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



 
                     DODD-FRANK DERIVATIVES REFORM:
            CHALLENGES FACING U.S. AND INTERNATIONAL MARKETS

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

                                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

                               __________

                           DECEMBER 13, 2012

                               __________

                           Serial No. 112-35


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



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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

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

               Matt Schertz, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     4
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     2
    Submitted correspondence.....................................    50
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress 
  from Arkansas, submitted statements:
        Boleat, Mark, Chairman, Policy and Resources Committee, 
          City of London.........................................    48
        Maijoor, Steven, Chair, European Securities and Markets 
          Authority..............................................    47
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................    24
Neugebauer, Hon. Randy, a Representative in Congress from Texas, 
  submitted letter...............................................    74
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     4
    Submitted statement on behalf of Americans for Financial 
      Reform.....................................................    76

                               Witnesses

Chilton, Hon. Bart, Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................     6
    Prepared statement...........................................     7
Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................     9
    Prepared statement...........................................    10
Kono, Masamichi, Vice Commissioner for International Affairs, 
  Financial Services Agency of Japan; Chairman of the Board, 
  International Organization of Securities Commissions, Tokyo, 
  Japan..........................................................    12
    Prepared statement...........................................    14
Pearson, Patrick, Head, Financial Market Infrastructures Unit, 
  Internal Market and Services Directorate General, European 
  Commission, Brussels, Belgium..................................    18
    Prepared statement...........................................    20


                     DODD-FRANK DERIVATIVES REFORM:
            CHALLENGES FACING U.S. AND INTERNATIONAL MARKETS

                              ----------                              


                      THURSDAY, DECEMBER 13, 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 8:59 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. K. 
Michael Conaway [Chairman of the Subcommittee] presiding.
    Members present: Representatives Conaway, King, Neugebauer, 
Austin Scott of Georgia, Crawford, Huelskamp, Ellmers, Gibson, 
Hultgren, Hartzler, Lucas (ex officio), Boswell, Walz, 
McGovern, David Scott of Georgia, Courtney, Welch, Sewell, and 
Garamendi.
    Staff present: Tamara Hinton, Kevin Kramp, Josh Mathis, 
John Porter, Matt Schertz, Nicole Scott, Suzanne Watson, Jason 
Goggins, Liz Friedlander, C. Clarke Ogilvie, John Konya, Debbie 
Smith, and Caleb Crosswhite.

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

    The Chairman. All right. This hearing of the Subcommittee 
on General Farm Commodities and Risk Management to review Dodd-
Frank derivatives reform and the challenges facing U.S. and 
international markets will come to order. A bit of a brief 
explanation, we have votes around 11 o'clock, and with the 
gracious consent of our four presenters today, we have combined 
the two panels into one in an attempt to make sure that we 
respect the fact that the U.S. regulators are here as well as 
our foreign regulators who have come a long way to visit with 
us. And to only get through one panel and then leave to go vote 
and that covey of quail disbursement looking thing that happens 
when we finish votes is disrespectful, so we have combined them 
into one. And we ask unanimous consent that Mr. Garamendi, who 
is not yet on the Committee, will be joining us today if 
everybody is okay with that. All right.
    The Subcommittee is honored to have Commissioner Jill 
Sommers and Commissioner Bart Chilton from the United States 
Commodity Futures Trading Commission to join us today. In 
addition, we have Mr. Masamichi Kono from the Financial 
Services Agency of Japan and Mr. Patrick Pearson from the 
European Commission. And I believe this is the first time the 
United States Congress has welcomed international regulators to 
testify with respect to the Dodd-Frank Act. And I want to thank 
them for traveling to Washington, D.C., to appear before us 
today and we are looking forward to their testimony.
    Today's meeting of the General Farm Commodities and Risk 
Management Subcommittee continues a series of hearings that 
started in 2011 aimed at examining problems that have arisen as 
regulators continue to work through the Dodd-Frank rulemaking 
process. This summer, the CFTC issued its proposed cross-border 
guidance to the marketplace for review and comment. What 
followed was an almost universal outcry of foreign governments 
and international regulators. Regulators who oversee the vast 
majority of derivatives markets outside the United States 
expressed deep concerns that the CFTC's proposed application of 
Dodd-Frank outside of the U.S. borders.
    Respect for equivalent, but not identical, regulatory 
standards has been a cornerstone of international banking 
regulations for decades. But now, the CFTC, pushed by Mr. 
Gensler, appears poised to rewrite that standard of 
international cooperation and extend the reach of U.S. law to 
regulate activity in foreign jurisdictions over the objections 
of the sophisticated and accountable regulators.
    I understand the international regulators have met with the 
Chairman and his staff several times in recent months to 
discuss how to resolve these cross-border concerns. However, 
based on his testimony yesterday to the Financial Services 
Committee, it does not appear that the Chairman is ready to 
accept that foreign efforts and regulatory reform will be 
equivalent to the rule proposed by the CFTC. Without a 
willingness to trust international regulators and their ability 
to regulate their own markets, I fear that next month's talks 
in Brussels will be just that--more talk.
    A major concern voiced by international regulators is that 
the global derivatives markets may become regionalized as 
institutions and customers transact a majority of business 
within their home jurisdictions. Such an outcome would 
concentrate risk in various economies and sectors of the world. 
Here at home, American end-users who use swaps to manage 
everyday business risk may have fewer counterparties to deal 
with. Fewer counterparties will of course mean less competition 
and less liquidity in the market and, I believe, will lead to 
higher costs for those end-users and a higher concentration of 
risks in the United States. With our economy facing an 
uncertain future, we can ill afford to implement reforms 
without a good faith attempt to cooperate with the 
international community so we do not negatively impact global 
markets.
    Getting the Dodd-Frank regulatory scheme right is more 
important than getting it done quickly. Congress can never 
become complacent. Our work did not end when this law was 
signed by the President in 2010. Examining the rulemaking 
process for errors, unfair instructions, or unintended 
consequences and then fixing the mistakes is the essential part 
of our job.
    I want to thank all the Members of the 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 and fair and beneficial for the participants who depend 
on the financial markets.
    [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 for this important 
hearing to examine challenges facing U.S. and international markets as 
we continue implementing the Dodd-Frank Act.
    The Subcommittee is honored to have Commissioner Jill Sommers and 
Commissioner Bart Chilton from the U.S. Commodity Futures Trading 
Commission join us today.
    In addition, I would like to extend a warm welcome to Mr. Masamichi 
Kono from the Financial Services Agency of Japan and Mr. Patrick 
Pearson from the European Commission.
    I believe this is the first time the U.S. Congress has welcomed 
international regulators to testify with respect to the Dodd-Frank Act, 
and I thank them for traveling to Washington to appear before us--we 
look forward to their testimony.
    Today's meeting of the General Farm Commodities and Risk Management 
Subcommittee continues a series of hearings that started in 2011 aimed 
at examining problems that have arisen as regulators continue to work 
through the Dodd-Frank rulemaking process.
    This summer the CFTC issued its proposed cross-border guidance to 
the marketplace for review and comment. What followed was the almost 
universal outcry of foreign governments and international regulators.
    Regulators who oversee the vast majority of derivatives markets 
outside of the United States expressed deep concerns at the CFTC's 
proposed application of the Dodd-Frank Act outside of the U.S. borders.
    Respect for equivalent, but not identical, regulatory standards has 
been a cornerstone of international banking regulation for decades. But 
now the CFTC, pushed by Chairman Gensler, appears poised to rewrite the 
standards of international cooperation and extend the reach of U.S. law 
to regulate activity in foreign jurisdictions over the objections of 
the sophisticated and accountable regulators.
    I understand that international regulators have met with the 
Chairman and his staff several times in recent months to discuss how to 
resolve these cross-border concerns. However, based on his testimony 
yesterday in the Financial Services Committee, it does not appear that 
Chairman Gensler is ready to accept that foreign efforts at regulatory 
reform will be equivalent to the rules proposed by the CFTC.
    Without a willingness to trust international regulators and their 
ability to regulate their own markets, I fear that next month's talks 
in Brussels will be just that, more talk.
    A major concern voiced by international regulators is that the 
global derivatives market may become regionalized as institutions and 
customers transact a majority of business within their home 
jurisdictions. Such an outcome would concentrate risk in various 
economies and sectors of the world.
    Here at home, American end-users who use swaps to manage everyday 
business risks may have fewer counterparties to deal with. Fewer 
counterparties will mean less competition and less liquidity in the 
market, which will lead to higher costs for end-users and a higher 
concentration of risk in the United States.
    With our economy facing an uncertain future, we can ill-afford to 
implement reforms without a good faith attempt to cooperate with the 
international community so we do not negatively impact global markets.
    As I have said, getting Dodd-Frank right is more important than 
getting it done quickly. Congress can never become complacent; our work 
did not end when this law was signed by the President in 2010. 
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.
    With that, I will turn to our Ranking Member, Mr. Boswell, for his 
opening remarks and then to our witnesses.

    The Chairman. With that, I will turn to our Ranking Member, 
Mr. Scott, for his opening remarks and then we will move on to 
our witnesses. Mr. Scott?

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    Mr. David Scott of Georgia. Thank you very much, Chairman 
Conaway. Chairman, I had to do sort of a double-check on the 
calendar on the way over here this morning to make sure that it 
was really December 2012 and not December 2010 because I sort 
of had a serious case of deja vu while walking over. It seems 
like we have had countless hearings over the last few years on 
the issues before us today, so many that they are starting to 
sort of blur together in my mind. And yet, after fielding more 
complaints about a lack of timing and coordination on behalf of 
the CFTC and their implementation of Dodd-Frank regulations on 
derivatives transactions, here we are once again trying to get 
answers to the questions that we have been asking ever since 
the beginning.
    Now, make no mistake about it, the complaints I--and I am 
sure others--have heard are not just market participants crying 
wolf. The consequences of poor sequencing of rules and 
implementation dates, poor coordination both with other 
domestic regulators and foreign regulators as well, are real 
and they are very damaging to U.S. companies. As we saw earlier 
this year, domestic banks can and they will lose business to 
foreign competitors if Title VII rules are not implemented 
properly and in a timely fashion. And that will in turn harm 
the end-user companies that they serve and that we on this 
Committee care so very much about.
    So again, Chairman Conaway, I want to thank you for holding 
the hearing. I hope we can make some progress on getting to the 
bottom of an issue that has frustrated us for some time now 
and, at the very least, remind the CFTC that they need to do 
better in implementing Title VII of Dodd-Frank.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Scott.
    Before we turn to our witnesses, I would like to, with 
unanimous consent, yield a couple of moments to Mr. Boswell, my 
Ranking Member, who I have worked with for years now and is a 
good friend. So, Mr. Boswell?

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

    Mr. Boswell. Well, thank you very much, Mr. Chairman. And I 
just want to make some, if I could, farewell remarks.
    You know, I have no animosity about anything that has 
happened. This place works as it works and we all know that. 
And it has been a privilege to work with you, Mr. Chairman, and 
your predecessor, and back when I was chair and all those 
things. But we have a tremendous responsibility, so as the 
patriarch of this Committee, I guess, age has something to do 
with it. And Mr. King, you don't have to smile that much. Yes, 
I am much older than you.
    But anyway, as I look out here at Mr. Chilton and some of 
the rest of you who I have learned a lot about and you have 
taught us a lot, and it is a tremendous responsibility here. 
And I think back to the debacle that took place and what 
certainly contributed to this recession and all the things we 
are struggling with now and it seems like it is really hard to 
get to and think about what CFTC has done and so on. The CFTC, 
as you well know, Mr. Chairman, didn't cause the problem. They 
have done their job. And we know that and it is just a point. 
And as we have learned recently on other issues--and I am 
rambling here little bit so if it is okay, then I will stop and 
I will be full stop.
    The Chairman. All right.
    Mr. Boswell. Thank you.
    You know, if we don't give the tools to do the job, for 
example, to the IRS and if this fiscal cliff thing happens, 
they don't have the capacity to deal with their responsibility. 
Well, I see the same thing with you folks that have the CFTC 
responsibility, whether we like Dodd-Frank or we don't like it, 
we have done it. If we have the will or the desire to change 
it, well, maybe that will happen, but meanwhile, we have 
charged the CFTC with a lot of responsibility, which we should. 
But they got to have the tools.
    And I know when I came back, Steve, from all those years 
gone in the army and I had to learn how to take care of 
machinery again, I didn't have the right toolboxes. And here I 
am stuck with a massive 750 out there and a bearing going out 
and I don't have the things in my toolbox to deal with it. But 
when I did, I could. And maybe that is an oversimplification, 
but we have to give them the tools. We have said this is your 
responsibility.
    You know, Mr. Chairman, you and I have talked about this 
and we have not exactly agreed on everything, but that is part 
of the process, which we both respect very much and it is what 
makes our country great. You got to have the wherewithal to do 
what we have asked you to do. I think you have done pretty darn 
good considering the things you have accomplished. So my 
caution, I guess, or my counsel or whatever you want to call 
this as I depart this responsibility is, a lot weighs on the 
welfare of the country to do this right, to have daylight is a 
term I learned to use, to have daylight on stuff so they know 
what is going on. And if we know what is going on, we got the 
possibility of doing what we need to do, which might include 
leave it alone and or do something that needs to be done to 
keep our country on its path.
    So I would just leave this thought with you. If we are 
going to change it, well, then, change it. If we can't, let us 
at least give the Commission the tools they need, the hardware, 
and the people to do the job we have said you have to do and 
not just be critical of it when they can't get it done because 
they don't have the tools.
    And with that, I just want to say to David, thank you for 
responding when this hearing was coming up. You know, I am 
going out the door and I know that and I did want to come and 
participate, but I thought it better for the continuity and 
going on if you or somebody would step up, and you have, and I 
thank you for it.
    And Mr. Conaway, I just appreciate you and your sincerity 
about what you do and expertise that you bring with your vast 
experience in accounting and so on. And since I did a little 
thing called rough-necking down in your part of the country 
when I was a youngster, I have a lot of respect for West Texas. 
You know, I was on a standard rig--I probably told you one 
time--when the oil came in. Wow. What an experience. But 
anyway, so much for that. That is too much reminiscing but I 
wish you well.
    The Chairman. Thank you.
    Mr. Boswell. I thank you for the opportunity to have a 
moment, and I will try not to interfere anymore, but if I have 
to, I will.
    But thank you.
    The Chairman. Thank you. Mr. Boswell yields back.
    Mr. Chilton, 5 minutes.

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

    Mr. Chilton. Thank you, Mr. Chairman. It is a pleasure to 
be with you. Thank you, Members of the Subcommittee, and 
particularly thank you, Chairman Boswell, for all your service. 
It has been an honor and personal privilege to work with you, 
sir.
    And I am also pleased to testify with my fellow regulator, 
Commissioner Sommers. We did so last year. And as you know, she 
heads our Global Markets Advisory Committee and does a superb 
job. And I thank her for all her counsel and assistance over 
the years.
    And as Chairman Boswell was talking, it reminded me of that 
movie around this time of year, It's a Wonderful Life. Do you 
remember that circumstance where Uncle Billy loses the money 
and George says to him, ``Where is that money you stupid, 
silly, old fool? Where is that money? Do you realize what this 
means? It means bankruptcy and scandal and prison. That is what 
it means. One of us is going to jail and it is not going to be 
me.''
    And the reason I raise that is that back in 2008--and I get 
this question asked all the time and perhaps you do back in 
your districts--how come nobody went to jail for what happened 
in 2008 for tanking the economy? Well, part of the reason is 
there wasn't a law against what they did, what was done to the 
economy. That is why Dodd-Frank is important. I think it is a 
good law.
    But as many Members, including Chairman Conaway has pointed 
out, if we don't implement it correctly, it could be bad. We 
have to do this right. We have to have a balanced approach. And 
that is particularly important with regard to cross-border 
issues, because as you all know and have spoken to us about in 
no uncertain terms, these markets are correlated. They are 
impacted globally. So we have to make sure that what we do 
doesn't put our U.S. firms at a competitive disadvantage, but 
we do want, ultimately, harmonized global regulations to the 
extent that it is practical.
    So with regard to that, if you go back to when Dodd-Frank 
was passed in 2010, at that point, it looked like other 
nations, and particularly the European Union, were maybe 2 
years behind implementing their financial reforms--2 years. So 
there is a big concern about regulatory arbitrage. What if the 
U.S. went first and did the things by the dates we required, 
July of 2011? But it turns out since we have taken our time--as 
Chairman Conaway has written to us many times, take your time, 
go slow, get it right--we have listened to you. You have been 
correct, sir. So we have slowed down. We have about \2/3\ our 
regs done so far but we are still trudging along. But in that 
delay, now there is not that big 2 year difference anymore. Now 
there is only maybe 5, 6 months difference between us and the 
EU. Some of the other nations are little bit behind that.
    So the thought that seems to make sense to me--and I am 
pleased that Commissioner Sommers and I are of a fairly like 
mind on this--is that let us sort of jump into the pool at the 
same time. Let us perhaps delay compliance for 6 months with 
some of these things in order that we can all do this at the 
same time. There is no regulatory arbitrage, and we don't 
negatively impact our companies, our U.S. financial firms. So I 
am not suggesting that that delay, Mr. Chairman, will make it 
like a super great wonderful life for financial firms, but it 
will definitely improve things.
    And one final note, I have given to the clerk some sheets 
that I have unrelated to this issue of cross-border, I know you 
guys are dealing with the farm bill, but we do have a 
reauthorization coming up next year and there are some issues 
that are critical. I have just provided one page for you. If 
you can take them and maybe we can talk about them next year, 
but they have to do with a need for an insurance fund in the 
derivatives sector because now derivatives customers are 
treated as second-class citizens compared to the securities 
side; second, the need to increase our penalty regime. We have 
these antiquated penalties where we only charge very little; 
and third, dealing with high-frequency traders, these traders I 
call cheetah traders, no mention of them in Dodd-Frank because 
they weren't seen as a problem. The Flash Crash of 2010 
happened just a couple of months before the bill. So to the 
extent you want to engage in that, I am happy to talk about it 
whenever.
    And I do thank you for the opportunity to be here, Mr. 
Chairman.
    [The prepared statement of Mr. Chilton follows:]

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

    Good morning, Chairman Conaway, Ranking Member Boswell, and Members 
of the Subcommittee. Thank you for the opportunity to be with you today 
regarding the harmonization of global derivatives market regulatory 
reform. The Subcommittee's oversight of the CFTC is critical to the 
work we do and I appreciate your attention to this and other matters. 
It is a pleasure, as it was last year, to testify alongside 
Commissioner Sommers, the Chair of our global Markets Advisory 
Committee (GMAC). She does a superb job.
    Today, I'm pleased to discuss the progress we've made, as well as 
some of the challenges we've encountered in implementing the Wall 
Street Reform and Consumer Protection Act of 2010--otherwise known as 
Dodd-Frank. We are always guided by the law and in this case we also 
have been considering the 2009 Pittsburgh G20 Communique (reaffirmed 
this year at the G20 Mexico summit), which set forth key directives for 
December 2012 implementation of clearing, trading, reporting, and 
prudential rules for G20 member countries. The recent statement issued 
by international financial regulators is a welcome signal that we've 
made significant progress in this area.
    Dodd-Frank is a good and needed law. While it is our law--a U.S. 
law--these are global, interrelated financial markets and financial 
firms. They are connected and correlated and rules and regulations need 
to be attentive to that fact. Dodd-Frank can, if we implement it 
correctly, avoid systemic risk to our economy and make markets more 
efficient and effective and devoid of fraud, abuse and manipulation. 
But, I said ``if'' we implement it correctly.
    We've known since passage of Dodd-Frank that, unless we strike the 
right balance and provide appropriate guidance and relief on cross-
border issues, we risk significant market disruption and migration, as 
well as regulatory arbitrage, due to an imbalance in global regulatory 
scope and content. As Chairman Conaway cautioned in an August letter, 
``Absent consistent regulatory standards proposed by our own domestic 
regulators, effective coordination between the U.S. and foreign 
regulators would seem virtually impossible.'' With the leadership of 
our Chairman and Commissioner Sommers, we have engaged in an 
international dialogue to move forward on a balanced approach to these 
regulations.
    In that regard, the entire regulatory process has taken longer than 
Dodd-Frank deadlines. Most regulations were to be completed by July of 
2011. The European Union appeared perhaps 2 years behind the U.S. at 
the time of Dodd-Frank's passage. It appeared that if the U.S. went 
first, and by 2 years so, the impact could create havoc for markets and 
market participants. Since the law passed, there have been those 
(including some on this Subcommittee) who have urged regulators to go 
slow. Particularly as to the impact of the new law on the international 
front, they were right. The regulatory reform rulemaking process has 
shown us that we needed much more information about the over-the-
counter (OTC) space in order to promulgate appropriate and reasonable 
rules. We've proposed and re-proposed and extended comment periods and 
amended our rules, provided comprehensive guidance, and where needed, 
appropriate relief. It has not always been a graceful exercise, but by 
and large, I believe we have gotten things right. If we haven't, we'll 
hear about it. And we've shown that we can be flexible in 
implementation content and timing. The result is that during these 
delays, the rest of the world, and particularly the European Union, has 
caught up to us. It now appears that EU regulations will be implemented 
in a matter of months after U.S. rules may be finalized, as opposed to 
the 2 years originally envisioned.
    In June, we proposed interpretive guidance and exemptive relief on 
extraterritoriality issues. We are now poised to provide final guidance 
in this area, to give clarity as to the application of Dodd-Frank on 
those operating outside our territorial borders. We need to ensure that 
we strike that correct balance in carrying out the mandates of the law, 
and at the same time confirm that appropriate substituted compliance is 
available to market participants.
    Given that global financial reform regulations can be completed on 
a more similar time horizon, it's clear to me that we need to provide 
for phased-in compliance and appropriate relief from rules for an 
interim period--perhaps 5 or 6 months. We do not want to repeat the 
process we--and the markets--underwent in October. In that instance, 
market participants were unclear what things would truly be required on 
the October 12th compliance date. We ended up working it all out, but 
it should have, and could have, been done in a more open and 
streamlined fashion. We need to avoid that now as we approach January 
1, 2013 implementation of certain rules and regulations. This would 
give markets and participants time to comply with the new regulatory 
environment and also would provide assurance to global markets and 
regulators that we are not causing unnecessary market disruptions. I've 
made specific recommendations which are:

    1. Extend the narrower, territorial definition of U.S. Person used 
        in the CFTC's October 2012 staff no-action letter.

    2. U.S. and foreign SD and MSP registrants would have interim 
        relief from compliance with external business conduct 
        standards, and during the interim period, should operate under 
        a ``good faith'' compliance standard.

    3. Allow non-U.S. dealers to not register when facing registered 
        U.S. swaps dealers. (i.e., their obligation to register would 
        be based on swaps with U.S. end-users. This is intended to 
        reduce the incentive for non-U.S. G20 dealers to conduct their 
        swaps with foreign branches and affiliates of U.S. SDs and MSPs 
        as opposed to trading with regulated U.S. SDs and MSPs.)

    4. Provide relief as to the swaps dealing aggregation standard 
        (i.e., swap dealing counting toward the de minimis level would 
        happen on an individual entity, not enterprise level).

    These seem to be common-sense measures that can be taken which 
would ease the transition to compliance, and reduce incentives for 
regulatory arbitrage, or a race to the thinnest rule book.
    Finally, we need to immediately respond to those who have requested 
relief from the Agency. I'm not suggesting we will grant exemptions, 
but at the least we need to respond . . . and now. Furthermore, in the 
limited meantime prior to requiring compliance, it would not be 
appropriate, reasonable, or responsible for the Commission to proceed 
against entities for non-compliance with Dodd-Frank rules unless and 
until they have received a response from the Agency to an existing 
request. And, importantly, I cannot envision the Commission moving 
forward with such an action.
    Separate from these issues of international harmonization, I look 
forward to working with the Subcommittee on the CFTC reauthorization 
this next year. In that regard, I believe we should do at least three 
things: First, increase penalties for those that violate our financial 
laws; second, create a futures insurance fund; and third, we need to 
develop a meaningful oversight regime for high frequency traders. I 
have a one-pager on each of these matters for Members and I will leave 
it to the Chairman if these three pages should be included in the 
hearing record.
    Thank you for the opportunity to present this testimony today.

    The Chairman. Thank you, Mr. Chilton.
    Ms. Sommers?

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

    Ms. Sommers. Good morning, Chairman Conaway, Ranking Member 
Boswell, and Members of the Committee. Thank you for inviting 
me to testify today. It is a pleasure to be here with my 
colleagues to speak about the challenges facing U.S. and 
international markets resulting from the Dodd-Frank derivatives 
reforms.
    I have worked in the derivatives industry for over 15 years 
and have been a Commissioner at the CFTC since August of 2007. 
During my time at the Commission, I have served as Chairman and 
sponsor of the CFTC's Global Markets Advisory Committee and 
have represented the Commission at meetings of the 
International Organization of Securities Commissions. I am 
pleased to give you my perspective on the enormous challenges 
facing regulators across the globe in their quest to meet the 
commitments on OTC derivatives reform made by the G20 leaders 
in 2009, and in particular, the challenges for U.S. regulators 
in interpreting the cross-border scope of Dodd-Frank.
    In May of 2011, Commissioner Chilton and I testified in 
front of this Subcommittee regarding the harmonization of 
global derivatives reform and its impact on U.S. 
competitiveness and market stability. At that time, I discussed 
three concerns: first, there were substantive differences 
between derivatives reform in the U.S. and in other 
jurisdictions; second, other jurisdictions were not as far 
along in their reform process, which could harm the global 
competitiveness of U.S. businesses due to regulatory arbitrage; 
and third, our failure to clarify how our rules would apply 
internationally was creating a great deal of uncertainty, both 
in the U.S. and abroad.
    Although my concerns today remain the same, since then, I 
have had the benefit of significant dialogue and feedback from 
foreign regulators and market participants regarding the cross-
border proposal the CFTC released in June. I have two specific 
solutions: first, the Commission should not act outside the 
jurisdictional limits that were set for us by Congress. Section 
722(d) of the Dodd-Frank Act, which added Section 2(i) to the 
Commodity Exchange Act, provides that the Act ``shall not apply 
to activities outside the United States unless those activities 
have a direct and significant connection with activities in, or 
affect on, commerce of the United States, or contravene rules 
or regulations prescribed by the Commission designed to prevent 
evasion.''
    In my view, those words direct and significant should be 
read together. It should not be enough that a swap transaction 
involves a U.S. counterparty. Rather, the connection to the 
United States must be direct and significant. I do not believe 
that every single swap a U.S. person enters into, no matter 
what the swap or where it is transacted, has a direct and 
significant connection with activities in, or effect on, 
commerce of the United States.
    Second, it is imperative for U.S. regulators to harmonize 
their approach with global regulators on the extraterritorial 
reach of Dodd-Frank. While we have been consulting regularly 
with the SEC and other regulators, our approaches are far from 
consistent. It does no good to coordinate with our fellow 
regulators if we are not going to listen to them or incorporate 
their suggestions. The Commission has worked for decades to 
establish relationships with our foreign counterparts built on 
respect, trust, and information sharing, which has resulted in 
a successful history of mutual recognition of foreign 
regulatory regimes in the futures and options markets spanning 
over 20 years.
    At the Pittsburgh Summit in 2009, all G20 nations agreed to 
a comprehensive set of principles for regulating the OTC 
derivatives markets. We should rely on their regional expertise 
and try to the best of our ability to avoid overlapping rules 
or dual regulations. While the pace of implementing reforms 
among the various jurisdictions has been uneven, I have no 
reason to believe that comparable or equivalent regulation is 
unachievable. It is obvious that more time is needed to 
facilitate an orderly transition to a regulated environment. 
This task is not going to be easy and we have a long way to go, 
but we must continue to work with our colleagues both 
domestically and internationally to coordinate our approaches 
to regulation of the global swaps market. Global coordination 
is key to successfully regulating these global markets. In 
order to accomplish harmonization with the rest of the world 
both in substance and timing, my hope is that in the coming 
days the Commission will issue clear and concise relief from 
having to comply with various Dodd-Frank requirements for both 
domestic and foreign swap entities. These are very complex 
issues but we should not make cross-border guidance more 
confusing than necessary.
    I am grateful for the opportunity to be able to discuss 
these important issues and happy to answer any questions.
    [The prepared statement of Ms. Sommers follows:]

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

    Good morning, Chairman Conaway, Ranking Member Boswell, and Members 
of the Committee. Thank you for inviting me to testify on the 
challenges facing U.S. and international markets resulting from the 
Dodd-Frank derivatives reforms. I have worked in the derivatives 
industry for over fifteen years and have been a Commissioner at the 
Commodity Futures Trading Commission (CFTC or Commission) since August 
of 2007. During my time at the Commission I have served as the Chairman 
and sponsor of the CFTC's Global Markets Advisory Committee (GMAC) and 
have represented the Commission at meetings of the International 
Organization of Securities Commissions (IOSCO), one of the principal 
organizations formed to develop, implement and promote internationally 
recognized and consistent standards of regulation, oversight and 
enforcement in the securities and derivatives markets. I am pleased to 
give you my perspective on the many challenges facing regulators across 
the globe in their quest to meet the commitments on over-the-counter 
(OTC) derivatives reform made by the G20 Leaders in 2009 and, in 
particular, the challenges presented in interpreting the cross-border 
scope of Dodd-Frank. The views I present today are my own and not those 
of the Commission.
    Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to 
the Commodity Exchange Act, provides that the Act shall not apply to 
activities outside the United States unless those activities have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States, or contravene rules or regulations 
prescribed by the Commission designed to prevent evasion. In 2011 the 
Commission acknowledged the growing uncertainty surrounding the 
extraterritorial reach of Dodd-Frank and in August of that year held a 
2 day roundtable, followed by a public comment period. In July 2012 the 
Commission published proposed guidance setting forth an interpretation 
of how it might construe Section 2(i), followed by another round of 
public comment. The guidance included a proposed definition of ``U.S. 
person,'' the types and levels of activities that would require foreign 
entities to register as U.S. swap dealers or major swap participants 
(swap entities), and the areas in which such swap entities might be 
required to comply with U.S. law and those in which the Commission 
might recognize substituted compliance with the law of an entity's home 
jurisdiction.
    On November 7, 2012 I convened a meeting of the GMAC to further 
discuss the Commission's proposed interpretive guidance and to identify 
questions and areas of concern in implementing the CFTC's proposed 
approach. A number of foreign jurisdictions were represented, including 
regulators from Australia, the European Commission, the European 
Securities and Markets Authority, Hong Kong, Japan, Quebec and 
Singapore. Representatives of the U.S. Securities and Exchange 
Commission (SEC) also attended to discuss the SEC's perspective. A 
common theme that emerged was concern over the breadth of CFTC's 
proposed definition of ``U.S. person,'' the implications of having to 
register in the U.S., the uncertainty of the Commission's proposal on 
substituted compliance, and the need to identify areas where complying 
with a particular U.S. requirement might conflict with the law of a 
foreign swap entity's home country regime.
    On November 28, 2012 regulatory leaders from Australia, Brazil, the 
European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, 
Switzerland and the United States met in New York to continue the 
dialogue. In a press statement issued after the meeting the leaders 
supported the adoption and enforcement of robust and consistent 
standards in and across jurisdictions, and recognized the importance of 
fostering a level playing field for market participants, intermediaries 
and infrastructures, while furthering the G20 commitments to mitigating 
risk and improving transparency. The leaders identified five areas for 
further exploration, including:

   the need to consult with each other prior to making final 
        determinations regarding which products will be subject to a 
        mandatory clearing requirement and to consider whether the same 
        products should be subject to the same requirements in each 
        jurisdiction, taking into consideration the characteristics of 
        each domestic market and legal regime;

   the need for robust supervisory and cooperative enforcement 
        arrangements to facilitate effective supervision and oversight 
        of cross-border market participants, using IOSCO standards as a 
        guide;

   the need for reasonable, time-limited transition periods for 
        entities in jurisdictions that are implementing comparable 
        regulatory regimes that have not yet been finalized and to 
        establish clear requirements on the cross-border applicability 
        of regulations;

   the need to prevent the application of conflicting rules and 
        to minimize the application of inconsistent and duplicative 
        rules by considering, among other things, recognition or 
        substituted compliance with foreign regulatory regimes where 
        appropriate; and

   the continued development of international standards by 
        IOSCO and other standard setting bodies.

    The authorities agreed to meet again in early 2013 to inform each 
other on the progress made in finalizing reforms in their respective 
jurisdictions and to consult on possible transition periods. Future 
meetings will explore options for addressing identified conflicts, 
inconsistencies, and duplicative rules and ways in which comparability 
assessments and appropriate cross-border supervisory and enforcement 
arrangements may be made.
    The Commission has worked for decades to establish relationships 
with our foreign counterparts, built on respect, trust, and information 
sharing, which has resulted in a successful history of mutual 
recognition of foreign regulatory regimes in the futures and options 
markets spanning 20+ years. At the Pittsburgh summit in 2009 all G20 
nations agreed to a comprehensive set of principles for regulating the 
OTC derivatives markets. We should rely on their regional expertise. 
While the pace of implementing reforms among the various jurisdictions 
has been uneven, I have no reason to believe that comparable or 
equivalent regulation is unachievable. It is obvious that more time is 
needed to facilitate an orderly transition to a regulated environment. 
It is important that assessments of comparability be made at a high 
level, keeping in mind the core policy objectives of the G20 
commitments rather than a line-by-line comparison of rule books. It is 
also important to avoid creating an unlevel playing field for U.S. 
firms just because the U.S. is ahead of the rest of the world in 
finalizing reforms. U.S. firms should not be disadvantaged by tight 
compliance deadlines set by the CFTC. Global coordination is key. It is 
my hope that in the coming days the Commission will issue clear and 
concise relief from having to comply with various Dodd-Frank 
requirements, for both domestic and foreign swap entities, until we 
have a better sense of the direction in which we are all headed.
    I am grateful for the opportunity to speak about these important 
issues and am happy to answer any questions.

    The Chairman. Right, thank you, Ms. Sommers.
    I need unanimous consent to insert this statement in the 
record just ahead of Mr. Kono's testimony. Mr. Kono is 
recognized as a representative of a foreign organization whose 
statements are being provided under the terms of diplomatic 
immunity given to the officials of the Government of Japan. The 
statements are being given in cooperation and freely for the 
information of the U.S. House of Representatives and the House 
Committee on Agriculture.
    So thank you, Mr. Kono.
    Mr. Kono, 5 minutes?

      STATEMENT OF MASAMICHI KONO, VICE COMMISSIONER FOR 
  INTERNATIONAL AFFAIRS, FINANCIAL SERVICES AGENCY OF JAPAN; 
              CHAIRMAN OF THE BOARD, INTERNATIONAL
      ORGANIZATION OF SECURITIES COMMISSIONS, TOKYO, JAPAN

    Mr. Kono. Thank you, Mr. Chairman.
    Mr. Chairman and Members of the Committee, it is my great 
honor and pleasure to be here today to speak to you about 
issues concerning cross-border regulation of OTC derivatives 
markets. My name is Masamichi Kono representing the Financial 
Services Agency of Japan. I am also currently the Chairman of 
the Board of IOSCO, the International Organization of 
Securities Commissions. But I must mention that any views I 
express today are not necessarily the views of the 
organizations that I represent.
    You will recall that G20 leaders agreed at the Pittsburgh 
Summit in September 2009 on the basic elements of reform and 
OTC derivatives markets, and a number of jurisdictions, 
including U.S. and Japan, have been making significant progress 
in implementing the G20 commitments towards the agreed deadline 
of the end of 2012. Actually, the regulations which Japan has 
already implemented from November this year, not exactly 
identical to U.S. regulations, but are fully consistent with 
the objectives of the G20 commitments to improve transparency 
in the derivatives markets, mitigate systemic risk, and protect 
against market abuse. In this respect, our laws and 
regulations, which we have implemented from November of this 
year, share the same goals as the Dodd-Frank Act.
    One important issue that has surfaced lately, as having 
been mentioned by previous speakers, is how to deal properly 
with the risks of cross-border activities and transactions in 
OTC derivatives, which is very much a globalized market. One 
point that I would wish to make today is that such risks need 
not be addressed by extraterritorial application of U.S. laws 
and regulations. Rather, the U.S. authorities could rely on 
foreign regulators upon establishing, of course, that the 
foreign regulators have the required authority and competence 
to exercise appropriate regulation and oversight over those 
entities and activities. This is what we consider as the most 
efficient and effective approach in line with the principles of 
international comity between sovereign jurisdictions.
    Such reliance on foreign regulators ensures that there is 
no conflict or overlap of applicable rules to entities 
operating cross-border and to transactions that take place 
across borders. It not only enables an efficient and effective 
use of our limited supervisory resources, but also, even more 
importantly, it removes legal uncertainty and significantly 
reduces the compliance costs of market participants and 
infrastructure operators in all jurisdictions. This will 
ultimately lead to significant cost savings for the investor 
and for the taxpayer as well, and actually in some cases, 
certain activities or transactions could be prevented from 
taking place because of conflicting regulations by different 
jurisdictions, and this can be avoided through enhanced 
coordination and cooperation between regulators.
    Thus, there are now growing calls internationally for 
taking the required steps to avoid conflicting or overlapping 
regulation and for demonstrating much greater coordination and 
cooperation among regulators. And regulators around the world 
will have to respond to those calls. Actually, it is very much 
in this spirit that a group of regulators, including ourselves, 
issued on December 4 a joint press statement entitled, 
Operating Principles and Areas of Exploration in the Regulation 
of the Cross-Border Derivatives Market.
    Now, in recent months, foreign regulators have expressed 
their concerns with regard to the CFTC's proposed reforms, 
primarily because they find potential conflicts or overlaps 
with our own rules that are or will be implemented soon. In 
this regard, we of course appreciate very much the ongoing 
efforts by the CFTC in addressing those issues raised by 
foreign regulators, but much needs to be done.
    Now, I might not have the time to go through each and every 
subject, but let me try very briefly. First, it is important 
that the details of the applicable laws and regulations are 
made clear as much as possible before their implementation in 
order to minimize regulatory uncertainty. Second, once the 
details are made available, regulators should work together to 
avoid outright conflicts and minimize overlaps as much as 
possible, ideally again before the rules are applied in their 
jurisdictions. Third, a sufficient transition period and 
adequate relief measures for foreign entities and 
infrastructure operators are needed. Fourth, when adopting an 
approach of reliance on foreign regulators, it should be based 
on a clear recognition of the foreign regulators' primary 
authority and competence.
    And in the U.S., our view is that the scope of application 
of substituted compliance can be further extended to a broader 
set of regulated entities and transaction requirements. And of 
course as a national regulator, we would like to be recognized 
as a primary regulator of the entities established in Japan.
    Fifth, cross-border transactions by their very nature will 
be subject to regulations of two or more jurisdictions so we 
need arrangements across different jurisdictions to avoid 
duplication. And in Japan, we have taken steps to refrain from 
applying our rules to cross-border transactions in anticipation 
of an international coordination arrangement at the outset of 
our implementation.
    Now, as I mentioned, we have made some efforts in recent 
days. We look forward to continuing to work with our 
counterparts in other jurisdictions to achieve this goal, and 
certainly, we would like to do our best to minimize the cost to 
the economy that has been referred to earlier.
    So thank you very much for providing this opportunity to 
share my views with you today, and let me emphasize again that 
we are very much intending to cooperate and coordinate with 
each other as much as possible in the coming days and weeks. It 
is a huge challenge but one that has to be pursued if we are to 
have globally interconnected financial markets that serve well 
to help those in the real economies worldwide.
    Thank you very much.
    [The prepared statement of Mr. Kono follows:]

      Prepared Statement of Masamichi Kono, Vice Commissioner for
International Affairs, Financial Services Agency of Japan; Chairman of 
the Board, International Organization of Securities Commissions, Tokyo, 
                                 Japan

Introduction
    Mr. Chairman and Members of the Subcommittee on General Farm 
Commodities and Risk Management. It is my great honor and pleasure to 
be invited to today's hearing to speak to you about issues concerning 
cross-border regulation of OTC derivatives markets. My name is 
Masamichi Kono, Vice Commissioner for International Affairs at the 
Financial Services Agency of Japan. In my capacity, I represent my 
Agency in various international organizations of financial regulators 
and supervisors. I am also currently the Chairman of the Board of 
IOSCO, i.e., the International Organization of Securities Commissions. 
I must mention that any views I express today are not necessarily 
identical to the official views of the organizations that I represent.
    In response to the financial crisis that started in 2007-2008, G20 
Leaders agreed at the Pittsburgh Summit in September 2009 that all 
standardized OTC derivative contracts should be traded on exchanges or 
electronic trading platforms, where appropriate, and cleared through 
central counterparties by end-2012 at the latest, and OTC derivative 
contracts should be reported to trade repositories.
    A number of jurisdictions, including Japan and the United States, 
have been making significant progress in implementing the G20 
commitments in an internationally consistent and coordinated manner 
towards the agreed deadline of end-2012. The regulations which Japan 
implemented from November this year are not identical to the U.S. 
regulations, but are fully consistent with the objectives of the G20 
commitments to improve transparency in the derivatives markets, 
mitigate systemic risk and protect against market abuse. In this 
respect, our laws and regulations which we have implemented from 
November this year share the same goals as the Dodd-Frank Act.
    As to the cross-border application of national laws to OTC 
derivatives, we can understand the CFTC's concern that risks emanating 
from an overseas commercial presence of a U.S. financial group could 
directly flow back to the U.S. and cause significant systemic 
disruptions, and this should be avoided. The same would apply if a non-
U.S. financial group had significant commercial presence in U.S. 
territory. We believe, however, that such risks need not be addressed 
by extraterritorial application of U.S. laws and regulations.
    If the overseas commercial presence of the U.S. financial group or 
the non-U.S. financial group is appropriately regulated by foreign 
regulators, the U.S. authorities could rely on the foreign regulators 
upon establishing that the foreign regulators have the required 
authority and competence to exercise appropriate regulation and 
oversight over those entities and activities abroad. This is what we 
consider as proper treatment in line with the principles of 
international comity between sovereign jurisdictions.
    Such reliance on foreign regulators ensures that there is no 
conflict or overlap of applicable rules to entities operating cross-
border, and to transactions that take place across borders. It not only 
enables an efficient and effective use of the limited supervisory 
resources of the regulator, but also, even more importantly, removes 
legal uncertainty and significantly reduces the compliance costs of 
market participants and infrastructure operators in all jurisdictions. 
This will ultimately lead to significant cost-savings for the investor, 
and for the taxpayer. In some cases, certain activities or transactions 
could be prevented from taking place because of conflicting regulation, 
and this can be avoided through enhanced coordination and cooperation 
between regulators. Needless to say, such reliance can only be possible 
when mutual trust is established between regulators, and appropriate 
supervisory arrangements exist between them.
    In recognition of the above, there are now growing calls 
internationally for taking steps to avoid conflicting or overlapping 
regulation, and for demonstrating much greater coordination and 
cooperation among regulators. Regulators around the world will have to 
respond to those calls. It is very much in this spirit that a group of 
regulators including ourselves issued on December 4 a joint press 
statement entitled ``Operating Principles and Areas of Exploration in 
the Regulation of the Cross-border OTC Derivatives Market''. I will 
come back to explain the background of this important press statement 
later.

OTC Derivatives Market Reforms in Japan
    Since September 2009, Japan has exerted its utmost efforts to put 
in place legislative and regulatory measures to reform the OTC 
derivatives markets, for the purpose of fulfilling the G20 commitments. 
Our Financial Instruments and Exchange Act (FIEA) has been amended in 
two stages.
    The first stage of legislation dates back to May 2010, when 
mandatory clearing requirements and requirements to report transactions 
to trade repositories were introduced. Those amendments took effect 
from 1 November this year, with phase-in arrangements for product 
designation and reporting requirements.
    As to the second stage, our Diet passed this September legislation 
introducing requirements for usage of electronic trading platform (ETP) 
and for enhancing price transparency. In consideration of the need to 
provide sufficient time for preparation on the part of market 
participants, and to address the potential impact on market liquidity 
that those measures could have, the implementation of this second stage 
of legislation will be phased in for a period of up to 3 years.
    With respect to the mandatory clearing requirement that entered 
into force last month, only Japanese index-based CDSs (i.e., the iTraxx 
Japan Index Series) and plain-vanilla Japanese Yen-denominated Interest 
Rate Swaps (IRS) with reference to LIBOR are subject to mandatory 
clearing. The scope of products subject to mandatory clearing will be 
expanded to the products, such as JPY-denominated IRSs with reference 
to TIBOR, foreign currency (USD and EURO) denominated IRSs, and single-
name CDSs referencing Japanese companies, taking into consideration 
such factors as the volume of transactions and the degree of 
standardization.
    Also, at the outset, the application of mandatory central clearing 
requirements is limited to transactions between large domestic 
financial institutions registered under the FIEA, who are members of 
licensed clearing organizations. In this regard, it should be noted 
that currently in Japan there is only one licensed CCP under the 
amended FIEA. Foreign CCPs are invited to be licensed in Japan, with 
less onerous requirements applicable in light of their foreign status. 
Going forward, the clearing requirements could be expanded to 
transactions between the above financial institutions and foreign 
financial institutions (not registered under FIEA), taking into account 
international coordination efforts currently underway on cross-border 
regulation.
    On reporting requirements, financial institutions registered under 
the FIEA are required to report their OTC derivatives transactions to 
trade repositories (TRs) for products such as (i) credit derivatives, 
and (ii) forward, option and swap transactions in relation to interest 
rates, foreign exchanges, and equities.

Need To Avoid Conflicting Or Overlapping Cross-Border Regulations
    In recent months, foreign regulators have expressed their concerns 
with regard to the CFTC's proposed reforms primarily because they find 
potential conflicts or overlaps with their own rules that are or will 
be implemented soon. Certainly the concerns described below are 
particularly relevant with regard to U.S. regulations, but it should be 
noted that many of them are, by nature, pertinent to any set of 
national or regional rules applied to entities operating cross-border 
and to cross-border transactions. In this regard, we appreciate very 
much the ongoing efforts by the CFTC in dealing with those issues 
raised by foreign regulators.
    First, it is important that the details of the applicable laws and 
regulations are made clear as much as possible before their 
implementation, in order to minimize regulatory uncertainty.
    Regarding the need for this transparency up front, more clarity on 
the detailed elements of the applicable rules is urgently requested in 
the case of the U.S. The examples of such elements are: the definition 
of a U.S. person, the terms and conditions for applying substituted 
compliance to foreign entities and cross-border transactions, and the 
method to be employed for aggregating transaction volumes of group 
firms worldwide in relation to the de minimis threshold for 
registration of swap dealers.
    Second, once the details are made available, regulators should work 
together to avoid outright conflicts and minimize overlaps as much as 
possible, ideally before the rules are applied in their jurisdictions. 
Reliance on foreign regulators can be arranged through approaches of 
mutual recognition, substituted compliance, and exemptions, or a 
combination of those approaches.
    Starting the implementation of U.S. regulations under the current 
circumstances has already created uncertainty in the markets. If not 
managed properly, significant reductions in market liquidity and/or 
shifts in transaction venues or counterparties could occur as a result.
    Third, a sufficient transition period and adequate relief measures 
for non-U.S. entities and infrastructure operators are needed to 
address the difficulties that they face in complying with U.S. 
regulations. A certain amount of time is also required to work to avoid 
regulatory conflicts and inconsistencies arising from differences in 
the content and the timing of implementation of national or regional 
regulations. Foreign market participants and regulators would require 
some additional time to fully prepare for the new U.S. requirements. In 
Japan, as described above, we are taking a two-stage approach in 
introducing new rules, and providing sufficient time for their phased 
implementation.
    Fourth, when adopting an approach of reliance on foreign 
regulators, it should be based on a clear recognition of the foreign 
regulators' primary authority and competence in exercising effective 
regulation of entities and infrastructures based in its jurisdiction.
    In the U.S., to the extent that the CFTC's proposed regulations 
have revealed, the scope of application of substituted compliance can 
be further extended to a broader set of regulated entities and 
transaction-level requirements. As a national regulator, we would like 
to be recognized as the primary regulator of the entities established 
in Japan, and the CFTC is invited to rely on our supervisory authority 
and competence as much as possible. Whether a swap dealer qualifies for 
substituted compliance should be determined on recognition of 
equivalent regulation on a country-by-country basis, not on an entity-
by-entity or rule-by-rule basis. In Japan, with respect to foreign CCPs 
and trade repositories, they are subject to less onerous requirements 
compared to CCPs and trade repositories established in Japan, if they 
are properly supervised by foreign regulators under supervisory 
cooperation arrangements with FSA Japan.
    Fifth, cross-border transactions, by their nature, will be subject 
to regulations of two or more jurisdictions, if no arrangements are 
made between the relevant regulators to avoid duplication. If those 
duplicative requirements are not entirely conflicting or inconsistent, 
market participants could still cope, although there may still be 
additional costs involved in ensuring compliance with several different 
rules, such as in the case of duplicative data reporting requirements. 
But, if those rules clash with each other, arrangements are needed 
between regulators to enable the transaction to take place legally. 
Such cases can arise in the context of central clearing requirements.
    In Japan, we have so far deliberately refrained from applying our 
rules to cross-border transactions in anticipation of an international 
coordination arrangement on regulation of cross-border transactions 
which we strongly hope to be developed soon.
    When the U.S. and Japan require central clearing for transactions 
of the same product, such as JPY-denominated IRSs with reference to 
LIBOR, market participants will not be able to enter into transactions 
without breaching the regulations of either the U.S. or Japan, unless 
there is a CCP licensed or registered both in the U.S. and Japan In 
this regard, a Japanese clearing organization licensed under FIEA 
(Japan Securities Clearing Corporation (JSCC)) is currently seeking 
CFTC registration as a derivatives clearing organization (DCO). The 
challenge for JSCC, however, is that it would need more time than its 
U.S. counterparts to fully comply with U.S. regulation, and a request 
is being made to grant some additional time for it to be fully 
compliant.

Need for Better International Coordination and the Initiatives Underway
    As noted above, there are a number of important issues we need to 
address with respect to cross-border application of OTC derivatives 
regulations. To address these issues, there is a much greater need for 
international coordination and cooperation among regulators.
    The G20 Ministers of Finance and Central Bank Governors agreed in 
Mexico City this November to put in place the legislation and 
regulation for OTC derivatives reforms promptly and act by end-2012 to 
identify and address conflicts, inconsistencies and gaps in their 
respective national frameworks, including in the cross-border 
application of rules. The Financial Stability Board, in its latest 
report on OTC derivatives market reforms, urged key, high-level OTC 
derivatives market regulators from G20 jurisdictions to pursue further 
discussions before the end-2012 deadline to (i) identify the cross-
border application of rules to infrastructure, market participants, and 
products; (ii) identify concrete examples of any overlaps, 
inconsistencies and conflicts; and (iii) develop options for addressing 
these issues.
    In response to the growing calls, leaders of regulators of major 
OTC derivatives jurisdictions, including regulators from the U.S., EU 
and Japan, met in New York City at the end of November, and agreed to a 
set of high-level operating principles and identified areas for further 
exploration in the regulation of the cross-border OTC derivatives 
market. This effort culminated in the joint press statement published 
last week which I referred to earlier. In pursuing this work, we have 
appreciated very much the leadership taken by the CFTC and the SEC. 
Regulators have agreed to regularly meet and consult with one another, 
going forward. The next meeting is scheduled to be in Brussels early 
next year.
    The joint press statement was intended to address important issues 
requiring international coordination and cooperation, and to present a 
useful way forward. This includes (i) an understanding on clearing 
determinations (prior-consultation when making clearing 
determinations), (ii) an understanding on sharing of information and 
supervisory and enforcement cooperation (relevant supervisory 
authorities enter into supervisory and enforcement cooperation 
arrangements), (iii) an understanding on timing (an orderly 
implementation process and a reasonable limited transition period) and 
(iv) areas of exploration regarding the scope of regulation and 
recognition or substituted compliance for cross-border compliance 
(possible approaches to prevent the application of conflicting rules 
and the desire to minimize the application of inconsistent and 
duplicative rules).
    We found the outcome of this discussion extremely useful in further 
promoting coordination and cooperation among themselves, and will 
continue to meet and consult regularly to coordinate in order to 
address any outstanding issues.
    Last but not least, with the deadline of G20 commitment coming 
near, we will continue to need to push ahead aggressively to put in 
place the legislation and regulation for OTC derivatives reforms 
promptly and act to identify and address conflicts, inconsistencies and 
gaps in our respective national frameworks, including in the cross-
border application of rules, so that we can achieve the G20's goals of 
improving transparency in the derivatives markets, mitigating systemic 
risk, and protecting against market abuse. We should make use of the 
opportunity that international forums such as IOSCO and the FSB could 
provide in supporting the work of OTC derivatives market regulators.
    Thank you very much for providing this opportunity to share my 
views with you today. Let me emphasize once again that, as agreed by 
international regulators last month, regulators intend to cooperate and 
coordinate each other much more closely and address the important 
issues related to cross-border regulation. It is a huge challenge, but 
one that has to be pursued, if we are to have globally interconnected 
financial markets that serve well to help growth in the real economies 
worldwide. Finding sensible, pragmatic cross-border solutions for 
global OTC derivatives trading is a test case for the global financial 
reform process. And it is urgent. We would be most grateful if you 
could provide your insights or suggestions in this regard. Now I will 
be delighted to respond to any questions you may have.

    The Chairman. Thank you, Mr. Kono.
    Mr. Pearson is also recognized as a representative of a 
foreign organization whose statements are being provided under 
the terms of the diplomatic immunity given to officials of the 
European Union. The statements are being given in cooperation 
and freely for the information of the U.S. House of 
Representatives and the House Committee on Agriculture.
    Mr. Pearson, you are recognized for 5 minutes.

         STATEMENT OF PATRICK PEARSON, HEAD, FINANCIAL
   MARKET INFRASTRUCTURES UNIT, INTERNAL MARKET AND SERVICES 
                 DIRECTORATE GENERAL, EUROPEAN
                 COMMISSION, BRUSSELS, BELGIUM

    Mr. Pearson. Thank you, Chairman Conaway, Ranking Member, 
and Members of the Subcommittee, for inviting me to testify 
today. My name is Patrick Pearson. I represent the European 
Commission. We have the rulemaking powers in this specific area 
together with the European Securities Market Authority (ESMA).
    Now, the reason for our work and the reason why we are here 
today are absolutely persuasive. The financial crisis exposed 
serious shortcomings to the OTC derivatives markets, it 
amplified shocks, and it impacted our economies in several 
ways. Our economies, our companies, our citizens, our taxpayers 
in the United States as well as in Europe and other parts of 
the globe are still paying for these shortcomings.
    We have reached a global consensus. We have a plan. The 
United States and European Union have shown genuine leadership 
in pushing for global regulatory reform. Now, these derivative 
reforms involve a significant change in regulation to cover 
both the regulation of firms, legal entities; it covers the 
regulation of transactions, of contracts, and we have been 
working in parallel with the United States' agencies over the 
past 30 months to adopt the legislative reforms to achieve 
common goals.
    The United States adopted the Dodd-Frank Act. Two months 
later, the European Union made its own proposals--European 
Market Infrastructure Regulation (EMIR). That legislation 
entered into force on the 16th of August of this year and, as 
in the United States, many technical rules will need to enter 
into force in the coming weeks to enact these requirements. The 
European Union hopes to enact its technical requirements before 
this Christmas.
    Now, the Commission has worked closely with the CFTC and 
the SEC over the past years, often successfully. We have tried 
to align our requirements with your approaches. The Chairman of 
the CFTC and European Commissioner Michel Barnier, have met in 
Brussels and in Washington on a number of occasions to discuss 
derivatives reforms, a very useful process. International 
regulators, as Mr. Kono has made clear, have met recently in 
New York. We made some progress, cooperation, info exchange, 
consultation; but crucially, there is one key area where there 
is no progress and no agreement, and that is cross-border work.
    And why is that crucial? It is because that $640 trillion 
OTC derivatives market is global. The Euro, the dollar, are the 
most important underlying currencies for derivatives. And the 
global nature of OTC markets with the two counterparties to 
transactions frequently located in different jurisdictions to 
each other or in a different location to the infrastructure 
being used makes the effective use of regulation absolutely 
critical. So we need rules that work not only for a national 
jurisdiction but also rules that work between jurisdictions. 
And even reforms that are consistent and coherent within one 
jurisdiction can have significant adverse impacts applied to 
cross-border transactions, even if we have apparently similar 
rules.
    We did a recent detailed analysis of the U.S. and European 
rules and we identified numerous--80 pages--of potential 
conflicts, inconsistencies, gaps between our rules that have to 
be addressed. If we don't, many of our collective reform 
efforts to reduce risk will remain obsolete. Example: it is 
quite possible that two parties to the same transaction can be 
required to trade in different venues, clear on different DCOs 
or CCPs, report to different trade repositories. Trade could be 
subject to clearing in one jurisdiction and to margin 
requirements in another, and this is particularly relevant to 
corporate end-users. Companies will not be able hedge their 
risks, risks will be concentrated within jurisdictions, and 
contracts simply will not be cleared. We defeated the 
objectives we agreed to attack.
    So what is the problem? There were three. First, scope. We 
have significant concerns with the proposals from the CFTC that 
would extend the territorial reach of its rules to 
counterparties outside of the United States. This immediately 
creates conflicts, undue burdens to market participants. Firms 
and traders will fall under two rules--U.S. rules and foreign 
rules. The only choice they have is whose rules to break--the 
United States' rules or European rules?
    The scope of persons who are subject to the application of 
our respective rules and regulations must be defined in a 
narrow manner. It has to be based on the establishment of the 
counterparty in the territory of our jurisdictions. And what is 
really important is that all the counterparties in two 
jurisdictions are subject to the requirements we all agreed to 
to ensure global safety. And we believe this is better done by 
ensuring comparability of rules than by overextending the reach 
of national rules.
    My second point--the principles of recognition of 
equivalent substituted compliance are critical to a cross-
border regulatory regime. We believe that the CFTC is too 
modest in the way it proposes to use substituted compliance. It 
should be applied more broadly. It should not only apply to 
entity requirements but also to transaction requirements. It 
should apply also to transactions between domestic U.S. and a 
third country counterparty. The CFTC has the powers to do this. 
It has done this in the past. Why not here?
    Third, registration. Registration might be unavoidable, but 
if you do it, you need to do it from the beginning with 
recognition and substituted compliance. Market participants 
must have absolute possibility and certainty ahead of any 
registration. Foreign swap dealers are being told to register 
without knowing the complete set of rules that will bind them 
as a consequence up front, how they will be applied in an 
international context, and once registered, you cannot de-
register. This isn't Facebook we are talking about. There are 
some significant issues.
    And finally, timing is absolutely essential. We need cross-
border rules that are right and not just rapid. We are strongly 
urging U.S. regulators not to enforce rules that will obstruct 
cross-border business before solutions for cross-border 
transactions have been finalized. The CFTC is intent on 
introducing its rules where the SEC's intentions in the same 
field are still unknown to us. Regulatory certainty is simply 
not available internationally. And a well known saying goes if 
you want to do something fast, you do it alone; if you want to 
do something right, you do it together.
    So concluding, if we don't reach agreement on a sensible 
cross-border approach, then conflicts, inconsistencies, and 
gaps will persist. Trades won't take place. It won't be 
cleared. It will be reported in a fragmented way. Companies in 
our economies will not be able to hedge risks they have to 
hedge to do business, commercial or financial. And to quote a 
historian we all know well, Tacitus, ``They created a desert 
and then called it peace.'' That is what we want to avoid here. 
We need to do this together, the right way.
    Thank you for listening to me.
    [The prepared statement of Mr. Pearson follows:]

     Prepared Statement of Patrick Pearson, Head, Financial Market
Infrastructures Unit, Internal Market and Services Directorate General, 
                 European Commission, Brussels, Belgium

    Chairman Conaway, Ranking Member Boswell, and Members of the 
Subcommittee, thank you for inviting me to testify at today's hearing.
    My name is Patrick Pearson, and I am the Head of the Financial 
Market Infrastructures Unit at the European Commission. The European 
Commission is responsible for the preparation and enforcement of 
legislation in the European Union. The European Parliament and the 
Council are responsible for the final enactment of that legislation, 
while the European Commission, together with the European Securities 
Market Authority (ESMA), has direct rulemaking powers in technical 
areas and in determining the `equivalence' of the rules of foreign 
countries.
    The financial crisis exposed serious shortcomings with respect to 
the OTC derivatives market which amplified shocks and impacted our 
economies in several ways. Collateral calls generated by sharp 
movements in the mark-to-market value of the OTC derivative trades 
drained liquidity buffers and provoked the fire sales of assets. 
Second, the bilateral nature of the OTC derivatives market--between the 
two parties to the contract--be it dealer and customer or dealer and 
dealer-created its own set of difficulties. When counterparties became 
concerned about the health of a particular dealer, they moved their 
business and collateral with them, which worsened the funding crunch in 
the market. Third, when a large counterparty, Lehman Brothers, filed 
for bankruptcy, it could no longer meet its obligations. Open OTC 
derivatives positions with its customers were frozen, which created 
large problems for Lehman's counterparties. Fourth, the opaqueness of 
the OTC derivatives market made the situation much worse because no one 
had clear insight into the financial health of their counterparties. 
Because there was no easy way to know who was in difficulty or not, the 
incentives were all on the side of assuming the worst--closing out open 
trades, hoarding liquidity, and retreating to the sidelines.
    The crisis made it crystal clear that the regulatory regime had not 
kept pace with the rapid growth of the global OTC derivatives market. 
In assessing the shortcomings of the OTC derivatives market after the 
crisis, a global consensus has been reached. The United States and the 
European Union showed genuine leadership in pushing for this global 
consensus.
    Standardizing trades improves transparency and price discovery. 
This mitigates the opaqueness that helped to generate the illiquidity 
and loss of market function evident during the crisis. Clearing such 
trades through CCPs reduces the aggregate amount of risk in the system. 
In a CCP framework, the bilateral exposures of each dealer to one 
another are replaced by a single set of claims to and from the CCP. 
Inserting a CCP in between two counterparties to a trade reduces the 
run risk faced by a potentially troubled dealer. If trades with the 
dealer are cleared through a CCP, direct exposures to the dealer are 
eliminated and replaced by exposures to the CCP itself. Mandatory 
reporting of trades to trade repositories is designed to ensure that 
the details of each contract are preserved and available to the 
regulatory authorities. They will have a full overview of risk in the 
system. Finally, the fact that CCPs will be central to the system 
dramatically increases their importance. In essence, global CCPs will 
be systemically important. Thus, for the system to be safer, it is 
necessary that CCPs be as safe as the United States Bullion Depository. 
They have to have the ability to perform and meet their obligations 
regardless of the degree of stress in the financial system and even if 
one or more of their participants were to fail in a disorderly manner. 
Hence, there is a compelling need for tougher principles that are 
broadly enforced.
    These derivative reforms involve a significant change in 
regulation, covering both the regulation of firms (legal entities) and 
the process for entering into and performing individual derivative 
transactions.
    The U.S. and the EU have been working in parallel over the past 30 
months to adopt the necessary legislative reforms to achieve these 
common goals. The U.S. adopted the Dodd-Frank Wall Street Reform 
Consumer Protection Act in July 2010, including some 80 pages (Title 
VII) on derivatives reform. Two months later, in September 2010, the 
European Commission adopted its legislative proposal to introduce 
similar reforms in the 27 Member states of the European Union. This 
legislative proposal--the European Market Infrastructure Regulation 
(EMIR)--which runs to some 60 pages was adopted by the European 
Parliament and the Council last July. It entered into force last 
August. As in the U.S., many detailed implementing rules need to be in 
place to specify the technical details of the legislation. In the U.S. 
the CFTC and the SEC are advanced in this process. The EU will adopt 
its technical implementing rules before the end of this year.
    The European Commission has worked closely with the CFTC and the 
SEC over the past years. Staff have held many meetings, sometimes even 
on a weekly basis, to understand and discuss the thrust and details of 
our respective approaches and draft rules. Wherever possible we have 
attempted, often successfully, to align our approaches to avoid 
discrepancies. The Chairman of the CFTC and European Commissioner, 
Michel Barnier, have met in Brussels and Washington to discuss 
derivatives reform on a number of occasions. This has been a very 
useful process of international cooperation.
    Nevertheless, there remains one key area where we believe further 
work is required to deliver reforms that will meet our common 
objectives. Our respective rules must also work on a cross-border 
basis.
    This is important because the $640 TR OTC derivative market is 
global. The Euro or the U.S. dollar are the most important underlying 
currencies used for OTC derivatives. The global nature of OTC 
derivatives markets, with the two counterparties to transactions 
frequently located in different jurisdictions to each other, or in a 
different location to the infrastructure being used, makes the 
effective and consistent regulation of cross-border activity crucial.
    We need rules that work not only for regulators and market 
participants in a national jurisdiction, but also in a cross-border 
environment and between jurisdictions. OTC derivative reforms that are 
consistent and coherent within a single jurisdiction can have adverse 
impacts when they apply to cross-border transactions. This is so even 
where the different jurisdictions involved have apparently similar 
rules. Cross-border application of multiple rules will inhibit the 
execution and risk management of cross-border transactions. Recent 
detailed analysis of U.S. and EU rules has identified numerous 
potential conflicts, inconsistencies and gaps between our rules that 
should be addressed through mutually acceptable solutions. Failure to 
address these issues will render many of our collective reform efforts 
to reduce risk in the system obsolete.
    By way of example, it is possible that two parties to a transaction 
may be required to trade in different venues, clear on different CCPs 
or report to different trade repositories. Trades would be subject to 
mandatory clearing in one jurisdiction and to margining requirements in 
another jurisdiction--this is particularly relevant for corporate end-
users.
    In order to achieve the effective and consistent implementation of 
our objectives, 2 weeks ago international Treasury departments, 
regulators and central banks meeting in the Financial Stability Board 
insisted on international coordination on the cross-border scope of 
regulations and cooperation on implementation in order to avoid 
unnecessary overlap, conflicting regulations and regulatory arbitrage.
    To be more precise, `scope' is the root cause of many cross-border 
problems that we have identified. We have significant concerns with 
proposals from the CFTC that would extend the territorial reach of its 
rules to counterparties outside the USA. This will create conflicts and 
undue burdens for market participants. The scope of persons who are 
subject to the application of our respective rules and regulations 
should be defined in the most narrow manner possible and be based on 
the establishment of the counterparty in the territory of our 
respective jurisdictions, where those jurisdictions have comparable and 
consistent requirements. What is important is that all the 
counterparties in two jurisdictions be subject to the requirements we 
all agreed to in the G20 to ensure global safety. This is better done 
by ensuring comparability of rules than by over-extending the reach of 
national rules. What ultimately matters is where the counterparties to 
a transaction are established, not the location where that transaction 
is concluded.
    The principles of `recognition', `equivalence' or `substituted 
compliance'--as referred to in our respective jurisdictions--are 
important underpinnings of a cross-border regulatory system. 
`Substituted compliance' will avoid the application of multiple rules 
to the same entity or the same transaction. Appropriate deference to 
foreign regulations is the most effective means of achieving our shared 
goals. We applaud the CFTC for proposing to rely on substituted 
compliance in the application of its OTC derivative rules. We agree 
that where different requirements achieve the same objectives market 
participants, intermediaries and infrastructures should be subject to 
one set of rules for their cross-border activity. We also believe that 
the CFTC is too modest in the way it proposes to use substituted 
compliance; it should be applied more broadly. We believe that the 
following key points should be applied by the U.S. regulators:

    First, regulators should apply substituted compliance between a 
        domestic and a third-country counterparty established in a 
        jurisdiction with comparable and consistent requirements, and 
        should not seek to restrict this only to transactions between 
        two non-domestic counterparties. The former situation reflects 
        the area where the large majority of conflicts and 
        inconsistencies exist between our rules. It is therefore 
        necessary to apply one set of rules to such transactions to 
        ensure legal certainty for cross-border transactions;

    Second, substituted compliance should apply to transaction level 
        requirements between counterparties in different jurisdictions, 
        and not only to entity level requirements as U.S. regulators 
        have suggested. Where transaction level requirements are 
        comparable, counterparties should e able to discharge their 
        obligations by complying with one set of requirements. We 
        believe that the CFTC has the statutory powers to do this, and 
        has even done this in the past in other areas of its 
        rulemaking.

    Third, foreign infrastructure which is subject to comparable 
        requirements in its own jurisdiction should not be required to 
        comply with domestic requirements in order to service the 
        domestic market. Agreement on this is essential to ensuring 
        clearing obligations can be complied with in respect of cross-
        border transactions.

    We also believe that registration should be required only in 
respect of those jurisdictions that lack comparable and consistent 
requirements. To the extent that registration is unavoidable, it should 
be combined, from the very outset, with recognition/substituted 
compliance in order to limit as far as possible any legal complications 
and burdens. Market participants must be afforded absolute certainty 
ahead of any registration in respect of the consequences if they apply 
for registration. However, the registration approach suggested by the 
CFTC has serious shortcomings. Foreign Swap Dealers would be required 
to register without knowing with sufficient certainty the complete set 
of rules that will bind them as a consequence, and how those rules will 
be applied in an international context--including how substituted 
compliance will work. A possible waiver or no action letter could 
provide solace. However, this will only delay, but not eliminate the 
problem. Even if registration only triggers certain trade reporting 
requirements, lack of substituted compliance could immediately create 
issues in terms of conflicting requirements. For example, conflicts 
with data privacy and data protection considerations in national and 
European law may well arise. We cannot put firms in the impossible 
position where they are forced to choose between breaching either U.S. 
law or EU law. Applying a registration requirement to EU firms without 
up-front clarity about whether and how substituted compliance will 
apply will do precisely this.
    Finally, timing is essential. We need the right cross-border rules, 
and not just rapid rules. We would strongly urge U.S. regulators not to 
enforce rules that will obstruct cross-border business before any 
solutions for cross-border transactions have been finalised.
    If we do not reach agreement on a sensible approach to applying our 
rules on a cross-border basis, and entities and particularly 
transactions are not subject to full substituted compliance, then 
conflicts, inconsistencies and gaps will persist, and we believe that 
trades will not take place, will not be able to be cleared and will, at 
best, be reported in a fragmented manner to repositories. In short, 
firms in our economies will not be able to hedge risks, commercial or 
financial, and our common objectives agreed in the G20 will not be met.
    The European Union is committed to creating an appropriate 
regulatory framework for OTC derivatives that provides comprehensive 
oversight, ensures systemic stability and promotes market transparency. 
The EU, like the U.S., is in the final stage of implementing the rules 
to achieve these policy objectives. We are also committed to working 
with you and other market participants to ensure that our rules work on 
a cross-border basis. We look to the U.S. to work with other 
jurisdictions to achieve our common objectives.
    Thank you, Chairman Conaway and Ranking Member Boswell. I 
appreciate the opportunity to testify, and look forward to your 
questions.

    The Chairman. Thank you, Mr. Pearson.
    We have been joined by the Chairman of the full Committee, 
and I would recognize him for 5 minutes.

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

    Mr. Lucas. Thank you, Mr. Chairman, and I apologize to the 
Chairman and the Ranking Member and our panel here today, lots 
of things going on. At various points recently, I sort of feel 
like a derivatives regulator with all of the stuff swirling 
around me. That said, I appreciate the Chairman holding this 
timely and important hearing to examine the real challenges 
that are facing both the U.S. and international regulators as 
we attempt to balance the various reforms across the global 
marketplace. And I hope that we can all agree that reforming 
the OTC derivatives marketplace is a global effort--as has been 
alluded to by our panelists--that demands genuine coordination, 
not the appearance of coordination. If due care is not taken to 
complement the regulatory structures across foreign 
jurisdictions, we could seriously jeopardize the efficiencies 
currently found in the global market whose nominal value well 
exceeds $600 trillion--yes, trillion dollars.
    And Ms. Sommers, I want to congratulate you and thank you 
for addressing numerous cross-border issues at the Commission's 
Global Markets Advisory Committee on November 7. I share many 
of the concerns echoed at that meeting. And Commissioner 
Chilton, I appreciate you testifying today and look forward to 
hearing, as we have heard, your views. I also want to echo my 
thanks to Mr. Kono and Mr. Pearson for taking time out of their 
extremely busy schedules to travel literally thousands of miles 
to testify before the Committee. I think that fact alone should 
demonstrate that the rest of the world is serious about getting 
derivatives reforms right and the United States should 
reciprocate that level of concern.
    And it is my hope that today's hearing will continue to 
foster genuine dialogue and actual sincere coordination between 
the U.S. and international regulators. Without proper 
coordination, American end-users will face higher costs because 
it will cost more or be impossible for some of them to access 
the global markets to manage risk.
    And finally, we must remember the United States was the 
first nation in the world to enact derivatives reform 
legislation, and as the first-mover on reform, we cannot take 
an approach that is substantially more restrictive than foreign 
jurisdictions or U.S. institutions will cease to remain 
competitive around the world. This is a result we cannot and 
must not allow to happen at any cost.
    With that again, I thank the Chairman and the Ranking 
Member. I yield back and look forward to some fascinating 
questions.
    The Chairman. I thank the Chairman.
    The chair would remind Members that they will be recognized 
for questioning in the order of seniority for the Members who 
are here at the start of the hearing. After that, Members will 
be recognized in the order of arrival. And I appreciate the 
Members' understanding.
    I now recognize myself for 5 minutes.
    Again, thank you for coming this morning.
    As we talk about trying to harmonize across international 
borders, I am very troubled by the fact that the SEC and the 
CFTC can't issue a common U.S. persons definition. It is my 
understanding that you can have the circumstance where you 
would be a U.S. person for swap dealer standpoint and a non-
U.S. person for a securities swap. It makes no sense. Is there 
some law that prevents the CFTC from issuing a joint rule or 
joint guidance that would at least harmonize on our side of the 
various oceans? Either one, Ms. Sommers or Mr. Chilton.
    Ms. Sommers. I don't think there is anything certainly that 
prevents us, and I want to stress that we have been 
coordinating with the SEC all along. There are just fundamental 
differences in both Commissions' approach to the cross-border 
issues.
    The Chairman. But do those fundamental differences mean we 
will in fact have two separate definitions that the world will 
have to deal with----
    Ms. Sommers. Right. That is right.
    The Chairman. There is no common ground that you can come 
to?
    Ms. Sommers. There is common ground and I believe that the 
staff is still working to come to a common agreement on those 
issues, but right now, we are not there.
    The Chairman. Yesterday, Chairman Gensler told the 
Financial Services Committee to expect to have some additional 
rules by the end of the year. I am not sure how the Commission 
works, if the Chairman has unilateral authority and each 
Commissioner does as well, but are you aware of these pending 
changes or things that will be done at the end of the year? And 
will that include a narrowing of the definition of U.S. 
persons?
    Mr. Chilton. I am not sure about the narrowing, Mr. 
Chairman, but the process is a little different than just a 
regular rule that we do as part of Dodd-Frank. This is the 
final exemptive order that we have been sort of talking about, 
moving things out for some time certain. But it could be 
narrowed and that is what I called for here in my testimony--
ensuring that if you are a U.S. affiliate in a foreign 
country--so you are U.S. bank XYZ but you are in another 
country--that you wouldn't have to be required for this time 
period certain--6 months, 5 months--to register, nor would 
anybody doing any business with you. A foreign swap dealer, for 
example, would have to register. So I am hopeful we can narrow 
this down as you suggest.
    And one thing if I might, Mr. Chairman, is that one of the 
problems that we have had this--and I take Congressman Scott's 
point--a lot of times this has not been graceful what we have 
done by any stretch of the imagination. It has been a little 
messy. But we have tried to accommodate things as we have gone 
forward. We had some compliance deadlines on October 12 and it 
was sort of a mess leading up to that. We have all these 
questions, a couple hundred questions, letters from people. We 
finally got it dealt with but it was not pretty. So I am 
hopeful that we don't end up in that circumstance this year, 
Mr. Chairman, at the end of this year. And certainly, if we 
haven't given an answer to somebody when they have requested 
guidance, I cannot imagine and I would not be supportive of the 
agency taking any action against such a firm.
    The Chairman. The mechanics of a 6 month extension is a 
blanket extension or each individual entity has to request the 
extension? What are you contemplating?
    Mr. Chilton. The Commission could do it and we could do it 
blanket, and what I am suggesting is a 6 month window on 
compliance so nobody would have to comply for 5, 6 months, 
whatever the time period would be.
    The Chairman. My professional background as a CPA, we have 
a similar issue with respect to 54 jurisdictions in the United 
States, all of them wanting to regulate CPAs differently. The 
regulatory agencies, all 54 of them and the CPAs, came together 
and created a Uniform Accountancy Act, which was the standard 
by which everything would be judged. And if your state laws met 
the standards of the UAA, then your CPAs could practice 
wherever they wanted to. Is the International Organisation of 
Securities Commissions, Mr. Kono, an appropriate body to create 
that standard, a uniform Act, on which all the jurisdictions 
could look to when they are putting theirs together so that 
they would have this substituted equivalency--or we called it 
substantial equivalency in the accountancy world--to alleviate 
some of these cross-border things? Is that the organization to 
do that?
    Mr. Kono. Thank you, Mr. Chairman.
    First, I should mention that IOSCO has certainly been 
effective in developing standards in certain areas, and 
particularly, those standards pertain to, for example, the 
rules that countries should apply or are recommended to apply 
with respect to mandatory central clearing, to data reporting, 
to other aspects of OTC derivatives reform.
    Having said that, those are standards that will have to be 
implemented by national governments and supervisors, each 
within their powers and within their mandates. And therefore, 
when it comes to coordination across different implementation 
schedules, different rules being implemented in countries, this 
coordination will have to take place amongst the regulators and 
supervisors. And IOSCO could certainly facilitate that process, 
but IOSCO is not necessarily a place where we can take 
decisions that will be enforceable upon governments. I think we 
have----
    The Chairman. Okay. Yes, I understand that you can't do it 
on their behalf, but if they had to go by documents that put 
their rules in place that comported with those, then they would 
meet the equivalent standards that would allow for the 
recognition of their regulatory scheme by the U.S.
    Thank you.
    Mr. Scott for 5 minutes.
    Mr. David Scott of Georgia. Thank you very much.
    Let me start with Mr. Chilton and Ms. Sommers. Again, 
welcome. But before I do that, let me ask unanimous consent 
that we submit this statement for the record from the Americans 
for Financial Reform.
    The Chairman. Without objection.
    [The information referred to is located on p. 77.]
    Mr. David Scott of Georgia. Thank you, sir.
    As you know, Commissioner, the temporary relief that you 
all approved on October 12 will expire on December 31, and that 
threatens a repeat of the business losses we saw in October. 
Will the CFTC act well in advance of this date to provide 
certainty and clarity for market participants and customers? It 
certainly seems that something definitely needs to be done. The 
date December 31 is rapidly approaching; it is about 2 weeks 
away.
    Ms. Sommers. Unfortunately, as you know, we are already at 
December 13. I think it is both my hope and Commissioner 
Chilton's hope that we have something that is clear and that 
clarifies all of these issues for market participants within 
the next week.
    Mr. David Scott of Georgia. All right. And Commissioner 
Chilton, earlier this year, you gave a speech where you 
provided an estimated timeline for the implementation of Dodd-
Frank rules, and you suggested that cross-border guidance be 
finalized by June 2013. But is this when you expect the CFTC to 
vote on the measure?
    Mr. Chilton. I would hope that we could do it now, like 
ASAP, Congressman, and then have the compliance delayed until 
June 1 or perhaps July, whatever make sense. I am not a 
stickler on whether or not it is a month or so. As I said, I am 
not sure that that makes everything super graceful, but it will 
help. When I talk with the financial firms, part of the concern 
is that it is disjointed. It is like Chairman Conaway was 
saying, people are going at different rates and speeds, and so 
if we do it at the same time when there is sort of a date 
certain, that will help at least.
    Mr. David Scott of Georgia. All right. Mr. Kono, let me ask 
you. During the SEC's Global Market Advisory Committee meeting 
on November 7, you stated that some firms outside the United 
States have started to decline transactions with the United 
States companies because of the uncertainties in the rules and 
the apparent lack of coordination between regulators. And 
indeed, I think this is what we saw in October. But in your 
current observations, have U.S. regulators taken sufficient 
action to clarify this uncertainty?
    Mr. Kono. Thank you very much for your question. I think 
that since then, we have been doing our utmost efforts in 
actually providing more clarity to our market participants, and 
of course initially, there was this reaction of wait-and-see. 
But now, I can testify that Japanese financial service 
providers are able and willing to conduct normal business with 
their U.S. counterparts once, of course, the rules become a 
clear and they are made known to them. I think there is still 
some work to be done in that respect so the uncertainty is 
being removed, but we still have some more work to do.
    Mr. David Scott of Georgia. Thank you very much.
    Mr. Pearson, I found your testimony to be very revealing 
and very consequential. I think it would be important to get a 
reaction from your recommendations from Ms. Sommers and Mr. 
Chilton in your efforts on this whole issue of cross-border 
extraterritorial. You stated your recommendations and major 
concerns were scope, registration, and timing, and you sort of 
laid the gauntlet down to challenge our regulators. And so Mr. 
Chilton and Ms. Sommers, how do you react to what he said and 
do you accept the challenge and the recommendations that he has 
offered? Or do you find any problems with adhering to those?
    Ms. Sommers. Congressman, I think that the difficulty for 
us right now in working with our global counterparts, as I 
alluded to in my testimony, is not just substance. There are 
issues with regard to substance that we continue to work on, 
but because the United States is requiring compliance with the 
Dodd-Frank rules that we have already finalized, it adds an 
enormous amount of challenges to firms who are trying to 
operate. Without knowing how we are going to apply Dodd-Frank 
extraterritorially, asking people to comply is where the 
problem is. So we are hopefully going to be able to issue some 
type of relief to both foreign and domestic swap dealers within 
the next week, and I think that is where the agreement that at 
least I have and I believe Commissioner Chilton has with Mr. 
Pearson's testimony. We do believe that that relief needs to 
happen for compliance while we are working out all of these 
details before we can all come to the same place and coordinate 
on all these rules.
    Mr. David Scott of Georgia. Thank you very much.
    The Chairman. I thank the gentleman.
    I ask the Committee's indulgence to recognize the Chairman 
of the full Committee for 5 minutes.
    Mr. Lucas. And I appreciate the Chairman and the 
Committee's indulgence.
    Commissioner Sommers, on or before October 12, the CFTC 
issued a number of staff no-action letters and interpretations 
to address many of the outstanding concerns and uncertainties 
surrounding implementation of its new derivative rules. Are the 
four other Commissioners outside of the Chairman's office 
consulted by CFTC staff on no-action relief letters or 
exemptive orders prior to their release?
    Ms. Sommers. Well, I think this process has been 
overwhelming for all of us. The answer would be sometimes we 
are and sometimes we are not. Certainly, before October 12, 
there were dozens of no-action letters that we issued and we 
are in the same place now before the end of the year because 
these compliance statutes are kicking in. We have had dozens of 
requests for additional pieces of no-action relief. These are 
issued by staff. The no-action letter is saying that staff has 
agreed to not take enforcement action against these entities 
for not complying with issues. Sometimes the Commission is 
aware of those requests and sometimes we are not.
    Mr. Lucas. But in the aftermath, the Commissioners all see 
these documents?
    Ms. Sommers. We do see the no-action letters, yes.
    Mr. Lucas. Yesterday, at the House Financial Services 
Committee meeting, Chairman Gensler was asked about the cost-
benefit analysis performed by the Commission on cross-border 
guidance, and he asserted that it had in fact been done. Are 
you aware of any such analysis?
    Ms. Sommers. There is a cost-benefit analysis within a 
proposed exemptive order that is circulating within the 
Commission right now. There is a cost-benefit analysis within 
that document.
    Mr. Lucas. Well, let me ask this question then. The 
Chairman asserted that he had approximately 40 different cost-
benefit analyses on different rules. How many of those analyses 
have been shared with you, or Mr. Chilton for that matter?
    Ms. Sommers. Typically, they are included within the drafts 
of the rules. There is a cost-benefit analysis included. It 
differs certainly with regard to how thorough those analyses 
are.
    Mr. Lucas. Mr. Kono, what do you say to reports that 
foreign firms stopped doing business with U.S. firms for fear 
of being swept up in the U.S. regulatory regime?
    Mr. Kono. Thank you very much. I think it is fair to say 
that insofar as the Japanese financial service providers are 
concerned, they are willing to comply with U.S. rules once they 
are, of course, made transparent and also that they are given 
enough time to comply. And I don't think that anything would 
lead us to think that all of the requirements will be too 
onerous for foreign providers to comply with; it is just that 
we need more transparency.
    Mr. Lucas. But it is fair to say that foreign firms are 
concerned about how this process will evolve?
    Mr. Kono. They are reasonably concerned, but at the same 
time, they do register recent progress and I mention that. 
Thank you.
    Mr. Lucas. Mr. Pearson, what are some of the potential 
consequences that would result from conflicting swap dealer 
regulatory regimes if you would expand on your testimony of 
course?
    Mr. Pearson. Congressman, the results and consequences that 
we have been able to analyze is that depending on the conflicts 
between the rules and requirements of the United States and the 
27 countries of Europe, trades will not be able to be cleared. 
If they can't be cleared, they won't take place. This means 
that firms, end-users will not hedge their risks; or firms will 
hedge their risks but they will only take place within one 
jurisdiction, which means that risk will be concentrated in one 
jurisdiction on the planet. That could be the United States. If 
your firms can't hedge their risks outside of the United 
States, they will have to hedge them here. The consequences of 
that is obviously a fragmented market and a significant 
concentration of financial risk in the U.S. system. And this is 
exactly what we tried to prevent with our global regulatory 
reform.
    Another consequence is that perhaps firms that will be able 
to conclude a contract but it is not clear which rules apply to 
that contract. If it is not clear which rules apply to the 
contract, you run obviously legal risk. Which rules do you 
apply; which rules do you not apply?
    A third consequence is that a contract might be able to be 
concluded, but the contract is reported for regulatory purposes 
to different jurisdictions and different swap data 
repositories. This means that the regulators and the 
governments will not have that overview of this important and 
significant market that we wanted to have. A global overview 
aware of the risks, who is bearing the risks, which financial 
firms in our economies are exposed to those risks? So that 
means that none of the objectives we tried to agree on in the 
G20 will be met.
    Mr. Lucas. Thank you, Mr. Pearson. And I appreciate the 
indulgence of the Chairman and the Ranking Member and yield 
back the time I do not have.
    The Chairman. Thank you, Mr. Chairman.
    The chair recognizes Mr. Courtney for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman. And I really again 
appreciate the fact that you have organized this hearing on 
Dodd-Frank implementation, which unfortunately Congress hasn't 
been around much the last couple months and a lot of things 
have been happening. And I apologize to some of our guests here 
from outside because I did want to focus on another issue which 
you have been grappling with.
    Again, I think the last time the two Commissioners appeared 
before this Committee, gas prices were about $4.25, $4.30 up in 
New England. Today, they are about $3.50, $3.40. I think Rhode 
Island is $3.30. Obviously that is a pretty dramatic drop, 
about 20 percent. End-users that I talk to, whether it is 
farmers, oil delivery guys, the cynicism with which they regard 
this market that is seeing this type of swing--I realize 
refineries were offline and now are back online. I mean there 
are some things that actually happened in the real world that 
might explain some of it, but the fact is is that nobody really 
believes that that drastic a drop can be explained by real 
market factors.
    And Dodd-Frank had a specific provision, and Commissioner 
Sommers, the language from Congress, which you eloquently 
talked about in your remarks, could not have been more crystal 
clear about the dictate to the Commission to put some position 
limits in almost a year ago. And obviously the court decision 
was a big disappointment that came down. Again, I would 
appreciate it, Commissioner Chilton, if you could give us an 
update in terms of where we stand regarding the legal case and 
where the Commission stands in terms of trying to address this.
    Mr. Chilton. Thank you for the question and thank you for 
your leadership, Congressman, on that particular issue, 
speculative position limits. The agency has appealed the 
district court's decision, yet staff is currently working--and 
we haven't seen a draft yet--on yet another rule. It is a 
little bit in the weeds. I will try to make it sort of high 
level. The court said that we have two authorities. We have the 
Dodd-Frank authority to establish speculative position limits, 
which we used. The court just said we should have explained why 
we needed to use that. And the law was pretty clear to me. I 
mean it said the agency shall establish appropriate position 
limits. But the case went to the word appropriate. What is 
appropriate? The court said, well, you should say why you are 
doing it, what is appropriate.
    The second authority that the judge said that we have, 
which we know we have, is a 1936 authority, and so I believe 
that the rule that we propose, yet another rule--so the appeal 
is going along at one rate and then the other rule that I hope 
we will approve sometime in the first quarter of the year--we 
will use both the 1936 authority and the Dodd-Frank authority. 
It will have the added benefit, this rule I hope, of doing an 
improved cost-benefit analysis, which was one of the other 
challenges in court. When we did the cost-benefit analysis, we 
did it based upon the information we had from market 
participants, but it wasn't very detailed because they didn't 
know. Now, because all of this was supposed to happen October 
12, they know how much it costs them, so I am hopeful that our 
rule will also include a better, more improved cost-benefit 
analysis.
    Mr. Courtney. Well, thank you. And I would just say this, 
again, with two Commissioners here. You know, for people who we 
go home and try and explain what is going on in Washington to 
deal with this issue, which again just goes to the heart of our 
economic recovery. Whether it is a nurse going to work in the 
morning who is dealing with high gas prices or a small business 
who is trying to stay ahead of this, the inability of us to 
even explain what the heck is going on and what is being done 
about it, again it just puts everyone in an impossible 
position. And frankly, the fact that the Commission appears to 
be divided in terms of even a decision of whether to file an 
appeal is very disappointing because just at some point what we 
are talking about here is not about sort of your job; it is 
about people's jobs every single day out there in the real 
economy. And they are counting on you to do something.
    And again, this is one of my last appearances in this 
Committee because I am going to be moving on in the next 
Congress, and I just, again, appreciate the Chairman's focus on 
this issue because it really does go to the heart of whether or 
not we are going to have a real recovery. And what you do, 
which is not that well understood out there in the public, is 
just critical. So please, when you are looking at these 
issues--Dodd-Frank didn't happen because people just wanted to 
create some regulatory structure. There was a real need in 
terms of what happened in 2008 and it is still going on today.
    I yield back.
    The Chairman. The gentleman yields.
    The gentleman from Iowa, Mr. King, 5 minutes.
    Mr. King. Thank you, Mr. Chairman. And I thank the 
witnesses for their testimony, especially those that came the 
furthest to provide that input to us today.
    I would first turn to Ms. Sommers. And I noted in your 
testimony that you referenced Section 722(d) and I believe that 
you said that the Act shall not apply to activities outside the 
United States unless those activities have a direct and 
significant connection. And you referenced that it needs both. 
And it is the implication that--and I don't know if I heard it 
clearly--you believe the rules that are being written today are 
reading that as direct or significant or how would you describe 
that to me?
    Ms. Sommers. Congressman, the CFTC put out a proposal for 
interpretive guidance on cross-border issues in June of this 
year, and that proposal suggested that if a swap had a direct 
connection to the United States, it should be regulated under 
Dodd-Frank. So the significant part of that definition in my 
opinion was not considered appropriately.
    Mr. King. They interpreted the word significant to be 
insignificant, then, in other words?
    Ms. Sommers. Yes.
    Mr. King. Thank you. And Mr. Chilton, I listened to your 
testimony in your recommendation that we not require compliance 
for 6 months but it does say they finalize the rule as soon as 
possible. That is generally how I hear it. And so if that is 
the case, can you tell me how close we are going to be in 
conformity with foreign regulators? Do we have a sense of that 
at this point? I know you said we are within 6 months, but I 
don't know how far apart the regulations might be.
    Mr. Chilton. On the issues, sir, yes. We are closer than 
some might think. I mean there are still some differences and I 
am hopeful that also during that transition period that they 
actually get closer. Now, when I say that, we will have pretty 
much done most of ours but we still will have things that we 
call interpretive guidance and we do Q&A's for people, and we 
will still work with foreign regulators. I stated earlier that 
everything we have done hasn't necessarily been graceful--but 
we have shown that we can sort of turn around and when we make 
a mistake, we certainly hear about it. You guys hear about it, 
and then we hear about it from you all. So if we make a 
mistake, we can fix it. I am committed to doing that, but so 
far I think that this delay that we have had, Congressman, has 
actually led us to a place that is much better. I thank you for 
the guidance to go slow at times. I think you guys were right. 
And to me, where we are now is much better a place than I 
thought we would have anticipated even 6 months ago. We still 
have a ways to go.
    Mr. King. Who needs to move more, foreign regulators or us 
as regulators?
    Mr. Chilton. Well, I think we have struck a pretty good 
balance, Congressman, and so I am not so sure that we need to 
move much. Now, on the compliance we definitely need to do 
that. And I think Commissioner Sommers and I are in lockstep on 
that. But I am pretty confident with where we are on the rules 
right now.
    Mr. King. And you heard Mr. Kono testify that he believes 
that we can rely on foreign regulators and you are comfortable 
with that testimony?
    Mr. Chilton. I am, particularly on the major things, the 
major reasons why Dodd-Frank was created, to avoid systemic 
risk, I mean, so that we don't have another $400 billion 
bailout. So if there is some big fish trader in London with a 
U.S. bank but he is in London and that can come back to haunt 
us and maybe our taxpayers with the bailout, we either have to 
ensure that the UK or the EU is regulating them or we have to 
do it. If they don't have a comparable regulatory regime, we 
need to protect our taxpayers by doing it.
    Mr. King. Okay, that is if there is a gap. But I will turn 
to Mr. Pearson and I recall your testimony, Mr. Pearson, that 
you said sometimes you have to decide which rules to break. 
What kind of input would you like to provide on the testimony 
you have heard since you spoke?
    Mr. Pearson. Thank you for the question. I think the knife 
cuts two ways. It is not really the question whether UK 
regulators expose U.S. taxpayers; we have faced exactly the 
same issue when European taxpayers were exposed to U.S. 
regulatory shortcomings--MF Global, AIG, Bernie Madoff. These 
are not European companies. So we are all in the same ship 
here. I think the point we are trying to make is that we have 
the same objectives. If we have the same rules and 
requirements, then we should be able to rely on the same rules 
and requirements. Where we don't want to be is to have the same 
rules and requirements which are slightly different to apply to 
the same actors and to the same contracts. That is an 
unworkable situation. The contracts simply will not take place 
and everybody will lose. Citizens will lose, companies will 
lose--they can't hedge their risks--firms will lose because 
firms will arbitrate and will shift and rebook their trades to 
other jurisdictions. Nobody wins. And that is where we need to 
focus our attention on.
    Mr. King. Thank you, Mr. Pearson. And I do think the word 
significant is significant.
    And I yield back, Mr. Chairman.
    The Chairman. I thank the gentleman.
    And the lady from Alabama, Ms. Sewell, is recognized for 5 
minutes.
    Ms. Sewell. Thank you, Mr. Chairman. I want to again thank 
Chairman Conaway as well as Ranking Member Boswell for 
scheduling this hearing today. You know, this hearing has 
really given us a chance once again to hear from witnesses and 
to discuss Dodd-Frank derivatives reform and some of the 
challenges that we are facing both in the United States and 
internationally. The 2008 financial crisis made it clear that 
regulators must have transparency in the global derivatives 
market in order to make educated policy decisions and to 
mitigate systemic risks.
    As we continue to move forward with the rulemaking in the 
implementation process provisions of Dodd-Frank, I think we 
need to be really mindful of the original intent and the 
original purpose behind the passage of this essential reform. 
Dodd-Frank was intended to add more transparency and oversight 
to the financial markets and to ensure that another financial 
crisis, a meltdown if you will, doesn't happen again.
    This is why I stood with a bipartisan group of Congress 
Members to introduce H.R. 4235, which is the Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 
2012. It was to help ensure regulators continue to have that 
transparency in the derivatives market needed to make those 
crucial decisions as to how to mitigate their risk. And it is 
my hope that this bill will come to the Floor in the very near 
future and be considered and passed by the entire body.
    I want to applaud the diligent work that both the CFTC, as 
well as the SEC, has had in both drafting and implementing 
these critical new regulations. I know it is hard. I appreciate 
all that you all do to take into account all the various 
parties that are involved in trying to make sure that we have 
cogent and workable regulations. However, as Members of 
Congress, we must continue to provide importance guidance and 
oversight to both the agencies to ensure that there are no 
unintended consequences to the original purpose and intent of 
Dodd-Frank.
    Additionally, many market participants, along with their 
regulators, continue to voice concerns over the very lack of 
rules and sufficient time to implement them. So this 
Subcommittee's hearing today is critically important.
    I am a former lawyer. I worked on Wall Street for the first 
part of my career at Davis Polk & Wardwell and did securities 
law. I think that the indemnification issue is an important 
one. And given all the significant extraterritorial issues, my 
question really is to either one of the Commissioners. The 
CFTC, is it ever going to really support striking the 
indemnification requirement and promote a passage of H.R. 4235?
    Ms. Sommers. Thank you, Congresswoman. I have supported 
that legislation publicly in the past, and I do think that the 
only way to really solve the problems with regard to those 
issues is a legislative fix. We have done everything we can in 
our rule to address the issue as far as our rulemaking ability, 
but I do think it needs a legislative fix.
    Mr. Chilton. Yes, I agree, Congresswoman. Thank you for 
your leadership on the issue.
    Ms. Sewell. There have been considerable debates around the 
intent of the Section 722 of the Dodd-Frank and the aggressive 
approach being taken by the CFTC to apply derivatives rules to 
the U.S. banks doing business overseas with foreign clients. I 
am concerned that the CFTC's application of section 722 and its 
expansive view of what is direct and significant connections 
with activities in and effect on commerce in the United States, 
what that means. And the proposed cross-border guidance misses 
the mark in many ways in really explaining and ameliorating 
that problem with the CFTC moving ahead to apply the Dodd-Frank 
rules abroad without real clear harmonization. And many 
international regulators are quite concerned about the 
conflicting laws for those entities. And I really wanted to ask 
you whether you thought that it would lead to greater conflict 
if not resolved, specifically Section 722?
    Mr. Chilton. Thanks, Congresswoman.
    I think the issue really comes down to, ideally, what we 
would all like, is to allow for comparable regulation by 
foreign regulators, but we have no desire to have little CFTC 
deputy agents running around Brussels. It is just a matter of 
everybody coming together, which is why this timing delay is so 
critical so that we are all doing it sort of together.
    There can be some sort of disagreement about what is 
significant. The Dodd-Frank Act was trying to get at the big 
things that were systemic risks that can bring down our 
economy, so I am hopeful that ultimately everybody will have 
their own regulations on the big things like systemic risk, 
capital, margin, those things, transparency like swaps data 
repositories. Those things, they need to be pretty close on the 
language--not identical but pretty close. And then there is a 
whole list of other things where they don't necessarily have to 
be so close. But on the key fundamental things, the things that 
impacted the entire global economy, those have to be fairly 
close together, at least that is my view.
    Ms. Sewell. Thank you. Thank you all for your participation 
in the hearing.
    The Chairman. Mr. Scott for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    And I, like you, come from one of those highly regulated 
industries, and Mr. Chilton, I can't help but laugh when you 
say if the regulators make a mistake, they will fix it. And I 
wonder is being one of the regulators, at what cost to the 
regulated does that come?
    But we are here today because this has an important impact 
on global trade. And 80 percent of the world trade is outside 
of the United States. Our trade partners, our global trade 
partners in general are also our allies when it comes to, in 
many cases, more difficult issues, and we need to make sure 
that this is implemented in a manner that doesn't hinder 
commerce.
    I listened as Mr. Pearson talked about scope, registration, 
timing, and other challenges that still remain with regard to 
the rules. And I have listened to you, Mr. Chilton, say that we 
need to have these timing delays so that we are able to get on 
some of the same page if you will. Is that correct? Yet you 
contradict yourself when you say we are going to go ahead and 
pass our rule in the United States--this month as I understand 
it--but we are going to delay the implementation for 6 months 
essentially to give the rest of the world 6 months to come in 
compliance with the U.S.
    Mr. Chilton. Well, there may be a little minuti# there that 
will save my potential contradiction, and that is we put out a 
proposal, Congressman. I believe it is fairly well done. It 
strikes a fairly good balance. But we do have an interpretive 
guidance and it does allow us to continue this dialogue, which 
Commissioner Sommers has been engaged in through the GMAC and 
the Chairman has been engaged in, so it doesn't mean that we 
can't move. It doesn't mean that this is it and there is 
nothing else that can be done. But look, in fairness, we were 
first. We have had some time to do this and the EU has been 
sort of playing catch-up and they have done a remarkable job. 
But we have a proposal out there and I hope people will 
continue to look at it and ultimately we will have comparable 
regulations across the globe.
    Mr. Austin Scott of Georgia. Mr. Chilton, with due respect, 
once it becomes a rule, it is no longer a proposal. It is no 
longer a proposal once you adopt it in December. Now, 
compliance with it, you can delay compliance for 6 months, but 
the bottom line is once you adopt that rule, firms must start 
to come into compliance with your rule, because when you turn 
on the compliance of it, they don't get 6 months from the date 
you turn it on; they get 6 months from the date you implement 
it to the date you turn it on. And if they are out of 
compliance on day two, then they are in trouble. And if you 
have made a mistake, you said you can fix it, but with all due 
respect, it will come at a tremendous cost to the people who 
are regulated and maybe to the U.S. economy because we----
    Mr. Chilton. Yes, I hope I am not talking past you, 
Congressman----
    Mr. Austin Scott of Georgia. You are not talking past me, I 
can assure you.
    Mr. Chilton. Okay. I didn't mean it as an insult. I meant 
that maybe I am not expressing myself correctly. So we have 
interpretive guidance. We are doing that all the time. I mean 
we are doing it on rules that were done a year ago. We continue 
to do that. And so my only point is not that the rule is not 
the rule when it is done, but there are things that can be done 
after the process and sometimes they will actually require 
amending a rule. A lot of times they can do it on a staff 
level. That was my only point, sir.
    Mr. Austin Scott of Georgia. Mr. Chilton, it is better to 
get it right the first time.
    And Mr. Pearson, if I understand you, we still have scope, 
registration, timing, other things that are still to be 
discussed. And Mr. Kono, do you agree that those three things 
have not been resolved?
    Mr. Kono. Thank you for your question. I think we are still 
very much in the process of addressing those issues. And in 
fact, I did talk about reliance on foreign regulators on this 
point. Of course, we are quite aware that we need to build an 
element of mutual trust before this can be done, particularly 
since we do understand the concerns that you have of those 
risks flowing back to the U.S. from abroad. On the other hand, 
to build this trust, we are determined to move forward and we 
would like to have some time for it.
    Mr. Austin Scott of Georgia. Yes, sir. And that is in the 
best interest of global trade is to give you that time. And my 
concern with the CFTC is they are going to do what they want to 
do regardless of whether this Committee says no or our trade 
partners, which are also our allies in military affairs, think 
that that is bad for global commerce.
    And I guess I would ask one last question, Mr. Pearson. 
Would it make sense--and it may or may not; just think out of 
the box--that a trade that was placed in Euros that the 
European Union be the primary regulator of that trade since it 
was placed in Euros? In other words, should the currency that 
the trade is placed in matter with regard to who regulates it?
    Mr. Pearson. Thank you. The currency is a key issue but 
there are other leading points as well, and that is where are 
the counterparties established? U.S. counterparties between 
themselves can have Euro-denominated trades.
    Mr. Austin Scott of Georgia. Sure.
    Mr. Pearson. It would be out of the question--out of the 
question--for that very reason only that the European Union 
would seek to regulate that contract. And the problem is, well, 
that is exactly what the CFTC attempts to do with its June 
cross-border guidance. We do not believe that it is the right 
thing to do the moment that one U.S. party is a counterparty to 
a trade, then U.S. rules apply. It makes no sense and it is not 
in line with international comity, as Mr. Kono has said.
    Mr. Austin Scott of Georgia. Thank you, sir.
    Mr. Chairman, I yield the time that I don't have.
    The Chairman. I thank the gentleman.
    Mr. McGovern for 5 minutes.
    Mr. McGovern. Thank you, Mr. Chairman. I apologize for 
being late.
    I have a question, Ms. Sommers. I know it is a bit off-
topic but it has been awhile since you were here to talk about 
MF Global and your investigation. When you testified here more 
than a year ago, you said in response to a question by my 
colleague Mr. Cardoza, ``there will be policy changes that we 
will want to come to this Committee for your consideration.'' 
You also told Mr. Cuellar and Mr. Gibson that you would get 
back to the Committee with a comprehensive list of lessons 
learned from MF Global. Can we expect any policy changes or 
lessons learned from you before the end of this year?
    Ms. Sommers. Congressman, thank you for that question. My 
delegation with regard to MF Global is solely with regard to 
the enforcement investigation. Chairman Gensler has taken a 
lead on the lessons learned from MF Global. We did issue 
earlier this year a package of rule changes to our own internal 
CFTC rules that had to do with customer protection, and many of 
those were part of the package of lessons learned from MF 
Global and were directly related to the incident that happened 
through MF Global. So I do think that the Commission has moved 
forward on that, but as far as lessons learned being submitted 
to the Committee, I am not sure if the Chairman intends to do 
that.
    Mr. McGovern. So is the enforcement investigation 
concluded?
    Ms. Sommers. No, sir, it is not.
    Mr. McGovern. And do you think it will be concluded before 
the end of 2013 or----
    Ms. Sommers. There is no way for me to speculate on when 
the enforcement investigation will end. I can assure you that 
we are working diligently on that investigation.
    Mr. McGovern. A few weeks ago our colleagues on the 
Financial Services Subcommittee on Oversight issued a report on 
MF Global.
    Ms. Sommers. Yes.
    Mr. McGovern. Do you have any comments or thoughts on that 
report, and do you think its characterization of the CFTC's 
performance during the MF Global crisis is accurate or fair?
    Ms. Sommers. I certainly do. It did reflect many of the 
important issues that we all, in hindsight, realized after MF 
Global happened.
    Mr. McGovern. Thank you, Mr. Chairman. I don't have any 
further questions.
    Mr. Crawford [presiding.] The gentleman yields back.
    I am going to recognize myself for 5 minutes.
    Mr. Pearson, yesterday, at House Financial Services, 
Chairman Gensler stated, ``We are comfortable with substituted 
compliance if there are real rules over there.'' We seem to be 
speaking specifically about Europe, Japan, Australia, and 
Canada. And that is interesting for a couple of reasons. One, 
his words call into question his repeated assurances that he 
has given the U.S. Congress that he is coordinating abroad; and 
second, it raises the logical question of what are the 
standards by which the CFTC and Chairman Gensler will judge as 
a real rule? Your thoughts?
    Mr. Pearson. Thank you for the question. We went through 
the process of comparing 500 pages of Dodd-Frank and CFTC draft 
implementing rules with 642 pages of European rules. We have 
real rules, both jurisdictions, and we have worked closely with 
Chairman Gensler and the staff on this. The rules are there. 
The question is also are they comparable? In many cases they 
are. In many cases U.S. rules and European rules are 
comparable; in a lot of cases European rules are tougher than 
American rules. Example: DCOs or CCPs. This is where the risk 
will be concentrated on OTC derivatives, the handful of them on 
the planet: $640 trillion of risk will be concentrated in five 
entities. We believe that they have to be able to stand 
financial Armageddon. They need to be stronger than the U.S. 
bullion depository, Fort Knox.
    The European rules are tougher, stricter than the U.S. CFTC 
rules on these CCPs, DCOs. Does that mean they are 
incomparable? No. It means we are following the same objective. 
We have differences in rules. We need to make sure that these 
rules work together. We need to make sure that U.S. firms, U.S. 
companies, U.S. financial firms can clear their trades in U.S. 
or in European DCOs, even if, as Mr. Chilton says, the rules 
are not identical, even if we go a bit further than the United 
States of America.
    We have been working on this. The question is not what do 
the rules say? The question is are we willing to defer to each 
other's rules? And as I said before, Congressman, we believe 
the CFTC needs to defer more in the field of transaction 
requirements than they are prepared to do at this point in 
time. Otherwise, the system simply will not work.
    Mr. Crawford Okay. Let me follow up on that. You recently 
talked about the inconsistencies between European rules and the 
CFTC approach. You stated that ``trying to regulate the cross-
border rules verges almost on rocket science'' and I can tell 
you this is a potential Apollo 13 situation. The message is, 
``Washington, we have a problem.'' Do still think that 
Washington, or maybe better stated, the CFTC has a problem, and 
what would the major issues be that are unresolved?
    Mr. Pearson. Thank you. Absolutely. When I refer to 
Washington, I refer to Apollo 13. My knowledge of Hollywood 
films is not as extensive as those of Mr. Chilton. I will quote 
the Roman historians or Shakespeare, but that is where it 
stops.
    Yes, we do believe we have a problem. We tried to resolve 
that problem as Mr. Kono made clear. Two weeks to the day we 
had a meeting in New York with international regulators. The 
problem is absolutely clear. There is no issue on the table 
that nobody understands. The question is to what extent are we 
prepared to accept that our rules are the same and to what 
extent are we prepared to defer to the rules of another 
jurisdiction where we have the same or similar rules and the 
same objectives? That is the problem. And the question is 
simply scope. Are we prepared to limit the scope of the 
extraterritorial application of our rules and requirements? In 
Europe we are.
    In Europe we have a rule on the table that our parliament, 
our Congress has accepted. As it is said, we are prepared to 
defer European rules entirely and apply Dodd-Frank entirely in 
European Union if it works both ways. We need the CFTC to 
understand that we need, too, to go down that route. We cannot 
do it on our own. And that is where we need further work and 
further discussions, Congressmen.
    Mr. Crawford Thank you, Mr. Pearson. I am going to yield 
the balance of my time and recognize the gentleman from 
California, Mr. Garamendi, for 5 minutes.
    Mr. Garamendi. Thank you. And since this is my first day in 
a Committee hearing on the Agriculture Committee, I will try to 
quickly catch up. And so if I cover some areas that have 
already been covered, my apologies to all.
    I am trying to understand the territorial thing. It seems 
to me it can be worked out and is likely to get worked out here 
in the very near future. It is certainly in all of our 
interests to do so.
    Mr. Chilton, in your testimony, you blew past an issue that 
I know that you are concerned about and that is high-frequency 
trading. Is there any information available today that high-
frequency trading causes disruptions or inappropriate 
directions in the marketplace?
    Mr. Chilton. Thank you for the question and I look forward 
to working with you, Congressman, on the Committee.
    The CFTC recently put out a report last week or the week 
before that showed that when high-frequency traders--these 
traders that I call cheetah traders because they go fast, fast, 
fast--that when they are in the market they tend to gain more 
when they are trading with a smaller trader or a passive 
trader. A lot of these guys are sort of commercial ag folks 
because these high speed traders are very, very quick. The 
argument on their behalf--on the cheetah's behalf--is that they 
provide liquidity to the markets, and that is obviously a good 
thing in general, but it is fleeting liquidity in that they are 
not there to hedge your bean or rice or corn crop for the 
season; they are there for 5 seconds and they are in and out of 
the market.
    So there have been a lot of examples, Congressman, where we 
have seen extreme volatility where these cheetah traders are in 
the market. You can go back to a few months ago when we saw 
crude oil go down $3 in 60 seconds. That was in part because 
cheetahs were heavily in the market. So there are many 
examples. We have seen it. We have seen it in India recently. 
We see it in the stock market as you know. You have followed 
that very often when Kraft shifted to NASDAQ.
    So I am concerned that there are some basic, prudent steps 
that need to be taken. They are not even required to be 
registered with us now, which means that we can't request their 
books and records. They are not required to test their 
programs. They are not required to have kill switches, and 
importantly, they are not required or we don't mandate that 
they stop what they call wash trading. That is when their 
trades bump into each other. They trade with themselves. And 
that is a big problem in my view. I can't really talk about the 
extent to which they do this cross trading, but I don't think 
that is good for markets. It is illegal and we need to do a 
better job of enforcing it, Congressman.
    Mr. Garamendi. A quick question, maybe a quick answer. Does 
the Commission have the authority to deal with these issues?
    Mr. Chilton. We have a lot of authority to deal with it, 
but quite frankly, it has been like drinking out of a fire hose 
with Dodd-Frank. So it is one of the reasons that I raised this 
earlier as an issue for reauthorization because we still have 
another 20 rules to finish, and so I think that we haven't been 
able to focus on it like we should.
    Mr. Garamendi. Excuse me for interrupting but I try to be 
obedient here as with regard to the clock.
    Mr. Pearson, how about the view from the European Union on 
high-frequency trading?
    Mr. Pearson. Thank you for the question, Congressman.
    Yes, we have seen the concerns expressed by Mr. Chilton. 
Our rules are currently in the making. They are not yet on the 
statute book, but the concerns express all the underlying 
issues that Mr. Chilton has made. And again there is another 
example that we need to work on this together. We need similar 
rules in the United States as we would have in the European 
Union. It makes no sense to regulate these rules in this 
jurisdiction in a slightly different manner than in the 
European Union or any other jurisdiction.
    Mr. Garamendi. So you are moving forward in the European 
Union----
    Mr. Pearson. Certainly, we are.
    Mr. Garamendi.--to deal with these sets of issues?
    Mr. Pearson. We certainly are moving forward.
    Mr. Garamendi. And perhaps the volume of the fire hose will 
diminish and the Commission can get to it here.
    Mr. Pearson. Mr. Chilton drinks from one fire hose; I have 
to drink from 27 at the same time, so----
    Mr. Garamendi. I yield back my time. Thank you.
    Mr. Crawford The gentleman yields back.
    Just real quick, Mr. Chilton, high-frequency traders, you 
referred to them as cheetahs.
    Mr. Chilton. Yes.
    Mr. Crawford Can I suggest maybe another name? That really 
kind of sounds bad. I know that you are making----
    Mr. Chilton. You can suggest it but it is in the lexicon 
now I am afraid, Congressman.
    Mr. Crawford Yes, that is too bad.
    Mr. Chilton. I am not saying cheaters, not like Boston card 
cheaters. I am saying cheetahs because they are fast----
    Mr. Crawford I understand.
    Mr. Chilton.--and scooping up micro dollars in 
milliseconds.
    Mr. Crawford I get it completely, but I just thought that 
might be an unfortunate choice of words, particularly in this 
environment, but that is another subject.
    The chair recognizes the gentleman from New York, Mr. 
Gibson, for 5 minutes.
    Mr. Gibson. Well, thanks, Mr. Chairman, and I appreciate 
the panelists. It has been an illuminating dialogue here this 
morning. And I thought I would take advantage of this 
opportunity to perhaps get to a finer point on recommendations, 
hearing from Mr. Kono and Mr. Pearson. It certainly has been 
encouraging to hear that we share that we want to have more 
collaboration, going forward. I am interested in your 
recommendation, specifically with regard to process, what 
recommendations you have so that we achieve this goal of closer 
coordination. Mr. Kono first.
    Mr. Kono. Thank you very much for your question.
    First, we do have now a group of regulators from the major 
markets of OTC derivatives and we have agreed to have regular 
meetings and also to coordinate as quickly as possible on all 
of the aspects that have been discussed today. On the other 
hand, IOSCO, where I am now chairing the Board, can certainly 
provide its support to this process, and in the past, IOSCO has 
been developing related standards with respect to cooperation 
and enforcement. There is what we call an MMOU, a Multilateral 
Memorandum of Understanding, which enables regulators to 
exchange information when necessary in the course of their 
enforcement actions. I think this can be further extended and 
we also should have more signatories to this MMOU in all those 
respects. So certainly regulators can do better in terms of 
making use of such international forums and also working 
closely together.
    Mr. Pearson. Thank you, sir. I will process three points. 
The first is that we actually need to agree that there is a 
problem. It doesn't make a lot of sense sitting around the 
table if some of or one of the counterparties is in denial and 
says there is no problem because either I disagree or I don't 
have the time to work through the problem with you.
    The second thing is to work through what the problem 
actually is, and that means time. This is very, very, very 
complex. And if we get it wrong, we will get it horribly wrong. 
And we are drafting history here for the global market so we 
need the time to work it through and accept that there is a 
problem. If there is a problem, there is a solution and that is 
a solution that has to work for everybody around the table.
    The third point is registration. A delay of the impact of 
registration doesn't help. You simply delay the problem but you 
don't eliminate the problem. If anybody thinks we can eliminate 
the problem of registration within 6 months, I am happy to sign 
up to that. But what sense does it make to require firms around 
the planet to register if you can't tell them what the 
consequences of registration will be and this gamble on solving 
this within 6 months. I dearly hope you will be able to solve 
it in 6 months but I sure would like to have some up-front 
clarity about that for our firms outside of the United States 
of America, sir.
    Mr. Gibson. I appreciate that. And I would like to hear Mr. 
Chilton and Ms. Sommers' reactions specifically to those 
points.
    Mr. Chilton. Thanks, Congressman.
    And let me just restate with a dialogue I was having a 
little bit earlier. I am not suggesting that our proposal was 
perfect or shouldn't be tweaked in some manner. I am just 
saying that I think we will get to it before the end of the 
year. So when I was having this conversation about what we can 
do, guidance, et cetera, I am not suggesting we shouldn't make 
some changes and we are working on that right now on some of 
the changes internally. But I don't disagree with Mr. Pearson 
at all. I think it makes a lot of sense and I agree with about 
everything he says, that it could go horribly wrong if we don't 
coordinate. We don't want regulatory arbitrage. That is the big 
negative to me of us going too far too fast is that companies 
will migrate to nations with the thinnest of rule books, with 
less rules. That is not what Dodd-Frank wanted. Congress wanted 
to make sure that we protected the U.S. economy from a big 
bailout, from systemic risk, to add the transparency. So that 
is the main goal. We have to keep our eyes focused on that and 
realize that if it is going to take a few more months to get it 
right, that is certainly worth the wait.
    Mr. Gibson. Okay, so just to make sure I heard you 
correctly, with regard to problem, definition, time, and 
registration, and notwithstanding earlier comments about 
ballpark figures in terms of when you would publish, you feel 
it is important to address these points and to get that right 
before you publish?
    Mr. Chilton. Absolutely, Congressman. Now, when I talk 
about guidance, there may be things that we don't anticipate 
because we didn't understand this, as Mr. Pearson says, $639 
trillion OTC market. We never viewed it. So we are actually 
learning things as we go along. So I agree. We should get it 
right the first time. I hope we do. We are trying. But the 
important point is if we do make a mistake that we can remedy 
it. And so I am hopeful we change our proposed exemptive order 
in the next couple of weeks, that we provide this relief for 
another time certain, perhaps a 6 month time horizon, and then 
we work with our colleagues across the world to try to make 
sure that we have a global harmonized system of regulatory 
regimes.
    Ms. Sommers. Thank you, Congressman. I think certainly the 
most important part of both what Mr. Pearson and Commissioner 
Chilton has said is that we are working together with our 
global counterparts. I think we are all very hopeful that we 
will come to a mutually agreeable solution but that it is 
important that the CFTC in the meantime does not impose our 
regulations on those entities until we know how this framework 
is going to work out.
    Mr. Gibson. I appreciate all that testimony and sorry to go 
over, Chairman. I yield back.
    Mr. Crawford The gentleman's time has expired.
    The chair recognizes the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Chilton used a holiday movie, It's a Wonderful Life. As 
I am talking to the market participants, particularly in the 
swaps area, they think the Grinch has stolen Christmas. And one 
of the things Mr. Gensler testified yesterday and one of the 
things that was brought out is that over the last couple of 
years, we have cautioned you, and some of you mentioned it in 
your testimony about making sure that we understand what we are 
trying to regulate and what the consequences of that regulation 
are and making sure that we don't disrupt these markets. And so 
then, if that was the goal, and we look at the swaps market, 
for example, right now where ICE has just announced that they 
are moving trillions of dollars worth of transactions to the 
futures area, the market is telling you something here.
    And I also talked to some folks the other day and said they 
are having trouble and said some of their customers are 
reluctant to trade with them until some of these issues are 
worked out, particularly on the registration issue and the 
cross-border issue. And so some of the businesses are moving to 
foreign countries because they are not sure whether they are 
going to be dragged into this regulation, and then they don't 
know what the regulation is actually going to be and what the 
consequences of dealing with those firms are.
    And so one of the things that is a very troubling to me is 
that, yes, we talk about, well, we had cost-benefit analyses. I 
have seen some of those cost-benefit analyses and they are 
marginal at best.
    Commissioner Sommers, what should we be doing different 
here? I am not sure that we are moving in a direction that is--
I mean the whole original plan, for example, for the 
derivatives in the OTC was just to bring transparency. It 
appears we have moved pass transparency into we are almost 
trying to micromanage those markets. Would you agree with that?
    Ms. Sommers. I do. Congressman, I think that one of the 
things that we could have done that we chose not to do, we 
could have taken the lead of the SEC on these issues in 
implementing the Title VII reform in that they are passing 
their rules and not requiring compliance until all of the rules 
are finished so they can look holistically at how the regime is 
going to be set up before they require compliance. And where we 
have run into trouble and where we have had to issue dozens of 
no-action letters to market participants because they can't 
comply is because our rule set isn't finished. In requiring 
compliance before we are finished has created problems.
    Mr. Neugebauer. And so why aren't we doing that?
    Ms. Sommers. That decision was made that we would not do 
that and I am not sure why. I would have been supportive of 
that.
    Mr. Neugebauer. Was that something that was voted on or was 
that just----
    Ms. Sommers. No, it was not.
    Mr. Neugebauer.--unilaterally determined by Mr. Gensler?
    Ms. Sommers. It was determined by the Chairman.
    Mr. Neugebauer. Yes. And so we are seeing some consequences 
of that?
    Ms. Sommers. Yes, sir.
    Mr. Neugebauer. Mr. Chilton, do you have some response to 
that?
    Mr. Chilton. Yes, and I hate disagreeing with Members of 
Congress, particularly people that I have worked with before 
and I really don't like to disagree with my colleague. I think 
Congress was pretty clear that it wasn't just transparency, 
sir, in the OTC market. Congress wanted us to guard against 
systemic risk so that if--look, risk is part of these markets. 
Everybody understands that. But if you go down, you shouldn't 
take--to risk another analogy--all the Whos in Whoville with 
you. I mean we don't want to have another bailout. I think that 
is really an important part of Dodd-Frank, not just the 
transparency.
    Mr. Neugebauer. Well, the thing about the over-the-counter 
market was that people didn't quite understand--they felt like 
that there could be systemic risk because they weren't quite 
sure what kind of space is out there. I am not sure how much of 
a systemic risk that that market actually was and I am not sure 
that we have done anything that has reduced if it is a systemic 
risk at this particular point in time.
    But what I do understand is that those are very important 
pieces of capital formation in our country and very important 
risk management tools, as far as you know, one of the gentlemen 
was talking about a while ago about keeping the cost of energy 
down for Americans. And if we have these markets who are trying 
to move away, market participants not wanting to participate, 
then we obviously are doing something that is not positive.
    Mr. Chilton. I don't disagree with you on the latter part, 
Congressman. I know your time is up so I will be very brief, 
but Bear Stearns, Lehman Brothers, those are a direct result of 
OTC trading. There wasn't a requirement that they value their 
OTC trades with the counterparty. They valued it at whatever 
they wanted it. Lehman Brothers in their final statement before 
they went down was leveraged 30 to 1. That is the type of 
systemic risk stuff that we are trying to address at least.
    Mr. Crawford The gentleman's time has expired.
    The chair recognizes the gentleman from Kansas, Mr. 
Huelskamp, for 5 minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman. A lot of Hollywood 
themes, Mr. Commissioner, I appreciate that.
    I would like to follow up on a related theme. Congressman 
McGovern had mentioned the MF Global situation. In your opening 
comments you talked about folks in that particular movie that 
you referenced, someone is going to serve time in jail. It has 
been quite a few months and I have yet to see anything, anybody 
really punished, or certainly nobody in jail for the MF Global 
situation. And so I wonder if you might indicate what is 
happening on that front and we can talk about what happened 4 
years ago. I am worried about something that is impacting 
constituents in my district yet today.
    Ms. Sommers. Congressman, as I said before, our enforcement 
investigation is ongoing and we continue to make significant 
progress on that case, but I am unable to discuss any of the 
specifics of our enforcement investigation.
    Mr. Huelskamp. Mr. Gensler is still not participating in 
that investigation? What is the latest of his status in there 
given his role?
    Ms. Sommers. He is not participating in the enforcement 
investigation but he is in charge of any type of lessons 
learned or our policy changes with regard to customer 
protection.
    Mr. Huelskamp. And Commissioner, I appreciate the 
difficulties or inability to say what is going on there, but 
can anyone say when we might have some information? My 
constituents see the gentleman--I mean Mr. Corzine, he was 
directly responsible and he is still walking around and we 
don't know if he is being investigated. Folks haven't been made 
whole. I mean we can talk about Lehman Brothers and talk about 
that, but clearly, when are we going to find out what is going 
on and when are we going to hold someone accountable here?
    And I am going to have a follow-up question with Mr. 
Pearson because there is a connection apparently with cross-
border with MF Global and I am curious what connection is going 
on, what investigations are going on over here. And we are 
talking about trying to solve a future problem; I am trying to 
make some constituents whole today. They are still waiting. And 
to just be able to tell them, well, we don't know yet after a 
year. And then maybe Mr. Chilton has some information on that.
    Mr. Chilton. Well, I know that it is frustrating when 
people don't know and I hate to speak for her but it is 
frustrating for us to not be able to explain certain things. 
But when these are investigations, they are very difficult for 
us to talk publicly. There is always the option, Mr. Chairman, 
of calling an executive session and more information could be 
provided. I am not suggesting that; if you are really concerned 
and you really want to find out more about it, that is one way 
that you can find out some more about it that we can't discuss 
in public.
    Mr. Huelskamp. I appreciate that. And one follow-up on Mr. 
McGovern's line of questions as well--I mean waiting for some 
proposals--what immediate things were done to prevent that in 
the future?
    Mr. Chilton. Several things: first, that we are requiring 
actual 24/7, 365 electronic access to the bank records instead 
of just relying on them telling us it is the case. Second, when 
they reach sort of these things that I call liquidity levels--
they are called something more complicated in our rule--but 
when they are running low on liquidity, they have to transfer 
the customers' funds to another entity. And then finally, the 
third point is that if they don't transfer the customer funds 
to somebody else, we can mandate that it be done. So those are 
three things. There are others, too, Congressman, but those are 
the three key things for me.
    Mr. Huelskamp. Have they been fully implemented?
    Mr. Chilton. No, they are proposals. They are not fully 
implemented yet.
    Mr. Huelskamp. And do we know when those might be 
implemented to provide protections to----
    Mr. Chilton. A couple of months, maybe the end of the year 
is it? No, next several months, Congressman.
    Mr. Huelskamp. Okay. And Mr. Pearson, if I might, what is 
happening on your front? I mean do you have these particular 
regulations in effect for your traders in the EU and can you 
describe how MF Global participates in those or did participate 
in that?
    Mr. Pearson. The situation is slightly different. We have a 
different approach to segregation of client funds and 
protection of funds, and that is a different legal approach, 
which goes somewhat further than the one that you are 
discussing over here. So we acknowledge the issue. We are also 
regulating the issue that has already been laid out in European 
regulation. We end up in more or less the same space. So we are 
absolutely cognizant and we have worked together with the CFTC 
very much to test whether our systems are comparable to yours 
and whether they are stress-resistant on a cross-border basis. 
And I am happy to say that so far that does appear to be the 
case.
    Mr. Huelskamp. So do you think there are more or less 
protections under your regimen versus ours?
    Mr. Pearson. It is a different set of protections, 
Congressman. The protection is different in that we have a more 
direct set of protections and less indirect set of getting 
there as you have in the United States of America. The end 
result is the same but the way we get there is slightly 
different.
    Mr. Huelskamp. Okay. Well, thank you, Mr. Pearson. I 
appreciate the questions and look forward to actual 
implementation of where we are heading. I am actually a little 
more nervous than when I started that we have some things out 
there in a few months we might fully implement them and I will 
have some follow-up questions of what exactly are the risks 
that remain in the system then. Thank you. I appreciate it.
    I yield back.
    Mr. Crawford The gentleman's time has expired.
    The chair recognizes the gentlelady from North Carolina, 
Mrs. Ellmers, for 5 minutes.
    Mrs. Ellmers. Thank you. And it looks like I am probably 
the last questioning. And I just want to say thank you, too, to 
our panel. I really like this system of bringing everyone 
together at the table at the same time so that everyone can 
hear the information being exchanged, and I think that is very 
helpful for us.
    Mr. Kono, I have a question for you. The analogy of risk 
spilling over into and onto U.S. shores in times of crisis has 
been used a lot recently. And certainly, we want to avoid such 
a scenario. How can that scenario be avoided without adopting 
an overly strict regime that does not respect the ability of 
foreign regulators?
    Mr. Kono. Thank you very much for your question, 
Congresswoman.
    And in fact my point was that certainly we understand those 
risks. And in fact if I may mention this, I was at the 
frontlines of supervision when the Lehman affair did occur. And 
in fact we have basically the same problem still today. We are 
still in the course of fixing that in the sense that we do not 
have enough flow of information plus enough tools to deal with 
such cross-border issues effectively in coordination with 
foreign regulators. And once that is established, a close 
cooperation, close exchange of information is established, we 
will do much better in preventing such risks from flowing from 
shore to shore.
    Mrs. Ellmers. Thank you, Mr. Kono.
    Mr. Pearson, in Chairman Gensler's testimony yesterday, he 
stated, ``I think if we do not cover the guaranteed affiliates 
offshore that you can basically blow a hole out from the bottom 
of Title VII and all of what Congress intended on transparency 
and risk.'' It doesn't appear that he has much faith in foreign 
governments being able to properly regulate their own 
affiliations and jurisdictions. How do you feel about this and 
do you see this as being very problematic?
    Mr. Pearson. Thank you, Congresswoman Ellmers. We take a 
slightly different view on this.
    There are a couple of points here and that is it cuts both 
ways. If the U.S. affiliate abroad is guaranteed by the U.S. 
parent and the U.S. taxpayers, the same applies to our 
affiliates here in the United States of America. Why is it that 
we do not apply the same approach as proposed by the CFTC? Why 
is it that we do not trust the United States' regulators to 
regulate our firms here and the U.S. regulators would not trust 
the European regulators to regulate your affiliates in Europe? 
It is about trust. It is about not understanding the level and 
the degree of rules that apply on both sides of the Atlantic. 
And as I have tried to explain earlier on, they are actually 
very comparable, very consistent, and in a number of cases, our 
rules are actually a lot stricter than the United States' 
rules.
    The next point is how do you enforce this? If the European 
Union were to try to enforce its rules on all of its affiliates 
in the United States of America, we would be doing two things 
that are horribly wrong. We would be trying to enforce 
something we cannot enforce in practice; even worse, we would 
be giving the impression that we will be able to enforce this. 
And if something goes wrong, where will the plane land? Will it 
land here in the United States or with a regulator in Europe? 
So that is the thing that we are trying to avoid. We do not 
afford ourselves a luxury of putting in place a regulatory 
system that we know we cannot enforce.
    Mrs. Ellmers. Yes. Well, thank you very much. And again, 
thank you to the panel.
    And I yield back the remainder of my time.
    Mr. Crawford Thank you. The gentlelady yields.
    And with no further comments from the Ranking Member, I do 
have some written testimony to enter into the record with 
unanimous consent, written testimony for the record from Mark 
Boleat from the City of London, and written testimony for the 
record from Steven Maijoor, Chairman of ESMA.
    Without objection, so ordered.
    [The information referred to is located on p. 49.]
    Mr. Crawford And we also have letters for the record. These 
were letters written to Chairman Gensler and CFTC, letters from 
the chief financial administrators from UK, France, Japan, and 
European Union, a letter from the Swiss regulator FINMA, a 
letter from Hong Kong Secretary of the Treasury, a letter from 
French financial regulators, a letter from British FSA, a 
letter from the FSA of Japan, and the Bank of Japan, a letter 
from the European Securities and Market Authority, a letter 
from the European Commission, a letter from the Brazilian CVM, 
and a joint letter from the Asian regulators from Hong Kong, 
Singapore, and Australia.
    Without objection, so ordered.
    [The information referred to is located on p. 52.]
    Mr. Crawford 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 question posed by a Member. 
I thank the participants for being here today.
    This hearing of the Subcommittee on General Farm 
Commodities and Risk Management is adjourned.
    [Whereupon, at 10:55 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

Submitted Statement by Hon. Eric A. ``Rick'' Crawford, a Representative 
in Congress from Arkansas; on Behalf of Steven Maijoor, Chair, European 
                    Securities and Markets Authority

    Dear Chairman Conaway, Ranking Member Boswell, and Members of the 
Committee,

    I would like to thank you on behalf of ESMA for your invitation to 
testify before this Committee on the important topic of derivatives 
reform. Unfortunately, due to other urgent obligations I am unable to 
be physically present at today's hearing. ESMA is submitting this 
statement to highlight, in particular, some issues in relation to the 
application of the Dodd-Frank Act to non-U.S. persons. I know that the 
European Commission, with which we have worked very closely in this 
process, is attending the hearing and will be able to expand on some of 
these points.
    I will now briefly introduce ESMA to you. As an independent agency 
of the European Union (EU) our mission is to enhance the protection of 
investors and reinforce stable and well-functioning financial markets 
in the EU. ESMA achieves this mission by building the single rule book 
for EU financial markets and ensuring its consistent application and 
supervision across the EU. ESMA also contributes to the supervision of 
financial services firms with a pan-European reach, either through 
direct supervision or through the active coordination of national 
supervisory activity.
    ESMA is deeply committed to finding convergent regulatory solutions 
to ensure there is an internationally coordinated application of the 
G20 commitments. The Dodd-Frank Act in the United States and the EMIR 
Regulation in the EU have many similarities, and both regimes are 
broadly aligned on many substantial points. However, there are some 
differences that require joint action and mutual understanding by 
regulators, like the CFTC and ESMA, which are tasked with drafting the 
secondary regulation that will allow the implementation of the 
respective Act and Regulation.
    One of the differences between our respective regulatory frameworks 
relates to the registration of foreign entities, such as swap dealers 
(when they fall above the relevant threshold), which is required under 
U.S. rules but not under EU rules. This registration requirement will 
apply to entities that are already authorised as dealers (investment 
firms or banks) under EU rules, and the U.S. regime will therefore 
apply to entities and transactions that are also subject to EU rules. 
As the two sets of rules are similar in substance, there is a clear 
case for avoiding the situation where a particular entity or 
transaction is simultaneously subject to two sets of rules. The 
application of two sets of rules to a single entity or transaction will 
lead to legal uncertainty and will be unnecessarily burdensome for 
firms.
    The main relevant international regulators have been working 
together to seek ways to achieve convergence on the application of the 
rules that legislators in our respective jurisdictions enacted to 
reform OTC derivatives markets. ESMA has cooperated with its peers in 
other jurisdictions and found many points in common, including with the 
CFTC. As highlighted in the statement issued by the OTC Derivatives 
Market Regulators following their meeting on 28 November, a number of 
conflicting, duplicative and inconsistent requirements have been 
identified when analysing the simultaneous application of different 
national regulations. These requirements, if applied on a cross-border 
basis to the same entities and transactions, would, in certain cases, 
impede a transaction from taking place or might impede an entity from 
operating with U.S. counterparties. This would have serious 
consequences for global market liquidity and might even have financial 
stability consequences.
    These conflicting and duplicative requirements are, amongst others:

    (1) different applications of the clearing obligation;

    (2) different bilateral margin requirements;

    (3) privacy and data protection constraints;

    (4) different scope and exemptions (non-financial counterparties, 
        inter-affiliates, pension funds, small banks, etc.);

    (5) different requirements for CCPs and trade repositories; and

    (6) indemnification requirements in the U.S.

    The group of international OTC Derivatives Market Regulators 
reached some common understanding of the problems that these 
conflicting and duplicative requirements may give rise to. They have 
also agreed to carry out further work to identify mutually acceptable 
solutions to address these problems, but more work is needed.
    ESMA considers that it is of fundamental importance to avoid the 
application of two or more sets of rules to the same entities or 
transactions, if those entities and transactions are subject to 
appropriate requirements in their home jurisdiction. Therefore, we 
would urge U.S. regulators to rely to the maximum extent on equivalent 
requirements enshrined in EU law, instead of imposing U.S. requirements 
when those non-U.S. entities are dealing with U.S. persons. When a 
duplicative application of rules cannot be avoided, we believe it is 
essential to identify and mitigate any possible conflict that might 
arise from that situation.
    ESMA has welcomed as a workable solution, the use of mechanisms 
like ``substituted compliance'', which would allow U.S.-registered 
foreign swap dealers to apply their home jurisdiction rules, to the 
extent that they are producing the same result as the corresponding 
U.S. rules. However, while this is moving in the right direction, we 
remain concerned about the fact that in its current version it would 
not be applicable to transactions in which one of the counterparties is 
a person established or domiciled in the U.S. We remain confident that, 
through common work, we will reach an agreement to allow the maximum 
possible use of mutual recognition and substituted compliance as ways 
to minimise conflicts and overlaps between different sets of laws.
    Pending any such agreement, and until a framework for dealing with 
the above issues is finalised, we are of the view that registration and 
other requirements should be suspended for foreign entities. In this 
vein, ESMA would like to express its strong concerns about maintaining 
the deadline for the registration of foreign swap dealers by the end of 
2012, despite a possible temporary waiver from some related 
obligations. This is due to the three reasons outlined below.
    Firstly, the registration requirement that EU swap dealers face is 
required at a stage when several associated rules that they will have 
to comply with in the future are not yet final. In addition, 
international coordination efforts are still under development and 
subject to the dialogue between international OTC Derivatives Market 
regulators. Therefore, foreign swap dealers would be required to 
register without knowing with sufficient certainty the complete set of 
rules that will bind them as a consequence of their registration, and 
how those rules will be applied in an international context--including 
how substituted compliance will work.
    Secondly, ESMA remains concerned about the fact that the 
registration application grants access to the U.S. supervisors and the 
U.S. Department of Justice to the books and records of registered swap 
dealers. It is important to reconcile this with the privacy or blocking 
laws that in many jurisdictions restrict the type of data that banks 
and investment firms can share with anyone except their national 
supervisors with a statutory power to require those data.
    Thirdly, while we have achieved some progress on reaching an agreed 
approach to resolving cross-border issues, our international dialogue 
has not yet been exhausted and, therefore, fixing the registration 
requirement ahead of the conclusion of that dialogue could undermine 
the above-mentioned cooperation process.
    I would like to thank you again for the opportunity to submit 
ESMA's views on this important matter to your Committee.
            Yours sincerely,

Steven Maijoor,
Chair,
European Securities and Markets Authority.
                                 ______
                                 
Submitted Statement by Hon. Eric A. ``Rick'' Crawford, a Representative 
 in Congress from Arkansas; on Behalf of Mark Boleat, Chairman, Policy 
                and Resources Committee, City of London

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

    Thank you for inviting me to testify before you today, I welcome 
this opportunity and apologise that I cannot be there with you to 
attend this hearing in person. In my absence, I have prepared the 
following testimony, which outlines my views on the topic of ``Dodd-
Frank Derivatives Reform: Challenges Facing U.S. and International 
Markets''.
    I am Policy Chairman at the City of London Corporation, which is 
the local government authority for the City of London. In the role of 
Policy Chairman, I am responsible for overseeing and coordinating the 
agenda of the City of London and this includes a remit for strategy, 
resource allocation and engagement with legislators and regulators in 
the UK, Europe and across the world on policy issues affecting London 
as a global financial centre.
    In my written testimony I would like to focus on three key 
challenges that I see facing U.S. and international markets because of 
Dodd-Frank derivatives reform and explain what action I think could be 
taken in order to resolve these challenges.
    I appreciate this Subcommittee's attention on the international 
dimension at this hearing because the past few years have demonstrated 
both the highly global nature of the financial markets and the need, 
where possible, to find international solutions especially through the 
G20. I support the efforts of the U.S. regulatory agencies to provide 
transparency and lower risk through increased clearing and swap dealer 
oversight but I have particular concerns regarding the extraterritorial 
application of some of the rules that form part of Dodd-Frank 
derivatives reform and the implications for the U.S. and international 
markets. I also strongly welcome the recent joint press statement of 
leaders on Operating Principles and Areas of Exploration in the 
Regulation of the Cross-Border OTC Derivatives Market \1\ and their 
identification of the areas that would be further explored in order to 
address the concerns that have been raised around extraterritorial 
requirements. However, I fear that given the scope of what is to be 
explored and the timescales for implementation and the difficulty 
inherent in jurisdictions moving at different speeds, much more needs 
to be done to better coordinate international regulatory regimes.
---------------------------------------------------------------------------
    \1\ http://www.cftc.gov/PressRoom/PressReleases/pr6439-12.
---------------------------------------------------------------------------
    In my consideration of challenges facing the U.S. and international 
markets, I will firstly discuss conflicting, inconsistent and 
duplicative rules. Secondly, I will explain my concerns about the gaps 
in guidance and clarification that need to be addressed given the 
sequencing and timing of Dodd-Frank derivatives reform. Thirdly and 
finally, I will discuss the need for consistent margin requirements 
across G20 regimes. On all of these issues, I will outline the problem 
facing U.S. and international markets, the potential impact and what 
could be done to address these problems.

1. The Challenge of Conflicting, Inconsistent and Duplicative Rules
    I am concerned that under Dodd-Frank derivatives reform, cross-
border transactions could be subject to duplicative, inconsistent and 
even conflicting rules. The proposed cross-border guidance from the 
Commodity Futures Trading Commission (CFTC) does not guarantee 
``substitute compliance'' for countries with equivalent regulatory 
regimes and instead allows the CFTC to determine which elements of a 
foreign jurisdiction's regulatory regime it will recognise.
    Having two sets of rules to comply with could increase compliance 
costs for the entities registered with the CFTC as swaps dealers, 
including non-U.S. branches and foreign subsidiaries of U.S. banks as 
well as foreign dealers, and end-users. Many end-users, whether based 
in the UK, U.S. or elsewhere, have operations in multiple 
jurisdictions, through numerous affiliates. These companies often 
manage risks arising from their foreign operations by executing hedges 
out of foreign subsidiaries, as part of their overall efforts to manage 
the risks inherent in their global commercial and business operations. 
Their ability to do so effectively and efficiently improves their 
ability to plan for the future, reduce volatility in their business, 
and offer more stable prices to their customers. It facilitates the 
flow of goods and services in a global economy, and enhances their role 
as drivers of economic growth and job creation in communities across 
the globe.
    Failure to address inconsistent, duplicative or conflicting 
requirements for cross-border transactions could create strong 
disincentives for both non-U.S. end-users to trade with U.S. 
counterparties, or for non-U.S. dealers to trade with U.S. end-users. 
Having a smaller pool of potential counterparties could reduce 
liquidity and the efficient pricing that having wide selection of 
counterparties provides. At the same time, a reduced pool of 
counterparties may inhibit an end-user's ability to diversify its 
exposures to counterparties, increasing the concentration of exposure, 
for example, to counterparties in certain regions.
    I would therefore ask that these inconsistent, duplicative or 
conflicting rules for cross-border transactions are resolved with 
``substitute compliance'' (allowing them to be referred to the home 
regulator) to ensure that international regulatory regimes are more 
closely aligned. Further clarification around the broad definition of a 
U.S. person would also help address some of the duplication.

2. The Challenge of Gaps in Guidance and Clarification Given the 
        Sequencing and Timing of Dodd-Frank Derivatives Reform
    In terms of the sequencing and timing of Dodd-Frank derivatives 
reform, important elements remain unclear and there are areas where 
insufficient clarification and guidance on cross-border rules has been 
provided, given the impending implementation timeline. The finalised 
cross-border guidance is yet to be released, causing uncertainty for 
non-U.S. entities over the need to register as a swap dealer, the 
designation of Commodity Pool Operators as well as the aforementioned 
scope of ``substitute compliance''.
    The lack of clarity and guidance on these issues is causing 
considerable uncertainty in U.S. and international markets. This could 
result in a shift in transactions, particularly from the U.S. to other 
markets, as firms attempt to comply with the regulations being 
implemented despite the uncertainty and it could reduce global 
liquidity. It has also caused confusion as to whether the cross-border 
rules within Dodd-Frank derivatives reform will be consistent with 
other national regulatory regimes.
    In order to address this problem, more guidance and clarification 
is of course needed, but a sufficient transition period should also be 
given so that parties have adequate time to comply with regulations. I 
believe that the application of CFTC rules with respect to non-U.S. 
persons should also be deferred to allow for better alignment with 
other national regulatory regimes and the potential for regulatory 
arbitrage.

3. The Challenge of Implementing Consistent Margin Requirements Across 
        G20 Regimes
    The final challenge I would like to highlight to the Subcommittee 
is the need for consistent margin requirements across G20 regulatory 
regimes. The inconsistencies between proposed margin requirements in 
the U.S. and the EU are of particular concern in this regard.
    As they stand, the proposed margin requirements under Dodd-Frank 
derivatives reform could result in an unlevel playing field between 
U.S. and European banks and possible regulatory arbitrage. The 
different requirements would also be difficult to apply cross-border 
and significant differences in collateral requirements among regulatory 
regimes would undermine G20 objectives to have consistent global 
standards for these margin requirements.
    I would therefore call on regulators to work together further on 
consistency. Even if convergence between the EU and the U.S. regulatory 
schemes on this issue is not possible in the near term, equal treatment 
within each scheme should be sought.
    In summary, I ask the Subcommittee to consider my concerns about 
firstly, duplicative, incompatible or conflicting requirements; 
secondly, regulatory uncertainty caused by lack of sufficient 
clarification and guidance; and thirdly, inconsistencies in proposed 
margin requirements. Fragmented or conflicting regulation, even when 
the policy objectives are the same, would have a negative impact on 
competition and consumer choice and on the ability of market users and 
participants to raise capital, manage risk and contribute to economic 
growth. We should work collectively to avoid the risk of impeding or 
disrupting the efficient functioning of our global financial markets as 
a result of regulatory fragmentation, which would be to the detriment 
of consumers, investors and other market participants. I would also 
urge the authorities involved to strengthen international regulatory 
dialogue and cooperation further to ensure a consistent approach that 
meets the needs of market users, without major unintended consequences, 
and avoids unilateral action by either side, or both.
    Thank you again for this opportunity to submit a testimony to this 
hearing. I appreciate the Subcommittee's attention to these issues and 
remain at your disposal to discuss them in further detail should you 
wish to follow up on them.
            Yours sincerely,

            
            
Mark Boleat,
Chairman of the Policy and Resources Committee.
                                 ______
                                 
     Submitted Correspondence by Hon. Eric A. ``Rick'' Crawford, a 
                Representative in Congress from Arkansas
16 July 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

  Swap Dealers Registration under Dodd-Frank Act
    Dear Chairman Gensler,

    We are writing to express our concerns about the potential 
extraterritorial effects of registration rules for swap dealers.
    We understand that the implementation of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of July 2010 
requires substantial rulemaking and have followed the related 
regulatory developments with interest. We share the view that closer 
monitoring of the derivatives business may, contribute to higher market 
confidence and mitigate systemic risks in highly interconnected 
markets. As regards the CFTC regulations, it is our understanding that 
the final rules adopted so far only address registration issues, while 
details of specific requirements remain pending.
    According to our information, registration with the CFTC is 
required by September, probably before the exact reach and scope of the 
U.S. swap dealer regulatory regime will have been clarified. The CFTC 
released a Proposed Interpretive Guidance and Policy Statement on 29 
June 2012 for public consultation to address--among other issues--the 
cross-border application of U.S. swap dealer requirements. The 
principle of substituted compliance may thereby only be recognized for 
certain entity level requirements of non-U.S. swap dealers and if the 
CFTC concludes that the foreign jurisdiction's laws and regulations are 
comparably robust and comprehensive. Beyond that the demand for direct 
extraterritorial access to transaction data and books and records as 
well as to entity level information on capital, compliance, risk 
management is not addressed in the guidance. The potential 
extraterritorial reach of the requirements still remains unclear to us. 
Hence, for the time being, we are not in a position to fully assess the 
consequences of a registration with the CFTC and whether these can be 
reconciled with Swiss regulatory standards, domestic laws, and 
supervisory practice. Nonetheless, we have serious doubts as to whether 
the registration as a swap dealer of a Switzerland-domiciled bank as a 
whole can be reconciled with Swiss practice.
    We are particularly concerned about potential CFTC margin 
requirements for swap deals that are not cleared by a central 
counterparty. If such margin requirements are applied to a Swiss-based 
entity, this may duplicate the requirements and may possibly conflict 
with international and domestic capital adequacy rules, thereby leading 
to prudential inefficiencies. Furthermore, certain of the proposed 
reporting requirements, in particular those regarding trade data and 
end-customer data, and access requirements may raise Swiss privacy and 
data protection issues as well as enforcement difficulties. Due to 
these concerns, we cannot exclude that FINMA may have to deny financial 
institutions permission to supply certain information or grant direct 
access to U.S. supervisors.
    We are conscious that UBS and Credit Suisse are planning to 
register as swap dealers with the CFTC. In this context, the 
registration of UBS's swap business may be particularly challenging. 
Contrary to other swap market participants, UBS does not book its 
derivative transactions through foreign affiliates of the group, but 
carries these out largely through a branch network. Most of the 
derivatives traded with U.S. counterparties are currently booked in the 
UBS London or Stamford branches. The bank is currently working on 
shifting its derivatives business to a standalone legal entity (UBS 
Limited London). This process is expected to take several years.
    Based on our current understanding, we are not comfortable with the 
idea of a Swiss-based bank as a whole registering with the National 
Futures Association (NFA) and the CFTC while the extraterritorial 
effects of the registration remain unclear.
    We are confident, however, that viable alternatives which comply 
with both of our prudential mandates can be found. Such alternatives 
could include the provisional registration of those foreign branches of 
Swiss-based banks in which swap transactions with U.S. persons are 
booked until a separate legal entity has been set up, or the 
registration of a U.S. incorporated entity acting as information 
transfer agent for the bank.
    We thank you for your consideration and look forward to discussing 
these issues with you in more detail. Our office will contact you to 
schedule a telephone call.
            Yours sincerely,

            
            




Patrick Raaflaub,                    Mark Branson,
Chief Executive Officer,             Head of Banks Division,
Swiss Financial Market Supervisory   Swiss Financial Market Supervisory
 Authority FINMA;                     Authority FINMA.



CC:

Hon. Mary Schapiro, Chairperson, Securities and Exchange Commission.
                                 ______
                                 
27 July 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

  Subject: CFTC International Guidance and phased compliance program

    Dear Chairman,

    As Minister of Economy and Finance and as Chairmen of the Autorite 
de controle prudentiel (``ACP'') and the Autorite des marches 
financiers (``AMF''), we are writing to share our strong concerns 
regarding extraterritorial effects of the cross-border application of 
the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act'').
    This issue was raised last month in an open Letter published by 
Michel Barnier, the EU Commissioner in charge of the Internal Market 
and Services.\1\ In February 2011, we also drew your attention as 
regards to credit institutions located in France that may have to 
register as Swap dealers or, from case to case, as Major Swap 
Participants, in the U.S.\2\
---------------------------------------------------------------------------
    \1\ See Financial Times, 21 June 2012.
    \2\ See Annnex I.
---------------------------------------------------------------------------
    In such a context, we welcome the CFTC's initiative aiming at 
defining through an Interpretative Guidance, the scope and the 
boundaries of the U.S. legislation in a cross-border context, as well 
as the proposal for a phased compliance program. In particular, we 
support the concept of ``substituted compliance'' related to non-U.S. 
Swap Dealers or non-U.S. Major Swap Participants. We are firmly 
convinced that the equivalence system is the best way to prevent 
overlaps and to achieve an efficient regulation and oversight of OTC 
de1ivatives markets. Other upcoming European financial regulations 
propose to adopt a similar cross-border equivalence approach. As 
fertile as such the concept of ``substituted compliance'' may be, based 
on the EU legislation (EMIR) \3\ and from a very practical point of 
view, we wish to emphasise that any entity-by-entity approach should be 
articulated with and complemented by the assessment, in a comprehensive 
perspective, of the rules applicable on both sides of the Atlantic. 
Indeed, such general approach, combined with an appropriate temporary 
exemptive relief (particularly for transactions between a non-U.S. and 
a U.S. entity and provided for an extended period of time), should 
facilitate the processing of the files (and reduce the costs for the 
firms) and avoid any distortion or discrepancies between the entities 
located in the same jurisdiction (i.e., EU or EEA).
---------------------------------------------------------------------------
    \3\ See Annex II.
---------------------------------------------------------------------------
    Generally speaking, the mere extension of the scope of registration 
for Swap Dealers or Major Swap Participants to non-U.S. entities would 
create regulatory and oversight overlaps which cause serious concerns 
for us and our industry.
    In addition, we would like to point out the main legal impediments 
we will face, namely the professional secrecy rules and the protection 
of strategic data (``Blocking Law'') which may prevent French entities 
from freely displaying information you may request (such concern should 
dully be considered, in particular, regarding Form 7-R). Similarly, you 
must consider clarifying the scope of the activities which would be 
concerned by the application of the Volcker rule in order to prevent 
significant extraterritorial consequences for the non-resident banking 
entities (i.e., functional and/or structural reorganization) that could 
induce unexpected impact for both U.S. and EU economies.
    Furthermore, we understand that the financial statements of EU Swap 
Dealers and Major Swap Participants which are prepared under IFRS, 
should be reconciled under U.S. GAAP. Such requirements would be 
contrary to the process of reconciliation initiated a few years ago 
between the U.S. and the EU accounting standards and inconsistent with 
mutual recognition commitments already taken on both sides of the 
Atlantic.\4\
---------------------------------------------------------------------------
    \4\ Since 15 November 2007, the SEC has decided to remove the 
requirement for non-U.S. companies reporting under International 
Financial Reporting Standards (IFRSs) as issued by the IASB to 
reconcile their financial statements to U.S. Generally Accepted 
Accounting Principles (GAAP). In the same way, since December 2008, the 
European Commission has identified as equivalent to IFRS the U.S. GAAPs 
for listed companies.
---------------------------------------------------------------------------
    Finally, we consider that the specific issue related to the cross-
border transactions should also be explicitly covered in the 
interpretative guidance, especially when such transactions occur 
between an EU and a U.S. counterparty: according to the recognition of 
equivalence and, if appropriate, following the substituted compliance 
decision, authorities should be able to rely on each other, regardless 
of the type of rules concerned. Given the importance of these 
requirements for market participants, we would also strongly encourage 
you to adopt a strict and objective definition of the concept of ``U.S. 
person'' without criteria that would be excessively subtle and 
difficult to implement and that could finally undermine the 
effectiveness of our common action to regulate OTC derivatives.
    We believe our objectives are the same and are fully convinced that 
we will succeed in building a sound and coherent global framework 
leading to improve the transparency, the efficiency and the robustness 
of the OTC derivatives market, in accordance with the G20 commitments 
and based upon a sound transatlantic level playing field. We are aware 
of the current efforts undertaken by U.S. authorities and are 
supportive on pursuing a constructive dialogue between our respective 
institutions.
            Yours sincerely,

            
            




Pierre Moscovici,        Christian Noyer,         Jacques Delmas-
                                                   Marsalet,
Minister,                Chairman,                Interim Chairman,
Ministere de l'economic  Autorite de controle     Autorite des marches
 et des finances;         prud-entiel (ACP)        financiers (AMF)



CC:

Mrs. Mary L. Schapiro, Chairman of the Securities and Exchange 
Commission.
Mr. Timothy Geithner, Secretary of the Treasury.

ANNEX I: JOINT LETTER FROM THE ACP AND THE AMF RELATED TO TITLE VII OF 
                 THE DODD-FRANK ACT OF 11 FEBRUARY 2011

11 February 2011

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

  Re: Title VII of the Dodd-Frank Act

    Dear Chairman,

    As Chairmen of the Autorite de controle prudentiel (``ACP'') and of 
the Autorite des marches financiers (``AMF'') we take the opportunity 
of the public consultation on your proposed rulemaking to raise 
specific concerns on the proposed rules related to Section 712(d)(1), 
Section 721(c) and Section 761(b) of Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act''). 
Although this is not a formal contribution to your consultations we 
would like to draw your attention specifically to the case of foreign-
headquartered financial organizations and in particular French 
entities.
    We understand that the CFTC and the SEC, in consultation with the 
Board of Governors of the Federal Reserve System (``Fed''), are 
proposing rules and interpretative guidance to further define the terms 
``swap dealer,'' ``security-based swap dealer,'' ``major swap 
participant,'' ``major security-based swap participant,'' and 
``eligible contract participant'' which would not specifically take 
into account the case of the non-resident entities and, therefore, 
could have non-desirable extraterritorial effects on such entities.
    Based on our common experience, especially in a cross-border 
prudential supervision and market regulation perspective, we believe 
that such unilateral approach could lead to regulatory overlaps and 
inconsistencies and therefore be counterproductive. Indeed, the 
articulation between the different legal and regulatory frameworks is 
an international challenge and is undoubtedly a corner stone for the 
achievement of G20's commitments.
    Therefore, from a practical point of view, we strongly support for 
foreign banking organizations and other financial institutions (such as 
asset management companies, investment advisers, private equity funds 
and other entities that might qualify as major swap participants) a 
mutual recognition regime built around an adequate and balanced 
symmetrical system taking into account the home and the host country 
regulatory regimes. Thus, without calling into question the 
registration of nonresident entities as ``swap dealer'', ``security-
based swap dealer'', ``major swap participant'' or ``major security-
based swap participant'', we expect that such registration will be 
limited to activities in relation with U.S. counterparties and/or 
clients and will not involve similar obligations to the financial 
organizations as a whole. The obligations for non-resident entities 
should indeed be proportionate and take into equivalent requirements in 
their home jurisdiction. In this perspective, in order to prevent 
double and recursive regulation, Memoranda of Understanding (MOUs) 
signed between the regulatory authorities concerned could be very 
useful instruments. Having regard to Section 752 of Title VII of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, we 
understand that such an approach could be relevant.
    Consequently, taking into consideration the short timeframe of the 
proposed rulemakings, we would be happy to explore with you various 
options in a constructive approach and we would be pleased to further 
discuss on this very important subject.
    We look forward to our continued co-operation in this field.
            With our best regards,

            
            




Christian Noyer,                     Jean-Pierre Jouyet,
Chairman,                            Chairman,
Autorite de controle prudentiel      Autorite des marches financiers
 (ACP)                                (AMF)



CC:

Mrs. Mary L. Schapiro, Chairman of the Securities and Exchange 
Commission.
Mr. William Dudley, Chairman of the Federal Reserve Bank of New York

    ANNEX II: ARTICLE 13 OF EMIR--MECHANISM TO AVOID DUPLICATIVE OR 
                           CONFLICTING RULES

    1. The Commission shall be assisted by ESMA in monitoring and 
preparing reports to the European Parliament and to the Council on the 
international application of principles laid clown in Articles 4 
[clearing obligation], 9 [reporting obligation], 10 [non-financial 
counterparties] and 11 [Risk-mitigation techniques for OTC derivative 
contracts not cleared by a CCP], in particular with regard to potential 
duplicative or conflicting requirements on market participants, and 
recommend possible action.

    2. The Commission may adopt implementing acts declaring that the 
legal, supervisory and enforcement arrangements of a third country:

    (a) are equivalent to the requirements laid down in this regulation 
        under Articles 4, 9, 10 and 11;

    (b) ensure protection of professional secrecy that is equivalent to 
        that set out in this Regulation; and

    (c) are being effectively applied and enforced in an equitable and 
        non-distortive manner so as to ensure effective supervision and 
        enforcement in that third country.

Those implementing acts shall be adopted in accordance with the 
examination procedure referred to in Article 86(2).

    3. An implementing act on equivalence as referred to in paragraph 2 
shall imply that counterparties entering into a transaction subject to 
this Regulation shall be deemed to have fulfilled the obligations 
contained in Articles 4, 9, 10 and 11 where at least one of the 
counterparties is established in that third country.
    4. The Commission shall, in cooperation with ESMA, monitor the 
effective implementation by third countries, for which an implementing 
act on equivalence has been adopted, of the requirements equivalent to 
those laid down in Articles 4, 9, 10 and 11 and regularly report, at 
least on an annual basis, to the European Parliament and the Council. 
Where the report reveals an insufficient or inconsistent application of 
the equivalent requirements by third country authorities, the 
Commission shall, within 30 calendar days of the presentation of the 
report, withdraw the recognition as equivalent of the third country 
legal framework in question. Where an implementing act on equivalence 
is withdrawn, counterparties shall automatically be subject again to 
all requirements laid down in this Regulation''.
                                 ______
                                 
August 13, 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

  Re: Proposed CFTC Cross-Border Releases on Swap Regulations

    Dear Gary,

    We appreciate the opportunity to comment on the proposed CFTC 
cross-border interpretative guidance and exemptive order regarding 
compliance with certain swap regulations. We are writing to ask the 
Commission's consideration of our concerns about these proposals, in 
particular about the application of registration and transaction 
requirements to operations of foreign financial institutions 
established outside the U.S.
    As to the extraterritorial application of OTC derivatives 
regulation of the Dodd-Frank Act, we can understand your concern that 
risks emanating from an overseas entity of a financial group could 
directly flow back to the whole group, and this should be avoided. We 
believe, however, that such extraterritorial application will need to 
be consistent with the principles of international comity between 
jurisdictions, as noted in the CFTC proposal. A number of 
jurisdictions, including Japan, have been making significant progress 
in implementing the G20 commitments, including mandatory clearing and 
trade reporting, in an internationally consistent and coordinated 
manner toward the agreed deadline of end-2012. The regulations which 
Japan will be implementing from November this year are not identical 
with U.S. regulations, but are consistent with the objectives of the 
G20 countries to improve transparency in the derivatives markets, 
mitigate systemic risk and protect against market abuse, and in this 
regard share the same goals with the Dodd-Frank Act.
    Against this backdrop, we have two overarching concerns and three 
specific requests to amend the CFTC proposals as follows.

I. Overarching Concerns
Avoidance of Overlapping or Conflicting Regulation
    First, to the extent that U.S. law subjects Japanese financial 
institutions established and conducting businesses in Japan to U.S. 
regulation, then this would inevitably lead to overlapping or 
conflicting regulation, thus placing undue burden not only on the 
financial institution itself but also on other market participants as 
well.
    In this regard, FSA Japan has the primary responsibility in 
determining and implementing appropriate regulation of OTC derivatives 
market participants and their transactions in Japan. Therefore, we 
would like to ask the Commission to reconsider the necessity of 
extraterritorial application of U.S. derivative regulations, including 
swap dealer registration requirements to Japanese financial 
institutions established and conducting businesses in Japan.
Need for International Coordination in Cross-Border Regulation
    Second, if the scope and timing of application of OTC derivatives 
regulations to cross-border transactions would be different and 
inconsistent among jurisdictions, there are risks that the application 
of a country's regulations to cross-border transactions without proper 
international coordination would unduly impose additional costs on 
those transactions and thereby reduce the liquidity of OTC derivatives 
markets. For example, where the scope of mandatory clearing in terms of 
products is not identical between jurisdictions and no single CCP is 
available for clearing the transactions of both counterparties, market 
participants will not be able to enter into a transaction for fear of 
finding themselves in breach of either of the two sets of regulations. 
In this context, FSA Japan intends to address this issue by limiting 
the scope of mandatory clearing to transactions between large domestic 
market players at the initial stage of implementation of OTC derivative 
regulations to enter into force in November this year.
    Therefore, we urge the Commission to consider deferring the 
application of its regulations on cross-border transactions until an 
internationally consistent approach on how to address cross-border 
regulation of OTC derivatives would be developed (e.g., for at least 1 
year and renewable, if necessary).

II. Specific Requests
    In addition to the overarching concerns above, we have the 
following three specific requests to amend the CFTC proposals:

    1. Further extension of application of substituted compliance, and 
        making clear its details, including due process and timing

    2. Deferral of application of CFTC regulations with respect to non-
        U.S. persons

    3. Exclusion of certain transactions from the calculation of swap 
        transactions in regard to the de minimis threshold for non-U.S. 
        persons
1. Further Extension of Application of Substituted Compliance, and 
        Making Clear Its Details, Including Due Process and Timing
    In the proposed CFTC guidance, we recognize that the Commission 
intends to introduce the concept of substituted compliance for the 
purpose of avoiding duplicative application of regulation. While we 
welcome this step, we have two concerns in this regard.

    (i) The first concern is that the scope of application of 
        substituted compliance is too narrow. We request it to be 
        further extended, so that overlap or conflict with Japanese 
        regulation could be avoided as much as possible.

      As for entity-level regulations, substituted compliance should 
        apply to all types of foreign affiliates of U.S.-based swap 
        dealers, including those with swaps booked in the U.S. 
        Substituted compliance should also be extended to a broader set 
        of transaction-level requirements. For example, transactions 
        conducted in Japan between Japanese financial institutions and 
        Japanese affiliates of U.S.-based swap dealers (swaps booked in 
        the U.S.) should be subject to substituted compliance. In 
        addition, cross-border transactions between the head offices of 
        Japanese financial institutions and U.S.-based swap dealers 
        should be able to benefit from substituted compliance.

    (ii) The second concern is that the details, including the 
        procedure and implementation timeline of ``substituted 
        compliance'' are not clear in the proposal. The Commission 
        proposes that it would make comparability determinations on an 
        individual requirement basis, such as mandatory clearing and 
        trade execution facility, rather than the foreign legislative/
        regulatory regime as a whole. We believe this determination 
        should be made on a country-by-country basis, and in a 
        comprehensive manner, from the viewpoint of whether or not 
        foreign regulation is broadly in alignment with U.S. regulation 
        and consistent with the overall objectives of the G20 
        commitments. The determination should also take into account 
        such elements as further regulations to be introduced in a 
        phased manner and the necessity of different regulation in 
        light of divergent practices in non-U.S. markets.

      Furthermore, when certain requirements under Japanese regulations 
        are not identical to those of the U.S. at a particular point in 
        time, it would not be acceptable for us that the Commission 
        applies its regulations in addition to Japanese regulations in 
        place to address the differences. In other words, substituted 
        compliance should respect foreign regulations as a set, not on 
        a piecemeal basis.

2. Deferral of Application of CFTC Regulations With Respect to Non-U.S. 
        Persons
    As noted above, we believe that CFTC regulations, including swap 
dealer registration should, as a matter of principle, not be applied to 
Japanese financial institutions established and conducting businesses 
in Japan. Even if Japanese financial institutions would be required to 
register as swap dealers under limited circumstances, these 
requirements should be the least onerous, and a sufficient preparation 
period needs to be ensured.
    In this regard, according to the CFTC rule, the application for 
registration as swap dealer will need to be filed within 60 days after 
the final rule on the definition of swaps is published in the U.S. 
Federal Register. Although this deadline is applied to non-U.S. 
persons, as well as U.S. persons, we request that the swap dealer 
registration requirement (along with other obligations that 
registration entails) should not apply to non-U.S. persons before (i) 
the details, including the procedure and implementation timeline of 
substituted compliance become clear, and (ii) the assessment by the 
Commission for substituted compliance is completed and agreed with 
interested parties.

3. Exclusion of Certain Transactions From the Calculation of Swap 
        Transactions in Regard to the De Minimis Threshold for Non-U.S. 
        Persons
    Third, the following types of swap transactions should be excluded 
from the calculation of swap transactions in regard to the de minimis 
threshold in determining the need for swap dealer registration for non-
U.S. persons, if non-U.S. persons are required to register under 
limited circumstances.

    (i) Transactions between non-U.S. affiliates of non-U.S. persons 
        under common control and U.S. persons

      We believe that only transactions with U.S. persons conducted by 
        Japanese financial institutions established in Japan should be 
        included in determining the need for registration as swap 
        dealer. In other words, transactions with U.S. persons 
        conducted by entities under common control of Japanese 
        financial institutions established outside Japan (e.g., in the 
        UK and Hong Kong) should not be included in the calculation of 
        swap transactions in regard to the de minimis threshold, with 
        respect to the Japanese financial institutions established in 
        Japan.

      Furthermore, even if Japanese financial institutions are to be 
        registered as swap dealers, their subsidiaries, sister 
        companies or parent companies which conduct transactions with 
        U.S. persons below the de minimis threshold should not be 
        required to register as swap dealers.

    (ii) Transactions between U.S. branches of non-U.S. persons and 
        U.S. persons

      According to the proposed guidance, we understand Japanese 
        financial institutions established in Japan do not need to 
        include the notional value of swap transactions with U.S. 
        persons in which their U.S. affiliates engage, when calculating 
        the swap transactions in regard to the de minimis threshold. In 
        parallel with this, we believe that transactions between U.S. 
        branches of Japanese financial institutions and U.S. persons 
        should also be excluded from the de minimis threshold 
        calculation for Japanese financial institutions.

    We would Like to kindly request that the Commission take into 
account the above and amend the proposed guidance and order in 
accordance with our requests. Should you have any questions concerning 
the above, please do not hesitate to contact us.
            Sincerely yours,

            
            
Masamichi Kono,
Vice Commissioner for International Affairs,
Financial Services Agency,
Government of Japan;



Hideo Hayakawa,
Executive Director,
Bank of Japan.

CC:

Commissioner Ms. Jill E. Sommers, CFTC
Commissioner Mr. Bart Chilton, CFTC
Commissioner Mr. Scott D. O'Malia, CFTC
Commissioner Mr. Mark P. Wetjen, CFTC
Chairman Mary L. Schapiro, SEC
Under Secretary for International Affairs Lael Brainard, U.S. 
Department of the Treasury
                                 ______
                                 
24 August 2012

  David A. Stawick,
  Secretary,
  Commodity Futures Trading Commission,
  Washington, D.C.

Subject: Comment Letter Proposed CFTC Rules

    Dear Mr. Stawick,

    The European Commission welcomes the opportunity to provide 
comments on the proposed Cross-Border Proposed Interpretive Guidance 
(RIN 3038-AD57) and the Proposed Exemptive Order (RIN 3038-AD85) as 
published by the Commodity Futures Trading Commission (CFTC) on 12 
July.
    These comments should be seen in the important context of our 
shared commitment in the G20 to comprehensively regulate over-the-
counter (OTC) derivative markets. Two years ago in Toronto, G20 Leaders 
reaffirmed their commitment to improve transparency and regulatory 
oversight of OTC derivatives ``in an internationally consistent and 
non-discriminatory way''. Since then the European Commission and the 
CFTC have engaged in a dialogue to fulfil those objectives. Regulatory 
frameworks that will improve the stability of the financial system are 
now in place in the U.S. and the EU and we have both made great efforts 
to ensure the consistency of our requirements. We have also worked 
together with a shared objective of avoiding duplicative and 
conflicting requirements and rules to prevent their avoidance.
    Nevertheless, we are of the view that the CFTC's proposed cross-
border Guidance and proposed Exemptive Order require further review in 
order to contribute to achieving our common goal.
Definition of a `U.S. Person'
    The European Commission understands the CFTC's concern about 
exposing the U.S. financial system to significant risks through 
connections with a foreign entity which is not resident or established 
in the U.S. To this end the CFTC proposes a wide definition of a `U.S. 
person'.
    This wide definition determines the territorial scope of 
application of the Dodd-Frank Act. The European Commission notes the 
significant potential risk attached to this proposed approach. It will 
maximise the potential for overlap and duplication of U.S. regulatory 
requirements with those of other jurisdictions, including the EU. An EU 
and a U.S. firm that conclude an OTC derivatives contract will be 
simultaneously subject to EU and U.S. requirements. This will lead to 
duplication of laws and to potentially irreconcilable conflicts of laws 
for market operators. Examples of such situations are the following:

   An EU-dealer could be subject for the same trade to the 
        European regulatory requirements (under EMIR, MiFID, and CRD 
        IV) and to CFTC requirements implementing the Dodd-Frank Act at 
        the same time.

   A collective investment vehicle managed from the EU, but 
        with a majority ownership by U.S. persons would be subject to 
        regulatory requirements in the EU and to Dodd-Frank in the U.S.

    Legal uncertainty is increased by the fact that the CFTC's proposed 
interpretation of the term ``U.S. person'' is based on a non-exclusive 
list of entities that fall within the definition. It is important for 
the CFTC to provide further clarification about the process for 
determining any other types of entities that it deems to be ``U.S. 
persons'' in the future and how and when it intends to apply regulatory 
requirements to those entities.
    A further consequence and source of concern about the CFTC's 
proposed approach is its practical and legal enforcement. The 
application of U.S. rules to non-U.S. firms implies that they would 
need to be enforced by U.S. regulators. In addition to the potentially 
irreconcilable conflicts of laws firms will face and the significant 
resource implications for the CFTC in view of the potentially large 
number of firms involved, this will entail significant supervisory 
inefficiencies as non-U.S. firms would be supervised by both the CFTC 
as well as their home regulators. A duplicative application of EU and 
U.S. rules could also lead to distortive and discriminatory situations.
    Although we have made significant efforts to develop common 
international standards in the field of OTC derivatives EU and U.S. 
firms could face permanent legal uncertainty if this issue is not 
resolved. We therefore suggest that the definition of a `U.S. person' 
should be qualified and should not apply to a person or entity that is 
not resident or established in the U.S. if the CFTC can establish that 
it is resident or established in a jurisdiction which has rules in 
force that are consistent with and comparable to those under the Dodd-
Frank Act.
    It is reasonable to expect U.S. authorities to rely on those rules 
and recognise activities regulated under them as compliant where those 
activities have been subject to comparable standards under a foreign 
jurisdiction. The concept of substituted compliance introduced in the 
guidance is a positive step in this direction but does not go far 
enough to deliver the full benefits of this approach for a consistent 
international regulation of OTC derivatives markets (see below).
Registration
    Under existing CFTC rules, Swap Dealers (SD) and Major Swap 
Participants (MSP) will be required to register with the CFTC within 60 
days of the final publication of a joint CFTC/SEC rule defining swaps, 
i.e., before 12 October 2012.
    First, we suggest that in view of uncertainties and significant 
issues identified with the definition of a `U.S. person' proposed by 
the CFTC the registration requirement for non-U.S. persons should be 
delayed at least until the final cross-border Guidance has been 
published. This will allow firms to determine whether they are required 
to register and will minimize the regulatory risk involved with 
incorrect registration.
    Furthermore, as a consequence of the CFTC's proposed approach and 
wide definition of `U.S. persons', many EU firms may be subject to the 
registration requirement with the CFTC. This raises significant 
concerns.

   According to the CFTC's proposed interpretation of the Dodd-
        Frank Act, a registration requirement would apply to a legal 
        person as a whole. In respect of a U.S. branch of an EU firm, 
        this may lead to a requirement for the EU-head office of the 
        parent company to register with the CFTC. First, if a U.S. 
        branch of an EU entity trades only with other non-U.S. persons, 
        there would seem to be no question of exposing the U.S. 
        financial system to significant risks. Second, in response to 
        the excessively wide scope of U.S. rules, EU banks might 
        consider converting their U.S. branches into affiliates in 
        order to avoid registration and its subsequent requirements 
        applying to the parent company. This would have the perverse 
        effect of introducing risk into the U.S., as an affiliate of a 
        non-U.S. bank will be a fully legally incorporated U.S. entity. 
        Furthermore, EU banks would face an increased cost in capital, 
        since they would have to maintain separate capital in these 
        affiliates.

   In terms of process, in the future EU firms would also have 
        to monitor on an on-going basis if their volumes of swaps 
        breach the registration thresholds proposed by the CFTC.

    We are of the view that these uncertainties, as well as the 
significant and unnecessary incremental and running costs generated by 
the obligation to register, could be avoided completely if the CFTC 
were to consider an approach based on a wider recognition of EU rules 
and increased cooperation between EU and U.S. regulators as discussed 
below.
    The treatment of non-EU firms proposed by the Commission in its 
legislative proposal (MiFID II) in respect of trading in financial 
instruments in EU financial markets could be a significant step to 
opening access to EU financial markets for U.S. firms. However, the 
CFTC's proposed registration requirements could put the adoption of 
this approach into question as it is difficult to envisage that the EU 
would adopt rules which would create an imbalance in treatment of EU 
firms under U.S. law compared to the treatment granted to U.S. firms 
under EU law.
`Substituted Compliance'
    We appreciate the statutory constraints under which the CFTC 
operates in the area of `substituted compliance' and appreciate the 
efforts made to introduce this concept, which shares some similarities 
with the European `equivalence' approach.
    However, and to limit as much as possible the effects and the cost 
of registration for EU-based firms, we strongly urge the CFTC to remove 
the registration obligation for EU firms since they will be subject to 
equivalent and comparable requirements. This would reduce the 
incremental costs associated with the registration process and 
alleviate compliance costs. This is similar to the approach adopted in 
EU legislation.
    We also appreciate that the proposed Exemptive Order addresses 
certain sequencing issues in relation to the application of a number of 
requirements. However, the proposal offers only temporary relief for 
entity level-requirements. We believe that this should also be extended 
to transaction-level requirements, including when they apply to non-
U.S. firms' transactions with U.S. firms.
    As regards transaction-level requirements, additional fundamental 
issues arise. We have reviewed closely and with great interest the 
concept of `substituted compliance' described in the proposed 
rulemaking. It is similar in some respects, but not all, to the 
European concept of `equivalence', and may to a degree also achieve the 
same results.
    If we understand the CFTC's proposals correctly, substituted 
compliance would apply only to transactions between two non-U.S. legal 
persons. Substituted compliance would not apply to trades involving one 
U.S. legal person and a non-U.S. legal person subject to comparable 
rules under a third-country regime. In other words, this cross-border 
application of the Dodd-Frank Act would imply that EU firms dealing 
with U.S. counterparties would always be subject to Dodd-Frank, while 
U.S. firms dealing with EU counterparties could not be subject to EU 
rules if the EU decides to grant equivalence to the U.S. Although the 
need for U.S. authorities to have certainty about the proper regulation 
of trades entered into by subsidiaries of U.S. firms is legitimate, it 
is difficult to understand why comparable foreign legislation would not 
equally legitimately achieve the same result. In our view, a comparable 
and consistent set of rules and requirements in the EU may equally 
legitimately achieve the result sought by the U.S. authorities.
    Second, wider application of substituted compliance by the CFTC is 
very important for our consideration of a positive equivalence decision 
in respect of the U.S. The adoption of an equivalence decision by the 
European Commission would allow us to determine that EU firms may be 
subject to the rules of a specific third country and still meet the 
requirements in EU legislation because they are considered to be 
equivalent. This is a direct and powerful instrument to avoid 
subjecting EU and U.S. firms to duplicative and onerous central 
clearing and margining requirements. The application of multiple sets 
of rules to the same transaction undermines the G20's financial 
stability objectives (trades may not be cleared in either 
jurisdiction), it is economically and financially unsustainable for 
U.S. and EU firms, and it is unwise from a market perspective as trades 
may migrate to other jurisdictions. The power and ability of the 
European Commission to adopt an equivalence decision to avoid all of 
these profoundly negative effects is subject to one important 
condition: the rules of the third-country concerned must be applied in 
an `efficient and non-distortive' manner. If this cannot be determined 
and the rules of a third country are considered to result in an 
unbalanced state of affairs which creates a discrimination of treatment 
between two jurisdictions, the European Commission could be prevented 
from granting equivalence.
    Third, we must draw your attention to a requirement in EMIR for the 
Commission to adopt rules on the basis of technical standards drafted 
by ESMA specifying which transactions between non-EU entities have a 
`direct, significant and foreseeable effect' on the EU. There are 
strong similarities between the potential scope of this rule--which has 
not yet been adopted--and section 722(d) of the Dodd-Frank Act. If the 
EU were to promulgate a rule with the same scope as the CFTC proposes 
in its guidance, swaps between two U.S. affiliates of EU firms would be 
subject to EMIR thus leading to the application of multiple rules to 
U.S. firms.

Process for Substituted Compliance
    In addition to the limited scope proposed for substituted 
compliance, we also have serious reservations about the manner in which 
the CFTC proposes to apply that approach.
    As proposed, a decision by the CFTC determining substituted 
compliance will not apply to jurisdictions (which is the case under 
EMIR in the EU) but only to specific firms after a chapter by chapter 
analysis and can be withdrawn from a firm at any time.
    We encourage the CFTC to adopt a similar approach to that of the EU 
which is based on the recognition of `equivalent' jurisdictions, and 
not of individual firms. EU entities will be subject to highly 
harmonised requirements for derivatives in the fields of clearing, 
reporting and margining (EMIR Regulation 648/2012, Markets in Financial 
Instruments Directive and Regulation--in the process of being updated), 
and the Capital Requirements Directive for banking and investment firm 
solvency. We understand that U.S. firms are subject to similar rules 
and requirements. In this situation it would be duplicative to require 
each EU entity seeking to benefit from substituted compliance in the 
U.S. to separately demonstrate the equivalence of these EU rules with 
Dodd-Frank. When determining acceptability for substituted compliance 
we invite the CFTC to take into consideration whether another 
jurisdiction complies with consistent and comparable standards.
    The approach proposed by the CFTC will introduce legal uncertainty 
and higher monitoring costs for EU firms than for U.S. firms that might 
benefit from an EU equivalence decision. Moreover, the application on a 
firm by firm basis could lead to different and even discriminatory 
treatment between firms and jurisdictions.
    We are of the view, however, that an approach that is based on an 
effective system of `substituted compliance' or `equivalence' requires 
close cooperation between regulatory authorities. The conclusion of 
Memoranda of Understanding between regulators will be required to 
establish clear rules and obligations in important fields of regulatory 
cooperation such as access to information, on-site inspections, etc. 
The European Commission is prepared to provide any necessary assistance 
to facilitate a common framework for the conclusion of such agreements.
    In conclusion, we are grateful for the opportunity to comment on 
the proposed Interpretative Guidance and Exemptive Order which provide 
the final cornerstones determining how the CFTC intends to contribute 
to an internationally consistent and non-discriminatory regulatory 
framework for the global OTC derivatives markets. As explained in our 
comments we firmly believe that the CFTC's proposals require further 
review in order to meet that goal. In the absence of this we believe 
that the G20 commitments will not be met and that the efforts that the 
EU and the USA and other jurisdictions have made will potentially 
result in an uncoordinated, duplicative international regulatory 
framework for OTC derivative markets. This will bring neither comfort 
to regulators and policymakers, nor clarity and transparency to market 
operators. It will create frequent regulatory conflicts and will 
adversely impact the derivatives markets.
    We look forward to discussing the issues raised in this comment 
letter with the CFTC.
            Yours sincerely,

            
            
Jonathan Faull,
Director General, Internal Market and Services,
European Commission.
                                 ______
                                 
24 August 2012

  David A. Stawick,
  Secretary,
  Commodity Futures Trading Commission,
  Washington, D.C.

  FSA Comment on Proposed Interpretive Guidance and Policy Statement on 
            Cross-Border Application of Certain Swaps Provisions of the 
            Commodity Exchange Act (``Proposed Cross-Border Guidance'') 
            and Proposed Exemptive Order Regarding Compliance With 
            Certain Swap Regulations (``Proposed Exemptive Order'')

    Dear Mr. Stawick,

    We appreciate the ongoing dialogue between the CFTC and FSA in 
relation to the cross-border application of the U.S. Dodd-Frank 
legislation, and we would like to take this opportunity to provide 
comments on behalf of the FSA on the two papers released by the CFTC 
last month.
    Our comments focus on a few areas of concern the FSA has with the 
proposed cross-border guidance and proposed exemptive order.
Deadline for Registration of Non-U.S. Swap Dealers (``SDs'') and Major 
        Swap Participants (``MSPs'')
    We understand that, in accordance with previous CFTC Dodd-Frank 
rulemakings. those SDs and MSPs required to register with the CFTC will 
be required to do so within 60 days of the publication in the U.S. 
Federal Register of a joint final rule with the SEC providing further 
definitions of ''swap'' and related terms.\1\ We understand that this 
means that SDs and MSPs will need to register with the CFTC by 12 
October 2012.
---------------------------------------------------------------------------
    \1\ CFTC/SEC Joint Final Rule and Interpretation: Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based 
Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping.
---------------------------------------------------------------------------
    The CFTC acknowledges in its proposed cross-border guidance that 
there is uncertainty over whether a non-U.S. person's swap dealing 
activities will be sufficient to require registration as an SD. The 
proposed guidance is designed, in part, to provide clarity on this 
issue. Non-U.S. firms will therefore not be in a position to determine 
whether they are required to register as an SD or MSP before the final 
cross-border guidance is published. If this is close to, or after 12 
October 2012, there is a risk that firms will incorrectly register (or 
conversely. not register when they should), which exposes them to 
regulatory risk.
    We therefore suggest that the CFTC delays imposing the registration 
requirement on non-U.S. persons until a defined period (perhaps 6 
months) after the CFTC has finalised its cross-border guidance. This 
would allow firms time to interpret the guidance and make an informed 
and considered decision on the appropriate entities to register.
Application of Transaction-Level Requirements To All Registered SDs and 
        MSPs
    Section III.B.S of the proposed cross-border guidance outlines the 
application of Dodd-Frank transaction-level requirements, specifically 
``to require non-U.S. swap dealers and non-U.S. MSPs to comply with 
Transaction-Level Requirements for all of their swaps with U.S. 
persons, other than foreign branches of U.S. persons, as 
counterparties''.
    The corresponding European Union legislation (the Regulation of the 
European Parliament and of the Council on OTC derivatives, central 
counterparties and trade repositories--``EMIR'') takes a fundamentally 
different approach. Under EMIR, where a foreign regime is deemed to be 
equivalent, ``counterparties entering into a transaction subject to 
this Regulation shall be deemed to have fulfilled the obligations 
contained in [relevant articles] where at least one of the 
counterparties is established in that third country.'' \2\
---------------------------------------------------------------------------
    \2\ Regulation (EU) No. 648/2012 of the European Parliament and of 
the Council on OTC derivatives, central counterparties and trade 
repositories, Article 13(3).
---------------------------------------------------------------------------
    We are concerned that the proposed cross-border guidance does not 
allow for a similar equivalence-based process, and will instead require 
firms to meet Dodd-Frank transaction-level requirements where one of 
the counterparties is a U.S. person. In our view this has the potential 
to have a real impact on trades between UK and U.S. firms. For example, 
it is likely to result in the Dodd-Frank requirements being exported to 
a wide range of UK (and other EU) firms, for example resulting in any 
UK firm doing business with a U.S. firm needing to trade on a CFTC-
registered Swap Execution Facility and clear the trade on a CFTC-
registered clearing organisation. Were any non-U.S. legislation/
regulation to take a similar approach to the proposed cross-border 
guidance. then a real risk of regulatory conflict for cross-border 
trades, potentially prohibiting such business, would exist.
    We would therefore encourage the CFTC to take an approach similar 
to that taken in EMIR. This would build on the substantial work done at 
an international level to ensure a consistently strong level of 
regulation of global derivatives markets, enabling each jurisdiction to 
determine independently which other jurisdictions it considers 
equivalent, to ensure there is no dilution in the strength of local 
regulations.
Impact of Proposed Exemptive Order on Non-U.S. Persons
    The proposed exemptive order would ``allow non-U.S. SDs and non-
U.S. MSPs to delay compliance with certain Entity-Level 
Requirements''.\3\ We believe this is appropriate as it will provide 
time for those firms for whom substituted compliance is possible to 
make an application to meet CFTC requirements through that route.
---------------------------------------------------------------------------
    \3\ Proposed Exemptive Order, Section III.
---------------------------------------------------------------------------
    However, the proposed exemptive order only provides limited relief 
in relation to transaction-level requirements. Related to the previous 
point on the general application of transaction-level requirements to 
non-U.S. SDs and MSPs, we believe that the delays in required 
compliance in the proposed exemptive order should extend to also cover 
transaction-level requirements for non-U.S. SDs and MSPs. This would 
provide time for the CFTC to undertake determinations of substituted 
compliance before the requirements become binding on firms.
Substituted Compliance Process
    We broadly support the process outlined in Section V of the 
proposed cross-border guidance for the determination of substituted 
compliance for an individual jurisdiction. We do however believe there 
are a number of additional points or changes that could be made in the 
proposed cross-border guidance that would help provide clarity to 
market participants on the process for determining substituted 
compliance.

   EU entities will be subject to highly harmonised regulation 
        on derivatives issues, with the EMIR regime for OTC derivatives 
        clearing, reporting and margining, the Markets in Financial 
        Instruments Directive (soon to be updated) for trading-related 
        issues and the Capital Requirements Directive for banking and 
        investment firm solvency. It would therefore seem duplicative 
        to require each EU entity seeking to benefit from substituted 
        compliance to separately demonstrate the equivalence of these 
        EU rules with Dodd-Frank. In the EU, assessments of equivalence 
        will be undertaken at a jurisdictional level. As far as 
        possible, we believe it would be beneficial, and more 
        efficient, if the CFTC were to take a jurisdictional rather 
        than firm-by-firm approach.

   In our view, the guidance could also outline more clearly in 
        what circumstances a particular foreign jurisdiction will be 
        acceptable for substituted compliance, and where substituted 
        compliance will only be able to be determined for specific 
        requirements as opposed to the entire set of CFTC swap 
        requirements.

   As a further point we would encourage you to consider 
        outlining in the guidance how the CFTC will make a 
        determination of substituted compliance when regulatory reform 
        in another jurisdiction is underway but not yet complete. For 
        example, it remains unclear whether the CFTC could deem another 
        jurisdiction to be acceptable for substituted compliance on the 
        basis that a jurisdiction has rules entering shortly into 
        force.

   We also believe it would be beneficial for the guidance to 
        outline the anticipated timing of the CFTC's substituted 
        compliance assessments, so that firms can have some certainly 
        around whether there will be a gap between the expiry of the 
        exemptive order and the relevant substituted compliance 
        determinations.

   Finally on this point, we would encourage the CFTC to take 
        into consideration compliance with relevant international 
        standards in the determination of acceptability for substituted 
        compliance. In general, compliance with relevant international 
        standards (such as the CPSS-IOSCO Principles for Financial 
        Markets Infrastructure or various reports of IOSCO) should be 
        an important factor in determining if a jurisdiction has a 
        regime acceptable for substituted compliance.

Treatment of U.S. Branches of Non-U.S. Persons
    We are concerned there is a lack of clarity about the treatment of 
U.S. branches of non-U.S. persons in the proposed cross-border 
guidance.
    Section II.D.3 of the proposed cross-border guidance suggests that, 
in certain circumstances, a U.S. branch of a non-U.S. person could be 
required to register with and be subject to oversight by the CFTC. We 
are particularly concerned that a non-U.S. person, who may trade only 
with other non-U.S. persons, could become subject to CFTC registration 
and oversight due only to the activities of a U.S. branch of the non-
U.S. person.
    As an example, it appears under the proposed cross-border guidance 
that a New York branch of a UK bank that is facilitating trades between 
the UK bank and another non-U.S. bank could result in the New York 
branch, or the UK bank itself, being required to register with the CFTC 
despite the legal person being located outside the U.S. and trading 
only with non-U.S. persons. We believe in this scenario that the 
transaction entered into by the non-U.S. person through a U.S. branch 
is unlikely to introduce any risk into the U.S.
    We therefore believe the guidance could be clarified to make clear 
that the presence of a branch in the U.S. should not, in itself, result 
in the branch or parent entity becoming subject to CFTC registration 
and prudential requirements, unless they are required to do so on some 
other basis.

Definition of a U.S. Person
    We understand the CFTC's desire to avoid a situation where the U.S. 
financial system is exposed to undue risks through links to a foreign 
entity. However, defining an entity which is not resident or 
established in the U.S. as a U.S. person comes with a risk of conflict 
of laws, particularly where that person is resident or established in a 
jurisdiction with a highly developed regulatory system. For example, a 
collective investment vehicle managed from the EU, but with a majority 
ownership by U.S. persons, would be subject to the Alternative 
Investment Fund Managers Directive and EMIR in the EU and to Dodd-Frank 
in the U.S., and the multiple registration requirements could present a 
significant possibility of conflict of laws. We would encourage a 
qualification to be added to the definition of U.S. person to state 
that an entity which is neither established nor resident in the U.S. 
will not be classed as a U.S. person where it is established or 
resident in a jurisdiction which has in force regulations with 
equivalent effect to Dodd-Frank.
    We thank you again for providing the opportunity to comment on 
these important releases, and we look forward to continued strong 
engagement between the CFTC and the FSA. We would be happy to discuss 
any of these issues raised with you further.
            Yours sincerely,

            
            
David Lawton,
Director of Markets, Financial Services Authority;



Stephen Bland,
Director of Investment Banks and Overseas Banks, Financial Services 
Authority.
                                 ______
                                 
27 August 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

    Dear Gary,

    1. We appreciate an opportunity to comment on the Commodity Futures 
Trading Commission (``CFTC'')'s draft interpretative guidance on the 
``Cross-Border Application of Certain Swaps Provisions of the Commodity 
Exchange Act'' (the ``Proposed Guidance'') in July 2012. We are writing 
to express our concerns and to seek clarification on various aspects of 
the Proposed Guidance as raised by our regulators and the industry.

    2. The Proposed Guidance indicates that the CFTC intends to regard 
non-U.S. persons as being subject to the CFTC registration requirements 
under certain conditions. We are concerned that such an approach to 
extend the CFTC's jurisdiction to the operation of foreign financial 
institutions would result in such institutions having to meet 
overlapping, and possibly conflicting, regulations in the U.S. and 
their home jurisdictions, and would undermine regulatory reform efforts 
currently under way in other jurisdictions including Hong Kong. 
Moreover, the proposed extension of the CFTC's jurisdictional reach 
would increase compliance costs for global market participants and more 
importantly, may discourage market participants from entering into 
Over-the-counter (``OTC'') derivatives transactions with U.S. persons, 
resulting in market fragmentation and liquidity withdrawal. 
Particularly for those provisions that may be in conflict with local 
legislation, enforceability is called into question.

Defining ``U.S. Persons''
    3. Regulators in Hong Kong, the Securities and Futures Commission 
(``SFC'') and the Hong Kong Monetary Authority (``HKMA''), have 
examined the Proposed Guidance with market participants operating in 
Hong Kong with the view to assessing the impact that such guidance may 
have on them and their operations here. The general feedback is that 
there is insufficient clarity as to how the U.S. rules and regulations 
will be applied to non-U.S. based swap dealers (``SDs'') and non-U.S. 
major swap participants (``MSPs''), leading to concerns about the 
practical implementation issues arising from the Proposed Guidance. A 
major area of concern is how the term ``U.S. person'' will be 
construed. As you will agree, it is critical for a non-U.S. person to 
be able to independently determine if it falls within the registration 
requirements of the CFTC rules. As we understand it, this hinges on 
whether the non-U.S. person's counterparty is a ``U.S. person''. In 
this regard, our market participants are concerned that the Proposed 
Guidance does not provide sufficient clarity or specificity to enable 
them to ascertain whether their counterparties will be construed by the 
CFTC as U.S. persons. Consequently, it is also difficult for them to 
assess the full impact of the registration requirements on them and 
their operations. This also hampers the ability of global players in 
the OTC derivatives market to streamline their structure and operations 
when dealing with both U.S. and non-U.S. counterparties.

Enforceability Issues
    4. Besides, financial institutions registered as non-U.S. based SDs 
are required to report all OTC derivatives transactions to a Swap Data 
Repository (``SDR''). Market participants are concerned about whether 
they could legally transfer customer data to the foreign SDRs to meet 
CFTC's reporting requirements, given that the client account opening 
documents are governed by the local laws and in the context of 
fulfilling the reporting obligations, the U.S. authorities are neither 
the banks' home or host regulators. Therefore, for the avoidance of 
legal risk, non-U.S. based SDs may be unable to continue dealing with 
non-U.S. customers in the OTC derivatives market unless these customers 
provide explicit consent to release their data to meet the U.S. 
reporting requirements or substituted compliance is permitted. This 
places them at competitive disadvantage versus peers which are not 
subject to the same restriction.

``Substituted Compliance''
    5. The Proposed Guidance indicates that the CFTC will allow for 
``substituted compliance'', i.e., compliance with local laws and 
regulations will be regarded as sufficient if such laws and regulations 
are comparable to U.S. rules and regulations. In the extreme cases, 
such requirements may force financial institutions to refrain from 
certain OTC derivatives activities, thus hampering liquidity in the 
global markets. However, it isn't clear how the CFTC will assess 
comparability for the purposes of allowing ``substituted compliance'', 
making it rather difficult for market participants and foreign 
regulators to understand how comparability will be applied in practice.

Regulatory Cooperation on Cross-Border Transactions
    6. We believe the international community should work together to 
build a cooperative framework for the regulation of OTC derivatives 
market on the global basis. As the OTC derivatives market is a global 
one, it is important that regulators adopt comparable rules based on 
guidance and standards set by international standard setting bodies. 
International standards and principles serve to harmonise regulatory 
standards and minimise regulatory arbitrage, while also respecting 
jurisdictional authority. Regulators in major markets have been working 
together through international standard setting bodies (such as the 
International Organisation of Securities Commissions and the Committee 
on Payment and Settlement Systems of the Bank for International 
Settlements) to agree on common standards and principles for regulating 
the OTC derivatives market. Reform efforts in individual markets, 
including Hong Kong, have also been progressing by reference to these 
international standards and principles.

    7. As foreign jurisdictions would have primary responsibilities in 
developing and implementing the regulatory frameworks for the OTC 
derivatives market participants and their transactions in their own 
jurisdictions. To avoid regulatory overlap and in the spirit of 
international comity, we propose that foreign jurisdictions be 
responsible for the regulation of OTC derivatives activities in their 
home jurisdictions in accordance to international standards. Under this 
framework, the application of the CFTC's rules to non-U.S. persons, 
e.g., foreign banks, should only be confined to their legal entities 
based in the U.S. (i.e., U.S. branch or subsidiary). In this 
connection, we would like to request the CFTC to reconsider the need 
and the implication of the extraterritorial application of the U.S. 
derivative regulations, including swap dealer registration requirement 
for non-U.S. persons (including Hong Kong financial institutions).

    8. We understand and appreciate CFTC's concerns over the activities 
of U.S. persons and their overseas branches and subsidiaries conducted 
outside the U.S. that may have a significant connection and impact on 
the U.S. markets and thus giving rise to CFTC's proposal for cross-
border application of their regulations. We should continue to explore 
how foreign subsidiaries of U.S. entities could meet the CFTC's rules 
on swap without coming into conflict with local regulations. Before 
international consensus is reached on this important matter, we would 
like to propose that CFTC defers application of its regulation with 
respect to non-U.S. person so that regulators in international forum 
could work out the arrangement for regulating cross-border OTC 
transactions in a coordinated manner.

Central Clearing of OTC Derivatives
    9. Furthermore, under the Proposed Guidance, non-U.S. based SDs in 
order to comply with CFTC requirements, will be compelled to clear 
their OTC derivatives transactions through a U.S. regulated central 
counterparty (``CCP'') in certain cases. Specifically, non-U.S. based 
SDs who transact with U.S. counterparties, or counterparties guaranteed 
by U.S. persons, will have to clear their OTC derivatives transaction 
through a CCP that is either registered in the U.S. as a Derivatives 
Clearing Organization (``DCO''), or exempted from having to be 
registered as a DCO. This requirement has significant implications 
because it means non-U.S. based SDs who want to clear through their 
local (non-U.S.) CCPs, some of which provide service for unique local 
products, could do so only if such CCPs would have been registered (or 
exempted from being registered) as DCOs before the implementation of 
the clearing obligations under the Dodd-Frank Act. If the CCPs fail to 
obtain such registration or exemption status in good time, there will 
be significant disruption to the global OTC derivatives market. For 
example, many market participants will need to establish in short time 
new clearing arrangements with CCPs which are U.S.-regulated DCOs, or 
already registered as such. Otherwise, they may have no choice but stop 
transacting with U.S. persons at all to avoid risking non-compliance. 
Either way, the consequences for market participants will be 
significant.

    10. It is believed that the above unintended and undesirable 
consequences can be avoided or minimised. In this regard, I urge the 
U.S. authorities to consider the following:

    i. Transitional arrangement. Allow OTC derivatives transactions 
        conducted outside the U.S. to carry on as usual during the 
        processing period for a DCO application or a ``substituted 
        compliance'' application;

    ii. Exempting foreign CCPs. Provide exemption from the DCO 
        registration if a foreign CCP is not systemically important to 
        the U.S. market. For example, a de minimis exemption could be 
        provided (similar to the de minimis threshold for the SD 
        registration) such that foreign CCPs that clear OTC derivatives 
        transactions for U.S. persons below a certain threshold, may be 
        exempted from the DCO registration; and

    iii. Recognising foreign CCPs. Develop a simplified process for 
        recognising foreign CCPs that are regulated by competent 
        authorities subscribing to international standards.

    11. In conclusion, we call for greater coordination internationally 
on implementation of OTC regulations, particularly those with cross-
border implications. We hope that the CFTC, SEC and the U.S. Treasury 
will defer the application of the U.S. rules and regulations over non-
U.S. persons and work with the international community on a coordinated 
framework on regulatory cooperation in cross-border OTC transactions. 
We also hope that U.S. authorities would provide greater clarity to the 
Proposed Guidance and to recognize the OTC derivatives regulatory 
regimes of overseas jurisdictions on the basis of international 
standard.
            Yours sincerely,

            
            
Professor K.C. Chan, Secretary for Financial Services and the Treasury.

CC:

  Secretary of the Treasury, USA, (Mr. Timothy Geithner)
  Chairman, U.S. Securities and Exchange Commission (Ms. Mary L. 
    Schapiro)
  Consul General of the United States of America in Hong Kong (Mr. 
    Stephen Young)
  Chief Executive, Hong Kong Monetary Authority (Mr. Norman Chan)
  Chief Executive Officer, Securities and Futures Commission (Mr. 
    Ashley Alder)
  Hong Kong Commissioner for Economic and Trade Affairs, USA (Mr. 
    Donald Tong)
                                 ______
                                 
27 August 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

CFTC's Proposed Guidance on Cross-Border Application of Certain Swap 
            Provisions of Commodity Exchange Act (``Proposed 
            Guidance'')

    Dear Chairman Gensler,

    1. We, the undersigned, are a group of financial regulators in the 
Asia Pacific region with a mutual interest in ensuring the smooth and 
effective implementation of the G20-agreed reforms of OTC derivatives 
markets in our jurisdictions. We welcome the release of the Proposed 
Guidance by the CFTC to clarify how it intends to apply the Commodity 
Exchange Act to cross-border swap dealing activities involving non-U.S. 
persons, and acknowledge the CFTC's efforts to consider the impact of 
the swap provisions on non-U.S. markets and participants. However, we 
are concerned that some of the proposed requirements as they currently 
stand may have significant effects on financial markets and 
institutions outside of the U.S. We believe a failure to address these 
concerns could have unintended consequences, including increasing 
market fragmentation and, potentially, systemic risk in these markets, 
as well as unduly increasing the compliance burden on industry and 
regulators. We therefore think it necessary to share with you our 
specific concerns, as well as some suggestions to mitigate these 
concerns, so that any unintended and adverse consequences for global 
markets and institutions can be averted.

Major Issues and Suggestions
    2. Currently, various national authorities around the globe 
(including those represented in this letter) are taking active steps to 
implement in their jurisdictions the reform measures endorsed by the 
G20 leaders in respect of OTC derivatives markets, with a view to 
promoting transparency and confidence in derivatives markets and 
reducing systemic risks arising from activities in such markets.

    3. However, the CFTC Proposed Guidance, that subjects non-U.S. 
persons to the swap dealer (``SD'') or major swap participant (``MSP'') 
registration requirements as well as entity-level and transaction-level 
requirements, may have the following consequences:

   Affected non-U.S. persons will have to comply with two sets 
        of regulations, which may be overlapping and conflicting, 
        imposed by the U.S. and individual non-U.S. regimes. This is 
        compounded by the lack of clarity and specificity in a number 
        of areas of the Proposed Guidance.

   Potential market disruption or fragmentation, with 
        consequently increased risks to systemic stability and market 
        liquidity in our markets, may arise as market participants may 
        have to change their business models or even withdraw from 
        certain businesses, all within a relatively short period of 
        time. The impact from any resulting (likely significant) 
        increase in compliance costs and the potential reduction in 
        liquidity of OTC derivatives markets should not be under-
        estimated.

    4. In our view, while the approach proposed by the CFTC is a useful 
first step, further changes are needed to the Proposed Guidance to 
achieve an internationally harmonised approach and avoid creating 
frictions in the international market place, given the cross-border 
nature of OTC derivative markets and the concerns expressed in this 
letter and also by other regulators.

    5. We would thus urge the CFTC to consider the following 
suggestions:

    (i) Re-assess scope and timing for implementing the Proposed 
        Guidance: We suggest that a re-assessment of the CFTC's 
        proposed approach should be made to avoid any unintended and 
        adverse implications for global markets and institutions. This 
        should preferably be done together with engagement with 
        affected jurisdictions (including ourselves) to address their 
        concerns before finalising the Proposed Guidance. We seek 
        further dialogue with the CFTC to do so. Consideration should 
        also be given to deferring the application of the relevant 
        requirements until there is international consensus on how such 
        cross-border transactions should be regulated.

      Rather than a rule-by-rule or case-by-case approach as it is 
        currently proposed, an approach that looks at substantive 
        regulatory outcomes (where appropriate) or an expansion to 
        place greater reliance on the regulatory and supervisory 
        regimes of other regulators would better achieve the concept of 
        international comity which the CFTC is seeking.

    (ii) Provide more guidance and clarity on assessment of substituted 
        compliance and definition of U.S. person: Notwithstanding the 
        suggestions in Paragraph 5(i), we believe the Proposed Guidance 
        would benefit from greater clarity and detail regarding the 
        application of the swap provisions. In particular, (a) the 
        definition of ``U.S. person''; and (b) the criteria, procedures 
        and implementation timeline for ``substituted compliance'' in 
        respect of each of the CFTC's entity-level requirements and 
        transaction-level requirements could each be further clarified. 
        We would welcome dialogue with the CFTC on these areas.

      We note that the proposed definition of ``U.S. person'' is high-
        level and different from that used in other regulations (e.g., 
        Reg S.). Market practitioners have also highlighted that it is 
        not easy to identify if a counterparty is a U.S. person. 
        Uncertainty will increase the risk for, and costs of, market 
        participants in assessing the full impact of the Proposed 
        Guidance (e.g., the registration requirements).

      On substituted compliance, the Proposed Guidance contains broad 
        language to the effect that the CFTC would determine 
        comparability for the purposes of ``substituted 
        compliance''.\1\ However, it is unclear on how comparability 
        will be assessed and whether there will be interim measures 
        prior to finalising the assessment as no further details or 
        elaboration are provided in the Proposed Guidance.
---------------------------------------------------------------------------
    \1\ Considerations include (i) the ``scope and objectives'' of the 
regulatory requirements imposed by a non-U.S. regulator; (ii) the 
comprehensiveness of the regulator's supervisory compliance programme; 
and (iii) the regulator's power to support and enforce its oversight of 
non-U.S. SDs and MSPs operating in its jurisdiction.
---------------------------------------------------------------------------
      We are of the view that one useful point of reference for 
        substituted compliance assessment would be the foreign regime's 
        compliance with applicable global standards set by 
        international standard-setting bodies like the CPSS, IOSCO and 
        the Basel Committee on Banking Supervision. Moreover, just as 
        the CFTC has proposed requirements which are tailored to the 
        U.S. market, there is also a need for other regulators to cater 
        for special characteristics of their local markets. For 
        example, in the case of Hong Kong, Australia and Singapore, we 
        are studying whether local market liquidity can justify 
        implementation of mandatory trading of OTC derivatives products 
        on exchanges or electronic trading platforms, and the form of 
        trading venue which will best suit the purpose of improving 
        pre-trade price transparency. This will affect our timing for 
        implementing mandatory trading in practice (although the powers 
        for imposing such trading obligation will be in place). In 
        addition, the CFTC has recognised that the pace of 
        implementation of OTC derivatives reforms by different 
        jurisdictions may vary, and we suggest that the approval for 
        ``substituted compliance'' should take into account, among 
        other things, the proposed regulations, and the progress in 
        introducing these regulations, in ``potentially comparable'' 
        jurisdictions.

    (iii) Allow transitional arrangements for application of Proposed 
        Guidance to non-U.S. entities: To minimise the risk of market 
        disruption and fragmentation in respect of the conduct of OTC 
        derivatives transactions outside the U.S. that will likely be 
        captured under the Proposed Guidance, we strongly recommend the 
        CFTC to consider more flexible transitional arrangements that 
        will allow market participants to carry on such transactions as 
        usual as it reviews jurisdictions for the purpose of 
        ``substituted compliance'', in line with the spirit of 
        international comity.

    (iv) Consider further temporary exemptive relief for non-U.S. SDs 
        and MSPs: We note that certain requirements, e.g., capital and 
        margin rules, the SEF rules, may not be finalised before the 
        swap dealer registration deadline. It is thus strange for non 
        U.S.-based entities to register without having certainty on the 
        full implications of the registration.

      In addition, certain SD requirements may conflict with domestic 
        requirements. For example, non-U.S. SDs that are regulated as 
        banks may be prohibited by local privacy laws from transferring 
        customer data to the U.S. for reporting swap transactions. To 
        avoid legal risk, non-U.S. SDs may be unable to continue 
        dealing with non-U.S. customers in the OTC derivatives market 
        unless (a) their customers provide explicit consent to the 
        release of their data in order to meet the U.S. reporting 
        requirements; or (b) ``substituted compliance'' is permitted.
      As such, we request that the CFTC considers delaying the 
        registration requirement for non-U.S. SDs until there is 
        clarity of the above issues.
      Furthermore, we have two comments with respect to the proposed 
        granting of temporary exemptive relief order, to allow non-U.S. 
        SDs and MSPs to delay compliance with certain entity-level and 
        transaction-level requirements. First, we suggest that the 
        ``non-affiliate'' condition is removed or modified as it will 
        capture foreign affiliates that operate independently from the 
        U.S. SD (and are not under the SD's majority control) and whose 
        swaps with non-U.S. counterparties are unlikely to have 
        significant systemic risk implications for the U.S. Second, 
        while we appreciate the intent of this temporary relief, it is 
        subject to progress made on operationalising ``substituted 
        compliance'' as well as more clarity on the conditions to which 
        the relief is subject.

    (v) Consider proportional regulatory approach to central 
        counterparties (``CCPs'') in non-U.S. jurisdictions with 
        relatively small OTC derivatives markets: We would strongly 
        encourage the U.S. authorities to develop a simplified and 
        pragmatic process for (a) recognising or exempting non-U.S. 
        CCPs (including those that operate in relatively small OTC 
        derivatives markets) that are regulated by competent 
        authorities subscribing to relevant CPSS/IOSCO standards; and 
        (b) handling applications for ``substituted compliance'' with 
        priority (provided that clear guidance on application criteria 
        and procedures is available to potential applicants). In 
        formulating this process, the CFTC is also requested to have 
        regard to the potential impact on non-U.S. CCPs and markets as 
        explained below.

      Under the Proposed Guidance, non-U.S. SDs, which may be 
        significant liquidity providers in foreign jurisdictions, will 
        be required to centrally clear their OTC derivatives 
        transactions with (a) U.S. counterparties or (b) non-U.S. 
        counterparties that are guaranteed by U.S. persons (although 
        ``substituted compliance'' may be permitted for transactions 
        described in (ii)) through registered or registration-exempted 
        Derivatives Clearing Organisations (``DCOs''). If the CFTC 
        mandates clearing for products that are also traded in our 
        markets, it will be critical that CCPs operating in those 
        markets be able to obtain approval from the CFTC as a 
        registered DCO (or be exempted from registration) in good time, 
        to allow participants to clear mandated transactions.
      Failure of a CCP to obtain approval as a registered DCO (or be 
        exempted from registration) in time may lead to the following 
        consequences:

     The mandated transactions may be channelled to registered 
            DCOs which are now global facilities. This raises concerns 
            over the potential over-concentration of risks in such 
            CCPs.

     Certain U.S. SDs operating in the Asia Pacific region are 
            major liquidity providers in local markets. If they are not 
            allowed to use clearing platforms other than DCOs that are 
            U.S.-registered or exempt from registration, and other 
            smaller local/regional players can only access central 
            clearing indirectly, the overall capacity of these players 
            to further provide liquidity in local/regional OTC 
            derivatives markets may be curtailed.

     This development may also undermine the financial 
            viability of local/regional CCPs, in turn resulting in such 
            CCPs ceasing to provide important clearing services for 
            products that are unique to our financial markets and not 
            cleared through foreign CCPs registered as DCOs, 
            potentially increasing systemic risk in such markets and 
            impacting the stability of U.S. markets and/or major 
            participants as well.

     Lastly, local and regional market participants who do not 
            have direct access to global CCPs may have to face the 
            credit risk of a small group of clearing agents who are 
            likely to be the same global dealers with whom they are 
            dealing, potentially restricting their counterparty risk 
            management capacity. This also adds to, and further 
            concentrates, the risks at the major clearing members.

    6. We appreciate the opportunity to provide our comments to the 
Proposed Guidance and look forward to our continued cooperation and 
engagement with the CFTC and other regulators to provide globally 
harmonised regulations for an efficient and robust OTC derivatives 
market.
            Yours sincerely,
            
            




Belinda Gibson,          Arthur Yuen,             Teo Swee Lian,
Deputy Chairman,         Deputy Chief Executive,  Deputy Managing
                                                   Director,
Australian Securities    Hong Kong Monetary       (Financial
 and                                               Supervision),
Investments Commission;  Authority;               Monetary Authority of
                                                   Singapore;


                                
                                                   




Malcolm Edey,            Keith Lui,
Assistant Governor       Executive Director
(Financial System),      Supervision of Markets,
Reserve Bank of          Securities and Futures
 Australia;               Commission, Hong Kong.


                                 ______
                                 
27 August 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

Ref: Answer to the Proposed Interpretative Guidance and Policy 
            Statement on Cross-Border application of Certain Swaps 
            provisions of the Commodity Exchange Act--RIN number 3038-
            AD57

    Dear Gary,

    On 12 July 2012, the Commodity Futures Trading Commission (CFTC) 
published a proposed interpretative guidance and policy statement 
regarding the Cross-Border application of Certain Swaps provisions of 
the Commodity Exchange Act.
    This consultation is of particular relevance to ESMA which is 
tasked with drafting technical standards under EMIR, including 
determining derivative contracts that are considered to have a direct, 
substantial and foreseeable effect within the European Union, as well 
as assisting the European Commission in its own task of adopting 
decisions on equivalence of the legal, supervisory and enforcement 
framework in third countries. We have maintained an open and fruitful 
dialogue with the CFTC in the past on these matters and we will 
continue to do so, in the interest of regulatory convergence at 
international level.
    In a market which is global in nature, it is particularly important 
that regulations in the different jurisdictions converge. Convergence 
and, consequently, avoidance of gaps and overlaps, will contribute to a 
safe and efficient global derivatives market.
    In order to prevent overlaps, it is important that regulators in 
different jurisdictions rely on each other especially when an 
equivalent regulation is implemented in the relevant jurisdiction. 
Indeed it is of paramount importance to strictly limit, if not 
eliminate, any overlap that could jeopardise both safety and efficiency 
of the derivatives market and that could negatively impact on the 
implementation of the G20 commitments.
    We would like to comment as follows:
U.S. Person and Registration
    The proposed interpretation of the scope of what has a ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States'' is broad.
    The CFTC proposes that non-U.S. persons who engage in more than a 
de minimis level of swap dealing with a U.S. person are required to 
register as a swap dealer (SD). In addition, non-U.S. persons who hold 
swap positions above the Major Swap Participants (MSP) specified 
thresholds with a U.S. counterparty are required to register as MSP.
    In practice, this would mean that European entities (whether or not 
affiliates or subsidiaries of U.S. entities) would be subject to CFTC 
registration requirements if they enter into transactions (above the SD 
or MSP thresholds) with U.S. persons. This means that these European 
entities will be subject at the same time to Dodd-Frank and EMIR 
requirements.
    We believe that the scope of the derivative transactions to be 
considered for the purpose of determining the registration requirement 
of SD or MSP should be limited to relevant transactions and to those 
other activities which could be carried out with the purpose of 
circumventing any relevant obligation. Indeed, it would be appropriate 
to consider that only transactions that might result in a significant 
exposure for a U.S. person should be deemed to have a direct and 
significant impact in the U.S.
    Far-reaching entity level registration requirements imposed on 
European entities as well as a limited scope for substituted compliance 
(as discussed below), contributes to dual regulatory compliance 
requirements. This is why we ask the CFTC to reconsider the need for 
European entities to register as SD or MSP to the extent they are fully 
subject to EU legislation on OTC derivatives.
    In addition, CFTC registration requirements would apply to European 
entities irrespective of whether they would solicit the counterparty in 
the U.S. or whether the transaction would be concluded at the 
initiative of the U.S. person. Moreover, in the case of U.S. branches, 
registration of the European head office is required even though the 
transactions would be legally entered into by the parent entity outside 
the U.S., with no additional risk for the U.S. compared to similar 
entities operating without U.S. branches.
    In Europe, under the MiFID proposal, the EU regime would be 
applicable to third country investment firms only if the latter promote 
their services or solicit clients in the EU. Such regime would not 
apply in the case of the provision of services by the third country 
investment firm at the exclusive initiative of the EU clients. Under 
the MiFID proposal, third country entities would also remain subject to 
their home country legislation if deemed equivalent by the European 
Commission.
    The broad scope of the definitions of a U.S. person, SD and MSP, 
and the resulting registration requirements could have a serious impact 
on the current business model of European and U.S. firms which may not 
be proportionate to the benefits being sought. Alternative approaches 
should be envisaged to ensure that the objectives of U.S. regulations 
are satisfied.

Substituted Compliance
    We appreciate the introduction of the concept of substituted 
compliance in the CFTC's proposal. However, we see two limitations in 
the concept, apart from its application (commented below):

   We have always been of the view that when equivalence or 
        substituted compliance is granted for an entire jurisdiction, 
        registration of entities located in that jurisdiction, 
        including affiliates or subsidiaries of U.S. entities, should 
        not be required. However, in the U.S. proposed regime, 
        registration is a pre-requisite before substituted compliance 
        could apply.

   We believe that the proposed use of substituted compliance 
        is still very limited. It would apply on a chapter by chapter 
        basis, and in some instances, on a case by case basis. It would 
        also only apply to transactions between non-U.S. persons and 
        not to cross-border transactions. If applied in this form, such 
        an approach would be far away from the concepts of equivalence, 
        mutual recognition and avoidance of duplicative or conflicting 
        rules included in EMIR.

    We understand that substituted compliance would apply for entity 
level requirements on a firm by firm basis but with provisions for 
applications by groups or by whole jurisdictions. It is important to 
note that EMIR is a regulation directly applicable in the 27 EU Members 
States. This will also be the case for the technical standards 
developed by ESMA that will take the form of a European Commission 
Regulation. Other entity-level requirements have already been 
introduced in Europe through either MiFID or the Capital Requirements 
Directive (CRD). Under this EU regime, firms established in European 
countries will apply these rules without any option to apply different 
rules. Because there is one set of rules that applies across the EU, 
and in order to facilitate the assessment and to limit the burden on 
European firms, substituted compliance should apply to all EU firms 
rather than at firm specific level. This is also the case for ensuring 
a consistent application of enforcement and supervision across EU 
firms. In this respect, there are several ESMA mechanisms to ensure 
that supervision and enforcement are convergent and comparable across 
the EU. Against this background, the European approach on equivalence 
is based on an overall assessment of the regulatory and supervisory 
regime in a particular jurisdiction and we encourage the CFTC to adopt 
a similar approach for substituted compliance for the entire EU.
    Concerning the application of substituted compliance to transaction 
level requirements, we believe that its application is too narrow. We 
understand that substituted compliance would apply to transactions 
between two non-U.S. counterparties but, for cross-border transactions 
(e.g., between a U.S. and a European counterparty) substituted 
compliance is not allowed. This would mean that both the European and 
U.S. regulations would apply to a transaction. We believe it would be 
essential to consider the application of substituted compliance for 
transactions between European and U.S. firms.
    Under Article 13 of EMIR, the European Commission, assisted by 
ESMA, will monitor the international application of requirements for 
OTC derivatives in particular with regard to potential, duplicative or 
conflicting requirements. In addition, the European Commission may take 
an equivalence decision to allow for the application of an equivalent 
third country regime for transactions between European and third 
country firms. Therefore, in order to allow for an equivalence decision 
and positive monitoring, it is important that the third country rules 
do not duplicate or conflict with the European regime. We urge the CFTC 
to extend the scope of substituted compliance to ensure a smooth 
adoption of a mutual recognition approach, to avoid an unacceptable 
situation for both market participants and regulators.
    In addition to Article 13 of EMIR, ESMA (under Articles 4 and 11) 
has to draft regulatory technical standards specifying the contracts 
that are considered to have a direct, substantial and foreseeable 
effect within the Union or the cases where it is necessary or 
appropriate to prevent the evasion of any provisions in EMIR. We are 
working on the development of this draft technical standard. In that 
context, the broad scope of a U.S. person definition and the limited 
use of substituted compliance might make this work complex in view of 
the objective to avoid duplications and potentially conflicting 
provisions which could have serious consequences for both U.S. and 
European firms.
    We believe that we will succeed in building a sound and coherent 
global framework leading to improved transparency, efficiency and 
robustness of the OTC derivatives market, in accordance with the G20 
commitments. To that end, although we welcome the introduction of the 
concept of substituted compliance, we are convinced that it will not be 
possible to achieve our common objective without changing significantly 
its scope to a regime where true reliance on the EU regulatory and 
supervisory regime is achieved. This could be done by expanding the 
number of cases where it can be applied (especially transaction level 
requirements) and by applying it EU-wide, instead of firm by firm or 
country by country.
    ESMA stands ready to assist the CFTC in assessing the conditions 
for substituted compliance in a EU-wide approach.
    I hope that these comments will help and look forward to continued 
cooperation with the CFTC with the aim to deliver convergent regulation 
for a safe and efficient OTC derivatives market.
            Yours sincerely,

            
            
Steven Maijoor, Chair, European Securities and Markets Authority.
                                 ______
                                 
August 27, 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

Re: Proposed CFTC Cross-Border Releases on Swap Regulations

    Dear Chairman Gensler,

    We would like to share our views and concerns regarding the impacts 
of cross-border application of certain swaps provisions of the 
Commodity Exchange Act (CEA). as a result of our assessment of the 
proposed interpretive guidance issued by the CFTC.

(1) Registration as a Swap Dealer or as a Major Swap Participant
    According to preliminary data, some Brazilian financial entities 
will exceed the de minimis threshold and be required to register as 
swap dealers (SD) or as a major swap participants (MSP) and, therefore, 
to comply with the relevant rules.
    The additional regulatory burden, associated with the CFTC 
oversight of activities already regulated in Brazil, as we have been 
told, might discourage Brazilian institutions from trading swaps with 
many active U.S. persons in our market, with potential impact on market 
liquidity.
    The regulatory overlap might not only make it more difficult for 
Brazilian authorities to address local market problems or to deal with 
troubled institutions, but also create a burdensome environment in a 
time of slow global growth.

(2) Substituted Compliance
    The proposed approach for a substituted compliance mechanism has 
several limitations.
    Rather than acknowledging the comparability of the foreign regime 
as a whole, applications for substituted compliance must be submitted 
by any individual firm registered as a SD or as a MSP. This approach is 
likely to impose unnecessary costs and burdens on individual firms in 
complying with the rules under the CEA. Also. it remains unclear 
whether the foreign applicant will be able to dispute any of the 
Commission's findings in terms of comparability assessments.
    With regard to G20 members, an alternative to the proposed 
substituted compliance approach would be a CFTC presumption that 
countries that have implemented the G20 commitments have an adequate 
regulatory regime for the purposes of ``substitute compliance'' or 
``equivalence''. The various implementation reviews that the FSB, IOSCO 
and other bodies have set up could be used as an input in this process.
    It is worthy to mention that Brazilian rules are stricter and 
provide more protection to stability than the requirements set forth in 
other jurisdictions. To mention some examples, we could point out the 
fact that, in Brazil:

    (i) the final beneficial owner is identifiable at all levels of the 
        holding chain, allowing for accurate and up-to-date monitoring 
        of exposures per market participant, on a daily basis; and that

    (ii) over 90% of all derivatives are exchange-traded and cleared at 
        a central counterparty clearing, providing unparalleled 
        systemic risk mitigation.

    Last, the ``transaction-level requirements'', as we understood, are 
not eligible for substituted compliance. In our opinion, the relevant 
rules. along with the features pertaining to other jurisdictions (such 
as mandatory central counterparty clearing and margin requirements), 
can lead to inefficient results. In this sense, we find it relevant 
that the particularities of a foreign regime be taken into 
consideration also in relation to the ``transaction-level 
requirements''.

(3) Privacy and Data Protection Issues
    Another area of concern relates to privacy and data protection 
issues, since substituted compliance relative to Swap Data Repository 
(SDR) reporting is only permitted if the CFTC is able to access the 
required information stored in the SDR. This approach may conflict with 
Brazilian bank secrecy rules set out in Law 105 of 2001. The Market 
Authority (CVM) has powers to share information protected by bank 
secrecy rules in cases of enforcement, but there are no previous cases 
of information sharing in cases of market supervision. In this context, 
Brazilian entities may be prevented from providing more detailed 
information requested by the CFTC.
    Even in the cases of market participants that are exempt from the 
registration as a SD or as a MSP, our concerns relative to bank secrecy 
rules remain, since SDR reporting rules also apply in such cases.
    We thank you for your consideration and should you have any 
questions concerning the issues we have raised, please do not hesitate 
to contact us.
            Yours sincerely,

            
            
Otavio Yazbek, Chairman, Comissao de Valores Mobiiarios.
                                 ______
                                 
17 October 2012

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

U.S. Cross Border Swaps Rules

    Dear Chairman Gensler,

    We, the undersigned, would like to share our concerns with you 
about the implementation of the current phase of post-crisis regulatory 
reform, as you reflect on the final shape of the CFTC cross-border 
rules for swaps.
    Faithfully implementing the reforms adopted by the G20 in 2009 in 
Pittsburgh on the clearing and electronic trading of standardised OTC 
derivatives in a non-discriminatory way remains of the utmost 
importance. As you know, Europe has adopted legislation on clearing and 
is in the final stages of negotiation on the trading aspect of the G20 
Pittsburgh reforms. In Japan, clearing requirements will be effective 
in November and legislation on trading platforms was recently approved 
by the Diet. While there may be differences in some areas of detail, we 
believe the U.S., the Member States of the EU and Japan are now set to 
implement these historic reforms in a broadly consistent way in our 
respective jurisdictions.
    This is a significant achievement, capturing the large majority of 
the global swaps market. But as has been continuously stressed by G20 
leaders since 2009, domestic legislation alone does not fulfil the 
political aim that was agreed in Pittsburgh and reaffirmed in Toronto 
in 2010. Regulation across the G20 needs to be carefully implemented in 
a harmonised way that does not risk fragmenting vital global financial 
markets.
    For all its past faults, the derivatives market has allowed 
financial counterparties across the globe to come together to conduct 
more effective risk management and, as a result support economic 
development. Done properly this should be of benefit to all. At a time 
of highly fragile economic growth, we believe that it is critical to 
avoid taking steps that risk a withdrawal from global financial markets 
into inevitably less efficient regional or national markets.
    We of course recognise and understand the need for U.S. and other 
regulators to satisfy themselves on the adequacy of regulation in other 
jurisdictions. But we would urge you before finalising any rules, or 
enforcing any deadlines, to take the time to ensure that U.S. 
rulemaking works not just domestically but also globally. We should 
collectively adopt cross-border rules consistent with the principle 
that equivalence or substituted compliance with respect to partner 
jurisdictions, and consequential reliance on the regulation and 
supervision within those jurisdictions, should be used as far as 
possible to avoid fragmentation of global markets. Specifically, this 
principle needs to be enshrined in CFTC cross-border rules, so that all 
U.S. persons wherever they are located can transact with non-U.S. 
entities using a proportionate substituted compliance regime.
    We assure you our regulatory authorities stand ready to work 
closely with you to ensure an effective cross-border regime is 
implemented at the earliest possible opportunity and provide you with 
the necessary information and reassurance regarding our respective 
regulatory frameworks.
            Yours sincerely,
            
            




George Osborne,                      Michel Barnier,
Chancellor of the Exchequer,         Commissioner for Internal Market
European Commission;                  and Services,
UK Government;








Ikko Nakatsuka,                      Pierre Moscovici
Minister of State for Financial      Minister of Finance,
 Services,
Government of Japan;                 Government of France.


                                 ______
                                 
Submitted Letter by Hon. Randy Neugebauer, a Representative in Congress 
                               from Texas
December 20, 2012

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

    Dear Chairman Conaway,

    Last week, the Subcommittee on General Farm Commodities and Risk 
Management held a hearing titled ``Dodd-Frank Derivatives Reform: 
Challenges Facing U.S. and International Markets.'' During the hearing, 
one of the CFTC witnesses indicated that the CFTC is drafting a new 
position limits rule and will appeal the D.C. District Court's decision 
vacating a previous version of the rule.
    I am concerned that the rule fails to distinguish between 
speculators on the one hand and certain broadly diversified, passive 
index funds on the other. Inappropriately applying position limits to 
such funds could significantly reduce investor access to commodity 
markets, shrink market liquidity, impede price discovery, and 
destabilize the market.
    The potential for such unintended consequences is so significant 
that the then-Chairwoman of the Senate Agriculture Committee, Blanche 
Lincoln, a primary author of what became Title VII of the Dodd-Frank 
Act, was compelled to send the enclosed letter to the CFTC. This letter 
constitutes the clearest expression of legislative history in this 
area, and I therefore ask that it be made a part of the official 
hearing record.
            Best regards,

            
            
Hon. Randy Neugebauer.
                               attachment
December 16, 2010

  Hon. Gary Gensler,
  Chairman,
  Commodity Futures Trading Commission,
  Washington, D.C.

Re: CFTC's Implementation of Position Limits

    Dear Chairman Gensler:

    I am writing in regard to the expanded powers granted by the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank'') 
to the Commodity Futures Trading Commission (``CFTC'') with respect to 
position limits. As you know, the CFTC is authorized to set aggregate 
position limits ``as appropriate'' across all markets. In the past, the 
CFTC has examined position limits as a means of preventing excessive 
speculation or sudden price fluctuations in the commodities markets. I 
support this authority. Going forward, I urge the CFTC to continue to 
keep these important twin goals in mind as it considers and initially 
sets position limits, so that investors who are fully collateralized 
and may pose little or no systemic risk are not arbitrarily limited and 
that we do not negatively impact valuable market liquidity.
    I am mindful of the CFTC's discretion to set aggregate position 
limits by ``group or class of traders.'' Further, Dodd-Frank encourages 
the CFTC to consider how position limits may impact particular classes 
of persons or swaps. As the CFTC seeks to implement position limits, I 
urge the CFTC not to unnecessarily disadvantage market participants 
that invest in diversified and unleveraged commodity indices. These 
investors often serve as an important, fully collateralized source of 
liquidity. At the same time, they are natural counterparties to 
producers who are seeking to reduce their commodity price risk. In this 
vein, as I have said previously, it is ``my expectation that the CFTC 
will address the soundness of prudential investing by pension funds, 
index funds and other institutional investors in unleveraged indices of 
commodities that may also serve to provide agricultural and other 
commodity contracts with the necessary liquidity to assist in price 
discovery and hedging for the commercial users of such contracts.''
    In addition to enhancing liquidity and facilitating greater price 
discovery for commercial end-users, diversified, unleveraged index 
funds are an effective way to diversify their portfolios and hedge 
against inflation. Unnecessary position limits placed on mutual fund 
investors could limit their investment options, potentially 
substantially reduce market liquidity, and impede price discovery. Such 
limits might also have the unintended consequence of forcing investors 
to rely on higher-cost managers with little experience, insufficient 
compliance and trade flow infrastructure, and limited risk management 
capabilities associated with effectively managing commodity index risk.
    Such a comprehensive approach to setting position limits would not 
be contrary to the public interest or to the purposes of the Commodity 
Exchange Act and Dodd-Frank. In drafting the position limits provision, 
Congress sought to eliminate excessive speculation and market 
manipulation while protecting the efficiency of the markets. 
Consequently, as Chairman of the Senate Committee on Agriculture, 
Nutrition, and Forestry, I encouraged the CFTC to differentiate between 
``trading activity that is unleveraged or fully collateralized, solely 
exchange-traded, fully transparent, clearinghouse guaranteed, and poses 
no systemic risk'' and highly leveraged swaps trading in its 
implementation of position limits.
    I repeat my request again today. As it contemplates position 
limits, I encourage the CFTC to carefully consider how such limits may 
impact particular types of investment vehicles and classes of 
investors. I hope that the CFTC will implement position limits in a 
manner that protects ordinary investors and ensures that the commodity 
markets continue to benefit from the liquidity and price stability 
provided by unleveraged broad-based index investments.
            Sincerely,

            
            
Senator Blanche L. Lincoln,
Chairman,
Committee on Agriculture, Nutrition, and Forestry.
                                 ______
                                 
 Submitted Statement by Hon. David Scott, a Representative in Congress 
       from Georgia; on Behalf of Americans for Financial Reform
    Today's hearing deals with the question of the cross-border or 
extra-territorial application of the Dodd-Frank Act's derivatives 
provisions. Americans for Financial Reform has previously commented on 
this issue in detail to the Commodity Futures Trading Commission 
(CFTC).\1\ However, for the purposes of the hearing AFR would like to 
provide a summary of key points.\2\
---------------------------------------------------------------------------
    \1\ See Americans for Financial Reform, ``Comment Letter On The 
Cross-Border Applications of Certain Provisions of the Dodd-Frank 
Act'', August 27, 2012. Available at http://ourfinancialsecurity.org/
blogs/wp-content/ourfinancialsecurity.org/uploads/2012/08/AFR-CFTC-
Cross-Border-Comment-letter-8-27-12.pdf.
    \2\ AFR is a coalition of more than 250 national, state, local 
groups who have come together to advocate for reform of the financial 
sector. Members of the AFR include consumer, civil rights, investor, 
retiree, labor, religious and business groups along with prominent 
independent experts.
---------------------------------------------------------------------------
    Strong extra-territorial enforcement of derivatives reforms is 
absolutely central to protecting the U.S. economy and U.S. taxpayers 
from the risks of unregulated derivatives markets. In recent months, 
large international banks and in some cases foreign regulators have 
opposed effective cross-border application of U.S. derivatives 
regulation. In evaluating this opposition, several key points must be 
kept in mind:

   The largest global banks can shift derivatives risks and 
        funding between thousands of international subsidiaries at the 
        touch of a computer keyboard. It is therefore impossible to 
        effectively regulate derivatives markets without applying rules 
        to transactions conducted through foreign subsidiaries. Without 
        cross-border applicability, there is no effective regulation of 
        derivatives.

   Many non-U.S. jurisdictions, particularly in Europe, lag 
        years behind the United States in implementing derivatives 
        protections. Delaying the application of derivatives rules 
        until they are completed in every jurisdiction could create an 
        open-ended delay of multiple years in regulating U.S. 
        derivatives markets. Four years after the financial crisis and 
        2 years after the passage of the Dodd-Frank Act, we cannot 
        afford further multi-year delays in effectively regulating our 
        financial markets.

   The application of derivatives safeguards to the global 
        operations of U.S. banks does not represent a competitive 
        threat to the U.S. economy. Indeed, these safeguards will 
        benefit the economy and taxpayers by preserving financial 
        stability, and will reduce incentives for the outsourcing of 
        U.S. jobs to foreign regulatory havens. The profits of Wall 
        Street subsidiaries in London or Singapore must not be 
        prioritized over the interests of U.S. taxpayers.

    None of these points mean that regulators should not take 
reasonable and responsible steps to accommodate differences in 
international regulatory regimes. But cross-border issues must not 
become an excuse for disguised deregulation.

Without Cross-Border Applicability, There is No Effective Derivatives 
        Regulation
    Modern financial markets are inherently global in scope. Profits 
and losses experienced in overseas affiliates return to affect the 
parent company and the U.S. economy.
    We have learned this lesson in many crises, most recently in the 
massive derivatives losses experienced at JP Morgan's London office, 
and most painfully in the world financial collapse of 2008. Nowhere is 
the globalization of financial markets more evident than in the 
derivatives market. As CFTC Chair Gary Gensler has stated with respect 
to the extraterritoriality issue:

        ``Swaps executed offshore by U.S. financial institutions can 
        send risk straight back to our shores. It was true with the 
        London and Cayman Islands affiliates of AIG, Lehman Brothers, 
        Citigroup and Bear Stearns. A decade earlier, it was true, as 
        well, with Long-Term Capital Management. The nature of modern 
        finance is that large financial institutions set up hundreds, 
        if not thousands of `legal entities' around the globe . . . 
        Many of these far-flung legal entities, however, are still 
        highly connected back to their U.S. affiliates.''

    Chairman Gensler's statements are confirmed by extensive experience 
and data. Bloomberg News has documented that large Wall Street banks 
routinely transact well over \1/2\ of their swaps business through 
foreign subsidiaries.\3\ Furthermore, these large institutions manage 
their revenues as integrated global entities, making little distinction 
based on the locations of gains and losses. As Professor Richard 
Herring of the Wharton School has stated: \4\
---------------------------------------------------------------------------
    \3\ See Brush, Silla, ``Goldman Sachs Among Banks Lobbying To 
Exempt Half of Swaps From Dodd Frank'' (http://www.bloomberg.com/news/
2012-01-30/goldman-sachs-among-banks-lobbying-to-exempt-half-of-swaps-
from-dodd-frank.html), Bloomberg News, January 30, 2012.
    \4\ Page 217, Herring, R. and J. Carmassi, ``The Structure of 
International Financial Conglomerates: Complexity and Its Implications 
for Systemic Risk,'' Chapter 8 in the Oxford Handbook of Banking, 
edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University 
Press, 2010.

        ``Despite their corporate complexity, LCFIs [Large Complex 
        Financial Institutions] tend to be managed in an integrated 
        fashion along lines of business with only minimal regard for 
        legal entities, national borders or functional regulatory 
        authorities. Moreover, there are often substantial 
        interconnections among the separate entities within the 
---------------------------------------------------------------------------
        financial group.''

    Exempting derivatives transactions conducted through international 
subsidiaries from Dodd-Frank requirements would make central 
derivatives reforms unenforceable. U.S. companies could simply route 
their derivatives transactions through foreign subsidiaries, evading 
regulation, and then transfer cash flows back to the U.S. parent 
company. Such transfers would be simple for the institutions, because 
as the above quote points out, major Wall Street banks are managed as 
global entities. It is well known and well documented that major banks, 
like other international corporations, manage liquidity on a global 
scale and freely move funding across borders in response to the needs 
of various subsidiaries and the home office.\5\ Revenues from global 
subsidiaries are generally swept back to the central corporate treasury 
for distribution, often on a daily basis. Professor Herring has 
described how this process worked at Lehmann Brothers, and how it 
complicated attempts at resolution of the bank: \6\
---------------------------------------------------------------------------
    \5\ For one of many recent studies documenting this, see e.g., 
Cetorelli, N. and Goldberg, L., ``Banking Globalization, Monetary 
Transmission, and the Lending Channel'' (http://www.newyorkfed.org/
research/economists/cetorelli/Cetorelli_Goldberg_final.pdf), 
Forthcoming, Journal of Finance.
    \6\ Page 225, Herring, R. and J. Carmassi, ``The Structure of 
International Financial Conglomerates: Complexity and Its Implications 
for Systemic Risk,'' Chapter 8 in the Oxford Handbook of Banking, 
edited by A. Berger, D. Molyneux, and J. Wilson, Oxford University 
Press, 2010.

        ``But the fundamental problem was that LB [Lehman Brothers] was 
        managed as an integrated entity with minimal regard for the 
        legal entities that would need to be taken through the 
        bankruptcy process. LBHI [Lehman Brothers Holdings, 
        Incorporated] issued the vast majority of unsecured debt and 
        invested the funds in most of its regulated and unregulated 
        subsidiaries. This is a common approach to managing a global 
        corporation, designed to facilitate control over global 
        operations, while reducing funding, capital and tax costs . . . 
        LBHI lent to its operating subsidiaries at the beginning of 
        each day and then swept the cash back to LBHI at the end of 
---------------------------------------------------------------------------
        each day.''

    Exempting any of the subsidiaries of a global bank from derivatives 
oversight could thus effectively allow banks to avoid regulation on any 
derivatives transactions they chose. This would perpetuate the 
unregulated derivatives markets that were at the heart of the financial 
crisis, and undermine the core purposes of Title VII of the Dodd-Frank 
Act. The failure to properly enforce derivatives reforms 
internationally would expose U.S. taxpayers to the risks of a financial 
crisis triggered by unregulated derivatives activities conducted in 
foreign regulatory havens.

U.S. Rules Must Not Be Delayed Until The Rest of the World Has 
        Equivalent Rules
    All of the G20 nations have agreed in principle to a similar set of 
derivatives reforms, including requirements for central clearing, 
transparency, and exchange trading. In 2009 the G20 nations jointly 
committed to implementing these reforms by the close of 2012.\7\ 
Unfortunately, other countries lag well behind the United States in 
meeting that deadline. The latest reports from Europe are that 
implementation of European Union derivatives rules will be delayed 
until at least mid-2014.\8\
---------------------------------------------------------------------------
    \7\ See Financial Stability Board, ``Progress of Financial 
Regulatory Reforms'' (http://www.financialstabilityboard.org/
publications/r_120420a.pdf), April 16, 2012.
    \8\ Stafford, Phillip, ``Europe Dallies on Derivatives Regulation'' 
(http://www.ft.com/intl/cms/s/0/8ff948ec-3e10-11e2-93cb-
00144feabdc0.html), Financial Times, December 4, 2012.
---------------------------------------------------------------------------
    The CFTC has already proposed to delay extraterritorial application 
of many U.S. derivatives rules through mid-2013 in order to accommodate 
the concerns of foreign regulators. But creating further open-ended 
delays in U.S. derivatives rules will leave U.S. taxpayers exposed to 
risks taken in foreign subsidiaries of Wall Street banks for many years 
to come. Over 2 years have passed since the Dodd-Frank Act became law, 
and further delays in implementing derivatives rules are unacceptable. 
The effort to postpone full implementation of U.S. derivatives reforms 
until some indefinite date when other nations complete their rules is 
just the latest of a set of delaying tactics that have been used by 
large banks to prevent completion of financial reforms.

Timely Implementation of Derivatives Reforms Is Not a Threat to U.S. 
        Competitiveness
    Some in the financial industry have argued that U.S. implementation 
of derivatives reforms is a threat to competitiveness. The claim is 
that foreign entities will refuse to engage in derivatives business 
with the foreign subsidiaries of U.S. banks if they know that such 
transactions will subject them to new requirements such as clearing, 
exchange trading, and capital requirements. In addition, foreign banks 
in Europe and other jurisdictions may refuse to do derivatives 
transactions with U.S. commercial counterparties if this would subject 
them to registration as a swaps dealer in U.S. markets.
    These arguments are deeply misguided, for several reasons. First, 
they appear to prioritize the profits of financial entities located in 
foreign countries over the creation of U.S. jobs and the stability of 
the U.S. economy. It would be a grave error to expose the U.S. economy 
to the risk of financial instability simply so that the Singapore or 
London subsidiary of a Wall Street bank can do unregulated derivatives 
transactions with foreign counterparties. This is especially true since 
an exemption for foreign subsidiaries would tend to benefit the economy 
of the foreign jurisdiction where those subsidiaries are located at the 
expense of the United States. Likewise, creating exemptions that permit 
U.S. commercial counterparties to perform unregulated derivatives 
transactions with foreign banks would privilege those foreign banks 
above regulated U.S. institutions.
    Industry arguments also ignore the benefits of global leadership in 
derivatives reform. As discussed above, the major G20 nations have all 
agreed to implement derivatives reforms similar to those proposed in 
the Dodd-Frank Act. While these reforms have been delayed in other 
nations, in the long term we can expect that they will eventually be 
implemented in most jurisdictions. As the global derivatives market 
transitions toward greater oversight, ensuring that U.S. companies have 
a head start and greater experience in complying with the rules should 
eventually result in a competitive advantage for U.S. firms. And in the 
case of any foreign jurisdictions which defy the G20 consensus and 
refuse to implement derivatives reform, we should clearly act to 
prevent exposure of the U.S. financial system to unregulated 
transactions in these jurisdictions.
    Finally, the argument ignores the potential competitive advantages 
to be gained by improving the stability and reliability of U.S. 
derivatives markets through new reforms. Derivatives reforms require 
better risk management and greater loss reserves. These changes will 
mean that U.S. banks will provide more protection and stability for 
derivatives counterparties and customers, which is a competitive 
advantage. The U.S. financial sector has gained its international 
reputation due to our global leadership in creating stable and 
transparent markets. Indeed, it was over 150 years ago that the U.S. 
pioneered the derivatives clearinghouse. This was a major positive 
innovation in establishing robust and valuable marketplaces for 
commodities as well as key financial markets. Although permitting 
regulatory loopholes such as extra-territorial exemptions may create 
short-term profits, in the long run the greatest threat to the U.S. 
competitive edge is a repetition of the deregulation that led to the 
disastrous financial crisis of 2008.

Any `Substituted Compliance' Regime Must Ensure That Foreign Rules Are 
        Truly Comparable To U.S. Rules
    The CFTC has indicated that it will permit `substituted compliance' 
with U.S. derivatives rules. Under substituted compliance, foreign 
subsidiaries of U.S. banks (and in some cases subsidiaries of foreign 
banks dealing with U.S. persons) will be able to satisfy U.S. 
requirements by complying with the rules in their local jurisdiction.
    The danger raised by substituted compliance is that banks may seek 
out locations where regulation is weak and then attempt to use the 
inadequate foreign regulations to satisfy U.S. requirements. This means 
that it is crucial that any substituted compliance regime be strictly 
limited to jurisdictions that have genuinely comparable rules to the 
U.S. both in nature and in enforcement. Otherwise, we will see the 
emergence of regulatory havens that play a role similar to the role the 
Cayman Islands and other offshore jurisdictions have played as tax 
havens. Unless it is backed up by a real and thorough process to 
determine genuine comparability between regulatory regimes, substituted 
compliance is simply a form of disguised deregulation.
    Regulators must maintain a commitment to genuine comparability 
determination using a thorough process that carefully compares both the 
nature and enforcement of rules in foreign jurisdictions to those of 
the United States. Some in industry have called for a `principles 
based' comparability procedure, where substituted compliance is 
permitted in any jurisdiction that has agreed in principle to oversee 
derivatives markets. Such calls for `principle based' comparability are 
simply an effort at backdoor deregulation, as they do not ensure that 
regulations are genuinely equivalent.
    Clearly there can be no substituted compliance until foreign 
jurisdictions actually complete and implement their rules. Foreign 
rules cannot be substituted for U.S. rules where foreign rules do not 
yet exist. As discussed above, foreign jurisdictions lag years behind 
the U.S. in implementing derivatives rules. The U.S. must therefore be 
prepared to implement derivatives reforms rapidly and institute any 
substituted compliance at a later date, once foreign governments have 
fully implemented their rules.

                               ATTACHMENT

Following are the Partners of Americans for Financial Reform
    All the organizations support the overall principles of AFR and are 
working for an accountable, fair and secure financial system. Not all 
of these organizations work on all of the issues covered by the 
coalition or have signed on to every statement.

    A New Way Forward
    AFL-CIO
    AFSCME
    Alliance For Justice
    American Income Life Insurance
    American Sustainable Business Council
    Americans for Democratic Action, Inc
    Americans United for Change
    Campaign for America's Future
    Campaign Money
    Center for Digital Democracy
    Center for Economic and Policy Research
    Center for Economic Progress
    Center for Media and Democracy
    Center for Responsible Lending
    Center for Justice and Democracy
    Center of Concern
    Change to Win
    Clean Yield Asset Management
    Coastal Enterprises Inc.
    Color of Change
    Common Cause
    Communications Workers of America
    Community Development Transportation Lending Services
    Consumer Action
    Consumer Association Council
    Consumers for Auto Safety and Reliability
    Consumer Federation of America
    Consumer Watchdog
    Consumers Union
    Corporation for Enterprise Development
    CREDO Mobile
    CTW Investment Group
    Demos
    Economic Policy Institute
    Essential Action
    Greenlining Institute
    Good Business International
    HNMA Funding Company
    Home Actions
    Housing Counseling Services
    Home Defender's League
    Information Press
    Institute for Global Communications
    Institute for Policy Studies: Global Economy Project
    International Brotherhood of Teamsters
    Institute of Women's Policy Research
    Krull & Company
    Laborers' International Union of North America
    Lake Research Partners
    Lawyers' Committee for Civil Rights Under Law
    Move On
    NAACP
    NASCAT
    National Association of Consumer Advocates
    National Association of Neighborhoods
    National Community Reinvestment Coalition
    National Consumer Law Center (on behalf of its low-income clients)
    National Consumers League
    National Council of La Raza
    National Fair Housing Alliance
    National Federation of Community Development Credit Unions
    National Housing Resource Center
    National Housing Trust
    National Housing Trust Community Development Fund
    National NeighborWorks Association
    National Nurses United
    National People's Action
    National Council of Women's Organizations
    Next Step
    OMB Watch
    OpenTheGovernment.org
    Opportunity Finance Network
    Partners for the Common Good
    PICO National Network
    Progress Now Action
    Progressive States Network
    Poverty and Race Research Action Council
    Public Citizen
    Sargent Shriver Center on Poverty Law
    SEIU
    State Voices
    Taxpayer's for Common Sense
    The Association for Housing and Neighborhood Development
    The Fuel Savers Club
    The Leadership Conference on Civil and Human Rights
    The Seminal
    TICAS
    U.S. Public Interest Research Group
    UNITE HERE
    United Food and Commercial Workers
    United States Student Association
    USAction
    Veris Wealth Partners
    Western States Center
    We the People Now
    Woodstock Institute
    World Privacy Forum
    UNET
    Union Plus
    Unitarian Universalist for a Just Economic Community
List of State and Local Affiliates
    Alaska PIRG
    Arizona PIRG
    Arizona Advocacy Network
    Arizonans For Responsible Lending
    Association for Neighborhood and Housing Development NY
    Audubon Partnership for Economic Development LDC, New York NY
    BAC Funding Consortium Inc., Miami FL
    Beech Capital Venture Corporation, Philadelphia PA
    California PIRG
    California Reinvestment Coalition
    Century Housing Corporation, Culver City CA
    CHANGER NY
    Chautauqua Home Rehabilitation and Improvement Corporation (NY)
    Chicago Community Loan Fund, Chicago IL
    Chicago Community Ventures, Chicago IL
    Chicago Consumer Coalition
    Citizen Potawatomi CDC, Shawnee OK
    Colorado PIRG
    Coalition on Homeless Housing in Ohio
    Community Capital Fund, Bridgeport CT
    Community Capital of Maryland, Baltimore MD
    Community Development Financial Institution of the Tohono O'odham 
    Nation, Sells AZ
    Community Redevelopment Loan and Investment Fund, Atlanta GA
    Community Reinvestment Association of North Carolina
    Community Resource Group, Fayetteville A
    Connecticut PIRG
    Consumer Assistance Council
    Cooper Square Committee (NYC)
    Cooperative Fund of New England, Wilmington NC
    Corporacion de Desarrollo Economico de Ceiba, Ceiba PR
    Delta Foundation, Inc., Greenville MS
    Economic Opportunity Fund (EOF), Philadelphia PA
    Empire Justice Center NY
    Empowering and Strengthening Ohio's People (ESOP), Cleveland OH
    Enterprises, Inc., Berea KY
    Fair Housing Contact Service OH
    Federation of Appalachian Housing
    Fitness and Praise Youth Development, Inc., Baton Rouge LA
    Florida Consumer Action Network
    Florida PIRG
    Funding Partners for Housing Solutions, Ft. Collins CO
    Georgia PIRG
    Grow Iowa Foundation, Greenfield IA
    Homewise, Inc., Santa Fe NM
    Idaho Nevada CDFI, Pocatello ID
    Idaho Chapter, National Association of Social Workers
    Illinois PIRG
    Impact Capital, Seattle WA
    Indiana PIRG
    Iowa PIRG
    Iowa Citizens for Community Improvement
    JobStart Chautauqua, Inc., Mayville NY
    La Casa Federal Credit Union, Newark NJ
    Low Income Investment Fund, San Francisco CA
    Long Island Housing Services NY
    MaineStream Finance, Bangor ME
    Maryland PIRG
    Massachusetts Consumers' Coalition
    MASSPIRG
    Massachusetts Fair Housing Center
    Michigan PIRG
    Midland Community Development Corporation, Midland TX
    Midwest Minnesota Community Development Corporation, Detroit Lakes 
    MN
    Mile High Community Loan Fund, Denver CO
    Missouri PIRG
    Mortgage Recovery Service Center of L.A.
    Montana Community Development Corporation, Missoula MT
    Montana PIRG
    Neighborhood Economic Development Advocacy Project
    New Hampshire PIRG
    New Jersey Community Capital, Trenton NJ
    New Jersey Citizen Action
    New Jersey PIRG
    New Mexico PIRG
    New York PIRG
    New York City Aids Housing Network
    New Yorkers for Responsible Lending
    NOAH Community Development Fund, Inc., Boston MA
    Nonprofit Finance Fund, New York NY
    Nonprofits Assistance Fund, Minneapolis M
    North Carolina PIRG
    Northside Community Development Fund, Pittsburgh PA
    Ohio Capital Corporation for Housing, Columbus OH
    Ohio PIRG
    OligarchyUSA
    Oregon State PIRG
    Our Oregon
    PennPIRG
    Piedmont Housing Alliance, Charlottesville VA
    Michigan PIRG
    Rocky Mountain Peace and Justice Center, CO
    Rhode Island PIRG
    Rural Community Assistance Corporation, West Sacramento CA
    Rural Organizing Project OR
    San Francisco Municipal Transportation Authority
    Seattle Economic Development Fund
    Community Capital Development
    TexPIRG
    The Fair Housing Council of Central New York
    The Loan Fund, Albuquerque NM
    Third Reconstruction Institute NC
    Vermont PIRG
    Village Capital Corporation, Cleveland OH
    Virginia Citizens Consumer Council
    Virginia Poverty Law Center
    War on Poverty--Florida
    WashPIRG
    Westchester Residential Opportunities Inc.
    Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI
    WISPIRG
Small Businesses
    Blu
    Bowden-Gill Environmental
    Community MedPAC
    Diversified Environmental Planning
    Hayden & Craig, PLLC
    Mid City Animal Hospital, Pheonix AZ
    The Holographic Repatterning Institute at Austin
    UNET

                                  
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