[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

