
week, the agency ``would be legally unable to meet any such 
indemnification requirement and has argued vigorously against similar 
requirements in other contexts.'' The CFTC would have a similar 
challenge.
    In addition, the early EMIR texts in Europe, which called for 
``direct access,'' were amended to call for ``immediate access.'' In 
Asia, the Monetary Authority of Singapore (MAS) has indicated in its 
public consultation that it will align its regulations with the 
Europeans in this area, and we expect the Japanese FSA, whose draft 
regulations are due shortly, to be similarly aligned. However, 
policymakers in Hong Kong have responded by beginning to move forward 
with the development of a national repository for its swap data.
Indemnification Would Fragment the Global Data Set and Impede 
        Regulatory Oversight
    It is highly unlikely third-party regulators will comply with the 
DFA requirement that they must provide indemnification in order for 
U.S.-registered SDRs to share critical market data with them for two 
primary reasons.
    First, the concept of indemnification is based on U.S. tort law 
and, therefore, inconsistent with many of the traditions and legal 
structures in other parts of the world. Many regulators worldwide have 
indicated that they would be unable or unwilling to provide an 
indemnity agreement to a private third party as required under the DFA. 
Second, these same regulators have noted that they are already 
following policies and procedures to safeguard and share data based on 
both the ODRF and IOSCO's Multi-Lateral Memorandum of Understanding.
    Without an indemnity agreement, U.S.-based repositories may be 
legally precluded from providing regulators outside the U.S. with 
market data on transactions that are under their jurisdiction. The 
clear risk is that global supervisors will have no viable option other 
than to create local repositories to avoid indemnification--a move that 
is the definition of data fragmentation. While each jurisdiction would 
have an SDR for its local information, it would be extremely difficult 
and time consuming to effectively share information between regulators.
    A proliferation of local repositories would undermine the ability 
of regulators to obtain a comprehensive and unfragmented view of the 
global marketplace. If a regulator can only ``see'' data from the SDR 
in its jurisdiction, then that regulator cannot get a fully aggregated 
and netted position of the entire market as a whole. And if a regulator 
cannot see the whole market, then the regulator cannot see risk 
building up in the system or provide adequate market surveillance and 
oversight. In short, regulators will be blind to market conditions as a 
direct result of the indemnification provision. In the name of 
transparency, this provision creates opacity.
    The CFTC and the SEC have carefully reviewed the impact of the 
indemnification provision and in a joint report concluded, ``Congress 
may determine that a legislative amendment to the indemnification 
provision is appropriate.''
    Furthermore, the SEC testified in support of removing the 
indemnification provision from the DFA during a hearing of the House 
Financial Services Capital Markets Subcommittee last week. The agency 
said the ``indemnification requirement interferes with access to 
essential information, including information about the cross-border OTC 
derivatives markets. In removing the indemnification requirement, 
Congress would assist the SEC, as well as other U.S. regulators, in 
securing the access it needs to data held in global trade repositories. 
Removing the indemnification requirement would address a significant 
issue of contention with our foreign counterparts, while leaving intact 
confidentiality protections for the information provided.''
Plenary Access: Congress Needs to Clarify Intent of Statute and Rules
    Direct oversight is necessary to ensure thorough examination of the 
SDR's operations, guaranteeing the completeness and accuracy of the 
data published by the SDR. This type of access, which could more easily 
be achieved by imposing a statutory books and records obligation 
related to the operation of the SDR, is distinct from that required by 
non-supervisory regulators who rely upon the SDR's data for systemic 
risk oversight. The level of access to an SDR's data should reflect the 
purpose for which a regulator seeks to review the SDR's information and 
remain within the regulator's authority.
    The DFA rules proposed and adopted by the CFTC and SEC are helpful, 
but they do not adequately address this problem. The concern remains 
that it can be interpreted too broadly, giving U.S. regulators access 
to data in which a U.S. nexus does not exist.
    While DTCC fully supports regulators having plenary access for SDR 
supervision activities, we oppose plenary access for other purposes 
because, as a result of this provision, non-U.S. financial firms 
executing transactions without a U.S. nexus will avoid reporting their 
trade data to a U.S.-registered SDR. Much like indemnification, plenary 
access would fragment swap transaction data across countless 
repositories that reside around the world, frustrating systemic risk 
oversight efforts.
    In the course of dozens of meetings with global regulators, 
including discussions we held last week in several Asian countries and 
at the ODRF, non-U.S. supervisors have consistently indicated that they 
will not permit the use of a U.S.-based trade repository for its 
domestic transactions if there are asymmetric access rights and no 
protection of the confidentiality for their market participants, 
particularly their private individual and sovereign data.
    If data fragmentation occurs, U.S. regulators like the SEC would 
face the daunting, expensive and time-consuming challenge of having to 
aggregate data with a U.S. nexus for purposes of market oversight and 
surveillance and systemic risk mitigation. This creates several 
significant burdens for the agency, including (1) the need to develop 
and enter into information-sharing agreements because current Memoranda 
of Understanding (MOU) limit transfer of data for only certain 
situations, such as market abuse investigations, and (2) the need to 
harmonize their rules with the European standard of equivalent 
recognition contained in EMIR.
    Data fragmentation would also impose a significant financial burden 
on the SEC, CFTC as well as the Office of Financial Research (OFR), 
which would be responsible for aggregating and standardizing data and 
resolving issues of data omission and duplication. Furthermore, the 
resulting fragmentation of data would negatively impact systemic risk 
analysis--if not make it completely impossible.
    DTCC has analyzed potential methods to resolve this complicated 
issue and remains ready and willing to assist legislators in fashioning 
a remedy to ensure regulators can access the information they need. 
Congress should seriously consider finding an appropriate legislative 
solution that clarifies that U.S. regulators may access the swap data 
of its registrant SDRs only to the extent necessary to perform its 
oversight and surveillance responsibilities or to regulate the 
operation of the SDR.
    Within the context of considering legislation that would repeal the 
indemnification provisions, addressing the concerns over plenary access 
would complement these efforts and help create a framework for global 
swaps data that is accessible to regulators in the United States and 
around the world. The goal of any amendment to the bill should be to 
appropriately position the DFA and U.S. regulators on plenary access. 
The SEC, CFTC, foreign regulatory agencies, governmental staff and 
lawmakers should be more comfortable that the intent of the ultimate 
regulatory interpretations of statute is designed to respect privacy 
and confidentiality, where there is no risk to the U.S. financial 
system.
Indemnification and Plenary Access: A Case Study
    To illustrate the combined impact of indemnification and plenary 
access and underscore why it has emerged as a major source of concern 
for regulators worldwide, let's examine the case of two British banks 
executing an interest rate swap in the UK involving a Sterling 
reference rate. Under the plenary access provision, if the trade was 
reported to a UK-based but U.S.-registered SDR, U.S. regulators could 
claim, as the regulator of the SDR, a legal right to view data on this 
transaction--even though the U.S. SDR regulator has no material 
interest in the counterparties, the transaction, or the underlying 
entity (as opposed to a Prudential Regulator seeking data for market 
oversight purposes). To compound the situation, the indemnification 
provision would require the British regulator to indemnify the U.S.-
registered SDR in order to access this same data--despite the fact that 
the entirety of the trade falls within the British regulator's 
jurisdiction.
    Just as a U.S. regulator would not be inclined to have sensitive 
data on U.S. trades available to non-U.S. supervisors--or, for that 
matter, have to provide indemnity to access data that is rightly theirs 
to view--regulators globally consider this extraterritorial reach 
inappropriate and inconsistent with widely established and agreed upon 
data sharing practices.
    In contrast, under both the current ODRF guidelines that have 
served regulators and the markets well, supervisors are authorized to 
access data where there is a nexus to the jurisdiction or entity. 
Therefore, U.S. regulators can view data where there is a U.S. nexus 
and, equally, British regulators can view data with a UK nexus. And in 
no case is an indemnification agreement needed before access to data is 
provided.
``Swap Data Information Sharing Act of 2012'': A Potential Legislative 
        Solution
    The Swap Data Information Sharing Act of 2012 (H.R. 4235), 
introduced by Representatives Dold, Moore, Crawford and Sewell, would 
make U.S. law consistent with existing international protocols by 
removing the indemnification provisions from sections 728 and 763 of 
the DFA. DTCC strongly supports this legislation, which represents the 
only viable solution to the unintended consequences of indemnification.
    The Swap Data Information Sharing Act of 2012 is necessary because 
the statutory language in the DFA leaves little room for regulators to 
act without U.S. Congressional intervention. This point was reinforced 
in the recent CFTC/SEC Joint Report on International Swap Regulation. 
The Report noted that the Commissions ``are working to develop 
solutions that provide access to foreign regulators in a manner 
consistent with the DFA and to ensure access to foreign-based 
information.'' It goes on to say, as noted earlier, ``Congress may 
determine that a legislative amendment to the indemnification provision 
is appropriate.''
    This bill would send a strong message to the international 
community that the United States is strongly committed to global data 
sharing and determined to avoid fragmenting the current global data set 
for OTC derivatives.
    However, resolving indemnification without addressing plenary 
access leaves open the likelihood that global swap data will be 
fragmented by jurisdiction. The two pieces must be dealt with together. 
Resolving one without the other does not diminish the likelihood of 
data fragmentation occurring. While this legislation is a strong step 
in the right direction, it is one of two key technical corrections that 
is required to ensure regulators continue to have the highest degree of 
transparency into OTC derivatives markets.
    Congress needs to address the issue of plenary access by simply and 
clearly clarifying the intent of the statue and reinforcing that 
regulators have access to the data in which the regulator has a 
material interest. We are pleased that several Members of the House 
Capital Markets Subcommittee voiced their concerns with plenary access 
during last week's hearing on H.R. 4235 and indicated their interest in 
crafting a legislative solution to address this problem. We stand ready 
to work with them and their colleagues on a technical correction to 
clarify the intent of the law.
    Toward that end, under the attached suggested amendment, which 
would add the so-called ``books and records'' provision to the law, 
regulators in the U.S. would continue to have full and complete access 
to any and all data to which there is a U.S. nexus and according to 
their regulatory domain. This would align U.S. policy with the current 
global data sharing standards that have been in place since 2010 and 
which have provided regulators with all of the information needed to 
oversee market participants and activity in their jurisdiction.
    By amending and passing this legislation to ensure that technical 
corrections to both indemnification and plenary access are addressed, 
Congress will help create the proper environment for the development of 
a global trade repository system to support systemic risk management 
and oversight.
Bipartisan, Bicameral Congressional Support for Resolving 
        Indemnification
    As the unintended consequences of the indemnification provisions 
have been brought to light, there is bicameral, bipartisan support to 
resolve this issue. For example, Senator Agriculture Committee 
Chairwoman Debbie Stabenow (D-MI) and Ranking Member Pat Roberts (R-
KS), and House Appropriations Agriculture Subcommittee Congressman Jack 
Kingston (R-GA) and Ranking Member Sam Farr (D-CA), authored separate 
letters last year to their counterparts in the European Parliament 
expressing interest in working together on a solution to the issue.
    In addition, several other Members of Congress have also publicly 
declared their support for a technical correction to the provision. As 
CFTC Chairman Gary Gensler indicated in testimony to this Committee in 
June 2011, both he and SEC Chairman Schapiro have written to European 
Commissioner Michel Barnier regarding the indemnification provisions of 
the DFA and are currently engaged in efforts to find a solution to the 
challenges of this section.
DTCC Has Deep Experience Operating Global Trade Repositories
    DTCC currently operates two subsidiaries specifically responsible 
for providing repository services to the global derivatives community: 
the TIW operated by The Warehouse Trust Company LLC for credit 
derivatives, a U.S. regulated entity; and DTCC Derivatives Repository 
Limited (DDRL) for equity derivatives, a UK regulated entity.
    In response to the G20 commitments made at the September 2009 
Pittsburgh Summit, the Financial Stability Board (FSB) Report on OTC 
Derivatives Market Reform, and forthcoming statutory legislation in 
various jurisdictions, the international financial community recently 
selected DTCC's DDRL entity to provide global repository services for 
interest rates and FX swaps. DTCC also was selected to operate the 
commodities repository (together with the European Federation of Energy 
Traders) under its newly established Netherlands entity, Global Trade 
Repository for Commodities B.V.
    DTCC is working closely with global partners and asset class 
experts to design repositories to meet the regulatory reporting 
requirements identified in the respective regional or national 
jurisdictions. DTCC has completed its first phase of creating and 
operating the new Global Trade Repository for Interest Rates (GTR for 
Rates) and Commodities (GTR for Commodities). The GTR for Rates 
recently began regulatory test reporting. DTCC is currently in 
discussions with industry and regulatory authorities, developing 
consensus on the right framework for the GTR for Commodities' 
reporting.
    DTCC has extensive experience operating as a trade repository and 
meeting transparency needs. In November 2008, in response to mounting 
concerns and speculation regarding the size of the CDS market following 
the collapse of Lehman Brothers, DTCC began public aggregate reporting 
of the CDS open position inventory. Today, this reporting includes open 
positions and volume turnover, providing aggregate information that is 
extremely beneficial to both the public and regulators in understanding 
the size of the market and activity.
    Further, following the ODRF data access guidelines for the TIW, 
DTCC launched a regulatory portal in February 2011, which provides 
automated counterparty exposure reports and query capability for market 
and prudential supervisors and transaction data for central banks with 
aggregate report views by currency and concentration. Nearly 40 
regulators world-wide have signed up to the portal. DTCC plans to 
expand on this portal as it launches its global trade repository 
services for the other asset classes.
    Thank you for your time and attention this morning. I am happy to 
answer any questions that you may have.

    The Chairman. Well, thank you so much, I appreciate those 
opening remarks. The chair will remind Members they will be 
recognized for questioning in order of seniority for Members 
who were here at the start of the hearing. After that, Members 
will be recognized in order of arrival and I appreciate the 
Members' understanding.
    All right. I will reserve my time for the end and will 
recognize Mrs. Ellmers--you were here next--for 5 minutes.
    Mrs. Ellmers. I would like to ask a question of Mr. Bodson 
since we were talking about the plenary access in your 
testimony, and basically, you argue that this legislation, 
there is a need to change the plenary access provisions in 
addition to indemnification, why aren't the actions of the 
agency sufficient? Can you restate again for us why you feel it 
is not sufficient?
    Mr. Bodson. Well, I think there is legal uncertainty with 
global regulators over the issue of plenary access. It is in 
the legislation. People respect the law. And while we are 
working with both the CFTC and SEC to clarify their approach, 
the level of certainty that is encompassed in having 
legislation fix the issue and clarify exactly what plenary 
access means would provide a great level of comfort and avoid 
the data fragmentation. So it really is a legislative issue.
    Mrs. Ellmers. Yes.
    Mr. Bodson. Legislation should fix it.
    Mrs. Ellmers. Okay. For Mr. Bailey and Mr. Saltzman, as you 
know, the CFTC recently finalized a swap dealer registration 
rule. In the absence of guidance on the territorial scope of 
Dodd-Frank, how are you preparing to comply with the rule once 
it is in effect? And I will start with Mr. Saltzman and then 
Mr. Bailey.
    Mr. Saltzman. I think our member banks are engaged in a 
duplicative exercise of planning for every possible 
contingency. Obviously, our members are committed to complying 
with the law, but unfortunately, the regulatory agencies have 
not yet issued any pronouncement, and it is very, very 
difficult. There are corporate structural issues, there are 
documentation issues----
    Mrs. Ellmers. Yes.
    Mr. Saltzman.--capital issues, funding issues, and 
unfortunately, banks and swap dealers are having to plan for a 
multiplicity of contingencies, which obviously adds a layer of 
inefficiency and cost. But there is tremendous legal 
uncertainty right now, which is why we urge the Committee to 
swiftly pass H.R. 3283.
    Mr. Bailey. I agree with the comments of Mr. Saltzman. This 
issue is presenting some very real difficulties for a number of 
international banks who do not know which entities they need to 
register----
    Mrs. Ellmers. Yes.
    Mr. Bailey.--the extent of that registration requirement, 
and the obligations that registration brings in terms of 
requirements to have accounting requirements, a compliance 
officer, and a whole variety of regulations that rightly stem 
from registration. It is impossible to properly assess which 
entities you register. And that can affect the entire structure 
of the business. So we think this is unfortunate. The approach 
that I think the banks have little option but to take is to 
explore every avenue as to which may wind up that they have to 
do something that is unexpected. So they are having to ready 
themselves for every outcome and that is an expensive exercise.
    Mrs. Ellmers. Sure. That is very difficult to do.
    And I have a little more time so, Mr. Vice, do you 
anticipate that the U.S. rules governing clearinghouses will be 
comparable to the regulations in foreign jurisdictions and what 
is the risk if they are not?
    Mr. Vice. I think we are very concerned about that. The 
United States is pretty far out in front of the rest of the 
world, we operate a large clearinghouse in the UK, clearing 
CDS, commodities, and so, as managers of those businesses, we 
are trying to plan--we are looking at Dodd-Frank capital 
requirements for members, all of the other implications there. 
That clearinghouse is also a U.S. DCO, which means that it is 
registered with the CFTC and capable of clearing U.S. swaps 
businesses as well as U.S. futures. So that kind of dual 
registry, which is important for serving global markets like 
commodities, like FX, it is going to be critical that those 
rules are harmonized and that they are as close as possible. 
Otherwise, it is going to be pretty messy quite honestly.
    I think there is a good history between the CFTC and the 
FSA in terms of mutual recognition, cooperation, information 
sharing, recognition of comparable regulation not exactly the 
same regulation, and so our hope is that as the rulemaking 
continues that there will be some harmonization there.
    Mrs. Ellmers. Great, thank you.
    Mr. Chairman, I yield back the remainder of my time.
    The Chairman. The gentlelady's time has expired. Mr. 
Boswell for 5 minutes.
    Mr. Boswell. Well, thank you, Mr. Chairman.
    A couple of questions and we have had several Members 
arrive, so I want them to have some time.
    The whole panel, those supporting H.R. 3283, in the past 
our regulators and foreign regulators have worked together to 
respect each other's respective jurisdictions and, in the words 
of Mr. Vice, lead to greater harmonization of regulation yet 
allow foreign regulators to oversee their institutions. Is 
there anything in the law that prevents the regulators from 
continuing this approach? The language of concern that you cite 
has not been interpreted yet by the CFTC and the SEC. Can they 
not read the language in a manner consistent with this past 
cooperative approach of foreign regulators? We will just go 
across. I would like for all to comment if you care to. Mr. 
Vice?
    Mr. Vice. Is the question is there anything preventing 
regulators from cooperating in the future as they have in the 
past? Not to my knowledge.
    Mr. Boswell. Can they?
    Mr. Vice. Can they? I think they can. I think from a 
practical standpoint as we sit here today, regulators--
certainly the FSA and the CFTC--are struggling with staffing. 
There is a lot of attrition in those agencies. They are 
struggling with budget challenges while they are trying to 
write rules, anticipate unintended consequences, and then 
probably last on the list is harmonizing with international 
regulators. So it is an enormous amount of work that they are 
having to do in a very short amount of time.
    Mr. Saltzman. Several agencies are involved in the picture. 
It is the SEC, the CFTC, the Fed. Obviously, we have been 
focusing an awful lot on the UK regulators but the derivatives 
market is a global marketplace, and as we indicated, legal 
certainty is critically important. So even if you could get to 
that normative goal of perfect harmonization, you have a 
sequencing and timing issue where the United States is readily 
apace at appropriately adopting many of the implementing 
regulations that provide the protections that we support, but 
you do have complexities as a result of that timing. So legal 
certainty at a statutory level would bring together the 
agencies and provide clarity to the marketplace.
    Mr. Bailey. And as you know, the provision in the statute 
requires that the regulators reach out and try to reach 
harmonization with the international regulators. I think that 
they are attempting to do that. It is a challenging issue which 
is accentuated by the timing differences that are arising 
between the U.S. rules and the rules that are coming into play 
in Europe and Asia, but there is absolutely a requirement that 
they do so and we believe that that is an achievable objective.
    Mr. Bodson. I think it is more H.R. 4235. I think the 
uncertainty that has been created for the indemnification and 
the plenary access issues breach this trust to a certain extent 
and puts up barriers to global cooperation. And the issue of 
data fragmentation is very much about everybody being able to 
see the data or the information they should see as a regulator, 
while also providing global systemic risk management. But when 
there are rules that appear to allow U.S. regulators to have a 
farther reach than their global colleagues may have, 
cooperation starts to fail.
    Mr. Boswell. Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman yields back.
    Mr. Huelskamp, 5 minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    A question for all the members of the panel, we have been 
hearing about increased risk that foreign countries are 
threatening to potentially retaliate for U.S. actions on 
financial reform they may view as an overreach. In your 
opinion, do these threats in fact exist and how and where would 
you think the risk is the greatest, and what could be a 
potential response on our side to avoid that? I open that to 
anyone who would like to answer that question.
    Mr. Bodson. Well, we saw in the European draft and your 
legislation that when they saw the indemnification and the 
plenary access issues, they were putting similar wording into 
their legislation. They have since pulled back from that. Other 
countries have followed suit such as Singapore, but that 
possibility of it arising again could always be out there. We 
have seen Hong Kong for a variety of reasons but one of which 
is the indemnification issue choose to go with a local 
repository and again starts the process of data fragmentation. 
Now we are working with them to get feeds of information in so 
there is a global view when there are global products involved. 
But you see the instance is already there, so we are working 
with legislators to get the wording out, but they are 
retaliating. And rather than taking an offensive stance on 
this, I think this is one where by fixing the issues here in 
legislation we avoid having the retaliation, or the issue come 
up at all.
    Mr. Heulskamp. Okay.
    Mr. Bailey. I agree with that. I would also note that in 
the earlier legislation that was recently agreed in Europe 
which deals principally with the clearing issue and the market 
infrastructure issues, at the last minute they introduced a 
provision which is extremely comparable to the Dodd-Frank 
extraterritorial provision, that the language is very slightly 
different but it deals with direct and foreseeable impact on 
the EU. It allows another regulatory body to impose a clearing 
in uncleared margin of requirements on transactions that are 
outside the EU, which meet that standard and are having a 
direct and foreseeable impact on the EU. Our understanding is 
that was inserted as a cautionary available tool to allow them 
to take essentially whatever action the United States--at least 
the interpretation of Dodd-Frank may choose to direct towards 
Europe. It is a very real risk that the Europeans will take a 
corresponding view on wherever the United States lands on this 
issue.
    Mr. Heulskamp. Yes. Mr. Bodson?
    Mr. Bodson. Just prudentially, there are appropriate 
theories for the jurisdictional nexus and it really requires 
some nexus to the United States. And, as we hear from some of 
the domestic regulators, they really are breaking new ground, 
possibly regulating overseas activities that will undoubtedly 
result in retaliatory measures. It is literally breaking ground 
by regulating activities that have no foreseeable nexus to the 
United States. I think it should be a source of concern for 
everyone.
    Mr. Heulskamp. I yield back. Thank you, Mr. Chairman.
    Mr. Bailey. Maybe just one more point. In relation to the 
Volcker Rule, which is obviously a very different context, I 
think you have seen a sense of the regulatory response from the 
offshore regulators as to the potential impact that that will 
have on their shores and on their markets. And last, it is a 
different context. I think it sets the tone.
    Mr. Heulskamp. Okay. Thank you.
    The Chairman. I thank the gentleman.
    Ms. Sewell for 5 minutes.
    Ms. Sewell. First, I would like to thank the Chairman 
Conaway as well as Ranking Member Boswell for having this 
hearing today and to our witnesses for testifying before us.
    This hearing has given us the opportunity to really hear 
from practitioners in the area of swaps and understand better 
why modifications to the confidentiality in the swap 
jurisdiction requirements in Dodd-Frank need to be made. As we 
continue to move forward with the rulemaking and implementation 
process provisions of Dodd-Frank, we must be mindful of the 
original purpose and intent behind the passage of such 
legislation. Dodd-Frank was intended to provide more 
transparency and oversight to our financial markets and to 
ensure that another financial crisis and meltdown does not 
occur.
    I want to applaud the diligent work of both the CFTC as 
well as the SEC in drafting and implementing critical new 
regulations. And I also would like to remind Members of 
Congress that we must continue to make sure that we hone and 
refine and clarify any provisions that may be unintended 
consequences of such regulation.
    Having said that, as a former practitioner in the 
securities industry--I was a lawyer at Davis Polk & Wardwell 
for over 7 years--and as a practitioner myself drafting swap 
contracts as well as derivatives, I understand fully the 
implications of the unintended consequences with respect to 
especially the indemnification provisions that are currently 
being required by Dodd-Frank. And that is why I am a cosponsor 
of H.R. 4235.
    My comments or questions are really directed to Mr. Bodson. 
I want you to talk a little bit more about the systemic risks 
involved in not correcting the indemnification provisions as 
well as helping to eliminate data fragmentation, and talk a 
little bit more about the data fragmentation that would occur 
if we don't correct that provision.
    Mr. Bodson. Sure. Thank you very much. Transparency of 
accurate and comprehensive data is a very powerful tool for the 
markets and for regulators. Uncertainty over that data breeds 
risks and breeds inappropriate actions. So let's roll the clock 
back a little bit and go back to the Lehman event and that 
weekend when the markets obviously were in a state of flux and 
high anxiety. There were market rumors about what was going to 
be happening with Lehman, whether Barclays was going to buy 
portions of the business and the debt.
    And if you think back to that weekend in September of 2008, 
you had The Washington Post and The Financial Times and The New 
York Times started speculating about what would the level of 
payments that were going to be made on credit default swaps on 
Lehman debt. And the numbers started going from $50 billion to 
$100 billion to $200 billion and it culminated with a $400 
billion number. You could see the markets starting to quiver 
saying, where is everybody going to come up with $400 billion 
given what was going on in the marketplace? At that point, 
Federal Reserve Bank of New York President Geithner was asking, 
what is the real number? As a result of a trade information 
warehouse we have for credit default swaps, we knew with a 
pretty high level of certainty that the actual number was $6 
billion. We knew because we had a comprehensive database of 
global positions. It was clean data, it was active data, and we 
knew the number was a very accurate number so we issued a press 
release. And you could see the tension going down immediately.
    It is just an example of what happens when you know you 
have a certainty over a number that you can provide the markets 
and the regulators with a clear picture of what is happening. 
If that $400 billion number had continued to float out there, 
the Asian markets would have melted down and it would have just 
exacerbated what was already a horrible situation in the 
marketplace. So comprehensive global data gives regulators the 
ability to manage systemic risk. They still have the access to 
the underlying data for their constituents or their parties of 
interest, but having that global view allows things to be put 
into context. If it starts fragmenting, putting the pieces 
together again; it is Humpty Dumpty revisited.
    Ms. Sewell. Thank you for that. I understand that your 
company is currently operating a trade repository for credit 
default swaps. Can you please explain the impact of the 
indemnification and plenary access requirements on how your 
company shares information with global regulators?
    Mr. Bodson. Sure. There has been a great level of global 
cooperation through the OTC Derivative Regulators Forum, this 
group of 40 regulators who have come together to create a 
protocol and the CFTC, SEC, and the Fed have all been involved 
in creating that protocol to allow regulators to come in and to 
get comprehensive data on credit default swaps. They go to one 
place. They come in through what we call a regulatory portal. 
They can do their inquiries as to the parties of interest and 
get that information back immediately. If we did not have the 
trade information warehouse, they would not be able to do that. 
They would have to go to repositories around the world, pull 
the information together, get rid of duplicative transactions, 
try to standardize the data schemas. They would never be able 
to get a comprehensive view on a regular day much less during a 
period of stress. Right now, they get it.
    Ms. Sewell. Thank you so much for your testimony.
    Mr. Bodson. Thank you.
    The Chairman. I recognize Mr. Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. This is a question 
for Mr. Bailey and Mr. Saltzman. You know, commodity swaps 
particularly for agricultural products are very important to 
producers in my Congressional District and other Members, and 
it would be interesting to see what your perspective on Section 
716 and what its effects if any it would have on hedging 
opportunities for the farmers and ranchers?
    Mr. Bailey. Section 716 as you know would require the push-
out of the commodity business into a subsidiary, which is not 
having access to discount window. And the cost of doing that is 
multiple. That decision would have to be independently 
capitalized. And that isn't a zero-sum game. That isn't simply 
a matter of moving capital from the exiting bank and putting it 
into the subsidiary. It is an additive requirement. That 
subsidiary would have to meet basic creditworthiness in order 
to be a sustainable counterparty to the agricultural community. 
It is unfavorable in terms of the risk management treatment 
both on the client side and the bank side. It requires 
additional dedicated risk management people. And we see this is 
a very real concern in terms of its translation into higher 
costs.
    I can certainly speak for Barclays, who is a meaningful 
player in the space in the commodities markets. We are quite 
concerned about that issue in terms of what it would do to our 
ability to provide the kinds of prices that we do currently to 
our customers. And obviously that isn't simply a matter of the 
trading customers or investment banking clients for whom we 
transact significant deals where the kind of larger hedges that 
attain to those and are important to be able to be done. 
Otherwise, the transaction really is at risk of failing to 
achieve completion.
    So we think that your question is very pertinent and it is 
something that will translate to significant increased costs 
for those banks that are having to move down that subsidiary 
route. It is possible that others will find that it is simply 
too expensive a proposition to do that and may in fact find 
themselves with little options but to withdraw from the 
marketplace which gives the customers less ability to clear as 
market participants.
    Mr. Neugebauer. Mr. Saltzman?
    Mr. Saltzman. I would just add a few thoughts. Clients lose 
the benefit of setoff and netting, which is likely to 
artificially increase collateral and margin requirements to the 
benefit of no one. You also have various operational risks 
associated with the segregation of both--as Mr. Bailey said--
from a bank's perspective as well as from the end-user's 
perspective. A whole new set of documentation, a whole new set 
of parameters around that really to no advantage. You are 
really creating just a completely duplicative architecture that 
in and of itself is likely to increase costs substantially to 
the end-user, and in some cases obviously crowd out those who 
are at the edge in terms of the price and cost-benefit.
    Mr. Neugebauer. So I wanted to kind of say back, what I 
heard: there are really two costs. One probably would increase 
the transactional cost because you have to go and duplicate the 
capital structure and the architecture in another entity, but 
second, that some current market participants may just decide 
not to make a market or to be involved in those activities. Is 
that a possibility?
    Mr. Saltzman. Very much so. I would also add from the swap 
dealer's perspective, you are materially increasing operational 
risks, and as Mr. Bailey said, risk management, risks which in 
and of itself would also translate into credit appetite, which 
in and of itself could have an inhibiting impact on providing 
the investing and hedging activities that swap dealers do need 
to provide to commodity end-users.
    Mr. Neugebauer. Mr. Bailey, do you want to amplify on that?
    Mr. Bailey. I agree with your assessment.
    Mr. Neugebauer. Thank you very much, Mr. Chairman. I yield 
back.
    The Chairman. The gentleman yields back. Mr. Scott for 5 
minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. You know, no 
legislation is ever perfect, especially one that is as large 
and as complex in scope as Dodd-Frank is, and as such, we 
shouldn't be afraid to revisit the issue, make changes and 
alterations where they are due. And the bills before us do just 
that on swap jurisdiction, repeal of Section 716, and the swap 
data repository clearinghouse indemnification. They are, in 
large part, just clarifications and revisions that do not 
undermine the letter or the spirit of this historic financial 
reform bill that was passed by this body and of which I am a 
cosponsor.
    I also think it is worth noting that the manner in which 
these bills were evolved, this is very important. The sponsors 
of these bills and their staff, both on the Majority and the 
Minority side of the aisle in this Committee and in the 
Committee on Financial Services, both of which I serve on, 
worked very closely together and with great consideration to 
one another's concerns to ensure that these bills were narrow, 
that they were targeted and addressed real problems. And that 
is why we have seen these bills move with strong bipartisan 
support, including mine through the Committee on Financial 
Services, and it is my hope, Mr. Chairman, that the same spirit 
of cooperation will reign in our Agriculture Committee as well 
and that we continue to see these bills progress smoothly 
through the legislative process.
    So let it be noted, Mr. Chairman, that in spite of what 
many may say, bipartisanship and cooperation is alive and well 
as demonstrated by our work on this bill.
    Now, let me turn to you, Mr. Vice, to discuss H.R. 3283 and 
some of the concerns you mentioned in your testimony with 
respect to the extraterritorial reach of certain provisions of 
Dodd-Frank. It is my understanding that you are already 
experiencing potentially duplicative regulation on your 
activities conducted at your clearinghouse in Europe. Perhaps 
you could elaborate for us on what you think the SEC is 
attempting to accomplish by venturing into territory--that is 
to say your energy swaps activity which is already, as I 
understand, regulated by the CFTC here in the United States and 
the FSA in the UK. How would H.R. 3283 address or remedy this 
situation?
    Mr. Vice. Well, just for background there, we have a 
London-based clearinghouse. We started about 5 years ago and of 
course it is regulated by the FSA clearing commodities swaps. A 
couple years after that we began clearing credit default swaps 
including index and single name. Excuse me. Prior to that, we 
registered as a U.S. DCO in preparation for Dodd-Frank to be 
able to clear U.S. OTC swaps and potentially even U.S. futures. 
So with that we were essentially dually regulated by the CFTC 
and the FSA.
    Subsequent to that, we did begin clearing credit default 
swaps, which for the single-name CDS brought in SEC oversight, 
appropriately so----
    Mr. Scott. Yes.
    Mr. Vice.--and so we have been in that business we have 
been overseen by three regulators. Some of the obscure 
language, an artifact of Dodd-Frank, gives the SEC some 
oversight of commodity swaps, believe it or not. In informal 
discussions with SEC staff, everyone can look at that and 
conclude that wasn't really the intent, but at the same time, 
they have proceeded on with essentially regulating our 
commodity swaps business. And we clear hundreds of commodity 
swaps in that clearinghouse and we add new swaps all the time. 
We are at a point now where each time we want to clear an 
additional swap that is already existing, is traded bilaterally 
on a global basis in some cases not even with any nexus to the 
United States, maybe traded largely in Asia, we are required to 
get FSA approval, CFTC approval, and now SEC approval. So it 
has dramatically slowed down our process there.
    Mr. Scott. There are some concerns that because of 
technology and because of electronic transactions that this 
business is highly mobile and it will naturally shift overseas 
to less regulated markets. What are your opinions on whether or 
not this is a real risk? And are there ways we can strengthen 
the language in this bill to prevent this from occurring while 
still accomplishing our goals?
    Mr. Vice. Yes, it is definitely a real risk. In fact, the 
primary reason we built our own clearinghouse in 2008--we were 
clearing at the London clearinghouse at the time--and the speed 
with which they could clear additional products for us was 
costing us business and was going to put us out of business 
eventually, so we needed to be in control of that part of our 
service, which includes getting regulatory approval for those 
products. So we have seen firsthand it is a very competitive 
environment out there between clearinghouses globally. All of 
these markets, whether it is FX, commodities, interest rates, 
they are global markets and so I guess the good news there, 
there is healthy competition among exchanges and clearinghouses 
and so we are very sensitive to unlevel playing field things 
like this. So this is again much like the indemnification issue 
which seemed like an obvious technical fix. I don't think 
anyone in Washington intended for the SEC to regulate 
commodities laws.
    Mr. Scott. Thank you, Mr. Vice.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    Mr. Crawford for 5 minutes.
    Mr. Crawford. Thank you, Mr. Chairman.
    Mr. Bodson, I just have a couple questions for you. Can you 
cite a specific example of when your trade repository has been 
able to provide regulators with accurate, timely information 
during a time of crisis?
    Mr. Bodson. I think, too, of the scenario I explained 
before during the Lehman Brothers crisis. There was obviously a 
lot of misinformation in the marketplace, which created 
uncertainty which created risk, and could have had a 
snowballing effect into the Asian marketplace providing that 
certainty over the exposure of its Lehman Brothers to the 
anxiety out.
    The other most recent event really is the Greek default 
situation where we were able to provide regulators throughout 
Europe primarily insight just to exactly what the exposures 
were for their financial institutions. And again, by coming in 
they were able to get a complete view not only of the positions 
but the counterparty risk that was involved, and that allowed 
them to focus their efforts on where the exposure would be. So 
again, without a global view, they would be having to go 
through regulators or SDRs around the world, try to get that 
information, try to normalize it, and try to get a view. In 
times of crisis, that is not the approach you want to take. So 
those are two instances where the regulators were able to do 
their job effectively by having a comprehensive global view.
    Mr. Crawford. Okay. If the indemnification provision is not 
removed from Dodd-Frank, in your opinion would it hurt 
regulators' ability to oversee global systemic risk?
    Mr. Bodson. Most definitely. I think the key is that being 
able to rely on a comprehensive data set that shows the full 
content and allows a full understanding of what is happening in 
the marketplace, allows for regulators to pinpoint their focus 
on where areas of risk may be arising, is critical. When you 
don't have that comprehensive view, when you have inaccurate 
data, you have inaccurate information, you are going to have 
the wrong actions. You are going to be focused on the wrong 
issues. Very simply, I mean the case that has been pointed out 
is AIG. If regulators had a sense of what was going on at AIG, 
would the issue have arisen to the level? You know, you are not 
going to be able to see it just by looking at an SDR but it 
will give you the telltale signs that I should be going in 
there, I should be looking at what is going on, I should be 
able to understand where that exposure is on a global basis. 
Without that information, when you start fragmenting it, you 
are never going to get that full view.
    It doesn't stop regulators from going into the firms or 
looking at specific transactions for market manipulation. They 
have those rights under their jurisdictions for the areas of 
interest. But by having that global comprehensive view also 
gives them a context they wouldn't have otherwise.
    Mr. Crawford. I understand these two issues indemnification 
and plenary access are separate and distinct. Can you explain 
why Congress should legislate a resolution of both 
indemnification and plenary access, and are both of those 
issues adequately addressed in H.R. 4235?
    Mr. Bodson. They are addressed in H.R. 4235. You can almost 
view them as two sides of the same coin. I mean in one case you 
are asking overseas regulators to provide an indemnification, 
which is not a concept they are used to; it is a U.S. tort law 
issue. And they really are not going to be willing to give an 
indemnification to a private entity such as the SDRs. That will 
cause the fragmentation. The plenary access issue is one where 
there is concern that confidentiality will be breached. You 
know, under the ODRF, as I mentioned before, there are great 
levels of global cooperation and trust in terms of respecting 
each other's boundaries in terms of what information will be 
accessed, who has the supervisory rights. If that trust is 
broken, you will see the same issue as indemnification. 
Regulators will not feel comfortable putting information into 
global trade repository. They will start pulling the 
information back to local repositories and you will get data 
fragmentation. Back to my previous answer, systemic risk 
therefore becomes that much more difficult.
    Mr. Crawford. Thank you, Mr. Bodson. I appreciate all of 
you being here today.
    I yield back.
    The Chairman. The gentleman yields back.
    Mrs. Hartzler for 5 minutes.
    Mrs. Hartzler. Thank you, Mr. Chairman.
    Thank you, gentlemen. I apologize for my tardiness as well, 
I had another committee meet at the same time so it is kind of 
frustrating.
    But I was just wanting to ask the panel a couple of 
questions and then another one specifically if we have time to 
Mr. Saltzman. But the first question, where do you see the 
greatest diversions between the United States and other 
countries implementing derivatives reforms? Mr. Bailey?
    Mr. Bailey. If I could just take that. And I speak 
principally in relation to Europe. There are very different 
approaches to a number of issues between the United States and 
the European regulators, but within the foundation of it, the 
broad commitments that were made as to derivatives. So it is 
all within the context of a requirement to clear appropriate 
transactions, who should be exempt, and a requirement to 
transact on regulated venues. While in the clearing space there 
is, in large part, a parity and we are very optimistic that 
there will be a position where regulators can mutually 
recognize clearinghouses in other jurisdictions because the 
protections are adequate.
    But, one of the more difficult areas may be in the 
execution space, the requirement that was in Dodd-Frank, of 
course, to trade certain products on SEFs is narrowed in the 
current negotiations of the documents around the market and 
financial instruments directly, which is the upgrade for the 
current regulations pertaining to execution in Europe. But the 
approach may be a little different there and it is still at an 
earlier stage. We haven't seen anything yet in the sense of 
rulemaking from ESMA (European Securities and Markets 
Authority). That is clearly a risk for some divergence and that 
would create some clear difficulties if Dodd-Frank were to have 
extraterritorial application into Europe where for the same 
transaction you would be obliged to execute all and that 
obviously means that the trade wouldn't happen. So we think 
that is an area of concern.
    As to reporting again we are hopeful that even real-time 
reporting of transactions to the market, we think that there 
will be sufficient consensus there, not to be too problematic. 
And as to issues around code of conduct, there are instances 
where you can see real conflicts, but in most cases it is a 
matter of avoiding duplication and layering of different 
requirements. Clearly, if we are transacting out of London to 
the Italian customer as it relates to the Investor Protection 
Rules, we principally think the Italians would hold sway on 
that, and secondary would be the London FSA because of where we 
are situated if we are transacting out of London. Whether the 
CFTC should be engaged in the matter in which that trade is 
executed we think is highly questionable. So it is really in 
execution that I think we have the concerns.
    Mrs. Hartzler. Can I follow up on that? And then I want to 
hear Mr. Saltzman. So are the execution concerns dealing with 
proposed regulations, concerns you think that might come down 
from Dodd-Frank, or are there already concerns in the 
legislation that you think clearly are going to be problematic?
    Mr. Bailey. It is at the regulation stage so it is not yet 
certain that it is problematic. It is potentially problematic.
    Mrs. Hartzler. So is there any legislation in the works to 
try to address those concerns right now, that aspect, 
proactively----
    Mr. Bailey. Well, the legislation that is before this 
Committee which would limit the jurisdiction of the United 
States imposing a particular execution requirement for 
transactions outside the United States would obviate that, so 
yes.
    Mrs. Hartzler. Very good. So it does address that.
    Mr. Bailey. Yes.
    Mrs. Hartzler. Perfect. Yes, Mr. Saltzman?
    Mr. Saltzman. Just very briefly I would also add no other 
jurisdiction is contemplating the push-out of swaps as we have 
in Section 716 and that is confirmed by Governor Tarullo, who I 
believe spoke before the Senate Banking Committee this week 
where he indicated that we are a loner in that respect. I think 
that is obviously a material structural difference between our 
approach to these issues and other jurisdictions.
    Mrs. Hartzler. Okay. One of the principal goals of Dodd-
Frank is to reduce systemic risk, so could you please discuss 
how the bills that we are considering today, how they would 
impact regulators' ability to monitor and to mitigate systemic 
risks?
    Mr. Vice. I will speak on the indemnification piece. I will 
let the banks respond to the extraterritoriality bill. ICE 
operates a repository much like DTCC. We are also in full 
agreement and support of this bill to address the 
indemnification issue, the full access issue for all the 
reasons that I think DTCC articulately laid out. I think we 
probably have a little different--it is important to 
differentiate some of the reasoning that DTCC has given for 
that. I mean Dodd-Frank allowed--the CFTC promulgated rules to 
allow multiple repositories, in other words, much like the 
clearing business or the exchange business allow that to be a 
competitive landscape. That means that by default there will be 
some aggregation of data across repositories. Regulators, 
particularly the CFTC, are very adept at doing this. They 
already aggregate data across exchanges and across 
clearinghouses. So SDR can readily be done as well.
    I think the unique problem that these issues bring up where 
we are in agreement with DTCC is it gives rise to the 
possibility that a trade could actually end up in two different 
repositories. So until you had a foreign exchange trade, a 
Euro-dollar trade with a U.S. bank and a UK bank, if those 
provisions are allowed to stand, the U.S. bank to be compliant 
or the set that it is trading on to be compliant may have to 
get that trade to a U.S.-registered SDR, which EU doesn't have 
access to, and similarly, it may go to any U.S. SDR. So you can 
see that type of duplication or data integrity that you would 
want to try to avoid. But, the more operational issue of 
aggregating data is, I mean that is the business we are all in, 
running computer systems. That is not rocket science.
    Mrs. Hartzler. Okay. Thank you very much, gentlemen, I 
appreciate it. I think my time has expired.
    The Chairman. The gentlelady's time has expired.
    Staying on that same theme, could each of you comment 
quickly or briefly on what the costs to you will be if we don't 
pass these corrections bills today, or if they don't get the 
President's signature relatively quickly?
    Mr. Vice. Again, I will say on the indemnification issue we 
are assuming it doesn't go away. We are hopeful it does but we 
will be registering separate entities with their own staff and 
resources and overhead. Certainly for starters we already have 
an application in with the CFTC for a U.S.-registered SDR and 
once the rules are out on the EU we would be registering as an 
SDR there. We will have to have what presumably will be all of 
the physical plant and chief compliance officers and people on 
the ground, essentially, duplicating what we are doing in the 
United States, and then I assume probably in other 
jurisdictions as well outside the EU.
    The Chairman. Mr. Saltzman?
    Mr. Saltzman. I think certainly with respect to H.R. 1838, 
the costs of running duplicative derivatives activity out of 
two separate legal entities and the ensuing risk management, 
collateral management, pricing, costs will be Draconian, 
including, as indicated earlier, many market participants on 
both sides of the transaction potentially leaving the business, 
thereby creating more systemic risk. I think Chairman Bernanke 
and former FDIC chair Sheila Bair during the course of the 
debate recognized the systemic risk associated with pushing the 
derivatives out to a less regulated, less well capitalized 
legal entity. And I would say with respect to the H.R. 3283, 
extraterritoriality, the tremendous legal uncertainty that 
continues to hang over the marketplace. It is very easy to 
quantify hard costs, but it is very difficult to quantify the 
soft costs of really not knowing how your business is going to 
be structured. It is almost proving the negative, what 
businesses are you not entering into, what business are you not 
doing because of that legal uncertainty.
    So we would urge the Chairman and the rest of the Members 
of the Committee to promptly and swiftly pass both bills. But 
thank you very much.
    The Chairman. Mr. Bailey, quickly?
    Mr. Bailey. I totally agree with Mr. Saltzman's comments in 
relation to the push-out bill which we have kind of covered 
before as well, highly expensive and likely to involve 
additional cost to customers of all segments of the 
marketplace.
    Just make one comment additionally on the extraterritorial 
bill, to the extent that there are conflicts that arise because 
or irreconcilable rules applying either here or in Europe or in 
Asia, that will result in transactions not occurring. Even if 
those are merely duplicative rules, it is creating an acquiring 
expense to make sure you are compliant with the higher standard 
and they may itself be sufficient to cause a firm to feel that 
they have to move their businesses to a ``subsidiary-ized'' 
structure in order to have only one set of those rules apply. 
And so you get the cost increment through that process.
    The Chairman. And Mr. Bodson?
    Mr. Bodson. It is hard to identify pure cost of what 
happens when you have repositories popping up all over. We are 
creating five asset class repositories, three data centers. It 
is about $\1/4\ billion spending in the next 5 years. But that 
is the hard dollar cost. That is easy to kind of estimate. 
Really it is what is the cost to the financial system of the 
uncertainty of not having comprehensive overview of what is 
happening in the marketplace? What happens in the next crisis 
when regulators or market participants are reacting 
inappropriately because they don't have a full view? That is 
the cost that is almost impossible to gauge.
    I do want to clarify by the way H.R. 4235, this deal with 
the indemnification and not the plenary access when we spoke 
before. I think that is the harder number to quantify is what 
happens when you don't have a full comprehensive view of what 
is happening in the marketplace? The SEC and CFTC can answer 
that better.
    The Chairman. The SEC has actually come and encouraged 
Congress--speaking of the indemnification--pass this fix. Yet 
the CFTC is saying they can actually just do that by some sort 
of an interpretive guidance. Mr. Bodson, your comments on which 
approach you would prefer? That is a leading question.
    Mr. Bodson. Yes. Well, let me see if I can swing and not 
miss this one. As I said before, it is a legislative issue and 
legislation fix it. I think while guidance may provide some 
comfort, at the end of the day, foreign regulators are very 
focused on what is the rule of the law, what does the 
legislation say and not what guidance says. So fixing this 
through legislation will provide the certainty that regulators 
want to have.
    The Chairman. Well, thank you. It would be helpful as we 
continue to build a case as to why this is important. If you 
could provide the Committee--this is a request, not any kind of 
a requirement--your thoughts on those hard costs of what you 
see occurring in your organizations if we don't do these things 
and do them on a timely basis, and as well as some thoughts on 
those soft costs no one really can quantify is what impact does 
it have from your intuition on the markets on people either 
entering businesses or not entering businesses. If you could 
provide that to the Committee over the next several days, we 
would most appreciate it. If you don't want to do that, that is 
fine as well because I do appreciate all four of you coming 
today to visit with our Committee and help add more momentum. 
Obviously, these came out of Financial Services yesterday 
afternoon. We will have a markup on them I am told in the 
Agriculture Committee and move these to the floor.
    So again, gentlemen, thank you for coming here to help us 
with that process.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any questions posed by a Member.
    This hearing of the Subcommittee on General Farm 
Commodities and Risk Management is adjourned.
    [Whereupon, at 11:48 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
    Letter Submitted by Michael C. Bodson, Chief Operating Officer, 
                Depository Trust & Clearing Corporation
April 10, 2012

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

          The Chairman. Well, thank you. It would be helpful as we 
        continue to build a case as to why this is important. If you 
        could provide the Committee--this is a request, not any kind of 
        a requirement--your thoughts on those hard costs of what you 
        see occurring in your organizations if we don't do these things 
        and do them on a timely basis, and as well as some thoughts on 
        those soft costs no one really can quantify is what impact does 
        it have from your intuition on the markets on people either 
        entering businesses or not entering businesses. If you could 
        provide that to the Committee over the next several days, we 
        would most appreciate it. If you don't want to do that, that is 
        fine as well because I do appreciate all four of you coming 
        today to visit with our Committee and help add more momentum. 
        Obviously, these came out of Financial Services yesterday 
        afternoon. We will have a markup on them I am told in the 
        Agriculture Committee and move these to the floor.

Attn: Paul Balzano

    Mr. Chairman,

    In response to your question regarding the ``hard'' costs of 
establishing the Global Trade Repositories, the following is a high-
level, thumbnail sketch of the challenges and costs to develop the 
infrastructure necessary to provide global regulators the transparency 
requisite for them to supervise the five major derivative asset classes 
(Credit, Interest Rates, Equities, FX and Commodities).
    Estimating the financial costs of developing software and 
implementing necessary infrastructures to develop and aggregate global 
data sets involves many variables. While fixed costs can easily be 
estimated, it also necessitates that some broad assumptions be made to 
estimate the variable costs over time. More consequentially, the hard 
dollar cost to construct the GTR network is relative to the potential 
risk caused by the failure to modify the indemnification provision and 
the resultant diminishment in market oversight resulting from lack of 
transparency; that section of U.S. law will have a more critical impact 
on systemic risk than just adding up the infrastructure investment.
    The hard cost investment of setting up a Trade Repository (TR or 
SDR), is between $20-$25 million per data center--just for physical 
facilities and core infrastructure. While the DTCC standard for 
infrastructure build-out is heavily focused on ensuring that 
appropriate safeguards are in place regarding issues such as 
resiliency, data protection, and redundancy, the range is a reasonable 
proxy for the cost of establishing one data center. Note however that 
in order to provide certainty over disaster recovery and continuous 
data access, DTCC is establishing three data-centers globally. This 
hard dollar estimate does not include the direct financial impact on 
member firms expected to report the data to the repository such as 
their connection costs to the resultant data reporting regiment(s) and 
other related regulatory obligations. Beyond the cost of establishing 
and maintaining multiple points of connectivity, the inevitable 
deterioration in common standards will add another layer of complexity 
and expense which firms will be required to deal with in order to meet 
regulatory reporting requirements. These costs are difficult to 
estimate but will increase over time.
    It is difficult to estimate the software development costs 
associated with a de novo establishment of an SDR but DTCC will be 
incurring costs of approximately $50mm over 3 years to build the GTR 
system worldwide. In addition, on an ongoing basis, direct support 
costs for the datacenters will be approximately $9mm per site per year. 
The global business management team supporting the GTR will cost 
approximately $10mm. While the scale of the GTR system is much larger 
than that of a single national repository, DTCC also has the benefit of 
years of experience in the repository space which has been critical in 
designing the GTRs and in executing the global roll-out of them. No 
value to these capabilities has been estimated.
    If the Indemnification provision remains in U.S. law, there is a 
high probability that derivative trade data will fragment into multiple 
local TRs in different jurisdictions globally. The decision by Hong 
Kong, and potentially other sovereigns, to have national repositories 
in order to meet both local needs and avoid the indemnification issue 
will complicate global TR development. While cooperation with these 
jurisdictions should minimize their impact, having additional multiple 
national repositories will make the problem of aggregating data 
increasingly impossible to do, especially in times of stress.
    But the real ``hard'' cost is the systemic risk of failing to 
provide aggregated and netted data to allow regulators to mitigate risk 
concentrations during times of financial bubbles and market downturns. 
That cost, as 2008 nearly proved, would be catastrophic. Once data is 
fragmented, timely ``defragmentation'' in times of crisis is a near 
impossible challenge that risks global financial markets to the luck of 
guesswork, rather than a reasoned response to market conditions.
    Once data is fragmented, the further uncertainty created by the 
plenary access concerns further compounds the issue by making 
aggregation and netting of data impossible to do, especially for U.S. 
regulators. In order to aggregate data in the U.S., non-U.S. nexused 
data must be combined with U.S.-nexused data. However, the moment the 
data is brought into a U.S. domiciled repository, it could be subject 
to plenary access claims by U.S. regulators. In order to avoid this 
issue, non-U.S. based repositories would by necessity avoid sending 
data into the U.S. The end-result is an inability to aggregate data 
with the resultant lack of market transparency which Dodd-Frank sought 
to achieve in the first place.
    Thank you for the opportunity to provide a more detailed and 
thoughtful answer to your question. Please do not hesitate to contact 
me, or Dan Cohen in Washington, D.C. [Redacted], for additional 
information.
            Sincerely,

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
Michael C. Bodson,
Chief Operating Officer,
President of DTC, NSCC and FICC,
Chairman, EuroCCP and MarkitSERV.

                                  
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