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




 
               CHALLENGES FACING THE U.S. CAPITAL MARKETS
                 TO EFFECTIVELY IMPLEMENT TITLE VII OF
                           THE DODD-FRANK ACT

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           DECEMBER 12, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-163


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
KEVIN McCARTHY, California           JOE DONNELLY, Indiana
STEVAN PEARCE, New Mexico            ANDRE CARSON, Indiana
BILL POSEY, Florida                  JAMES A. HIMES, Connecticut
MICHAEL G. FITZPATRICK,              GARY C. PETERS, Michigan
    Pennsylvania                     AL GREEN, Texas
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 12, 2012............................................     1
Appendix:
    December 12, 2012............................................    67

                               WITNESSES
                      Wednesday, December 12, 2012

Bailey, Keith, Managing Director, Markets Division, Barclays, on 
  behalf of the Institute of International Bankers (IIB).........    42
Bopp, Michael D., Gibson, Dunn & Crutcher, LLP, on behalf of the 
  Coalition for Derivatives End-Users............................    44
Cohen, Samara, Managing Director, Goldman, Sachs & Co............    46
Cook, Robert, Director, Division of Trading and Markets, U.S. 
  Securities and Exchange Commission (SEC).......................    13
DeGesero, Eric, Executive Vice President, Fuel Merchants 
  Association of New Jersey, on behalf of the Petroleum Marketers 
  Association of America (PMAA), the New England Fuel Institute 
  (NEFI), and the Fuel Merchants Association of New Jersey (FMA).    47
Deutsch, Thomas, Executive Director, American Securitization 
  Forum (ASF)....................................................    49
Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission (CFTC)..............................................    10
Giancarlo, J. Christopher, Executive Vice President, GFI Group 
  Inc.; and Chairman, Wholesale Markets Brokers Association, 
  Americas (WMBAA), on behalf of WMBAA...........................    51
Parsons, John E., Senior Lecturer, Finance Group, Sloan School of 
  Management, Massachusetts Institute of Technology (MIT), and 
  Executive Director, MIT's Center for Energy and Environmental 
  Policy Research................................................    53

                                APPENDIX

Prepared statements:
    Bailey, Keith................................................    68
    Bopp, Michael D..............................................    85
    Cohen, Samara................................................    88
    Cook, Robert.................................................    99
    DeGesero, Eric...............................................   106
    Deutsch, Thomas..............................................   112
    Gensler, Hon. Gary...........................................   120
    Giancarlo, J. Christopher....................................   135
    Parsons, John E..............................................   145

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of Companies Supporting Competitive 
      Derivatives Markets........................................   151
    Written statement of Terrence A. Duffy, Executive Chairman 
      and President, CME Group, Inc..............................   158
Moore, Hon. Gwen:
    Written statement of Americans for Financial Reform..........   161
    Letter to Treasury Secretary Timothy F. Geithner and CFTC 
      Chairman Gary Gensler from Hon. Barney Frank, dated 
      September 21, 2012.........................................   171
Sherman, Hon. Brad:
    Letter to CFTC Chairman Gary Gensler from Senator Blanche L. 
      Lincoln, dated December 16, 2010...........................   172
Stivers, Hon. Steve:
    Letter to CFTC Chairman Gary Gensler from George Osborne, 
      Chancellor of the Exchequer, UK Government; Michel Barnier, 
      Commissioner for Internal Market and Services, European 
      Commission; Ikko Nakatsuka, Minister of State for Financial 
      Services, Government of Japan; and Pierre Moscovici, 
      Minister of Finance, Government of France, dated October 
      17, 2012...................................................   174
Bopp, Michael D.:
    Written responses to questions submitted by Chairman Bachus..   176


                   CHALLENGES FACING THE U.S. CAPITAL
                    MARKETS TO EFFECTIVELY IMPLEMENT
                    TITLE VII OF THE DODD-FRANK ACT

                              ----------                              


                      Wednesday, December 12, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Biggert, Hensarling, Neugebauer, Campbell, Pearce, 
Posey, Fitzpatrick, Hayworth, Grimm, Stivers, Dold, Canseco; 
Waters, Sherman, Lynch, Miller of North Carolina, Maloney, 
Moore, Carson, Himes, Peters, and Green.
    Ex officio present: Representative Bachus.
    Chairman Garrett. Good morning. The Capital Markets and 
Government Sponsored Enterprises Subcommittee is called to 
order. I thank everyone for being with us. Today's hearing is 
entitled, ``Challenges Facing the U.S. Capital Markets to 
Effectively Implement Title VII of the Dodd-Frank Act.'' I 
welcome the panel, and I welcome my colleagues on both sides of 
the aisle.
    Before I begin, I will start with this, a little more than 
a housekeeping matter--I made a similar statement previously to 
a private sector panel who appeared before us, and it is 
apparently apropos that I make this statement here, and that is 
is that it was agreed in a bipartisan manner with the rules of 
the committee with regard to testimony and its preparation for 
the committee and for both sides of the aisle's members of the 
committee--Mr. Gensler and Mr. Cook, as you are aware, the 
committee rules require that the committee receive written 
statements 48 hours, that is 2 days, in advance of the hearing. 
In this case, this committee invited you all to testify before 
Thanksgiving. The SEC's written submission arrived at 
approximately 1:25 yesterday afternoon. The CFTC's submission 
did not arrive until around 4 p.m. yesterday.
    And the reason I bring it up is the same reason I brought 
it up when the private sector was here; the reason we agreed 
that we should have these things in all of our hands 48 hours 
in advance is for ourselves and our staffs, for all of us to be 
able to read it, understand it, and digest it in a timely 
manner. In this case, as I say, it goes back almost several 
weeks that this meeting was noticed, and also, as you know, 
this was actually postponed one time.
    So I hesitate to put a rationale as to why the Commissions 
are unable to provide the statements in a timely manner. I 
hesitate to wonder why they are not able to comply with the 
House rules when I am sure that you would require various 
businesses and what-have-you to comply with your rules. Some 
would suggest that it appears to reflect a lack of respect for 
the committee and its members, and I will--just before we 
begin, I will just ask both of you, is that the reason or is 
there--
    Ms. Waters. Would the gentleman yield?
    Chairman Garrett. Yes.
    Ms. Waters. With all due respect for your concern about 
whether or not our witnesses are in compliance with the rules, 
I would respectfully ask the Chair to have a private 
conversation with them about their workloads and what they are 
attempting to do. And I am not attempting to make any excuses, 
but I think we would be better served if we could move forward. 
For today, I think you have indicated your concern. Let us do a 
private meeting or a private response to that and move on, 
because the issue before us today is of such great importance 
that I would like us to not utilize all of our time with them 
having to make an excuse for it. As the ranking member, I am 
concerned about these issues. I take it seriously, and I would 
respectfully ask that we move forward and have Mr. Gensler and 
Mr. Cook both talk with you a little bit later about this.
    Chairman Garrett. That is fine, and I will defer then to 
the ranking member's wishes on this, because I am sure she 
shares the same concern that I do that her staff has the 
opportunity to review this, as our staff and our Members do as 
well.
    And so with that, we will move into the hearing, begin with 
opening statements, and I will recognize myself for 5 minutes.
    As everyone is well aware, the main reason Congress is 
still in session after the recent election is because 
negotiations are ongoing to try to reach an agreement on the 
so-called fiscal cliff. However, there is another cliff that is 
receiving a lot less attention, but has the potential to be as 
problematic and costly to Main Street businesses, retirees, 
farmers, municipalities, and many others, and that, of course, 
is the Dodd-Frank regulatory cliff. And while the President 
campaigned for reelection, his financial regulators kept a 
number of these potentially economically damaging rules, you 
might say, bottled up to get through the November 7th election.
    Now that the election has passed, the regulators have been 
free to unleash their regulation tsunami, you might say, on the 
U.S. economy. Whether it is the Qualified Mortgage (QM) 
definition; the Volcker Rule; the risk retention issue; or the 
Collins Amendment, the economic impact of each one of these 
individually and collectively will be severe.
    Today's hearing will focus on just one specific area of 
this regulatory cliff, the new regulations of the U.S. swap 
markets under Title VII.
    So let me begin by correcting a common mischaracterization 
from friends across the aisle sometimes: Republican do not 
oppose all regulations. In fact, in the aftermath of the 
financial crisis, Republicans proposed additional regulations 
for the swap markets in a regulatory reform alternative, and, 
believe it or not, we do support regulation of the market. 
Unfortunately, some of our colleagues always present a false 
choice on this issue. They say, either you support what is 
exactly proposed by the regulators, the CFTC, or you support 
deregulating the swaps market altogether.
    This cannot be further from the truth. My colleagues and I 
support commonsense, thoughtful regulations in the markets that 
promote transparency and allow for Main Street end users to be 
able to effectively hedge their day-to-day operations in a 
prudential manner. Unfortunately, in terms of the proposals 
that have been issued so far, this has not been the case.
    Recently, the CFTC had a Global Markets Advisory Committee 
meeting with foreign regulator counterparts, and during that 
meeting the head of the European Commission's Financial Markets 
Infrastructure, Patrick Pearson, described in detail many 
potential negative consequences of some of the proposed rules 
in Title VII, and he stated at the time, ``Washington, we have 
a problem.'' And I believe if he was sitting up here, he might 
say, ``Chairman Gensler, we have a problem.''
    The criticism the CFTC has received from foreign countries 
has been overwhelming. Europe, Asia, and Australia have 
formally weighed in as well. If this keeps up, some suggest 
that our President may have to go around the world at the 
beginning of the year and do one of his famous apology tours 
for what is going on here in this country.
    The criticism of this as received is by no means limited to 
foreign regulators. There has also been a lot of criticism 
levied by many domestic entities, including some of your 
counterparts at the SEC and even some of your own 
Commissioners. Even former Clinton Administration Chairman of 
the Council of Economic Advisers Martin Baily, a senior fellow 
now in the Economic Studies Program at the somewhat liberal-
leaning Brookings Institute, has suggested that a swing of the 
pendulum has gone back and is overly harsh.
    I also constantly hear about the CFTC being a world-class 
regulator, and that is what we all want. Now, I am told it is 
the best entity to determine the rules of the road for the 
swaps market, but some might have some doubts. For example, 
does a world-class regulator rush forward on some rules and 
then, after that, issue dozens of so-called short-term no-
action letters to exempt market participants? And would a 
world-class regulator circumvent the lawful, good-government 
rulemaking process of Congress by issuing regulations through 
guidance or staff emails? Does a world-class regulator ignore 
specific letters from congressional oversight panels, or does a 
world-class regulator front-run its foreign and domestic 
counterparts in order to try to have some sort of legacy here 
for this institution in this country? Does a world-class 
regulator not properly prepare its rulemakings, only to find 
them struck down repeatedly in the courts? And would a world-
class regulator throw an entire consumer funding market into 
disarray, doing so by encroaching on another regulator's 
discretion? And does a world-class regulator repeatedly defy 
congressional intent by not following congressional statute? 
Does a world-class regulator create arbitrage opportunities and 
reduce competition for market participants by overreaching on 
its proposed rulemaking?
    So from the refusal to work collaboratively with foreign 
and also domestic counterparts, to the attempts to bypass the 
appropriate cost-benefit analysis that we require, to laws to 
rush unorganized exemptive actions creating more market 
stability, to refusal to follow explicit congressional intent 
to allow voice brokerage, to finally forcing market 
participants to leave the swap markets to go over now to the 
future markets because, well, it is a chaotic and overreaching 
nature of the rulemaking, I can say that the entire 
implementation, then, of Title VII has been somewhat, you might 
say, of a train wreck. And now, because of a train wreck, we 
have as a class its migrating away from the swaps into the 
futures markets, and I am not sure why then the ranking member 
went through all the hard work on the law that--well, he is not 
here with us today--bears his name if the regulation is being 
finalized--not this ranking member, the ranking member of the 
full committee--if the laws that are being finalized by the 
CFTC simply make swaps now economically unfeasible.
    So what do we need? We need an appropriate and workable 
regulatory regime over our swaps market if there is to be one. 
A regulatory framework should promote transparency, increase 
efficiency, and allow end users to effectively hedge the risk. 
And this committee and others will have to hold many other 
oversight hearings going forward to ensure that this is the 
eventual outcome, and the implementation, therefore, is too 
important and affects too many people to let us to continue to 
deteriorate. We must get things back on the right track, and 
that means involving some commonsense approach.
    With that, I yield back, and I recognize the gentlelady 
from California.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this important hearing today. And I would like to welcome Mr. 
Gensler and Mr. Cook here today.
    Mr. Cook, I understand that this perhaps will be your last 
hearing, that you will not be the Director of the Division of 
Trading and Markets following this session, so we would like to 
thank you for your service.
    Mr. Gensler, thank you for appearing here once again, and I 
would like you to not feel constrained to defend yourself 
against the accusations that were just made about you and your 
work.
    Under Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, the Congress responded to one key 
cause of the 2008 financial crisis: the unregulated over-the-
counter derivatives market. Through the Act, the Congress 
tasked the Commodity Futures Trading Commission (CFTC) and the 
Securities and Exchange Commission (SEC) with bringing much 
needed transparency to this market, which amplified the 
collapse of the housing bubble and cascaded losses across the 
global financial system.
    The CFTC and the SEC are now in the process of implementing 
what the Congress has tasked them with both through regulation 
of firms at the entity level and with regulation at the 
transaction level, including clearing, data reporting, margin, 
trade execution, and business conduct standards. Once in place, 
these rules will bring much needed stability to the financial 
system, while also lowering costs to the end users who rely on 
these products to run their businesses.
    With that said, our hearing today will begin to get into 
the details with regard to some of the rulemakings the CFTC and 
the SEC are now conducting, particularly with regard to how 
swaps regulations will extend across U.S. borders. On this 
point, I think it is important that we be sure not to import 
unregulated risk back to the United States, while also 
recognizing some of the legitimate concerns raised by market 
participants, including a lack of harmonization between the SEC 
and the CFTC, challenges raised by the faster implementation 
timeline in the United States relative to the European Union 
and Asia, as well as lack of global harmonization and a lack of 
clarity regarding implementation dates.
    In addition to exploring these concerns, I look forward to 
hearing comments from stakeholders related to a number of other 
issues related to Title VII and its implementation. I hope we 
can all agree on the broad goals and structure of Title VII, 
which will strengthen our financial system even as we continue 
to debate the implementation details of some of these reforms.
    With that, Mr. Chairman, I thank you very much, and I yield 
back.
    Chairman Garrett. Thank you.
    The gentlelady yields back. The chairman of the full 
Financial Services Committee, Chairman Bachus, is now 
recognized for 5 minutes.
    Chairman Bachus. Thank you.
    We all know the Dodd-Frank Act is 2,300 pages long, and 
Title VII, which is the subject of this hearing, is 444 pages 
long. Reforms are absolutely necessary. We all know what 
happened, we witnessed what happened in 2008, and there should 
be no question that we need reforms.
    Actions of companies like AIG and others--there were a lot 
of innocent parties in the economy--jobs that were lost as a 
result of those actions. And I think we know and I think the 
dealers should report their trades to a data repository or an 
appropriate regulator. Dealers should submit eligible trades 
for clearing to a central counterparty or registered 
clearinghouse and electronic platforms. And exchange trading 
and voice brokerage should be available to market participants.
    Having said all that, the rules must have some flexibility. 
They must be flexible enough to have alternative forms of 
execution to flourish. If all derivatives were supposed to be 
traded on an exchange, then they would all be futures. 
Derivatives are different from exchange-listed products, and 
imposing the listed futures or equities market model on the 
derivatives is not the mandate of Title VII. And I know there 
are some different interpretations.
    I want to say that the very complexity of this, we were all 
there, a lot of this was done in the last 2 or 3 days, the last 
night things were thrown together, and that is a problem for 
the regulators. This was not something you went out and wrote; 
it was handed to you. I don't underestimate your challenges, 
and I want to compliment the SEC and the CFTC and your staffs, 
because actually we have had seven hearings before this 
subcommittee. That has required a lot of preparation on your 
part. You are dealing with challenges. You are continuing to 
deal with misbehavior in many cases in the market. This is the 
greatest rewrite of our financial laws since the 1930s, I 
suppose.
    And I want to say, Mr. Cook, this may be your last 
appearance before the committee. I appreciate your service. I 
appreciate, Chairman Gensler, that you served here under a 
difficult time. I don't think the committee members ought to 
underestimate the challenges and sacrifices that you have made, 
and the SEC and the CFTC.
    My concern, and I think a concern of a lot of us--and this 
is not blaming you--is just that law is ambiguous in parts, it 
is subject to different interpretation. If we have a 
conflicting definition of what is capital, for instance, which 
appears to be the case with the regulators, and even the global 
regulatory bodies, people can't seem to agree on some of the 
definitions, then our financial institutions are having to deal 
with various interpretations, various different approaches by 
the regulators. And I would just urge you to try to sync those, 
because there is a real concern, I think, on the Hill, and part 
of this is the law itself and the complexities of the law, so 
it is not something that you created; but it is absolutely 
essential that when it becomes operational, it syncs together 
and it is functional. And I would just urge you to consider as 
this is implemented its effect on the economy, the markets, the 
institutions, and even your abilities to regulate. It is going 
to be absolutely essential that you cooperate in this effort.
    I want to say this: The Financial Services Committee has 
been successful in a bipartisan way, many times working with 
the SEC and the CFTC, in fixing some of the big problems with 
Title VII, including striking the provisions that would impede 
American businesses use of derivatives to ensure stable pricing 
and to reduce volatility, and fixing the indemnification 
provisions in the swap push-out program. That has all been done 
by this Congress, with the help of the regulators, and 
moderating the extraterritorial reach of Title VII.
    So I would hope that in this next Congress we can continue 
to work together, not pointing fingers or publicly castigating 
each other, but it is going to require a lot of behind-the-
scenes work and a lot of work together, because we are all 
patriotic Americans, we all want what is best for the economy, 
and for the sake of the financial industry and the consumers 
and the American public, we need to try to get together and 
cross those bridges and try to what I would say is make these 
regulations functional and the implementation as smooth as 
possible.
    I appreciate your attendance, and I would like to say that 
Mr. Schweikert, who is vice chairman of this subcommittee, and 
one of the most capable members of this committee, will not be 
serving on it over the next 2 years, and neither will Mr. Dold, 
Ms. Hayworth, and Mrs. Biggert. I think we all agree they are 
some of our most thoughtful Members who won't be with us, and 
that is a tremendous loss our committee, I think, in its 
ability to perform its service.
    But I thank the gentlemen for being here. Many times, there 
is a lot of criticism, and a lot of frustration on your part, 
but no one ought to think that this is a problem that you 
created, because it is not. Thank you.
    Chairman Garrett. The gentleman yields back, and I, too--
    Chairman Bachus. And also Mr. Canseco, who is one of my 
best buddies; I have been to San Antonio with him on two 
occasions. I want to thank you for your service.
    Chairman Garrett. I thank the gentleman from Alabama, and I 
also echo the words dealing with Director Cook for your 
service, and we do appreciate that, and also for the members of 
the committee. It is indeed a true brain trust that we are 
losing here on the committee. These members brought a 
significant amount of ability to the committee. I think that 
was one of the things we all said with this class coming in and 
these members of the committee, that they got right to it, they 
understood the issues, and they did delve into it in a big way. 
And, of course, that goes in strong measure to my vice 
chairman, whom I will certainly miss in that capacity, and the 
many services that he performed for me as well. So I thank you 
all for your service to the committee, and I will allow you a 
moment at the end, 10 seconds, if we get permission from the 
ranking member.
    Mr. Schweikert. Thank you, Mr. Chairman. Sort of a point of 
personal privilege. For all of us, we love being on this 
committee, but do you notice a pattern here of how many of us 
are going to be gone? Could it be you? No, it has truly been 
one of my great joys being on this subcommittee.
    Chairman Garrett. I said I liked you in the past being vice 
chairman of the subcommittee. But thank you. And with that--and 
we will be mindful of the time--
    Ms. Waters. Mr. Chairman, what I am going to do is I am 
going to build in a little bit of extra time to make up for the 
difference. So with our next speaker Mr. Lynch, there will be 2 
minutes.
    Chairman Garrett. The gentleman from Massachusetts is 
recognized for 2 minutes.
    Mr. Lynch. I thank the ranking member and I thank the 
chairman for your courtesy. I would also like to thank the 
witnesses here for your good work, for your service, and for 
helping the committee with its work.
    As we know, Title VII of the Dodd-Frank Act brought 
historic and much needed reform to the over-the-counter 
derivatives market by bringing these financial products out of 
the shadows and onto transparent exchanges and requiring 
companies to actually show that they have the cash to back up 
their commitments.
    As the full committee chairman, the gentleman from Alabama, 
mentioned earlier, in the AIG example we had a small London 
affiliate of the insurance parent manage to quietly make enough 
of these risky bets to put the fate of the company at risk and 
also the fate of the entire financial system in jeopardy. 
Congress has now enacted Title VII to address this kind of 
rampant speculation and turn the over-the-counter derivatives 
market from that opaque backroom market operation to a more 
transparent public market, something more akin to the stock 
exchanges.
    And I have to say that the regulators have done much to put 
these reforms into effect, and I want to thank you for your 
continued work, but more must be done before we can deem the 
derivatives market safe and sound. We also want to make sure 
that the rules apply to the entire derivatives industry, 
whether the swaps market, the futures market, or any other 
market if it has the capability to bring down the economy, as 
happened in the AIG example.
    So I hope that the regulators will move forward with 
necessary reform measures, and that this committee will again 
provide you with the resources necessary to get that work done, 
because it is very important to the entire financial system. I 
thank the chairman for the additional time, and I yield back.
    Chairman Garrett. The gentlelady from California?
    Ms. Waters. Next, we will have Mrs. Maloney for 2 minutes.
    Mrs. Maloney. Thank you, and welcome to the witnesses.
    Title VII of Dodd-Frank is in many ways the heart of our 
financial reform. Derivatives trades are unregulated, and 
transacted completely in the dark between two counterparties 
with little oversight. The financial crisis proved that if one 
financial institution became overly leveraged and invested in 
overvalued instruments, that one institution could bring down 
the whole system.
    With AIG, confidence fell like that, and they came before 
this committee and told us they didn't know where their swaps 
were, they didn't know their exposure, they only needed $50 
billion. They kept coming back; next time $85 billion, and we 
still don't know what is going on. It ended up being $185 
billion in taxpayer money.
    Dodd-Frank tried to change that. It put rules in place, 
capital and margin requirements, recording and clearing 
components and other checks on an institution's ability to add 
risk to the system, to put sunlight so that people could 
understand what was going on.
    Now, the CFTC, to its credit, has released roughly 60 draft 
rules and proposals, yet in the days leading up to the October 
12 effective date, a number of the rules--they were forced to 
issue these no-action letters and guidance because they needed 
more time to act and to get it right. And we do need to give 
the regulators enough time to get it right, and to really get 
it right, because it is so critically important, and in a way 
that we do not implement rules that drive business away from 
America, and that we do not implement rules that make it 
difficult for us to interact with the global markets, and with 
other countries, and certainly with the SEC.
    But I feel that markets run much more on trust than on 
capital. And I would like to see America remain the financial 
capital of the world, and I would like to see rules that help 
us remain in that position.
    I would like to also understand why all the financial 
crises seem to happen in London. AIG exploded in London in 
their Financial Special Markets Office, not in their well-
regulated New York office. The London Whale, the LIBOR crisis. 
Why do all of the crises happen in London?
    Thanks. My time is up.
    Chairman Garrett. I thank the gentlelady from New York.
    Ms. Moore is recognized for 2 minutes.
    Ms. Moore. Thank you so much, Chairman Garrett and Ranking 
Member Waters.
    I just want to laud the SEC and the CFTC for the 
extraordinary work that both agencies have done to this point. 
It is a Herculean task when you consider a point that Ranking 
Member Waters has driven into the ground, and that is you are 
not adequately funded to do the work that we have asked you to 
do in such a short timeframe.
    I am concerned about a couple of things today that have 
already been mentioned, and I look forward to hearing from the 
regulators on the rulemaking process, particularly on H.R. 
4235, which Mr. Dold and I authored, which removes the 
requirement that SDRs as primary regulators be indemnified 
prior to sharing the data with other regulators, including 
foreign regulators. The SEC has testified to this committee 
that it favors removal of this indemnification requirement, two 
CFTC Commissioners have opined on this, and yet the CFTC 
interim guidance on indemnification is something that is not 
being--it raises grave concerns among our foreign regulators as 
to its efficacy.
    Finally, I am troubled, as we have heard earlier, by 
reports detailing the parties are encouraging the use of 
product swap futures over swaps to avoid margin, and that they 
are being marketed as economic equivalents. Although I think 
that they carry unique market risk, this is a regulatory 
arbitrage, I believe, and I would argue that promotion of these 
products may provide another damaging example of market 
participants putting their interests ahead of their end-user 
customers.
    I do thank you for your testimony, and I look forward to 
hearing from our witnesses. I yield back, sir.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Connecticut is recognized for 2 minutes.
    Mr. Himes. Thank you, Mr. Chairman. I would like to just 
take a few seconds--thank you, Chairman Gensler and Director 
Cook, for being with us. I would like to just take a few 
seconds to try to offset some of the criticism of you in which 
the hearing opened.
    Of all the vast causes in the web of the difficulties that 
brought down the economy in 2008, no area, I think, is more 
complex than the areas that you have been charged to oversee, 
derivatives; not Fannie Mae, not Freddie Mac, not pick-a-pay 
mortgages, not the activities of Countrywide. This is one of 
the more catastrophic areas as we look back on where we were 
and also probably the most complex area, and I salute you and 
compliment you for really working hard around something that is 
enormously challenging in the face of criticism. And I exempt 
the chairman of the committee when I say this. It is often 
churlish of your efforts, and it is a criticism that also 
forgets the devastation that was visited on this country, the 
trillions of dollars of lost value as a result of the downturn, 
the devastation that was visited. The criticism forgets when 
words like ``tsunami'' are bantered about, what kind of tsunami 
hit America households in 2008 and 2009. So thank you for your 
efforts in that regard.
    You also are struggling uniquely, I think with cross-border 
issues. And we have had lots of conversations on this issue, 
and I think that regardless of party, we agree that final 
regulations from a public policy standpoint should avoid 
international arbitrage. We don't want these instruments, which 
are so useful to so many commercial end users, and that, by the 
way, in many instances are also very dangerous, to move to less 
regulated environments and therefore decrease our transparency 
of these instruments. We also, of course, want to make these 
regulations with a nod towards our industry competitiveness.
    So I close with just a request, which is that in particular 
as we look back on the events of October 12th and some of the 
concern about offshore entities not perhaps registering, I 
would make a request of both of you that you give us a 
perspective and an update perhaps on how you believe those 
events inform final rules and how you feel about them. But 
again, I close as I began, by saying thank you for your efforts 
and your constructive work in this terribly important area.
    I yield back.
    Chairman Garrett. The gentlelady from California?
    Ms. Waters. Mr. Green for 2 minutes.
    Mr. Green. Thank you, Madam Ranking Member, and I thank the 
Chair as well, and I thank the witnesses for appearing.
    It is my belief that the general public probably does not 
put a lot of emphasis on words like ``arbitrage'' and ``cross-
border swaps,'' but I do think the general public understands 
that a major institution such as AIG ought to be properly 
funded. And I think the general public understands that this 
country by and through its representatives did the right thing 
when we did not allow AIG to bring down the economic system not 
just in this country, but probably and possibly worldwide.
    So I am here today to thank you for what you are doing to 
help us perfect Dodd-Frank. There is still great work to be 
done, but any time we pass legislation of this magnitude, there 
is work to be done in the years to come. I plan to work with 
you and I plan to work with my friends across the aisle to make 
sure we do this great work. And I yield back the balance of my 
time.
    Chairman Garrett. The gentleman yields back. And that 
concludes all time for Members on both sides of the aisle.
    We will now turn to our first panel, which is comprised of 
the Chairman of the CFTC, Gary Gensler, and Mr. Robert Cook, 
Director of the Division of Trading and Markets at the SEC.
    Chairman Gensler?

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

    Mr. Gensler. Thank you, Chairman Garrett, Ranking Member 
Waters, Chairman Bachus, incoming Chairman Hensarling, and 
members of the subcommittee for your time. I, too, want to 
thank all the Members I may be testifying before for the last 
time, unless you come back to this body, which often happens; 
and to Robert Cook, because I think we have all worked so well 
together on an enormous challenge that was created out of the 
2008 crisis: How do we best bring commonsense rules of the road 
to help best protect the public.
    Two-and-a-half years after Congress and the President came 
together to ensure that swaps markets reform works for the 
American public, we are here before you. And I just want to 
address the chairman to say that we have deep respect for this 
committee and for Congress. We will work to get testimony in 
earlier where we can. We just always are trying to make it 
complete and to address all the questions that we think might 
come up from the committee. So it may be balancing that a 
little bit to that issue.
    A crisis, as we all know, put 8 million people out of work, 
partly due to the unregulated swaps market and, yes, as 
Congressman Himes said, a very complex market. Congress 
directed the CFTC and the SEC to bring reforms to this market, 
and given the magnitude of the crisis, Congress actually asked 
us to do it in 1 year, and they gave us a lot to do, as was 
mentioned, maybe up to 60 rules that were mandated for the CFTC 
and others for the SEC.
    Where are we today, 2\1/2\ years in? We haven't been doing 
this against a clock; we have been trying to do it 
thoughtfully, taking into consideration all the costs and 
benefits and the nearly 40,000 public comments that we received 
in nearly 2,000 meetings that we have had.
    We have completed about 80 percent of the rules. The 
marketplace is increasingly moving to implementation, and the 
results of completed reform, central clearing, which this 
committee, I think, on a bipartisan basis endorsed, will start 
to be a reality throughout 2013 and phases through 2013. And 
this fulfills the President's commitment at the G-20 meeting in 
Pittsburgh in 2009 to have that in place be the end of 2012. 
This committee, this Congress made that happen.
    Transparency has begun with reporting to regulators, but 
beginning on the first of the year, it will be to the public as 
well. We price in volume for certain interest rate and credit 
default swap indices like the indices that were in the midst of 
the London Whale. And, yes, swap dealers will begin to register 
at the end of this month.
    Now, the CFTC has been working to complete these reforms in 
a deliberative way, taking into consideration and seeking broad 
public input, and working with our friends at the SEC and 
international regulators.
    We have also looked at phased compliance. We have been a 
significant supporter of phasing compliance. We want to smooth 
the transition from an opaque, unregulated market to a 
transparent, regulated marketplace. As Chairman Bachus said, if 
I may quote you, you want to make it operational, sync together 
and function.
    So in the midst of that implementation, and it is upon us 
now, it is the natural order of things that many market 
participants have sought further guidance. Sometimes the 
questions come early, but as all of us know, because we were 
all in school at one point, sometimes we do our papers late 
into the night the day before it is due, and that is just human 
nature. We will address questions that come up early, and we 
will do our best to address them even if they come up late.
    Prior to a milestone on October 12th--and this milestone 
was just because the SEC and the CFTC had finished the 
foundational definitional rules, and so the definition of 
``swap'' and ``swap dealer'' and so forth went into effect on 
October 12th--we got a lot of those questions, some early, some 
late. Along with my fellow Commissioners and staff, we sorted 
through about 20 issues, and I think that we sorted through 
them for the benefit of the public to make it operational, sync 
together and function; but we also said, if you have further 
questions, come in. And we have gotten further questions. We 
are committed to working through those questions to smooth this 
transition, because it is very significant and important.
    Four years after the crisis, though, it is time for the 
public to benefit from this transition to transparency and 
lower risk. Reforms that hold the similar promise of the 1930s 
reforms in the securities and futures markets I think can 
contribute to decades of economic growth and innovation. That 
is what transparency is about. It helps growth and innovation 
in our economy.
    So though we are nearly complete, we have two important 
areas I just want to address, we still have to finish rule 
writing, and they have come up already in this hearing. First, 
final rules to promote pre-trade transparency. This is through 
the trading platforms, the swap execution facilities. And I 
know you will hear from Mr. Giancarlo later today, with whom we 
have spent a lot of time.
    These execution facilities will benefit the public by 
bringing greater liquidity and competition in the markets. 
Buyers and sellers will meet in the marketplace on the most 
standardized swaps; not the customized, but the most 
standardized swaps.
    The Commissioners are reviewing the draft final rules now, 
and though we had hoped to maybe get them out in December, 
yesterday, or 2 days ago, we provided some additional relief 
that we will try to get these out in January or February and 
phase them in throughout 2013 to give the market time to phase 
this in.
    Second is guidance in phased compliance regarding cross-
border application of the swaps market reform. Congress 
recognized the basic lessons of modern finance in the 2008 
crisis in adopting Dodd-Frank. Swaps executed offshore by U.S. 
financial institutions can send risk straight back to our 
shores. It was true with the affiliates of AIG, of Lehman 
Brothers, Citigroup, and Bear Stearns. And yes, risk here can 
send things crashing to Europe, and we certainly did that with 
our housing crisis, hurting people in Europe as well.
    Under the guidance and completed rules, swap dealing of 
more than $8 billion in notional value with U.S. persons would 
require somebody to register, and we anticipate many will do so 
at the end of this month.
    The best way to protect taxpayers and promote transparent 
markets swaps, markets reform should cover transactions of 
overseas branches and overseas affiliates guaranteed by U.S. 
entities. I think failing to do so, if we don't cover somehow 
the overseas affiliates that are guaranteed back here, not only 
will we expose the public to risk like AIG, but we actually 
will probably send jobs from the United States to overseas 
because our U.S. firms would just send the jobs overseas, but 
the risk would still back here. I think that is a competitive 
issue.
    Furthermore, for foreign firms that register, we are 
committed to substituted compliance. What does this mean? That 
means if there is comparable and comprehensive foreign 
regulatory requirements that we can look to, let us look to 
them. For a lot of reasons, it is the right thing to do. But we 
are also a small agency, and a bit underfunded, so it is good 
to look to other regulators.
    But where the overseas swap dealer transacts with a U.S. 
person, let us say back here in the United States, maybe it is 
in New Jersey or in California, but they are transacting back 
here in the United States, we think that on a transaction 
level, those foreign swap dealers should come under Dodd-Frank 
just like a U.S.-affiliated swap dealer. Again, this is 
consistent with the law, but it also enables U.S. and overseas 
firms to compete on a level playing field, rather than U.S. 
firms coming under Dodd-Frank, and overseas firms not. That 
does not seem to be the right competitive place to be.
    I thank you for this opportunity to testify today. I know I 
ran a little over. I just want to say one last thing. I am so 
damn proud of the people at the CFTC, sir. I know that there 
are going to be many criticisms raised about this agency. That 
is because this agency is doing something for the American 
public. The crisis was partly about the swaps, and 8 million 
people lost their jobs. And you all, I think, coming together 
gave us a heck of a task, but it is an important task. The 
dedicated folks of the CFTC are not trying to be, as you say, a 
``world-class regulator.'' They are just trying to comply with 
the law, put it in place, ensure for transparent markets, and 
ensure, yes, for a smooth transition so it is operational, 
syncs together and functions. Thank you.
    [The prepared statement of Chairman Gensler can be found on 
page 120 of the appendix.]
    Chairman Garrett. Thank you.
    Director Cook?

  STATEMENT OF ROBERT COOK, DIRECTOR, DIVISION OF TRADING AND 
     MARKETS, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

    Mr. Cook. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, good morning. My name is Robert 
Cook. I am the Director of the Securities and Exchange 
Commission's Division of Trading and Markets. Thank you for the 
opportunity to testify today on behalf of the Commission 
regarding Title VII of the Dodd-Frank Act.
    Let me begin by acknowledging the chairman's concerns about 
the timing of the testimony, to apologize for that, and to 
assure you that it was by no means any indication of 
disrespect, and we would be happy to address any further 
concerns in that regard at your convenience.
    As you know, Title VII creates an entirely new regulatory 
framework for over-the-counter derivatives and directs the SEC 
and the CFTC to write a number of rules to implement this 
regime. The SEC has authority over security-based swaps, and 
the CFTC has authority over swaps. The vast majority of 
products subject to Title VII are within the CFTC's 
jurisdiction.
    My testimony today will provide an overview of the SEC's 
efforts to implement Title VII since Chairman Schapiro's 
testimony before the subcommittee in April. In addition, I will 
discuss the Commission's efforts to address the implementation 
of Title VII in the cross-border context.
    Since enactment of Dodd-Frank, the SEC has proposed 
substantially all the rules required by Title VII and in some 
cases has adopted final rules, and we continue to work hard to 
implement the title's provisions. Our adoption efforts to date 
have focused on the key definitional terms under Title VII and 
the rules relating to clearing infrastructure.
    In July, the SEC, acting jointly with the CFTC, adopted 
final rules and interpretations related to product definitions. 
This effort followed a joint adoption in April of final rules 
and interpretations relating to Title VII entity definitions.
    Although the completion of these two joint rulemakings is a 
significant milestone in the journey toward full implementation 
of Title VII, the adoption of these two definitional rules did 
not trigger a requirement to comply with other rules the 
Commission is adopting under Title VII. Instead, the compliance 
stage applicable to each final rule will be set forth in the 
adopting release for each such rule, taking into account the 
scope and complexity of that rule's requirements and any other 
relevant factors known at the time of the adoption. In this 
way, the Commission will be better able to provide for the 
orderly implementation of the various Title VII requirements.
    To that end, the SEC issued in June a policy statement 
describing the order in which it expects to require compliance 
with the Commission's final rules and requesting public comment 
on that proposed order. The SEC's approach aims to avoid the 
disruption and cost that could result if compliance with all 
the rules were required simultaneously or haphazardly. The 
policy statement also emphasizes that those subject to the new 
regulatory requirements should be given adequate but not 
excessive time to come into compliance with them. Market 
participants have generally had a positive response to the 
policy statement, and we are taking their comments into account 
as we work toward completing the Title VII adoption process.
    In addition to the key definitional rules, the Commission 
has also adopted rules relating to clearing infrastructure. In 
June, the Commission adopted rules that established procedures 
for its review of certain actions undertaken by clearing 
agencies. These detail how clearing agencies will provide 
information to the Commission about the security-based swaps 
the clearing agencies plan to accept for clearing, which the 
Commission will then use to aid in determining whether those 
swaps are required to be cleared.
    The rules also require clearing agencies designated as 
systemically important under Title VIII of the Dodd-Frank Act 
to submit advance notices of changes to the rules, procedures 
and operations that could materially affect the nature or level 
of risk at those clearing agencies.
    In October, the Commission adopted a rule that established 
standards for how clearing agencies should manage their risks 
and run their operations. This is designed to help ensure that 
clearing agencies will be able to fulfill their 
responsibilities in the multi-trillion-dollar derivatives 
market as well in the more traditional securities market.
    Finally, also in October, the Commission proposed capital 
margin and segregation requirements for security-based swap 
dealers and major security-based swap participants.
    The next major step in our efforts to implement Title VII 
will be the Commission's efforts to address the international 
implications of Title VII in a single holistic proposal. Our 
cross-border approach is being informed by discussions with 
fellow regulators in other jurisdictions, and we are also 
paying close attention to the comments on the CFTC's proposed 
guidance.
    In part, the purpose of the publication of a single 
proposal addressing the international implications of Title VII 
across the full range of regulatory categories and transaction 
requirements is to give investors, market participants, foreign 
regulators, and other interested parties an opportunity to 
consider our proposed approach as an integrated whole. The 
cross-border release will involve notice-and-comment 
rulemaking, not only interpretive guidance. As a rulemaking 
proposal, the release will incorporate an economic analysis as 
required by the Exchange Act that considers the effects of the 
proposal on efficiency, competition, and capital formation.
    Although a rulemaking approach takes more time, we believe 
there are a number of benefits that will make this approach 
worth the effort, including a full articulation of the 
rationales for and economic consequences of particular 
approaches and a consideration of usable alternative.
    In conclusion, as we continue to implement Title VII, we 
look forward to continuing to work closely with Congress, our 
fellow regulators both at home and abroad, and members of the 
public.
    Thank you for the opportunity to share our progress and 
current thinking on the implementation of Title VII. I will be 
happy to answer your questions.
    [The prepared statement of Director Cook can be found on 
page 99 of the appendix.]
    Chairman Garrett. And I thank you, Director Cook.
    At this time, we will begin the questioning, and I will 
recognize myself for 5 minutes.
    So, Christmas is coming, and I am in the process of trying 
to buy some gifts for the family, and I won't say what I 
bought, but I will just lay out what I have done to try to 
achieve that, to do that.
    One is I went online, and I bought some stuff from Texas. 
So I ask Chairman Gensler, would you say that when I bought 
those packages for my kids from Texas online, would that be 
interstate commerce that I was engaged in?
    Mr. Gensler. I am not sure where the question is going, but 
I think it is good for your children for sure, and it is 
probably interstate commerce.
    Chairman Garrett. Okay. And then I bought some other things 
from Michigan through one of the catalogues, mail catalogues. 
And would you say when I did that, it was also through means of 
interstate commerce?
    Mr. Gensler. Again, I hope your children are happy with the 
gifts.
    Chairman Garrett. They don't ask for much. They are good 
kids.
    And lastly, one of them I had to go and call up a company 
out in California and buy their gifts. Would you say that was a 
means of interstate commerce that I did with them?
    Mr. Gensler. If I understand the question, whether using a 
telephone, online, and there may have been a third means in 
there--
    Chairman Garrett. Yes, mail.
    Mr. Gensler. These are all means of interstate commerce, I 
think I understand that they are. Even carrier pigeons might be 
a means of interstate commerce.
    Chairman Garrett. If they had not become extinct.
    So that seemed pretty clear to us, and it was pretty clear 
to Congress when we put in the language any means of interstate 
commerce would be appropriate and allowable under SEFs. But it 
seems as though the Commission, a hard-working staff, I agree 
with you all, are having difficulty in defining that. And that 
now I understand that the Commission is considering revising 
the rules that will reference the latter one, the last one, 
which was the voice over the telephone, is that correct? You 
are revising it to include voice, but you are using language 
not in the actual rule to do so; you are doing so in the 
preamble.
    So the question is if it is so clear to both of us right 
here that these are any means of interstate commerce, why isn't 
it clear to the Commission, and why is this one little area 
something that is already resolved and done with?
    Mr. Gensler. Just to bring it back to basics, what Congress 
asked us to do, both agencies, is to ensure greater competition 
where buyers and sellers meet in a transparent marketplace 
through swap execution facilities. ``By any means of interstate 
commerce'' is in the statute. We got a lot of comments, and 
they were good comments, on our proposal that we have to ensure 
that we are technology neutral, whether it is telephone, 
Internet and these three means, and that is what is being 
considered by the Commission right now--
    Chairman Garrett. Okay.
    Mr. Gensler. --revising it to be technology neutral.
    Chairman Garrett. Okay. I will close on this, that it seems 
that all three of your ``any means of interstate commerce,'' 
this should be able to be resolved quickly.
    Moving on through the process here, I see a different 
process between your agency and the SEC as far as handling some 
of these things. For example, with cross-border applications, 
one agency is doing a formal rulemaking process, and the other 
agency is doing more through--and therefore with cost-benefit 
analysis, the other agency here is doing it not so much with 
rulemaking, a formal process, instead is doing it through 
guidance and missing what Congress intended, which is cost-
benefit analysis.
    So in one specific area, you are in the process of creating 
a new definition of U.S. and non-U.S. persons, correct; the 
agency, CFTC, in the process of defining a new definition of 
what a U.S. person is as opposed to a non-U.S. person?
    Mr. Gensler. It is included in an exemptive order that 
actually also has cost-benefit.
    Chairman Garrett. So when the SEC did this, they went 
through the regulation, as I understand it, to do so, but the 
CFTC misses that and does it through guidance. As a matter of 
fact, this was a letter that I think our office sent to yours 
asking why are you going through guidance on some of these 
things as opposed to what the SEC is doing here, I will say 
more thoughtful and more compliant with Congress' intent in 
going through a formal rulemaking process? So, first, why are 
you doing it; and second, should we anticipate an answer to our 
letter back from this summer?
    Mr. Gensler. Congress included in Title VII something for 
the CFTC that was not included for the SEC. There is a specific 
provision for cross-border application in swaps, not 
securities-based swaps. It is actually Section 722(d). We got a 
lot of questions in our rulemaking. We put out the 55 
proposals, all with cost-benefit. As we finalized rules, we are 
doing--and benefiting from cost-benefit on all of those. But 
people ask, can you interpret these words, make a legal 
interpretation of these words, in Section 722(d)? And we put 
that out to public comment and notice, and we are benefiting 
from public comment as well on that.
    Chairman Garrett. So you can't do that through a rulemaking 
process as opposed to a guidance and seeking advice?
    Mr. Gensler. There are a number of places; this is probably 
the fourth or fifth place that we have addressed through 
interpretation. It was referred to earlier. The indemnification 
area is another area for swap data repositories we used and 
interpret it. People have asked us, can you interpret words, 
and we are trying to do that in this circumstance.
    Chairman Garrett. I am mindful of my time and other 
Members'. These things can all be done, and it may be asking 
the agencies for that. I am sure the SEC was being asked for 
some of these clarifications as well. But I applaud what the 
SEC did. It complied with congressional intent here through a 
formal process.
    With that, I yield now to the gentlelady from California 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I want to get back to some more discussion on 
extraterritoriality. Under Section 722(d) of the Wall Street 
Reform Act, the CFTC was given latitude and flexibility in 
terms of how you would regulate swaps that crossed national 
borders. You actually would.
    In June, the CFTC released its interpretive guidance on the 
cross-border application of Title VII of the Wall Street Reform 
Act. That guidance defined foreign branches or guaranteed 
subsidiaries of U.S. persons to be U.S. persons and therefore 
subject to the entity and transaction-level requirements of 
Dodd-Frank.
    Many in the industry, again, have expressed concern that 
non-U.S. entities have been stopping business with the branches 
or guaranteed subsidiaries of U.S. firms overseas. Others have 
even suggested that the guidance encourages U.S. firms to 
incorporate subsidiaries overseas simply to avoid our U.S. 
derivatives reforms. At the same time, we certainly don't want 
unregulated risk occurring in the offshore branches or 
subsidiaries of U.S. firms to be imported back here to the 
United States.
    So, Chairman Gensler, how are you reconciling these 
competing concerns given that other parts of the globe are 
still behind us in terms of derivatives reform?
    Mr. Gensler. An excellent question, and it is a matter of 
balance. The overseas affiliates guaranteed back here can send 
risk back here, and so I think Congress included 722(d) to 
ensure that risk didn't flow back here as it did in AIG, in 
Lehman, in Bear Stearns, and in others. But what we have said 
is for those offshore guaranteed affiliates, substituted 
compliance can be the way to move forward. Foreign regulators 
that are comparable and consistent, that is okay with us. And 
we are also saying we are not going to have any of those rules 
come in for some time.
    The only rules that come in on January 1st is if a dealer 
is dealing with U.S. persons, which is more of a territorial 
U.S. person, not the guaranteed affiliates. And we are saying 
until next summer, let us continue to work with the other 
overseas regulators to sort through it. So narrow U.S. person 
will come into place early, say January 1st. The guaranteed 
affiliates we are delaying that, phased compliance as well as 
substituted compliance.
    Ms. Waters. Thank you.
    Mr. Cook, can you weigh in on the question also?
    Mr. Cook. Sure. Thank you. The Commission has not yet 
issued its cross-border guidance. It is the front of the agenda 
for us in terms of implementation of Title VII. I do believe 
that the task at hand is to try to strike the right balance 
between, on the one hand, achieving our domestic regulatory 
priorities, and on the other hand, recognizing that this is a 
global marketplace and that we need to understand that what we 
do here will impact what the other regulators and other 
jurisdictions do.
    I would point to a statement that recently was issued by a 
number of the leaders of different regulatory agencies around 
the world, as a result of a meeting earlier at the end of 
November, where there was a discussion about how to best 
achieve international coordination consensus. And that is part 
of an ongoing dialogue that I think we will incorporate into 
our cross-border release and try to take that into account at 
that point.
    Ms. Waters. Finally, let me just remind everybody that the 
President's request for the CFTC and the SEC is $308 million 
and $1.566 billion, respectively. However, the House 
Appropriations Committee has passed a bill appropriating only 
$180 million and $1.371 billion for your agencies. Give me a 
moment and tell me how this funding level will affect ongoing 
operations, especially as it impacts on implementation and 
enforcement of Title VII authorities. Do your counterparts 
overseas face similar funding shortfalls? How are they funded?
    Mr. Gensler. Simply put, the CFTC is an underfunded agency. 
We are about 10 percent larger than we were 20 years ago and 
the futures market we oversee has grown fivefold. And Congress 
has asked us, of course, to take on this important task in the 
swaps market. We won't be able to address everybody's 
questions. There will be gaps in our oversight.
    Ms. Waters. Mr. Cook, we are very concerned about the SEC. 
It looks as if you are losing people over there. What is going 
on? How do you deal with the question of a lack of adequate 
funding?
    Mr. Cook. Thank you. I think that does present challenges, 
particularly in the implementation phase. I think writing the 
rules is less people-resource intensive, however, than 
ultimately overseeing, examining, and bringing enforcement 
actions to enforce the new regime. So I think as the progress 
moves forward, the challenges will become greater, because 
there is a wide range of new types of market participants and 
new types of transactions that are coming within this 
regulatory framework, and there needs to be strong and 
effective enforcement around it to make it meaningful.
    Ms. Waters. Thank you very much, and I yield back.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Arizona is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman. There are just so 
many different questions here to run through. Just because you 
touched on it, and it wasn't going to be one of my original 
questions, indemnification of depository, why not do a full 
rule set?
    Mr. Gensler. Indemnification of data repositories?
    Mr. Schweikert. Correct.
    Mr. Gensler. We did an interpretation to try to interpret 
it so that foreign regulators could have access, and if it was 
regulated by them or it is under their laws, that they have 
access without that indemnification. And though that addressed 
probably the bulk of their concerns, as the Congresswoman had 
raised earlier, the question still remains whether this 
Congress or the next Congress addresses that.
    Mr. Schweikert. Chairman Gensler, my understanding is the 
way you did that then, you did not do a cost-benefit, go 
through those mechanics?
    Mr. Gensler. That is correct. It was a legal interpretation 
of when does an indemnification have to be used. There is 
probably, I think it is four or five different places that we 
have done this where people have come to us and said, what does 
a word mean? It is not a full rulemaking, but when does that 
indemnification under the words in the statute?
    Mr. Schweikert. All right. Thank you, Mr. Gensler.
    Mr. Cook, my understanding, when it comes to cross-border, 
the SEC is doing a formal rulemaking, you are doing a full 
cost-benefit analysis, correct?
    Mr. Cook. Yes, sir.
    Mr. Schweikert. Mr. Gensler, wasn't that actually in the--
and help me, I have only had little bits of information on 
this--the court case that recently went against the CFTC, that 
was because you had not done that?
    Mr. Gensler. For different reasons, actually, sir. We do--
    Mr. Schweikert. Let me just, because I want to help define 
this. My understanding is the court ruled that you had not done 
enough cost-benefit analysis. Do you disagree with that?
    Mr. Gensler. I do, respectfully. Though the litigants 
raised that issue, the court spoke to a different topic. It was 
whether there had been a specific mandate from Congress that we 
put in place position limits. We believe that Congress really 
did mandate it, and the judge sent it back and said he saw it 
differently. But we did do full cost-benefit in the position 
limit rule, as we have in all of the 40 or 50 or so rules that 
we do. We benefit from them. And we do them with the chief 
economist has to sign off on each one personally before we 
consider them.
    Mr. Schweikert. So in this particular case, because I know 
in a lot of what we read there is the constant discussion of 
harmonization between U.S. regulators, foreign regulators, and 
often we are concerned is there harmonization between the two 
of you in both the approach, the methodology, use of language 
in the regs. Because many of us are starting to see a more 
complex world coming in swaps where there is multiple products 
wrapped in there. And if there is a currency in there, okay, 
that might be exempt. There might be a package swap that 
actually has, from both of you, that sort of harmonization 
really does become really important. Is there a difference 
between the way your two regulatory bodies are approaching 
these?
    Mr. Gensler. We have jointly worked together and 
harmonized, we have had joint rules on the definitions you just 
mentioned about swaps and mixed swaps and securities-based 
swaps. So I think the public has a great deal of guidance and 
rules on that. But to the extent they need to come back, as you 
say, on these package swaps we would address it together, and I 
would look forward to that.
    Mr. Schweikert. Okay. In my last 60 seconds, Mr. Cook, do 
you have any comment? Am I seeing different approaches? Is that 
just cultural between your two regulatory bodies?
    Mr. Cook. I can't speak to the CFTC's statute per se. But 
one of the reasons it drove us towards doing a rulemaking in 
the cross-border context is that we looked at the data. And in 
our market, the security-based swap market, most transactions 
involve a party that is not in the United States. So this is 
really a cross-border market. And how you do the cross-border 
rules is really how you do Title VII. And so we felt under 
those circumstances that when you were looking at the whole it 
was important to take a holistic approach to the cross-border 
rules and that, because it had such a significant impact on how 
those rules were going to work, that we needed to do a formal 
rulemaking.
    Mr. Schweikert. Okay. Mr. Cook, thank you.
    Mr. Chairman, I know I am literally out of time. I am 
comfortable with what Mr. Cook is doing because of the amount 
of data you are going to collect.
    Mr. Gensler, it makes me a little nervous, particularly 
because of the different approaches there.
    And there are so many other questions I wanted to get to, 
but, Mr. Chairman, I know I am out of time. Thank you.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentleman from California has joined us.
    Mr. Sherman. Thank you.
    Mr. Gensler, I am a little concerned about whether your 
budget is adequate. You have expressed those concerns. I wonder 
if you could provide for the record a couple of things. First, 
if we really wanted effective regulation, what should be the 
budget of your agency? And second, will it be a fee structure 
so that we could collect that amount from those who rely on 
derivatives? I am not really asking for an oral answer now, but 
I wonder if you could provide that for the record?
    Mr. Gensler. We could.
    We are about a $205 million agency. The President put a 
budget of $308 million forward. It is for about 1,040 people, 
up from our 700 people now. But what we really need is also an 
enhanced technology. We need to probably close to double our 
technology because it is so data-intensive.
    Mr. Sherman. But although you are dealing with a market 
that is 5 times as large as it was a couple of decades ago, the 
308 would be sufficient to properly regulate the market?
    Mr. Gensler. I think that it is appropriate also to phase 
in wherever we are. I don't know where we might need to be 5 or 
10 years from now. But I think this is--to be a 1,000-person 
agency--our friends at the SEC are 4,000, just to put it in 
context. We are really like the smallest regulator around.
    Mr. Sherman. Okay. And hopefully you can provide us with a 
fee structure so that the average person working in my district 
isn't paying these costs; they are being paid by those who deal 
with derivatives.
    Next, I would like unanimous consent to submit for the 
record a letter from Senator Blanche Lincoln, dated December 
16, 2010, and addressed to the CFTC. She was the primary author 
of the title we are dealing with.
    Chairman Garrett. Right. Without objection, it is so 
ordered.
    Mr. Sherman. Deepened liquid commodity markets will provide 
benefits to our economy. Pension plans and institutional 
investors, even ordinary people saving for their retirement now 
depend upon mutual funds that invest not only in stocks and 
bonds, but also commodities. Will the new position limits 
arbitrarily limit mutual fund trading in these markets and take 
this kind of investment away from those who are saving, whether 
they be pension plans or individuals? And particularly, how 
would that relate to index commodity funds?
    Mr. Gensler. I think not. Congress has debated position 
limits since the 1930s when they were put in our statute. And 
they are really to promote the integrity of markets to ensure 
that no one actor, no one speculative actor, has too big a 
footprint in the marketplace. But the nature of the ratios that 
were in position limits, the mutual funds or pension plans 
could invest, it is just that they couldn't have, no one could 
have an--
    Mr. Sherman. Is there much difference, though, with an 
index fund? Five small index funds do exactly what one big 
index fund does. Would you classify the index funds as 
speculative investors?
    Mr. Gensler. Again, Congress has given us guidance on that, 
that it is the producers and merchants and people who actually 
use a physical commodity or intend to use it or receive it who 
are not under position limits, and then everyone else 
colloquially are called ``speculators,'' but they are the non-
producer merchants and hedgers.
    Mr. Sherman. I don't know if I would use the word 
``speculator'' for an index fund, but I will move on.
    My next concern is just the whole process of these no-
action letters. And you have market participants who are trying 
to complete the work needed ahead of a compliance date, and 
then at the 11th hour, the date is extended. Certainly, it 
would be better if the date were extended prior to the 11th 
hour. I understand that the CFTC has been issuing numerous no-
action letters and temporary relief exemptive orders and that 
they tend to come in at the 11th hour. It can be frustrating 
for those who don't know until that 11th hour whether that 
document will be issued.
    Do you think that full implementation schedule with 
adequate time for compliance would be more appropriate, or in 
the alternative, post a full no-action letter until all the 
Dodd-Frank rules are finalized? And just in general, what can 
be done so that companies don't have to wait until the 11th 
hour.
    Mr. Gensler. With all due respect, it is a bit of both. The 
data reporting rules were completed in 2011, one year ago, and 
when they were completed we said the compliance would be July 
15th or 17th of this year. We extended the general compliance 
of that until about this time. So now they have had 1 year, the 
big dealers, to get ready, or 2\1/2\ years since the law. There 
are further questions. We really want to smooth this 
transition, and so we give further phased compliance when it is 
targeted. We could stick with the January 1st deadline, but we 
think it is appropriate to give that additional relief.
    Chairman Garrett. Thank you. And the gentleman's time has 
expired.
    Mr. Sherman. I yield back.
    Chairman Garrett. Thank you.
    The chairman of the full Financial Services Committee is 
recognized for 5 minutes.
    Chairman Bachus. Thank you. Chairman Gensler, on page 7 of 
your written statement, about halfway down, you say, ``we are 
very committed to allowing for substituted compliance, or 
permitting market participants to comply with Dodd-Frank 
through complying with comparable and comprehensive foreign 
regulatory requirements.'' You go on to say, ``The guidance--
you are talking about cross-border guidance, which is what a 
majority of these questions have been about--includes a tiered 
approach for foreign swap dealer requirements, which was 
developed in consultation with foreign regulators and market 
participants.''
    When you say consultation, after that meeting a lot of the 
participants at least expressed that they have grave concerns, 
that they didn't appear to agree that was the approach you were 
taking. Have any of the foreign regulators endorsed the CFTC's 
approach? I know in conversation with Brazilians that 
substituted compliance has come up, and I know they are hoping 
for that.
    Mr. Gensler. The consultation started in early 2011, so 
nearly 2 years ago. The approach that entity-level requirements 
would come under substituted compliance and transaction level 
would be done separately actually came from the international 
bankers, the IIB, that you will hear from later. I saw Sally 
here, who represents them. It came from their letters 
initially, this concept.
    So we largely embraced, we could be criticized from the 
other side, we largely embraced what market participants and 
the large international banks said, entity level, substituted 
compliance, and they then said transactions with U.S. persons 
in Alabama, New Jersey, California, Arizona--it would be Dodd-
Frank. We put that out to public consultation with a lot of 
consultation with international regulators, Canada, Australia, 
Japan, Europe, et cetera, and we continue to work the issues. I 
would say that with banks registering, the largest banks 
registering near term, we are going to have many issues to sort 
through, and we are committed to sorting through those issues.
    Chairman Bachus. Yes, and you are talking about those firms 
which register, when you are making that statement?
    Mr. Gensler. Right. Yes, just the firms that register.
    Chairman Bachus. But I have seen expressions from some of 
the foreign regulators that they feel like some of the guidance 
may be in conflict with their own regulations, and I guess that 
is what I am saying. They said you know they are in conflict. 
So how are you dealing with those conflicts?
    Mr. Gensler. One example is in Japan. They have a clearing 
requirement they actually put in place November 1st, and we now 
have a clearing requirement we finished in November. There is a 
conflict because we both say they have to be cleared and 
registered clearinghouses. They have yet to register the London 
clearinghouse and we have yet to register the Japanese 
clearinghouse, and so we are working on relief so that our U.S. 
firms can use that Japanese clearinghouse even though it is not 
registered here and give that clearinghouse, they have asked 
for a year in that case. And so we are going to do that in the 
next few days. Where there is a direct conflict, we are 
completely committed to sorting that out and sorting it out in 
a practical way.
    Chairman Bachus. And with the no-action letters, some of 
them were sort of last minute. If we see that we are trying to 
work out these conflicts and more time is needed, I suppose you 
will announce that ahead of time?
    Mr. Gensler. Yes.
    Chairman Bachus. Okay. Mr. Cook, has the SEC endorsed the 
CFTC's approach to cross-border guidance?
    Mr. Cook. The Commission hasn't formally made its proposal. 
We have been very much engaged with both the CFTC and foreign 
regulators on how to approach this issue. There are concerns, 
frankly, between--there are a lot of jurisdictions that are at 
the cusp of implementing their G-20 commitments. And I think 
there is a real opportunity at this moment in time to find a 
way to strike the right balance and to bring the whole system 
to the right place, because I think any one piece of it that 
doesn't come along or that goes along too far can disrupt the 
dynamic.
    Different jurisdictions have different ways of thinking 
about this. The Europeans, for example, talk in terms of mutual 
recognition instead of substituted compliance. What all that 
means is something that I think is part of an ongoing dialogue, 
the devil is in the details. What does substituted compliance 
really mean, where will you recognize, where won't you, how 
broadly will you look. I think that is part of the work that we 
all have in the next few months, frankly.
    But there has been part of this international dialogue an 
effort to catalogue conflicts, overlaps, inconsistencies, so at 
least we know what we are talking about. Where is there a 
conflict. As Chairman Gensler says, that is a real problem. We 
need to figure out a way. Where are there inconsistencies?
    Chairman Garrett. Thank you. We got the point. Thank you.
    Chairman Bachus. All right. Because you have had a 
Singapore bank, a Swedish bank said we are not going to 
register. But I appreciate it. That is the answer I wanted, is 
that you are identifying those conflicts and the dialogue is 
proceeding.
    Chairman Garrett. Thank you.
    The gentleman from Massachusetts is recognized.
    Mr. Lynch. Thank you, Mr. Chairman. I appreciate it.
    Mr. Gensler, I want to thank you again for your service. 
You have done some great work on this. I did hear your opening 
remarks, especially with respect to the extraterritorial 
application of Dodd-Frank's derivatives reforms. I remain 
concerned that financial firms will still try to avoid those 
reforms in Title VII by using the foreign subsidiary structure. 
I read part of your proposed guidance, and I think you are 
right on the mark when you, I am quoting you here, you said 
that in your view the concerns regarding risks associated with 
the affiliated group structure are heightened where a U.S. 
person guarantees a foreign affiliate or subsidiary. You go on 
to say, you ask whether the term U.S. person should be 
interpreted to include a foreign affiliate or a subsidiary 
guaranteed by a U.S. person.
    And I think you are right at the heart of the issue there. 
When the American taxpayer bailed out AIG, for example, we 
didn't just bail out AIG's AIG-FP, their London affiliate. The 
conduct of AIG-FP had already infected the entire company so 
that when we came in, we had to bail out the entire company. 
The kind of risks that are posed by the derivatives market that 
we tried to address in Dodd-Frank don't stop at our borders. 
These are international risks. When a company has agreed to 
backstop a foreign affiliate, that affiliate is for all intents 
and purposes a U.S. company. And I know in your remarks as well 
you address the job issue where the jobs could also follow that 
foreign affiliate.
    I would just like to get your thoughts on how we might 
tighten up the language in your proposed guidance to try to get 
at that problem in a more effective way.
    Mr. Gensler. You are very kind. I am just trying to 
maintain it, not lose it. 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--I served on Wall Street for 
18 years, we often structured around legal entities, and that 
is the nature of modern finance. Many of these large financial 
institutions have 2,000, 3,000, 4,000 legal entities. It is a 
matter of structuring. And if you can put a legal entity 
somewhere and guarantee it, the risk still comes back here.
    And in the middle of a crisis, you pull one thread of a 
financial institution and the whole sweater comes undone. If 
there is a run on one subsidiary in Japan or Australia or 
Canada, the United States, Europe, it runs elsewhere. So our 
risks run to Europe, but also those risks run back here. But we 
are comfortable with substituted compliance if there are real 
rules over there to cover our guaranteed affiliates.
    I think if we don't cover them, also it is not good for the 
jobs. I see the Congresswoman from New York. I think the large 
financial institutions in New York would then just move the 
jobs to some jurisdiction, put a legal box on the structure in 
that jurisdiction, be done with it, be happy that the CFTC gave 
the relief that they requested. But I don't think it is good 
for New York jobs, I don't think it is good for the economy 
because the risk would just flow right back here in a crisis. 
And we are somewhat like the fire department. We have to look 
at our rules in the context of crisis, what are the rules in 
crisis so that the risk doesn't hit our taxpayers.
    Mr. Lynch. What kind of cooperation are we getting right 
now in terms of substituted compliance? I know Congressman 
Frank earlier was working on that with our colleagues in the 
EU, but how is that going?
    Mr. Gensler. Excellent. I can't say enough good things 
about our friends and colleagues in the European Union and 
London and France, Brussels, Germany, throughout, and other 
countries as well. They are anxious as to how this will work. 
We have said, let's give it more time, let's work through the 
substituted compliance issues. But they have been excellent.
    Mr. Lynch. Okay. Thank you.
    My time has expired. I yield back. Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from Illinois is recognized for 5 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman.
    And thank you, Chairman Gensler and Director Cook, for 
being here. Am I right that there is a different timetable that 
has been adopted by the SEC and the CFTC on comparable 
requirements?
    Mr. Gensler. You are right that we were given maybe an 
easier task than the SEC because we are just a futures and 
swaps regulator, a derivatives regulator, so that is what we 
have been focused on, and they have a much broader portfolio. 
So we have completed about 80 percent of the rules. We actually 
got the same time scale, 1 year. Congress gave us 1 year to 
complete the task. But here we are, 2\1/2\ years later.
    Mrs. Biggert. Right. Is that going to be confusing for 
firms and costly for U.S. firms?
    Mr. Gensler. Though there may be challenges, the swaps that 
we oversee, interest rate swaps and the physical commodity 
swaps and credit indices represent about 95 percent of the 
marketplace. They are also used by corporations and municipals 
across this country. The securities-based swaps are not only a 
smaller part of the market but they are generally not used by 
your small and medium-sized companies across this country.
    Mr. Cook. I agree that most of the market is under the 
CFTC's jurisdiction, 95 percent versus 5 percent. I think as a 
practical matter, as the SEC begins to move towards 
finalization of rules that have already been adopted by the 
CFTC, we will need to take into account that framework, and to 
the extent that there is any perceived need to be different 
need to explain it and justify the potential cost to market 
participants. There are different products, and so sometimes it 
makes sense to have differences. The types of information you 
report for an oil-based swap might be different than what you 
would report for an equity-based swap. And there may be other 
examples. But I think that ultimately, if we are different, we 
are going to need to be able to justify those differences.
    Mrs. Biggert. So you are talking about December 31st or 
January 1st?
    Mr. Gensler. It actually would have been finished in July 
of 2011, we were supposed to be complete.
    Mrs. Biggert. But it has been extended?
    Mr. Gensler. We extended it through three 6-month 
extensions called exemptive orders. But now that we have 
completed so many of the rules, we have moved to these more 
targeted phase compliance, either no-action letters and the 
like.
    Mrs. Biggert. But you talk about January 1st or December 
31st?
    Mr. Gensler. That is correct.
    Mrs. Biggert. The reason I ask is it just seems like kind 
of an odd time to launch such a big project. Aren't most 
companies really focused on closing the books for the year, and 
really are they having to do a lot in this last couple of 
months that is going to cut into that time?
    Mr. Gensler. For many of them we delayed and deferred the 
compliance and gave additional times throughout, as they 
requested. There are some that we are delaying from December 
31st. For instance, the trade association, International Swap 
Dealers Association, has come in and said many of their sales 
practice regime, they want it delayed from October to the end 
of the year. We did that. They have now come in and said they 
are only about 20-plus percent done, could we give them 4 more 
months. And we have something in front of the Commission to 
give them 4 more months. So we are working through to phase 
each of these where issues come up.
    Mrs. Biggert. So you don't think that this really has any--
it won't cause--if there are operational problems, they can be 
solved easily?
    Mr. Gensler. This is a very significant change, an 
important change for the public. But as firms register come 
January 1st and start sending information to data repositories, 
that is a positive for the American public. As long as people 
are operating in good faith, we are going to continue to work 
with each of these market participants to get this in place in 
the smoothest way possible.
    Mrs. Biggert. So there is some flexibility?
    Mr. Gensler. Yes, absolutely, absolutely.
    Mrs. Biggert. Thank you. I yield back.
    Chairman Garrett. If the gentlelady will yield to me, I 
just have one follow-up question. So with regard to this issue 
of swaps and guarantee of swaps, the Commission has said that 
guaranteed swaps aren't actually swaps, whereas the SEC has 
held a contrary view on that. My question to the Commissioner 
is, can you point me to the page of Title VII where the word 
guarantee is explicitly set out anywhere that gave you the idea 
that a guarantee of a swap is a swap?
    Mr. Gensler. I am sorry, because I will probably get a 
little geeky here. In the securities law, a guarantee of a 
security is a security, and that is in statute, predates Dodd-
Frank. So a guarantee of a securities-based swap is a security. 
That happened on their side, as I understand it anyway. What we 
look to is Section 722(d), does it have a direct and 
significant effect on the commerce or activities in the United 
States, and so that is where we--
    Chairman Garrett. You use that as an expansive, and it 
could bring in anything then as long as it is--
    Mr. Gensler. No, it is related to the guaranteed 
affiliates. So if a large financial institution here guarantees 
that offshore affiliate, as sure as we are sitting in this 
room, if that offshore affiliate fails, the risk is going to 
come cascading back here of that legal entity.
    Chairman Garrett. Let me just say that the SEC, as I said, 
at the outset, takes a contrary view on--
    Mr. Gensler. Actually, theirs is more direct. It is right 
in statute. But Robert might want to address it.
    Chairman Garrett. My time has--
    Mrs. Biggert. I yield back.
    Chairman Garrett. The gentlelady yields back.
    I will go to the gentlelady from New York. Mrs. Maloney is 
recognized for 5 minutes.
    Mrs. Maloney. Thank you.
    In Dodd-Frank, it was made clear that clearinghouses must 
provide open access, be transparent, and that data repositories 
cannot bundle or require that additional services be bought 
from them. I am hearing there are some difficulties in this 
area, and I would like to submit some questions in writing on 
some technical items there.
    And I would like to go back to the opening question of the 
chairman, the statute that we adopted defined swap execution 
facilities as being able to use any means of interstate 
commerce. Your proposed rule in January 2011 restricted the 
permitted modes of execution. But I understand that your draft 
final rule allows for voice, but it is only made clear in the 
preamble and is silent in the regulation. Why is it not clear 
in the regulation or the rule itself?
    Mr. Gensler. As it is a draft and it is internal documents, 
can I just speak more broadly just to the--Congress said by any 
means of interstate commerce. We got a lot of comments. And I 
can only speak for this Commissioner. I believe that the final 
rule should be as Congress directed, technology neutral. By any 
means of interstate commerce covers phones, Internet, carrier 
pigeons. However there is still a requirement, and it is a very 
real requirement, that it is multiple parties having the 
ability to transact, buy or sell with multiple parties. That is 
how markets work best. It was true in days of old when you had 
a central market for fruit and vegetables, and it is true in 
this electronic era that multiple people meet multiple people, 
but they can meet them in a number of different technology 
ways.
    Mrs. Maloney. I would like to ask about, in your judgment, 
why so many of the crises seemed to happen in London. And as 
you said, in many of the cases it comes back and hits the 
American taxpayer. So is their regulation the same as ours, is 
it stricter, looser? But it is unusual that many of the major 
financial crises that have rocked the confidence of the markets 
have started in London. Why do you think that is?
    Mr. Gensler. I think more generally, risk knows no 
geographic border or boundary. It can go around the globe. So 
risk here in the United States of our housing crisis also 
splashed over to Europe. It is true in both directions.
    But the nature of modern finance is that these large 
financial institutions will have several thousand legal 
entities sometimes, or just hundreds, and often will put a 
legal entity somewhere that satisfies their capital needs. And 
sometimes, they want lower regulation in an island nation. It 
could be the Cayman Islands. Long-Term Capital Management had 
their entity set up in the Cayman Islands. Bear Stearns had a 
number of their legal entities in the Cayman Islands. They 
found that was appropriate for them for tax planning and other 
reasons, but the risks still came back here.
    Mrs. Maloney. If the risk comes back to us, is the 
substituted compliance as strict in London as it is in America? 
It is unusual that the crisis happens in London. Mr. Cook, 
would you like to comment on that?
    And I will say that in Basel III, we are hearing from some 
of our financial institutions that the capital requirements are 
more onerous on American banks because American regulators are 
going to enforce them and their competitors may feel they will 
not enforce it. So this is a problem if someone can go to 
another, have a different standard in what is a competitive 
global market in the case of capital requirements, have a 
situation which is a disadvantage to American firms. And 
certainly, I am concerned about the threat to American 
taxpayers. You can say you have substituted compliance, but how 
are you enforcing the substituted compliance? You hear from 
some financial institutions, I won't say it publicly, but they 
don't feel that it is regulated in certain cases in certain 
places, and I am wondering, is London one of them? Why are so 
many financial crises in London? I would like to hear from Mr. 
Cook.
    Mr. Cook. Thank you. I think that is going to be a very 
important consideration if substituted compliance is granted, 
is how do you evaluate the foreign regime and whether it is 
deemed sufficient and along what metrics. Saying you are going 
to give substituted compliance is just the beginning. You then 
have to figure out, you have to understand the other regime, 
how it works, and then you need to think about as well how is 
that regime being enforced.
    I think one of the advantages of substituted compliance is 
that you basically retain jurisdiction, so in the future, if 
you determine that the regime is inadequate or is not being 
adequately enforced, then you can determine that the 
substituted compliance is no longer available. I think the 
question you are raising about the different capital and other 
requirements, while we are not, I think, the banking regulators 
who are behind the Basel regime, I think it does raise the 
broader question of how do we make sure that there is full 
implementation of these G-20 commitments in the derivatives 
space, not just in the United States but in other countries as 
well. And I think that is part of the advancing international 
dialogue, and I think there is a lot of progress being made, 
but that is something that would need to be taken into account 
before recognizing any other regime for substituted compliance 
purposes.
    Mrs. Maloney. Thank you. Thank you for your service. My 
time has expired.
    Chairman Garrett. Thank you.
    I recognize the gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I appreciate you both being here today. Chairman Gensler, 
in the last couple of years, I think this committee has 
expressed a lot of concerns about the rulemaking process as you 
begin to implement this title, and some people have felt that 
some of these rules were inconsistent, confusing, and others 
felt that the CFTC was dodging some issues by just issuing 
guidance rather than being very prescriptive, and then others 
have said that you are overreaching the original intent of 
Dodd-Frank.
    I think the question and what the concern was is that was 
going to cause uncertainty in the market participants. And I 
think what we are beginning to do now is see that playing out. 
For example, as you are aware, recently ICE decided to move 
trillions of dollars worth of swap, energy swap contracts over 
to the futures side. And so the question is, is when you look 
at a lot of regulations and the policy that you are making, it 
almost appears that you believe that the intent of Congress was 
to somehow drive people out of the swap market. Do you believe 
that was the intent of Congress?
    Mr. Gensler. Not at all, and I don't think that is what our 
rules are about either. I think swaps are critical to our well-
functioning economy so that end users, whether farmers or 
ranchers or large financial institutions, can lock in a price 
and hedge a risk and then focus on what they do well, and 
create jobs and innovate. And it is to promote transparency in 
that market and lower the risk of that market, but it is just 
like the reforms of the 1930s, transparency in the securities 
and futures markets, I think, helped promote economic growth 
these last 7 or 8 decades.
    Mr. Neugebauer. As we are beginning to see how some of the 
market participants are reacting to this, has the agency said 
internally, hey, we didn't anticipate, for example, that ICE 
would move trillions of dollars worth of transactions out of 
one space to another space? Are you beginning to wonder whether 
the road you are going down is actually accomplishing the 
intent of Congress and is it beneficial to the marketplace?
    Mr. Gensler. Every day when I walk in, I wonder about that 
very question, because markets adjust, evolve; this is a very 
complex market. And so that is why we have changed. Nearly 
every one of the final rules have been changed from the 
proposals. We have reproposed some of them. We are not shy of 
doing that. If we don't think we got the first one right, like 
we did on block rules, we do not shy away from phasing 
compliance and where we think we can under the law to giving 
the appropriate relief to smooth this into place.
    In terms of futures and swaps I think you had a regulated 
futures market that has worked well through the crisis and for 
many decades and an unregulated swaps market that, frankly, did 
not work well in 2008. So when Congress said regulate this and 
bring it up somewhere here, it is sort of inevitable that some 
of these swaps might now be called futures. But if I might say, 
futures is transparent, it has a low risk profile because it is 
centrally cleared, and the dealers or the equivalent of dealers 
tend to be regulated. So I think whether it is futures or 
swaps, Congress has said it should be transparent and have some 
oversight.
    Mr. Neugebauer. I think there is no question that there is 
a place for both of those products in our financial markets. 
What I am concerned about is that we seem to be by some of the 
policies and the rules that you are initiating, trying to move 
the marketplace more to the futures space, whereas this is a 
valuable part of risk management that many of the market 
participants that I talk to are very concerned about--one is 
that in the form that it has been in the past, certainly 
everybody is for the transparency and making sure that we 
address some of the risk factors of that, but I don't think 
there is support that we move all of the market to the futures.
    Mr. Gensler. You and I completely agree on that.
    Mr. Neugebauer. We would like to see some things that would 
indicate that is the Commission's position. And I think one of 
the things that we keep talking to you about, Chairman Gensler, 
is the cost-benefit analysis before we implement a lot of this 
and anticipating some of the consequences, unintended 
consequences of some of this rulemaking process rather than 
being in a hurry to just put out a lot of different rules. And 
so obviously the market is telling you something here, and 
hopefully we will look for your response as to rethinking 
whether you have done some things here that are pushing--we 
don't need the government telling people what markets they can 
participate in. What we need the government to be doing is 
making markets transparent and fair. But we don't need the 
government trying to tell people that these are the products we 
think you should be using.
    Chairman Garrett. Thank you. Thank you very much.
    Ms. Moore is recognized for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    I just sort of want to pursue the line of questioning that 
Mr. Neugebauer ventured into, because it seems to me that you 
are suggesting that futures are transparent, they are well-
regulated, and we all know that swaps were not. And now that 
this new swaps future market is developing, I am wondering if 
you are concerned about the regulatory arbitrage of only about 
50 percent of margin being required and if they are being 
treated as equivalents don't you think that--margin may just be 
one of the regulatory gaps that exist. Wondering what your 
thoughts are on that.
    Mr. Gensler. One of the innovations in the market in the 
last few months has been this product of future on a swap, so 
it is a future, it trades or on a futures exchange, and it is 
clear, and it is transparent. But yes, we are taking a look at 
it to better understand it. It is a new product. If I can call 
you chairman as well, the chairman said the market should 
innovate, that we are not deciding whether it is futures swaps 
or futures on swaps, but we are certainly taking a look at the 
development.
    We have historically had reason to have higher margin 
requirements on swaps because they were not as liquid as 
futures. Margin is meant to be there just if one party defaults 
to unwind the position after somebody goes bankrupt. If 
liquidity comes to the swaps market, an active liquidity like 
the futures market, then you would want to ensure that the 
margins were more aligned.
    Ms. Moore. Mr. Gensler, much of your testimony was devoted 
to how you thought that your regulatory work has been focused 
on making sure these swap execution facilities get up and 
running and they are well-regulated. You say that you don't 
want to pick what kind of products people ought to use in the 
marketplace. Are you concerned that these SEFs may just become 
irrelevant as you see the exit from swaps into the new product? 
Is that any concern about market stability?
    Mr. Gensler. I think it is critical that we finish these 
rules on swap execution facilities. This has been a long 
journey together, 2\1/2\ years when Congress only gave us 1 
year. I think the swap execution facility rules need to be 
finalized. We have something in front of the Commissioners. We 
will find a consensus amongst the five of us and try to finish 
this up in January or February so that these commercial 
enterprises--
    Ms. Moore. It won't be a dinosaur by the time you are done, 
will it? It won't be irrelevant?
    Mr. Gensler. Knowing some of the men and women who work at 
these institutions, no, I don't think so. I think they are very 
clever and innovative institutions. But I think we need to 
finalize these, complete the task that Congress gave us, and 
then let these swap execution facilities and designated 
contract markets provide a service to the public and compete.
    Ms. Moore. Let me ask you a question about some of the 
extraterritorial stuff that we have been talking about today. 
Mr. Dold and I, and I am sure he is going to pursue this, we 
passed H.R. 4235. And a couple of the Commissioners--
Commissioner Sommers and Commissioner Scott D. O'Malia--have 
said that they really do think that there should be a 
legislative fix to this. And I would submit that H.R. 4235 was 
that fix. And so if you were to join with these Commissioners, 
we could repeal the indemnification provisions that were passed 
by this committee, I believe unanimously. And I am wondering if 
you would endorse that kind of legislative fix to this?
    Mr. Gensler. We have been working with the international 
regulators, and we did within the law the best we could to 
address this issue through the interpretive approach. It was 
interpreting this indemnification. Foreign regulators, who have 
required data to be in a data repository, can access that data 
without the indemnity.
    Ms. Moore. I guess my understanding is that they have grave 
concerns about the guidance versus this legislative fix. Why 
don't we just do H.R. 4235?
    Mr. Gensler. That, of course, is not the Commission. We 
have done what we can.
    Ms. Moore. I know, but if--
    Mr. Gensler. I imagine in 2013 Congress will take this 
issue up as they take up, whether it is our reauthorization of 
the Commodity Exchange Act or other things that Congress takes 
up.
    Chairman Garrett. Thank you. I thank the gentlelady.
    Mr. Pearce is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Gensler, I am fascinated with your discussion. On page 
14, it paints a vivid picture: Picture the NFL expanding 
eightfold to play more than 100 games in a weekend without 
increasing the number of referees. This would leave just one 
referee per game, and in some cases, no referee. Imagine the 
mayhem on the field, the resulting injuries to players, the 
loss of confidence fans would have in the integrity of the 
game. So I think I would like to begin my discussion about this 
idea of how many referees it would take. And so I go, to judge 
the future, I take a look at the past, and so I am looking. The 
CFTC was pretty involved in MF Global, right? You were there.
    Mr. Gensler. The CFTC--
    Mr. Pearce. You were the referee, yes?
    Mr. Gensler. The CFTC oversees the futures market--
    Mr. Pearce. Yes, so the CFTC was deeply engaged in MF 
Global, is that correct?
    Mr. Gensler. It is one of the many Futures Commission 
merchants, yes. MF Global is one that we oversee.
    Mr. Pearce. And MF Global had about 30,000 futures accounts 
and 318 SEC-regulated accounts, so one of the many. It is 
almost 100 percent under CFTC regulations. And yet the referees 
in the room made a decision, according to Chairman Schapiro, 
when I questioned her, that they were going to allow it to be 
described as a security trading firm, not the 30,000 accounts, 
but the 318 are going to dominate the process. And you see that 
is a little, just for those people who might be watching out 
there in America, that was a little sleight of hand. You talked 
about the clever, innovative companies that you try to 
regulate. But there was a clever sleight of hand because when 
declared it a securities firm, then it was allowed to process 
bankruptcy in a way that favored investors.
    Mr. Cook, would you have any idea who made the 
recommendation that this would be a securities firm and not a 
futures trading firm?
    Mr. Cook. Sir, the MF Global unit that had customers--
    Mr. Pearce. I am asking, do you know who made that 
suggestion? Because Chairman Schapiro said that someone from 
SEC made the suggestion. Were you in the room that day?
    Mr. Cook. I was on the phone at the time.
    Mr. Pearce. Were you in the room?
    Mr. Cook. No, I was not.
    Mr. Pearce. You were not a participant, but you were one of 
the referees on the field, I think is what we are talking 
about. Mr. Gensler drew us a very good word picture there. You 
were one of the referees.
    Mr. Cook. Yes, there was an ongoing call among the 
regulators that included the CFTC and the SEC to determine what 
to do in light of the shortfall in accounts and the obvious 
inability of this firm to open up the next morning.
    Mr. Pearce. Yes, but who made the decision that it was 
going to be a securities firm and not a futures firm?
    Mr. Cook. The decision was made to refer this to SIPC 
because--
    Mr. Pearce. And that allowed then the investors to be 
protected at the loss, at the loss to the consumers.
    Mr. Cook. Well, no.
    Mr. Pearce. And I am reading, if you will allow me, I am 
reading your testimony, sir. And you say that in the 
discussions before us on derivatives trading, we are here to 
avoid systemic risk, we are here to enhance investor 
protection, we are here for transparency, we are here for 
consistent and comparable requirements, we are here to protect 
the consumers. And yet, you were on the phone and Mr. Gensler 
was in the room; you were the referees. We were the referees, 
but we need hundreds more of us. You two guys were sitting 
there when 30,000 accounts were turned over and you protected 
the investor and you did not protect the consumer, and you want 
us to sit up here and give you more money, you want us to sit 
up here and believe the fairy tales that you are giving us that 
somehow you are going to act differently under derivatives 
trading.
    And I say, if I am going to look at your future, I am going 
to look at your past. You two guys, not the ones sitting across 
the hall from you. And I just wonder about this Administration, 
which constantly talks about the 99 percent. When it comes down 
to the rub, it protected the 2 percent. It didn't protect the 
small guys, it didn't protect the hog farmers--30,000 accounts 
versus 318 accounts. Mr. Gensler, you worked at Goldman Sachs. 
You knew those guys. They started picking up assets that day.
    Mr. Chairman, I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Carson is recognized for 5 minutes.
    Mr. Carson. Thank you, Chairman Garrett, Ranking Member 
Waters, Mr. Gensler, Mr. Cook, and all of the witnesses.
    I want to remind my colleagues of the importance of 
cooperation and collaboration with our international partners. 
I believe the United States should demonstrate our global 
leadership by raising our financial standards and not entering 
into a race to the bottom of sorts of banking standards. I also 
believe that if the provisions of Dodd-Frank were in place 5 
years ago, we would not have faced the economic crises we are 
just beginning to crawl out of. So I am very reluctant to carve 
out more exceptions or exemptions to Dodd-Frank before the 
rules have actually been put in place to fully implement the 
law or without more speculation that could go wrong.
    My colleague, Peter King, would have us suspend enforcement 
of Dodd-Frank's Volcker Rule until our international partners 
have instituted their own regulations addressing proprietary 
trading. As I mentioned in my opening statement, I strongly 
believe that the United States should lead by example and not 
wait for others to take the lead. What do you guys see being 
the pros and cons of Mr. King's proposal?
    Mr. Cook. Both the CFTC and the SEC have a role in 
implementing the Volcker Rule. I think the Commission hasn't 
taken any position on this proposal. We are actively engaged at 
a staff level with the other agencies to move forward with the 
Volcker Rulemaking, taking into account the enormous number of 
comment letters we got, over 18,000, a very complex set of 
issues, but I think we have been making a lot of progress. And 
I think as a staff person, our goal is to continue moving 
forward with the implementation process as expeditiously as we 
can.
    Mr. Gensler. And though I am not familiar with the proposed 
legislation, the Volcker Rule is one of the more challenging, 
maybe the most challenging of rules I think the regulators were 
given, to prohibit one activity, proprietary trading, to help 
the taxpayers not bear some risk, and yet permit things that 
are important to markets, market making, hedging, underwriting 
and the like. So prohibit one thing, permit another, and then 
where is the border or boundary between the two? So it is one 
of the most challenging I think, and there are five regulatory 
agencies working on that. Internationally, they don't have the 
similar rule, and so we are dealing with Congress' will and 
trying to get that in place when they don't have that overseas.
    Mr. Carson. Thank you. Thank you, Mr. Chairman. I yield 
back.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Dold is recognized for 5 minutes.
    Mr. Dold. Thank you, Mr. Chairman.
    I certainly want to thank Mr. Gensler and Mr. Cook. Thank 
you for taking your time to be here.
    Mr. Gensler, back in March the committee held a hearing 
about the potential danger of our regulatory framework if 
foreign regulators are required to comply with the 
indemnification and confidentiality provisions in Dodd-Frank. 
The European Securities and Markets Authority expressed concern 
that the CFTC cannot overrule the Dodd-Frank Act itself and 
concluded that the confidentiality and indemnification issue 
could only be fully addressed with a legislative amendment by 
repealing the original provision in Dodd-Frank.
    As you know, this committee passed, as my colleague Ms. 
Moore noted, H.R. 4235, which would provide this legislative 
fix, a solution that I believe is supported by the SEC and 
certainly supported by our foreign authorities as well. The 
CFTC's interpretive guidance says that the CFTC will not 
require foreign regulators to indemnify a registered SDR or its 
primary regulator. This regulatory workaround is essentially to 
ignore the law, to ignore a provision of Dodd-Frank. On what 
basis of authority do you propose that the CFTC can ignore the 
law and how can foreign regulators rely upon this 
interpretation?
    Mr. Gensler. With all due respect, I think we actually took 
this law into consideration. Also, as I understand it--I am not 
a lawyer, but rules of international comity--in essence, when 
there is a conflict between laws how do we address that? We are 
doing that in the cross-border rules as well. So we have 
interpreted the indemnification provision that Congress put in 
place, but said if a European regulator or Asian regulator, or 
Canadian regulator actually requires that information to be in 
that data repository, that Dodd-Frank doesn't trump their law, 
that they can have access to that information without an 
indemnity. So it was actually taking into consideration what I 
have come to understand as the international regimes on comity 
and recognition that has gone all the way to our Supreme Court.
    Mr. Dold. On H.R. 4235, Mr. Gensler, Ms. Moore asked, do 
you support that legislative fix. Obviously you said, well, 
perhaps they are going to do that in 2013. Unfortunately or 
fortunately, however you want to look at it, we are going to be 
in session here for a little while and we have an opportunity 
to fix it right now. Would you support an H.R. 4235 fix which 
has passed the committee here unanimously? So again, why put 
off until tomorrow what we can try to deal with today? Would 
you support something along those lines?
    Mr. Gensler. I will just leave it that I support the 
interpretive guidance that we completed. I think that we 
addressed the issues that ESMA raised with regard to that. ESMA 
doesn't have to indemnify if there is information in that data 
repository that they have asked to be there.
    Mr. Dold. Two dissenting Commissioners, Mr. Gensler, stated 
that the Commission has purposely chosen to interpret the 
statute in a manner that constrains other domestic regulators' 
ability to examine the swap market data. If the DOJ needed to 
access data from an SDR for an investigation, would it need to 
enter into an indemnification agreement? Can the DOJ do that? 
And if not, why would the CFTC limit access to relevant data?
    Mr. Gensler. I might have to have our General Counsel get 
back to you on the specifics of that question, but I know that 
other U.S. regulators have two paths: they can get it directly 
from the data repository; or they can come to the CFTC, and we 
would forward it to the Department of Justice in your scenario.
    Mr. Dold. I have nothing further. Thank you again for being 
here.
    I yield back, Mr. Chairman.
    Mr. Garrett. Thank you. The gentleman yields back.
    The gentleman from Texas is now recognized.
    Mr. Canseco. Thank you, Mr. Chairman.
    The derivatives portion of Dodd-Frank, which is Title VII, 
has spawned some of the most baffling and complicated 
regulations that the financial markets have ever seen. In part, 
this is due to the vagueness of Dodd-Frank and more so, and 
largely due to the manner in which some regulators, 
particularly the CFTC, have gone about implementing Title VII.
    Now, in recent months, and leading up to October 12th, 
there has been a decrease in trades with U.S. firms. 
International regulators have condemned the overreach of the 
CFTC, all which shows that Title VII is doing plenty to 
increase confusion, and is taking business away from the United 
States, yet it remains an open question whether any of these 
rules are making our financial system safer or sounder.
    Mr. Gensler, in past appearances before this committee, you 
have touted the CFTC's work and cooperation with international 
regulators. For example, when you testified before our 
committee in early 2011, you stated that the CFTC is ``actively 
consulting and coordinating with international regulators to 
harmonize our approach to swaps regulations,'' and that you had 
worked closely with regulators in Europe, the U.K., and Japan. 
And just recently, in October, you stated in a speech that the 
CFTC has ``consistently engaged with our international 
counterparts through bilateral and multilateral discussions to 
promote robust and consistent swap market reform.''
    Recently, the regulators of the U.K., France, and Japan 
sent the CFTC a letter and urged your agency to better 
coordinate regulation with them, and it has been widely 
reported that regulators of other countries are concerned about 
your agency's approach. So my question to you is, what 
happened?
    Mr. Gensler. What happened is what happens in human nature 
is that not--we don't always agree, partly because we have 
different underlying statutes, we have different cultures, we 
have different political systems. We have been sharing our 
drafts rules, our term sheets. We get feedback. I don't know of 
any other U.S. regulator who does this, by the way, with all 
due respect. We really do get a lot of excellent feedback, but 
ultimately there will be some differences. We can narrow those 
differences, but we will have some differences.
    Mr. Canseco. So what you are saying is that it is going to 
take some time to get these regulations in sync with the EU and 
Japan and other traders?
    Mr. Gensler. We have made tremendous process. There are 
laws in place in Europe, Canada, the United States, and Japan 
to have central clearing, data reporting, and, at least here in 
the United States and Japan, for some of this public 
transparency. Europe is still focused on that.
    Wherever there is a direct conflict, we are going to sort 
that through and be very practical, as we have been in Japan, 
as we have on this indemnification issue, within the law and 
recognizing international regimes, called this international 
comity. But where there are some differences where they haven't 
adopted a law, whether it be in the Cayman Islands or other 
places, we have to make sure that our taxpayers are protected 
and our markets are transparent.
    Mr. Canseco. I understand that, but in the meantime we are 
losing a lot of that market share and all of that opportunity.
    What assurances do you have that we are going to get these 
regulations in sync with the Europeans and the Japanese and 
others?
    Mr. Gensler. I think that as we have moved forward, we have 
done that where we can. Another example is--and I know it was 
raised earlier by other Members--margin, the amount of money 
that is put up on transactions. We proposed something along 
with the bank regulators in the spring of 2011. We have not 
finalized that because we went out internationally with the 
Europeans and Asians and put out a concept on how to do this 
earlier this year. And we are committed to try to do this in 
sync, with them, which may take until late in the first half of 
this coming year.
    Mr. Canseco. Now, let me ask you this: Do you believe that 
the international regulators are wrong in their statements that 
they made at the GMAC conference earlier this autumn? Fabrizio 
Planta of the European Securities and Markets Authority stated 
that this is not workable with regards to the rules that are 
being implemented by the CFTC. And he says, they are not 
workable, and we, as international regulators, have the 
responsibility to find mutually acceptable workable solutions 
to solve these issues. And Patrick Pearson from the European 
Commission stated that the message is, Washington, we have a 
problem. That is an objective fact, not a subjective one.
    Mr. Gensler. I believe this is workable. We have something 
that is in our law, which is registration. Congress debated 
that firms will register, and they will register starting in a 
few weeks. That is not in European or Asian law. So that is 
just a difference in approach.
    They will register, but then we will look to substitute a 
compliance, we will look to phased compliance. We have an 
exemptive order that we are finalizing pieces of to give more 
time for that. But when they are dealing with enough U.S. 
persons, they will register so that the public here is 
protected as well and that we level the competitive playing 
field. We don't want our firms from New York or elsewhere in 
this country to have to register, but just if you are in 
Frankfort, or Paris, or London, or Tokyo, that you don't 
register when you deal with U.S. persons in this country. That 
would seem not only to be a conflict with the law, but it 
wouldn't be appropriate competitively.
    Mr. Canseco. Thank you. I see my time has expired.
    Chairman Garrett. The gentlelady from New York is 
recognized for 5 minutes.
    Dr. Hayworth. Thank you, Mr. Chairman. And I want to 
express my appreciation for the privilege of having worked 
under your guidance on this subcommittee for the past 2 years.
    And Mr. Cook and Mr. Gensler, thanks for your service, Mr. 
Cook particularly, upon this particular occasion.
    Recognizing that Dodd-Frank is a massive law that was 
passed with the best of intentions, but, of course, it was not 
composed in its entirety by people who are so deeply immersed 
in the world of financial services and its products and 
processes as you are and as those we are seeking to serve are, 
do--I realize you have been given a set of tasks that can be, 
as we have heard, amply documented not only in this hearing, 
but throughout the past couple of years; that we are working to 
try to provide a certain element of--obviously a tremendous 
element of control, of assurance, of security, of minimization 
of risk to the vulnerable, but in so doing it is clear that 
trying to map that law onto a regulatory structure and onto our 
financial services industry has created tremendous problems in 
terms of process and timing, and they have real cost in a 
highly competitive world. So these issues that we are talking 
about, as you know, as we all know, have real consequences, as 
Mr. Canseco was just saying. We lose market share when products 
and offerings and services move elsewhere in the world where it 
is perceived that they are more welcome or there is more 
opportunity.
    I want to ask you more specifically in that regard about 
cross-border guidance, and I know you had a--Mr. Gensler, you 
had a little conversation with Chairman Bachus about it, and 
you say there has been a cost-benefit analysis done. Earlier 
this year, in February at a CFTC open meeting, your counsel 
said that indeed there had been a cost-benefit analysis on a 
particular rule, but when Commissioner O'Malia asked it about 
subsequently, in fact it turned out that there actually hadn't 
been a numerical sort of analysis that they could actually look 
at and say, yes, this is what it is going to cost, this is what 
we reliably project.
    Clearly we need that kind of quantitative analysis, because 
obviously we have to assess the costs and benefits of what we 
are doing. There is a happy point in there somewhere 
statistically, there has to be realistically.
    So do you have a real quantitative analysis that you can 
provide of the cross-border rules? And if so, could you provide 
that to the committee in the next few days?
    Mr. Gensler. We consider cost-benefits on each of our 
rulemakings. Sometimes they measure 100 pages long in some of 
these and throughout these 40 or so rules. Thus, it measures 
into the thousands of pages and always signed off by our chief 
economist.
    It benefits from market input, but it is both qualitative 
and quantitative. And often we ask market participants for 
numbers, and they are not able to give us numbers, partly 
because it is a competitive issue, they may not want to send 
it, and partly because this is a new regime--
    Dr. Hayworth. Right.
    Mr. Gensler. --as well. So we consider that throughout the 
various rules.
    It also has to be measured against the cost to the American 
public, and I think Congress was well aware of that, of the job 
losses, the businesses that shuttered, the people who lost 
their homes as a result of a crisis that in part was due to 
this opaque marketplace.
    Dr. Hayworth. Sir, without--and I don't mean to interrupt 
you abruptly, but do you--all taken, yes, although the root 
cause remains Federal action that facilitated the kind of 
unwise investment in the housing markets, the high-risk 
investments that resulted in this. The derivatives were a 
symptom, if you will, or an end result, but the root cause was 
actually Federal action, I would submit.
    But, sir, do you have a quantitative analysis of any of 
these cross-border rules that you can share with us, 
understanding limitations that you have described?
    Mr. Gensler. In each of our rules, whether it is about data 
reporting, clearing, business conduct, there is cross-border--
cost-benefit considerations written up.
    Dr. Hayworth. Understood. Can you provide them to us, sir; 
can you give us some sort of documentation of them?
    Mr. Gensler. We could probably pull together those 40 or so 
cost-benefit sections and send them in and so forth.
    Dr. Hayworth. Yes, sir.
    Mr. Gensler. But they are rule by rule.
    Dr. Hayworth. Understood. But whatever you could provide 
us, I think that would be useful.
    I know my time has expired, and I thank you.
    Chairman Garrett. Anything we can get from the Commission 
with regard to cost-benefit analysis would be beneficial, and a 
first, so that would be great.
    Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    And I appreciate both witnesses being here today. Big 
picture, we all want to promote market integrity, lower risk, 
and have harmonized regulation both here in the United States 
and internationally.
    I would like to start with harmonization because I think it 
is really important. Since the two of you are at the table, how 
would you, in very brief terms, characterize the coordination 
between the SEC and the CFTC on swaps rules as they stand 
today? Are you in unanimity, are you close, are you--do you 
have distance between you?
    Mr. Gensler. I would say the coordination has been 
exceptional. And I want to take this moment to thank Chairman 
Schapiro, because I know her term is almost up, as well as Mr. 
Cook, because they have been incredible partners to this 
agency. We jointly put in place definitional rules, as Congress 
asked us to do. We jointly address public reporting of hedge 
funds. Many of the other rules we were not asked by Congress 
nor required to be ``joint,'' but we had to consult and 
coordinate and harmonize where we can, and we have done that.
    But where we are different is in timing. The CFTC has 
completed about 80 percent, and Robert could tell you--Mr. Cook 
could tell you their percent. But that is partly because that 
is all we really do. We oversee futures and swaps, and they 
have a lot more to oversee.
    Mr. Stivers. If we could allow him to quickly characterize 
where you are, and then I have a bunch more questions.
    Mr. Cook. Sure. I would agree that there has been good 
coordination in terms of sharing documents back and forth.
    Mr. Stivers. Would you agree you are in the same place?
    Mr. Cook. As far as timing, we are in a very different 
place, but again, we are 5 percent of the market, and they are 
95 percent of the market.
    I think the other thing is that at the proposal stage, 
there has been a lot of similarity, and there have been some 
differences. Sometimes those differences reflect difference in 
products; sometimes they reflect a difference in approach. I 
think that it is appropriate at the proposal stage to put out 
different ideas for people to think about. As we move into our 
final rulemaking stage, we will need to really focus hard on 
where we are different, and is there a justification for being 
different from the CFTC?
    Mr. Stivers. And I would argue very strongly that 
differences in timing create a lot of uncertainty in the 
marketplace. And also the fact that the CFTC didn't go through 
the administrative rulemaking process without formal comments, 
they are doing many things through guidance and non-action 
letters, I think that is a real problem. And I would urge you 
to try to come together more on timing because I think it will 
help keep the market from becoming fragmented.
    I would like to ask Mr. Gensler, approximately how many no-
action letter requests do you have before you now on these 
swaps rules?
    Mr. Gensler. We have worked through many of them, but I 
think that we have between 10 and 15 right now that we are 
still working through. But if I am off, there could be a 
handful more.
    Mr. Stivers. So when you add those up with the ones you 
have already approved, how many would be in effect at the 
beginning of--well, in short order? How many--add the 10 to 15 
you have now with--how many no-action letters have you already 
approved?
    Mr. Gensler. I don't have an exact number. It is on our Web 
site, and we can get back to you, sir, with a specific number.
    Mr. Stivers. That would be great.
    The whole point of that is if you had gone through the 
administrative rulemaking process, you could have gotten 
comments, you could have changed rules, and you could have 
gotten the benefit of cost-benefit analysis that we talked 
about.
    I do want to ask Chairman Gensler the status of H.R. 2779, 
which is the inter-affiliate swap bill that Congresswoman Fudge 
and I sponsored. It passed the House with 357 votes, and I know 
you proposed the rule to allow inter-affiliate exemption from 
clearing requirements. How is that going?
    Mr. Gensler. We proposed something probably around when 
your bill was, but maybe it was after that, recognizing that we 
might not have the time to complete that, and we had this 
cross-border and other issues in front of us. We did use a no-
action letter to give us time until I think it is April 1st to 
complete that. We got very good comments from the public, and 
we look to complete that in the first quarter.
    Mr. Stivers. Thank you.
    I am running out of time. I would like to insert a letter 
for the record on harmonization from our international partners 
that Mr. Canseco referenced. In the letter, they state that 
they have really deep concerns about the differences between 
their positions and ours right now.
    I yield back the balance of my time to the chairman for a 
question that he would like to ask.
    Chairman Garrett. I appreciate that.
    Just very quickly, with regard to position limits in the 
court case right now, first, I have heard media reports that 
the Commission might be thinking of appealing that decision?
    Mr. Gensler. We actually did file papers to appeal it.
    Chairman Garrett. Okay. And second, I have heard rumors 
actually from fellow Commissioners stating that you plan to 
draft another positions limits rule to try to fix that problem.
    Mr. Gensler. We are looking at that as the district court 
suggested that--they remanded it, so recognizing that Congress 
really said, get this in place. And if I might say, position 
limits work. They work in the markets to promote integrity in 
the markets.
    Chairman Garrett. Has your solicitor or your counsel 
notified the court at the same time that you are filing an 
appeal that you are also going down another track of 
potentially proposing another rule?
    Mr. Gensler. I will raise that with our counsel, but it is 
really--
    Chairman Garrett. Because that would--
    Mr. Gensler. We appealed it because we think that Congress 
directed us to put position limits in place. They said, in 
fact, not even do it in the year, do it in 6 and 9 months, and 
then report back to Congress once we have done it.
    Chairman Garrett. I am just--
    Mr. Gensler. But in the meantime, we are also looking at--
    Chairman Garrett. Having been in court and seeing other 
cases by this Administration where the Administration filed in 
court, and the court says no, and at the same time at the last 
minute they come back into court and say, never mind to the 
appeal that has been filed, we have seen already courts from 
the bench saying, why didn't you let us know that you were 
doing this? You are basically running down two expensive tracks 
at the same time, one an appellate process trying to appeal 
your original position, and the other at that time creating 
another rule. We have heard so much that the Commission is 
short on assets and resources to get the job done. This just 
seems to be one case of an evidence of that, why that may be 
the case.
    With that said, and coming to the close of this first 
panel, I appreciate both the Chairman and the Director being 
with us today. There will be opportunity for Members to submit 
other questions in writing. Now, I would normally end it right 
there, and say to the next panel to come on up, but that does 
remind me of my opening comment that we have already done that 
in the past, sent letters to the Commission asking for answers 
on some things, and several months later, we are still awaiting 
answers from the Commission.
    So on one hand, I am extending that offer to all the 
Members, all my colleagues on both sides of the aisle, to once 
again within the next 30 days submit questions to both members 
of the panel. I would ask the panel before they leave, is it 
their intention to answer these questions and any previous 
questions from any Members that they may have in a timely 
manner, timely being within the next week or so?
    Mr. Gensler. In a timely manner, yes. In a week is very 
often a challenge. I am just being very realistic. A week 
sometimes--
    Chairman Garrett. How about any outstanding correspondence 
from myself and anyone else who may have--
    Mr. Gensler. I am not aware of any outstanding ones, but I 
would like to work with your staff to ensure that--if there are 
any outstanding ones.
    Chairman Garrett. Okay. Sure. I appreciate that. I am sure 
the Commission will--
    Mr. Cook. We will work very hard to get to your answers as 
quickly as we can.
    Chairman Garrett. Great. Thanks.
    With that, I thank both members of the panel. This first 
panel is dismissed. Thanks a lot.
    Mr. Gensler. Thank you very much.
    Mr. Cook. Thank you.
    Chairman Garrett. And to the second panel, greetings. While 
you are getting your papers, et cetera, organized in front of 
you, I welcome the second panel.
    First, a couple of housekeeping items. I know some members 
of the panel have testified here before, and others have not. 
So for those who have not been here before, and as a reminder 
to those who have, your complete written statements will be 
made a part of the record. You will be recognized for 5 minutes 
for a summary of your statement right now. Sometimes, we say to 
capsulize your statement. And, of course, right in front of 
you, in front of Eric there, is the little clock with red, 
green, and yellow lights. It goes down to 5 minutes and final 
time.
    Also, I will just say that I saw all of you sitting here 
for the first panel. And so we understood from the first panel 
everything is going well. We will move quickly through the 
process and have harmonization not only around the world, but 
back here at home as well. And I assume the second panel is 
going to tell us the exact same thing, that everything is 
moving smoothly, and we have no real need for concern, in which 
case we can leave here happily. If not, then I get the old 
adage of the former radio host Paul Harvey: And now, we hear 
the rest of the story.
    So with that, we have seven members to the panel. We will 
start right off as we normally do from the left. Mr. Bailey 
from Barclays, we recognize you and welcome you to the panel, 
and you are recognized for 5 minutes.

STATEMENT OF KEITH BAILEY, MANAGING DIRECTOR, MARKETS DIVISION, 
 BARCLAYS, ON BEHALF OF THE INSTITUTE OF INTERNATIONAL BANKERS 
                             (IIB)

    Mr. Bailey. Good afternoon, Chairman Garrett, Ranking 
Member Waters, and members of the subcommittee. My name is 
Keith Bailey. I am from Barclays, where I am a managing 
director in the markets division. I appreciate the opportunity 
to testify today on behalf of the Institute of International 
Bankers (IIB) on the implementation of Title VII of the Dodd-
Frank Act and its impact on the market.
    The IIB greatly appreciates the hard work that has been 
done by the regulators and the congressional committees to 
promote efficient transition of markets to meet the goals of 
Title VII. The challenges facing the CFTC and the SEC in 
getting this right are considerable, given the OTC markets 
operate on such a global basis.
    My testimony will focus on the continuing uncertainty 
surrounding the cross-border application of the Title VII 
regulations, the effect this is having on the market today, and 
the risks to the market if the implementation process is not 
placed on a more stable footing.
    Congress in the Dodd-Frank Act recognized the need for 
international consistency and coordination in the 
implementation of Title VII's derivative reforms. As the 
committee is aware, in support of this goal, the Act limits the 
overseas application of U.S. rules to activities where there is 
either a direct and significant effect on U.S. commerce or the 
potential for evasion.
    We support the goals of Title VII, which will provide 
greater market transparency and increased oversight of the 
global swaps market; however, there is growing concern 
surrounding the sequencing of rules by the CFTC and the 
divergence between the CFTC and the SEC regarding the process 
and timing for the consideration and adoption of rules 
governing how swaps and security-based swaps are offered to 
clients. As the committee is aware, the industry is facing 
quickly approaching compliance deadlines with respect to swaps 
without the benefit of final guidance as to the international 
scope of these rules.
    The lack of clarity related to the rules' cross-border 
application manifests itself in particular with respect to 
three aspects which apply equally to registration with the CFTC 
and the SEC, albeit the more immediately pressing concerns over 
the CFTC's requirements. The first is, who has to register as a 
swap dealer? Given the need to register by December 31st, firms 
had to make decisions a while ago as to which entities to 
register with the CFTC. Making these decisions without being 
fully informed as to the rules that will apply and what it will 
take to comply imposes an untenable level of unpredictability 
on firms. The inability to properly plan affects the ability of 
firms to serve their clients.
    The second major challenge is the creation of a new 
definition of ``U.S. person.'' The CFTC has proposed a 
definition that is expansive and without precedent, posing 
difficulties for market participants to know which entities 
around the world will be in scope. This is important because if 
a registered dealer trades with a U.S. person anywhere in the 
world, that transaction will be subject to U.S. requirements to 
clear and to execute that trade on a U.S.-registered 
clearinghouse and swap-execution facility, potentially in 
conflict with local regulations.
    Conflicts introduce compliance risks for both the dealers 
and clients, resulting in trades simply not occurring. A 
narrower definition of ``U.S. person'' will reduce the 
instances of this conflict.
    Regulators must also mutually recognize each other's 
clearinghouses and exchanges. The expansive U.S. person 
definition further contributes to the uncertainty over who has 
to register under the so-called aggregation rule. As it stands 
now, this rule requires affiliates of non-U.S. dealers that 
register with the CFTC to themselves register as swap dealers 
if they transact even a single transaction with a U.S. person. 
This would significantly increase both the number of registered 
swap dealers and the resources the CFTC will require to 
regulate them. It is hard to see how the liabilities of non-
U.S. entities with only a very limited U.S.-facing activities 
could pose a risk to U.S. commerce.
    Substituted compliance is the third issue. It applies more 
broadly than just to the execution of transactions. For 
example, to what extent is a foreign-headquartered bank 
accountable to the CFTC for risk management of its global swap 
activities if the CFTC's rules are different than those of its 
home country prudential regulator?
    The CFTC is proposing to apply the offshore prudential 
regulators rules, but only if their rules pass a narrow 
substitute compliance test that will require a high degree of 
comparability. The IIB agrees with the numerous global 
regulators who have suggested that such an approach won't work. 
As demonstrated this past October, such uncertainties create 
paralysis in the market. Clients, regulators, and Title VII's 
objective for transparence and efficient markets are the 
losers.
    The resolution of these issues cannot wait until the last 
minute. As discussed at greater length in our written 
statement, there are near-term steps the CFTC can take to 
alleviate these uncertainties. Such actions not only would 
provide the breathing space needed for global regulators to 
resolve their differences in striving for convergence in 
achieving the G-20 objectives for OTC derivatives reform, but 
also would provide the time for the CFTC and the SEC to 
establish a consistent approach to the cross-border application 
of Title VII's requirements.
    Thank for inviting us here today to contribute to the 
dialogue, and I look forward to any questions you may have.
    [The prepared statement of Mr. Bailey can be found on page 
68 of the appendix.]
    Chairman Garrett. And I thank you.
    I now recognize Mr. Bopp from the Coalition for Derivatives 
End-Users. I hope to hear so much about what would be impacted 
by this. Thank you for being on the panel.
    Mr. Bopp. Thank you.
    Chairman Garrett. You are recognized for 5 minutes. Make 
sure you do pull your microphone close to your face.

STATEMENT OF MICHAEL D. BOPP, GIBSON, DUNN & CRUTCHER, LLP, ON 
       BEHALF OF THE COALITION FOR DERIVATIVES END-USERS

    Mr. Bopp. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, I want to thank you for inviting 
the Coalition for Derivatives End-Users to be represented at 
this important hearing. The Coalition includes more than 300 
end-user companies and trade associations, and collectively we 
represent thousands of end users from across the country. Our 
members are united in one respect: They use derivatives to 
manage risk, not to create it.
    Many U.S. companies are able to maintain more stable and 
successful operations through the use of a variety of risk-
management tools including derivatives, yet derivatives used by 
end users must be put in perspective. End-user trades account 
for less than 10 percent of the notional value of the overall 
derivatives market.
    The Coalition has been very engaged throughout the 
regulatory process, meeting with regulators dozens of times, 
submitting nearly 20 comment letters. We very much appreciate 
the receptivity of regulators to hearing our concerns and for 
taking the time to meet and speak with us on numerous 
occasions.
    We also work with Congress, and in particular with your 
committee, on legislative means to prevent unnecessary 
regulatory burdens from being imposed on Main Street 
businesses.
    On behalf of the Coalition, I would like to take a moment 
to thank the Financial Services Committee for its hard work in 
helping to move legislation through the House to address some 
of the unintended consequences of the Dodd-Frank Act. In 
particular, I want to thank Congressmen Grimm and Peters for 
the end-user margin bill; Congressman Stivers, Congresswoman 
Fudge, and Congresswoman Moore for the inter-affiliate swaps 
bill. The overwhelmingly bipartisan and collegial process that 
led to passage of both bills in the House demonstrates that 
there are changes to the Dodd-Frank Act that make sense and can 
achieve a consensus.
    With regulatory compliance deadlines looming in the next 
few months, however, the Coalition is concerned with the 
direction in which certain rules appear to be heading. We are 
primarily concerned about regulations relating to margin and 
capital requirements, inter-affiliate trades, Treasury hedging 
centers, and the application of rules across borders. I will 
touch upon these points briefly.
    The proposed margin requirements, particularly those 
proposed by the prudential banking regulators, are especially 
troubling and would harm Main Street businesses. Congress was 
clear both throughout the legislative process and in the text 
of the Dodd-Frank Act that end users should not be subject to 
margin requirements because they do not meaningfully contribute 
to systemic risk. Congress also made it clear that imposing 
margin requirements would unnecessarily impede end users' 
ability to efficiently and effectively manage risks.
    As proposed, however, the rules contradict congressional 
intent and would impose unnecessary margin requirements on end 
users, diverting working capital away from productive business 
use. A survey conducted by our Coalition found that a 3 percent 
initial margin requirement could reduce capital spending by as 
much as $5 billion to $6.7 billion among S&P 500 companies 
alone, costing 100,000 to 120,000 jobs.
    We are also concerned that inter-affiliate derivatives 
trades, which take place between affiliated entities within a 
corporate group, may face the same regulatory burdens as 
market-facing swaps. There are two serious problems that need 
addressing. First, under the CFTC's proposed rule, financial 
end users would have to clear purely internal trades between 
affiliates unless end users posted variation margin between the 
affiliates or met specific requirements for an exception. If 
end users have to post variation margin, there is little point 
to exempting inter-affiliate trades from clearing requirements 
as the costs could be similar.
    Second, many end users, approximately one-quarter of those 
we surveyed, execute swaps through an affiliate. This, of 
course, makes sense as many companies find it more efficient to 
manage their risk centrally and to have one affiliate trading 
in the open market instead of dozens or even hundreds of 
affiliates making trades in uncoordinated fashion. But it 
appears from the regulators' interpretation of the Dodd-Frank 
Act that purely non-financial end users will face a choice: 
Either dismantle their central hedging centers and find a new 
way to manage risk, or clear all of their trades. Stated 
another way, this problem threatens to deny the end-user 
clearing exception to end users because they have chosen to 
hedge their risk in an efficient, highly effective way. It is 
difficult to believe that this is the result Congress hoped to 
achieve.
    Finally, the proposed cross-border guidance is also a cause 
for concern for the Coalition. The guidance would impose 
additional costs on end users and would diminish their 
available choices of counterparties. We are also concerned by 
the CFTC's creation of a new regulated entity found nowhere in 
the four corners of the Dodd-Frank Act. The term ``conduit'' as 
used in the proposed guidance could be applied to central 
hedging centers and, again, could force end users to abandon 
these efficient structures for executing trades.
    Throughout the congressional development of the Dodd-Frank 
Act and the regulatory process that has followed its passage, 
the Coalition has advocated for a more transparent derivatives 
market through the imposition of thoughtful, new regulatory 
standards that enhance financial stability while avoiding the 
imposition of needless costs on end users. We believe that 
imposing unnecessary regulation on derivative end users, which 
did not contribute to the financial crisis, would create more 
economic instability, restrict job growth, decrease productive 
investment, and hamper U.S. competitiveness in the global 
economy.
    Thank you.
    [The prepared statement of Mr. Bopp can be found on page 85 
of the appendix.]
    Chairman Garrett. I appreciate that. Thank you, Mr. Bopp.
    Ms. Cohen, welcome to the panel. You are recognized for 5 
minutes.

STATEMENT OF SAMARA COHEN, MANAGING DIRECTOR, GOLDMAN, SACHS & 
                              CO.

    Ms. Cohen. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, my name is Samara Cohen, and I am 
a managing director in the securities division of Goldman 
Sachs. My responsibilities include developing and delivering 
trading, hedging, and risk-management solutions to the firm's 
OTC derivatives clients, with specific focus on the market 
structure changes resulting from global regulatory reform. In 
my current role, I interact regularly with market participants 
that transact in swaps to manage risk, access liquidity, and 
improve returns. Thank you for inviting me to testify at 
today's hearing to share a perspective with you and answer any 
questions you may have.
    Goldman Sachs supports the overarching goals of Dodd-
Frank's derivatives provisions, including decreasing systemic 
risk and increasing transparency, and has devoted substantial 
resources to build necessary compliance systems.
    Commissioners and staff at the regulatory agencies, 
including the CFTC and the SEC, were given a very difficult 
task, and we commend their efforts to fulfill the goals of the 
legislation. Along with our customers, we have been carefully 
monitoring the way that regulators view the cross-border reach 
of Dodd-Frank's derivatives provisions, including how the U.S. 
regime will interact with the regulatory reform efforts under 
way in other G-20 jurisdictions.
    Today, I will raise four challenges we and our clients see 
with the CFTC's approach to Title VII implementation and the 
consequences that might result from their proposed cross-border 
guidance.
    First, the CFTC has taken a sweeping approach to its 
jurisdiction beyond U.S. shores that is without precedent. 
Recent public meetings held by the CFTC and others have made it 
clear that swap market participants and non-U.S. regulators 
have substantial concerns about this expansive approach. These 
concerns will inform the ways in which swap market participants 
operate, with some local banks in Asia, Europe, and South 
America signaling to U.S. financial institutions that they will 
have to stop trading with U.S. dealers to avoid CFTC swap 
dealer registrations. The approach also may encourage foreign 
regulators to be similarly expansive as they craft their own 
regulatory regimes.
    Second, the CFTC's definition of ``U.S. person'' that 
dictates registration and application of Title VII requirements 
is overly broad and at times vague. As a result, market 
participants do not know whether they or their counterparties 
are or are not U.S. persons and cannot make informed business 
plans. In addition, the breadth of the definition makes it 
nearly certain that some market participants will be both a 
U.S. person for the purpose of U.S. regulation and an EU person 
or its equivalent for the purpose of EU regulation, causing 
unnecessary overlap and potential conflicts in regulation.
    Third, regarding sequencing, the CFTC has chosen to 
finalize substantive Title VII rules and require compliance 
with them before specifying to which entities they will apply. 
As a result, market participants face significant uncertainty 
as to what rules may apply. In contrast, the SEC recognizes the 
need to finalize the cross-border application of its rules well 
before requiring compliance.
    Our fourth and final concern relates to the fact that the 
CFTC's cross-border approach has not been developed in 
coordination with non-U.S. regulatory regimes as is necessary 
in a global derivatives market. In the short term the timing 
mismatch between the CFTC's rulemaking and that of other G-20 
jurisdictions could cause swap customers to move their business 
so that U.S. regulations do not govern their swap transactions.
    While a permanent solution to these issues is being 
developed, it is critical that the CFTC address the industry's 
immediate concerns to avoid harmful and potentially permanent 
disruptions to the swap markets on and around December 31st. 
Specifically, the CFTC should temporarily permit the simplified 
form of the ``U.S. person'' definition in the CFTC's October 
12th registration no-action letter for compliance with all 
Title VII obligations. This definition is simple and clear, but 
still captures the vast majority of entities that market 
participants generally consider U.S. persons. While a final 
U.S. person definition is developed, in consultation with other 
regulators, the CFTC should apply Dodd-Frank requirements to 
transactions between registered swap dealers and U.S. person 
customers only.
    We appreciate the opportunity to offer our views to this 
committee, Congress, and the regulators as we work together to 
fully implement these important new rules.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Cohen can be found on page 
88 of the appendix.]
    Chairman Garrett. Thank you, Ms. Cohen.
    Mr. DeGesero, of the Fuel Merchants Association, welcome to 
the panel.

  STATEMENT OF ERIC DEGESERO, EXECUTIVE VICE PRESIDENT, FUEL 
MERCHANTS ASSOCIATION OF NEW JERSEY, ON BEHALF OF THE PETROLEUM 
 MARKETERS ASSOCIATION OF AMERICA (PMAA), THE NEW ENGLAND FUEL 
  INSTITUTE (NEFI), AND THE FUEL MERCHANTS ASSOCIATION OF NEW 
                          JERSEY (FMA)

    Mr. DeGesero. Thank you, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee. My name is Eric 
DeGesero, and I am representing the Fuel Merchants Association 
of New Jersey, the Petroleum Marketers Association of America, 
and the New England Fuel Institute. Our members collectively 
distribute 60 percent of the gasoline and 90 percent of the 
heating oil consumed by the American public.
    First, we want to commend the CFTC for its dedication to 
moving forward with prudent futures and swaps market 
regulations which will bring greater transparency, certainty, 
and fairness to all commodity market participants. Bona fide 
end users of commodities, many of which are our members, feel 
that the futures and swaps markets are not serving the best 
interests for what they were created: managing risk and 
discovering price.
    So why Title VII? For the first time, Dodd-Frank requires 
all swaps, whether cleared or not, to be reported to swap data 
repositories. This is an important step to help the CFTC 
capture the trillions of dollars traded in the opaque swaps 
market.
    Additionally, Title VII is important because it limits 
excessive speculation on energy trades, enhances prohibition 
and prosecution of fraud and manipulation, and promotes greater 
consumer protections. While the rules might not be perfect, 
they are a welcome start in overturning the Commodity Futures 
Modernization Act (CFMA), which watered down oversight, 
exempted Wall Street from position limits and requirements that 
ensured transparency and competition and prevent fraud, and 
manipulation, and excessive speculation.
    Before passage of the CFMA, commercial hedgers comprised 60 
to 90 percent of the market for commodities. Today, 60 to 90 
percent is purely speculative, and that is only the markets 
that we know about. This level of speculation is excessive and 
undermines risk mitigation and price discovery mechanisms, 
exacerbates market volatility, and unhinges the markets from 
supply and demand fundamentals.
    Commodity futures markets were established as a tool for 
true physical hedgers to manage risk. They weren't set up 
strictly for investment banks to dominate the marketplace.
    The very definition of ``cash-settled swaps'' as look-
alikes means that what occurs in the financially settled swaps 
market directly impacts what occurs in the physical market.
    In recent years, excessive speculation on oil futures 
exchanges has driven prices at the pump. In April 2011, Goldman 
Sachs warned clients to lock in trading profits before oil and 
other markets reversed, suggesting speculators were boosting 
crude prices as much as $27 a barrel, which translates to 
upwards of 40 to 60 cents per gallon at the pump. Goldman noted 
that every 1 million barrels of oil held by speculators adds an 
8 to 10 cent rise in oil prices.
    So not to say that we are opposed to speculation. Quite the 
contrary. We need speculation in the marketplace for physical 
end users to manage risk, but excessive speculation distorts 
the markets and creates tremendous volatility.
    Furthermore, the effect of excessive speculation on small 
business petroleum marketers is a problem with far-reaching 
consequences. In recent years, gasoline and heating oil 
retailers have seen profit margins from fuel sales fall to the 
lowest point in decades as prices have surged. Small businesses 
do not benefit from high crude or gasoline prices because they 
operate in such a competitive environment: the higher the 
prices climb, the further the margins are compressed. Thus, 
rising gasoline prices not only hurt motorists, but small 
businesses as well.
    Regarding the position limits rule, it is unfortunate that 
the U.S. district court ruling vacated the clear intent of the 
elected branches of government on the new position limits rule, 
albeit on narrow ground, and sent it back for further 
consideration.
    More than 100 studies have been published showing that 
excessive speculation has been disruptive to commodity markets.
    We would also like to note, in echoing statements that were 
made earlier relative to the bipartisan process of some of 
this, that as recently as the 110th Congress, 70 House 
Republicans voted to approve legislation that would have 
established across-the-board position limits and provided the 
CFTC with 100 employees, 100 new employees, to carry out their 
mission. Of that number, 44 are still Members of the House.
    Regarding cross-border derivatives, transactions conducted 
by offshore affiliates of U.S.-based firms can have a direct 
and immediate impact on businesses, consumers, and the 
stability of the American economy. Financial institutions have 
direct access to the Federal Reserve's discount window and FDIC 
backing. That is why Congress gave the CFTC enough discretion 
to go after offshore affiliates. If the CFTC isn't able to 
effectively regulate U.S. bank foreign affiliates that engage 
in swap transactions, Title VII of Dodd-Frank will effectively 
be gutted.
    Given the over-the-counter derivatives market has grown 
exponentially over the last 10 years, a small downpayment for 
the CFTC to ensure the markets are reflective of supply and 
demand is critical. The OTC market totals approximately $300 
trillion in the United States and another $300 trillion 
worldwide. We believe the CFTC's budget needs to increase from 
$205 million to $308 million. We urge the subcommittee to allow 
the CFTC to do its job and implement the will of the people's 
branch without further delay.
    I thank the subcommittee for the opportunity to testify and 
I look forward to any questions you may have, Chairman Garrett. 
Thank you.
    [The prepared statement of Mr. DeGesero can be found on 
page 106 of the appendix.]
    Chairman Garrett. Thank you very much.
    Mr. Deutsch, you are recognized for 5 minutes.

   STATEMENT OF THOMAS DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN 
                   SECURITIZATION FORUM (ASF)

    Mr. Deutsch. Chairman Garrett and distinguished members of 
the subcommittee, my name is Tom Deutsch. I am the executive 
director of the American Securitization Forum. I thank you for 
the opportunity to participate in the hearing today on behalf 
of the 330 member institutions of the ASF that represent all 
the various constituencies in the global structured finance 
markets, including issuers, investors, financial 
intermediaries, lenders, trustees, servicers, and rating 
agencies.
    In my testimony today, I address in detail two key 
unintended consequences of potential outcomes of the 
implementation of Title VII of the Dodd-Frank Act on the 
structured finance industry. There are certainly a number of 
areas of securitization and structured finance that is subject 
of Dodd-Frank, such as QM, QRM, risk retention, loan level 
data, conflicts of interest; certainly a litany of issues that 
we would address in different hearings.
    Today's hearing is not one in the summer of 2010 that I 
would have expected us to participate in, in large part because 
the use of swaps and derivatives in securitizations are 
generally of the most plain-vanilla type, such as the use of 
interest rate or currency swaps to eliminate securitizations 
investors' exposures to interest rate or currency fluctuations.
    Let me provide two basic examples. First, a captive auto 
finance company, they package a number of auto loans into a 
securitization to sell to investors. Typically, auto loans are 
sold to borrowers at a fixed rate; that is, the borrowers want 
to keep their fixed-rate loans and have managed their daily 
fluctuation. However, captive finance companies, when they try 
to sell these securitizations to investors, oftentimes the 
investors want to have floating-rate notes. So the issuers of 
those securitizations want to ensure a basic swap to 
effectively be able to allow the borrower to enter into a 
fixed-rate loan with the issuer, but at the same time be able 
to sell to investors. Pension funds, mutual funds, and the like 
would like to get floating rate notes. In effect, both sides 
and all three parties win in that transaction. The borrower 
gets a fixed-rate note, the investor gets a floating-rate 
purchase, and also the issuer is able to provide as much and 
maximize the amount of investor appetite for those securities 
as possible.
    Let me provide a second example. That is an English 
mortgage lender may package a number of home loans that it 
makes to English homeowners into a securitization to sell to 
U.S. investors. The English homeowners are required to pay 
their loans, obviously, in U.K. pounds. The English homeowners 
are required then to pay those back, but the U.S. institutional 
investors who purchase the mortgage-backed securities that they 
are based on, they have to pay their obligations, that is to 
U.S. pensioners and other investors in mutual funds--they have 
to pay those back in U.S. dollars.
    As such, the U.K. securitizer will enter into a currency 
swap that will effectively protect the investor from any 
currency fluctuations in buying a securitization. That way, 
again, the English homeowner gets their mortgage in U.K. 
pounds, but ultimately the institutional investor can focus on 
the credit and prepayment risk of those securities rather than 
worrying on currency fluctuations.
    Now, historically this hasn't been a challenge, and there 
has been little interaction between the CFTC and 
securitization, but two recent rule changes and proposals have 
unfortunately created significant concern for the 
securitization markets with these: first, that a posting of 
cash margin may be required for securitization transactions 
even for the most basic vanilla types; and second, various 
commodity pool regulations that may trip up and rope in many 
securitization transactions into those rules.
    First, let me address briefly the posting of the cast 
margin. Our concern is that many securitizations that use these 
plain-vanilla swaps will, in fact, have to post cash margin 
into the transaction, and that will take on additional risk for 
the securitization, but, most importantly, tie up much of the 
much needed capital for many types of securitization vehicles.
    If you look in Appendix I of our written testimony, we 
provide a very detailed example showing that if posting of cash 
margin is required for these transaction vehicles, then in 
scenario 1, where interest rates were to be within 95 percent 
of their usual fluctuation, nearly 10 percent of the 
securitization transaction will have to be posted as margin. So 
as an example, there is $42 billion a year issued in auto ABS 
in 2011. If 10 percent margin would have to be posted on those 
transactions, that would be approximately $4 billion that 
wouldn't be available in credit. That leaves a lot of cars on 
car lots and a lot of factories idling.
    But in scenario 2, where we look at a much higher increase 
or fluctuations in interest rates, over 20 percent of liquid 
margin will have to be posted in those transactions, meaning 
approximately $8 billion of margin would have to be posted for 
those auto ABS transactions, again, a significantly more 
restricted credit market just in the auto context alone, let 
alone in mortgage, credit cards, autos, and the like.
    With that, we would also like to thank the CFTC for their 
work related to commodity pool and alleviating many of the 
concerns associated with it. I look forward to answering 
questions as the committee may see fit.
    [The prepared statement of Mr. Deutsch can be found on page 
112 of the appendix.]
    Chairman Garrett. Thank you.
    I now recognize Mr. Giancarlo from GFI, and also the 
Wholesale Market Brokers Association.

     STATEMENT OF J. CHRISTOPHER GIANCARLO, EXECUTIVE VICE 
  PRESIDENT, GFI GROUP INC.; AND CHAIRMAN, WHOLESALE MARKETS 
   BROKERS ASSOCIATION, AMERICAS (WMBAA), ON BEHALF OF WMBAA

    Mr. Giancarlo. I am Chris Giancarlo, executive vice 
president of GFI Group, an American business and a wholesale 
broker of swaps and other financial products. I testify today 
as chairman of the Wholesale Markets Brokers Association, an 
independent industry body representing the world's largest 
wholesale brokers, active in every global financial market.
    Our member firms were the model for swap execution 
facilities, or SEFs, under Dodd-Frank. We use voice and 
electronic trading platforms to execute trades and swaps and 
other products. Our members plan to register as SEFs and 
security-based SEFs when final rules are completed.
    We stand for swaps regulation that improves transparency, 
promotes competition, and increases market participant access. 
We have supported the clearing, execution, and the regulatory 
reporting mandates of Dodd-Frank through dozens of writings and 
formal testimony, and we continue that support today.
    I would like to briefly discuss: one, the unfinished SEF 
rulemaking; two, the cross-border impact of Dodd-Frank; and 
three, the overnight futurization of swaps markets.
    I will start with the SEF rulemaking. We are informed that 
final SEF rules have been presented to the CFTC Commissioners 
and hopefully may be finalized soon. Chairman Gensler has said 
that the final rules allow swaps to be executed ``through any 
means of interstate commerce,'' as set out under Title VII of 
Dodd-Frank, and our member firms welcome the news.
    But, Mr. Chairman, I was pleased to hear Chairman Gensler 
say a few minutes ago that swaps execution should be 
technologically neutral, including voice transactions. That 
neutrality needs to be stated not just in the preamble to the 
final rules, but in the rules themselves. The rules must be as 
clear as was the statute. To provide otherwise would be 
inconsistent with the express provisions of Dodd-Frank, 
contrary to public comment, and will certainly lead to 
regulatory uncertainty and market confusion.
    Let me tell you now what we are seeing in overseas 
financial markets. Since the June release of the CFTC cross-
border interpretive guidance, U.S. trading firms are being 
shunned by foreign counterparties to avoid registering with the 
CFTC. In some cases, two-tiered trading markets are emerging, 
one where U.S. traders can transact, and one where U.S. traders 
are prohibited from transacting. As we meet today, we are 
hearing from foreign firms that they don't want to trade with 
American firms lest they be caught in CFTC regulation. This 
development is not good for America's global trading and not 
good for America's economic interest.
    Finally, I will speak about futurization of the swaps 
markets. From Friday, October 12, 2012, to Monday, October 
15th, we saw a complete migration of trading activity in U.S. 
natural gas and electric power markets from cleared swaps to 
economically equivalent futures. By Tuesday, almost no swaps 
were trading in the North American energy markets.
    This overnight development in a vital U.S. market happened 
almost entirely because energy trading firms sought to avoid 
registering as swaps dealers or major swaps participants. It 
happened because the CFTC has furthered regulatory arbitrage 
against one product under its jurisdiction, swaps, in favor of 
another product, futures. And it happened with little study or 
understanding by regulators of the unintended consequences on 
U.S. markets, traders or energy consumers. And it happened 
certainly without a cost-benefit analysis.
    Here are the concerns. First, the futurization of swaps 
harms the competitive market structure that Dodd-Frank meant to 
preserve; that is, choice of financial products, choice of 
methods of trade execution, trading venues and clearinghouses. 
By contrast, the U.S. futures market, while serving a finite 
set of highly liquid commodities and financial products, 
restrains competition by limiting trading methods and having 
single vertical silos for execution and clearing. The 
futurization of swaps leads to monopolistic control, reduced 
customer choice and, inevitably, higher costs of trading and 
execution.
    Second, the futurization of swaps markets increases balance 
sheet risk for market participants and systemic risk for the 
U.S. economy. Because futures do not allow for specific 
exercise dates, they are imperfect hedges and cause market 
participants to incur basis risk and greater earnings 
volatility. But futurization also increases systemic risk, 
because labeling a product as a future and listing it on an 
exchange results in a lower margin requirement than for a 
cleared swap even though the economic characteristics of their 
products may be identical.
    Let me repeat that: Calling something a swap future and 
putting it on exchange results in a lower margin than for the 
same economically equivalent instrument if it is called a swap.
    Regulators have not analyzed what that means to systemic 
risk. As a result, clearinghouses are forced to absorb more 
risk, especially during a liquidity crunch or market crisis. 
While a lower margin may be attractive to some futures traders, 
it can have dire consequences for the American taxpayer.
    Dodd-Frank was designed to promote competition, reduce 
systemic risk, facilitate clearing, and increase transparency. 
Congress did not mandate a preference for futures products over 
swaps, monopolies over competition, or increased risk to 
trading firms or the economy.
    In closing, we call on regulators to finish the SEF rules 
as Congress intended, to carefully consider their international 
impact, and to better understand and analyze any further 
migration to futures.
    Thank you very much, and we look forward to your questions.
    [The prepared statement of Mr. Giancarlo can be found on 
page 135 of the appendix.]
    Chairman Garrett. And I thank you.
    Finally, from MIT, Mr. Parsons from the Center for Energy 
and Environmental Policy Research.

 STATEMENT OF JOHN E. PARSONS, SENIOR LECTURER, FINANCE GROUP, 
    SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF 
  TECHNOLOGY (MIT), AND EXECUTIVE DIRECTOR, MIT'S CENTER FOR 
            ENERGY AND ENVIRONMENTAL POLICY RESEARCH

    Mr. Parsons. Thank you. I am John Parsons. I am a member of 
the finance faculty at MIT Sloan School of Management. I 
publish research on hedgings, and teach a course on risk 
management for non-financial corporations, and have consulted 
with a number of companies on hedging issues as well as other 
corporate finance issues.
    I want to thank Chairman Garrett, Ranking Member Waters, 
and other members of the subcommittee for allowing me the 
opportunity to testify here.
    All of us share a common objective, I think, of helping in 
our different ways to craft effective regulation that reduces 
hedging costs for companies and increases the productivity of 
the economy.
    I submitted my written testimony with the title, ``Hit or 
Miss.'' I am going to use these remarks basically to describe 
two broad categories of actions: one that I think misses the 
mark, that will be ineffective at reducing costs for non-
financial companies and potentially have some dangerous side 
effects; and another broad category of actions that I think has 
a proven track record of helping to reduce costs for companies, 
which I would label the hit.
    So, first to talk about the miss. In the public discussion 
of Title VII and the OTC swaps markets, I see that there is a 
very broad misunderstanding about how companies can avoid the 
costs of hedging. Many people imagine you can avoid those costs 
if you can avoid margins. And a lot of congressional action has 
been targeted to trying to find ways to facilitate non-margin 
swaps because that will lower costs. I am worried that people 
think that you can get a free lunch in an area like this.
    All non-margin swaps entail credit risk, and all credit 
risk is costly. Banks know that, derivative dealers of all 
sorts know that. They handle non-margin swaps accordingly. They 
examine companies' credit risks, they maintain a folder, so to 
speak, in the old days, but more currently other means, to keep 
track of companies' credit risks and they price the credit risk 
when they sell the swap. They charge for it, the cost is there.
    Lobbyists have sponsored studies commissioned to produce 
large estimates of costs as a result of forcing companies to do 
margins. , You have heard the results of one of those studies 
cited here by Mr. Bopp. All of those studies that I have seen, 
including the one cited by Mr. Bopp, are preposterous. All of 
those studies assume away any costs created by credit risk to 
non-margin swaps. That problem has been publicly stated and 
criticized. There is no public defense of the inadequacies of 
those studies. And I would recommend that the Congress look for 
reliable figures from disinterested parties which can stand up 
to public scrutiny.
    Some legislation which has been aimed at avoiding this cost 
is misguided at best and dangerous at worst, especially bills 
which try to direct bank supervisors to ignore the credit risk 
that is embedded in non-margin swaps. For example, H.R. 2682 is 
one of those types of bills. It threatens to return us to an 
unstable and ill-supervised financial system.
    Turning now to the hit, I want to talk briefly about 
central clearing and how it is an effective tool for decreasing 
costs. Once again, in the public discussion I think there is a 
lot of misimpression that central clearing is a new, untested 
mandate originated in Dodd-Frank imposed on a tried-and-true 
OTC market structure that had evolved to minimize cost. In 
fact, it is quite the opposite. It is a return to a tried-and-
true system, a rediscovery of an important innovation which 
American financial markets and American industry expanded on 
throughout the 20th Century to reduce costs. I think that the 
way we want to look at the problem is to find a way to improve 
the extent of central clearing, improve the extent to which 
central clearing can reduce costs, and there are lots of ways 
to make that implementation better.
    So in closing, I hope we can focus on true and effective 
means for reducing costs to non-financial companies and avoid 
focusing on ineffective ones. Thank you very much.
    [The prepared statement of Dr. Parsons can be found on page 
145 of the appendix.]
    Chairman Garrett. And I thank you, Mr. Parsons.
    I thank the entire panel. Before I proceed to questions, I 
ask unanimous consent to make two statements a part of the 
record: first, the testimony of Terrence Duffy, executive 
chairman and president of CME Group; and second, testimony of 
the Companies Supporting Competitive Derivatives Markets. 
Without objection, it is so ordered.
    I now yield myself 5 minutes. I am not necessarily running 
down the whole list, since I can't get to that in 5 minutes. I 
will start though, with Mr. Parsons, since the thought is in my 
mind. So with central clearing, that of course is the way that 
we are going here, there is, though, another side to the cost 
factor with central clearing, is there not, and that is, is 
that now you are centralizing, hence the name, the risk, too. 
It is combining all of the risk in this one place. And under 
Dodd-Frank we gave the clearinghouses through Title VIII access 
now to the discount windows at the same time. So isn't there a 
potential for an additional cost and/or risk?
    Mr. Parsons. It is true that you now have the risk 
centralized, but you should be careful you are not just moving 
risk. Central clearing actually reduces risk overall. That is 
why so many exchanges at the end of the 19th Century and the 
beginning of the 20th Century moved to it, because it allowed 
them to sell more derivatives more effectively at lower cost, 
because the absolute amount of risk in the system was less.
    Chairman Garrett. Mr. Giancarlo, do you have a comment on 
that? And then secondly, do you have a comment on what you 
probably heard earlier today from the Commissioner with regard 
to CFTC on the SEF rulemaking?
    Mr. Giancarlo. Thank you, Mr. Garrett. We do. Our trade 
association, the WMBAA, supports central clearing of swaps 
transactions. I note Mr. Parsons' comment, which I take very 
well, that non-margin swaps equal credit risk. My concern would 
be that then it must be equally true that inadequately margined 
futures would also equal credit risk for clearinghouses. And as 
you note, with clearinghouses having access to the discount 
window I wonder whether in a few years, in the next market 
crisis, we may be back here where the clearinghouses are too-
big-to-fail because the margin rules made an arbitrageable 
situation between swaps and futures, in favor of futures.
    Chairman Garrett. We have already taken care of that with 
the point on access to the discount window. They will just be 
able to get whatever they need and so they will never fail.
    Mr. Giancarlo. I think they said that about the big banks 
at one time.
    Chairman Garrett. Yes, exactly.
    Mr. Giancarlo. As I noted also in my testimony, I was very 
pleased to hear Chairman Gensler say that swap execution, in 
accordance with Congress' stated intent, will allow SEFs to use 
any means of interstate commerce. I think he said it will be 
technology neutral. And I think it is essential that technology 
neutrality be recognized in the rule itself so that there is no 
confusion on this as there are on a number of other rulemakings 
that have come out.
    Chairman Garrett. Thank you.
    Mr. DeGesero, you probably heard my question. I was just 
curious about your comment with regard to position limits and 
where the CFTC is going right now with their court case and 
with their appeal on it, and also down their other track with 
regard to coming up with a potentially new rule on that. Do you 
have any thoughts on that?
    Mr. DeGesero. Thoughts regarding the parallel track?
    Chairman Garrett. The parallel track and also what the 
potential outcome will be on that. Obviously, the court has 
struck it down initially. I think you commented on that, but I 
will let you elaborate.
    Mr. DeGesero. I think Chairman Gensler said he needed to 
leave it to the General Counsel of the CFTC to respond. So I 
certainly am not qualified to respond to the parallel track 
question.
    Chairman Garrett. And with regard to their position thus 
far on the position limits and their appeal to that case, 
obviously the court struck it down.
    Mr. DeGesero. Right.
    Chairman Garrett. Right. Let me give you an opportunity 
to--
    Mr. DeGesero. The stated position of the CFTC is that they 
are appealing that, for which we are thankful. We think the 
position limits are long overdue, and we think that the court's 
ruling was completely erroneous. The Petroleum Marketers 
Association of America must have testified 15 times, give or 
take, in the years leading up to the passage of Dodd-Frank. And 
while not every single one of those hearings was on position 
limits, it was certainly discussed in Congress.
    The ruling is very narrow. Only in Washington are the words 
``is'' and ``appropriate'' not known. I think it is unequivocal 
that Congress intended with the timeframes that were put in 
there and that the court overturned it on something called the 
Chevron part one or part two test, I think the will of the 
elected branch was explicit and the court overturned the will 
of the elected on a very narrow ground and sent it back.
    Chairman Garrett. And, Ms. Cohen, you mentioned the one 
word that we tried to get through on the previous panel, which 
was on sequencing, and if I am understanding your testimony 
correctly, the lack thereof perhaps as far as how the CFTC has 
handled matters, and I am not putting words in your mouth, 
versus how the SEC has handled matters. Do you want to 
elaborate on that?
    Ms. Cohen. Sure. Thank you for the question. The CFTC 
probably more than any global regulator in the world has 
attempted to meet the 2012 deadline for derivatives reform. But 
in doing so, they have assembled a confluence of rules that 
really all go effective at the same time in the next couple of 
weeks. And we can contrast that to the SEC's approach, where 
they actually provided to the market a sequencing plan 
conditioned on certain foundational rules such as what product 
definitions. That is something the SEC did jointly with the 
CFTC. Entity definitions, who is a swap dealer, who is a major 
swap participant, they did that jointly as well.
    But unlike the CFTC, the SEC has also said that they will 
make their cross-border rule a rule and foundational, just like 
product definitions and entity definitions, so we can take 
those three foundational pieces of information and build our 
implementation plan. They then went on to give categories of 
rules which related one to the other, which really helps effect 
and implement reform in a practical and thoughtful way.
    Chairman Garrett. Just to close before I yield, we tried to 
engage the FSOC in this matter as well, since they would 
presumably have some authority to say let's try to bring these 
parties together and sequence it or put that together an order, 
and we got not much of a positive answer back.
    With that, I yield back. And I yield to the gentlelady who 
has her notes all there and ready--yes, there you go, for 5 
minutes.
    Ms. Moore. Thank you so much, Mr. Chairman. And I just 
think this is an outstanding panel. I guess I just want to say 
that Mr. Giancarlo's comment about Mr. Gensler preferring the 
futures market over the swaps market because of its 
jurisdiction, I guess I find that rather provocative. And I 
will let him respond a little bit, but I was more curious about 
what Mr. Parsons thought about Mr. Giancarlo's comments that 
this really creates a lot of regulatory arbitrage and 
unintended consequences. As an economist, I would like for you 
to comment on his testimony.
    Mr. Parsons. It is a very important problem, and the CFTC 
is kind of between a rock and a hard place, for two reasons. If 
you are talking about customized swaps, those are clearly 
different from futures and can only be dealt with in the OTC 
swaps markets. But, for example, all of these energy swaps we 
have been discussing that moved from ICE swaps into futures, 
those were not customized. Those are standardized instruments, 
they trade on an exchange effectively, they are cleared.
    As long as you are dealing with standardized swaps, and if 
you require them to satisfy regulations, supervised 
transparency, and clearing, they are virtually, from an 
economist point of view, indistinguishable from futures. So now 
you definitely get to regulatory arbitrage. No matter what the 
CFTC does, any little difference in the regs for futures and 
swaps will send those standardized instruments to one or the 
other. But there is no way, when Congressman Neugebauer was 
discussing this earlier, he kept referring to Congress' intent. 
It is impossible for the CFTC to meet the intent of preserving 
standardized swaps, because once you do the things that Title 
VII requires--make them transparent, make them cleared--and 
they are regulated, supervised, which they weren't before, 
there is no fundamental economic difference with futures, and 
it is always going to be little regulatory differences that 
cause things to move one to the other.
    Ms. Moore. I did promise you could weigh in, yes, sir.
    Mr. Giancarlo. Thank you. Two quick points. If in fact all 
we have seen is a shift from swaps to futures without any 
change in the liquidity characteristics of the market, which I 
can vouch for because that is what we have seen and my members 
have seen, then there should be no difference in margin. There 
shouldn't be 5-day margin for swaps and 1-day margin for 
futures.
    Second, if Congress intended to have a competitive trading 
landscape for swaps and if that competitive landscape is now 
migrating into futures, then we do have to ask ourselves 
whether the anti-competitive, single-silo, monopolistic 
structure of the futures market should continue for products 
that were formerly swaps and that Congress intended to trade 
through competitive venues and competitive clearinghouses.
    Ms. Moore. Thank you.
    Let me ask Mr. Bopp a question regarding the inter-
affiliate swaps. Can you speak to how the CFTC rules compare to 
a bill that we had, H.R. 2779, and whether or not you think 
that margin and clearing enhances the market for inter-
affiliate swaps? Because I am thinking of companies in my 
jurisdiction who have really indicated to me that inter-
affiliate trade, the credit risk really is not there when it is 
inter-affiliate, it is just a book entry for central risk and 
hedging purposes. So can you tell me how the CFTC's rule would 
apply?
    Mr. Bopp. Sure. And you are absolutely right, Congresswoman 
Moore. This is an important issue and your bill is still 
needed. Now, the CFTC proposed rule is helpful, there is no 
question. They have created an exemption for inter-affiliate 
swaps that applies to non-financial end users. The problem is 
there are two key issues, two problems facing end users that 
are not addressed by the CFTC rule.
    Number one, non-financial end users, there is an eight-step 
process or an eight-criteria process that non-financial end 
users must meet. And one of the criteria is posting variation 
margin between affiliates. Now, again, if you post, if you have 
to post variation margin between affiliates, the whole point 
behind an exemption from clearing requirements is defeated 
because your costs are roughly similar if you have to post 
variation margin.
    Second, though, and very importantly, there are lots of 
companies, both in your district and throughout the country, 
that have Treasury hedging centers, and the CFTC rule doesn't 
do anything to exempt trades. So if you have a non-financial 
end user with a Treasury hedging center and that hedging center 
is facing the market, if what that hedging center was set up to 
do is enter into swaps, that hedging center will be deemed to 
be a financial entity. So now you have a financial-to-financial 
swap that is not eligible for the end-user clearing exemption 
even if the swaps are being entered into for a purely non-
financial end user. It is a big problem, I know a number of you 
are hearing from companies about it, and it is not addressed by 
the CFTC rule.
    Ms. Moore. Thank you. Are we are going do have another 
round?
    Chairman Garrett. Maybe.
    Ms. Moore. Maybe.
    Chairman Garrett. The gentleman from Arizona.
    Mr. Schweikert. Mr. Chairman, I am enthusiastically looking 
forward to the next round. This is one of those moments where 
there are just so many things I want to ask this panel. I do 
need to just touch on one thing just because it bothered me.
    Mr. Parsons, if I remember in some of your testimony you 
actually come back and the staff committee preparation for this 
hearing, so you actually in here quoted the committee's hearing 
memo. I am not going to ask where you got it, but traditionally 
that is sort of--that is an internal document that we work on 
back and forth. It is sort of like your lawyer, somehow you 
getting my internal lawyer's prep memo. So someone sort of 
violated the mechanics and the internal rules I think we all 
live under. And that is as much being shared, so next year's 
committee knows that we are not supposed to go there. You have 
all started a conversation that--
    Ms. Moore. Mr. Schweikert, would you yield? Would you 
yield? I am sorry about this, but they are making me go. You 
know how staff are.
    Mr. Schweikert. Oh, you are going to leave me.
    Ms. Moore. They are making me go. But I just wanted to know 
if I could ask unanimous consent to enter in the record 
something for the ranking member, a statement from Americans 
for Financial Reform.
    Chairman Garrett. Without objection, it is so ordered.
    Ms. Moore. Thank you. Can you give him back his time, Mr. 
Chairman?
    Chairman Garrett. More than he wants.
    Mr. Schweikert. I want to hit on an overall theme that I 
have dealt with for the last 2 years on this committee, and 
that is the law of unintended consequences, because I have 
already seen multiple bits of conversation here saying the pop 
term of regulatory arbitrage. On one hand, we start to have the 
discussion of swap futures. But my understanding is margin 
should stay the same because margin is ultimately risk-priced. 
So in some ways I am not sure the way I was understanding what 
you are saying is completely fair. But let's first step out to 
regulatory arbitrage internationally.
    Mr. Parsons, you have really smart people around you, the 
rest of you do, and Mr. Deutsch and I have had this 
conversation in the past. Do we wake up with our rule sets and 
first get an international arbitrage? And then second, with 
things like swap futures, are we even starting to see some 
movement in our own energy markets internally? And is that just 
rational economically, is you are going to go to where you 
perceive either the lowest cost of ultimately doing your 
trades? Am I barking up the wrong tree? Or first if you sat 
down with your really smart people, could you first find an 
international way to arbitrage some of the rule sets and then 
do you find a domestic way?
    Mr. Bailey. Thank you for the question. Clearly, the 
regulators have expressed and have endorsed a profound intent 
to eliminate regulatory arbitrage internationally. And I think 
you do see that very clearly in the efforts in relation to the 
margin for uncleared swaps and IOSCO and the regulators coming 
together. It is difficult to envision, though, that everything 
will be completely the same across the world. There will be 
instances of preference, there will be certain entities, be 
certain participants in the markets, pension plans who have 
slightly different rule sets that apply to them. And I think it 
is simply unrealistic to suppose that we are going to get 
complete harmonization.
    Mr. Schweikert. And this is the hazard of doing these in 5-
minute increments. The brilliant young man sitting behind me, 
we were sort of game theorying this earlier, what if I just 
routinely turned my swap into slightly customized, all of a 
sudden now did I just move it to sort of an OTC-type product. 
Anyone else want to? Am I complicating the simple? Ms. Cohen?
    Ms. Cohen. I don't think you are complicating the simple. I 
think that is something we have to watch very closely. And we 
are seeing one instance, in the case of futurization, where 
investors are demonstrating where they think they will get the 
most efficiency in return. I would make the case in the example 
of futurization that these are also highly regulated markets, 
but it is a good example that we will see investor behavior 
driven by different rule sets. And a particularly good example 
is probably in the equity and the credit markets, where the 
CFTC and the SEC really do share jurisdiction of products that 
are traded often by the same trading desks and the same 
investor bases, where significantly different rules promulgated 
by the two regulators will likely encourage migration between 
the two products. So I think it is a really important question 
to ask now and to keep asking as the rules are finalized.
    Mr. Schweikert. And this is to everyone on the panel. I 
actually have a real interest in this, because in sort of our 
game theory we have worked out what would happen if you have 
international affiliates? Are there certain things they could 
be trading that are meant that you keep solely on the book of 
the international even though ultimately it is trading at 
domestic risk? What happens if you break up your trading desk 
or your Treasury management now is sort of broken up through 
the organization? Does that move you out of some of the end-
user rules and the obligations? If I started to customize the 
design in my hedges, do I get around some of the platform 
trades? So I am just trying to get my head around where are 
exposures and where are we going to walk into the law of 
unintended consequences.
    Mr. Chairman I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Texas.
    Mr. Canseco. Thank you, Mr. Chairman. And thank you to the 
members of the panel.
    Mr. Bailey, let's talk about the term ``U.S. person.'' How, 
in your opinion, should it be defined?
    Mr. Bailey. We take the view that you have to be extremely 
careful in relation to funds and the treatment of funds and 
whether you are looking at a relationship where the investors 
themselves are U.S. investors or whether the fund manager is a 
U.S. person. We think that the CPO definition needs to be very 
much tidied up. We have questions around whether the principal 
place of business should be in the definition.
    So we really do, at the IIB, we line up closely with the 
definition that the CFTC arrived at in the no-action letters 
that preceded October 12th, where they took the 7 prongs that 
they had in the original proposal and basically cut that down 
to 4\1/2\ prongs. And though that was specifically for the 
purpose of registration only, we think that as an interim 
definition that has some merit while the CFTC--
    Mr. Canseco. So you are happy with the CFTC's definition of 
``U.S. person?''
    Mr. Bailey. This is the definition that they revised on 
October 12th.
    Mr. Canseco. But in your opinion, how should it be defined, 
the way the CFTC does it, or how should it be defined?
    Mr. Bailey. How the CFTC had defined it on the October 12th 
for the purpose solely of what needs to be included in the 
calculation of whether or not you reach the de minimis trading 
limit to have to register is close to the appropriate 
definition that they should use for all the purposes under the 
statute.
    Mr. Canseco. So do you perceive any problems or have there 
been any problems over the uncertainty of defining ``U.S. 
person'' as it is defined by the CFTC?
    Mr. Bailey. Are you asking in relation to whether the 
marketplace has continued to be reticent to trade with U.S. 
persons in that regard?
    Mr. Canseco. Correct. On the definition of ``U.S. 
persons.''
    Mr. Bailey. That is an issue on which we only have some 
anecdotal evidence, and I think it would be difficult to depend 
on. I defer to Mr. Giancarlo's issue where I think he has 
stated that he has seen lately the reticence on the part of 
European institutions in some cases to trade with entities that 
may possibly fall within a U.S. definition if the CFTC were to 
adopt the wider definition that they had originally proposed in 
July. The uncertainty issue is still there.
    Mr. Canseco. Do you have an opinion whether or not a broad 
definition is a good idea or a bad idea?
    Mr. Bailey. A broad definition brings into play 
considerable risks in relation to introducing higher levels of 
conflict, because entities that are present in Europe and Asia 
would fall within that definition with the result that the 
local rules may very well apply, would likely apply to them, as 
well as the U.S. rules, and that puts increased pressure on the 
need for substitute compliance to resolve that issue.
    Mr. Canseco. I have a short time. Mr. Giancarlo, do you 
want to weigh in on this U.S. person definition?
    Mr. Giancarlo. We have not taken a view, my organization 
has not taken a position on that, and I don't wish to take one. 
All I do wish to say, though, is harmonization is absolutely 
critical if we are not going to balkanize global trading 
markets and discriminate against U.S. trading participants.
    Mr. Canseco. Thank you.
    Now, Mr. Bopp, I represent a district that is home to a 
large energy industry as well as farmers and ranchers who use 
derivatives to manage risk. Why should Congress exempt non-
financial companies from the margin requirements?
    Mr. Bopp. That is an excellent question. And the answer is 
because non-financial companies don't engage in the sorts of 
trades that create risk that would warrant margin requirements. 
Non-financial companies enter into derivatives transactions to 
manage risk. And baked into Dodd-Frank is a requirement that if 
a non-financial company is going to be eligible for the end-
user clearing exemption, they can only be eligible if they are 
hedging commercial risk. And so the types of transactions that 
they enter in, that end users enter into, and the fact that 
they are not speculating, they are managing their risk, in 
other words that the transactions offset risk within the 
company, all suggest that--not just suggest--but that margin 
requirements on non-financial companies are not only not 
needed, but would impose additional costs that simply are just 
not--that would be detrimental to these companies.
    Mr. Canseco. So do you feel that the actions by regulators 
have carried out the intent of Congress or do you feel that 
there is still some ongoing confusion regarding the end-user 
exemption?
    Mr. Bopp. We do not. We do not feel that the actions of 
regulators have carried out faithfully the intent of Congress. 
We do think that the CFTC margin rule is better and closer to 
the intent of Congress than the prudential regulators margin 
rule. But the prudential regulators margin rule would impose 
margin requirements on end users. And they believe, the 
prudential regulators believe that the Dodd-Frank Act, as 
written, handcuffs them and does not give them enough authority 
such that they don't have to impose margin requirements on end 
users. We simply do not believe that regulators should be in 
the room second-guessing the decisions made by corporate 
treasurers and their swap dealer counterparties.
    Mr. Canseco. Thank you, Mr. Bopp. I see my time has 
expired.
    Chairman Garrett. The gentleman's time has expired. We will 
just run through--I have a couple of questions, but I won't 
take the whole 5 minutes.
    Mr. Deutsch, we have talked earlier about October 12th and 
prior to that and all the exemptions that have come out from 
that point in time. Can you speak to your position with regard 
to the exemptions, which are obviously temporary, right, with 
regard to commodity pools and basically, as I understand the 
situation, in securitization, that you basically have swaps 
within the securitization and the exemption gives you some 
really temporarily on this but not overall? What does that do 
to the marketplace now and what relief permanently you would be 
looking for?
    Mr. Deutsch. Sure. Over the summer, I think the 
securitization market kind of put a lot of pieces together and 
realized that the commodity pool regulations may actually rope 
in securitizations to be called commodity pool operators which 
are by definition operated for the purpose of trading in 
commodity interest. Most plain-vanilla securitizations, auto 
loan securitizations, credit card, mortgage securitizations, 
really aren't conceived at all for the purpose of commodity 
interest, but instead to fund credit fundamentally. We 
approached the CFTC in June and many follow-up letters and 
dialogue with the CFTC staff and Commissioners and Chairman 
Gensler himself to get appropriate relief to make sure it is 
very clear that securitization should not be roped into those 
commodity pool regulations.
    Chairman Garrett. Part of the argument there is that 
securitization is already regulated.
    Mr. Deutsch. Correct. There is a significant amount of 
regulations from the SEC and other various parts from, say, 
Dodd-Frank and otherwise, and particularly the transparency 
issues, if a securitization has a swap in it the disclosure 
requirement's required by the SEC, not from the CFTC.
    So we are already effectively sort of covered by the 
transparency-related issues. The real question is, does 
securitization use swaps for kind of investment exposure to 
take investment risk? And in most instances they don't take any 
investment risk, they are really trying to hedge risk for the 
investor's benefit to eliminate, say, currency or interest rate 
swaps. So far, we have gotten no-action relief or interpretive 
guidance both on October 11th and then also most recently this 
past Friday that provides for some legacy relief from the staff 
for all outstanding transactions and then extension of the 
compliance deadline for other transactions until March 31st. So 
we look forward to working with the CFTC staff on the 
additional transactions that their relief hasn't covered 
already. There are certain types of transactions that still may 
not fall within the four corners of that relief.
    But the hope is that these transactions and the market 
participants simply don't have to start preparing to comply 
when they won't have to comply, in effect. There are many types 
of transactions that just clearly aren't commodity pool 
operators, and so far at this point, we have gotten most of 
what we need, but I think there are still some key areas to 
evolve the guidance by March 31st.
    Chairman Garrett. Okay.
    One other question. Ms. Cohen, you heard the previous 
discussion with regard to definition of U.S. personnel. Do you 
want to share your perspective there?
    Ms. Cohen. Absolutely. Thanks again for the question. We do 
think that there are risks to a ``U.S. person'' definition that 
is too broad. One of the risks--we were talking earlier about 
unintended consequences--is again that you can have a market 
participant who is a U.S. person, an EU person, and maybe not 
an SEC U.S. person, and that market participant could 
potentially optimize around what person or combination of 
people they want to be. And that is potentially an unintended 
consequence.
    I think really the guiding principle, I think that the U.S. 
person definition has to be addressed in two ways. Number one, 
the immediate need for a clear, consumable definition, and 
specifically the one to which we have been implementing, so 
that we can go live with a number of very important rules, such 
as SDR reporting business conduct that will really position us 
showing leadership to the rest of the world on key aspects of 
derivative reform. We need that clarity so that we can start in 
the next 3 weeks.
    And then over time, in consultation with other stakeholders 
here and around the world, whatever definition of U.S. person 
is ultimately decided upon has to be something that is clear, 
consumable, and not debatable from firm to firm. We don't want 
firms competing on whether or not they see a specific entity as 
a U.S. person. And I would add that one of the accomplishments 
of Dodd-Frank that is already under way is that all entities 
that participate in the financial marketplace register for 
legal entity identifiers, and when they do that, they register 
a country of organization. I can go to the Web site, you can go 
to the Web site, we can all see whether their country of 
organization is in the United States or not. That is the level 
of clarity that we need for the ``U.S. person'' definition.
    Chairman Garrett. So it sounds like where we stand now, we 
are creating a schizophrenic definition, schizophrenic U.S. 
person with multiple personalities.
    Ms. Cohen. The clients that I talk to every day cite that 
as their number one confusion.
    Chairman Garrett. Okay. My time is up. The gentleman from 
Arizona for last questions.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Mr. Giancarlo, okay, I am sorry, back to our running 
through this before. Okay. So on swaps futures what would you 
change?
    Mr. Giancarlo. We believe, and I just want to clarify my 
remarks before if they weren't clear, we believe that margins 
should be the same for economically equivalent swaps or 
futures. The name should not determine the margin if they are 
economically equivalent. Perhaps you didn't understand that.
    Mr. Schweikert. And we may have to drill down into that 
one, because I think I have a couple of articles that talk 
about, and maybe I need to learn more on sort of the risk side 
on the margins actually being somewhat equivalent.
    Mr. Giancarlo. But, say, in the North American natural gas 
and electric power markets, which were formerly swaps and that 
moved over the course of a weekend into futures, the liquidity 
in those markets did not change. But what changed from Friday 
to Monday was the margin that market participants--
    Mr. Schweikert. Was the margin also the fact of having to 
go do the types of registration?
    Mr. Giancarlo. The registration for non-traditional dealers 
facing the prospect of registering as dealers drove them into 
futures, so the regulatory arbitrage drove it. But also, the 
margin changed. And the point I was making is that we are 
creating systemic risk if in fact--
    Mr. Schweikert. Back to the original part of the question, 
what would you change? If you saw this as a problem, what would 
you fix?
    Mr. Giancarlo. Okay. So a number of things. The first is 
the margin, as I said. Second, there are a number of other 
arbitrageable differences. One is in fact that exchanges set 
their own block trade sizes. Those are commercial entities. 
They take commercial advantage of that. In swaps the CFTC has 
taken for itself the right to set block size notwithstanding, I 
think, the fairly clear language of Dodd-Frank that says that 
SEFs should be setting block sizes. So now in one case of 
futures you have exchanges setting block sizes, in the case of 
swaps, you have the regulator, the non-commercial regulator 
setting block sizes. And that is going to be another 
opportunity for arbitrage for market participants in choosing 
one product over another.
    Another area is the timing of trade reporting. Congress 
established a swap data reporting regime for swaps. That regime 
doesn't exist in futures. Arguably, that regime is what 
Congress intended, but now we are seeing products move away 
from Congress' intention to have that type of reporting regime. 
There are business conduct rules that apply to swaps that don't 
apply to futures. So there is a whole series now of 
implications of that movement from one product to the other, 
but there is no real change in the economic nature of the 
products themselves.
    Mr. Schweikert. Okay. And this is for anyone else on the 
panel, probably Mr. Deutsch. Is this something I should fret 
about?
    Mr. Deutsch. I think the margining rules that we focused on 
are something that we fret about quite consistently and are 
very concerned about on a go-forward basis, that if 
securitization transactions, as an example, are required to 
post margin, particularly liquid margin, in the 10 to 20 
percent range on a deal, reducing consumer credit by $4 billion 
to $8 billion in the auto market today, that would 
significantly change the auto landscape, we think.
    Mr. Schweikert. Do others on the panel see a migration 
here? Is this sort of the unintended consequences? Mr. Parsons?
    Mr. Parsons. Yes. I think there is a certain amount of 
inevitability here. When the Dodd-Frank Act was passed, the OTC 
swaps market sold itself as doing customized instruments. Now 
we are learning that a vast amount of what the OTC swaps market 
does is economically equivalent to what can be done on the 
futures market. So you have to eventually decide should the 
swaps regulations be set for a market that is customized, which 
will be one set of regulations, or should it be set for a 
market that is standardized. But right now it was done as if 
they were all customized but they aren't.
    Mr. Schweikert. Yes. And that was almost where I was before 
in the previous question. Does anyone else think this is worthy 
of our focus?
    Mr. Bailey. Speaking as Barclays, rather than the IIB, I 
would just note that it is perhaps a curiosity that a market 
maker in swap futures doesn't have to register as a swap 
dealer, which I think was part of the reason why that was such 
a critical date, the October 12th instance, that it precluded 
you from having to count obviously those swaps in the tally 
whether or not you had to register. But I would say that 
absolutely futures has a place in the future representation of 
the derivative market for swaps. It is just a question of 
whether or not it is intellectually consistent with the 
treatment of other products in the same space.
    Mr. Schweikert. And there becomes my fear of a market that 
actually seems pretty efficient, the fear of actually doing 
damage when we are trying to make other things work at the same 
time, and back to our law of unintended consequences.
    Mr. Chairman I yield back. Thank you.
    Chairman Garrett. Thank you.
    And the gentleman from Texas with a final word.
    Mr. Canseco. Thank you, Mr. Chairman. Just a few follow-up 
questions.
    Ms. Cohen, with regards to cross-border regulations, do you 
feel that the SEC and the CFTC should harmonize the cross-
border approaches before implementing them?
    Ms. Cohen. I think, just like product definitions and 
entity definitions, cross-border application of the derivative 
provisions is foundational to implementing derivatives reform. 
And I would also note that a major area of distinction between 
the U.S. approach to derivatives reform and the rest of the G-
20 is that we do have these two regulators who are responsible 
for different products, and that creates confusion, more 
confusion around the rest of the world as they look and try to 
understand the system to which we are implementing. So I think 
that there are certain areas where it is much more acute than 
others that the two regulators coordinate tightly, and cross-
border guidance is one of the most significant.
    Mr. Canseco. Thank you. Would anyone else on the panel like 
to weigh in on this issue?
    Mr. Bopp, following up what I was asking earlier, if 
regulators decide to impose margin and capital requirements on 
end users do you feel there is a possibility that companies 
could begin to use markets outside the United States to manage 
their risk, in other words a flight of business out of the 
United States?
    Mr. Bopp. It is an excellent question, and it is a question 
that I think our member companies have to think about. We heard 
from Chairman Gensler that the CFTC is trying to make its rules 
coherent and consistent with foreign rulemaking as well. If the 
prudential regulators, if we can bring them in and the rules 
can become consistent and consistently applied, we are still 
hopeful that we can get some relief from margin requirements on 
a regulatory basis and not have to have legislation passed. 
Now, that said, the legislation is still critical at this point 
because, as Chairman Bernanke testified earlier this year, the 
Fed believes that its hands are tied and that it has to impose 
margin requirements even on non-financial end users.
    Mr. Canseco. So you think that it will jeopardize the 
flight of business out of the United States and into other 
markets?
    Mr. Bopp. I think that is an option that companies have to 
think about. And I know that some certainly are giving it some 
thought. I don't think that it is an option that they want to 
take advantage of. I think that what companies are hoping for 
is some rationality, and that congressional intent behind Dodd-
Frank will eventually prevail.
    Mr. Canseco. Thank you, Mr. Bopp.
    I yield back.
    Chairman Garrett. The gentleman yields back. That concludes 
the questioning. And I very much thank this entire panel, both 
for your testimony that you gave here just now and also for 
your written testimony which we and our staffs have reviewed 
previous to this. So I thank you for that. I get a lot of 
different takeaways from this. And it was good that we had this 
panel following the first panel to see actually how the 
implementation of Title VII by the CFTC specifically is panning 
out, and we may be actually getting into that, as I said 
before, schizophrenia situation on more ways than one as far as 
this plays out in the weeks and months ahead.
    So I thank this panel.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    This hearing is now adjourned. Good day.
    [Whereupon, at 1:50 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           December 12, 2012


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