    [Senate Hearing 112-276]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 112-276

                               OVERSIGHT HEARING:
                       IMPLEMENTATION OF TITLE VII OF THE
                 WALL STREET REFORM AND CONSUMER PROTECTION ACT

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

                                    HEARING

                                   before the

                           COMMITTEE ON AGRICULTURE,
                             NUTRITION AND FORESTRY

                              UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 3, 2011

                                   __________

                           Printed for the use of the
                Committee on Agriculture, Nutrition and Forestry

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                COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY

                     DEBBIE STABENOW, Michigan, Chairwoman

    PATRICK J. LEAHY, Vermont            PAT ROBERTS, Kansas
    TOM HARKIN, Iowa                     RICHARD G. LUGAR, Indiana
    KENT CONRAD, North Dakota            THAD COCHRAN, Mississippi
    MAX BAUCUS, Montana                  MITCH McCONNELL, Kentucky
    E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
    SHERROD BROWN, Ohio                  MIKE JOHANNS, Nebraska
    ROBERT P. CASEY, Jr., Pennsylvania   JOHN BOOZMAN, Arkansas
    AMY KLOBUCHAR, Minnesota             CHARLES E. GRASSLEY, Iowa
    MICHAEL BENNET, Colorado             JOHN THUNE, South Dakota
    KIRSTEN GILLIBRAND, New York         JOHN HOEVEN, North Dakota

                 Christopher J. Adamo, Majority Staff Director

                  Jonathan W. Coppess, Majority Chief Counsel

                        Jessica L. Williams, Chief Clerk

                  Michael J. Seyfert, Minority Staff Director

                    Anne C. Hazlett, Minority Chief Counsel

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    Oversight Hearing: Implementation of Title VII of the Wall Street
      Reform and Consumer Protection Act.............................     1

                                  ----------

                            Thursday, March 3, 2011
                        STATEMENTS PRESENTED BY SENATORS

    Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan,
      Chairwoman, Committee on Agriculture, Nutrition and Forestry...     1
    Roberts, Hon. Pat, U.S. Senator from the State of Kansas.........     2

                                    Panel I

    Gensler, Hon. Gary, Chairman, Commodity Futures Trading
      Commission, Washington, DC.....................................     4
    Schapiro, Hon. Mary, Chairman, U.S. Securities and Exchange
      Commission, Washington, DC.....................................     6

                                    Panel II

    Bunkin, Steven M., Managing Director and Associate General
      Counsel, Goldman Sachs, New York, New York.....................    27
    Duffy, Terrence A., Executive Chairman, CME Group Inc., Chicago,
      Illinois.......................................................    25
    Greenberger, Michael, Law School Professor and Director, Center
      for Health and Homeland Security, University of Maryland School
      of Law, Baltimore, Maryland....................................    30
    Harlan, Jill, Corporate Risk Manager, Caterpillar, on behalf of
      the Coalition for Derivatives End Users, Peoria, Illinois......    24
    Thompson, Larry, General Counsel, Depository Trust and Clearing
      Corporation (DTCC), New York, New York.........................    28
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Brown, Hon. Sherrod..........................................    44
        Chambliss, Hon. Saxby........................................    47
        Cochran, Hon. Thad...........................................    50
        Harkin, Hon. Tom.............................................    52
        Bunkin, Steven M.............................................    54
        Duffy, Terrence A............................................    60
        Gensler, Hon. Gary...........................................    81
        Greenberger, Michael.........................................    92
        Harlan, Jill.................................................   120
        Schapiro, Hon. Mary..........................................   124
        Thompson, Larry..............................................   133
    Question and Answer:
    Stabenow, Hon. Debbie
        Written questions for Hon. Gary Gensler......................   151
        Written questions for Hon. Mary Schapiro.....................   180
        Written questions for Larry Thompson.........................   201
    Roberts, Hon. Pat
        Written questions for Steven Bunkin..........................   146
        Written questions for Terrence A. Duffy......................   148
        Written questions for Hon. Gary Gensler......................   154
        Written questions for Jill Harlan............................   178
        Written questions for Hon. Mary Schapiro.....................   182
        Written questions for Larry Thompson.........................   201
    Chambliss, Hon. Saxby
        Written questions for Hon. Gary Gensler......................   172
        Written questions for Hon. Mary Schapiro.....................   194
    Cochran, Hon. Thad
        Written questions for Hon. Gary Gensler......................   175
        Written questions for Hon. Mary Schapiro.....................   195
    Gillibrand, Hon. Kirsten
        Written questions for Hon. Gary Gensler......................   171
        Written questions for Hon. Mary Schapiro.....................   193
    Harkin, Hon. Tom
        Written questions for Hon. Gary Gensler......................   166
        Written questions for Hon. Mary Schapiro.....................   189
    Leahy, Hon. Patrick J.
        Written questions for Hon. Gary Gensler......................   164
        Written questions for Hon. Mary Schapiro.....................   185
    Nelson, Hon. E. Benjamin
        Written questions for Hon. Gary Gensler......................   170
    Bunkin, Steven M.
        Written response to questions from Hon. Pat Roberts..........   146
    Duffy, Terrence A.
        Written response to questions from Hon. Pat Roberts..........   148
    Gensler, Hon. Gary
        Written response to questions from Hon. Debbie Stabenow......   151
        Written response to questions from Hon. Pat Roberts..........   154
        Written response to questions from Hon. Patrick Leahy........   164
        Written response to questions from Hon. Tom Harkin...........   166
        Written response to questions from Hon. Ben Nelson...........   170
        Written response to questions from Hon. Kirsten Gillibrand...   171
        Written response to questions from Hon. Saxby Chambliss......   172
        Written response to questions from Hon. Thad Cochran.........   175
    Harlan, Jill
        Written response to questions from Hon. Pat Roberts..........   178
    Schapiro, Hon. Mary
        Written response to questions from Hon. Debbie Stabenow......   180
        Written response to questions from Hon. Pat Roberts..........   182
        Written response to questions from Hon. Patrick Leahy........   185
        Written response to questions from Hon. Tom Harkin...........   189
        Written response to questions from Hon. Kirsten Gillibrand...   193
        Written response to questions from Hon. Saxby Chambliss......   194
        Written response to questions from Hon. Thad Cochran.........   195
    Thompson, Larry
        Written response to questions from Hon. Debbie Stabenow......   201
        Written response to questions from Hon. Pat Roberts..........   201

                               OVERSIGHT HEARING:

                       IMPLEMENTATION OF TITLE VII OF THE

                        WALL STREET REFORM AND CONSUMER

                                 PROTECTION ACT

                                  ----------

                            Thursday, March 3, 2011

                                  United States Senate,
              Committee on Agriculture, Nutrition and Forestry,
                                                         Washington, DC
        The Committee met, pursuant to notice, at 2:34 p.m., in
    room SR-328A, Russell Senate Office Building, Hon. Debbie
    Stabenow, Chairman of the Committee, presiding.
        Present: Senators Stabenow, Klobuchar, Bennet, Gillibrand,
    Roberts, Chambliss, Johanns, Boozman, Thune, and Hoeven.

    STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
     OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION
                              AND FORESTRY

        Chairwoman Stabenow. I am calling the meeting to order, and
    let me, before formally beginning--certainly welcome and good
    afternoon. We were just commenting upon the candy that is here.
    I have been looking for some dried cherries or blueberries to
    bring in for the Committee, and Senator Roberts beat me to it
    with--where is this candy from, Senator Roberts?
        Senator Roberts. Madam Chairwoman, they are from Abilene,
    Kansas, home of Dwight David Eisenhower. It is just one to a
    member and one to the people who are testifying, and then the
    people who share my views get two.
        Chairwoman Stabenow. Get two, okay.
        [Laughter.]
        Chairwoman Stabenow. Well, thank you. Thank you for the
    treats. Good afternoon, everyone, and we want to thank our two
    Chairmen for joining us today--we very much appreciate your
    time--and the other witnesses that will be with us, and we are
    here today, as we know, to discuss an extremely important part
    of the Committee's jurisdiction: oversight of derivative
    reforms and the Wall Street Reform and Consumer Protection Act.
        Derivatives are a significant part of our financial markets
    and play an important role in our economy. More than 38 million
    Americans work at companies that use derivatives to manage
    their risk, and many more from pensions to municipalities use
    them to protect against market volatility.
        Unfortunately, derivatives also played a very significant
    role in the failure that led to the financial crisis. Before
    regulatory reform, swaps were trading over the counter, off
    exchange, and in the dark. The result was that people who had
    saved money and played by the rules saw their 401(k)s plummet
    in value. Small businesses and farmers could not get the credit
    they needed to keep the lights on. Many had to close their
    doors permanently. Before it was over, 8 million Americans had
    lost their jobs.
        Last year, Congress passed the Wall Street Reform and
    Consumer Protection Act to address the abuses in these markets
    and to give significant authority to our regulators to prevent
    future crises. During that debate I fought to ensure that the
    bill preserved the ability of American farmers, co-ops,
    manufacturers, utilities, and businesses to use derivatives for
    legitimate business purposes. They use derivatives to protect
    themselves from fluctuating currency exchange rates, interest
    rates, fuel prices, and commodity prices. This risk protection
    provides companies with the certainty to be able to grow and to
    be able to create jobs.
        While Congress greatly expanded the authority of the SEC
    and the CFTC, that authority came with a warning: not to
    overreach. These agencies must follow congressional intent and
    protect end users from burdensome margin requirements which, if
    imposed, would divert much needed capital from investments in
    job creation.
        Chairman Gensler, Chairman Schapiro, I hope you have
    considered how new rules with fit together in a way that makes
    sense for the markets, whether that is phasing in
    implementation or carefully sequencing the rules. We must make
    sure that market infrastructure is in place, the technology is
    ready, and that market participants are able to meet the
    requirements of this law.
        The new accountability and transparency we have created is
    clearly in the public interest, and the most important thing is
    to get it right.
        We also know there are serious budget constraints, and I am
    concerned that if our agencies do not have the tools that you
    need, we are asking for a repeat of the crisis that cost, as I
    mentioned, 8 million American jobs.
        It is also critical that the system be able to adapt to the
    significant changes in the law. These are dynamic, diverse
    markets, and we need to provide as much certainty as possible.
        I look forward to working with everyone involved to make
    sure that we are getting the implementation of these reforms
    right to protect our system from another crisis while
    maintaining the competitiveness of U.S. farmers, businesses,
    and financial markets.
        I would now like to yield to my distinguished Ranking
    Member, Senator Roberts.

     STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
                                 KANSAS

        Senator Roberts. Thank you, Madam Chairwoman, and
    especially for holding what should be the first of several
    hearings regarding the implementation of the derivatives
    provisions included in the Dodd-Frank Wall Street Reform Act.
        Now, you and I are new in this particular leadership
    position on this Committee. We have the privilege of doing
    that. But we are not new, Madam Chairwoman, to the very
    important issues surrounding derivatives regulation. We have
    both worked very hard, albeit from the different perspectives,
    on the Dodd-Frank bill as it went through the Senate last year,
    yet we share similar ultimate goals of properly reforming the
    derivatives markets while maintaining robust and liquid markets
    to allow our farmers and ranchers and commercial end users to
    manage risk and to discover market-driven prices.
        I think it is fair to say that, as the Ranking Republican
    of this Committee, I would have preferred a more measured
    approach than what was passed, but I am optimistic that the
    regulators, specifically the Commodity Futures Trading
    Commission and the Securities and Exchange Commission have
    sufficient discretion in their newly granted authorities to
    ensure that we stay competitive and do no harm to our domestic
    markets, exchanges, or users. I sincerely hope that you use it.
        That being said, I want to stress that the Dodd-Frank
    derivatives provisions reach far beyond financial firms. It
    will impact every segment of our economy from farmers and
    ranchers to manufacturers to energy companies to health care
    and to technology. Dodd-Frank gave the CFTC and the SEC nearly
    limitless authority with regard to the regulation of those
    derivatives, formerly known as over-the-counter swaps.
        Now, proponents of the derivatives portion of Dodd-Frank
    surely believe it will prevent the next financial meltdown, and
    I hope that that is true. However, the regulation provisions of
    Dodd-Frank go well beyond dealing with credit default swaps,
    which, as far as I can tell, were the only derivatives ever
    mentioned as being part of the financial crisis, and completely
    regulate every aspect of every swap and every swap user,
    including a whole lot of people and businesses who had nothing
    to do with causing the financial crises.
        So, the CFTC and the SEC have a lot of authority, and that
    does worry some folks. If our regulators stay focused, as
    indicated by the Chairwoman, on only writing regulations that
    truly reduce systemic risk and avoid actions that will
    unnecessarily raise risk management costs, then American
    farmers and businesses will be able to keep managing their
    business risk with derivatives in an economically sustainable
    manner.
        Madam Chairwoman, with the fragile state of the economy
    today, we need to ensure that all new derivatives regulations
    and, for that matter, any regulation meets two tests: it must
    lower the systemic risk and, two, costs cannot outweigh any
    benefits. With the globalization of derivative markets, we need
    to ensure our regulators are exercising their authority in a
    manner that ensures we will continue to have thriving domestic
    derivatives markets.
        I look forward to hearing from our witnesses today, and I
    thank them for their time.
        Chairwoman Stabenow. Thank you very much, Senator Roberts.
    And let me stress what you said in your opening statement as
    well, that this is the first but not only oversight hearing,
    and I look forward to working with you on this.
        In the interest of time, we will ask other members to
    submit their opening statements for the record, and we want to
    welcome our two distinguished Chairmen, Chairman Gensler and
    Chairman Schapiro, and we would ask, Chairman Gensler, if you
    would provide us with your comments.
        Senator Chambliss. Madam Chairwoman?
        Chairwoman Stabenow. Yes, Senator Chambliss.
        Senator Chambliss. Before you turn to them, can I just make
    a quick statement? Since this is the first opportunity I have
    had to attend a hearing with you taking over the chairmanship
    and with my shotgun rider here for the last 6 years being the
    Ranking Member, I just want to tell you we are very proud of
    you. Congratulations to you for assuming the chairmanships, and
    it is going to be a fun time over the next couple of years. And
    I know under your leadership and with Pat's assistance, we are
    going to continue to work in a very strong and bipartisan way,
    and I want to commend and congratulate both of you.
        Chairwoman Stabenow. Well, thank you. Thank you very much.
    It was a pleasure to work with you on the last farm bill in
    your position as Ranking Member, and we spent a lot of time
    working together to get that done, and I am looking forward to
    doing it again. So thank you very much.
        Chairman Gensler.

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

        Mr. Gensler. Good afternoon, Chairwoman Stabenow, Ranking
    Member Roberts, and members of the Committee. I thank you for
    inviting me here to testify on the Dodd-Frank Act, and I am
    pleased to testify on behalf of the Commission. I also thank my
    fellow Commissioners and CFTC staff for all their hard work and
    commitment to implementing the legislation.
        I am pleased to testify along with Chair Schapiro. I think
    it is probably the 10th or 12th time we have done this together
    over the 2 years, and the work between the staffs of the two
    agencies has been very close. We have formed a great
    partnership, and I think it is a great partnership as well.
        Before I mention the testimony, I do want to congratulate
    the new Chair. I know it has been a difficult week. I read your
    statement and I express my condolences to you and your staff on
    your loss. It sounds like a wonderful individual.
        I also congratulate Senator Roberts. I hope that from time
    to time I will get that second chocolate, that we will agree.
        The CFTC is working very closely with the SEC and other
    regulators in the U.S. to implement Dodd-Frank. We also are
    coordinating and consulting with international regulators to
    harmonize the oversight of the market. And we have received
    thousands of comments from the public, both before the
    proposals were made and during public comment periods, that
    have helped inform the Commission.
        At this point in the process, the CFTC has come to a
    natural pause. We have actually proposed rules in 28 of the 31
    topic areas that the rule lays out. We do have three important
    topics to move forward on, and we anticipate at least on the
    two major ones to do that hopefully in the next month or 6
    weeks.
        As we receive comments from the public, we are looking at
    the whole mosaic, and hopefully the public is able to look at
    the whole mosaic as it is out there now.
        Two components that we have asked the public specifically
    on is phasing of implementation, particularly with regard to
    the cumulative effect of these rules, and the cost/benefit
    analysis. The public comments will help inform the Commission
    as to what requirements can be met sooner and what requirements
    need to be phased over time.
        Further, asking the public is one of the best ways to
    actually get a clearer picture on the cost and benefits of
    proposed rules as they bring those estimates and thoughts to
    us.
        We will begin considering final rules only after the staff
    can analyze, summarize, and consider the comments, only after
    the Commission is actually able to discuss the comments and
    provide feedback from a wonderful five-person Commission to the
    staff and only after the Commission also consults with the SEC
    and the other Federal regulators and the international
    regulators. So this will take some time. We do not yet have any
    scheduled or planned final rule hearings. But as we bring this
    together, some of the, I will say, easier ones we will move on
    earlier, and others will certainly be over the course of the
    summer. And we are human. I will say it again. The July 15th
    deadline I do not think needs to change, but some of these
    rules will certainly be finalized after the July 15th date.
        One proposed rule that I did want to comment on is with
    regard to margin. With the Dodd-Frank Act, Congress did
    recognize different levels of risk posed by different
    transactions in financial entities and the non-financial
    entities. This is what you took up in the clearing exemption.
        Consistent with that, proposed rules on margin
    requirements--the CFTC I am speaking for--should focus only on
    transactions between financial entities rather than those
    transactions that involve non-financial end users. And as I
    mentioned, I think that we will probably take up that proposal
    towards the early part of April.
        Before I conclude, I will briefly address the resource
    issue. We appreciate the difficult decisions that Congress and
    our great Nation face with regard to the budget deficit. Even
    in this context, the CFTC we believe is a good investment. Its
    mission is to promote transparent, open, and competitive
    markets, lowering the cost to end users and helping promote
    economic activity. The CFTC has a key role to play in
    overseeing derivatives markets for key commodities, including
    agricultural, energy, metal, and also financial products.
        Now, the U.S. futures market is about $40 trillion notional
    size; the U.S. swaps market, about $300 trillion size. We will
    share some of that responsibility, but it is about 7 times the
    size of what we oversee now, and it is far more complex.
        Last month, the President submitted a fiscal year 2012
    budget--so for next year, not this year--of $308 million. That
    would be up from our current funding of $168 million. The CFTC,
    at about 675 people, is not that much different in size than we
    were 16, 18 years ago. In the early 1990s, we were 634.
    Unfortunately, we did shrink all the way down to the crisis
    when we were only 440 people in 2008.
        So only last year with this Committee and all of Congress'
    help did we get back to our head count of where we were in the
    1990s. But staff is not enough. We will also need technology.
    Technology is the best way to be efficient as a regulator, and
    leveraged resources to the President's budget in 2012 would
    actually double our resources for technology, remarkably just
    from $31 million up to $66 million, far less than most of the
    large dealers spend in technology in a month--actually less
    than most of them spend in a week. But it does ask for about 45
    percent more people.
        I look forward to working with Congress to get these rules
    in place, and I look forward to your questions.
        [The prepared statement of Mr. Gensler can be found on page
    81 in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Now, welcome, Chairman Schapiro.

    STATEMENT OF HON. MARY SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND
                  EXCHANGE COMMISSION, WASHINGTON, DC

        Ms. Schapiro. Chairwoman Stabenow, Ranking Member Roberts
    and members of the Committee, thank you for inviting me to
    testify today on behalf of the Securities and Exchange
    Commission regarding our implementation of Title VII of the
    Dodd-Frank Wall Street Reform and Consumer Protection Act. It
    is a pleasure to appear with my colleague Chairman Gensler.
        Title VII of the Dodd-Frank Act creates an entirely new
    regulatory regime for the previously unregulated over-the-
    counter derivatives market. In particular, it calls upon the
    SEC and the CFTC to write a substantial number of rules
    designed to bring greater transparency and oversight to the
    market. While implementing these provisions and meeting these
    goals is a complex and challenging undertaking, we recognize
    the importance of this task, and we are committed to getting it
    right.
        As part of that effort, we have engaged in a very open and
    transparent implementation process, seeking input from
    interested parties even before issuing formal rule proposals.
    In addition, our staff has sought meetings with a broad cross-
    section of market participants. We joined with the CFTC to hold
    public roundtables, and we have been meeting regularly with
    other domestic and international financial regulators to ensure
    consistent and comparable requirements across the rulemaking
    landscape.
        Title VII is intended, among other things, to reduce
    counterparty risk by bringing transparency and centralized
    clearing to security-based swaps, reduce systemic risk, protect
    investors by increasing disclosure, and establish a regulatory
    framework that allows the OTC derivatives market to continue to
    develop in a transparent, efficient, accessible, and
    competitive manner.
        To date, the SEC already has proposed ten swaps-related
    rules designed to achieve these goals. Among others, we have
    proposed rules that would address potential conflicts of
    interest at security-based swap clearing agencies, security-
    based swap execution facilities, and exchanges that trade or
    will trade security-based swaps; rules that would specify who
    must report security-based swap transactions; what information
    must be reported and where and when it must be reported; and
    then what information will be disseminated to the public; rules
    that would require security-based swap data repositories to
    register with the SEC; rules that would define security-based
    swap execution facilities and establish requirements for their
    registration and ongoing operations; and rules that would
    specify information that clearing agencies would provide to the
    SEC in order for us to determine if security-based swaps must
    be cleared and specify the steps that end users must follow to
    rely on their exemption from clearing requirements. And just
    yesterday, we proposed rules that would establish the standards
    for how clearing agencies should operate and be governed. In
    addition, with the CFTC, we have proposed rules regarding the
    definitions of many of the key terms within the Dodd-Frank Act.
        In the coming months, we expect to propose rules to
    establish registration procedures for security-based swap
    dealers and major security-based swap participants and rules
    regarding business conduct, capital, margins, segregation, and
    recordkeeping requirements for dealers and participants.
    Finally, we will also propose joint rules with the CFTC
    governing the definitions of swaps, security-based swaps, and
    the regulation of mixed swaps.
        We recognize the magnitude and the interconnectedness of
    the derivatives market, and so we intend to move forward at a
    deliberate pace, continuing to thoughtfully consider issues
    before proposing and certainly before adopting specific rules.
        The Dodd-Frank Act provides the SEC with important tools to
    better meet the challenges of today's financial marketplace and
    fulfill our mission to protect investors, maintain fair,
    orderly and efficient markets, and facilitate capital
    formation.
        As we proceed, we look forward to continuing to work
    closely with Congress, our fellow regulators and members of the
    financial community, affected end users, and the investing
    public.
        Thank you for inviting me to share with you our progress on
    and plans for implementation, and I look forward to answering
    your questions.
        [The prepared statement of Ms. Schapiro can be found on
    page 124 in the appendix.]
        Chairwoman Stabenow. Well, thank you very much to both of
    you, and let me thank you for your service. We have given you
    major new responsibilities and tremendous amount of hard work
    that I know that you and your staffs are involved with. And
    issues around resources make it even more challenging, so thank
    you very much for your service.
        The first question I would have is regarding the
    harmonization of the rules that you talked about. I have some
    concerns regarding coordination, both domestically and
    internationally. There are not only significant differences
    between the U.S. and Europe and Asia approaches to swap
    regulation, but also certain rules that are between agencies
    right now. For example, the SEC and the CFTC rules regarding
    swap execution facilities and the definitions, real-time trade
    reporting are different. Also, we are still waiting on the
    product definition rules. These are rules such as swap or mixed
    swap that require coordination between the agencies and have
    significant market and jurisdictional implications.
        Having a different set of rules that governs similar
    transactions could have negative impacts on the markets. What
    can you do to assure us that the agencies are working together
    to iron out the differences on these rules, first? Second,
    could you expand on your efforts to ensure that global
    financial regulation is harmonized to the maximum extent
    possible? And where do you think international regulators might
    take a different approach than what we are talking about in the
    U.S.? Chairman Schapiro?
        Ms. Schapiro. We are having trouble coordinating who should
    speak first, so that maybe does not bode well for----
        [Laughter.]
        Ms. Schapiro. I think to some extent there are differences,
    clearly, in the rules that have been proposed by the two
    agencies, and I think that that is perhaps to be expected, in
    part because we have two agencies in largely overlapping
    spaces; but I also think because to some extent we have
    products that, while they are over-the-counter derivatives, are
    actually quite different. And the narrow area that is under the
    regulatory auspices of the Securities and Exchange Commission's
    security-based swaps is a relatively small piece of the market
    and not a highly liquid piece of the market. So there may be
    some differences that arise just from the fact that we are, in
    fact, regulating different products.
        But what I would say is that, first of all, we are still
    only at the proposing stage, so there is opportunity for us to
    come together and have very highly consistent rules. Also,
    where we have proposed something slightly different than the
    CFTC, we have asked for comment on CFTC's approach in our
    releases so that we can understand whether industry or other
    commenters think the CFTC has a better approach than the one
    that we have proposed. And so we are looking also at all the
    comment letters the CFTC receives in response to their
    proposals.
        I think that we will continue to work together very, very
    closely. We meet on a consistent basis. Our staffs meet
    virtually continuously. We have held many meeting with industry
    in particular on a joint basis so we can hear the same comments
    at the same time, and we will continue to push forward to
    ensure that we have as consistent an approach as possible.
        I would just add one thing in that I think that while
    differences in the products we regulate might dictate some
    differences, if I could use the example of swap execution
    facilities, we will both have rules requiring chief compliance
    officers. I think the obligations of those chief compliance
    officers must be the same. We cannot put an institution through
    very different rule proposals or final rules. But at the same
    time, because of the difference in the products we regulate,
    there might be some reason to have different rules about how
    orders have to intersect and interact in the marketplace
    because of the nature of the products being different.
        So we are very focused on this issue, and I am happy to
    speak to international, but I will let Chairman Gensler go
    ahead, and then if you wish, I can come back to that.
        Mr. Gensler. I would just echo, I mean, I think that we are
    working very closely together. Maybe other than my fellow
    Commissioners, the four Commissioners at the CFTC that deserve
    any thanks that you have, it is for them as well. Chair
    Schapiro and I have spent an enormous amount of time, and I
    consider it a close working partnership. And I think I speak
    for probably a hundred plus other people at the agency who have
    similar partnerships with the SEC back and forth. We shared all
    our drafts with them. We shared our memos with them in
    September and August and continue to do that.
        In terms of international coordination, it has been very
    positive. It is more than our two agencies. Of course, it is
    the Treasury and the Federal Reserve and the FDIC as well. I
    plan to be back over in Europe again in a couple of weeks in
    front a committee somewhat similar to this but in the European
    Parliament. They are currently considering and taking up rules
    that are very similar to what we have here on clearing, on data
    repositories--and, yes, they have an end user exception that is
    very similar to ours--and on dealer oversight. They are
    separately looking at something called MiFID reform, which is
    about trading, and that is a little later in timing.
        We have shared with them directly many of the drafts with
    the European Commission, the folks in London, the FSA. We even
    shared with Tokyo and Canada some of our drafts and got
    comments from them, though we do have different cultures and
    politics so there will be some differences. But I feel good
    that we are trying our best and they are, too.
        Chairwoman Stabenow. Well, thank you. In the interest of
    time here--my 5 minutes are almost up--let me just ask one
    thing about end users because you know how strongly I feel, and
    I hope the Ranking Member shares that as well. I am concerned
    about that there are differences--Chairman Gensler, you have
    said you will not impose margin on end users, but there is a
    difference with the Federal Reserve looking at a proposal for
    end users, and I am wondering if you are still committed to
    following congressional intent as it relates to this, not to
    apply this for end users and their affiliates. And how are you
    coordinating with the Federal Reserve?
        Mr. Gensler. To the first part of your question, yes, for
    the CFTC Congress gave both of our agencies oversight for
    capital margin for non-banks, for the various products we
    oversee. We are working very closely with the banking
    regulators. We have been since August on this topic and are
    very close. So I cannot speak for them. They can speak for
    themselves. But I think we are looking to try to take up rules,
    as I said, in that early part of April and maybe even try to do
    it all on the same day, if that was possible.
        Chairwoman Stabenow. Thank you.
        Senator Roberts?
        Senator Roberts. Thank you, Madam Chairwoman.
        For both of you, thank you again for coming. The President
    recently issued an Executive order--it got a lot of notice and
    made the press; very happy to see that--that intended to cut
    through the red tape and needless regulations all throughout
    Government, which I think all of us support. Unfortunately, his
    Executive order does not apply either to the SEC or the CFTC. I
    said ``unfortunately.'' Perhaps you believe fortunately.
        I recently introduced legislation that would correct that
    oversight and I think would be a very good starting point for
    reviewing not only the regulations being proposed by the SEC
    and the CFTC in the implementation of Dodd-Frank, which is why
    we are here today, but also to all of the economically
    significant regulations being pushed out by Cabinet agencies
    across the board and across the country.
        During a CFTC public meeting last week, Commissioner
    Sommers noted that all of the CFTC's proposed rulemakings for
    Dodd-Frank contain what we might call boilerplate language
    stating--and I am stating here--the CFTC has not attempted to
    quantify the cost of the proposal because Section 15(a) of the
    Commodity Exchange Act does not require the Commission to
    quantify the cost--we talked about this a little bit when you
    had the courtesy to come to my office, and we had a nice
    visit--and that the CFTC is merely obligated to consider costs
    and benefits without determining whether the benefits outweigh
    the costs.
        I agree with Commissioner Sommers that the CFTC should
    quantify the costs of its proposal, especially when the
    original goal of the legislation was to reduce systemic
    financial risk.
        Chairman Gensler, given the importance of getting these
    rules right, will you commit to voluntarily included a
    meaningful cost/benefit analysis prior to issuing any final
    rules? And that question would also apply to Chairwoman
    Schapiro.
        Mr. Gensler. We at the agency are committed to do that, and
    it is also in our statute. Congress took this up, I do not
    know, probably more than a decade ago and included it directly
    in our statute, as you said, Section 15(a). And more broadly,
    with regard to the President's Executive order, we actually are
    following the key principles in there about public involvement.
    We have also said that we will take up within 120 days is that
    it asks to have a plan to look at our entire rulebook, not just
    related to Dodd-Frank, but to have the plan to look at the
    whole rulebook. That might be later this year. And one of the
    best ways to actually learn about costs and benefits is also to
    ask the public.
        And so what we have asked each of our teams to do is to
    take all of the public comments, these thousands of comments,
    and summarize it and that we as Commissioners will consider
    each of those detailed comments from the public on the costs
    and, as I said, the benefits, quantities as well as qualitative
    issues that the public raises with us.
        Ms. Schapiro. Senator, we actually consider economic data
    to really be core and central to all of our rulemaking
    proposals, and so we do include a cost/benefit analysis in our
    proposals, and we ask for comment on that and we will evaluate
    before we go final. I think specifically the language we look
    to is the economic implications of proposed rules under our
    statute.
        We also consider the impact of our rules on competition
    under the Securities Exchange Act. We have to do a Paperwork
    Reduction Act analysis so we can understand the burdens of
    information collection because, as you can imagine, we have
    lots of reporting rules. We do a regulatory flexibility
    analysis to understand the impact of our rules on small
    businesses. And as with the CFTC, we routinely ask people to
    provide us with economic analysis and data that we can
    incorporate into our rulemaking process.
        We are also following a very public notice and comment
    process for all our rules, which is suggested under the
    President's Executive order. And we have made a determination
    that we would on a voluntary basis look at our existing rules,
    particularly with respect to their impacts on small businesses,
    to see if there are things we can do to facilitate small
    business capital formation going forward.
        Senator Roberts. So I take it from both of your answers
    that the answer is yes.
        Ms. Schapiro. Yes. A very long way.
        Senator Roberts. I have just a few seconds here, but,
    Chairman Gensler, I have a CFTC-specific question about the
    current budget situation. Your testimony states that you
    operate on $169 million per year. The President requested $308
    million. As you have indicated, the other body is
    contemplating--i.e., the House budget--about $112 million.
        My question is: You have 680 employees apparently
    transferring from the information technology budget to avoid
    some layoffs. This concerns me given the fact that these new
    regs will require significant technological investments--we
    have talked about that--to administer. There is already a self-
    regulating body. The National Futures Association looks like it
    will be quite capable of shouldering some of the burden, if not
    a lot of the burden, of these implementation issues.
        Question: How will you handle Dodd-Frank implementation if
    the Commission stays at or below its current funding level? How
    will you prioritize the regulatory enforcement? Shouldn't we at
    least define swap first and know what we are regulating? And
    what role do you see, if any, for the National Futures
    Association in implementation?
        I apologize for being over time to my colleagues and the
    Chairwoman.
        Chairwoman Stabenow. That is perfectly fine. It is an
    important question, but I would ask you both to be brief.
        Mr. Gensler. If we were actually rolled back to the 2008
    levels, we could not ensure the public that we can fulfill our
    mission on the futures market let alone take on swaps. We only
    had 440 people in 2008. Particularly if it came in the middle
    of the year, we would have to have reductions in force far more
    significant to smaller than that.
        On technology, I agree with the Senator very much. It is a
    very hard choice. It was not one that I wished to make, but to
    put it--we only spent $31 million on technology last year out
    of $168 or $169 million, only 18 percent. We think we need to
    spend significantly more. The President has proposed $66
    million in technology. I think that is the right thing, spend
    more on technology, obviously some more on people, and, yes, we
    are working closely with the NFA and Dan Roth as to how they
    can take up registration and possibly examination of swap
    dealers.
        Ms. Schapiro. Senator, I think that our ability to
    operationalize these many rules under Dodd-Frank under the
    current continuing resolution or a cutback is very much in
    question, and we will obviously need to be very transparent
    about what we are able to do and what we are not able to do.
        We are a little bit more disadvantaged in the sense that we
    cannot rely on a self-regulatory organization on the securities
    side the way the CFTC can rely on the NFA under the statute as
    it was drafted. So we will not have the option to push off
    hedge fund examination or swap dealer examination unless they
    are also dually regulated and registered as broker-dealers on
    the securities side. So that will create some additional stress
    for us.
        We have made no decisions at this point about how to make
    the trade-offs between human resources and technology resources
    without knowing yet what the budget numbers really will look
    like.
        Chairwoman Stabenow. Okay. Thank you very much.
        We will now go to members' questions for 5-minute rounds.
    If we finish and there is someone who wants to ask a question
    after we have done this once, then we can offer that. But right
    now I would like to ask for 5 minutes, and we will start with
    Senator Bennet.
        Senator Bennet. Thank you, Madam Chair. Thank you for
    holding the hearing.
        Thank you for your testimony. We get to see each other all
    the time on Agriculture and Banking.
        I wanted to come back on the international question for a
    second that the Chairwoman had raised because it is incredibly
    important that our efforts here do not force trading in other
    places rather than here, especially in markets that are
    untransparent or have vastly different regulatory regimes. And
    I wonder whether that, first of all, is a risk in your view and
    what we are trying to do to mitigate that risk. And are there
    regions or countries that you worry about?
        Mr. Gensler. It is a risk because risk and money know no
    geographic boundaries or borders. And, in fact, it moves not
    just in minutes but it moves in microseconds and nanoseconds.
    So we are working very closely with international regulators. I
    think we have made great progress with Japan, with Canada, with
    Europe, but there are some regions that are not as engaged.
        I would say this, that the statute is very clear. If an
    international bank is dealing with U.S. commerce, is entering
    into swaps with U.S. counterparties under Section 722 of the
    act, it is supposed to be transparent and supposed to have the
    benefits of the act. And so one of the things we are trying to
    ensure is, whether it is an international bank or a U.S. bank
    that is dealing with a U.S. counterparty, that it would be a
    level playing field. And we think that is very important, and
    we think that was Congress' intent to make sure that U.S. banks
    somehow, you know, did not have the same treatment.
        Ms. Schapiro. I would agree these are incredibly global
    markets, and there are many, many cross-border issues for us to
    resolve. But I do think that most other foreign jurisdictions
    are in the process of developing their own derivatives
    regulatory regimes. I would say they are, as a general matter,
    at earlier stages than we are, but I think also very much
    committed to having a reasonable regulatory approach.
        It seems to me that we have to build a system in this
    country that makes people want to do business here because a
    race to the bottom will not serve anybody well, and as you know
    from the Banking Committee, after May 6th, when we had that
    extraordinary volatility in our equity and futures markets, we
    saw lots of people pull out because they were not sure about
    the basic integrity and quality of the U.S. markets. And a
    sound, rational regulatory system can do a lot to giving people
    basic confidence that this is someplace where they want to do
    business.
        So we have to translate that desire, which I think all
    regulators share, into very consistent, concrete rules that
    make it possible for businesses to operate fluidly around the
    world but not engage in regulatory arbitrage and not have the
    regulators looking for a race to the bottom.
        Senator Bennet. I think that is well put, and Senator
    Roberts said at the beginning that he hopes this is the first
    of several, and I agree with that. And I hope over time we can
    keep our eye on this question about what is really happening
    globally, whether we are pushing people away, and also away to
    places that create systemic risk, which brings me to my last
    question.
        There was a lot of discussion that we had when we were
    legislating Dodd-Frank about the risk of the clearinghouses
    themselves becoming systemically risky. I used the word
    ``risk'' twice in one sentence--appropriate given what we have
    just been through. Could you tell us a little bit about that,
    what you are doing to mitigate that danger?
        Ms. Schapiro. I would be happy to. In fact, it is a little
    fresh in my mind because yesterday the SEC proposed clearing
    agency standards that will now go out for comment, and the goal
    there is to ensure that clearing agencies do not marshal risk
    together and then not have the risk management capabilities to
    manage it so that they--the proposals we set out yesterday is
    quite a large number of requirements, but the basic goal is to
    create fair and open access so we have competition, promote
    prompt and accurate clearances and settlement, finality of
    payments, safeguarding of securities and funds, and good risk
    management practices, including testing of margin models,
    limiting exposure to individual counterparties, maintaining
    financial resources so that transactions--so that the
    institution can withstand the default by, in the case of the
    rules we propose, the two largest exposures in a security-based
    swap clearing agency.
        And so I think we will be very anxious to get comment on
    this set of proposals, but I think it does a lot to really
    bolster the risk management and integrity of clearing agencies
    because what you have said is exactly right. We have to get
    this right, or all of this effort to move transactions into
    clearing agencies to reduce counterparty risk will really come
    to naught.
        Mr. Gensler. I would just say what we are doing is
    following international standards, so it is good news on the
    international front. IOSCO, which Chair Schapiro plays a big
    role in, but we have a lesser role at the CFTC, has
    international standards. They are still updating those, but our
    clearing rules are meant to be consistent also so that our U.S.
    clearinghouses will be accepted by Europe. Europe has a
    provision in there, what they are considering in front of the
    European Parliament, that there has to be an equivalency. So
    for European banks and European end users to use the
    clearinghouses, they want them up to international standards.
    So that is a harmonization and clearing question together.
        Senator Bennet. Thank you.
        Chairwoman Stabenow. Thank you.
        Senator Johanns?
        Senator Johanns. Thank you, Madam Chair, and I thank both
    of you for being here today. I really appreciate it.
        I am listening to the testimony of both of you, and I know
    you both to be people of enormously good faith, and I think you
    deal with this straight. But there is such a different story
    between the world you see from where you are at and those who
    are regulated.
        In fact, I would go so far as to say that I really do think
    that we are going to look back in 5 years and ask ourselves
    what happened to this market. I do think we are forcing it out
    of the United States to areas where it will be in the shadows
    and it will be less regulated. This is a big business. Any
    country would want this business, and they will do everything
    they can, I believe, to take it away from us. So I think we are
    just subjecting our economy to enormous risk here by
    overregulation.
        Let me ask you a couple of specific questions, though. By
    any measure, I think both of you would have to agree that
    because of the act, not because of something new invented,
    there has been a massive amount of regulations and paper. I
    mean, we must be clearing forests to keep the paper going into
    your office.
        Just speaking honestly, there cannot have possibly been any
    kind of decent economic analysis or cost/benefit analysis of
    these rules and regulations, especially the interrelationship
    between your two areas. Is that a safe assumption?
        Ms. Schapiro. Senator, I think our staff--we have about 30
    economists on our staff, and as I say, we do cost/benefit
    analysis for all of our rule proposals and our final rules, and
    I think they have worked very hard to do the best quality
    economic analysis possible. And as I said, we seek economic
    data and information from the industry, which has lots of
    access to good data because it is their data and lots of access
    to high-powered economists to help generate it and we try to
    incorporate that in our rulemaking process.
        There is no question that the pace of rulemaking has been a
    challenge, and we will undoubtedly miss a number of the
    deadlines because we are trying to take the time we need, even
    if it was not necessarily time that was offered under the
    statute. Part of that time is to enable us to try to do high-
    quality cost/benefit analysis.
        I understand your concern. I clearly hear it. I think we
    have to be highly sensitive to the regulatory regimes that
    develop around the world. But we also, I think, have to be
    leaders in bringing people to rational, high-quality regulation
    of this market in a way that allows businesses to continue to
    function effectively.
        Senator Johanns. Chairman, here is my concern. You know,
    everything I read about the financial crisis is that there were
    a handful of enormously greedy people who created a system that
    darn near brought our economy down. And I am not talking about
    millions of people, although millions got caught up in it. I am
    talking about a handful of very, very powerful people in key
    positions who made very dumb decisions over time.
        And I look at this, and I find it heart-breaking. I mean, I
    hear about the little gas and oil company somewhere out there
    that is trying to hedge risk, or the farmer, and all of a
    sudden they are caught up in this massive rewrite, and they
    just do not have the economic power to deal with you.
        Ms. Schapiro. I agree with that, and that is why I think
    end user exemption from the clearing requirement is so
    important, and Congress was very wise to include that. The
    clear congressional intent we have heard with respect to margin
    on end users, with respect to rules that are not really the
    subject for today but hedge fund reporting, for example, on the
    SEC side. We have tried to tier the market so that we can have
    lesser burden on smaller hedge funds. We have proposed a small
    bank exemption as well from the clearing requirements on the
    SEC side. So we are trying to be very sensitive to those
    issues, and there is no desire to make it harder for any
    institution to mitigate the risks that it faces in running its
    business.
        Senator Johanns. Chairman Gensler, I am out of time, and I
    do not want to abuse the privilege of being here, and others
    want to ask questions. Here is what I would ask of the two of
    you, just to wrap up. You have been very, very accommodating in
    stopping by all of our offices. I would hope that you would set
    aside some time to do that again. I have got some very serious
    concerns, and I do not want to be Chicken Little running
    around, ``The sky is falling, the sky is falling.'' But I think
    we are overregulating in a massive sort of way, and I just want
    to try to come to grips with what we are headed toward here.
        Mr. Gensler. I would like to do that. I think it is a
    marketplace that is enormously consequential to those farmers,
    those oil producers, the gas stations. It is to make sure it is
    transparent and it does not pose risks to those folks. They are
    not going to be in the clearing. They are not going to be in
    the margin at the CFTC. They are not going to be major swap
    participants and so forth. But they benefit from transparency
    and they benefit that the folks that are the big actors do not
    force millions of people out of work because of the calamities
    like we had in 2008.
        Chairwoman Stabenow. Thank you very much, and I would just
    echo what Senator Johanns has said in terms of continuing to be
    available. We appreciate that very much. But it is very
    important to members of the Committee given the impact on the
    economy and the fact that we need to make sure that this is
    being done correctly and we have the opportunity to continue to
    have dialogue. So I would echo Senator Johanns' request.
        Senator Gillibrand?
        Senator Gillibrand. Thank you, Madam Chairwoman.
        Thank you both for being here. I respect you both immensely
    and appreciate your dedication and service at this time.
        I would like to drill down on two of the questions that the
    Chairwoman started with, compliance costs and competitiveness
    and international harmonization, and then ask a question about
    fiduciary duty if we can get to it.
        But on compliance costs, many people are concerned that
    because, you know, you are making this effort to work together
    to make sure your rules are compatible, there are still a
    number of significant differences in implementation that may
    result in higher compliance costs. For example, under current
    proposed real-time reporting rules, the SEC has put forward 12
    categories of data it requires while the CFTC has between 29
    and 37 varying requirements for block trades and other specific
    inconsistencies.
        What are you actually going to do to iron out the
    differences for these technical differences to make it
    straightforward and simple to report this essential
    information? And, you know, do you have a plan to do that? And
    how will you do that?
        Ms. Schapiro. Well, I would say that as the comment letters
    come in and we read both the CFTC's comment letters on their
    proposals and our own, we will sit down together and try to
    hammer all of these differences out. I think there are some
    differences that will perhaps continue to exist for very good
    reason because the nature of the markets is so different. As
    you know, the Securities-based swaps, we are talking about
    under the SEC's jurisdiction are only about 5 percent of the
    notional value of this marketplace. So it is a pretty small
    piece, and these are products that do not trade anywhere near
    the way interest rate swaps trade, with anywhere near that kind
    of liquidity. So there may be some reasons for us to approach
    something like block quite differently than the CFTC has chosen
    to do it. We have actually not put out our block proposal yet.
    We have asked for comment on how should we think about block
    trading in the context of our markets, and then we will come
    out with some standards, objective standards on block trading
    at a later time.
        Mr. Gensler. I know we have about 75 comment letters on the
    real-time reporting rule. It closed about 3-1/2 weeks ago, so
    the staff is still summarizing it. But we will be looking very
    closely at the SEC's comments, our comments, and as Chair
    Schapiro said, some of the product differences because we cover
    oil swaps, interest rate swaps, agricultural swaps. So some of
    those fields may be relevant for, for instance, agricultural
    swaps that are not relevant for interest rate swaps.
        Senator Gillibrand. Okay. In terms of international
    harmonization, one of the concerns that I have is in timing and
    making sure we have a timetable because obviously we do not
    want to create the opportunity for regulatory arbitrage, and we
    want to avoid incentives for market participants to go abroad.
    So are you seeking a memorandum of understanding with other
    countries? What are you actually going to do to prevent this
    kind of reaction?
        Mr. Gensler. We have actually initiated dialogue with a
    number of other countries. We think that the CFTC will probably
    have between a dozen and 20 memorandums of understanding,
    principal amongst them the European Union and the new ESMA,
    which is their joint regulator for this in Europe, the FSA, and
    elsewhere.
        We have been an agency for long that has mutual recognition
    agreements. Maybe it is just partly that we are small. We need
    to leverage off of international regulators.
        Ms. Schapiro. I would say that I think the European markets
    are a bit behind us, and I understand that timing is a concern.
    But I think that we do not yet really know the timing in the
    United States just because we are going to have to be very
    thoughtful about how we sequence the implementation of the
    rules that we ultimately adopt, allowing the industry
    sufficient time to develop the technology that they need,
    allowing us some time to develop the technology that we need to
    have oversight of this market.
        So I think I am not worried yet about the fact that we are
    on different timetables, but it is something for us to keep a
    very close watch on.
        Senator Gillibrand. Okay. The last issue is, you know,
    during Dodd-Frank we worked very hard to ensure that
    municipalities and other entities that had little experience in
    the swap markets would be protected while continuing to provide
    market access to entities that need to address their risk. And,
    additionally, we expanded fiduciary responsibilities for
    investment advisers to similarly protect investors.
        But in recent weeks, we have seen that the Department of
    Labor has issued a new proposal that would expand the scope of
    fiduciary duty requirements for many of these same market
    participants. What are you doing to work with the Department of
    Labor to coordinate the proposals and the new rules that you
    are developing to avoid conflicting requirements?
        Ms. Schapiro. Well, we have delivered to Congress--on time,
    in fact--our fiduciary duty study, but we were very careful
    there to say that we were not implicating fiduciary duty under
    the ERISA statute, which is solely the responsibility of the
    Department of Labor.
        There are some issues with respect to how the Department of
    Labor is contemplating--and they have just closed their comment
    period, and I think they actually had 2 days of hearings this
    week that our staff attended, and I believe CFTC staff attended
    as well--and where they are considering expanding the
    definition of ``fiduciary,'' and the concern being whether
    fulfillment of any of the business conduct obligations of Dodd-
    Frank will turn dealers or others into fiduciaries under ERISA
    bringing in all the prohibited transaction language.
        We have been talking with DOL about this. We stand ready to
    provide expertise and assistance to them in any way they choose
    going forward.
        Mr. Gensler. We, too, are in dialogue directly with the
    Department of Labor. I believe that we can harmonize the
    business conduct standards as Congress anticipated with what
    the Department of Labor is doing.
        Senator Gillibrand. Okay. Thank you.
        Thank you, Madam Chair.
        Chairwoman Stabenow. You are welcome.
        Senator Boozman?
        Senator Boozman. Thank you, Madam Chair.
        I was with an individual the other day, and he was telling
    me about a hearing over in the House, and they were questioning
    one of the other agencies, one of the other regulators, and the
    House Member said something to the effect of, ``Every place I
    go, people are so angry,'' at, you know, this and that. ``What
    have you done to upset so many people?'' And I hope that, you
    know, in a matter of months you are not back over here and we
    are asking you the same question as you go forward with this.
    This is really very, very serious, and I just want to reiterate
    the importance.
        All of us agree that, you know, so many of the--while the
    end users themselves were not in a position to cause any of the
    problems that we had, and we need to protect them. It is so
    important, not only in fairness but also because of the
    economy. There is so much uncertainty out there right now, you
    know, it is so difficult to plan, so difficult to look forward
    as you go forward with your agricultural venture, whatever, if
    you do not know the certainty of things.
        So I would just encourage you. I think that I would just
    want to echo, you know, what you are hearing at the Committee,
    how important that is, and we really do expect you to do that
    as you go forward. But it is important not only, like I say, a
    fairness issue, doing things right, but also the importance of
    the economy that we try and get some stability so that people
    can plan, so that they can make decisions, so that we can get
    things moving forward.
        Mr. Gensler. I deeply appreciate that. I think this market
    fundamentally is helping end users, investors, and
    municipalities to plan for risk. It is really a market that
    helps them shift risk to somebody else, whether it be a
    speculator or somebody else to hold that risk. And at the core
    of Dodd-Frank is to lower risk to those systemically important
    folks, but also to create transparency for whether it is the
    agricultural user in Arkansas or elsewhere to use these
    products. And we have proposed rules. We look forward to
    comment on agricultural swaps as well.
        Senator Boozman. Thank you, Madam Chair.
        Chairwoman Stabenow. You are welcome.
        Senator Klobuchar?
        Senator Klobuchar. Thank you very much. Thank you, both of
    you, for being here today.
        I am the co-chair with Senator Thune of the bipartisan
    Congressional Farmer Co-op Caucus. I bet you did not know there
    was such a thing, but there is. Minnesota boasts the largest
    number of agricultural co-ops, and these co-ops use the future
    and swap markets to lock in prices for fuel and fertilizer, and
    also to guarantee that their farmer members receive a certain
    price for their crop. There is concern that these farmer co-ops
    will face additional regulations because of your work, which I
    know is done for all the good reasons, but they are concerned
    that they are going to be facing these additional regulations
    intended for swap dealers which will increase costs.
        So my question is this: Assuming that farmer co-ops are
    using the market to hedge the risk of their members, how do
    farmer co-ops fit into the new transparency and regulatory
    requirements? And will the CFTC classify farmer co-ops as a
    swap dealer or a major swap participant?
        Mr. Gensler. We have been working very closely with farmer
    cooperatives--Dairy Farmers of America, Land O'Lakes, others,
    some in the non-dairy area as well. The comment period on that
    proposed rule just closed last week, but I think that much of
    what they do, in fact, will not be a swap at all. Often they
    use documents called ISDA documents to do what is called
    forwards or options embedded in forwards, and though I know we
    have not proposed it yet, this product definition rule we
    anticipate will extend the forward exclusion from futures to
    being a forward exclusion from swaps. And that has clearly been
    the congressional intent, and there were a lot of colloquies
    and letters on that.
        Senator Klobuchar. Right, yes.
        Mr. Gensler. We plan to extend that.
        Senator Klobuchar. I am so glad you read them.
        Mr. Gensler. I have read as many as I can, but, yes, I have
    read them and the staff has, and we plan to follow that
    congressional intent. But we are looking closely and working
    and meeting with them because many of them are quite small,
    also, and might fall as they sense--even that which they do
    might be de minimis, but working with them closely on these
    matters.
        Senator Klobuchar. Okay. Thank you.
        I think you remember that during our work on the
    Agriculture Committee I worked to include language that would
    authorize the CFTC to regulate companies that act as both swap
    dealers and end users according to the actual activity that
    they are engaged in. Could you comment on the progress you have
    made to ensure that diversified businesses will have the
    segments of their business that use the market to hedge risk
    qualify for that end user exemption?
        Mr. Gensler. Well, if somebody is a non-financial entity,
    they are an end user as long as they are hedging a commercial
    risk, and we put a proposal out that has a very wide definition
    of commercial risk.
        Secondly, on the language to which you refer, we have been
    talking to a number of companies directly, just as they think
    that they might want to be a swap dealer. And there are not
    many in the commercial space that want to be, but some of them
    provide risk management services. We are talking to them
    already about how they might work with us to comply with the
    statute, as you say, that some activities are a swap dealer and
    then something over here is not. But it is usually then--and
    this is partly why we need resources, to have that give and
    take, to meet with companies and make sure that we get it
    exactly as Congress has laid out.
        Senator Klobuchar. Okay. And just the last question would
    be that I know you spoke earlier before I got here about the
    resources and the staffing level needs, and it was only, I
    think, this year that these staffing levels returned to the
    levels that they were in the 1990s. We could see what happened
    when we did not have enough staff with some of the problems we
    have incurred in this country. But if you could explain a
    little more to the Committee about the need for the modern
    technology, why that is needed, how the size and the complexity
    of today's marketplace requires having more regulators
    overseeing the marketplace.
        Mr. Gensler. Well, I thank you for that. The marketplace
    that we oversee and the futures marketplace is about 40
    trillion notional, but it is also all on exchanges. By statute,
    since the 1930s it has all been on exchanges. This swaps
    marketplace is about 7 times the size. A lot of it will still
    be bilateral and off-exchange.
        And so in terms of technology, our needs for technology--it
    is only $30 million or $31 million we spent last year--is less
    than even one week's budget of the major swap dealers that they
    spend on technology. It might only be a few days' budget. We
    need the technology to actually take the information in,
    aggregate it, and make sure that we check for trade practices,
    whether those be trade practices that we all could lock arms
    and say we should not have wash sales and things like that. But
    if you do not have technology to bring it in--there are 12
    million transactions a day in the futures marketplace. There
    are not as many in the swaps marketplace. It is low volume
    transactions but high risk and so forth. So it is aggregating
    data. And May 6th, it took us months, really, between our two
    agencies to aggregate data and actually do a really thoughtful
    report on that, and that makes it difficult.
        Senator Klobuchar. Well, thank you. I think I have always
    believed, in my old job as a prosecutor, that you have to be as
    sophisticated as the people you are trying to in this case
    regulate. I think the added piece of that is we want this
    market to function, and we want you to be able to work with
    some of these companies that should not come under the
    regulations, and that is why I have supported your added staff,
    so thank you.
        Chairwoman Stabenow. Thank you very much.
        We have a second panel that we certainly want to hear from,
    but because of this important discussion, we are going to give
    one more opportunity for a question from any members in terms
    of doing a second round.
        I would just simply, first of all, ask a follow-up to
    Senator Klobuchar's question in terms of farmers and co-ops
    being an important part of the end user exemption that we
    talked about. And I just want to make sure that you are
    saying--or that you are going to guarantee that the
    relationship between farmers and co-ops will be preserved and
    that farmers will continue to have affordable access to risk
    management tools.
        Mr. Gensler. That is a broad question. Farmers are end
    users--I have not found any farmer that is not an end user. At
    most, thousands of co-ops are end users. There is a short
    handful of co-ops who have been very gracious to come in, give
    us their comments, because they are providing some risk
    management services to farmers. And so we are sorting through
    that, you know, these six or eight co-ops that are sort of the
    Federal co-ops, where we are helping-- they are helping us and
    we are sorting it through with them.
        Chairwoman Stabenow. Thank you. One other question on
    transparency, because increased transparency is one of the most
    important aspects, as we know, of the reform efforts. We wanted
    to give you and the markets more access to trade information in
    order to increase market efficiency and identify market
    manipulation and, of course, price discovery. There will be a
    lot of sensitive data moving back and forth and a lot of
    analysis that is going to need to be done. And so my question
    would be: Will your agencies--the technology and the market
    infrastructure be ready to handle the information load by this
    summer? And then what are you doing to deal with information
    security breaches? And can you guarantee that data
    confidentiality and protections for proprietary information
    will be there?
        Mr. Gensler. Two excellent questions. I think in terms of
    timing we have asked the public on the phasing of this. I think
    that it will take longer than this summer. The data
    repositories in some fields, like interest rate swaps and
    credit default swaps, are earlier. There is not yet a data
    repository for agricultural swaps, for instance, and that will
    take longer. Under the statute, there is strict confidentiality
    about individuals' positions, but we have also included in the
    real-time reporting questions for the public to help us that
    the confidentiality has to be protected about who the
    counterparty is. And in some cases, that means there will be
    less information to the public.
        Ms. Schapiro. I would just add that we would not register a
    swap data repository if it could not prove to our satisfaction
    that it had the capacity to protect the confidentiality of the
    data in its possession.
        Chairwoman Stabenow. Thank you.
        Senator Roberts?
        Senator Roberts. Thank you, Madam Chairwoman. And thank you
    for your testimony. It is very pertinent to the concerns that
    we all have. Let me identify and associate myself with the
    remarks by the Senator from Colorado, Senator Bennet, and
    Senator Johanns--if Senator Johanns is Chicken Little, I am
    Rooster Big--and Senator Gillibrand.
        Let me ask just a couple of real quick ones and then get to
    the main question, and then I will submit the last one for the
    record.
        Chairman Schapiro, you said you only had 30 economists. How
    many do you need? I cannot imagine 30 economists in one room.
        [Laughter.]
        Senator Roberts. What you need is an economist with one arm
    so he cannot say, ``On the other hand.''
        Ms. Schapiro. That is exactly right.
        [Laughter.]
        Ms. Schapiro. Well, we are actually recruiting right now
    for a new chief economist, although we have a very fine
    acting----
        Senator Roberts. Well, if you get the chief and you have
    got 30, how many more do you need? Thirty, 40, 50, 60? I mean,
    for economists? Come on.
        Ms. Schapiro. I guess given--our economists work not just
    on rule writing at the SEC and on our cost/benefit analysis,
    but we also use them, for example, after the May 6th events, to
    help us reconstruct data and do trading analyses, but also to
    assist us in our enforcement efforts. So I would love to come
    back to you with a specific number because I do not have one
    off the top of my head, but we would like----
        Senator Roberts. Okay. That is fine. I just think that
    numbers of economists sort of boggle my mind. But at any rate,
    you said you had a small bank exemption. Can you tell me where
    you are on that? What are we talking about?
        Ms. Schapiro. That is out for proposal. The statute
    directed us to contemplate whether it would be appropriate to--
    --
        Senator Roberts. What, 100 million and less?
        Ms. Schapiro. It is 10 billion.
        Senator Roberts. Oh, I am for you. All right.
        Ms. Schapiro. Yes, small banks, credit unions----
        Senator Roberts. No, wait a minute. I am not for you. I
    need to raise it up. I am sorry.
        Okay, go ahead. I am sorry.
        Ms. Schapiro. It is out for comment right now, and I am not
    sure exactly when that comment period ends.
        Senator Roberts. All right. I appreciate that very much.
        The European proposal on position limits--I am being
    repetitive here--which is you have to go through the numerous
    legislative steps before it is close to final, and it is going
    to be significantly less prescriptive than the CFTC proposal.
    Won't this timing gap alone create arbitrage opportunities?
    Moreover, if the EU adopts a less restrictive regime, won't
    that be an obvious invitation to move business away from the
    U.S. A very similar comment and question by Senator Gillibrand
    and others.
        Ms. Schapiro. I am sorry, Senator. I did not hear the first
    part. Was this about position limits?
        Senator Roberts. No. We are talking--yes, about the
    position limits on the European proposal and the timing in
    regards to the steps before it is close to final, significantly
    less prescriptive than the CFTC proposal. Won't this timing gap
    alone create arbitrage opportunities? Moreover, if the EU
    adopts a less restrictive regime, won't that be an obvious
    invitation to move the business away from the United States
    overseas?
        Mr. Gensler. Once again, we are working very closely with
    the Europeans on position limits as well as many other
    perspectives. I think what Congress did in terms of position
    limits is ask for agricultural, metals, and oil, energy
    commodities that we shall put a proposal forward. We have done
    that. I would suspect this is one we will get thousands of
    comments on. We put a proposal forward last January to
    reinstate energy position limits. We got 8,200 comments. And
    they were helpful. We withdrew that and re-proposed based on
    those 8,000 comments, based upon the Dodd-Frank Act, and I
    think it is very important to get this right. And as you say,
    it has not been over in Europe, and that is part of the
    considerations as well.
        Senator Roberts. I appreciate that. The 15 largest dealers
    will spend about $1.8 billion, an estimate, to implement the
    derivatives portion of the Dodd-Frank bill over 3 years.
    Question: Who do you think will end up paying that bill?
    Answer, my answer: Consumers. Divided by three, that is $700
    million, that is more than you are asking for your budget. Any
    comment?
        Mr. Gensler. Well, I think that it does put in light a
    small agency budget of $168 million. The $1.8 billion, which
    was an estimate by the Tabb Group, is in the context that the
    U.S. financial industry, that same Tabb Group, spends $20 to
    $25 billion a year on technology. So while $600 or $700 million
    a year sounds large--and it is--it is in the context of an
    industry that is spending $20 to $25 billion a year.
        Senator Roberts. Yes, but they are not going pay for it.
    The consumer is going to pay for it, with all due respect.
        I have another question about the rules for swap execution
    facilities and for security-based swaps is different than the
    CFTC, but I am going to submit it for the record in the
    interest of time.
        [The question of Senator Roberts can be found on page 205
    in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Senator Gillibrand, did you have another question.
        Senator Gillibrand. One more.
        Chairwoman Stabenow. Yes.
        Senator Gillibrand. Chairman Gensler, the CFTC proposed
    rules require requests [inaudible] the SEC says many customers
    want. Many people are concerned about low trades where they are
    the only possible counterparties whether it will make it hard
    to trade these kinds of products. Why doesn't CFTC feel it is
    needed?
        Mr. Gensler. Well, this was a proposal whose comment period
    still runs for another week, and we look forward to the
    comments. But as we looked at the swap execution facility
    rules, Congress had said that they had to have multiple
    participants have the ability to execute with multiple
    participants, so what some people call ``many to many.'' And we
    have a history, a 70-plus-year history, in the futures market
    and a statute that says that all futures have to come to an
    exchange.
        That is not the case with swaps. There are bilateral swaps
    and customized swaps. But it is in that context that we also
    took up this rule, and we are very focused on how the SEC and
    we work to harmonize and try to be as consistent as possible,
    but at the same time not undercut a futures regime in some way
    and have some regulatory arbitrage between futures and swaps.
    So there is that trade-off. But we look forward to the public
    comment. We look forward to working consistently with the SEC.
        Senator Gillibrand. Thank you.
        Chairwoman Stabenow. Well, thank you very much. We
    appreciate your time today. You have a very big job, both of
    you, the Commissions, and the work that you are doing, again,
    we appreciate the hard work. We look forward to working with
    you as we go forward. We are very anxious to see this be done
    correctly, as I know that you are, and that the time that is
    necessary to do it right is taken to sequence and to phase this
    in in a way that is going to be good for our economy and good
    for consumers and provide the light of day that we know is very
    important on these markets.
        So thank you very much again.
        Mr. Gensler. Thank you.
        Ms. Schapiro. Thank you.
        Chairwoman Stabenow. We will welcome our second panel. We
    have a very distinguished second panel that is going to join
    us.
        Welcome. We very much appreciate all of you being here and
    your patience, and I do want to reiterate, as members are
    moving to other meetings, that as you know, we will be both
    reviewing all of your comments. They are in the record and are
    a very important part of the record, and so Senator Roberts and
    I, while we are the only two here at the moment, you are
    providing a very, very important part of our discussion on
    oversight, and it will be part of our effort moving forward.
    You are providing us very important insight, and so we thank
    you very, very much for being here. Let me just briefly
    introduce everyone.
        Ms. Jill Harlan is the corporate risk manager at
    Caterpillar, and we appreciate your being here this afternoon.
        Terry Duffy, it is good to see you, the executive chairman
    of CME Group. Welcome.
        And Steven Bunkin, who is the managing director and
    associate general counsel at Goldman Sachs, where he is the
    global co-head of commodities legal coverage.
        And Larry Thompson, who is with us, general counsel for the
    Depository Trust and Clearing Corporation.
        And last, certainly not least, Professor Michael
    Greenberger, who is with us as a professor at the University of
    Maryland School of Law and former director of Division of
    Trading and Marketing at the CFTC under Chairperson Brooksley
    Born.
        So we welcome all of you. We appreciate having this level
    of expertise and input as we move forward on our oversight. Ms.
    Harlan, we would ask you to go first.

    STATEMENT OF JILL HARLAN, CORPORATE RISK MANAGER, CATERPILLAR,
     ON BEHALF OF THE COALITION FOR DERIVATIVES END USERS, PEORIA,
                                ILLINOIS

        Ms. Harlan. Good afternoon, Chairwoman and members of the
    Committee. Thank you very much for the opportunity to be with
    you today. My name is Jill Harlan, and I am the corporate risk
    manager for Caterpillar, Inc. I am also testifying on behalf of
    the Coalition for Derivatives End Users, of which Caterpillar
    is a member. The coalition represents thousands of companies
    across the country that use derivatives to manage their day-to-
    day business risk.
        For more than 85 years, Caterpillar, Inc. has been a global
    leader in making sustainable progress possible. We directly
    employ 47,000 people in the U.S., and our dealer network
    employs an additional 34,000. We have manufacturing facilities
    across the U.S. and successfully compete globally from that
    significant U.S. production base, with approximately 70 percent
    of our sales outside of the U.S. in 2010.
        We support this Committee's efforts to ensure that the
    derivative markets operate efficiently and are well regulated
    and appreciate the opportunity to share with you some of our
    concerns related to derivatives regulations impacting the end
    user community.
        Understanding and managing risk is key to successfully
    operating our business and thousands of others in virtually
    every sector of the U.S. economy. The best-run companies
    identify risks associated with external and internal factors
    and seek to mitigate both.
        At Cat, for example, we can control many internal risk
    factors. We cannot, however, control many external factors like
    the global price of copper, fluctuation in value of the
    Japanese yen, or the movement of interest rates in key
    economies. We do mitigate these risks by hedging our net
    exposures with derivative contracts.
        In my written statement, I describe an FX forward
    transaction that illustrates how we use derivatives to mitigate
    currency risk. While I find FX derivative transactions very
    exciting, I will not bore the Committee by describing it again
    here this afternoon.
        [Laughter.]
        Ms. Harlan. It is important to understand that Cat does not
    use derivative contracts for speculative purposes. Cat's
    derivative policies are specifically written to ensure we only
    focus on the management of risks associated with our business
    operations.
        Cat and our coalition partners have many concerns about the
    impact of potential rulemaking on our end user derivative
    activities. I will focus today on four primary areas. My
    written statement goes into these concerns in some detail, so I
    will just summarize them this afternoon.
        First, we are very concerned about the costs associated
    with direct or indirect imposition of margin costs on end
    users. Such regulatory action appears contrary to congressional
    intent and would harm our ability the ability of end user
    companies generally to manage our risks. It would also divert
    capital from more productive uses such as growing the economy
    and creating jobs.
        Second, we are concerned about uncertainty surrounding
    foreign exchange forwards. We hope that the Treasury Secretary
    will exercise his statutory authority to exempt foreign
    exchange swaps and forwards from the regulations that will be
    applied to other derivatives contracts.
        The third area of concern I describe in my written
    statement is the need for clarity concerning the impact of
    regulations on captive finance affiliates such as Caterpillar
    Financial Services, which bring an important source of
    liquidity to small and medium customers. The Dodd-Frank Act
    contains language exempting certain captive finance companies
    from the mandatory clearing requirement and the major swap
    participant definition. The standard, though, needs greater
    regulatory clarity in order to ensure that the captive's
    function of facilitating sales of the parent organization is
    able to be fulfilled.
        A lot is at stake in the regulatory rulemaking process, and
    our final concern is the amount of time that has been allocated
    to draft and implement these critically important rules. We
    would like Congress to provide regulators and affected parties
    with more time for rulemaking and for regulators to allow
    market participants sufficient time for implementation.
        The end user market for over-the-counter derivatives
    functioned well both before, during, and after the crisis. The
    responsible and effective use of these products by Cat and
    other end users helped reduce risk at both the individual
    company and the systemic level. We hope that active oversight
    from the Committee will help avoid a situation where
    implementation of rules increases costs for Main Street
    businesses and drives behavior that inhibits economic growth.
        On behalf of Caterpillar and the coalition, I would like to
    thank you very much for your time this afternoon and the
    opportunity to share our thoughts on these important issues. I
    am happy to answer questions.
        Thank you.
        [The prepared statement of Ms. Harlan can be found on page
    120 in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Mr. Duffy, welcome.

     STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME GROUP
                        INC., CHICAGO, ILLINOIS

        Mr. Duffy. Thank you, Chairwoman Stabenow, Ranking Member
    Roberts, and members of the Committee. I want to thank you for
    the opportunity to testify on the implementation of the Dodd-
    Frank Wall Street Reform and Consumer Protection Act. I am
    Terry Duffy, executive chairman of CME Group, which includes
    our clearinghouse, our four exchanges--CME, CBOT, New York
    Mercantile Exchange, and COMEX.
        In 2000, Congress adopted the Commodity Futures
    Modernization Act. This leveled the playing field with our
    foreign competitors. It gave us the opportunity to grow and put
    us in a position to become the world's most innovative and
    successful regulated exchange and clearinghouse. As a result,
    we are now an economic engine of growth in Chicago, New York,
    and the Nation.
        The 2008 financial crisis focused attention on the lack of
    regulation of OTC financial markets. The Nation learned painful
    lessons about unregulated derivatives trading. But we also
    demonstrated that regulated futures markets and futures
    clearinghouses operated flawlessly before, during, and after
    the crisis. Futures customers were protected.
        Congress responded to the financial crisis by reining in
    the OTC market to reduce systemic risk through central clearing
    and exchange trading of derivatives, to increase data
    transparency and price discover, and to prevent fraud and
    market manipulation. We support these goals, but we are
    concerned that the CFTC has launched its own initiative to turn
    back the clock on regulation of futures exchanges and
    clearinghouses. This will impose unwarranted costs and stifle
    innovation.
        We are not alone. Most careful observers, and even some of
    the Commission, have concluded that many of the proposed
    regulations unnecessarily expand the Commission's mandate under
    Dodd-Frank.
        Much of the problem results from the CFTC's efforts to
    expand its authority, and it is changing its role from an
    oversight agency whose purpose has been to assure compliance
    with sound principles to a front-line decisionmaker that
    imposes its business judgments on every operational aspect of
    derivative trading and clearing. This role reversal, which is
    inconsistent with Dodd-Frank, will require doubling the
    Commission staff and budget. It will also impose astronomical
    costs on the industry and the end users of derivatives. There
    is no evidence that any of this is necessary or even likely to
    be useful. This is the classic solution in search of a problem.
        The crisis of 2008 did not arise from a failure of the
    regulated transparent futures markets. My written testimony
    includes numerous examples of rulemaking that will have costly
    adverse consequences on customers, end users, exchanges, and
    the economy.
        We are strong proponents of an adequate budget for our
    regulator. However, we object to expanding the Commission's
    staff and budget to enforce regulations that are uncalled for
    by Dodd-Frank or that duplicate the duties that are now being
    performed by SROs, which are self-regulatory organizations, at
    no cost to the taxpayer.
        The Commission justifies its budget demands by focusing on
    a couple of points: one, the growth in the notional value of
    the contracts it oversees on regulated futures markets; and,
    two, the notional value of the swap markets that it will be
    responsible for under Dodd-Frank. But there is no valid
    relationship between notional value of contracts traded and the
    regulatory burden associated with them.
        The swap market today that the CFTC will regulate involves
    only 4,000 to 5,000 transactions per day. The futures market,
    on the other hand, has grown to millions of transactions per
    day. It has become a global electronic marketplace with a
    sophisticated audit trail and high-tech enforcement tools.
        The CFTC's budget should reflect the positive impact of
    technology and other enforcement tools that SROs already have
    in place which meet the regulatory obligations imposed by Dodd-
    Frank. This Congress can mitigate some of the problems that
    have burdened the CFTC's rulemaking process. It can do this by
    demanding a full and fair cost-and-benefit analysis on every
    proposal.
        It also can extend Dodd-Frank's effective date in the
    rulemaking schedule so that professionals, including exchanges,
    clearinghouses, dealers, market makers, and end users, can have
    their views heard. This would give the CFTC a realistic
    opportunity to assess those views and measure the real costs
    imposed by its new regulations. Otherwise, we believe that the
    well-regulated futures industry will be burdened by overly
    prescriptive regulations. These regulations would be
    inconsistent with the sound industry practices and make it more
    difficult to reach Dodd-Frank's goal of increasing transparency
    and limiting risk.
        I thank you very much for your time and attention this
    afternoon, and I look forward to answering your questions.
        [The prepared statement of Mr. Duffy can be found on page
    60 in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Mr. Bunkin, welcome.

    STATEMENT OF STEVEN M. BUNKIN, MANAGING DIRECTOR AND ASSOCIATE
           GENERAL COUNSEL, GOLDMAN SACHS, NEW YORK, NEW YORK

        Mr. Bunkin. Thank you. Chairwoman Stabenow, Ranking Member
    Roberts, and members of the Committee, my name is Steve Bunkin.
    I am a managing director at Goldman Sachs. Thank you for
    inviting me to testify at today's hearing.
        The over-the-counter derivatives market plays an essential
    role in the capital markets and the economy generally. Various
    entities, including corporate end users and investment funds,
    use these instruments as risk management and investment tools.
        In debating Title VII of the Dodd-Frank Act, Congress
    considered the possibility of requiring that all derivatives be
    traded on exchanges and centrally cleared. Congress recognized
    the importance of OTC products and determined that they should
    continue to be available to the broad range of market
    participants that rely on them. As a firm, Goldman Sachs has
    supported many of the policies reflected in Title VII.
        Since Congress enacted the Dodd-Frank Act last summer, the
    CFTC, SEC, and other regulators have been working with great
    dedication to propose various rules contemplated by the act. We
    appreciate the remarkable effort that the agency's staff and
    Commissioners have made to develop the rules.
        It is critically important that the implementation of these
    complicated reforms be done in a manner that avoids disruption
    and allows continuing access to derivative instruments. To
    protect market liquidity, the final rules must be developed
    with great care. With that in mind, we offer the following
    recommendations to support the Committee in its Title VII
    oversight responsibilities.
        First, we recommend that Title VII rules be phased in on a
    sequence that will best enhance financial stability. We propose
    a three-part process. Phase 1 would involve the creation of
    swap data repositories and the application of requirements to
    provide transactional information to them. Phase 2 would
    involve the application of clearing requirements. Phase 3 would
    involve the application of requirements to execute relevant
    swaps on exchanges or swap execution facilities and have
    information regarding all swaps be reported to the public.
        Second, we recommend that the regulators establish a strong
    foundation to promote an evolution of markets to achieve the
    overarching goals of Dodd-Frank.
        Third, we recommend promoting liquidity as a central means
    of reducing systemic risk by, A, closely following the
    statutory definition of swap execution facility; B, defining a
    block transaction as a trade that is larger than customary
    social size and designing appropriate alternative public
    reporting requirements for such transactions; and, C, adopting
    position limits only if the statutorily required determination
    that such a rule is appropriate has been made and then ensuring
    that such a rule adheres to the four-part mandate articulated
    in Title VII.
        Fourth, and finally, we recommend that the CFTC reconsider
    the proposed business conduct rules. In particular, these
    proposed rules would severely restrict access to derivatives
    for pensions, endowments, and governmental entities because of
    the fiduciary-like standards contained in them, notwithstanding
    the specific decision by Congress not to include a fiduciary
    standard in the statute itself.
        Goldman Sachs is committed to working with Congress, the
    regulators, industry participants, and, of course, our clients
    to achieve a successful transition to the reforms adopted in
    Title VII of the Dodd-Frank Act.
        I appreciate the opportunity to testify before this
    Committee and look forward to any questions you may have.
        [The prepared statement of Mr. Bunkin can be found on page
    54 in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Mr. Thompson, welcome.

    STATEMENT OF LARRY THOMPSON, GENERAL COUNSEL, DEPOSITORY TRUST
          AND CLEARING CORPORATION (DTCC), NEW YORK, NEW YORK

        Mr. Thompson. Thank you, Chairwoman Stabenow, Ranking
    Member Roberts, and members of the Committee. I am the general
    counsel of the Depository Trust and Clearing Corporation, a
    non-commercial utility that in 2010 settled approximately 1.7
    quadrillion in securities transactions.
        Since 2006, DTCC has also developed and operated the Trade
    Information Warehouse, a global electronic database that now
    has virtually all position data on credit default swaps. The
    TIW currently represents about 98 percent of all credit
    derivatives transactions in the global marketplace,
    constituting approximately 2.3 million contracts with a
    notional value of $29 trillion.
        DTCC shares Congress' goals of ensuring more transparent
    markets for global regulatory oversight and systemic risk
    mitigation. Today I would like to make two central points: one,
    transparency is a key pillar of any attempt to mitigate
    systemic risk in the swaps markets; and, two, providing
    transparency is a cooperative effort.
        The Dodd-Frank Act requires that all swaps, cleared and
    uncleared, must be reported to swap data repositories. To the
    extent that OTC derivatives contributed to the 2008 crisis, we
    believe it was due to a lack of a comprehensive view of who
    held what exposures in the swaps markets. That uncertainty,
    that lack of transparency, contributed to the hesitancy about
    the creditworthiness of institutions at just the wrong time.
        The basic safety net needed to address these sorts of
    situations has since been put in place for the credit default
    swaps market on a global basis in cooperation with the OTC
    derivatives regulators form, which comprises over 40 regulators
    and other authorities worldwide, including all of the major
    regulators and central banks in the U.S. and Europe.
        In response to the 2008 crisis, DTCC used the warehouse to
    provide standard position reports to appropriate regulatory
    authorities worldwide, and since then DTCC has responded to
    over 100 ad hoc requests from such authorities. We also began
    publishing comprehensive market information to ensure public
    transparency.
        Just 2 weeks ago, we launched a web-based regulator portal
    through which regulators and other authorities can directly
    access and query detailed position risk data relating to their
    regulatory purviews. At present, 20 regulators worldwide have
    used our portal.
        Providing transparency is a cooperative effort.
    Transparency has been achieved because of the substantial
    degree of global regulatory cooperation and support. One factor
    that made this possible was that DTCC is now a traditional
    commercial entity and does not use the data for commercial
    purposes. This removes commercial concerns from what is and
    what must remain a market utility, base regulatory, and
    supervisory support function. This structure works because all
    market participants, all clearers, all trading platforms are
    cooperating.
        If cooperation fails, if the reporting of data becomes
    fragmented, the inevitable result will be misleading public
    reporting of exposures and regulatory errors. What would follow
    is a very expensive if not politically impossible task for
    regulators to build complex data aggregation and reporting
    mechanisms that the industry and the regulators themselves have
    brought to fruition in a single place within DTCC. Both of
    those results would be undesirable.
        The challenge is to bring similar regulatory and public
    transparency to other asset classes of the swaps markets, as we
    have done in the CDS market. As an industry-governed utility,
    it is our sense that market participants are poised to
    undertake the significant cooperative effort necessary to
    achieve complete transparency across all asset classes and
    derivatives markets as contemplated by Dodd-Frank.
        I urge the Committee in exercising its oversight function
    to focus on removing obstacles to this process and to continue
    to use proven infrastructure while avoiding the injection of
    commercial considerations that would hinder the cooperative
    attitude that has so far made progress possible.
        Thank you, and I welcome your questions.
        [The prepared statement of Mr. Thompson can be found on
    page 133 in the appendix.]
        Chairwoman Stabenow. Thank you very much.
        Now Professor Michael Greenberger, welcome.

      STATEMENT OF MICHAEL GREENBERGER, LAW SCHOOL PROFESSOR AND
     DIRECTOR, CENTER FOR HEALTH AND HOMELAND SECURITY, UNIVERSITY
             OF MARYLAND SCHOOL OF LAW, BALTIMORE, MARYLAND

        Mr. Greenberger. Thank you, Chairwoman Stabenow and Ranking
    Member Roberts and other members of the Committee. I have
    submitted testimony that has an introduction that I think hits
    my major themes and has a lot more information in it. I am
    fully prepared to answer substantive questions, but I think
    process questions need to be addressed in the few minutes I
    have.
        I have worked as a volunteer adviser to Americans for
    Financial Reform and the Commodity Market Oversight Coalition.
    The latter is an end user group that represents petroleum
    marketers, heating oil dealers, many farm groups, airlines,
    truckers, car manufacturers in some sense, and it is reflective
    certainly of a bipartisan, at a minimum, philosophical
    ideology. I also work with Americans for Financial Reform,
    which is a coalition of 250 consumer groups, unions,
    environmental groups, public interest groups, the AARP, and
    others.
        Those two groups that represent the broadest bipartisan
    spectrum have come together, I would say, while they have not
    had time to review my testimony, I believe that they represent
    the rank-and-file people who are exposed to--were exposed to
    the worst financial crisis since the end of the Great
    Depression, and if we think we are sitting here today with the
    war being over and now we can cut against the edges of Title
    VII--which, by the way, this Committee should take a lot of
    credit for. Were it not for the Senate Agriculture Committee,
    Title VII would not be in the excellent shape it is in. The war
    is not over.
        First of all, all the derivatives that are executed up
    until the point that the CFTC and the SEC put their regulations
    into place are unregulated. I pointed out how Mr. Paulson, who
    did a perfectly legal, shrewd thing, represents the investors
    who, without having any exposure to subprime mortgages, got
    insurance at a 2-percent minimum and insured themselves
    trillions of dollars if those subprime mortgages, which they
    did not own, failed. The hole that was blown into the economy
    was not the defaults. It was the fact that those mortgages were
    bet on often 9 times by people who did not own them that they
    would fail.
        Now, Senator Johanns said there are 15 people who made some
    terrible mistakes. The people who made those terrible mistakes
    essentially insured the subprime market at 100 percent on the
    dollar.
        Now, some people say that is a zero sum game. If the
    American taxpayer had not intervened to trillions of dollars,
    it would have been a lose-lose game. Your end users, who are
    saying, oh, we are just doing perfectly business-like kind of
    things, ask them how they would feel if Lehman Brothers was
    their swap dealer. They would now be in a bankruptcy hoping to
    get 10 cents on the dollar.
        We cannot cut back on this process. If municipalities start
    failing--and Jamie Dimon, who is the CEO of JPMorgan Chase,
    gave a speech a month ago worried about the stability of
    municipalities--municipal bonds will fail, and Republicans,
    Democrats, Tea Party members, and Independents will lose
    pension money because of that.
        If sovereign defaults occur in Europe, there are credit
    default swaps up the gazoo on people who do not own the debt
    but are betting that Ireland, Italy, Portugal, and the euro
    will fail.
        Everybody is asking questions about what could go wrong
    with Title VII. If AIG had had to post capital as a swap
    dealer, they would have never gotten to the $75 billion
    business of insuring that the cherrypicker in California who
    earns $14,000 a year got a $729,000 mortgage. They insured that
    mortgage because it was AAA rated, and it was so confusing
    because it had been manipulated so many times, they did not
    understand what they were insuring.
        If AIG had to post capital to get in the business of being
    a swap dealer, they would have had to go to their holding
    company, and the holding company would have said, ``We are not
    going to put billions of dollars of capital into insuring the
    cherrypicker in California.''
        The transaction would have been transparent, and you would
    have CNBC and Fox business analysts talking all day about the
    stupidity of people who are trying to insure the subprime
    market. Now, the subprime market, you have got the same
    instruments for the prime market, commercial real estate,
    credit cards, student loans. This market is still out there,
    and I spend half my time worrying about al Qaeda, and if I had
    to bet who is a greater threat to the United States within the
    next 2 years, it is the next round of commitments that are
    undercapitalized to insure somebody who does not own municipal
    bonds or does not own sovereign debt will fail, and there will
    not be capital to make that payment. And the American
    taxpayer--that is what too big to fail means--will be looked to
    again to bail these people out.
        The reason the American taxpayer is furious about the
    budget crisis is trillions of dollars have been spent to put
    Wall Street back in the saddle again, and it has not meant
    anything for jobs, pensions, or anything else.
        So the Commissioners who work on this, this Committee, this
    Congress have got to keep in mind when your end users come to
    you and say, ``We do not want to post collateral, and we do not
    want the bank to post collateral,'' what happens if that bank
    becomes the next Lehman, Bear Stearns, AIG? Their shrewd
    business hedging will collapse in the absence of clearing,
    transparency, and pricing.
        You have got in my assessment the most important job of any
    Committee in this Congress, and if there are municipalities
    failures or sovereign debt failures, or if oil and food, which
    are related to betting through swaps, start going through the
    roof, you will be back here not voluntarily, but you will be
    back here. Chairwoman Stabenow, you remember July 2008 when we
    met and had a debate in front of the Democratic leadership
    about whether supply-demand or speculation and swaps caused $4-
    a-gallon gasoline.
        My final point would be to say, Senator Roberts, talk to
    YRC in Overland Park, Kansas. They almost went bankrupt because
    the holders of credit default swaps did not want them to work
    out a bankruptcy. I volunteered as a lawyer to the Teamsters
    and the 90,000 employees who would have lost their jobs but for
    the fact that the Teamsters and the State Attorneys General
    went to the holders of those credit default swaps and said,
    ``You cannot drive the largest truck manufacturer in the United
    States into bankruptcy.''
        Thank you.
        [The prepared statement of Mr. Greenberger can be found on
    page 92 in the appendix.]
        Chairwoman Stabenow. Well, thank you very much, and let me
    just indicate that, of course, there is a concern, I would just
    say, Professor Greenberger. That is why we passed the law, and
    that is why, as you talk about the impacts on families, on
    farmers, on businesses, on consumers, the need to bring things
    into the light of day, to have transparency, to have
    accountability, that is what this is all about.
        I guess from my perspective I think it is important to also
    look at the role of hedging risks in the marketplace and the
    capital that it has made available for businesses that are
    hedging their own risk. And I do think we have got to make sure
    we are addressing everything you are talking about, but also
    making sure that we are allowing businesses and farmers and co-
    ops to continue to function in terms of their activities in the
    marketplace as well.
        And so I guess that would lead me, Ms. Harlan, to ask you a
    question, to talk a little bit more about why it is important
    from your standpoint to be able to have the end user exemption.
    And could you talk more specifically about how Caterpillar uses
    its finance arm and why it is critical in your judgment to your
    competitiveness that margin requirements are not applied to the
    swap transactions?
        Ms. Harlan. As far as our financing arm goes, Caterpillar
    Financial Services, it does exist solely to provide financing
    for Caterpillar equipment. Now, we need the definition to be a
    little bit broader than that because that is their purpose. But
    certainly there are times when they provide financing for an
    attachment, for example, to a Caterpillar unit, or another
    example might be to provide financing for an entire vessel to
    support the sale of a Caterpillar engine. But they use the
    derivatives products in the same way as the Cat Inc. parent
    does from a standpoint of we only enter into a derivative
    product if we are trying to protect a risk. So we are hedging
    or mitigating our risks. In their case either it could be a
    foreign exchange movement or it could be an interest rate
    movement. So as a captive finance, they are there to support
    the parent and in the sale of the parent product, and that is
    their main purpose.
        As far as the margin issue--I believe that was your other
    question--today we do not post margin, so that would be an
    additional cost and additional expense to us in the future. So
    it appears that as an end user, the way the regulation is
    going, we would not post margin. We are still concerned that
    our bank counterparty would be in a situation--it appears some
    of the regulators may be thinking along the lines that they
    would post margin. If that happens, we think those costs would
    still end up coming in our direction, coming towards us. So
    that is our concern from the other side of the transaction with
    our counterparty.
        Chairwoman Stabenow. And could you speak a little bit more
    about what that means in the real world to you in terms of the
    business and jobs?
        Ms. Harlan. It means an additional cost. We would not treat
    that cost any differently than any other cost. So, for example,
    if we have an additional cost in our product, we would have to
    consider numerous things. One would be, you know, do we move
    the price of our product? Does it impact that? Caterpillar has
    not specifically considered the cost and how we would manage it
    at this juncture, but that probably would not be a popular
    choice. So we would look at do we hedge or do we stop hedging.
    If we do not hedge to try to avoid that cost, that obviously
    means we would be taking on more risk, which in the end could,
    in fact, be a lot more costly.
        We also would consider if there is a cheaper way to still
    be able to enter into that derivatives contract, and one of
    those options may be to utilize our regional treasury centers
    that are located in other places if we did not need to post a
    margin in those locations.
        Chairwoman Stabenow. Thank you. When looking at the
    important changes that were made in the Dodd-Frank legislation
    and looking at the important transparency measures, the real-
    time reporting, the mandatory clearing and trading provisions,
    the reliance on swap execution facilities and swap data
    repositories, I wonder if each of you might speak about the
    timelines in terms of from your perspective how long you think
    the markets need to adapt to the new requirements, and just
    speak from your perspective from where you sit in terms of
    timelines.
        Mr. Duffy, I will start with you.
        Mr. Duffy. You know, I think it is kind of hard to predict
    the timeline as these things get rolled out. There are still,
    as Chairman Gensler said, many comment letters that are still
    yet to even be read by the staff of the CFTC, yet to be
    analyzed and how they are going to write the rules.
        As I said in my testimony, Madam Chairwoman, I do believe
    that the Congress needs to extend the rulemaking process so
    everybody can have an adequate amount of time to assess the
    different rules that are being proposed, and then we can decide
    how they should come out and in what sequence, because
    sequencing, as everybody has said, is very important.
        Chairwoman Stabenow. Mr. Bunkin?
        Mr. Bunkin. Senator, the question on timing and
    implementation is very important. I think as you said in your
    opening remarks, the most important thing is that we get this
    right. And in terms of how we would view this, it is no
    different than building a house. You really have to survey the
    land, get the plans drafted, build the foundation, build the
    walls and so forth. And we are talking about a very significant
    build across swap data repositories, enhancement to
    clearinghouses, the creation really for the first time of swap
    execution facilities, of a magnitude that we have not seen
    probably since the 1933 and 1934 act.
        In terms of the total time that that will take, it will
    probably be dependent to a large extent on the existing
    infrastructure that we have for particular asset classes. So as
    you heard from Mr. Thompson, in the context of the credit
    markets the existence of DTCC gives us a great head start in
    having a swap data repository that will be ready, willing, and
    able to begin its mission.
        In other asset classes, such interest rates, currencies,
    and commodities, we do not have the benefit of having that much
    of a head start. So it will be asset class dependent, and I
    think the important thing, as you had indicated, is that we get
    it right, we do it thoughtfully and based on the data that we
    collect so that we have a good, informed understanding of how
    we are going about the process as it moves forward.
        Chairwoman Stabenow. Mr. Thompson?
        Mr. Thompson. Madam Chairwoman, I think Mr. Bunkin stated
    it very well. It depends on how well you use the present
    infrastructure that is already in place, which has already been
    built at great expense. The credit default swaps market through
    DTCC is in pretty good shape. There obviously will be some
    things that we will have to add.
        What I said in my testimony, written as well as spoken here
    today, is that that should be used as well for other asset
    classes. So there are some extensions. The communication lines
    to some of those members in the interest rate swaps and the
    equity swaps area already exist, and those things should be
    utilized in order to save money and to speed implementation.
        I also stated that transparency should be the number one
    goal. With transparency, you could prevent some of the things
    that Professor Greenberger was concerned about. What is going
    to happen? It would give the supervisors and the regulators the
    tools that they need in order to oversee the market while the
    market is phasing in at a deliberate rate, the rest of the
    regime in a pace and a time that works for them.
        As to DTCC, we are committed, once the regulations are
    clear as to what needs to be built, to build that as quickly as
    we can possibly do it. But as Mr. Bunkin said, this has to be
    an industry build, and the industry is made up of both large
    and very small participants. And each one of those will have to
    spend a great deal of funds in order to build some of this
    infrastructure in order for it to work.
        Thank you.
        Chairwoman Stabenow. I see I am over my time, but, Mr.
    Greenberger, would you want to respond to that as well?
        Mr. Greenberger. Yes. I would say [inaudible] dealing with
    rulemakings, and those statutory deadlines are very hard to
    enforce, and the Commission Chairmen, Chairman Schapiro and
    Chairman Gensler, already said they will not be able to meet
    them.
        The second thing is the rules contemplate phase-in periods.
    Gary Gensler did not just fall off a hay wagon yesterday. He
    was the youngest partner in the history of Goldman Sachs. He
    has been on the other side of these things. He knows how these
    things run, and I believe from meetings I have had with him and
    other staff members, they are very sensitive to phasing these
    things in in a realistic way. Obviously, there is some
    infrastructure available. A lot is not. That will be taken into
    account, I have no doubt in my mind. In other words, if there
    is a final rule, that does not mean right away everything is
    going to happen.
        Chairwoman Stabenow. I think that became clear from the
    Chairmen today, so thank you.
        At this point I am going to turn this over to our Ranking
    Member, Senator Roberts.
        Senator Roberts. Thank you, Madam Chairwoman.
        Some very quick questions, Ms. Harlan. What are the biggest
    potential deterrents to hedging in the Dodd-Frank bill and the
    proposed implementation rules? I am sorry. Did you hear me?
        Ms. Harlan. No, I am sorry. Could you repeat that?
        Senator Roberts. What are the biggest potential deterrents
    to hedging in the Dodd-Frank bill and the implementation rules
    that are being proposed?
        Ms. Harlan. I would say if we are required to post margin,
    that is by far our biggest concern because of the additional
    costs it would impose upon us to hedge.
        Senator Roberts. I appreciate that.
        Moving right along, a lot of questions for the record. Mr.
    Duffy, tell me what you think about the effects of Dodd-Frank
    implementation will be on U.S. derivatives markets'
    competitiveness?
        Mr. Duffy. To be quick, sir, I am very concerned about the
    competitiveness of the Dodd-Frank Act. If the Dodd-Frank Act
    overextends itself, these over-the-counter products, which are
    important derivative products. They are also very complementary
    towards regulated futures markets. If they were to migrate to
    different jurisdictions, you could absolutely take the futures
    business along with it, and that is the last thing in the world
    that you would want to see happen, is to have regulated futures
    markets migrate out of the United States. So I am concerned
    about some of the overreaching on the over-the-counter markets
    because it is an integral part of the regulated market.
        Senator Roberts. Mr. Thompson, comment briefly on any areas
    of your operations that will be affected by the lack of
    harmonization between the SEC and CFTC proposals. Some of them,
    as you know, are quite different. How would this lack of
    harmonization impact your businesses and customers?
        Mr. Thompson. Well, thank you, Ranking Member Roberts.
    There is a significant difference in terms of how some of the
    reporting is going to be done. In the SEC proposal on
    reporting, swap data repositories have to report the data to
    the SEC; whereas, in the CFTC proposal, there is no
    requirement, similar requirement for that. So you could have a
    non-commercial entity which is not regulated, which does not
    come under the swap data repositories, registration
    requirements, being required to give the same data. We think
    that is something that should be very carefully considered.
        But there is equally a more important issue from our mind,
    and it concerns the international harmonization. There is a
    requirement right now in Dodd-Frank that swap data repositories
    receive an indemnification from foreign regulators in order to
    receive certain information. In our talks with foreign
    regulators, that has been a very sore point. They believe that
    this is data that they are entitled to, and, in fact, it is
    data that they are presently receiving in the credit default
    swaps market from our Trade Information Warehouse. And just as
    our regulators would be upset if they had to indemnify a
    foreign company, they see no need to have to indemnify us. And,
    quite frankly, we do not see it either. And we think that could
    be a source of fragmentation going forward into the future.
        Thank you.
        Senator Roberts. I thank you for that.
        Mr. Bunkin, many folks have been complaining about the al
    dente approach of the CFTC, Dodge City language, throw all the
    rules on the wall at once and see which one sticks. Some of us
    have suggested, as you did in your testimony, that a more
    rational approach would be to phase in the rules in a tiered
    manner basically by order of importance and necessity. If the
    CFTC were to do this, either voluntarily or with some
    encouragement by Congress, how much time do you think each
    phase needs in terms of the implementation period? And what
    should come first? I would suggest perhaps definition might be
    a consideration.
        Mr. Bunkin. Thank you, Senator. That is an important
    question. And I think that it has--the answer has two aspects
    to it.
        The first is I think a lot of the rules that are going to
    be finalized would benefit from having better data with regard
    to the market. That would include: How do you establish the
    right block transaction size? How do you determine which
    products should be cleared? How do you determine whether to
    apply position limits and, if so, how to size the position
    limits?
        So from our point of view, all of the rules would benefit
    from having good data on the market, and from that perspective
    what makes sense is to first create the data repositories so
    that the information can be collected to ensure that we have
    rules that are done on an informed basis.
        Senator Roberts. I appreciate that. I am down to one
    second.
        Professor or Mr. Greenberger, whatever title you wish, we
    will meet in Kansas City at the Gates Barbecue and talk over
    the saving of YRC. Thank you, sir.
        [Laughter.]
        Senator Roberts. Thank you, Madam Chairwoman.
        Chairwoman Stabenow. Thank you, Senator Roberts.
        Senator Hoeven.
        Senator Hoeven. Thank you, Madam Chairwoman.
        My question essentially is, I guess, for each one of you,
    if you would address it. What is the best way to make the
    commodities market--and I am talking about futures options,
    certainly derivatives. What is the best way to achieve
    transparency, to understand it in terms of systemic risk so the
    regulators can some way and the public can some way determine
    what is the systemic risk? Who in terms of an end user should
    get an exemption in terms of their hedging their product for
    business purposes, not speculate, not creating premiums, if you
    will, in times of scarcity or great uncertainty or, you know,
    some of the issues that we face now in the oil markets, for
    example? Other commodity markets, too.
        So I would ask each panel member, transparency, what do we
    do to make it transparent in terms of derivatives, commodities
    market, futures options, transparent, understandable in terms
    of the systemic risk in the market from a regulatory
    standpoint, and for end users, who should have that hedging
    exemption? So if you would just respond to that.
        Mr. Thompson. Well, perhaps I should go first because I
    made transparency the highlight of my particular talk, both in
    my written as well as my oral testimony.
        I agree with Mr. Bunkin that swap data repositories need to
    be built, and along the lines that we have already built the
    Trade Information Warehouse. That will lead to more
    transparency into the marketplace. That information should be
    made available to all regulators, and it should be made
    available to the public as the regulators see fit so that the
    public understands exactly what is going on and sees
    transparency. And, therefore, we have already done that. We
    already make available information to the public about the CDS
    marketplace. We are building an equity repository. We intend to
    do the same thing with that information that we have done with
    the credit default swap.
        I think the answer to some of your other questions really
    sort of depends on what does the information inform the
    regulators of, which is what Mr. Bunkin had said earlier. They
    need to understand what the position limits are, and you will
    not have a full understanding of that unless you have all of
    the positions in one place. And the thing I think we have to
    remember is that this is a global marketplace. And even though
    the U.S. is a large part of that marketplace, in some of the
    asset classes we are not as much as 50 percent. Those are in
    Europe and in Asia. And in order to encourage that, we have got
    to be certain that those markets are also participating on a
    global basis in a cooperative fashion in order to get the
    information that they need as well.
        Senator Hoeven. And do you feel the systems you are
    building are transparent and understandable and that the
    regulators will be able to both understand them and assess
    risk?
        Mr. Thompson. At this particular point, we do believe that
    with the credit default swaps information that we built because
    we built it in cooperation with the regulators. There are 40
    regulators in the OTC Regulators Forum. They come up with the
    guidelines that we have adopted. They are the ones who go into
    our portal to retrieve the information that they are looking
    for. They are the ones who are giving us the ad hoc requests
    for the information so that we can give back the information to
    them. And so we have worked cooperatively with them over the
    course of the last 2 years to build a system that they are
    comfortable with.
        Senator Hoeven. My next question would be to whoever wants
    to go next. Then if that system is being built and if it is
    transparent and accountable, then how should it be managed in
    terms of capital, in terms of margin requirement, and who
    should get end user exemptions on the basis of hedging versus
    speculating? Mr. Duffy?
        Mr. Duffy. If I may, since I think I am the only one that
    runs an exchange and owns a clearinghouse, we are a transparent
    institution. The central limit order book is the first way to
    figure out transparency on price. The second way to get the
    transparency is through central clearing. On trade data
    repositories, clearinghouses have the ability today without
    going through a third party to go directly to the regulator. So
    we already have that transparency.
        As far as end user exemptions go, I think the CME--and I
    have been very consistent in this. We never believed that
    anything should be mandated from an end user perspective. We
    believe that there should have been capital incentives for
    people that want to clear and not clear.
        So I think that is the best way to get the transparency,
    and as far as the costs go and who should manage it right now,
    exchanges like ours and others throughout the U.S. are already
    incurring these costs today. And to get the duplication, as we
    talked about earlier, through the regulator does not make any
    sense at all.
        Senator Hoeven. Mr. Bunkin?
        Mr. Bunkin. Yes, Senator, I think there are a couple of
    different kinds of transparency. Mr. Thompson talked about
    transparency of having complete information about all
    transactions which would reside in a data repository and be
    completely accessible to the regulators. They would understand
    the full composition of positions at any given moment in time.
        Another type of transparency is what the market sees, what
    the public sees. That is a type of transparency that comes
    perhaps through closing settlement prices on an exchange or
    through reporting requirements that are made available
    publicly. And the concern that requires attention with respect
    to that type of transparency is its potential impact to
    liquidity and the continuing availability of products.
        As it relates to end users, I think the question is: When
    can an end user be exempt from clearing requirements, execution
    requirements, margin requirements? But also when do they get an
    exemption from position limits? It is a very critical aspect of
    their ability to enter the market and hedge risk. And one of
    the concerns that exists with respect to the CFTC's proposal on
    position limits is, notwithstanding the fact that there is a
    specific exemption for end users, the way that the rule is
    otherwise defined, it will severely impact the ability of the
    intermediaries to provide liquidity to the end users. And I
    think that is a subject that would appropriately deserve the
    attention of the Committee.
        Senator Hoeven. I do have another question or two, but I
    would certainly wait until the next round.
        Chairwoman Stabenow. Senator Roberts and I said we would
    like to give you a little bit more time because you were
    joining us a little bit late in the meeting, so we would like
    to have you have an opportunity for another question. I think
    once you are finished we will be wrapping up.
        Senator Hoeven. Thank you, Madam Chairman.
        Mr. Bunkin, does Goldman Sachs understand and do you feel
    have accurately quantified its risk under all derivative
    transactions it is currently engaged in? And would you say that
    is true for other not only investment bankers but hedge funds?
    Do they understand their full risk involved in their
    derivatives that they have outstanding at this point?
        Mr. Bunkin. I cannot speak for other organizations,
    Senator, but I can----
        Senator Hoeven. I am just asking for your opinion.
        Mr. Bunkin. I can tell you with respect to our firm we
    spend a tremendous amount of resources and effort to understand
    and manage risk. That is a critical function of what we do. It
    applies across all types of instruments and markets in which we
    are involved, and derivatives would be a key focus for those
    efforts.
        With regard to other organizations, I think it really is
    dependent on the extent of their involvement in the markets and
    their resources that they dedicate to that activity.
        Senator Hoeven. So you feel that you have a good handle as
    an organization on your risk involved in all your derivatives
    and option and futures activity? You assess that, you have
    models that quantify it, you feel you understand it, and that
    if there is some type of event--Mr. Greenberger referred to,
    you know, something happening either in one of our markets or,
    as Mr. Thompson said, in a market overseas--you feel that you
    would understand how your derivative products would react in
    that situation, that you have adequate capital margin and so
    forth to make sure that you do not have a financial problem for
    the firm should something like that occur?
        Mr. Bunkin. We do a number of different things to address
    our risk. We value it every day, both at the level of the
    individuals who are responsible for putting on positions and
    then independently through a separate control function that
    verifies prices independent of the traders.
        But we also do other things such as run scenario analyses
    and shock tests and various types of reviews to imagine
    different market scenarios and the potential effects that they
    would have on our liquidity position and so forth. So that is a
    very important part of what we do at Goldman Sachs.
        Mr. Greenberger. Senator, if I might have a chance just to
    address some of your questions?
        Senator Hoeven. Just a second. Madam Chairwoman, I want to
    be respectful of my time and the Committee's time, so I----
        Chairwoman Stabenow. Yes, well, we do need to wrap up in
    the next couple of minutes, but, Mr. Greenberger, if you would
    like to respond to that.
        Senator Hoeven. Specifically, Mr. Greenberger, my question
    to you would be: Should there be any end user exemption? And if
    so, for whom? Remember, certainly Senator Roberts and myself
    will tell you about our farmers and others who are out there
    trying to hedge and already have many cost constraints that
    they face. But as you can tell, I also am very concerned about
    systemic risk and whether or not we have handled that.
        So should there be end user exemptions? And what should
    they look like?
        Mr. Greenberger. Yes. As I said, the Commodity Market
    Oversight Coalition, which I do a lot of work with, has a lot
    of--the farmers are not unified in this, and it tends to be on
    what their size is. And Caterpillar may have a different view
    than the family farmer. But I will say Dodd-Frank has an end
    user exemption. The Commodity Market Oversight Coalition
    supported it. But it is limited to commercial hedging by people
    who physical handle the farm product, the oil, and everything
    else.
        I think it is now beyond peradventure, pursuant to what Mr.
    Gensler said and Chairman Schapiro, that they will not be
    charged margin for that. Now, as is evidenced, I think that is
    risky, but my political judgment is they are doing the right
    thing.
        So the end user has a great exemption. What worries us all
    is that the Goldmans of this world--the position limits, end
    users have never since 1936, when position limits were created
    by that Congress, they are not applied to farmers or people who
    handle the product. The position limits keep speculators--
    speculators are needed to make the market liquid, so we do need
    speculators. But if you have too many speculators, the markets
    go haywire. So the farmers in your region have given up trying
    to hedge on the CME because speculators have taken over those
    markets because there are not adequate position limits.
        Farmers should not be subject to position limits. They
    should hedge for every dollar of risk they feel they have.
        Senator Hoeven. A last question----
        Chairwoman Stabenow. I would say this will have to be the
    last question. Thank you.
        Senator Hoeven. You have got to be quick, because I wanted
    to ask Ms. Harlan to respond to what Mr. Greenberger just said.
    But it sounds like, Mr. Duffy, you would like to as well.
        Mr. Duffy. I certainly would.
        Chairwoman Stabenow. I would ask 2 minutes each because we
    really do have to wrap up.
        Mr. Duffy. If you do not mind, Madam Chairwoman, I really
    appreciate it, because we were not in a discussion around
    speculators in the marketplace, which there has been absolutely
    no evidence that they have anything to do with the effective
    price, whether it comes from an academic, whether it comes from
    a Government study or anything else. So just to put that clear.
    So the farmers that are in your State and the farmers in Kansas
    are hedging quite a bit on the CME today, and they do have
    position limits to put in place.
        Secondly, your other question, sir, where you talked about
    risk, Mr. Thompson talked about a quadrillion. I do not know if
    anybody heard that number but me. We did 1.2 quadrillion value
    of contracts cleared in CME in 2008. We did 900 trillion of
    value cleared, notional value of contracts in 2010. We did not
    come to the taxpayer for any monies. We settled those products
    completely each and every night, and I think that is how you
    risk manage the product.
        So when you are talking about risk, I think that we are
    talking about oversight and we are talking about overreaching
    of rules that are being written on regulated exchanges. I think
    it is important to highlight the record that no customer has
    ever lost a penny in 156 years at the CME Group due to one of
    our clearing member defaults. And I think that is a record that
    we could put up against anybody in the financial services
    industry.
        I just wanted to get that on the record. I appreciate it
    very much.
        Senator Hoeven. Thank you.
        Chairwoman Stabenow. And we have the 2-minute warning.
        Ms. Harlan. Our position, Caterpillar's position and the
    coalition's position, is that there should be a strong end user
    exemption, and I will wrap up. I know we are close for time.
    But that is our position, that there should be a strong end
    user exemption. When we put on a derivatives contract, we are
    taking risk off the table. We are not putting risk on the
    table. We are taking risk off the table because of our business
    operations, and we are mitigating that risk.
        Chairwoman Stabenow. Thank you very much to everyone.
        Let me say this is a very important discussion that we need
    to continue as we move forward to implementation, and from my
    perspective, as somebody who was very involved in creating a
    narrow end user exemption for the purposes of people being--
    entities being able to hedge their own risk, we certainly want
    to maintain that narrow focus, but at the same time have that
    available for those that are involved in managing their own
    risks as a tool.
        But there is a very important set of issues that we want to
    continue to work with all of you on as this is implemented. We
    want to get this right. There was a reason we passed the law.
    There was obviously an incredibly serious crisis that affected
    millions and millions of Americans, and there was a reason to
    put in place this new law. But there is also a reason to spend
    the time to get this right and to make sure that it works and
    maintains liquidity in the marketplace and allows us to
    continue to create jobs and growth. And so that is why very
    much appreciate all of your time and attention and look forward
    to continuing to work with you.
        Thank you.
        [Whereupon, at 4:47 p.m., the Committee was adjourned.]

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

                                A P P E N D I X

                                 MARCH 3, 2011

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

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                             QUESTIONS AND ANSWERS

                                 MARCH 3, 2011

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