[Senate Hearing 112-280]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 112-280

                    ONE YEAR LATER - THE WALL STREET
                  REFORM AND CONSUMER PROTECTION ACT:
                      IMPLEMENTATION OF TITLE VII

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                               __________

                             JUNE 15, 2011

                               __________

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            Committee on Agriculture, Nutrition and Forestry










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            COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY



                 DEBBIE STABENOW, Michigan, Chairwoman

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

             Christopher J. Adamo, Majority Staff Director

              Jonathan W. Coppess, Majority Chief Counsel

                    Jessica L. Williams, Chief Clerk

              Michael J. Seyfert, Minority Staff Director

                Anne C. Hazlett, Minority Chief Counsel

                                  (ii)










                            C O N T E N T S

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                                                                   Page

Hearing(s):

One Year Later - The Wall Street Reform and Consumer Protection 
  Act: Implementation of Title VII...............................     1

                              ----------                              

                        Wednesday, June 15, 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

Born, Hon. Brooksley, Former Commissioner, Financial Crisis 
  Inquiry Commission; and former Chairperson, Commodity Futures 
  Trading Commission, Washington, DC.............................    20
Conner, Hon. Charles, President and CEO, National Council of 
  Farmer Cooperatives, Washington, DC............................    32
Cooper, Adam, Senior Managing Director and Chief Legal Officer, 
  Citadel LLC on behalf of Managed Funds Association (MFA), 
  Chicago, Illinois..............................................    33
Damgard, John, President, Futures Industry Association, 
  Washington, DC.................................................    35
Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, DC.....................................     4
Gibson, Michael S., Ph.D., Senior Associate Director, Division of 
  Research and Statistics, Board of Governors of The Federal 
  Reserve System, Washington, DC.................................     6
Roth, Daniel, President and CEO, National Futures Association, 
  Chicago, Illinois..............................................    22
                              ----------                              

                                APPENDIX

Prepared Statements:
    Chambliss, Hon. Saxby........................................    44
    Born, Hon. Brooksley.........................................    47
    Conner, Hon. Charles.........................................    54
    Cooper, Adam.................................................    58
    Damgard, John................................................    71
    Gensler, Hon. Gary...........................................    77
    Gibson, Michael S............................................    88
    Roth, Daniel.................................................    95
Document(s) Submitted for the Record:
Gensler, Hon. Gary:
    Additional material submitted to the Committee on 
      Agriculture, Nutrition and Forestry........................   102
    Financial Services Agency Government of Japan, prepared 
      statement..................................................   103
    National Rural Electric Cooperatives Association, prepared 
      statement..................................................   105
    The Farm Credit Council, prepared statement..................   112
Question and Answer:
Chambliss, Hon. Saxby:
    Written questions to Hon. Gary Gensler.......................   134
    Written questions to Michael S. Gibson.......................   140
Roberts, Hon. Pat:
    Written questions to Hon. Gary Gensler.......................   129
Stabenow, Hon. Debbie:
    Written questions to Hon. Gary Gensler.......................   124
    Written questions to Michael S. Gibson.......................   141
Thune, Hon. John:
    Written questions to Hon. Gary Gensler.......................   138
Gensler, Hon. Gary:
    Written response to questions from Hon. Debbie Stabenow......   124
    Written response to questions from Hon. Pat Roberts..........   129
    Written response to questions from Hon. Saxby Chambliss......   134
    Written response to questions from Hon. John Thune...........   138
Gibson, Michael S.:
    Written response to questions from Hon. Debbie Stabenow......   141
    Written response to questions from Hon. Saxby Chambliss......   140


 
                    ONE YEAR LATER - THE WALL STREET
                  REFORM AND CONSUMER PROTECTION ACT:
                      IMPLEMENTATION OF TITLE VII

                              ----------                              


                        Wednesday, June 15, 2011

                              United States Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 9:36 a.m., in 
room SR-328A, Russell Senate Office Building, Hon. Debbie 
Stabenow, Chairwoman of the Committee, presiding.
    Present: Senators Stabenow, Klobuchar, Gillibrand, Roberts, 
Lugar, Chambliss, Johanns, Boozman, and Thune.

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

    Chairwoman Stabenow. Well, good morning. The meeting
    will come to order of the Committee on Agriculture, 
Nutrition, and Forestry. We welcome our witnesses today and 
thank you to everyone that is joining us for our second in an 
ongoing effort to do oversight related to financial services 
reform.
    We are here today to continue the oversight particularly of 
Title VII of the Wall Street Reform and Consumer Protection 
Act, and one year after passing financial regulatory reform, I 
think it is important to take a moment to remember why Congress 
passed this historic legislation.
    In 2008 the world held its breath as we watched financial 
markets collapse and global financial institutions crumble. By 
the time the crisis subsided, millions of jobs were lost. Not 
only did hard-working Americans lose their jobs, but many lost 
their homes and their life savings in the process.
    Make no mistake. The United States experienced an 
unparalleled crisis that required bold action. The reforms in 
the Wall Street Reform and Consumer Protection Act, and in 
particular in the derivatives title, were passed to protect the 
public, reduce systemic risk, increase transparency, and 
promote competition and decrease costs for companies that use 
these markets to hedge their risks.
    I look forward today to the testimony and the discussion, 
to hear from our regulators and market participants on the 
implementation of Title VII. These rules and regulations will 
significantly impact global financial markets and our economy, 
which is why we must take the time to get the rules right while 
not unnecessarily delaying important reforms.
    To that end, I would like to thank the CFTC for their 
commitment to phasing in the reforms, provided temporary relief 
for regulatory requirements, and allowing market participants 
to weigh in on the rules as a whole. We have seen a remarkable 
amount of work coming from the regulators in the past year, and 
I would like to commend everyone involved and their staffs for 
what I know is a tremendous amount of hard work moving forward.
    I have several concerns that I hope the witnesses will 
address today as well. While we gave substantial new authority 
to the regulators, it will remain critical that the rules 
reflect congressional intent. The rules must maintain market 
liquidity, preserve the ability of end users to hedge and 
manage risk, and foster transparent, competitive markets. 
Regulators must also harmonize regulations not only 
domestically between agencies but also internationally with 
other jurisdictions. We must promote international 
harmonization to ensure that we do not undermine strong reforms 
to the financial markets.
    These oversight hearings are an important part of the 
process, and I look forward to working with my colleagues and 
agencies and market participants to ensure that we never allow 
the failures of the past to be repeated.
    So, again, welcome, and it is now my pleasure to turn to 
Senator Roberts, my partner on the Agriculture Committee. 
Senator Roberts.

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

    Senator Roberts. Madam Chairwoman, I appreciate your 
calling this hearing today. CFTC oversight is a critically 
important function of this Committee, and I am looking forward 
to hearing from our witnesses today with regard to the 
implementation of the Dodd-Frank Act, especially since we are 
only a month away from the act's effective date. Roughly 11 
months ago, the more-than-800-page Dodd-Frank bill was passed 
and began the process of what appears to be a re-engineering of 
our financial markets.
    What has followed has been 385 new rules and thousands of 
pages of new regulations which cover areas, I think, well 
beyond the scope of the financial crisis or the Dodd-Frank 
legislation. Fifty-one of the new rules are proposed by the 
CFTC's 31 different rulemaking teams that are still in 
operation, I am sure. I fear some may suffer a classic case of 
the cure for Government regulations is more Government 
regulation.
    I am curious to know whether these additional Government 
regulations will actually fix the mess created by non-market 
forces in the housing market and if any in-depth cost/benefit 
analysis of some of these rules has been done. That, by the 
way, was ordered by the President in his Executive order of 
January 18.
    I am concerned with yet another agency putting out a litany 
of regulations that will raise transaction costs, stifle 
legitimate economic activity, increase unemployment, and create 
new risks and uncertainty where it did not exist before. Some 
of these regulations re-engineer the principles-based risk 
management of futures markets that did not cause the financial 
crisis and that have operated well for decades.
    Madam Chairwoman, raising compliance costs and stifling the 
ability to actually manage the risks in today's global 
marketplace are not the objectives of this Committee, and I do 
not believe this administration as well. I have a real concern 
that choking off innovation and risk management by increasing 
the cost of entering into a swap transaction at a time when 
U.S. firms are struggling to compete globally may cause U.S. 
firms to seek distant shores for relief. I am worried that the 
Fed, the SEC, and the CFTC have spent too much time in their 
own respective foxholes, not really coordinating the overall 
regulatory impact of this act. And I am particularly concerned, 
as the Chairwoman and I have expressed in a recent letter to 
our European counterparts, that our regulatory process is 
headed for trouble internationally.
    Here are just a couple of the pieces I am interested in 
exploring today. Senators Lugar, Chambliss, and I, all three 
former Chairmen of this Committee and a Committee in the House, 
sent a letter concerned that the Dodd-Frank Act creates a black 
hole when it comes to regulating swaps and transactions after 
July 16 of this year--sort of a swaps purgatory, if you will.
    What happens next? I am expecting Chairman Gensler will 
fill us in on the Commission's actions today for members' own 
edification. The Chairman and the CFTC has made the top page of 
the Wall Street Journal, above the fold, so congratulations at 
least on honing in on that. Come to think of it, we could 
probably read this and not have the hearing, but then that is 
not what we are going to do.
    [Laughter.]
    Senator Roberts. Secondly, I have here an unusual letter 
from the Financial Services Agency of Japan asking why U.S. 
regulations would apply to Japanese financial institutions 
operating in Japan, and I think that is a fair question. They 
did not say, ``Domo arigato.'' They said, ``Wakarimasen,'' 
meaning ``I do not know what is going on.''
    My third question today has me wondering why fundamental 
and commonly used methods of hedging on futures markets, not 
swaps but wheat and corn futures markets, which have been in 
operation for decades without incident, had absolutely nothing 
to do with the financial crisis, would suddenly be considered 
speculation by one of the rules that is proposed by the CFTC. 
More on that later.
    In closing, I would simply suggest that instead of looking 
back over the past year at this hearing today, we should be 
examining the overall effect of all of these new regulations on 
our economy and globally over the next 10 years.
    I thank you.
    Chairwoman Stabenow. Thank you very much.
    We have three excellent panels today. I am going to turn to 
our witnesses. I do want to say for my colleagues any opening 
remarks we would be pleased to enter into the record. And 
Senator Roberts and I, because of the importance of this 
hearing, have agreed that for our first panel we are going to 
lengthen the questioning from the regular 5 minutes to 7 
minutes to allow a little more time rather than going to a 
second round because we have three panels today and that would 
make it difficult in the time allowed. But we have agreed to 
lengthen for our first panel to a 7-minute round, and so I 
appreciate that.
    Senator Roberts. Madam Chairman, if I may?
    Chairwoman Stabenow. Yes, Senator Roberts.
    Senator Roberts. Could I ask unanimous consent that the 
letter I received from the Financial Services Agency of the 
Government of Japan follow my comments and be inserted into the 
record at that point?
    Chairwoman Stabenow. Without objection. Absolutely.
    [The letter can be found on page 103 in the appendix.]
    Chairwoman Stabenow. Let me turn now and welcome our first 
panelists. Of course, Chairman Gensler, Gary Gensler, is no 
stranger to the Committee. As Chairman of the Commodity Futures 
Trading Commission, we welcome you back. Chairman Gensler has 
spent his career in finance, both in the public and private 
sectors. He is widely known for his work on oversight of the 
accounting industry and corporate governance and Sarbanes-
Oxley, and we thank you very much for joining us today.
    Our second panelist is Michael Gibson, a Senior Associate 
Director within the Division of Research and Statistics of the 
Federal Reserve Board. Mr. Gibson joined the Fed after 
completing his Ph.D. in economics at MIT and has been there 
since, focusing on risk management, financial markets, and 
corporate finance.
    We welcome both of you today, and we will ask Chairman 
Gensler to begin.

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

    Mr. Gensler. Good morning, Chairwoman Stabenow, Ranking 
Member Roberts, members of this Committee. I thank you for 
inviting me here today to testify. I am pleased to testify on 
behalf of the Commodity Futures Trading Commission.
    Though the financial crisis in 2008 had many causes, it is 
clear that the swaps market did play a central role. Swaps 
added leverage to the financial system with more risk being 
backed by less capital. And they contributed, particularly 
through credit default swaps, to the asset bubble in the 
housing market and helped accelerate the crisis when we got 
closer to it. And I believe they also contributed to a system 
where large financial institutions which had been thought too 
big to fail, all of a sudden this new term, ``too 
interconnected to fail.'' So that swaps, initially developed to 
help manage and lower risk--and that is what they do for most 
of America--they also concentrated and heightened risk in the 
economy and to the public, and ultimately millions of Americans 
found themselves out of work due to the crisis.
    It is essential that oversight ensures that the swaps 
market function with integrity, transparency, openness, and 
competition, free from fraud, manipulation--in essence, to make 
sure, as has been true for 100-plus years, that futures and 
then, later, swaps can be used to lock in a price, lock in an 
interest rate or currency rate so that businesses can focus on 
what they want to focus on and innovate and invest and lay off 
a risk to the marketplace somewhere else.
    The CFTC has substantially completed the proposal phase of 
our rule writing. That took us about 9 or so months. And the 
public has had an opportunity to look at the entire mosaic. We 
reopened all the rules for 30 days of comments, and those 
comment periods closed June 3rd.
    We will begin to consider final rules only after staff can 
actually analyze all of those comments. We have about 20,000 
comments to date, 12,000 of which are on one rule, position 
limits, but the others you can see are spread across 50 other 
rules. We will summarize, consider those comments, but the 
Commissioners will weigh in individually. We have a wonderful 
Commission, and they will each weigh in on these 50 or so 
rules. We will start taking up some this summer, but no doubt 
we will be at this well into the fall, and it may well be, 
since we are human, that it takes a bit of time.
    We are also coordinating and consulting closely with 
domestic regulators and international regulators. On the 
international front, Michel Barnier was just here a couple of 
weeks ago, and Europe looks to be moving on a similar approach 
to us. It is being debated in the European Parliament now, and 
they look to try to finalize their legislative package this 
fall on clearing, data repositories, capital, margin, and the 
like.
    The Commission yesterday also addressed the issue that I 
thank the three Senators--it was a very timely letter, and we 
agreed with your letter. We addressed this issue of what 
happens with regard to July 16th. And what in essence we did 
yesterday is the law says that those things that are subject to 
a mandatory rule do not go in effect on July 16th. So until we 
finish these rules, they do not go into effect, and we 
published a list of what we thought were the mandatory rules.
    But on those things that are self-effectuating, those 
things that would go into effect, we published relief in a 
proposed order until December 31st of this year. We will get 
public comment over 2 weeks; we will see what the public has to 
say about the proposed order and finalize an order of before 
July 16th so that the market has this certainty it needs over 
this period of time. If we come to November and there are still 
things that we have not done, then we can look and tailor 
appropriate relief at that time as we continue on this process.
    We will be finalizing rules over the course of the summer 
and the fall, as I said, and you were kind enough and Congress 
gave the CFTC and SEC flexibility in phasing implementation 
dates. And it is our belief that we lower risk and we lower 
cost to phase the implementation rather than having it all at 
one time. We had a 60-day comment period. We had 2 days of 
roundtables on this. That comment period just closed last week, 
so we are trying to pull together thoughts on the phasing as we 
move forward.
    With that, I look forward to taking any questions.
    [The prepared statement of Mr. Gensler can be found on page 
77 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Dr. Gibson?

    STATEMENT OF MICHAEL S. GIBSON, PH.D., SENIOR ASSOCIATE 
    DIRECTOR, DIVISION OF RESEARCH AND STATISTICS, BOARD OF 
    GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC

    Mr. Gibson. Thank you. Chairwoman Stabenow, Ranking Member 
Roberts, and other members of the Committee, I appreciate this 
opportunity to provide the Federal Reserve Board's views on the 
implementation of Title VII of the Dodd-Frank Act. The Board's 
responsibilities with respect to OTC derivatives fall into 
three broad areas: consultation and coordination with other 
authorities, efforts to strengthen the infrastructure of 
derivatives markets, and supervision of many derivatives 
dealers and market participants.
    Our consultation and coordination with other authorities 
consist of both domestic and international activities. 
Domestically, Dodd-Frank requires that the CFTC and SEC consult 
with the Board on many of their Title VII rulemakings. Staffs 
of the Commissions and the Board have fashioned a process for 
this consultation, and to date, Federal Reserve staff have 
commented on the proposed rules of the Commissions at each 
stage of their development.
    Internationally, the G-20 leaders have set out reform 
commitments for the OTC derivatives markets that will form a 
broadly consistent international regulatory approach. The Board 
also participates in international groups such as the
    Basel Committee on Banking Supervision and the Committee on 
Payment and Settlement Systems that are coordinating policies 
related to derivatives markets.
    The goal of all of these efforts is to develop consistent 
approaches to the regulation and supervision of derivatives 
products and market infrastructures to promote both financial 
stability and fair competitive conditions to the fullest extent 
possible.
    Dodd-Frank gives central counterparties an expanded role in 
the clearing and settling of OTC derivatives transactions, and 
the Board believes benefits can flow from this reform. If they 
are properly designed, managed, and overseen, central 
counterparties can reduce risk to market participants and to 
the financial system. Central counterparties that are 
designated as systemically important by the Financial Stability 
Oversight Council will be subject to heightened supervisory 
oversight.
    Title VII requires that the CFTC, the SEC, and the 
prudential regulators adopt capital and margin requirements for 
the non-cleared swap activity of swap dealers and major swap 
participants. The Board and the other prudential regulator have 
released a proposed rule on capital and margin requirements. 
Our proposal is currently out for public comment.
    Our proposal would impose initial and variation margin 
requirements on the non-cleared swaps held by swap dealers or 
major swap participants that have a prudential regulator. For 
swaps with a non-financial end-user counterparty, the proposed 
rule would not specify a minimum margin requirement. Rather, in 
keeping with the statute, it establishes a risk-based rule that 
would allow a banking organization that is a dealer or major 
participant to establish an exposure threshold below which the 
end user would not have to post margin. The proposed rule would 
not impose any caps on the thresholds for non-financial end-
user counterparties. In contrast, for swaps with other 
counterparties, the proposal would cap the allowable 
thresholds.
    Thank you and I look forward to answering your questions.
    [The prepared statement of Mr. Gibson can be found on page 
88 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Again, we will use a 7-minute question period for the first 
panelists.
    Chairman Gensler, I want to talk for a moment about 
pensions and business conduct standards. We continue to hear a 
lot of concern from the pension community that the proposed 
business conduct rules conflict with the Department of Labor's 
current and proposed fiduciary rules. As a result of this, 
there is a lot of concern that banks may not enter in the swaps 
with pensions, in part because of the concerns about legal 
risk. It is important that we do not create a situation where 
the protection of pensions and other entities, special 
entities, unintentionally limits their ability to use swaps. 
And so I am wondering what you are doing to address this issue. 
Can you provide us with certainty that pensions will continue 
to be able to hedge their risks using swaps?
    Mr. Gensler. I think it was the clear intent of Congress 
that pensions would be able to use swaps to hedge their risk. 
They do it quite often to hedge fluctuations in the bond 
markets and interest rate risks. We have been working directly 
with the Department of Labor to ensure that the provisions of 
Dodd-Frank are harmonious with what they are doing, and in 
essence that a swap dealer working with a special entity and 
complying with Dodd-Frank with special entities does not 
somehow inadvertently become a fiduciary under ERISA rules. The 
Department of Labor sent us a very specific letter, which is a 
public letter--I believe you all have that as well--which we 
think addresses much of this. But we continue to talk with the 
pension industry, talk with the Department of Labor on 
remaining concerns that they have.
    Chairwoman Stabenow. And I very much appreciate in general 
the Commission's efforts to provide legal certainty for swap 
transactions to mitigate disruptions in the market. But it is 
important to provide certainty to market participants regarding 
the timing and scope of the new requirements as well, and I 
know you have spoken to this, but I am concerned that we have 
not seen enough clarity on the order and the timing of 
implementation, which would help market participants prepare 
for the changes.
    Does the CFTC have sufficient authority in your mind to do 
all of the phase-in of the reforms that you believe need to be 
done? And how do you plan to provide that certainty needed to 
allow the market participants to really be able to plan going 
forward since that is so important as we phase in these rules 
in terms of the ability to avoid disruptions?
    Mr. Gensler. We do believe that we have sufficient legal 
authority. Congress said that any rule can go effective no 
sooner than 60 days after the rule, but we feel that we can 
phase after that. We put concepts out publicly in late April, 
13 key concepts of how to phase them, and we had 2 full days of 
roundtables and a 60-day comment period that people commented.
    What we are looking to do is through each of the final 
rules to provide timing, but we might also summarize that which 
we have brought together from these roundtables and comment 
periods and so forth and provide that with further guidance to 
the marketplace overall.
    We think it is very important that the data repositories, 
the clearinghouses, and the various execution platforms be what 
we have come to call ``registration ready'' or ``open for 
business,'' have their rule books in place before there is any 
mandatory clearing or mandatory trading, and that mandatory 
clearing, trading, transaction compliance be phased after that 
and have the marketplace have sufficient time.
    Chairwoman Stabenow. Let me also ask you to speak a little 
bit more about what is happening globally, and this is 
something I am hearing a great deal of concern about in terms 
of the international harmonization. And we know that Europe is 
behind us. You have spoken about their process. Senator Roberts 
and I recently sent a letter to our European counterparts. When 
we look at what is happening, given the importance to our 
financial industry in a global economy, to having international 
coordination and the need for a holistic understanding of the 
rules, how are you addressing the different timelines if there 
are significant differences in the rules themselves? What steps 
are you taking to avoid regulatory arbitrage? And from a 
practical standpoint, how do you plan on regulating global 
financial institutions, particularly in this time of limited 
resources? To me, this is a very important piece of how we move 
forward.
    Mr. Gensler. All great questions, on which you could have a 
whole hearing. But, first, the President and the heads of 19 
other nations came together in September of 2009 and committed 
to mandatory clearing and the trading and some of the keys that 
were in Dodd-Frank. Some nations moved ahead of us--Japan, as 
Senator Roberts mentioned. But Japan, Canada is ready, we are 
moving about it.
    Europe, they will move their legislative package through by 
this fall on clearing and many of the key issues. The trading 
components they will take up through something called MIFID 
probably in the fall and into next year. We, of course, are a 
little--we are taking some more time to get our rules in place, 
and it is appropriate. So some of the timing will become 
aligned, but also we are setting up work streams with the 
Europeans in particular to look at any differences.
    We are an agency of only about 675 people now. We need a 
lot more resources. But we have had a long history of doing 
mutual recognition agreements where we recognize comparable and 
consistent regulation overseas and then defer to overseas 
regulators. The best example might be in London where the 
largest clearinghouse actually that exists today is registered 
with us, but we sort of defer to the British regulators, the 
FSA, who take the lead on that clearinghouse that clears swaps.
    So we look to enter into maybe 15 or 20 mutual 
understanding arrangements with foreign regulators where we 
sort of defer where we can, as long as there is enough 
comparability. It does not have to be exact, but that is the 
standard approach that we have taken.
    Chairwoman Stabenow. Thank you very much.
    In a very short time limiting, Dr. Gibson, let me just say 
that I am particularly concerned as we go forward about the 
intent regarding protecting end users by providing exemptions 
for clearing, exchange trading, and margin rules. I want to 
follow up with you. I am going to do that in writing in order 
to respect the time that we have here, but I am concerned about 
the divergence of interpretation of the statute between the 
CFTC and our prudential regulators in terms of the stringency 
of the approach that is taken and very concerning to me and I 
know to the Ranking Member and others on the Committee that 
full legislative intent is followed related to this issue. So I 
will follow up with you in writing on that.
    Senator Roberts?
    Senator Roberts. Thank you, Madam Chairwoman.
    The commodity industry from growers to buyers is concerned 
with your proposal, Mr. Chairman, to what constitutes a bona 
fide hedge. I would like to give you an example and then get 
your thoughts, if I may.
    A Sumner County, Kansas, elevator expects in the near 
future to enter into a forward contract with the area wheat 
farmers at a fixed price with delivery at a later date. To 
hedge this risk, the elevator goes short on wheat futures. 
Under the CFTC's proposed rule, this would seem to make the 
elevator's future transaction a speculative one and, therefore, 
not eligible for the commercial hedge exemption from any 
position limit since at the time the elevator's futures 
position was taken, there, in fact, was not an underlying 
physical contract. This example seems to me to be a very normal 
transaction by a person who deals in the physical commodity, 
and he was trying to help farmers manage the risk. This is not 
AIG. This scenario is real and current. We are cutting wheat 
today back home, and we need clarity. Are they hedging or not?
    Mr. Gensler. I think what you have described is a hedge, 
so--and I think that is my answer. What you have described--
somebody in the wheat markets, whether they are a farmer, a 
wheat elevator operator, or anyone in the supply chain, your 
merchant producer, they can take that physical grain into their 
ownership, enters into a forward or, for that matter, enters 
into a future, they have for a long time--and I think it was 
consistent with what Congress did in Dodd-Frank, is a bona fide 
hedger under the bona fide hedge definition.
    Senator Roberts. So they would be eligible for the 
commercial hedge exemption?
    Mr. Gensler. Well, there is a number of different hedge 
exemptions. I believe you are referring to--Congress addressed 
it--I am asking because I am not entirely sure. Are you 
referring to the bona fide hedge transaction exemption from 
position limits?
    Senator Roberts. Yes.
    Mr. Gensler. As you described it, Senator, I believe so. If 
there is ambiguity in the language, I would love to follow up 
with your staff, and we know your staff very well. Thank you, 
by the way. He is very good. You took him from us, but he is 
good. And we would be delighted to follow up to understand the 
ambiguity that it might be----
    Senator Roberts. They are not on loan, by the way.
    Senator Lugar, Senator Chambliss, and I sent you a letter 
May 27 asking for clarity on what exactly happens on the 
effective date of Title VII of Dodd-Frank. In your response you 
told us to wait for your meeting yesterday. Then yesterday you 
said to wait until the details were made public.
    I finally saw your answer just this morning. We had one 
staffer who got it 7 o'clock last night, and with the 23 pages 
and two addendums, and are starting to digest it. I tried to 
digest it this morning, but I got indigestion.
    I believe you have done--this is not the way to deal with a 
Committee hearing. Madam Chairman, I do not think we can have 
this kind of--I do not want to call it a ``cavalier attitude,'' 
but that is about what it amounts to. In fact, if you are sent 
a letter, you respond a week later and say we are going to have 
a meeting, you have a meeting and then the very next day we 
come here and we still do not know the details--and I am going 
to recommend very strongly we have additional hearings. I know 
we have 7 minutes, but 7 minutes? We need 17 to get into this.
    From what I understand you included a sunset date of 
December 31 of this year. Even if the rules are still not in 
place, that means we would have a 6-month purgatory. Won't that 
put us back in the same position of uncertainty as the date 
draws near? Why does it make more sense to just simply provide 
certainty until the new regulations become effective?
    Mr. Gensler. Senator, any regulation that is called for in 
the statute does not go effective until that regulation is 
finalized. The 6-month date only is to those things that might 
otherwise be self-executing, so the clearing rules, the 
business conduct rules, and position limit rules, and many of 
the rules, if the statute says write a rule, it does not happen 
until we--and the pressure is on us to finish that, but it does 
not happen even if that is March of next year.
    This sunset of December 31st is only on those things that 
might otherwise be self-executing, and we will take a look 
again in November and I am committed to take a look in November 
to see if there are things that we should do and working with 
this Committee and working with market participants, if there 
is tailored, appropriate relief at that time.
    Senator Roberts. I appreciate that. The CFTC has proposed 
over 50 rules since the passage of Dodd-Frank, comprising 
thousands of pages of materials. As I understand the 
Administrative Procedures Act, major revisions to a proposed 
rule require that an agency re-propose the rule for further 
comment. Who at the CFTC will make the ultimate determination 
on what changes require a rule to be re- proposed? Are you 
encouraging interested parties to suggest changes to rules that 
would not require re-proposal? We have heard this from various 
market participants. Will you be willing to re-propose rules if 
necessary? Or will the only changes that get made to your 
original proposed rule be those that can be made without 
requiring re-proposing? My commentary would be: Isn't really 
getting the rules right the most important thing, not timing?
    Mr. Gensler. I would agree with you, getting the rules 
right. The American public, though, is also still unprotected, 
so there is a balancing, and we are focused on trying to get 
these rules completed.
    On your central question, with 51 proposed rules there is 
no doubt that there will be some that will be re- proposed. 
That is the nature of rule writing, and that does not, I do not 
think--I am very proud of the CFTC, but really what we have 
asked the market to do is to give us their best comments. Given 
the statutory construction, we do not want to overread the law 
or underread it. We want to do just what Congress intended us 
to do, and I think that most of our rules, the final rules, 
will have come changes to them, and those final rules will be 
logical outgrowths of what we proposed. But if it is more than 
a local outgrowth, if it truly something new, then the 
Administrative Procedures Act says you re-propose.
    Senator Roberts. I am concerned that a large number of 
regulations that the CFTC is proposing and the huge regulatory 
costs that will be imposed on industry will threaten the 
economic utility of derivatives. Is there a detailed analysis--
has CFTC done any of the detailed analysis of the costs of 
being imposed on this financial system and the impact of those 
costs on participation in this market? That is what the 
President intended in his January 18 directive to all Federal 
agencies. There was some question as to whether or not 
independent agencies like yourself are included. He has since 
clarified that and said, yes, they are, and I certainly give 
him a lot of credit for that.
    If CFTC has done the analytical work, would you please 
provide it to this Committee?
    Mr. Gensler. We worked to comply with the cost/benefit 
considerations as laid out by Section 15(a) of our statute. You 
may have well worked on it years ago helping us get that. 
Subsequent to the President's Executive order, which you 
correctly said does not technically come over us, we had our 
chief economist and our general counsel issue new guidance to 
all of these 30 or so teams as to how to comply with 15(a) but 
also take in mind what the President said, and that is what we 
will be following for our final rulemaking and any new 
proposals we----
    Senator Roberts. I really appreciate that, and you will 
please provide it to the Committee, in terms of the analytical 
work, who is doing it, the detailed analysis of the cost, i.e., 
the cost/benefit yardstick. Just show us the yardstick.
    Mr. Gensler. Well, we include cost/benefit considerations 
in each of the rules we have in our proposals. We will continue 
to do that in the finals. We have new guidance which we would 
be glad to share with this Committee, that new guidance.
    Senator Roberts. I appreciate that. Thank you.
    Chairwoman Stabenow. Thank you very much.
    We will go to Senator Klobuchar and then Senator Lugar.
    Senator Klobuchar. Thank you very much, Madam Chairwoman, 
and thank you for holding this hearing.
    I think we all know that reckless trading of unregulated 
over-the-counter derivatives played a significant role in 
triggering the financial crisis in 2008. Bringing transparency 
and accountability to this market is essential, and that is why 
I am glad we are having this oversight hearing and that you are 
both here to talk about the implementation of Wall Street 
reform.
    I think it is also important to remember, as I think both 
of you know, that while many financial institutions gambled in 
the over-the-counter derivatives market, farmers, cooperative 
manufacturers, and a host of other businesses that produce 
goods and provide services were successfully using derivatives 
to reduce risk in their business. Derivatives, when used 
properly and backed by sufficient collateral, play a crucial 
role in our financial and economic system.
    Now, my questions are first about the speculation in the 
oil market. I do not think you are surprised by this first 
question, Chairman Gensler. We have had an ongoing dialogue 
about it, and I would like to hear what progress the CFTC has 
made. Frankly, the CFTC was required by law to implement 
position limits by legislation adopted by this Congress, passed 
in January. Back in January, these position limits were 
supposed to--the rules were supposed to be put in place, and I 
am concerned that we have not been moving ahead, at least in 
the energy market. We have seen some recent drop in gas prices, 
but I also think that we know that the recent run-up has 
already had a significant impact on our economic recovery.
    We all know speculation alone cannot be blamed for the 
rising price of oil, but I think the evidence is pretty clear 
back in 2008 and now that excessive speculation can contribute 
to volatility in the market and a periodic spike in prices that 
we have also seen more and more of the speculation in the hands 
of hedge funds and others and not in the hands of people like, 
say, Delta Airlines that are legitimately hedging their bets.
    So could you explain the reasons behind the delay and how 
you are going to address this to get this done?
    Mr. Gensler. One of the critical components of the Dodd-
Frank Act is that Congress mandated that we, as the Senator 
says, get this done. We have had position limit at since the 
1930s, but Congress specifically broadened that to include part 
of the swaps market and also narrowed certain exemptions from 
it.
    We proposed these rules in January of this year, received a 
little over 12,000 comments on them. We put significant 
resources on summarizing those comments so we can comply with 
the Administrative Procedures Act and get the best judgments of 
the public as well. And we are trying to bring that together in 
a way that we can put a version of this, a document in front of 
our Commissioners and get Commissioner feedback based upon what 
to do with these 12,000 comments. There is nothing that would 
please me more if I could tell you that we are going to vote on 
it next week, but I am not here. I cannot tell you that with 
12,000 comments.
    But we are moving forward on large trader reporting. I 
think we will vote on that in the next month, and that is an 
important piece of this to get the data in on these position 
limits. And we are going to try to move this as soon as we 
humanly can.
    Senator Klobuchar. I appreciate that. I continue to be 
concerned, and as you know, biofuels are now 10 percent of our 
fuels in this country, and there has been a lot of sudden 
discussion about that and some potential sudden changes that I 
think could also affect the price of gas. So I hope that we 
will move forward quickly with this speculation issue.
    Minnesota boasts the largest number of agricultural co- ops 
in the country, and there has been a concern that they could be 
classified as a swap dealer under the new rules. As the co-
chair with Senator Thune of the Congressional Farmer Co-op 
Caucus--I do not know if you know that exists, but it does--I 
believe----
    Mr. Gensler. I have known it from you.
    Senator Klobuchar. I believe that we must maintain the 
ability of farmers to band together to market their products 
and manage their risk. I know the farmer co-ops have been in to 
meet with you as well as Commission staff to discuss this 
issue. How do you see agricultural co-ops that offer risk 
management tools to their members fitting under the new 
regulatory structure? Do you think they will be classified as a 
swap dealer?
    Mr. Gensler. We have been working I think very actively and 
constructively with them. Most of what they do are actually 
probably not even swaps. They are forwards, and under our 
product definition rule, which we look to get comments on, I 
think that will be clarified. But to the extent they do do 
swaps only with their members in the agricultural space, we 
have been trying to look through how we can sort of define that 
into the swap deal definition so that it is out, not in. 
Congress gave us authorities under de minimis definitions, and 
so we have been actively sort of working with the various 
members, not just from your State but from other States as 
well.
    Senator Klobuchar. Well, thank you, because I hope there is 
a way to uniquely define farmer co-ops so they can continue to 
do the kinds of things that they do.
    Dr. Gibson, I would like your take on the margin issue. 
While the CFTC made clear that end users will not have to post 
margin, the Federal Reserve, along with the other banking 
regulators, proposed rules that exempt end users up to a 
certain threshold of exposure after which the margin would have 
to be collected. Can you take me through the Federal Reserve's 
thought process--I always like the entire Federal Reserve's 
thought process--on this proposed rule? And what practical 
effect do you think it will have on end users?
    Mr. Gibson. Yes. As required by the statute, the proposed 
rule of the prudential regulators applies to all swaps of a 
swap dealer, and also as required by the statute, it takes a 
risk-based approach so it divides the swap dealer's 
counterparties into three groups: other swap dealers or major 
swap participants, which is a high-risk group; financial end 
users are in the middle; and commercial end users are the low-
risk group, because we believe that the commercial end users 
pose little or no systemic risk, so that justifies putting them 
in the low-risk group.
    Our proposed rule, like the CFTC's proposed rule, would not 
require any margin to be collected from commercial end users as 
long as the exposure is below a threshold that the bank swap 
dealer establishes, which we believe is consistent with the 
status quo where banks set limits on their exposures to all 
their customers, limits above which they would not be 
comfortable having an exposure. So we believe the general 
structure we have proposed is consistent with the status quo 
for commercial end users.
    Also, like the CFTC, the prudential regulator proposed rule 
would require trading documentation, including a credit support 
agreement, or a CSA. We understand that would be a change for 
some commercial end users that currently do not have that sort 
of trading documentation. So that would be an additional 
burden, both of our rule and the CFTC's rule. But in keeping 
with the general improved transparency and regulation of the 
derivatives market, we feel like that is a reasonable 
requirement. So that is it.
    Senator Klobuchar. Okay. Thank you very much.
    Chairwoman Stabenow. Senator Lugar.
    Senator Lugar. Thank you, Madam Chairman.
    Chairman Gensler, you mentioned that as many as 15 
agreements may have been coordinated with trading commissioners 
in other countries. My question comes from this letter that has 
been mentioned from the chairman of the Japan Financial 
Services Agency which expressed ``a concern regarding 
extraterritorial application of rules relating to the U.S. 
Dodd-Frank Act,'' and especially in regard to registration and 
clearing requirements.
    Leaving aside the specifics of the Japanese concern, what 
concerns do you have or what has already developed as far as 
traders in the United States or others who might use the CFTC 
deciding to use other countries' mechanisms? To what extent, in 
other words, has there been deliberate evasion or really plans, 
simply, to express whatever they want to do through these swaps 
markets in some other situation?
    Mr. Gensler. Well, money and capital and risk know no 
geographic border or boundary, and today's modern financial 
system and modern communications can be moved anywhere. So that 
is why it is so important that we seek to work with other 
regulators and harmonize what we are doing.
    I do not know the specific of that one letter, but I think 
the Dodd-Frank Act was quite specific on it in a section in 
Title VII where if it has direct effect, you know--if there is 
a U.S. counterparty somewhere in the mix-- it is not, say, a 
Japanese bank doing a trade with a Japanese insurance company. 
But if it is U.S. counterparties, that may come under that. I 
say ``may'' because there are lots of specifics that could be 
aligned with that.
    So if a foreign bank is doing business here in the U.S., 
they may have to register as a swap dealer. But we also were 
given authority by the Congress to be able to recognize some 
foreign regulators if they are consistent regulation or 
comparable, if they have capital regime or the clearing regime. 
Again, it does not have to be identical but, you know, that it 
is comparable enough that we can recognize some of those 
regimes.
    Senator Lugar. To what extent, if there was a crisis that 
occurred really through swaps, could those who created the 
crisis in the United States simply transfer their operations to 
another country? In other words, have we suppressed the 
specifics of at least American situations, but simply 
transferred to the international community something that may 
come back to bite us in another way?
    Mr. Gensler. I now understand the question. I think that 
the worst example one might say is AIG. AIG Financial Products 
was operating in Connecticut and London. Just because it was--
actually, the gentleman that ran it ran it out of London. Just 
because he was in London, it was the American taxpayers that 
ended up on the hook for $180 billion. So because capital can 
be placed anywhere around the globe, yes, it can hurt the U.S. 
economy.
    I think what we are looking at and what Congress asked us 
to look at is if it has a direct or significant effect on U.S. 
commerce or the U.S. economy, you know, we have to at least 
consider that and ensure that the public is protected and there 
is the transparency and openness to that transaction.
    Senator Lugar. Give that predicament, it is not too late 
ever to amend the Dodd-Frank Act, but from your experience 
taking a look at the problems that occurred in the markets they 
are trying to regulate, what should Congress have done here? 
Was an attempt made to overregulate situations that really do 
not require that and simply bollix up the situation? Or is 
there a legitimate concern on your part that the Dodd-Frank Act 
was necessary? Can you give some feel for our market?
    Mr. Gensler. I think that Title VII, the derivatives title, 
was necessary. I think that the American public remains exposed 
today and unprotected because the market. The $300 trillion 
size market or $20 for each $1 in our economy is yet to have 
the transparency and risk-reducing features like clearinghouses 
that can help. So I think what Congress did was both historic 
but necessary.
    Senator Lugar. The House of Representatives, perhaps you 
know, in their budget has reduced funding for the CFTC by 15 
percent, as I understand it. That is not the final word on how 
the Federal budget may come out this year, but what are the 
implications for CFTC if a 15-percent reduction were to occur? 
How do you manage at that point?
    Mr. Gensler. It would be bad for the American public. We 
will get these rules done. Anybody who is thinking of the 
delay, and cutting our budget is a good way to slow that down, 
I think that would be sort of unlikely. I think we will find a 
way even if we are cut. But the immediate effect of cutting the 
budget 15 percent is that we would have to cut staff. We are 
only a little bit larger than we were in the 1990s. We are 675 
people. We are taking on a market seven times the size--you 
know, you are from a great State, but think of seven more 
States that your police force has to take on. You need more 
funding. We have asked for about 50 percent more funding, and 
given our Nation's budget deficits, I am a little hesitant to 
ask for that 50 percent more. But we are taking on seven times 
the size. So that is, I think, a good investment for the 
American public. A cut to our funding would mean we could not 
oversee these markets. We will get the rules done, but not only 
could we not oversee and be a cop on the beat, but all those 
questions that market participants, that some of the later 
panels--we will not have the people to answer their telephones. 
There will be more market uncertainty in 2012 than necessary. 
We would rather have the lawyers and economists and accountants 
to answer the questions, give interpretations, and actually 
work to make sure this is a smooth transition.
    Senator Lugar. Thank you very much.
    Chairwoman Stabenow. Thank you very much.
    Senator Johanns?
    Senator Johanns. Thank you, Madam Chair.
    Mr. Chairman, let me start out by reading into the record 
just a couple paragraphs from an article that--very, very 
recent, in fact, within the last 10 days. This article says, 
``Europe's relatively pragmatic approach to reforming 
derivatives regulations offers a `terrific opportunity' at the 
expense of the United States, which risks scoring `one of the 
biggest own-goals in financial markets history,' a senior 
banker said.''
    It goes on to say, `` `The U.S., through Dodd-Frank and 
other means, is excessively focused on derivatives markets,' 
Colin Grassie, chief executive of Deutsche Bank's operations in 
the United Kingdom, told the recent annual conference of 
International Capital Market Association.''
    He goes on to say, ``Grassie said that Europe's reforms of 
over-the-counter derivatives were so far more pragmatic than 
those in the U.S. and much more in tune with the derivatives 
markets. Derivatives are like cars and guns,'' and this is a 
quote from him, ``not inherently bad. `It is what you do with 
them,' he said. `If they do what they should do, they play a 
very important role. Europe understands this,' he says. The 
U.S. has failed to understand it.''
    Now, you know, I listened to the testimony today, and you 
throw these phrases around like the rest of the administration, 
to be honest with you. I sit on Banking, I sit on Ag. You know, 
this parade of people come and taxpayers are on the hook for 
$180 billion. I am so tempted to walk through where that money 
went to with you, but I will spare everybody that. You talk 
about the American public is currently unprotected. You talk 
about capital and risk know no boundaries, et cetera. All of 
the right things to say. But I sit here and listen as a former 
Cabinet member, a former Governor, trying to promote economic 
development, et cetera, and I say to myself, ``How did a wheat 
farmer and a co-op in Kansas get tangled up in this?'' And, you 
see, to me and the average person out there, that makes no 
sense whatsoever. They just go, ``This is ludicrous.''
    But, most importantly, what is happening out there in my 
personal opinion is this: You are seizing up the marketplace. 
People cannot decide what to do next. They do not know if you 
are going to be regulating them, not regulating them, what the 
extent of the regulations are. And I think it is just having a 
depressing impact on the whole economy, and I am not just 
talking about the Kansas wheat farmer. I am talking about the 
entire financial markets. They are just freezing up from this 
fear of what Dodd-Frank is turning into.
    Let me just ask you directly. Don't you think we overdid it 
here?
    Mr. Gensler. With all respect, I think that the Dodd- Frank 
derivatives title was very necessary. A market that is so large 
does affect the wheat farmer. That wheat farmer in Kansas is 
not going to be a swap dealer, is not going to be an end user, 
is not going to have to post--come into clear or post margin 
under the proposed rules. If there are any doubts about the co-
ops, we are working with the co-ops, because that is clear, 
that is congressional intent. But is lowering risk because that 
wheat farmer actually lost out. They lost out when the 
financial system failed in 2008. And, by the way, the 
regulatory system failed. It was not just Wall Street. The 
regulators failed, too. And so that is, I think, what is 
necessary and appropriate. Based upon a lot of public input, we 
are going to get the rules finished and balanced. We have given 
more time here. I think that balance is important. But I think 
that was very much appropriate because millions of Americans 
were put at risk by a financial system that at least in part 
failed due to derivatives. There were a lot of other reasons as 
well.
    Senator Johanns. You know, and my response to that is, 
``There you go again.'' You just create this impression that if 
we are not out there regulating everything and eliminating risk 
from the marketplace, that somehow the wheat farmer in Kansas 
is going to get punished again. And all I am asking you--and I 
think it is a very fair question here: Doesn't it occur to you 
that with the risk of losing this business, literally forcing 
jobs and capital to the place of least resistance, which, holy 
smokes, that might be Europe? I mean, can you imagine? Haven't 
we just gone too far? Aren't we just crazy in our 
overregulation here? Isn't there someplace where you would just 
give me a little victory here and say, ``I think maybe we did 
too much here''? Because it looks to me like we have punished 
everybody for no good reason.
    Mr. Gensler. I think that Congress took a balanced approach 
in Title VII and that there is going to be more transparency 
and more competition in a marketplace and that markets work 
best when there is that transparency and competition in the 
marketplace. We are going to work closely with European 
regulators to harmonize and where we can within the statute try 
to harmonize and bring it together.
    There are certainly things that we are doing to try to 
interpret the statute in a way to harmonize. It was even a good 
question the Chairman and the Ranking Member raised about 
indemnification in the data repositories that Chairman Schapiro 
and we have come together to try to find a way and thread the 
needle to lower that concern of the Europeans. So where we can, 
we are looking to try to harmonize as best we can to bring 
alignment but also to make sure that our financial markets are 
strong and that the taxpayers do not stand behind the large 
financial institutions as they, unfortunately, have.
    A perverse outcome of the crisis is that a lot of people in 
the market think it is even more likely that taxpayers will 
bail these companies out because they are even larger. They are 
larger as a percentage of the economy now. And we did it once. 
We did it in 2008. That is a perception, and Title VII helps to 
address that in part.
    Senator Johanns. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you.
    Senator Chambliss?
    Senator Chambliss. Thanks, Madam Chairman. Chairman 
Gensler, Dr. Gibson, good to see both of you.
    Mr. Chairman, you will recall leading up to the debate on 
Dodd-Frank as well as throughout the debate, you and I had tons 
of conversations in my office and by telephone and in this 
Committee room about the implication of these drastic changes 
in the regulation and how the impact of it was just--as Senator 
Roberts, Senator Lugar, and Senator Johanns just alluded to, it 
is going to drive business offshore. And we were very concerned 
about that, and you kept reassuring us, as well as Secretary 
Geithner kept reassuring us that, no, no, that is not going to 
happen. We are going to lead the way. The Europeans are going 
to follow us. The Asians are going to follow us, and everybody 
is going to be happy, and everybody is going to have the same 
amount of business.
    Well, I hear you defending the language in Dodd-Frank with 
respect to the overregulation, in my opinion, of the swaps and 
derivatives market and that, you know, the Europeans are still 
going to come along. But very honestly, Mr. Chairman, the facts 
are not on your side. The letter Senator Lugar referred to 
earlier was dated back in April. It came from the head of 
Japan's Financial Services Agency. In that letter he says they 
have a concern regarding the extraterritorial application of 
rules relating to the U.S. Dodd-Frank Act. He went on to voice 
a particular concern over registration and clearing 
requirements, and the letter concludes by saying that Japanese 
institutions might have to avoid trading with U.S. 
institutions, exactly the concern that we had back then.
    Last week Secretary Geithner gave a speech in which he said 
the U.K. had set a tragic example through light-touch 
regulation, and he warned that it was essential for European 
and Asian jurisdictions to fall in line with the United States 
on derivatives regulations. Well, what did the Europeans do? A 
gentleman, a European regulator from Britain, Martin Wheatley, 
responded in this way: ``To suggest that the United States sets 
a gold standard that other markets should follow is nonsense.''
    I mean, Mr. Chairman, if we continue down the road of 
overregulating this industry--and certainly there was some 
participation by this industry in the collapse of 2008, but it 
was not the sole reason. There were many, many other reasons 
why the collapse occurred. And if we continue down the road of 
overregulation, it is pretty obvious that the concerns that a 
number of us had that were attempted to be allayed by you 
during the debate and, unfortunately, you prevailed and we did 
not, but our fears are going to come true, and are true today. 
We are seeing swaps and derivatives traded around the world in 
markets even like Panama, and we are supposed to take some 
confidence in the fact that because we are going to 
overregulate the financial markets in the United States that 
everything is going to be safe and secure in the future.
    I would like your comment to that.
    Mr. Gensler. Well, I think that what happened in 2008 and 
what was addressed by Congress was to ensure that the 
transparency comes to these markets and we lower risk in the 
markets if U.S. commerce is affected. ``Directly and 
significantly affected'' I think are the words of the statute. 
So if it is a transaction, whether it is in Panama, Germany, 
Japan, and it is between, you know, Germans, Panamanians, or 
Japanese, that is not what is under this. But if it relates to 
the U.S. commerce, to have that transparency, to have that 
openness in the marketplace. And that is going to--that is the 
core of it. We are going to work very closely with the 
Securities and Exchange Commission, with the other domestic 
regulators like the Federal Reserve but also with the 
international regulators on this harmonization. We share just 
about all of our draft rules with the Europeans and sometimes 
with the Canadians and the Japanese and have them take a look--
they give us comments--even before we published them as 
proposals. And we have gotten a lot of very constructive 
feedback.
    We meet with the most senior folks and the staff folks. We 
have ongoing work streams with them on this. And so we are not 
going to end up identical, and certainly if there is a 
transaction in Germany between German parties, that is not what 
we are covering here. But it is really related to U.S. 
commercial and derivatives markets.
    Senator Chambliss. Well, I appreciate your response, but 
very honestly, I do not think that is good enough to provide 
security in the U.S. marketplace. For example, it is my 
understanding that 54 percent of the credit default swaps that 
have been issued by financial institutions in Greece are owned 
by U.S. financial institutions. We know what is going on in 
Greece, and if the economy of Greece collapses and the 
financial institutions in Greece collapse, I am not sure what 
impact that will have, but I would like your comment on whether 
or not that is, in fact, the case, what regulatory measures do 
you have in place to ensure that U.S. institutions do not get 
overloaded and countries that are on the brink of collapse like 
Greece? And what would be the impact of the collapse of the 
Greek economy as to our financial institutions?
    Mr. Gensler. The last part of it I might let the Federal 
Reserve answer, but I think that that is actually an example 
why you would want U.S. regulators to be looking at U.S. banks 
for the credit default swaps they might write, as you say, on 
Greece or any other country, because if they are providing 
insurance--and that is in essence what a credit default swap 
does, is insures against the risk of a default in a country 
overseas, and if that is going to come back and hurt the 
capital base of U.S. banks and maybe hurt the taxpayers in the 
U.S., you would want the banking regulators and the appropriate 
market regulators to be looking at that.
    I do not know if the 54 percent number is accurate. We 
could try to get back to you on that specifically. But if it 
were accurate, I think that is an example why you would want 
U.S. regulators, banking regulators particularly, to be able to 
see into those banks and make sure there is enough capital and 
margin behind those credit default swaps.
    Mr. Gibson. I can add that we have been looking closely at 
the exposures of U.S. banks to Greece in particular for a 
number of months, and exactly as Chairman Gensler said, making 
sure that we are comfortable that the exposures are kept in 
check relative to the capital and resources available.
    Senator Chambliss. Do you know if that number is correct?
    Mr. Gibson. I do not know about the specific number you 
cited, but we can look into that.
    Senator Chambliss. Are you concerned about the amount of 
money that U.S. banks hold on Greece-issued credit default 
swaps?
    Mr. Gibson. We have been monitoring it closely for a number 
of months, and our efforts are designed to make sure that 
whatever exposures there are are manageable.
    Senator Chambliss. Thanks, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    As we conclude the first panel, thank you very much for 
joining us today. We take our oversight responsibilities very 
seriously on this issue, and we will continue to work with you. 
We appreciate all of the efforts and the responsibilities that 
have been given through the new statute. And we also know that 
we continue to have to work together on these international 
issues, which are very important, as we make sure that first 
and foremost we are focused on the American consumer, the 
American taxpayer, the American citizens in terms of how this 
system moves forward, but we are impacted about what happens 
around the globe. And as you can tell from the questions by the 
Committee, we are concerned about how this will proceed and the 
implications of it when we are involved in the challenges of 
harmonizing with various countries around the globe.
    So thank you both very much. We look forward to working 
with you.
    Mr. Gensler. Thank you. We look forward to continuing 
working closely with you.
    Chairwoman Stabenow. Thank you very much.
    We will ask our second panel to come forward. I am very 
pleased to have two additional distinguished leaders with us to 
speak about this topic. And we will have a third panel today as 
well, so we ask the patience of the Committee. We have a lot of 
important information to be gathering from the hearing today.
    Well, good morning. We are so pleased to have both of you 
with us this morning. Let me introduce our first witness on our 
second panel.
    Brooksley Born, we welcome you to the Committee and 
appreciate your leadership over the years. Recently a member of 
the Financial Crisis Inquiry Commission, a group tasked with 
investigating the causes of the recent financial crisis, also a 
former Chair of the CFTC under President Clinton, and someone 
who has extensive experience with the derivatives markets and 
certainly the issues leading up to the crisis that our country 
faced. So we welcome you this morning and look forward to your 
testimony.
    We also want to welcome Dan Roth. Mr. Roth is the president 
and CEO of the National Futures Association, where he has been 
for over 25 years. We all know that the NFA is a 
congressionally authorized organization intended to self- 
regulate and protect the integrity of the derivatives market.
    So we welcome both of you, and we would ask Ms. Born to 
proceed.

    STATEMENT OF HON. BROOKSLEY BORN, FORMER COMMISSIONER, 
 FINANCIAL CRISIS INQUIRY COMMISSION; AND FORMER CHAIRPERSON, 
      COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC

    Ms. Born. Thank you very much, Chairwoman Stabenow, Ranking 
Member Roberts, and members of the Committee. Thank you so much 
for inviting me to appear before you to discuss the 
implementation of the derivatives provisions of the Wall Street 
Reform and Consumer Protection Act. Effective and prompt 
implementation of these provisions is critically important to 
protect the American public and our financial system.
    The Financial Crisis Inquiry Commission on which I served 
recently issued its report on the causes of the financial and 
economic crisis in the United States. In that report the 
Commission concluded that profound failures in financial 
regulation and supervision along with failures of corporate 
governance and risk management at major financial firms were 
among the prime causes of the financial crisis. The Dodd-Frank 
Act addresses a number of the causes of the financial crisis 
found by the Commission, including the unregulated over-the-
counter derivatives market.
    The Commission in its report specifically concluded that 
OTC derivatives contributed significantly to the financial 
crisis. The Commission found that this enormous market was 
characterized by uncontrolled leverage, lack of transparency, 
lack of capital and margin requirements, speculation, 
interconnections among firms, and concentrations of risk.
    The Commission concluded that derivatives known as credit 
default swaps fueled the securitization frenzy and the housing 
bubble by encouraging investors in mortgage- related securities 
to believe that they were protected against default and also 
were used to create synthetic CDOs, which were merely bets on 
real mortgage securities and amplified the losses from the 
collapse of the housing bubble.
    Insurance giant AIG's sale of the credit default swaps on 
mortgage-related CDOs without adequate capital reserves brought 
it to the brink of failure and necessitated its rescue by the 
Government, which ultimately committed more than $180 billion 
because of concerns that AIG's collapse would trigger cascading 
losses throughout the financial system.
    In addition, the existence of millions of OTC derivatives 
of all kinds, not merely credit default swaps, created 
interconnections among a vast web of systemically important 
firms through counterparty credit risk, exposing the financial 
system to contagion and helping to precipitate the massive 
Government bailouts.
    The financial regulatory reforms in Title VII of the Dodd-
Frank Act are vital to strengthening the financial system and 
reducing systemic risk posed by this unregulated market. 
However, there now appears to be a concerted effort by some 
large financial institutions and their trade associations to 
prevent full implementation and enforcement of Title VII and 
other provisions of the Dodd-Frank Act. Bills are pending in 
Congress that would weaken or repeal the act. Efforts to 
persuade or require agencies to issue watered-down regulations 
or to delay or otherwise fail to fully implement provisions of 
the act are underway. The CFTC is threatened with funding cuts 
that will impair its ability to implementation and enforce 
Title VII.
    The political power of the financial sector is still 
enormous, and policymakers in Congress and the executive branch 
must have the political will to resist these efforts to derail 
regulatory reform. If we as a country do not learn from the 
financial crisis and put in place the regulatory reforms needed 
to address its causes, we may be doomed to suffer future 
financial crises. The American people deserve better.
    Thank you.
    [The prepared statement of Ms. Born can be found on page 47 
in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Roth, welcome.

 STATEMENT OF DANIEL ROTH, PRESIDENT AND CEO, NATIONAL FUTURES 
                 ASSOCIATION, CHICAGO, ILLINOIS

    Mr. Roth. Thank you, Madam Chair. For the last 30 years or 
so, NFA has acted as the self-regulatory organization, the 
industry-wide self-regulatory organization for the U.S. futures 
industry. Now, though, it looks like we may be taking on some 
significant additional responsibilities in light of the CFTC's 
Dodd-Frank rulemaking.
    What I wanted to do today, if I could, would just be to 
spend a little bit of time talking about the new 
responsibilities that may be coming NFA's way and what we are 
doing to prepare for those responsibilities.
    The first involves the registration process. The CFTC has 
proposed that NFA handle the registration process for all swap 
dealers and major swap participants. Frankly, for the last 25 
years we have handled the registration process for every 
category of registration under the Commodity Exchange Act, so 
this is not anything that is particularly new to us. We have 
already made the changes necessary to our Web-based 
registration system to accommodate these new categories of 
registration, and we can begin accepting and processing 
applications and conducting the necessary background checks 
whenever the CFTC asks us to do that.
    The trickier part of the registration process is going to 
come as the CFTC's new rules under Section 4s of the Act are 
implemented. What the Commission has proposed is that each firm 
would become provisionally registered as a swap dealer or major 
swap participant, but then as each of the new rules kicks in, 
the applicant would have to submit to NFA its policies and 
procedures that are reasonably designed to demonstrate that 
they will be in compliance with the new rule, and NFA will then 
have to review those fairly voluminous submissions in a 
thorough and meaningful and timely manner. So this is going to 
require us to really bring on additional staff from outside of 
NFA. We are going to have to redeploy some of our existing 
resources temporarily to handle that charge. And we are going 
to have to develop very clear guidance for our staff to review 
those submissions. And on all of that we will be working very 
closely with the CFTC, but we cannot really complete that 
process and develop the guidance for our staff until the rules 
themselves are adopted in their final form.
    In addition to the registration process, the CFTC has 
proposed that all swap dealers and major swap participants 
become members of National Futures Association, and our 
responsibility, our basic responsibility, would be to monitor 
those firms for compliance with the applicable regulations, 
though obviously for some of the major bank firms that have 
prudential regulators, our responsibilities might be somewhat 
more limited.
    In order to take on that additional responsibility, we have 
got to accomplish three basic undertakings that I have 
described in my written testimony.
    First, we have to revamp our governing structure at NFA to 
ask sure that our board structure has enough checks and 
balances to deal with the issues that I described in my written 
testimony. We have a committee that is working on that. We have 
made significant progress on that. We cannot complete that 
process, though, until we have final definitions of the terms 
``swap dealer'' and ``major swap participant.''
    Secondly, we have to work out a funding mechanism to make 
sure that NFA recovers its costs of performing these regulatory 
functions. And, again, we cannot say for certain what those 
costs are. You do not know until you know. You do not know 
until you see how many firms walk through the door and how many 
members you actually have. We are working under the assumption 
that we will have to almost double the size of our compliance 
department and generate somewhere in the neighborhood of $25 
million a year in order to recover our costs.
    The third thing we have to do is just prepare to do the 
work itself. We have to recruit and hire and train staff that 
have experience in these markets. We need to train the existing 
staff at NFA to perform some of these functions, and we need to 
prepare audit modules and audit programs so that when our staff 
goes out into the field they can monitor for compliance with 
the rules in a manner that is very effective and yet very 
efficient and a smart way to approach the work. So we have to 
develop those audit modules. We cannot, obviously, complete 
that work, again, until the 4s guidance is complete.
    One final thing I wanted to make a third area of 
responsibility for NFA will involve swap execution facilities. 
Dodd-Frank imposes certain self-regulatory functions and 
surveillance responsibilities on swap execution facilities. The 
CFTC has proposed allowing those SEFs to outsource that 
function to an organization like NFA. This is something we have 
been doing for the last 10 years with respect to some of the 
smaller contract markets. We know this is a very different sort 
of business model than the contract markets. We are going to 
have to revise our surveillance programs to accommodate those 
changes. We have been working very closely with SEFs and with 
the CFTC to try to determine the exact audit trail of 
information we will need to perform that function, and we will 
continue to work with SEFs and with the Commission to try to 
make sure we can take on that responsibility when the time 
comes.
    So it is a very different time for NFA, a lot of new 
responsibilities coming our way, but we look forward, as we 
have for the last 30 years, to working very closely with the 
Commission and the industry to find solutions that hopefully 
work for everybody.
    Thank you.
    [The prepared statement of Mr. Roth can be found on page 95 
in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Ms. Born, when we look back at the year 2000 and we look at 
your position with the CFTC at the time, you were a lonely 
voice expressing concern about deregulation at that time and 
what could happen, and we fast-forward to see, unfortunately, 
what did happen. I wonder if you might talk about what you 
believe are the most important reforms or authorities in Dodd-
Frank that could have prevented the financial crisis.
    Ms. Born. Well, as the Financial Crisis Inquiry Commission 
found, the statute in 2000, the Commodity Futures Modernization 
Act, that deregulated the over-the-counter derivatives market 
was, we believe, a key turning point in the process going 
toward the financial crisis. I think the most important reforms 
in Title VII are the central clearing provisions and the 
exchange trading provisions.
    What we saw in the financial crisis in 2008 was an enormous 
market of more than $670 trillion in notional amount worldwide 
that was not transparent. It was opaque. Regulators, market 
participants, traders in the marketplace did not have a picture 
of the market itself. They did not know the amount of exposure 
of their counterparties.
    Transparency is provided by exchange trading. Price 
discovery was also lacking in many aspects of the market. There 
was an inability to price many transactions. Exchange trading 
provides price discovery in a meaningful way.
    Counterparty credit risk was what added to the panic in the 
fall of 2008. It is the reason that the derivatives market 
froze up, that the credit markets froze up, and we were on the 
brink of being plunged into another Great Depression. Central 
clearing provides protection against counterparty credit risk 
in a significant way and will make a big difference.
    Chairwoman Stabenow. Thanks very much. I wonder, again, 
with your experience at the CFTC if you might speak a bit about 
what is happening in terms of the debate around the budget for 
the CFTC. There is a lot of debate about defunding, about 
reducing the budgets, and I am concerned that this will 
actually create more delays or more uncertainty or potentially 
more damage to financial markets if they are not able to fully 
address the concerns in a timely manner and move forward in a 
way where the implementation is done in the right way. But I 
wonder if you might speak to whether or not from your judgment 
you think that the current budget is sufficient to implement 
the reforms, to oversee the global market issues that we have 
been talking about, and what impact it would have on our 
ability to protect consumers if we were to see what the House 
passed, which I believe was a 44-percent cut in funding for the 
CFTC. If that actually were to happen, how would that impact 
what we are all concerned about in terms of implementing these 
changes in the right way?
    Ms. Born. Well, I believe that the CFTC needs more 
resources in the next fiscal year than it has in this fiscal 
year, and that it should have a substantial increase rather 
than any decrease.
    The size and resources of the CFTC are not that much bigger 
than they were in the late 1990s when I was Chair. There was a 
10-year period where there was little or no expansion of staff. 
Indeed, the staff fell below the staffing levels in the late 
1990s.
    The staffing level is now back up to about what I had or 
slightly above it, but, of course, the regulated futures and 
options markets have grown exponentially in the 10 to 12 years 
since I was Chair. And the responsibility for the over-the-
counter derivatives market, which approaches $300 trillion in 
notional amount just in the United States, is an enormous new 
responsibility.
    I think that to be really effective in full implementation 
and enforcement of the act, the CFTC needs more resources.
    Chairwoman Stabenow. Thank you very much.
    Senator Roberts?
    Senator Roberts. Mr. Roth, regarding the registration of 
swap dealers and major swap participants, in your testimony you 
mention that the CFTC's proposed rules allow provisional 
registration for swap dealers and major swap participants 
before all the rules are finalized. As each rule is finalized, 
the NFA would review compliance with the new rule by each 
provisional swap deal and major swap participant. Do you think 
this process, this provisional registration process, is the 
most effective means of registering new swap dealers and major 
swap participants? Could there be a better or more efficient 
process in your view?
    Mr. Roth. Yes, I think the provisional registration process 
is actually workable in that it is an opportunity for firms to 
begin the registration process while allowing the CFTC to phase 
in the 4s requirements over a period of time. The provisional 
registration process provides that those submissions have to be 
made at NFA. There is not a specific clock or deadline by which 
those submissions have to be reviewed and approved. So I think 
there is some flexibility built into that system that will 
allow the registration process to occur while these rules are 
being phased in. So I actually thought it was a fairly workable 
approach.
    Not to minimize the effort that is going to be involved for 
the firms to make the submission.
    Senator Roberts. I am glad you added that last part.
    I noticed that your testimony suggested a phased-in 
approach to regulatory requirements for swap execution 
facilities--everything has to be an acronym in this town, so 
that is a SEF so that NFA would not have to attempt to begin to 
perform regulatory services for all interested SEFs on the same 
day. Do you have any indication that the CFTC will agree with 
your suggestion? In the absence of a phase-in, how would one 
determine which SEF would receive your regulatory services 
first, thus perhaps providing a competitive advantage to the 
earliest SEF?
    Mr. Roth. In its rule proposal regarding SEFs, the CFTC 
proposed to avoid exactly the sort of competitive advantage 
that we were talking about in our testimony by providing that 
all SEFs that had their applications by a certain date would be 
able to continue to operate while their applications were being 
reviewed.
    I think the approach that we are suggesting with our 
testimony is completely consistent with that, which is, again, 
that the SEFs should be allowed to continue to operate while--
to the extent that they are contracting with NFA for us to 
perform those services, while we phase in that operation, they 
should be allowed to continue to operate to avoid an artificial 
competitive advantage for those that are there first.
    So I think the Commission is--based on its rule proposal, I 
think they are sympathetic with our view, and I would certainly 
hope that they would be.
    Senator Roberts. I appreciate that.
    Thank you, Madam Chairman.
    Chairwoman Stabenow. Thank you very much.
    Senator Gillibrand.
    Senator Gillibrand. Thank you, Madam Chairwoman, for 
holding this hearing. Thank you for your testimony, both of 
you. I have two areas of questions.
    The first is the issue of extraterritorial application of 
margin. I do not know if you have seen it, but a number of 
Senators, we sent a letter to Chairman Gensler and to other 
agencies and regulators asking them specifically about whether 
they intended to have the same margin requirements on U.S. 
subsidiaries operating abroad in non-U.S. firms because 
obviously the concern is it creates an enormous competitive 
edge for competitors if we have to satisfy those margin 
requirements in those markets. I would like your thoughts on 
that issue.
    Ms. Born. Well, I have not done much thinking specifically 
on that issue. You know, it was a foreign subsidiary of a U.S. 
company that brought down AIG. Most of AIG Financial Products' 
activities were in London, and they entered into an enormous 
portfolio of credit default swaps without putting forth 
collateral, without putting forth margin, without putting aside 
capital reserves.
    So one should keep in mind about this issue that this can 
threaten the U.S. parent; it can threaten the U.S. financial 
system.
    Mr. Roth. Can I just mention that regulatory arbitrage is 
always going to be an issue, and Chairman Gensler alluded to 
this. If you look at the CFTC's previous experience in dealing 
with its Part 30 regulations, the Part 30 regulations create 
exemptions for certain foreign intermediaries if they are 
subject to a regulatory regime that is comparable to the U.S. 
regulatory regime. That Part 30 regime has been in place for a 
long time and has worked extraordinarily well, I think. But a 
key ingredient of it is, again, assessing the overall 
comparability of regulation. And to the extent that a 
particular jurisdiction, for example, had margin requirements 
that were far less stringent than ours, then I think it would 
not qualify for that sort of reciprocal recognition.
    Senator Gillibrand. Further to that question, in the AIG 
example a lot of their contracts were with U.S. counterparts, 
so that was one of the reasons why--and, granted, they had all 
contracts in one direction, assuming that the real estate 
industry would never go down in value. Bad assumption. But some 
of those contracts were with the U.S. counterparts, and under 
the regulatory framework that we have talked about in Dodd-
Frank, those U.S. counterparts would have capital requirements 
as well and 100 percent disclosure.
    So if you know enough details about the AIG example, do you 
see those protections as being sufficient if we did not have 
capital requirements for the non-U.S.-based entities?
    Ms. Born. Well, AIG Financial Products also had enormous 
credit default swap commitments to European banks. I do agree 
with Mr. Roth, however, that international discussions, 
international harmonization, can be a solution here. Certainly 
when I was at the CFTC, we worked very closely with European 
regulators to try to, number one, harmonize derivatives 
regulation but also, secondly, to recognize equivalent 
regulatory schemes abroad. And we entered into a number of 
memoranda of understanding with European countries' regulators 
that recognized that their regulatory scheme was essentially 
comparable. And I think that that is what the United States 
regulators and Secretary Geithner are working toward today.
    Senator Gillibrand. I agree that that is what they said, 
and I also agree that we have made efforts with memorandums of 
understanding. But, unfortunately, we have also heard from 
foreign regulators that they think that they are skeptical of 
the U.S. approach, that they do not necessarily follow the 
approach or that they are skeptical about the pace of reform. 
And so my concern is that if we do not make it a priority--
because I really believe we have to have international 
harmonization, because if we do not there will be immediate 
regulatory arbitrage, and that will be very devastating to the 
U.S. economy. If you have billions of dollars of transactions 
that would normally originate in the U.S. being conducted 
abroad, that is an enormous amount of--or less investment in 
the U.S. and I our economy at a time when everything we are 
trying to do here in Washington is to create a greater 
opportunity for job creation, to make a greater landscape for 
economic growth.
    So what should our regulators be doing now or what should 
the administration be doing now to make it more likely that we 
will have harmonization in a timely fashion? Because even 
Chairman Gensler said this morning he expects the regulatory 
reform to take an additional 6 months from his July deadline, 
but how do we expect to have harmonization within the next 6 
months? And what could we do to make that more likely?
    Chairwoman Stabenow. And I will ask you to be brief in your 
answer.
    Senator Gillibrand. Sorry. Thank you, Madam Chairwoman.
    Ms. Born. Well, from my view--and I have talked to both 
U.S. regulators who are working on this, and I have met with a 
number of EU personnel who are involved--I think there is a 
very good-faith, strong effort going on right now, and I 
believe that there will be adequate harmonization. Of course, 
as Chairman Gensler said, some countries are ahead of us, for 
example, Canada.
    Chairwoman Stabenow. Senator Lugar.
    Senator Lugar. Thank you, Madam Chairman.
    Chairman Born, in testimony before our Committee at the 
time the Dodd-Frank bill was being drafted, we had many persons 
coming in and saying we are just regular businesses in the 
United States doing manufacturing, trying at least to get some 
pricing of commodities, or we are wheat farmers or corn farmers 
or what have you, we are not AIG or we are not very 
sophisticated people. And as a matter of fact, they were 
attempting to draw a distinction between persons in the back 
room at AIG or very sophisticated bankers trying to figure out 
how to game the system and in due course, as you pointed out, 
brought it to a crashing halt.
    Was there any way of drafting Dodd-Frank in ways that 
recognized these more modest uses of swaps and derivatives as 
opposed to some defensive mechanism toward the cleverest of 
all, who may still be thinking even as we are talking today, 
about how to outsmart Dodd-Frank or the system we are talking 
about? In other words, the idea of transparency is very 
important, trading on exchanges, but is there any potential 
differentiation between the sophisticated bankers and regular 
businesses and farmers?
    Ms. Born. Well, I think Dodd-Frank Title VII actually 
recognizes the difference with the end-user exemption, Senator. 
You know, commercial entities that are using these contracts 
for hedging purposes should be treated somewhat differently, 
but they, too, need transparency; they need protection against 
counterparty credit risk. So that I think it is very important 
that the market as a whole should come under the regulatory 
regime.
    Senator Lugar. The end-user situation, in other words, you 
believe does make this differentiation so that this is not 
quite so onerous to other people.
    Ms. Born. Indeed. Yes, not only does it allow them an 
exemption if they wish from clearing, but also both the SEC and 
the CFTC Chairs have said that margin will not be imposed on 
those contracts as well.
    Senator Lugar. Mr. Roth, you have described the work of 
your organization and the great amount of additional 
application paperwork that folks will be involved in. Does this 
create such a burden that U.S. firms are likely to be 
competitively affected? In other words, have we imposed, by 
attempting to do the right thing in the United States as we see 
it, such substantial costs that we really are not competitive? 
With regard to people abroad, leaving aside any desire of 
evasion, it just simply would be easier to do business in some 
other country that did not have the regulations and the forms.
    Mr. Roth. To discuss that in sort of general terms, any 
form of regulation imposes additional costs, and the balancing 
act obviously is always that in a long-term perspective, the 
more well regulated--not overregulated but well-regulated 
jurisdictions are the ones that thrive over time, and that is a 
very difficult balancing act, and there is always a temptation, 
I think, to move one way or the other and miss the mark by 
overregulating or underregulating. But, clearly, additional 
regulation imposes additional costs. The question that 
everybody has to answer is whether over a long period of time 
those additional costs are a good investment.
    Senator Lugar. Are you going to be able to identify, as we 
have future hearings, which I am certain we will, be able to 
quantify those costs or offer us some metrics so we understand 
this is reasonable, excessive, or out of reach?
    Mr. Roth. We certainly can provide updated information on 
what the costs are. Frankly, the problem that we have-- just at 
NFA, when we do a little--sometimes when you are trying to do a 
cost/benefit analysis, it is hard to measure the impact of 
something that you prevented. You know, how many firms did not 
go under? How many customers were not defrauded? There is an 
inherently difficult process of trying to measure a negative, 
and that complicates the process. But we can certainly provide 
additional data as it becomes available on the costs.
    Senator Lugar. Thank you very much.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you.
    Senator Boozman?
    Senator Boozman. Thank you, Madam Chair.
    Mr. Roth, I want to follow up on Senator Lugar's line. A 
lot of our agribusinesses, a lot of our--I am thinking of a 
manufacturing business that makes motors and, you know, hedges 
on the materials that they use for that. I do not think right 
now that they really understand the impact of what is going to 
happen.
    I guess my question to you would be: Do you think there is 
enough clarity at this point, is there enough information out 
that that is a correct statement?
    Mr. Roth. Senator, I certainly think that until the final 
definitions of the terms ``swap dealer'' and ``major swap 
participant'' are promulgated, certain firms are not going to 
know which side of the line they are on and, therefore, do not 
know what additional costs they will be taking on or not taking 
on.
    So I think to the extent that if the question is how much 
can people assess the impact----
    Senator Boozman. How they are going to be impacted.
    Mr. Roth. --of the regulations on them, I think it is hard 
to do that until you know what the final definitions are.
    Senator Boozman. I guess the next question then is: If that 
is true, how can they make the necessary changes that they are 
going to need to do for compliance?
    Mr. Roth. And I think the approach there has to be-- that 
is why I think it is important to phase in regulations in a 
time that gives--a rule that people cannot comply with is a bad 
rule. And I know that from personal experience because I have 
written some of them.
    [Laughter.]
    Mr. Roth. And that is why I think the phase-in approach is 
so important, and I think the Commission is very consistent 
with that and very supportive of the concept of phasing these 
regulations in, and they have to be phased in where it takes 
into account both their importance to the public policy and the 
difficulty of coming into compliance. Firms have to have that 
time. But you lose credibility of a regulatory system if you 
have rules that cannot be complied with.
    Senator Boozman. Thank you, Madam Chair.
    Chairwoman Stabenow. You are welcome.
    Senator Thune?
    Senator Thune. Thank you, Madam Chair, and I want to thank 
you and the Ranking Member for holding this important hearing 
today, and I appreciate the panels that are testifying.
    You know, we have a lot of concerns about Dodd-Frank and 
hope to correct some of those. I think it is important that 
this Committee here work together to try and monitor the work 
that is done by the CFTC, the Fed, and the SEC to make sure 
that these troubles with the bill, the concerns that we have, 
are not compounded. And I am in particular concerned about the 
limited definition the CFTC is looking to instate for the de 
minimis exemption when defining ``swap dealers.'' I understand 
there has been some discussion of this already with the first 
panel, with Chairman Gensler, but, you know, there are a lot of 
elevators and local co-ops that provide important risk 
management opportunities for producers. They are hardly the 
large and systemically important entities that Congress 
intended to be regulated by this law, and including them in the 
definition of ``swap dealers'' will only raise prices for 
producers and limit their chances to engage in bona fide 
hedging.
    So I say that just as sort of a prefatory remark, but I am 
interested in knowing--I think this was perhaps answered by the 
previous panel, but if you could shed some light on whether you 
think that farm cooperatives pose a systemic risk to our 
economy and should they be regulated in the same way.
    Ms. Born. Well, I certainly think that they should be 
trading in regulated markets and that it is important to have 
the Dodd-Frank derivatives reforms in place to protect them by 
providing more transparency, protection against counterparty 
credit risk, open and fair access to markets.
    Senator Thune. Mr. Roth, would you comment on that?
    Mr. Roth. I certainly agree with what the former Chair 
said. If there is a farmers co-op out there that poses a 
systemic risk to the economy, I have not bumped into it yet.
    Senator Thune. Okay. Well put.
    I would like to ask you a little bit about the factors that 
the CFTC ought to consider, or at least you think ought to 
consider when making these new capital and margin requirements. 
Obviously, should they consider whether an institution is 
systemically important, I think that is probably a given. But 
should they consider the economic cost of tying up capital and 
margin requirements?
    Ms. Born. Well, I think that there should be some cost/
benefit analysis done, but I think in terms of assessing the 
benefits of having margins and collateral requirements, we need 
to focus on what happened in 2008 when the lack of such 
requirements played a significant role in bringing the 
financial system to a standstill.
    Senator Thune. Do you think they ought to consider the 
benefit of price discovery that comes from having many 
investors in a liquid market?
    Ms. Born. Absolutely, and that is why transparency is 
necessary, and price discovery is best effectuated through 
exchange trading. So I think the higher the percentage of 
transactions that actually go on exchange where everybody, all 
market participants, all commercial entities, can see what the 
prices are, the better.
    Senator Thune. Should end users who are hedging financial 
risk be given an exemption?
    Ms. Born. An exemption from clearing?
    Senator Thune. Yes.
    Ms. Born. They have been given the exemption. If it had 
been up to me--and it was not--I would have been concerned 
because, of course, they will not have the protections of 
central clearing, which reduces counterparty credit risk. They 
will not have the advantages of transparency, which would 
reduce their costs. But Congress and the President of the 
United States made that decision, and I accept it.
    Senator Thune. Will users who are not or should users who 
are not systemically important be allowed to front less 
capital?
    Ms. Born. To have less capital themselves?
    Senator Thune. To front less capital, right.
    Ms. Born. Well I think you need to distinguish between 
capital requirements and margin requirements. I think they need 
to put up margin. I do not think the capital requirements of 
small participants is a significant----
    Senator Thune. A final question. My time is running out. I 
would direct this to either one of you. But do you believe that 
the position limits that are being proposed by the CFTC will 
raise costs for smaller investors who have money in commodity 
mutual funds?
    Ms. Born. I have not thought of it in those terms. I do 
think that the position limits are critically important to stem 
excessive speculation, which I think we have seen in a number 
of commodity markets. Recently we certainly saw it--and the 
Financial Crisis Inquiry Commission discusses this. We saw it 
in the summer of 2008, and it certainly made the financial 
system much more fragile.
    Senator Thune. Mr. Roth?
    Mr. Roth. I would assume that the imposition of new 
regulations generally increases costs for someone. The question 
is always: Is there an offsetting benefit to that regulation? 
And in this case the judgment is whether there is excessive 
speculation and whether it is hurting the overall economy.
    Senator Thune. Okay. Thank you, Madam Chairwoman.
    Chairwoman Stabenow. You are welcome.
    Thank you very much to both of you. We will excuse you and 
ask our third panel to join us.
    [Pause.]
    Chairwoman Stabenow. Well, good morning, and thanks very 
much to each of you for coming and for your patience. It is 
always a challenge being the third panel of witnesses, so we 
appreciate your patience this morning. Let me introduce our 
witnesses.
    Mr. Chuck Conner is the president and chief executive 
officer of the National Council of Farmers Cooperatives. He has 
worked at the USDA as Deputy Secretary, at the White House as a 
Special Assistant to President Bush, and as president of the 
Corn Refiners Association, and we welcome you this morning.
    Mr. Adam Cooper is the senior managing director and chief 
legal officer at Citadel LLC in Chicago, and he is here today 
on behalf of the Managed Funds Association, an organization he 
knows well, having served two terms as the chairman. At Citadel 
Mr. Cooper is responsible for the firm's global legal 
compliance transaction management and regulatory affairs 
function. We welcome you.
    I should also mention just on the side that Mr. Cooper is a 
graduate of the University of Michigan, so even though I went 
to Michigan State, I will welcome you.
    [Laughter.]
    Chairwoman Stabenow. And then last, certainly not least, is 
John Damgard, who has been president of the Futures Industry 
Association for nearly 30 years. Mr. Damgard also has a record 
of public service with stints at the USDA and the White House, 
and while at the USDA served as Deputy Assistant and Acting 
Assistant Secretary of Agriculture, was responsible for major 
marketing and regulatory functions at the USDA.
    So we welcome all three of you, and we will ask Mr. Conner 
to go first.

 STATEMENT OF HON. CHARLES CONNER, PRESIDENT AND CEO, NATIONAL 
         COUNCIL OF FARMER COOPERATIVES, WASHINGTON, DC

    Mr. Conner. Chairwoman Stabenow, Ranking Member Roberts, 
and members of the Committee, thank you for holding this 
hearing today to review the implementation of the Dodd- Frank 
Act. I appreciate the opportunity to be here to discuss the 
role of the over-the-counter derivatives market in helping 
farmers and, more specifically, farmer-owned cooperatives 
manage commodity price risks, which is such an important factor 
today.
    Before proceeding further with my testimony, Chairwoman 
Stabenow, I just do need to say that while my remarks express 
some degree of criticism against the Commodity Futures Trading 
Commission and the direction they are taking, as an 
organization we have been given unprecedented access to them as 
well and certainly given full opportunity to make our views 
known throughout that process, both to the Commissioners as 
well as to the staff members at the CFTC, and for that we are 
very, very appreciative to them.
    NCFC is here today to ask for your continued help in 
ensuring that the implementation of the Dodd-Frank Act does 
indeed preserve the management tools available for farmers and 
their cooperatives. We were pleased to hear your own remarks, 
Chairwoman Stabenow, and those of Senator Klobuchar at the 
earlier hearing on March 3rd on Dodd-Frank implementation.
    Due to market volatility in recent years, co-ops using more 
and more over-the-counter products to better manage their risk 
exposure by customizing what are known as commercial hedges, 
and more producers are depending upon their cooperatives to 
provide them with these tools to manage price risk and to 
assist them in locking in these margins.
    As I indicated earlier, and as others have noted, 
volatility is probably one of the most difficult challenges 
that we face in American agriculture today. American farmers 
and ranchers must continue to have access to these new and 
innovative risk management products if they are to survive.
    NCFC supports elements of the Dodd-Frank Act that bring 
more transparency and oversight to the over-the-counter 
derivatives markets. However, the uncertainty created by the 
``definitions'' rules is our greatest concern at this time. 
While the CFTC has proposed regulations for swaps and swap 
dealers, it is unclear to us who will be subjected to these 
additional regulations. Further, some activities of co-ops 
would appear to be swept into the ``swap dealer'' definition 
category.
    The two main issues in the proposed rule are the 
application of the so-called interpretive approach for 
identifying whether a person is a swap dealer and the very low 
thresholds on the de minimis exception. The proposed rule would 
likely capture a number of entities that were never intended by 
this Committee to be regulated as swap dealers, including 
farmer cooperatives.
    Additionally, some cooperatives are at risk of being 
designated as swap dealers due to their unique structure. For 
example, a federated grain or farm supply co-op is owned by 
many local cooperatives which are separate business entities. 
Unlike a traditional corporate structure where risk can be 
transferred and consolidated internally, cooperatives look to 
transfer risk from the local level to an affiliated federated 
co-op. Using swaps as a tool to transfer that risk should not 
lead them, we believe, to be designated as dealers. Under the 
draft rules, they simply would be.
    These rules were intended for large, systemically important 
institutions, and to answer an earlier question, we are not in 
that category by any means. Imposing them on co-ops would mean 
increased financial requirements and other regulatory costs. 
This in turn would make offering these services to our farmer 
members simply uneconomical. Such action would result in the 
unintended consequence of increasing risk in the agriculture 
sector and to farmers-- the exact opposite of what this 
Committee, I believe, would have happen. We do not believe this 
was your intention.
    So I thank you again for the opportunity to testify before 
the Committee. We appreciate your role, your very active role, 
in ensuring that farmer co-ops will continue to be able to 
support the viability of their member farmers and for the 
cooperatives that we own, and we look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Conner can be found on page 
54 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Cooper.

 STATEMENT OF ADAM COOPER, SENIOR MANAGING DIRECTOR AND CHIEF 
     LEGAL OFFICER, CITADEL LLC ON BEHALF OF MANAGED FUNDS 
              ASSOCIATION (MFA), CHICAGO, ILLINOIS

    Mr. Cooper. Thank you, Chairman Stabenow, Ranking Member 
Roberts, members of the Committee. I am here on behalf of the 
Managed Funds Association and its members, but also on behalf 
of Citadel, which is a global financial institution that 
provides asset management services and a range of capital 
markets activities from our headquarters in Chicago and offices 
in financial centers such as New York, San Francisco, Boston, 
London, and Hong Kong.
    MFA appreciates the opportunity to provide its views on the 
implementation of Title VII of the Dodd-Frank Act, and we 
commend the Committee for its diligent oversight of the new 
regulatory framework affecting derivatives. MFA is the voice of 
the global alternative investment industry, and our members 
help pensions, endowments, and other institutions diversify 
their investments, manage their investment returns, and 
generate reliable returns to meet their obligations to their 
beneficiaries.
    Our members are active participants in the OTC derivatives 
markets. We have a strong interest in promoting the integrity 
and the proper functioning of these markets through the 
increased transparency, competition, and systemic risk 
mitigation. MFA recognizes the efforts of the CFTC and the SEC 
in promulgating numerous new regulations called for under Dodd-
Frank.
    We believe it is imperative that the regulators implement 
the rules in a straightforward, common-sense, and workable 
manner. To assist in these efforts, we have provided regulators 
and we have submitted in connection with our testimony here 
today a blueprint which contains a detailed plan for adopting 
and implementing all Title VII rules. By properly ordering 
priorities and establishing defined milestones, the OTC 
derivatives market could achieve substantial progress towards 
key regulatory forms, including central clearing, sooner rather 
than later.
    MFA supports policymakers' efforts to reduce systemic risk 
by requiring central clearing and data gathering about swaps. 
We believe that a straightforward and workable phased 
implementation, starting with central clearing, will play an 
essential role in reducing systemic, operational, and 
counterparty risk; will enhance market transparency, 
competition, and regulatory efficiencies; and will fulfill the 
primary goal of Title VII of Dodd-Frank. We are confident that 
good clearing--and, that is, clearing with open access and 
real-time processing--will become the foundation for 
competitive execution facilities and significant improvements 
in transparency.
    Clearing of OTC derivatives is not new. Extensive dealer-
to-dealer clearing happens today. The buy side has also 
undertaken significant preparations. For example, a number of 
buy-side firms, Citadel included, have negotiated clearing 
agreements, tested margin methodologies, tested straight-
through processing, and worked through a wide range of 
operational and reporting issues necessary to clear at scale. 
It makes good sense from a policy perspective to capitalize on 
this momentum and facilitate greater buy-side access--great 
buy-side access to clearing now.
    We urge regulators to move promptly and to ensure that all 
market participants that want access to clearing have access to 
clearing. The success of central clearing and data gathering 
will depend on the structure, governance, and the financial 
soundness of the clearinghouses, the data repositories, and the 
other institutions in this marketplace. We strongly believe 
there is a need for those entities to have transparent and 
replicable risk models and straight-through clearing processes 
that enable fair and open access that incentivize competition 
and that reduce barriers to entry. It is important to have 
customer representation on the governance and risk committees 
of the clearinghouses and for no one group to constitute a 
controlling majority. As financial end users, MFA's members 
regularly exchange margin with their counterparts.
    The prudential regulators' proposed capital and margin 
requirements for swap dealers and for major swap participants 
do not require those entities to post variation margin to their 
non-dealer counterparts. This will undermine market discipline. 
In fact, the absence of this two-way margining discipline and 
regime is the central lesson to AIG's failure.
    We are also concerned that the CFTC's proposed margin and 
segregation rules may impair arrangements that permit netting 
across customers' cleared and uncleared positions. We believe 
this will increase systemic and settlement risk and will 
restrict the efficient use of capital.
    MFA remains concerned about the efficacy of position 
limits. We are particularly concerned about the workability of 
the CFTC's proposed rules, which depart from its longstanding 
policy on disaggregation of independently controlled accounts. 
Inappropriately formulated limits would impair the ability of 
markets to serve their essential risk allocation function, 
which would increase the cost of managing risk and harm hedgers 
and ultimately consumers of these products.
    Lastly, we are aware that in Europe and throughout the 
world, regulators are working on proposed OTC derivatives 
regulations to align with the Dodd-Frank Act. We are concerned 
about the extraterritorial application of these regulations; 
however, we very much appreciate the ongoing efforts of U.S. 
and non-U.S. policymakers and regulators to coordinate and 
ensure the harmony, the efficacy, and the alignment of 
derivatives reforms.
    On behalf of Citadel and the MFA, I very much thank you for 
the opportunity to testify and stand available to answer any 
questions. Thank you.
    [The prepared statement of Mr. Cooper can be found on page 
58 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Damgard, welcome.

    STATEMENT OF JOHN DAMGARD, PRESIDENT, FUTURES INDUSTRY 
                  ASSOCIATION, WASHINGTON, DC

    Mr. Damgard. Thank you. Chairwoman Stabenow, Ranking Member 
Roberts, Senator Lugar, I am John Damgard, president of the 
Futures Industry Association. On behalf of the FIA and its 
members, I want to thank you for the opportunity to appear 
before you today.
    FIA is the leading trade association for the futures, 
options, and over-the-counter cleared derivatives markets. Its 
membership includes the world's largest derivatives clearing 
firms, as well as the leading derivatives exchanges from more 
than 20 countries, including Citadel.
    We take justifiable pride that throughout the financial 
crisis, the futures markets continued to function exactly well. 
The futures regulatory system passed the test with flying 
colors. And I would like to say, in contrast to what Mrs. Born 
said, our trade association has no interest in stonewalling or 
undermining this process. Our members have spent hundreds and 
hundreds of millions of dollars in their efforts to make sure 
that they are ready for these changes, and I think I speak for 
all other trade associations that are in the financial world.
    One of our greatest concerns with the Dodd-Frank Act is the 
potentially adverse effect on competition. As the president of 
the FIA, I can assure you that the global derivatives 
marketplace is becoming more and more competitive every year. 
Just last week, I was in London for our annual international 
derivatives expo, and I heard a lot of discussion about the 
potential impact of these new regulations. Our competitors in 
London and in other financial centers around the world are 
watching what we do here very closely indeed. While our 
regulators are making a strong and sustained effort to consult 
with their counterparts abroad, there are some significant 
differences emerging in our respective approaches, and we need 
to do our utmost to preserve a level playing field.
    In my written testimony, I have attached a six-page summary 
of more than two dozen comment letters that the FIA has filed 
on various Dodd-Frank rulemakings. I doubt that any of us 
realized last year just how complicated this process would be. 
Yes, the futures regulatory system provided Congress with an 
excellent model for regulating swaps, but cleared swaps are not 
the same as futures. One size does not fit all. To get this 
right, the new regulatory framework must be carefully designed 
and sensibly implemented.
    I commend the leadership of the CFTC and the SEC for their 
determination to carry out the monumental rulemaking mandate 
assigned them by Dodd-Frank. But through no fault of their own, 
it has become obvious to everyone that the July 16th deadline 
was simply too ambitious.
    Just yesterday, the CFTC issued a proposed order providing 
temporary regulatory relief for several important provisions of 
the Dodd-Frank Act that are due to take effect on July 15th, 
and I think Chairman Gensler went over that fairly carefully. 
But this is only a temporary measure. Of far more importance is 
the substance of the many rulemakings now under consideration 
and the overall impact of the proposed regulations as a whole. 
The CFTC has not yet made decisions on a host of critical 
issues that will have an important influence on the structure 
of this industry and the costs that my members must bear.
    The CFTC confirmed yesterday that the final definitions of 
``swap, ``swap dealer,'' and ``major swap participants'' will 
be among the very last rules adopted, and yet many of the new 
regulatory requirements will hinge on these core definitions; 
and until they are finished, it is hard to know for sure who 
and what will be covered.
    Chairman Gensler has correctly observed that the proposed 
rules fit together in a mosaic. Mosaics, however, are nothing 
more than chips of colored stone until they have been pieced 
together into a work of art. The Commission has shown us the 
individual chips, but it has not shown its vision on how they 
will fit together. The industry and the public deserve an 
opportunity to analyze and comment on this regulatory mosaic 
before it is set in concrete.
    In conclusion, I would like to circle back to my opening 
theme, namely, the international dimension of Dodd- Frank. When 
Congress was considering this legislation, many in the 
financial services industry and in Congress cautioned that the 
extraterritorial reach of the regulatory such being established 
here would inhibit the ability of U.S. market participants to 
compete internationally. Today there is increasing evidence 
that last year's fears will be this year's reality.
    We were pleased to learn that the Chairman and Ranking 
Member of this Committee recently wrote to their colleagues in 
the European Parliament expressing their concern. As the 
Senators emphasized, ``a key objective of the [Dodd-Frank] Act 
was to `consult and coordinate with foreign regulatory 
authorities on the establishment of consistent international 
standards' for the regulation of derivatives transactions.'' 
The FIA welcomes your pledge to work with your European 
colleagues to harmonize these rules and stands ready to help in 
any way we can.
    In our experience, the CFTC's Part 30 rules provide a 
successful model for limiting the extraterritorial impact of 
Dodd-Frank. The Part 30 rules, which govern the offer and sale 
of foreign futures and options to U.S. participants, were 
promulgated in 1987, as Dan Roth said, and have promoted 
international trade for nearly 24 years without sacrificing 
customer protections. CFTC's Part 30 rules recognize we cannot 
expect other countries to implement regulations identical to 
ours. Instead, it provides a mechanism for providing exemptions 
to exchanges and clearinghouses that are subject to comparable 
regulations in their home countries.
    The swaps markets, even more than the futures markets, are 
international in scope. This is in part because swaps have been 
traded in bilateral transactions, and there have been no 
trading platforms or central clearing organizations that would 
focus trading in certain locations. As regulations around the 
world develop rules, it is essential that they be coordinated 
and comparable, both with respect to substance and timing.
    Thirty years ago, the CFTC determined that given the 
agency's limited resources, it is appropriate this time to 
focus the Commission's customer protection activities upon 
domestic firms and upon firms soliciting or accepting orders 
from domestic users of the futures markets. This same policy 
should govern the regulation of swaps.
    In particular, we urge the CFTC to use its authority under 
Dodd-Frank to provide an exemption for swap clearinghouses 
located outside the United States that clear swaps for U.S. 
participants, provided that they are subject to comparable 
regulations in their home country. Such an exemption would 
facilitate international competition, provide more choice in 
clearing for U.S. entities, and free the CFTC staff to focus on 
transactions that more directly affect U.S. market 
participants, and I thank you very much for the opportunity to 
testify.
    [The prepared statement of Mr. Damgard can be found on page 
71 in the appendix.]
    Chairwoman Stabenow. Thank you very much, and, Mr. Damgard, 
you answered the first question I was going to ask you in terms 
of what is happening abroad. Senator Roberts and I have sent a 
letter, and we will be working together with our European 
counterparts, and I appreciate your comments on that. As you 
can tell from the Committee discussion today, we are very 
concerned about how all this fits together and making sure it 
is done in the right way.
    Mr. Cooper, being part of a firm that is very active in 
these markets, I would like to hear more about your perspective 
on phasing in implementation of financial regulatory reform and 
any potential delays. Would delaying the bill create additional 
legal or market uncertainty, in your opinion? And what sort of 
information or certainty from the regulators would be ideal to 
help your firm meet the changes required by reform?
    Mr. Cooper. Thank you, Chairwoman. I think that I approach 
it really from the fundamental premise that we are today maybe 
literally 1,000 days from the demise of Lehman. We still do not 
have meaningful central clearing of derivatives. One of the 
greatest goals of Dodd-Frank was to reduce systemic risk that 
built up from the daisy chain of interconnectedness.
    Phasing-in represents a common-sense approach to--we do not 
subscribe to a big bang theory. There are a lot of rules. There 
are a lot of issues. But what we do know is that today the 
infrastructure for clearing exists. I think as Mr. Damgard 
alluded to, we have been clearing derivatives for nearly a 
century in this country. Clearing takes place today between the 
dealers. The buy side is ready. We are asking for mandatory 
access to clearing for those firms that are ready to clear. 
Most of the risk that exists in the system today is derived 
from the largest firms and those that are capable and desirous 
of clearing.
    Certainty is key. Once we launch clearing and the related 
data that will be available to the regulators from reporting 
the swap data repositories, the regulators can then be much 
more thoughtful about phasing in and providing specificity 
about the subsequent aspects of implementation of Dodd-Frank. 
So we think the launch of clearing will, in fact, provide a 
range of data that will help our regulators make more informed 
decisions, smarter regulation, and greater certainty for the 
marketplace.
    Chairwoman Stabenow. Thanks very much.
    Mr. Conner, we appreciate your testimony today and for 
highlighting what is certainly an important responsibility of 
this Committee as we look at the importance of risk management 
for farmers and co-ops and end users in general. But I wonder 
if you might go into more detail about the impact of increased 
volatility in the commodity markets, how it has impacted your 
members, why it is critical to preserve the relationship 
between the farm and the co-op, and also if you might have any 
specific examples on the impact of farmers or co-ops in terms 
of additional regulations that are coming, such as swap dealer 
requirements, that kind of thing.
    Mr. Conner. Thank you, Senator Stabenow. Let me just say 
the costs are substantial, we feel, and, you know, the 
volatility in today's marketplace is really just unprecedented. 
I mean, this is not theory. This is not, you know, hypothetical 
``what if's.'' I mean, we are living in the midst of, you know, 
the most volatile commodity times that we have ever seen in our 
Nation's history. Last week USDA's crop report and immediately, 
you know, prices are locked up, the maximum daily limits, you 
know, there are consequences associated with these kind of 
price moves, and you have both producers and buyers out there 
on any given day, you know, you are not looking to limit your 
exposure over the course of a day or a couple of days. I mean, 
you are trying to limit your exposure over the course of hours 
and minutes because there is that kind of volatility in this 
marketplace.
    You know, for our producers, obviously, you know, they just 
simply cannot withstand that kind of volatility. They cannot be 
sitting on a commodity that is worth something one day and the 
next day it may be worth 50 percent less--or 50 percent more. 
And if you are a livestock guy, you know, how do you deal with 
that that on any given day there can be that kind of change in 
your input cost?
    So this is a huge, huge issue for American agriculture. Co-
ops did not get into this business, you know, because we saw 
opportunities out there. We got in there because our farmer 
owners came to us and said, you know, this may well be the 
number one issue we are facing, and as our co-op, what can you 
do to help us manage these kinds of risks?
    Individual farmers, despite, you know, the presence of a 
very strong futures market there for hedging, in many cases 
individual farmers simply do not have the ability to hedge 
their commodities on the futures market and withstand the kind 
of margin calls that you could get in that daily price 
movement. They do not have access to that kind of capital to 
lock up, you know, to handle those margin calls. They have 
looked to the co-ops to say, you know, what can you do for me 
to basically absorb some of that margining kinds of 
requirements so that you can offer me a forward price at some 
point? You know, once I have my crop in hand, I will take that 
price, but I cannot handle the margin of then hedging that 
particular price on our futures exchanges.
    Co-ops, one of the functions we have done is we have 
assumed that. We have taken over that price risk function. We 
have taken over the responsibility for margining, if you will, 
those kinds of transactions. Some of that margining has 
involved over-the-counter swaps in order to limit our own 
exposure.
    The example I use, Madam Chairman, is I have had one co-op 
that on one given day, as a result of change in the corn and 
soybean market, had a $100 million margin call in one day. That 
is one transaction. So, I mean, you know, these are not small 
numbers, and the impact of trying to capitalize yourself to be 
able to withstand that kind of action on a given day--you know, 
you walk into the office and someone is on the phone saying, 
``I need $100 million of your capital.'' You know, you cannot 
sustain that kind of thing. And we have used, I think 
effectively, been forced to use these over-the-counter 
transactions to try and manage that on behalf of our producers.
    Mr. Damgard. Which in turn finds its way to the exchange. 
As a corn and soybean producer, I certainly sympathize and 
agree with everything Chuck says. And ye clearinghouses are 
very, very complicated organizations. I mean, they are very, 
very capital intensive, and to your point, Adam, the 
clearinghouses have to be very careful about establishing 
standards about who can be members of that clearinghouse and 
how much money it requires to be a member. You cannot let the 
local corner shoe store guy become a clearing member without 
running the other people that have substantial capital deciding 
to get out of the clearinghouse.
    So the clearinghouses have worked exactly well, but they do 
not eliminate risk. They mutualize it among the people that 
have the deep pockets.
    Chairwoman Stabenow. Thank you very much.
    Senator Roberts?
    Senator Roberts. Madam Chairman, once when I was Chairman 
of the Emerging Threats Subcommittee of the Armed Services 
Committee, I made it mandatory that every panel member be 
shackled to their chair so that they could hear all panels, and 
I just think it would be appropriate here, shackling.
    [Laughter.]
    Senator Roberts. But at any rate, it would be interesting 
to have a panel here with Mr. Conner and then have Ms. Born and 
then Mr. Cooper, and then I would like to place Chairman 
Gensler right next to John Damgard, and then have at it and 
have about a 15--you know, a roundtable discussion, and I think 
it would be very helpful.
    Chuck, welcome back. Thank you for your contribution. Thank 
you for that last statement. What are you going to tell your 
membership as a result of this hearing? Are you going to say 
that you have every confidence that a farmer cooperative is 
free in regards to some of the CFTC rulings that you are 
worried about? What are you going to tell them?
    Mr. Conner. Well, that is a great question, Senator 
Roberts. You know, again----
    Chairwoman Stabenow. I am just going to say, he is going to 
start by saying it was chaired brilliantly.
    [Laughter.]
    Senator Roberts. I think that is a given, Madam Chairwoman.
    Mr. Conner. We have had unprecedented access to Chairman 
Gensler and the Commissioners and the staff at CFTC, and so 
we----
    Senator Roberts. Well, now, Chuck, wait a minute.
    Mr. Conner. --have been given the opportunity----
    Senator Roberts. Wait a minute, wait a minute.
    Mr. Conner. All right.
    Senator Roberts. The Chairwoman has held a hearing. We sent 
a letter, three of us, down to the CFTC saying, ``What is the 
legal standing after July 16?'' And it was not until yesterday 
that they met. There were several 3-2 votes, which were 
obvious, in regards to deadlines and what was going on. And 
then we had the order. I guess that is the order. I said 
regulations. I was chastised by staff saying it is an 
``order,'' and it is 23 pages long with two appendixes. I have 
not read it all. I am supposed to digest it. As I said before, 
I will probably get indigestion.
    Now, you cannot tell me that you have had access to the 31 
working groups and the 51 regulations and the thousand pages of 
regulations. You may be able to tell me as to your specific 
concern that you have had some access and have had some 
guarantee or something like that.
    Now, Senator Boozman indicated, ``What am I going to tell a 
local manufacturer?'' The Chairwoman does not know, I do not 
think. She is awfully good and awfully brilliant in conducting 
a hearing, but I doubt if she has had time because we did not 
get these things until 7 o'clock in the morning. The Wall 
Street Journal had more than we had. At any rate she does not 
know. Senator Klobuchar does not know. Senator Gillibrand does 
not know. Senator Thune does not know. Senator Johanns does not 
know. Senator Boozman does not know. Senator Chambliss does not 
know. Senator Lugar does not know. And I certainly do not know. 
We have staff, one member, that does know, but we have not had 
time to really digest it.
    I do not think that Chairman Gensler knows what all these 
31 working groups and 51 regulations are going onto the detail 
that we would like to know, and so they have simply delayed it 
until December 31, and we are in another state of swap 
purgatory, although there are some exceptions that we have been 
advised not to worry, you know, we are going to take care of 
this.
    Now, I am being a little harsh here, but the way that this 
has been handled, having a hearing the day before they come up 
and then regs showing up at 7 o'clock in the morning, I do not 
like that at all. I do not think that is the way to be treated. 
I do not think the Chairwoman should be treated like that, or 
me or, for that matter, any other Senator. So I am sort of 
being obstreperous about this.
    Mr. Cooper, what are you going to tell your membership, 
John, what are you going to tell your membership in terms of 
what you found out at this hearing?
    Mr. Damgard. Well, Senator, we also----
    Senator Roberts. How about another hearing a little bit 
later on?
    Mr. Damgard. We welcome that very much. We know that this 
mosaic that I spoke of is going to be very, very difficult to 
put together. I have great sympathy for Chairman Gensler. I 
think you are right. I think that, you know, he is working as 
hard as he can for coordination, but, I mean, somebody handed 
me this today, which he could not have known. Simon Lewis, who 
is the chairman of the Association of Financial Markets in 
Europe, was quoted as saying yesterday, `` `There remains the 
risk of poorly calibrated, rushed, inconsistent, or unclear 
regulation,' Lewis told the Brussels audience.'' So it is not 
easy for these things to be coordinated in a way that is going 
to make sense.
    Senator Roberts. Mr. Damgard, you said in your testimony 
the European Parliament is considering regulatory retaliation 
against the United States clearing organizations unless the 
U.S. allows mutual recognition of equivalent foreign regulatory 
regimes. It is not follow along or get in line. It is basically 
equivalent foreign regulatory regimes.
    What should the CFTC do to address this possibility? And 
what would be the consequences if the CFTC does not act in 
regards to a retaliatory kind of situation here in regards to 
what you heard over there in the European Parliament?
    Mr. Damgard. Well, in my testimony I talk about Part 30 
initial recognition, and I think that really is the answer. And 
I think sometimes Secretary Geithner's remarks about, you know, 
whatever, the light touch in London was the reason for this 
terrible tragedy, that was not constructive. I happened to be 
over there at the time, and people were not happy with that. 
They were saying, ``Well, you did not have any regulation on 
these products at all, so why can you criticized us for light 
regulation?'' It tends to make it more difficult to reach any 
accommodation, and my sense last week was that if the United 
States goes it alone, we would be risking an awful lot of not 
only retaliation but damaging U.S. participants in the market.
    Senator Roberts. Well, I thank you for your comment. I am 
over time by a minute and 40, typically, but at any rate--and I 
have been rather unpleasantly irascible this morning, but I am 
irascible because of the situation, and I am just trying to 
figure out what you are going to tell your people. And I think 
what you are going to tell them is, well, it was a pretty darn 
good hearing, we had some pretty good pertinent questions, 
Chairman Gensler did the best that he could, Ms. Born was 
reliving the thrilling days of yesteryear in 2008, et cetera, 
et cetera, et cetera. But I am not sure if you got any 
specific, concrete answer that can put you at ease that you can 
tell your membership do not worry about this. It is a situation 
where I think this Committee has to continue our strong 
oversight responsibility, and when things clear up a little 
bit--and Lord know, you know, Chairman Gensler has a tremendous 
challenge ahead because of the budget restrictions and what he 
is forced to do, mandated to do, what he wants to do under 
Dodd-Frank.
    So I do not know. Do you have any specific positive thing 
that you could go back to your membership and say, hey, you 
know, we think we are going to be all right?
    Mr. Cooper. Senator, if I may, I do think there is 
something encouraging that I can report to my members, and, 
that is, I have not heard anything that would detract from the 
regulators' opportunity to announce a date certain by which 
clearinghouses will be open for business and that those who 
want access to clearing can have access to clearing so that we 
can phase in those rules, so that we can launch central 
clearing and reduce systemic risk today in a meaningful way.
    Senator Roberts. That is a good thing, and with that I 
think I will yield back. Thank you.
    Chairwoman Stabenow. Well, thank you very much.
    Let me say as we conclude the hearing, we thank all the 
witnesses today. We certainly appreciate your comments, and as 
we have said since the beginning of the year, we take our 
oversight responsibilities very seriously, and we will continue 
to do that both through the Committee hearing process but also 
on a day-by-day communication that is happening at staff, and 
certainly Senator Roberts and I are very engaged at various 
levels in this.
    So we thank you very much. Any additional questions for the 
record should be submitted to the Committee clerk within 5 
business days, and the Committee hearing is adjourned. Thank 
you.
    [Whereupon, at 12:01 p.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                             JUNE 15, 2011






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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             JUNE 15, 2011



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                         QUESTIONS AND ANSWERS

                             JUNE 15, 2011



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