[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
Available via the World Wide Web: http://www.fdsys.gov/
U.S. GOVERNMENT PRINTING OFFICE
71-625 WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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
=======================================================================
[GRAPHIC] [TIFF OMITTED] 71625.008
[GRAPHIC] [TIFF OMITTED] 71625.009
[GRAPHIC] [TIFF OMITTED] 71625.010
[GRAPHIC] [TIFF OMITTED] 71625.001
[GRAPHIC] [TIFF OMITTED] 71625.002
[GRAPHIC] [TIFF OMITTED] 71625.003
[GRAPHIC] [TIFF OMITTED] 71625.004
[GRAPHIC] [TIFF OMITTED] 71625.005
[GRAPHIC] [TIFF OMITTED] 71625.006
[GRAPHIC] [TIFF OMITTED] 71625.007
[GRAPHIC] [TIFF OMITTED] 71625.011
[GRAPHIC] [TIFF OMITTED] 71625.012
[GRAPHIC] [TIFF OMITTED] 71625.013
[GRAPHIC] [TIFF OMITTED] 71625.014
[GRAPHIC] [TIFF OMITTED] 71625.015
[GRAPHIC] [TIFF OMITTED] 71625.016
[GRAPHIC] [TIFF OMITTED] 71625.017
[GRAPHIC] [TIFF OMITTED] 71625.018
[GRAPHIC] [TIFF OMITTED] 71625.019
[GRAPHIC] [TIFF OMITTED] 71625.020
[GRAPHIC] [TIFF OMITTED] 71625.021
[GRAPHIC] [TIFF OMITTED] 71625.022
[GRAPHIC] [TIFF OMITTED] 71625.023
[GRAPHIC] [TIFF OMITTED] 71625.024
[GRAPHIC] [TIFF OMITTED] 71625.025
[GRAPHIC] [TIFF OMITTED] 71625.026
[GRAPHIC] [TIFF OMITTED] 71625.027
[GRAPHIC] [TIFF OMITTED] 71625.028
[GRAPHIC] [TIFF OMITTED] 71625.029
[GRAPHIC] [TIFF OMITTED] 71625.030
[GRAPHIC] [TIFF OMITTED] 71625.031
[GRAPHIC] [TIFF OMITTED] 71625.032
[GRAPHIC] [TIFF OMITTED] 71625.033
[GRAPHIC] [TIFF OMITTED] 71625.034
[GRAPHIC] [TIFF OMITTED] 71625.035
[GRAPHIC] [TIFF OMITTED] 71625.036
[GRAPHIC] [TIFF OMITTED] 71625.037
[GRAPHIC] [TIFF OMITTED] 71625.038
[GRAPHIC] [TIFF OMITTED] 71625.039
[GRAPHIC] [TIFF OMITTED] 71625.040
[GRAPHIC] [TIFF OMITTED] 71625.041
[GRAPHIC] [TIFF OMITTED] 71625.042
[GRAPHIC] [TIFF OMITTED] 71625.043
[GRAPHIC] [TIFF OMITTED] 71625.044
[GRAPHIC] [TIFF OMITTED] 71625.045
[GRAPHIC] [TIFF OMITTED] 71625.046
[GRAPHIC] [TIFF OMITTED] 71625.047
[GRAPHIC] [TIFF OMITTED] 71625.048
[GRAPHIC] [TIFF OMITTED] 71625.049
[GRAPHIC] [TIFF OMITTED] 71625.050
[GRAPHIC] [TIFF OMITTED] 71625.051
[GRAPHIC] [TIFF OMITTED] 71625.052
[GRAPHIC] [TIFF OMITTED] 71625.053
[GRAPHIC] [TIFF OMITTED] 71625.054
[GRAPHIC] [TIFF OMITTED] 71625.055
[GRAPHIC] [TIFF OMITTED] 71625.056
[GRAPHIC] [TIFF OMITTED] 71625.057
[GRAPHIC] [TIFF OMITTED] 71625.058
[GRAPHIC] [TIFF OMITTED] 71625.059
[GRAPHIC] [TIFF OMITTED] 71625.060
[GRAPHIC] [TIFF OMITTED] 71625.061
[GRAPHIC] [TIFF OMITTED] 71625.062
[GRAPHIC] [TIFF OMITTED] 71625.063
[GRAPHIC] [TIFF OMITTED] 71625.064
[GRAPHIC] [TIFF OMITTED] 71625.065
[GRAPHIC] [TIFF OMITTED] 71625.066
[GRAPHIC] [TIFF OMITTED] 71625.067
[GRAPHIC] [TIFF OMITTED] 71625.068
[GRAPHIC] [TIFF OMITTED] 71625.069
[GRAPHIC] [TIFF OMITTED] 71625.070
[GRAPHIC] [TIFF OMITTED] 71625.071
[GRAPHIC] [TIFF OMITTED] 71625.072
[GRAPHIC] [TIFF OMITTED] 71625.073
[GRAPHIC] [TIFF OMITTED] 71625.074
[GRAPHIC] [TIFF OMITTED] 71625.075
[GRAPHIC] [TIFF OMITTED] 71625.076
[GRAPHIC] [TIFF OMITTED] 71625.077
[GRAPHIC] [TIFF OMITTED] 71625.078
[GRAPHIC] [TIFF OMITTED] 71625.079
[GRAPHIC] [TIFF OMITTED] 71625.080
[GRAPHIC] [TIFF OMITTED] 71625.081
[GRAPHIC] [TIFF OMITTED] 71625.082
[GRAPHIC] [TIFF OMITTED] 71625.083
[GRAPHIC] [TIFF OMITTED] 71625.084
[GRAPHIC] [TIFF OMITTED] 71625.085
[GRAPHIC] [TIFF OMITTED] 71625.086
[GRAPHIC] [TIFF OMITTED] 71625.087
[GRAPHIC] [TIFF OMITTED] 71625.088
[GRAPHIC] [TIFF OMITTED] 71625.089
[GRAPHIC] [TIFF OMITTED] 71625.090
[GRAPHIC] [TIFF OMITTED] 71625.091
[GRAPHIC] [TIFF OMITTED] 71625.092
[GRAPHIC] [TIFF OMITTED] 71625.093
[GRAPHIC] [TIFF OMITTED] 71625.094
[GRAPHIC] [TIFF OMITTED] 71625.095
[GRAPHIC] [TIFF OMITTED] 71625.096
[GRAPHIC] [TIFF OMITTED] 71625.097
[GRAPHIC] [TIFF OMITTED] 71625.098
[GRAPHIC] [TIFF OMITTED] 71625.099
[GRAPHIC] [TIFF OMITTED] 71625.100
=======================================================================
QUESTIONS AND ANSWERS
MARCH 3, 2011
=======================================================================
[GRAPHIC] [TIFF OMITTED] 71625.101
[GRAPHIC] [TIFF OMITTED] 71625.102
[GRAPHIC] [TIFF OMITTED] 71625.103
[GRAPHIC] [TIFF OMITTED] 71625.104
[GRAPHIC] [TIFF OMITTED] 71625.105
[GRAPHIC] [TIFF OMITTED] 71625.106
[GRAPHIC] [TIFF OMITTED] 71625.107
[GRAPHIC] [TIFF OMITTED] 71625.108
[GRAPHIC] [TIFF OMITTED] 71625.109
[GRAPHIC] [TIFF OMITTED] 71625.110
[GRAPHIC] [TIFF OMITTED] 71625.111
[GRAPHIC] [TIFF OMITTED] 71625.112
[GRAPHIC] [TIFF OMITTED] 71625.113
[GRAPHIC] [TIFF OMITTED] 71625.114
[GRAPHIC] [TIFF OMITTED] 71625.115
[GRAPHIC] [TIFF OMITTED] 71625.116
[GRAPHIC] [TIFF OMITTED] 71625.117
[GRAPHIC] [TIFF OMITTED] 71625.118
[GRAPHIC] [TIFF OMITTED] 71625.119
[GRAPHIC] [TIFF OMITTED] 71625.120
[GRAPHIC] [TIFF OMITTED] 71625.121
[GRAPHIC] [TIFF OMITTED] 71625.122
[GRAPHIC] [TIFF OMITTED] 71625.123
[GRAPHIC] [TIFF OMITTED] 71625.124
[GRAPHIC] [TIFF OMITTED] 71625.125
[GRAPHIC] [TIFF OMITTED] 71625.126
[GRAPHIC] [TIFF OMITTED] 71625.127
[GRAPHIC] [TIFF OMITTED] 71625.128
[GRAPHIC] [TIFF OMITTED] 71625.129
[GRAPHIC] [TIFF OMITTED] 71625.130
[GRAPHIC] [TIFF OMITTED] 71625.131
[GRAPHIC] [TIFF OMITTED] 71625.132
[GRAPHIC] [TIFF OMITTED] 71625.133
[GRAPHIC] [TIFF OMITTED] 71625.134
[GRAPHIC] [TIFF OMITTED] 71625.135
[GRAPHIC] [TIFF OMITTED] 71625.136
[GRAPHIC] [TIFF OMITTED] 71625.137
[GRAPHIC] [TIFF OMITTED] 71625.138
[GRAPHIC] [TIFF OMITTED] 71625.139
[GRAPHIC] [TIFF OMITTED] 71625.140
[GRAPHIC] [TIFF OMITTED] 71625.141
[GRAPHIC] [TIFF OMITTED] 71625.142
[GRAPHIC] [TIFF OMITTED] 71625.143
[GRAPHIC] [TIFF OMITTED] 71625.144
[GRAPHIC] [TIFF OMITTED] 71625.145
[GRAPHIC] [TIFF OMITTED] 71625.146
[GRAPHIC] [TIFF OMITTED] 71625.147
[GRAPHIC] [TIFF OMITTED] 71625.148
[GRAPHIC] [TIFF OMITTED] 71625.149
[GRAPHIC] [TIFF OMITTED] 71625.150
[GRAPHIC] [TIFF OMITTED] 71625.151
[GRAPHIC] [TIFF OMITTED] 71625.152
[GRAPHIC] [TIFF OMITTED] 71625.153
[GRAPHIC] [TIFF OMITTED] 71625.154
[GRAPHIC] [TIFF OMITTED] 71625.155
[GRAPHIC] [TIFF OMITTED] 71625.156
[GRAPHIC] [TIFF OMITTED] 71625.157
[GRAPHIC] [TIFF OMITTED] 71625.158
[GRAPHIC] [TIFF OMITTED] 71625.159
[GRAPHIC] [TIFF OMITTED] 71625.160
[GRAPHIC] [TIFF OMITTED] 71625.161
[GRAPHIC] [TIFF OMITTED] 71625.162