[Senate Hearing 112-503]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-503

                          CONTINUING OVERSIGHT
                           OF THE WALL STREET



                               before the

                       COMMITTEE ON AGRICULTURE,
                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                            DECEMBER 1, 2011


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

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                 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
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


                            C O N T E N T S



Continuing Oversight of the Wall Street Reform and Consumer 
  Protection Act.................................................     1


                       Thursday, December 1, 2011

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

                                Panel I

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, DC; accompanied by Hon. Jill Sommers, 
  Commissioner, Commodity Futures Trading Commission.............     4
Schapiro, Hon. Mary, Chairman, Securities and Exchange 
  Commission, Washington, DC.....................................     6


Prepared Statements:
    Chambliss, Hon. Saxby........................................    48
    Gensler, Hon. Gary...........................................    52
    Schapiro, Hon. Mary..........................................    63
Question and Answer:
Stabenow, Hon. Debbie:
    Written questions to Hon. Gary Gensler.......................    70
    Written questions to Hon. Mary Schapiro......................    84
Roberts, Hon. Pat:
    Written questions to Hon. Gary Gensler.......................    73
    Written questions to Hon. Mary Schapiro......................    85
Chambliss, Hon. Saxby:
    Written questions to Hon. Gary Gensler.......................    76
    Written questions to Hon. Mary Schapiro......................    90
Grassley, Hon. Charles:
    Written questions to Hon. Gary Gensler.......................    79
Thune, Hon. John:
    Written questions to Hon. Gary Gensler.......................    80
    Written questions to Hon. Mary Schapiro......................    94
Gensler, Hon. Gary:
    Written response to questions from Hon. Debbie Stabenow......    70
    Written response to questions from Hon. Pat Roberts..........    73
    Written response to questions from Hon. Saxby Chambliss......    76
    Written response to questions from Hon. Charles Grassley.....    80
    Written response to questions from Hon. John Thune...........    80
Schapiro, Hon. Mary:
    Written response to questions from Hon. Debbie Stabenow......    84
    Written response to questions from Hon. Pat Roberts..........    85
    Written response to questions from Hon. Saxby Chambliss......    90
    Written response to questions from Hon. John Thune...........    94

                          CONTINUING OVERSIGHT
                           OF THE WALL STREET


                       Thursday, December 1, 2011

                              United States Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                     Washington, DC
    The committee met, pursuant to notice, at 10:07 a.m., in 
Room 106, Dirksen Senate Office Building, Hon. Debbie Stabenow, 
Chairwoman of the committee, presiding.
    Present or submitting a statement: Senators Stabenow, 
Conrad, Baucus, Nelson, Brown, Klobuchar, Gillibrand, Roberts, 
Chambliss, Johanns, Boozman, Grassley, Thune, and Hoeven.

                          AND FORESTRY

    Chairwoman Stabenow. Good morning. Thank you for being 
here. We thank our witnesses this morning. This is the 
Committee on Agriculture, Nutrition and Forestry. We will call 
the meeting to order.
    Today's hearing is part of this committee's continuing 
oversight of the Wall Street Reform and Consumer Protection 
Act. We know why reform was needed. The collapse of the 
financial industry cost taxpayers hundreds of billions of 
dollars and we lost eight million jobs. We passed Wall Street 
Reform to prevent systemic failures and to ensure that 
taxpayers are never again asked to bail out our financial 
    Wall Street Reform addressed four key areas: Systemic risk, 
full accountability and transparency, greater consumer 
protections, and better capitalization for the largest, most 
systemic institutions. The priority all along has been to 
protect consumers and to ensure that consumers can trust the 
integrity of our financial markets.
    The crisis in Europe is a reminder of how important it is 
to get these rules done and to get them done right. We have 
already seen with the bankruptcy of MF Global how dangerously 
exposed our economy is to what is happening in Europe. The 
implications of this cannot be overstated.
    Chairman Gensler, Chairman Schapiro, as you work to 
finalize all of the rules, I encourage you to harmonize your 
rules with each other and other prudential regulators, working 
closely with your global counterparts. We need a consistent set 
of rules, not conflicting or duplicative regulations.
    And as you both know, a priority for me and many members of 
this committee has been protecting commercial end users--
farmers, ranchers, manufacturers, co-ops, others who use the 
swaps market to hedge legitimate business risk. We put 
protections in place in Wall Street Reform for those end users 
and regulators, in my judgment, must follow Congressional 
    The Wall Street Reform Act is bringing transparency and 
accountability to over-the-counter swaps for the first time. 
The MF Global bankruptcy underscores the importance of having 
effective oversight in all of our financial markets. We need 
these markets to function properly, and we need consumers to 
have faith in them. MF Global's customers included farmers, 
ranchers, co-ops, small businesses, and individuals who use 
these markets to hedge their business risk. They believed their 
money would be handled appropriately. They believed that the 
markets would function properly. They believed in the guiding 
principle of these markets, that their money would be kept 
separate from the firm's money.
    Now their confidence is shaken and MF Global's customers 
are understandably very angry. With hundreds of millions of 
dollars of customers' money missing, maybe more than a billion 
dollars, it is clear that something went terribly wrong. As the 
committee continues to investigate this bankruptcy, we will be 
asking where the money is, how to get customers their money 
back, whether the bankruptcy was preventable, and whether the 
rules were appropriately crafted to protect customers' money.
    I want to thank our witnesses today. You have been before 
us before. We appreciate very much your willingness on an 
ongoing basis to be with us, Chairman Gensler and Chairman 
Schapiro. I also appreciate that Commissioner Sommers is here 
to respond to any questions that Chairman Gensler feels he 
cannot answer about the MF Global bankruptcy. I appreciate the 
time and effort all of you have put into writing these rules, 
and we realize the task that we gave you, and for being here 
and being available to the committee.
    At this point, I would turn to my friend and our Ranking 
Member, Senator Roberts.


    Senator Roberts. Well, thank you, Madam Chairwoman. I 
appreciate your calling this hearing today. CFTC oversight, as 
you have indicated, is a critically important function of this 
committee. Our last hearing on this subject was about six 
months ago, and in light of recent events, I am looking forward 
to hearing from our witnesses for an update on how our 
regulatory authorities are coordinating their efforts with 
regard to the Dodd-Frank legislation.
    It is time to get back, as you have indicated, to the core 
fundamentals over at CFTC. Congress created the agency back in 
1974 to make sure the use of risk management tools, such as 
futures markets, were safe and secure for all of the 
participants. Unfortunately, in response to the financial 
crisis, the CFTC, in my view, has been off on a series of 
tangents, proposing one regulation after another.
    Meanwhile, back at the ranch, for the first time ever, we 
have a major problem--a major problem--with one of our larger 
Futures Commission merchants. I am referring, as the Chairman 
has indicated, as well, to the collapse and bankruptcy of MF 
Global, the seventh or eighth largest bankruptcy in United 
States history, a collapse that occurred under the leadership 
of one of our former colleagues, Jon Corzine, and under the 
watch of the Commodity Futures Trading Commission headed up by 
Chairman Gary Gensler, also a former colleague of Mr. Corzine 
at Goldman Sachs.
    On behalf of many investors, agri-businesses, farmers, 
ranchers, and their bankers across the country who are caught 
up in the events surrounding MF Global's bankruptcy, I want to 
thank the Chairwoman again for agreeing to schedule a hearing 
on December 13 for this committee to hear from the key players. 
Through no fault of their own, folks in Kansas, Michigan, all 
across the country, have been severely damaged economically by 
the actions and subsequent bankruptcy of MF Global. They want 
to know what happened and see that it does not happen again. 
But more importantly, they want to know what is being done to 
get this money back in the hands of rightful owners as soon as 
possible. We must find out what happened with MF Global and we 
must do so in a manner that restores faith in the futures 
markets and maintains them as a legitimate trusted risk 
management option for numerous producers and small businesses.
    Madam Chairwoman, we cannot look past the critical 
oversight issues we must address regarding Dodd-Frank. I know 
that, and there are many. However, MF Global is the most 
pressing issue facing us today. Thousands of our constituents 
are looking at the possible loss of hundreds of millions of 
dollars and it has nothing to do with Dodd-Frank. We are 
getting more calls today in my home State of Kansas on this 
issue than we are having on the farm bill.
    For many decades, the futures market has served as a way 
for agriculture producers and numerous small businesses to 
hedge risk. Without this ability, many could not stay in 
business. Throughout those decades, they have never once 
questioned the stability of the futures market until now. We 
need to get to the bottom of exactly what happened with MF 
Global. The lead in those efforts should be the CFTC and 
Chairman Gensler. I know that the CFTC is working hard, and I 
know Chairman Gensler has tried to step aside or be a 
nonparticipant or be recused and not let his past ties to Mr. 
Corzine create questions about the CFTC role in this process.
    Unfortunately, the manner in which Mr. Gensler chose to 
step aside or recuse himself has raised more questions than it 
has answered. Why did he not recuse himself from MF Global 
issues from the beginning of his term if there was a conflict 
based on his previous relationship? Why did he wait until 
November 3 to decide he should step aside instead of doing it 
immediately on October 31, when everything came unraveled and 
MF Global declared bankruptcy? Why did it take the Chairman 
another five days to provide a recusal letter to his agency 
ethics officer? And why did it take him an additional two weeks 
to provide me a copy of that letter after I had requested it 
    We must restore faith in the futures market so that our 
ranchers and farmers and small businesses can again know they 
can use futures to provide the risk management they so 
desperately need. This task and understanding what happened 
with MF Global must be our top priorities. A key first step on 
this path will be getting a better understanding today from Mr. 
Gensler on the answer to many questions that I have outlined.
    Madam Chairwoman, I again thank you for holding this 
hearing and for an additional hearing you have scheduled on MF 
Global for December 13.
    Chairwoman Stabenow. Thank you very much, Senator Roberts.
    As is the custom of the committee, we will ask members to 
submit opening statements for the record so we can move to our 
witnesses today.
    We have two distinguished witnesses who have been with us 
before. We are well aware of your distinguished backgrounds and 
appreciate again having your time and effort coming forward in 
cooperating with the committee.
    So we will first start with Chairman Gensler, and we would 
ask you keep your statements to five minutes and then we will 
turn to Chairman Schapiro. Thank you.


    Mr. Gensler. Thank you, Chairwoman Stabenow, Ranking Member 
Roberts, members of the committee. I am pleased to testify on 
behalf of the CFTC. I am also glad to be here with Chairman 
Schapiro and CFTC Commissioner Jill Sommers.
    Three years ago, both the financial system and the 
financial regulatory system failed, and as the Chairwoman said, 
more than eight million Americans still have lost their jobs 
and many Americans are struggling. And swaps played a central 
role in the crisis. There were other causes, as well. But swaps 
so important for managing and lowering risk for end users 
across this land also concentrated risk within the financial 
    In response, Congress and the President came together and 
passed Dodd-Frank. The CFTC is now working to complete Dodd-
Frank rules thoughtfully, not against a close. The CFTC has 
actually benefited from public comment, over 25,000 comments, 
1,100 meetings, 14 roundtables.
    What have we done? We have substantially completed the 
proposal phase earlier this spring and we turn the corner to 
finalizing rules. We finished 18 rules but have a full schedule 
in front of us the rest of this year and well into next year. 
Each of the final rules have benefited from careful 
considerations of cost and benefits, and we appreciate all that 
people have sent in on that.
    Just mentioning a few of the key rules we have completed, 
large trader reporting for physical commodity swaps, 
registration of the data repositories themselves, aggregate 
position limits, and risk management for the clearinghouses 
themselves. We have also finished rules giving the Commission 
more authority to prosecute wrongdoers that recklessly 
manipulate markets.
    And next week, on Monday, we are going to take up a number 
of rules, one of them considering enhanced customer protections 
regarding the investment of customer funds, and we will look 
soon to finish rules on segregation of customer funds for 
cleared swaps. Segregation of funds is at the core foundation 
of the customer protection regime, as both the Chair and the 
Ranking Member noted, and both of these rules that we will take 
up shortly, I think, will help enhance the critical safeguards 
to customers. It will not be enough, though, and we are 
continuing to review all of our rule sets and audit and 
examination programs.
    In addition, the Commission will consider rules next Monday 
with regard to registering foreign boards of trade.
    Moving forward, we are working to finish shortly key 
transparency rules, including specific data to be reported to 
regulators through data repositories that will give the public 
more critical information. And as mandated by Dodd-Frank, we 
are working closely with the SEC on key definitions, 
definitions of swap dealer and swap which we hope to complete 
early next year.
    The Dodd-Frank Act gives non-financial end users the choice 
of whether or not to use central clearing, the so to speak end 
user exception. Consistent with Congressional intent, and I 
think it is clear what Congressional intent is on this, the 
CFTC's margin proposal states that non-financial end users will 
not be required to post margin for uncleared swaps. The swaps 
market and the futures market are meant to be there so end 
users of all sorts can hedge risk, lock in a price of corn, 
wheat, or a rate, and then focus on what they do best and not 
be brought into the margining or clearing and so forth. We are 
conscious of that. We are dedicated to it.
    The Commission is actively coordinating internationally to 
promote consistent standards. For instance, next week, Chairman 
Schapiro and I will be meeting with our counterparties over in 
Paris. Counterparties from Asia and Canada are also coming. I 
know Commissioner Sommers also heads up our Global Markets Task 
Force and we work closely trying to get this consistent around 
the globe.
    I also anticipate the Commission will explicitly week 
public input on what is called the extraterritoriality 
application of Dodd-Frank, or there is a Section 722(d) was the 
specific section.
    As we finalize rules, let me just say we do need additional 
resources. With just 700 staff members, we are about ten 
percent larger than we were at our peak in the 1990s, and since 
then, the futures market has grown fivefold and Congress has 
given us this new task to look at a market that is seven times 
greater than that fivefold market, or roughly $300 trillion in 
size. Without sufficient funding, the nation cannot be assured 
the CFTC can oversee the futures and swaps markets and enforce 
the rules to promote transparency and critically to protect the 
public, whether it is protecting customer funds or protecting 
against systemic risk.
    Furthermore, the current debt crisis in Europe is just but 
a stark reminder that we need to complete financial reform and 
have adequate resources for the CFTC. Far more costly might be 
if the public were to maintain--to remain unprotected from the 
risks of the swaps market.
    I thank you.
    [The prepared statement of Mr. Gensler can be found on page 
52 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Chairman Schapiro, welcome.


    Ms. Schapiro. Thank you very much, Chairwoman Stabenow, 
Ranking Member Roberts, and members of the committee. Thank you 
for inviting me to testify today regarding implementation of 
title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. It is a pleasure to appear with my colleagues, 
Chairman Gensler and Commissioner Sommers.
    As you know, title VII primarily relates to the regulation 
of over-the-counter derivatives, creating an entirely new 
regulatory regime and directing the SEC to write a number of 
rules designed to bring greater transparency and oversight to 
this market. Since its enactment in July 2010, the SEC has 
proposed or adopted more than three-fourths of the many rules 
required by the Dodd-Frank Act and we continue to work 
diligently to implement all provisions of title VII.
    As part of that effort, we have engaged in an open and 
transparent process, seeking input from interested parties 
throughout. Our Commissioners and staff have met with a broad 
cross-section of market participants. We joined with the CFTC 
to hold public roundtables. We have been meeting regularly with 
other financial regulators to ensure consistent and comparable 
definitions and requirements across the rulemaking landscape.
    In addition, as Chairman Gensler mentioned, next week, we 
are convening with the CFTC and the European Securities Markets 
Authority a meeting of international regulators to talk through 
the status of derivatives regulation implementation in other 
jurisdictions and to address cross-border issues that are 
arising. We are working closely with foreign regulators to 
adopt consistent approaches to OTC derivatives market 
regulation that will both reduce cross-border risks to the 
financial system and address domestic U.S. competitiveness 
    To date, the SEC already has proposed rules in 13 areas 
required by title VII, including rules that would prohibit 
fraud and manipulation in connection with security-based swaps; 
address potential conflicts of interest at security-based swap 
clearing agencies, security-based swap execution facilities, 
and exchanges that trade security-based swaps; specify who must 
report security-based swap transactions, what information must 
be reported, where and when it must be reported, and what 
information will ultimately be disseminated to the public; 
require security-based swap data repositories to register with 
the SEC; define security-based swap execution facilities and 
establish requirements for their registration and ongoing 
operations; specify information that clearing agencies would 
provide to the SEC in order for us to determine which swaps 
must be cleared, and specify the steps that end users must 
follow to rely on the exemption from clearing requirements; 
establish standards for how clearing agencies should operate 
and be governed; impose certain minimum business conduct 
standards upon security-based swap dealers and major security-
based swap participants when those parties engage in security-
based swap transactions; and establish registration procedures 
for security-based swap dealers and major market participants.
    In addition, with the CFTC, we have proposed rules 
regarding the further definition of the key terms within the 
Dodd-Frank Act, including swap, security-based swap, swap and 
security-based swap dealers, and major market participants.
    In the coming months, we expect to propose the last of our 
title VII rules regarding capital, margin, segregation and 
recordkeeping requirements for security-based swap dealers and 
swap participants.
    In addition, because the OTC derivatives market has become 
a truly global market, we are evaluating carefully the 
international implications of title VII. Rather than deal with 
these implications piecemeal, we intend to address the relevant 
international issues holistically in a single proposal.
    After proposing all of the key rules under title VII, we 
will seek comment on an implementation plan that will 
facilitate a rollout of the new requirements in a logical, 
progressive, and efficient manner that minimizes unnecessary 
disruption and cost to the markets.
    In conclusion, the Dodd-Frank Act provides the SEC with 
important tools to better meet the challenges of today's 
financial marketplace and fulfill our mission to protect 
investors, maintain fair, orderly, and efficient markets, and 
facilitate capital formation. As we proceed, we look forward to 
continuing to work closely with Congress, our fellow 
regulators, and members of the financial community, affected 
end users, and the investing public.
    Thank you for inviting me to share with you our progress on 
and plans for implementation, and I look forward to answering 
your questions.
    [The prepared statement of Ms. Schapiro can be found on 
page 63 in the appendix.]
    Chairwoman Stabenow. Thank you very much to both of you.
    As we begin, we do intend to do more than one round of 
questions today, so I will ask my colleagues to remain within 
the five-minute time frame for each round and we will do at 
least two, and depending on interest and time, we can go from 
    Before I ask my opening questions, though, I know that 
Senator Brown has to preside, so on behalf of all of us, we 
thank you for presiding over the Senate and I will yield to you 
for a moment to submit some questions for the record.
    Senator Brown. Thank you. Thank you, Madam Chair. I 
actually would--I have to leave in a few minutes, but thanks 
for that, and I would just like to say a few words and ask a 
question now and they can answer it either now or later, 
whatever works. Thanks, Madam Chair.
    Chairwoman Stabenow. Sure.
    Senator Brown. First of all, thank you for your public 
service, both of you, Mr. Chair, Madam Chair. I appreciate 
    As we know, the MF Global episode is just the latest 
example of the dangers of inadequate oversight. In 1984, a 
downturn in the energy markets caused the failure and bailout 
of the bank Continental Illinois. The 1998 crisis in East Asia 
and in Russia caused the failure and bailout of the hedge fund 
Long Term Capital Management. And more recently, the mortgage 
market caused the failure and bailout of many of our most 
prominent financial institutions. So there are many lessons.
    One of the lessons is not all crises, of course, not all 
crises are exactly the same. That is why we need to give the 
market watchdogs adequate resources so they can oversee these 
markets and prevent, or at least minimize, the damage of the 
next potential crisis. That means giving CFTC the necessary 
funding to carry out both the great responsibilities we have 
given them in the Dodd-Frank Act and the everyday 
responsibilities to supervise derivatives markets. Trading 
volume, for instance, increased 400 percent from 2000 to 2010, 
while CFTC staff increased nine percent, completely apart from, 
previous comments notwithstanding, completely apart from Dodd-
    Wall Street allies in Congress, and there are far too many 
of them, are trying to cut funding because they do not like the 
idea of greater oversight and transparency of these markets. As 
we have seen in MF Global, this is a dangerous game, this 
cynical, almost Orwellian contention that the financial crisis 
was because of too much government and the dangerous game 
because of underfunding agencies that need to be watchdogs. It 
puts at risk the companies in States like Ohio and Michigan 
that Senator Roberts mentioned. It puts those companies at risk 
in those States that use these markets.
    So a couple of questions, Mr. Chairman, if I could ask you. 
What sort of decisions will CFTC have to make with regard to 
its priorities in this funding situation, what you can project? 
What are the implications of these decisions for your role in 
overseeing markets? And third, can you effectively implement 
Dodd-Frank at that funding level? If you could sort of pull all 
three of those together.
    Mr. Gensler. It is a challenge. I think that we will be 
successful, or, I say, largely successful completing the rule 
set, but we will not have the people to help oversee the market 
or even answer all the questions that people have, the hundreds 
if not thousands of questions, interpretation, registration, 
applications, and that is a challenge for us. Congress just 
increased our funding by $3 million for this coming year we are 
in right now, but ringfenced $18 million additional dollars for 
technology, and we sorely need more money for technology, but 
the arithmetic means we have to find $15 million of cuts 
elsewhere because they took the top line up three and 
ringfenced $18 million elsewhere.
    This means we will not do things. We currently--there are 
many things we should do already that we are not doing, like 
annual examinations of the clearinghouses. We do not yet do 
that. We do not have on-site people. We do not, as the recent 
questions--we rely on the self-regulatory organizations to 
examine what is called Futures Commission Merchants. We do not 
individually go in there. That is the routine we have.
    So there is a lot that we probably will not do, but we will 
be able to complete the rules, largely. I mean, it is a human 
exercise. Maybe some will not get done. But we will complete 
the rules but not have the people to oversee the markets.
    Senator Brown. Do you, Chairman Gensler--MF used window 
dressing tactics, this sort of repo to maturity, borrowing 
client funds against its sovereign bond investments to mask its 
exposure. Its auditor, CME, did not detect these actions until, 
frankly, too late, apparently. Your fellow Commissioner Chilton 
said that you have the authority to conduct deep data dives 
into companies. Have you directed your staff to use that 
authority? Do you agree with Commissioner Chilton that you do 
have that authority, and second, are you doing that?
    Chairwoman Stabenow. I would ask you to be brief in your 
    Mr. Gensler. I am not familiar with his quote, but we do 
have general authority to ask for data from Futures Commission 
Merchants, and what we are doing right now is doing, along with 
the CMA, a limited review of all the Futures Commission 
Merchants about their segregated accounts.
    Senator Brown. Okay.
    Mr. Gensler. We hope to complete that by the end of this 
    Senator Brown. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much, and we will now 
move back to regular order.
    As we look, to both Chairman Gensler and Chairman Schapiro, 
when we look at all of the issues involved, in some ways, it is 
hard to know where to begin in terms of the questions. But one 
thing that bothers me is that MF Global's collapse has 
shattered the faith of many in the futures markets. I am very 
concerned that customers are now questioning whether they will 
ever use the futures market to manage risk again. The 
protection of segregated customer funds, as we have mentioned, 
has been a cornerstone of the futures industry for years, but 
the MF Global situation has brought all of that into question. 
Customers were shocked to find out that their money could be 
invested without their consent. And it is even more shocking 
that certain risky transactions were considered permissible 
investments. The idea of sacred segregated customer funds has 
really been thrown out the window.
    Chairman Gensler, you have spoken about the fact that there 
are rules that you have looked at that would limit the 
permissible investments of customer funds. They have been 
looked at earlier this year. You are now having a meeting next 
week. But my first question is, why has the rule not been 
finalized up to this point? Have there been disagreements among 
the Commission, the Commission members regarding the rule, and 
if so, can you explain those disagreements?
    Mr. Gensler. We in October of 2010 proposed enhancements to 
the investment of customer funds. I have personally 
consistently felt that we need to do it. It is not necessarily 
just Dodd-Frank. And we have a very busy agenda. We did provide 
such final drafts to Commissioners this summer and there was 
still continued debate, so I chose to continue to have the 
dialogue with my fellow Commissioners. But I think next Monday, 
we will take this up. Segregation is the key foundation of this 
and I think it is important that we limit how funds can be 
used, as Congress intended. The statute only allows investments 
in Treasuries and three or four other areas and this would 
really narrow an earlier exemption that in 2005 the Commission 
    Chairwoman Stabenow. And is your expectation that the rule 
will be adopted next week?
    Mr. Gensler. I think it would be fair that I let the 
process go, that Commissioners vote on Monday and I not get 
ahead of individual Commissioners. But I certainly scheduled 
the vote hoping that they would have that support. But there 
still may be some deliberation.
    Chairwoman Stabenow. Thank you.
    I would like to ask both of you about the question of red 
flags, both with MF Global but broadly as we look at the 
companies under your jurisdiction. MF Global was a significant 
player in the global futures markets, significant customer 
base. It was also an example of a company with a history of 
problems. And so, broadly, looking at companies, using this as 
an example, the CFTC fined this particular company in 2009 for 
risk supervision failures, including a $141 million trading 
loss on wheat futures. We have documents that show 35 
regulatory actions taken by FINRA against MF Global. Also, MF 
Global's annual report filed earlier this year indicated 
dangerous leverage and risky exposures to European debt crisis, 
and I have great concern about the implications for other 
companies, as well, if we are going to see other companies in 
the same situation.
    But these are very serious red flags and examples. So as we 
look broadly at this kind of an example, for companies like 
this with this kind of a record, should there be more 
oversight, such as additional disclosures or more frequent 
audits that could identify problems before they are too late? 
And where do we go with this at this point? And, Chairman 
Schapiro, I would ask you to respond first.
    Ms. Schapiro. I would be happy to. Thank you. Let me just 
say that, by comparison, the securities business at MF Global 
was quite small. There were only 400 active securities 
accounts. But nonetheless, FINRA, which is the self-regulatory 
organization upon which the SEC relies in large measure for 
broker-dealer oversight, had been in the firm over the summer, 
quite concerned about whether there was sufficient capital 
supporting the repo to maturity transactions which involved the 
sovereign debt and required the firm to increase its capital 
levels. The firm actually appealed that to the SEC and we 
supported FINRA's decision that they needed to infuse capital 
into the firm at that time.
    I will say that while our equivalent of the segregation 
rules, 15c3-3, are also quite strong rules and are a foundation 
of broker-dealer solvency and customer protection, we are also 
looking at whether there are additional rules that ought to be 
in place on the securities side. One that we actually proposed 
earlier this year that I hope the Commission will take up and 
finally adopt relates to the requirement for a more regular 
audit by a Public Company Accounting Oversight Board registered 
auditing firm of the custody arrangements that broker-dealers 
have. We put in place two years ago a similar rule with respect 
to investment advisors post-Madoff. We have now proposed to 
extend that toe broker-dealers and we think that such a rule 
that would look very carefully through the leverage of a third 
party accounting firm at whether a firm is complying with its 
financial responsibility rules could be very helpful.
    I will also say that FINRA recently put in place 
requirements for qualifications exams and registration of back 
office personnel, which I think would be very useful in the 
context of a situation like this, and they filed with us and it 
is now out for comment some additional rules for more detailed 
financial reporting that I think would also have been very 
helpful in monitoring the situation here.
    But I think that FINRA was there in the summer, supported 
by the SEC.
    Chairwoman Stabenow. Thank you very much, and in the 
interest of time, my time is up, so Chairman Gensler, I will 
come back to you at a later point to answer that question. I am 
going to turn to Senator Roberts.
    Senator Roberts. I thank you, Madam Chairman.
    Chairman Gensler, as I mentioned in my opening remarks, I 
had several questions pertaining to the Commission's 
development of the new Dodd-Frank regulations. Thank you for 
your call the other day. We went over possibly five rulemaking 
issues and I appreciate that conversation. But before I get to 
those, I would appreciate clarification of your role--we may 
have to do that on the second round, maybe third round--in the 
events surrounding MF Global's bankruptcy. When did you first 
know there was a problem with MF Global?
    Mr. Gensler. I think as the week of October 24 developed, 
staff briefed our Commission, I think it was probably 
Wednesday. We normally have a briefing Wednesday, and then we 
had another briefing Friday of that week.
    Senator Roberts. Then that confirms my understanding that 
MF Global was downgraded on October 24, obviously, that Monday. 
Did that raise a real red flag at the Commission? Did you feel 
that this was a very serious problem at that time?
    Mr. Gensler. Well, I understood that staff had increased 
monitoring. Other regulators and the CFTC were in contact 
increasingly as that week ended and into the weekend, and with 
the key focus being the protection of the customers and moving 
the customer positions in the funds throughout that weekend.
    Senator Roberts. All right. I understand the CFTC had staff 
in Chicago from Wednesday, October 26, through Friday, the 
28th, looking into MF Global's segregated funds. This tells me 
the CFTC had very serious concerns about these accounts five 
days before the bankruptcy. I also understand CME reconciled 
the segregated accounts on Wednesday. You folks were in your 
offices looking at the same accounts through Friday. Yet on 
Monday, almost a billion dollars was missing from these 
    Now, this leads to several questions. What involvement to 
date have you had with MF Global, both since they began to 
deteriorate and regarding regulatory issues that might have 
affected their business prior to their bankruptcy?
    Mr. Gensler. My involvement, sir, over that weekend, along 
with the regulators from the SEC and international regulators, 
was the focus on moving customer positions and ensuring the 
customers were protected. There was a series of calls, 
particularly on Sunday, with that regard.
    Senator Roberts. Well, then why--given that, why did you 
step aside or, as you have said, step aside or recuse or non-
participate, I am not too sure which one it is, as you have 
said previously, from MF Global issues?
    Mr. Gensler. I had reached out to the agency ethics 
officers and General Counsel of the agency during that week of 
October 31 and they ensured me that there were no legal or 
ethical reasons that I needed to non-participate. But I told 
the General Counsel that Thursday that I thought that it would 
be best not to be a distraction to the really important work of 
this talented staff at the CFTC----
    Senator Roberts. But why would it be a distraction?
    Mr. Gensler. I just thought just there were--I had left 
Goldman Sachs 14 years ago, and though I had worked on 
Sarbanes-Oxley in 2002, a Senator at that time but then 
subsequently the CEO of the firm had worked a bit back in 2002, 
and the lawyers had assured me there was no reason--no legal or 
ethical reasons, but I thought it could be a distraction in the 
media and the press, and as that Thursday came, we were about 
to have a Friday closed-door surveillance meeting that we have 
that has been true for 30-plus years at the agency and I 
thought I should stand aside when it was clean and before the 
closed-door surveillance started to get into these very 
important matters of where is the money.
    Senator Roberts. Well, if you thought it was best to remove 
yourself from matters involving MF Global during its demise and 
you thought that would be a distraction because of your 
relationship with Mr. Corzine, Senator/Governor Corzine, why 
did you not remove yourself from all issues involving MF 
Global? Did something in your relationship change?
    Mr. Gensler. No. What had changed was that there was a 
developing enforcement investigation specific to possible civil 
and criminal actions.
    Senator Roberts. I appreciate that. The time line 
surrounding your statement of non-participation is a little 
confusing to me. Your response to my letters raises questions 
about who was in charge of the work in the early days of this 
    According to your letter, you notified your General Counsel 
that you would not participate in enforcement matters. Why did 
you come to this realization on November 3? As you have 
indicated, October 24 was the first big red flag, although 
there had been earlier indications that would be a problem. Had 
you not been participating in official CFTC actions regarding 
MF Global before this date?
    Mr. Gensler. As I said, over those last days of the week 
and the weekend, along with other regulators from the SEC and 
around the globe, we were focused on really, first, monitoring, 
two, moving positions, and three, ensuring against any systemic 
risks. As it turned into potential enforcement, civil and 
criminal, and before the surveillance meeting that Friday, I 
was ensured by the General Counsel and the ethics folks their 
views, but I also indicated that I thought it could be a 
distraction for the really talented career staff doing their 
    Senator Roberts. I appreciate that.
    Madam Chairman, I am over on time and we have other members 
here, but I want to continue this line of questioning at least 
for a short time before we get to the rulemaking questions and 
I appreciate that. Thank you.
    Chairwoman Stabenow. Thank you.
    Senator Baucus.
    Senator Baucus. Thank you, Madam Chairman.
    I would like you both to know, and I know you already know, 
that this is not an academic exercise for a lot of people. I am 
speaking about farmers and ranchers who legitimately hedge, 
want to lock in a price, a very common transaction, common 
exercise. It is what they do to help manage their operation as 
good businessmen and women.
    There is one fellow in Montana and his name is Marty 
Klinker. He has lost 300--actually, he had $336,000 in liquid 
assets at MF Global and 108,000 open trades with MF Global. As 
of this date, he has received about 60 percent. He is about 40 
percent out. And the prospects for Marty getting the rest of 
his funds back are pretty grim, it seems. He legitimately is 
very put out.
    [The Hon. Max Baucus submitted an addendum for the above 
        [I would like to submit an addendum to my statement 
        from the Agriculture, Nutrition, and Forestry Committee 
        hearing that took place on December 1, 2011. I would 
        like to clarify the amount of money that Montanan Marty 
        Klinker has gotten back from his MF Global accounts. In 
        my statment, I said Marty had received 60 percent of 
        his money back. That is the amount he has received from 
        his cash accounts. The amount he had received back as 
        of December 1, 2011 from his open trade account was 20 
        percent. This is an important distinction and it should 
        be noted in the official record.]
    There is a Grain Growers Convention going on in Montana as 
we speak and the talk there is not the farm bill. It is not 
anything else. It is MF Global and farmers there who have lost 
a good portion of their assets with MF Global, and they are a 
bit angry, and they should be angry.
    I mean, look what has happened. Right now, public opinion 
of Washington, D.C., is at an all-time low. Look what happened 
with the 2008 financial collapse. How can ordinary folks trust 
Washington with their money? How can they? I think, frankly, 
that the 2008 debacle is very simply explained. It is just a 
bunch of greed without sufficient adult supervision. I mean 
greed up and down the lines, from the mortgage brokers, the 
bankers, and so on and so forth, and insufficient regulations, 
insufficient adult supervision, whether it is private 
supervision or government supervision.
    And here is a case where Marty, for example--and he is not 
alone--has lost a lot of money. He trusted the system and the 
system let him down. So how is Marty going to get-- and other 
farmers and ranchers--how are they going to get their money 
back? And what can you say to Marty? What can you say to 
farmers around the country that, hey, you can still trust the 
system, you know, trust us? I mean, this is a pretty simple 
violation, it seems to me, just as the failure to segregate 
accounts. That is basic and even something as basic as that was 
not honored by the company, by the self-regulator, and even by 
CFTC and the other appropriate agencies here.
    So, number one, when is Marty going to get his money back, 
and how much of it is he going to get back? And what can you 
say to farmers and ranchers and others who legitimately hedge 
as a good business practice and who are not being protected 
when agencies are not looking sufficiently at these companies 
to make sure that companies are doing what they are supposed to 
be doing?
    Mr. Gensler. I think, as I am not participating in the 
specific matter, I might have to defer part of your question to 
CFTC staff or Commissioner Sommers, but if I could just 
generally say that I think you are absolutely right. The system 
has to work for the farmers and ranchers and energy companies 
and all of the people that need to lock in a price and 
segregation is at the absolute core of this system that has 
been existent for decades. Now, we do rely on self-regulatory 
organizations, and we are looking at every piece of the CFTC, 
with Commissioner Sommers' help where I am not participating, 
but looking at every piece of the CFTC on how the audit 
function works and whether we should adopt some of what the SEC 
has, that there has to be a separate audit of the segregated 
accounts, how the examination function, which we do not 
actually do the examination, it is done at the self-regulatory 
organizations, as well----
    Senator Baucus. But just basic, ordinary English. You are 
out at the Grain Growers Convention and the farmers there are 
asking you, Commissioner Gensler, what can you tell me that can 
reassure my trust that I can hedge and next year that my funds 
are protected?
    Mr. Gensler. Uh----
    Senator Baucus. What can you tell me? What assurance can 
you give me in plain English, what are you going to do, in the 
basic way people talk?
    Mr. Gensler. Umm, what we are doing at our agency is 
turning over every rock in every corner as to our rules and 
what we can do better and being self-reflective because we know 
that this has to be better. These funds have to be separately 
segregated. I think that probably we need more transparency 
where these Futures Commission Merchants have to tell their 
customers where they are putting the money, as well. We are 
actually tightening up rules next week on how they invest the 
money that they get----
    Senator Baucus. Do you think the current rules are 
insufficiently loose on----
    Mr. Gensler. Yes, I did in October of 2010 when I supported 
a rule to change investment of customer funds----
    Senator Baucus. You think so today, too?
    Mr. Gensler. What is that?
    Senator Baucus. You think so today, too----
    Mr. Gensler. I think what we might do next Monday will 
help, but yes, I think so. I think we have to tighten up 
something about use of money. You could actually since 2005 use 
customer money and lend it to another part of an affiliate or 
in-house at the same. You could lend it to the proprietary 
trading side of a firm. You would have to get collateral back. 
It is called--something called repurchase agreements. But I 
think we need to tighten that up and I have felt that since 
October of 2010.
    Senator Baucus. Well, I just urge you--I mean, I do not 
want to over-dramatize this, but, you know, we are the hired 
hands. We are the employees, you and I. The employers are the 
people who work for it in the country and they want us to, as 
employers, to do what we are supposed to be doing, and that is 
making sure that there is an orderly procedure here and that 
their accounts and sufficiently protected. They will gamble, I 
mean--that is not the word-- they will hedge, they will take 
that risk, that is legit. They want to make sure that their 
funds are in the appropriate account and somebody is not taking 
advantage of them by the proprietor taking their funds for 
their own account.
    Chairwoman Stabenow. Thank----
    Senator Baucus. And they want you to make sure you are 
taking care of them.
    Chairwoman Stabenow. Thank you very much. Well said.
    Senator Grassley.
    Senator Grassley. Thank you, Madam Chairman.
    Chairman Gensler, first of all, thank you for your 
forthright recusal and thank you for the gentlemanly 
conversation you had with me on that subject.
    I want to follow on where Senator Roberts left off. What 
specific event caused the CFTC staff concern with MF Global 
that week of October 21--no, October 24? As you had mentioned, 
staff concerns were raised at the beginning of that week.
    Mr. Gensler. I am doing this from memory, sir, but I thank 
you for your thanks. It was a good conversation we had on that 
week about my not participating.
    Senator Grassley. Sure.
    Mr. Gensler. As I recall, the firm was downgraded by a 
rating agency, but I think it was Wednesday, the 26th, that 
staff first briefed us in our regular weekly briefing meetings 
they had been downgraded. I think that was the initial--they 
also may have reported a quarterly loss in their financials.
    Senator Grassley. Okay. Then the second question, when CFTC 
analysts were examining the records of MF Global prior to 
October 31, were there indicators that there were problems with 
the segregated accounts? What were those indicators? And how 
early did CFTC officials see those indicators?
    Mr. Gensler. As this is all a matter of specific 
investigation, enforcement investigation, if I could just more 
generally answer that, because I do not want to say something 
that might prejudice an investigation that I am not even 
participating in, but the lawyers have said they do not want me 
to inadvertently prejudice something--
    Senator Grassley. Okay.
    Mr. Gensler. As I understand it, over those last days of 
the week and over the weekend, we as regulators were trying to 
ensure that customer positions and customer funds were fully 
segregated and could be moved. I participated in some phone 
calls on that Sunday throughout the day and into the 31st when, 
of course, the company officially said they had a deficiency. 
All companies, all Futures Commission Merchants have to give us 
a deficiency notice, and it happens from time to time. A bit of 
money moves inadvertently. It is usually a day and then it is 
cleaned up. That deficiency notice came on the 31st from them.
    Senator Grassley. Okay. My next question, it has been 
reported that in the early morning hours of October 31, the 
CFTC was notified that customer money was missing from the 
segregated accounts at MF Global, who informed the CFTC of this 
shortfall in the segregated accounts. Who discovered the 
shortfall in the accounts?
    Mr. Gensler. Again, I am not participating in these 
matters, so I might need to, to the extent CFTC staff or 
Commissioner Sommers would want to be referred to that, those 
questions about the specifics of the investigation.
    Senator Grassley. Okay. Does that mean you want me to get 
an answer in writing, or you want somebody else to--I would 
like to----
    Chairwoman Stabenow. Senator Grassley, if we might, we had 
asked through Chairman Gensler Commissioner Sommers, who is 
handling the investigation, to be here for questions. 
Commissioner, if you would want to step forward and answer 
Senator Grassley's question.
    Senator Grassley. Thank you.
    Ms. Sommers. Good morning, Senator. It is my understanding 
that on the morning of October 31, CFTC staff were informed by 
MF Global staff that there was a shortfall in the customer 
segregated funds account.
    Senator Grassley. Okay. My last question, Chairman Gensler, 
prior to October 31, did you have any discussion with MF Global 
CEO Jon Corzine about the state of affairs at MF Global and 
whether MF Global was in trouble, and if you did have 
conversations, when were those conversations and what did Mr. 
Corzine convey to you?
    Mr. Gensler. The only conversations I partook in with MF 
Global is with the regulators over that weekend, and I do not 
remember exactly, because Chairman Schapiro and I were on so 
many of those calls Sunday and into the a.m. of Monday, but the 
group of regulators from London and here were on calls that MF 
Global presented from time to time, and as I recall, the CEO of 
that firm at least once spoke up, but I am not sure because 
there were other people tying into a conference call that 
probably had 20 to 50 people on it.
    Senator Grassley. But at least he was very much involved in 
the discussion with people of CFTC staff.
    Mr. Gensler. I actually do not know, because----
    Senator Grassley. Okay.
    Mr. Gensler. --I was not physically at the company.
    Senator Grassley. Okay.
    Mr. Gensler. But that long regulatory call, I only recall 
him speaking up once.
    Senator Grassley. Yes. Madam Chairman, I thank you. I would 
like to associate myself with the remarks that Chairman Baucus 
made about how this affects people at the grassroots of 
America, because we have had calls. I am not sure that they are 
quite as colorful as what he had, but still, we have had very 
concerned citizenry.
    Chairwoman Stabenow. Well, thank you very much, Senator 
Grassley. I think we all have received those calls and share 
your concern about this and I think that is certainly a general 
feeling of every member on this committee, a deep, deep concern 
about what has happened here.
    Senator Nelson.
    Senator Nelson. Thank you, Madam Chairman, and thank you 
all for being here today, both the Chairs of SEC and the 
Commodity Futures Trading Commission.
    I want to also associate myself with the comments about the 
correspondence and the calls we have gotten from Nebraskans who 
have felt the impact of this unfortunate situation.
    Madam Chairwoman, I appreciate you calling this hearing 
because I think it is important to get the oversight authority 
out in the open and find out what, in fact, has happened to try 
to protect future situations from happening, but also 
responding to the current situation, as well.
    I have got a couple of questions. I really want to make a 
comment or two or relate a comment or two from some Nebraskans 
who have been in touch with us. While today's hearing is to 
focus on implementation of the Wall Street Reform and Consumer 
Protection Act, I have heard so many comments from folks back 
home that they are struggling with this bankruptcy. They have 
had their accounts frozen. They are uncertain if they will be 
made whole and when they might be made whole. Others received 
checks from their excess margin accounts only to have them 
returned when deposited. There appears to be a lack of 
information on which customers can rely to resume normal 
trading and risk management activities. And I understand there 
are some unprecedented circumstances surrounding this collapse. 
But I would like to know what rules are currently in place to 
protect customers like my constituents from Nebraska. What 
rules-- they are inadequate, but what kind of rules are 
conceivably there?
    Mr. Gensler. Senator, the rules are very clear. It is 
actually right in Congressional statute, and then there are 
associated rules that customer funds are to be segregated at 
all times of the day. It is not just at the end of the day. 
There is a once-a-day calculation at the end of the day, but no 
one should confuse that once-a-day calculation that all times 
of the day the money is to be segregated in bank accounts or in 
various securities accounts. I do not know if there are similar 
rules on the security side, as well.
    Senator Nelson. Chairman Schapiro?
    Ms. Schapiro. Yes, sir. We have a rule called 15c3-3 which 
requires that broker-dealers have physical possession and 
control of all fully paid and excess margin securities of their 
customers. It is a calculation that is done once a week because 
it is quite a complex calculation. But the goal is to tie up 
and protect customer funds and assets. And unlike the CFTC rule 
which Chairman Gensler is working hard to change, customer 
funds on the securities side can only be invested in government 
securities that are backed by the full faith and credit of the 
United States. So there is an additional level of protection 
    Senator Nelson. It would not be sovereign funds, for 
    Ms. Schapiro. No. Full faith and credit of the United 
    Senator Nelson. All right. Exactly. Let me read from a 
letter that we got from a person from a small town in Nebraska. 
Vern says, ``How can we stop people from stealing money from 
segregated accounts which are supposed to be safe? What can I 
do about this and what can my Senator do about it?''
    I have the same feeling that my colleague, Senator Baucus, 
had, that people back home expect all of us back here to 
protect them. Now, Vern understands that he has market risk 
when he hedges. He does not expect to have account risk, and 
they are different, entirely different. So I guess I tell Vern 
we are going to straighten out the account risk issue so that 
in the future he can take the market risk but he does not have 
to worry about whether his money will be in an account when he 
needs it, subject to, of course, market risk, but it is 
altogether different.
    The other one that I would like to read is from somebody 
who is an attorney representing a number of people who have now 
contacted him regarding MF Global, and he says, ``Members of 
the Agriculture community are willing to take risk. We know 
that when we plant crops and pray for rain. We know that. 
However, it is unreasonable to expect farmers, commodity 
traders, and grain elevators to anticipate that MF Global would 
convert segregated customer funds into a financial play on 
European sovereign debt.'' He goes on to say, ``This has a 
chilling effect on trading in the agricultural markets. Market 
players can no longer trust the market. This has the potential 
to be a huge systemic problem in and of itself.''
    Do we run the risk of what we were worried about with the 
Dodd-Frank bill, the potential of not just one entity but 
systemic risk with all the entities in connection with account 
risk because of their investment in sovereign funds? Yes, 
Chairman Schapiro.
    Ms. Schapiro. I think, Senator, there is not really any 
good news about MF Global and it is a tragedy, what has 
happened, particularly for people in your State and others who 
are relying on these markets for legitimate hedging and risk 
mitigation activities.
    But to the extent there is any silver lining, it is that MF 
Global ultimately was not systemic and did not cause----
    Senator Nelson. No, as an entity, it is not, but is the 
fact that others are in this subject to the same situation a 
systemic risk until it is, in fact, taken care of by additional 
rule, regulation authority?
    Ms. Schapiro. That would be very hard to judge, but I think 
it is really incumbent upon all the regulators to look at 
whether we do need to have stronger rules, whether we need to 
have better audit and oversight of custody arrangements, 
including segregation and reserve account arrangements. And at 
the end of the day, when people violate those rules, very tough 
enforcement, very strong sanctions in order to send a broader 
deterrent message throughout the financial community that these 
rules are sacrosanct. They absolutely are the underpinning of 
investor confidence in these markets and the regulators will 
take swift and sure action.
    Senator Nelson. Is it safe to say that when rules are in 
place, it is anticipated that people will follow them, but 
enforcement is the way in which you deal with it when they do 
not follow them?
    Ms. Schapiro. That is right. I mean, our system requires 
that we rely on people to obey the law, I mean, because we do 
not have a regulator in every firm. We do not have a policeman 
on every corner, as much as sometimes that seems like it would 
be a good way for us to go forward. We have to rely on people 
to be following the rules.
    That said, there has to be oversight of their activities 
through the self-regulatory organizations, through the 
regulatory agencies, through a strong rule set, through the 
rules we are trying to go forward with, that would have 
accounting firms sort of enlisted in our--to our assistance and 
making sure that funds are where they are supposed to be. And 
then, as you say, enforcement.
    Senator Nelson. Thank you, Madam Chair. Thank you both.
    Chairwoman Stabenow. Thank you very much.
    Senator Boozman is next in terms of appearance, but I 
understand you are deferring to Senator Johanns, is that 
    Senator Boozman. Yes, ma'am.
    Chairwoman Stabenow. Senator Johanns.
    Senator Johanns. Thank you, Madam Chairman.
    If I could have the Commissioner return to the table, and 
this is probably a question for both the Commissioner and the 
Chairman. We have just heard that we need more rules and this 
and that and the next thing. But as a lawyer, this seems real 
straightforward to me.
    You know, when you practice law, you have a trust account 
and your client will sometimes put on deposit money to pay 
filing fees or deposition costs. Then you have your bank 
account to pay your staff salaries and whatever else, the draw 
you took out of the law firm, whatever it was. And if you mix 
those two, or if you took that money out of the trust account 
and used it for your personal desires, whether it was gambling 
in Vegas or buying and selling stock, you committed a crime.
    No matter how we sanitize this, it seems to me, would you 
not agree, that we have a situation where you have a trust 
account where trusting people put their money into that and 
somebody abused that trust and took that money and basically 
played like you would play in Vegas. They made very bad bets 
and now the money is gone. Do you disagree with that 
characterization, Commissioner?
    Ms. Sommers. I do not disagree, Senator. I do not disagree. 
I think that, like Chairwoman Schapiro, I believe that you can 
have the strongest and most effective oversight and it may not 
prevent people from violating the law.
    Senator Johanns. Mr. Chairman, would you agree with my 
assessment of this?
    Mr. Gensler. Well, I want to be careful because I am not 
participating on the particular company. But as a general, 
general matter, I think it is pretty straightforward that 
segregated accounts are meant to be segregated, similar to your 
analogy of the escrow accounts at a law firm. It is not always 
technically the same, but they are really supposed to be 
segregated, invested prudently. The statute says there are only 
four or five things it can be invested in. We did as an agency 
back in 2005 widen that. It is my hope that we can narrow that 
back down again. But they are still supposed to be kept for one 
reason, for customers.
    Senator Johanns. You know, Mr. Chairman, I am not going to 
give you the same kudos that Senator Grassley gave you, and 
here is why. As you know, for about three years, I sat in a 
similar position to yours, huge operation, the USDA. But when I 
was called to task by the Senators, they did not give me a 
pass. I was not able to say, well, this is a big organization 
and we have got offices all over the world and, gee, I do not 
know this and I do not know that. They wanted answers.
    Here is my concern with where you are at. My concern is 
that a week ago or so, you said, ``I will recuse myself.'' It 
looks to me like you are trying to avoid the heat. You 
certainly did not recuse yourself all of the other weeks and 
months and days while MF Global was doing what it was doing. 
Why is it that they could get away with this and all of a 
sudden we have got innocent people in States like Nebraska and 
Montana and Arkansas, et cetera, who it looks to me are going 
to come up on the short end of the stick. Do you agree with me, 
you folks failed?
    Mr. Gensler. I take very seriously the responsibility that 
I have as a Commissioner and Chairman and the responsibility of 
the whole agency to ensure for the protection of customers and 
their funds. That is why I was involved that weekend, along 
with other regulators, to ensure that customer positions and 
funds were properly moved. As it went into an enforcement and 
investigative matter, though I had not worked at the similar 
firm for 14 years with an individual who might be actually the 
individual themselves might be under investigation, I thought I 
did not want to distract from that very important matter for 
the career staff.
    But that does not absolve me in any way from the broader 
responsibilities that are the agency's, just as you said. You 
had a bigger agency to run, but I take very seriously that we 
have got to go back through every piece of what we are doing as 
an agency, whether it is our rules, our reliance on the self-
regulatory organizations and the examination functions, and 
really see how we can foster greater confidence in this 
important segregated accounts system.
    Senator Johanns. Commissioner, let me point that question 
at you. Would you agree with my assessment that you folks 
    Ms. Sommers. Senator, I think that the investigation is 
still ongoing with regard to what the actual events that 
happened at MF Global--what those actual events are, so I 
cannot comment on whether or not what ends up being found is 
the fault of the regulator. I think that we will find out, and 
if it is, obviously, there is something that needs to be done 
about the way that we implement our regulations.
    Chairwoman Stabenow. Thank you.
    Senator Johanns. Thank you, Madam Chairman.
    Chairwoman Stabenow. Thank you very much.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chair.
    As we know, the focus of today's hearing was supposed to be 
on this oversight of the implementation of the Wall Street 
Reform and Consumer Protection Act, but today, this important 
topic is being overshadowed by the collapse of another over-
leveraged financial firm that took on too much risk and did 
little to disclose its bets.
    Three years after the U.S. financial system was nearly 
toppled by this sort of recklessness, it seems that little has 
changed, and you look at those that say that Wall Street Reform 
was not necessary, that we have learned from our mistakes, that 
we do not need stronger rules, I would have you talk to the 
farmers in my State that cannot access their life savings and 
are not sure when or how much of it they will get back.
    Dean Tofetland from Luverne, Minnesota, a town of 4,600, 
his family grows corn and soybeans and raises pigs on their 
farm in Southwest Minnesota. He currently has over $200,000 in 
what was supposed to be a segregated MF Global account which he 
cannot access and which he does not know how much he will ever 
get back. He is not a speculator. He uses the futures market to 
manage risk, locking in prices of the growing season so he is 
protected against price fluctuations that can eat into his 
profits. Those are the kind of people that we have been hearing 
from in Minnesota.
    Now, I guess my first question is, we know some of the 
actions that are being taken. You mentioned, Chairman Gensler, 
that we are looking at the rules. But just for average people 
out there in my State trying to figure out how this all works, 
I know Chairman Schapiro mentioned that of MF Global, something 
like 400 accounts were under your jurisdictions, and those are 
not the ones we are talking about here.
    So then we have the CFTC, Chairman Gensler, that has 
jurisdiction, but in fact, the Chicago Mercantile Exchange 
somehow has jurisdiction, as well. Could you explain this so I 
can explain it to the farmers in my State?
    Mr. Gensler. If I can explain it on the general side, just 
so I do not step over the line of where my counsel says I can 
go, because I am not participating on a particular company, but 
what happens is there are some firms that are regulated both by 
the Securities and Exchange Commission and the CFTC because 
they do both brokerage and they do futures business, and so 
they have both of us together.
    And to the extent it is over on our side of the watch, we 
rely on self-regulatory organizations such as the Chicago 
Mercantile Exchange to do the examinations and the day-to-day, 
and that has been true for decades. That is the nature of our 
agency. It is about a 700-person agency, as I have mentioned.
    We do get notices from companies if they are deficient, and 
the Chicago Mercantile Exchange as a self-regulatory 
organization works very closely with us and we do what is an 
examination of the SRO itself, but the SROs are the ones that 
are the front-line regulators.
    Senator Klobuchar. Okay. And I do not know if Commissioner 
Sommers wants to come up for these questions here. So that is 
what happened, and supposedly they were filing these forms with 
the Chicago Mercantile Exchange and everything was supposed to 
be looking good until the very end here. And so I am just 
trying to figure out what we need to do differently. In my 
second round, I am going to ask about this actual problem and 
how they recover their money.
    But in 2005, the rule was somehow expanded--Chairman 
Gensler, you mentioned this--so they could invest these 
segregated funds in more things, including sovereign debt, is 
that right?
    Mr. Gensler. In 2005, it was expanded to include lending 
the money to another side of the firm and taking back 
collateral. It is called a repurchase agreement. The sovereign 
debt expansion might have been a couple of years earlier.
    Senator Klobuchar. Two-thousand, I think, is that right?
    Mr. Gensler. Yes.
    Senator Klobuchar. Okay. So, over time, we have kept 
expanding, and now suddenly we are going to finally go back and 
look at it and retract it. But you clearly think that is one of 
the things that could solve this going forward?
    Mr. Gensler. Well, I thought in October of 2010 that we 
should narrow back. As Chairman Schapiro says, over in the 
securities world, it is just government securities and the 
statute book. What Congress has actually said to the CFTC is a 
very short list of four or five things. From 2000 until 2005, 
we exempted and let it get wider. We are still deliberating as 
a Commission, but I think that we should not allow what is 
called affiliate repurchase agreements or in-house, where you 
take customer money and lend it to another side of the house.
    Senator Klobuchar. Okay. Then another area I wanted to ask 
about as we look at solutions that I think Chairman Schapiro 
mentioned broadly, this idea of transparency and getting things 
out there more, one thing we know about this for sure is that a 
$6.3 billion bet on the bonds of troubled European countries, 
such as Spain and Italy, set this chain of events into motion. 
It is further known that MF Global hid the risks that should 
have been on its books through complex repo transactions in 
which it pledged the bonds to a third party in return for a 
loan with a promise to buy the bonds back when same matured. 
When these risky bets came to light, this triggered a loss of 
confidence. The result is the eighth largest bankruptcy in U.S. 
history. Pain is being felt in little towns like Luverne, 
    So one question I have is should we reexamine how companies 
disclose their off-balance sheet risk or the use of repo 
agreements altogether?
    Chairwoman Stabenow. And I would ask that-- unfortunately, 
I know that is a very important question, but I would ask you 
to be very brief.
    Ms. Sommers. Maybe I will take that one. FASB recently 
revised the accounting standard for repos and the only repos 
now that qualify for off-balance sheet treatment are repos to 
maturity, the type that, as you mentioned, MF Global entered 
into with respect to the sovereign debt. And while the 
disclosure that surrounds those is an improvement over what 
used to exist, I think it is a fair question and we are 
discussing with FASB whether or not we need further revision of 
the disclosure and accounting standards around repo to 
    I also want to be very clear that we are investigating very 
carefully both the accounting treatment and the disclosure by 
the firm and we will be looking at it closely.
    Senator Klobuchar. Whether it was legal, and then you are 
    Ms. Sommers. Whether it was in accord with GAAP and whether 
the disclosure was sufficient around how they disclosed the 
repos, the hedges that were expiring, window dressing. All of 
those issues are under investigation.
    Senator Klobuchar. But there might be some further work 
that could be done to----
    Ms. Sommers. And we are talking to FASB about whether 
further revisions are needed.
    Senator Klobuchar. Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Chambliss.
    Senator Chambliss. Thanks, Madam Chairman.
    Chairman Gensler, in light of the recent collapse of MF 
Global and the related ongoing investigations, do you think it 
is really prudent to continue to impose a futures industry 
model on the OTC derivatives industry without a complete 
analysis of the practices of MF Global and the regulation of MF 
    Mr. Gensler. Senator, I think that one of the core reasons 
of the 2008 crisis was the swaps marketplace. It is seven times 
the size of the futures marketplace and I think we are making 
good progress, but I do think that we continue. We are not--
there is a lot of very, very good features of the futures 
industry and the swaps industry already benefits from many of 
those features voluntarily, but I think it is important to 
bring that which we can into clearinghouses. That is just the 
standard part of the market. And that which we can to greater 
transparency, into data reporting, and to the public so that 
the public gets the benefit of that transparency.
    Senator Chambliss. You just finalized a rule establishing 
the requirements applicable to clearinghouses that would set a 
minimum capital requirement for clearinghouse members at $50 
million. That is much lower than the amount currently required 
by clearinghouses. It is my understanding that this $50 million 
threshold was criticized as being too low both by members of 
the Commission as well as other members of the industry. It is 
also my understanding that one of the firms pushing for the 
lower capital requirements was MF Global. Can you please 
explain how you arrived at the $50 million number and whether 
you did any sort of economic analysis to determine whether or 
not that number makes sense from a risk management perspective?
    Mr. Gensler. One of the features of the Dodd-Frank Act was 
that the clearinghouses have open access. In the futures world, 
in fact, in the securities world, the public has benefited by 
the competition that brings, that people can use either a big 
firm or a smaller firm to help access the clearinghouse. In the 
swaps world, it has been more, shall I say, exclusive. Some of 
the swaps clearing was more exclusive.
    So we proposed, and then as you rightly said we finalized a 
rule that said that the clearinghouses would have to accept 
parties that are smaller, but they can scale them. So if 
somebody only has $200 million in capital, they cannot have the 
size that somebody with $2 billion in capital. It has to be 
scaled, but they--to allow greater competition and more market 
access following Congressional intent to have open access.
    But I think that any clearing member has to have all the 
operational capabilities. They have to show that they can risk 
manage. And it is up to the clearinghouse as to set those 
operational risk management and how they scale based on 
capital. So I am agreeing with you. It is critical that every 
clearing member meets the robust and rigorous requirements to 
protect customer money and to be a member of a clearinghouse.
    Senator Chambliss. You have been the Chairman now for going 
on three years, and you went through Dodd-Frank with us in 
great detail. What does your experience tell you with respect 
to how many systemically risky entities there are out there? 
What is an estimate?
    Mr. Gensler. Were you counting just this country or Europe, 
as well, sir?
    Senator Chambliss. Well, let us start with just this 
    Mr. Gensler. I think that the Dodd-Frank Act has the 
Financial Stability Oversight Council look at entities over $50 
billion of assets, but the largest entities, there are maybe 
about ten or 12 that are over $250 billion, if I can recall the 
figures. And, of course, there are global organizations that I 
am not a member of but I have identified something called 
global systemically important financial institutions.
    Senator Chambliss. Do you believe swaps dealers are in that 
category of systemically risky?
    Mr. Gensler. Some of them. Not all of them, but some of 
them, sir, certainly are.
    Senator Chambliss. So, obviously, that is a yes, then, I 
assume. That being the case, how can you justify capturing 
commercial entities who are clearly not systemically risky in 
that systemic category, that risky category? And by that, are 
you telling this committee that a collapse of a grain co-op in 
Omaha or a dairy co-op in Michigan would threaten the integrity 
of the U.S. financial system?
    Mr. Gensler. Senator, I think that commercial enterprises 
are not going to be swap dealers, and there may be some swap 
dealers who are not large Wall Street banks, but I think it is 
going to be a group that are actively making markets, 
accommodating demand in the markets, regularly putting 
themselves to buy or sell swaps. And I think that the tens of 
thousands of end users will be end users. They are not going to 
be swap dealers. That grain merchant that you are referring to, 
unless I am mistaking which one you could be talking about, I 
cannot imagine would be a swap dealer.
    Senator Chambliss. So it is not your intention to apply 
regulatory measures to them the same as the systemically risky 
    Mr. Gensler. We are in agreement on that, sir.
    Senator Chambliss. Okay. Thank you.
    Chairwoman Stabenow. Thank you.
    Senator Conrad.
    Senator Conrad. Thank you, Madam Chairman. Thanks for 
holding this hearing. Chairman Gensler, thank you for being 
here, Chairman Schapiro, as well.
    First of all, let me just say, we have had six contacts 
from my State, two customers, four broker-dealers. One of the 
broker-dealers has told us he has got $500,000 that is out 
there in the ether somewhere and, you know, that is a huge 
amount of money, certainly to that broker-dealer, and he is 
deeply concerned. He is asking, how can this happen? How can 
this conceivably happen?
    Let me go to that question. Under the law, it is my 
understanding that customers' funds that are segregated can be 
invested in sovereign debt, is that correct?
    Mr. Gensler. Under the Commodities and Exchange Act, they 
were not allowed to be in anything other than the sovereign 
debt of the U.S., but there was an exemption, I think it was in 
2000, that the Commission granted to invest in sovereign debt 
if the customer gave you that currency. So it is in a narrow 
situation. If the customer gave you, for instance, the currency 
of the United Kingdom, Sterling, you could put it into the 
United Kingdom's sovereign debt called Gilts.
    Senator Conrad. So is that change that was made long before 
you were ever there includes any sovereign debt?
    Mr. Gensler. I believe that the exemption that was granted 
and still is on the books is if a customer gives you a certain 
currency, you can invest it just in the sovereign debt of that 
country to which that currency----
    Senator Conrad. I see. But that is any sovereign debt. So 
it could be Greek. It could be Libyan sovereign debt. It could 
    Mr. Gensler. I do not know the Libyan currency, but if 
somebody gave you the Libyan currency, I believe, but we could 
get back to you specifically, sir, on that.
    Senator Conrad. So there was no standard with respect to 
rating agencies' assessment of the risk of that sovereign debt?
    Mr. Gensler. Let me just--I think I am going to have to get 
back to you, Senator.
    Senator Conrad. Well, I would be interested to know. Is 
there any standard with respect to the sovereign debt?
    Mr. Gensler. See, you have reminded me, and I am sorry. It 
took a moment. Your second question helped me a lot. The rules 
in place include a rating agency provision about being highly 
rated. Dodd-Frank actually said that we could no longer rely on 
rating agencies and we had to remove the reference to rating 
agencies in all our rules. So the current exemption does rely 
on ratings, highly ratings, so the Libya or the junk credit 
country maybe could not happen.
    Senator Conrad. Okay.
    Mr. Gensler. In October of 2010, we had to remove that in 
the proposal and it sort of lost part of this--it is part of 
this rule, is that we have to remove any reference to ratings.
    Senator Conrad. Okay. Let me go back to where I started, 
because I want to make sure I have got this right in my head. 
The notion that money that is in segregated accounts, in a 
customer's segregated account, separate from the company's 
operating accounts, that can be invested by law in sovereign 
debt to the extent that the customer provides the currency of 
the country for which that sovereign debt applies.
    Mr. Gensler. That is the current rules. It may be limited 
right now to this rating agency, but, you know, that it had to 
be highly rated. But yes, that is, as I understand it.
    Senator Conrad. The next question I have is the Securities 
Investor Protection Corporation provides insurance up to 
$500,000 on an account. Is that not true, Chairman Schapiro?
    Ms. Schapiro. Yes, that is right.
    Senator Conrad. But on the other side of the ledger----
    Ms. Schapiro. For securities accounts----
    Senator Conrad. That is for securities accounts. For 
futures accounts, there is no insurance available, is that 
    Mr. Gensler. That is correct.
    Senator Conrad. And what is the--again, this happened long 
before you were there, but do you understand what the rationale 
was for there not to be insurance?
    Ms. Schapiro. It is long before my time, as well. I am not 
even sure when SIPC was created, maybe in the early 1970s----
    Senator Conrad. But you have got it in securities.
    Ms. Schapiro. Yes.
    Senator Conrad. You have got a $500,000--as I understand, 
you can get $500,000 of insurance. Is that $500,000 automatic?
    Ms. Schapiro. Well, there is a claims process that the SIPC 
trustee would administer to determine whether----
    Senator Conrad. But, I mean, you have got automatic 
coverage up to $500,000 in order to----
    Ms. Schapiro. Effectively.
    Senator Conrad. Yes. Why would there not be insurance on 
the futures side available?
    Ms. Schapiro. I would say, and certainly Chairman Gensler 
should jump in, that is something that Congress certainly 
should consider, whether it does make sense. It has worked 
pretty well on the securities side. There are lots of questions 
    Senator Conrad. Okay.
    Ms. Schapiro. --how does a segregation regime and an 
insurance regime interact. There are lots and lots of 
questions, but----
    Senator Conrad. Let me go----
    Ms. Schapiro. --we would be happy to provide----
    Senator Conrad. I have got one other--Madam Chair----
    Chairwoman Stabenow. Yes, if we do it briefly. Thank you.
    Senator Conrad. The thing that is most curious to me, in 
the Wall Street Journal, they say MF Global's trading frenzy 
might have attracted more attention if it had not been hidden. 
The purchases of European government bonds added up to several 
times MF Global's entire market cap. But by using this repo to 
maturity technique, those trades were considered sold for 
accounting purposes and therefore they disappeared from MF 
Global's balance sheets.
    I do not know if, Chairman Gensler, you are the appropriate 
one to ask, because you are recused from this investigation, 
but I would like to know, how is it possible that somebody is 
able to bet the farm multiple times here, multiples times their 
market cap, and it disappears from their balance sheet because 
of this repo to maturity technique that considers them sold.
    Ms. Sommers. Senator, I will be happy to try to answer 
that. As I had mentioned to Senator Klobuchar. FASB recently 
revised their accounting standards around repos so that the 
only repos that do qualify for off-balance sheet treatment are 
repos to maturity. We are talking to FASB about whether that is 
a policy that ought to be changed. They did improve the 
disclosure around it, but there is a question, I think, about 
whether repos to maturity should be included on the balance 
    And I want to also be very clear. We are investigating the 
disclosure and accounting by this firm. What they did disclose 
in their second quarter 10-Q was that they had net exposure to 
sovereign debt. They did disclose, but not very clearly, or not 
as clearly, their gross exposure. They reported that they had 
$16.5 billion in reverse repos of which 70 percent was 
collateralized by European sovereigns. So not as direct as the 
net exposure disclosure.
    I think these are----
    Senator Conrad. Well, I would just say in conclusion----
    Ms. Schapiro. --very fair questions for----
    Senator Conrad. --that is a loophole so big you could drive 
a Mack truck through it. My God, if that is not closed down, we 
have really got to ask ourselves what we are doing.
    Chairwoman Stabenow. Thank you.
    Senator Boozman.
    Senator Boozman. Thank you, Madam Chair, and we do 
appreciate you all being here.
    Today, it sounds like we all agree very definitely that 
accounts must be segregated. If a person does not segregate an 
account and essentially steals the money, takes it and gambles 
it away--and we are not talking about any specific situation, 
but just in general--gambles it away, is that a rule breaking 
or is that a criminal process? Either one is fine.
    Mr. Gensler. Well, it----
    Senator Boozman. What is the penalty for doing something 
like that, besides getting fined?
    Mr. Gensler. It is quite clear in the statute and in the 
rules of the commodities world that customer funds need to be 
segregated and that those monies can only be invested in a 
certain list of permitted funds.
    Senator Boozman. Mm-hmm.
    Mr. Gensler. They are not to be used for some other purpose 
other than for the customer, and that is supposed to be all day 
long, every day.
    Senator Boozman. Right. And if somebody does that, though, 
if they break that rule and they use those funds for riskier 
investments or whatever, what is the--what happens to the 
individual who does that?
    Mr. Gensler. Under----
    Senator Boozman. Or individuals?
    Mr. Gensler. I might have to defer to have staff to get 
back to you, but on the Commodities and Exchange Act, we just 
have civil money penalties that we pursue in segregation cases. 
So it is just civil money.
    Ms. Schapiro. The SEC is also a civil enforcement agency, 
so we would have the ability to fine someone, to----
    Senator Boozman. Yes. Well, I think the problem----
    Ms. Schapiro. --expel them from the industry----
    Senator Boozman. and I do not mean to----
    Ms. Schapiro. --but the criminal authorities could 
certainly pursue a criminal case if they can meet the standards 
of proof that are required there. Breaking the rules can and 
should lead to enforcement action and, where appropriate, 
criminal action, as well.
    Senator Boozman. I guess the problem that I have, and I 
think the people of Arkansas, is that if you go into a 
financial institution and you rob the bank or you rob the 
financial institution, that is a Federal crime. That is 
highlighted if you saw ``J. Edgar Hoover,'' the movie, 
recently. But there is no ifs, ands, or buts. The resources of 
the Federal Government are going to come to bear and you are 
going to go to jail for that crime.
    If a person through doing this other essentially can steal 
hundreds of millions of dollars and there is no penalty except 
for some civil penalty, that is a real problem.
    Mr. Gensler. Senator, if I can add, my good General Counsel 
was able to tell me the words. In the Commodities and Exchange 
Act, it does say if an individual knowingly and willfully--
knowingly and willfully violates the Commodities and Exchange 
Act, that is a criminal violation for the individual.
    Senator Boozman. And we have a history of prosecuting those 
kind of things?
    Mr. Gensler. It has happened.
    Senator Boozman. Well, that is not a history. And again, 
this is a real problem and this is why the American people are 
losing faith in their institutions.
    Now, tell me about you all in the sense that one of the 
concerns I have, you can be so close to these things that you 
almost do not really realize when things are going on. What is 
your protocol for investigating yourself in this process? Are 
your IGs involved now, or what is going on?
    Ms. Sommers. We will do a lessons learned review----
    Senator Boozman. So will you have an IG investigation 
regarding this?
    Ms. Sommers. I am not sure what they would investigate----
    Senator Boozman. Well, we had the meltdown in 2008, lots of 
stuff going on. We passed Dodd-Frank, tremendously increasing 
regulation. This stuff continues to go on. I guess I would like 
to know, and I think the American people would, to make sure 
that the individuals in your agency are actually doing the job 
that we entrust them to do.
    Ms. Sommers. Well, that is certainly very----
    Senator Boozman. And it is hard to self-regulate yourself. 
You said yourself a while ago that you are the policemen, and I 
agree with that. The policemen have separate departments when 
things happen, and something big has happened, to make sure 
that the people involved were doing the appropriate thing.
    Ms. Sommers. Senator, I agree, and we will carefully-- I do 
not know through what mechanism at the agency's response here, 
but we should be clear that this was potentially violations of 
a very, very serious nature by the firm that caused this firm 
to fail. And while we will always look at our conduct to see if 
we can do better and do more, you know----
    Senator Boozman. We want to make sure, also, that there was 
not, how would I say it, just--well, for whatever reason, that 
the agencies did not do as good a job as they could have done 
in making sure that they were policing the-- to make sure that 
this did not happen in regard to this instance. I mean, is that 
    Ms. Sommers. I think it is always important for regulators, 
when there has been a problem in an industry, whether it is the 
May 6 Flash Crash or any other kind of event, to take a look at 
whether things could have been done differently. We always do 
    Senator Boozman. So an IG investigation would not be an 
    Ms. Sommers. Well, we will take some approach to looking at 
what we can do to tighten up our rules, tighten up our 
    Senator Boozman. Thank you.
    Ms. Sommers. --approach our examination processes 
differently, whether FINRA did, and I would imagine on the 
commodities side the CME did as effective a job as possible.
    Senator Boozman. Madam Chair, I hope that we can talk about 
this again. I think that would be very, very appropriate. Thank 
    Chairwoman Stabenow. Well, thank you, Senator. And as you 
are aware, we do have a specific hearing on December 13 
regarding MF Global and we will----
    Senator Boozman. I cannot wait.
    Chairwoman Stabenow. We will have a number--starting with 
the victims, because I think that is the most important thing 
for us, is to make sure we understand what this is really 
about, and this is real people that have been hurt in this 
situation. So thank you very much.
    Senator Thune.
    Senator Thune. Thank you, Madam Chairwoman, and I agree 
that this hearing has essentially evolved into an MF Global 
hearing already.
    But I think everybody here at the table--we have heard--
several of my colleagues have shared what they have heard from 
their constituents who are suffering economic damage as a 
result of the failure, and I want to just read one of the 
messages that I received from a South Dakota grain elevator 
manager, and I quote, he said, ``This MF Global failure is 
causing tremendous stress in our and other business operations 
as we are unable to use our futures accounts and unable to 
access funds. The continuation of this may cause my industry to 
suspend purchasing grain from farmers as we are unable and 
unwilling to hedge our purchases in an exchange that is not 
secure. This lack of certainty and security is starting to make 
traders across the world question the security of all 
positions, even those not held in MF Global accounts. 
Timeliness is of utmost importance. The trust that we all have 
in the regulated futures industry is at stake,'' end quote.
    And I guess the question I have is--an observation and a 
question--but marketing agricultural commodities through 
hedging and use of futures has become nearly as important as 
growing the crop. What has occurred with MF Global has severely 
damaged these practices for many producers and facilities, and 
in plain and simple terms, what is your plan, not only of 
action items, but also in terms of outreach to the agriculture 
community, that use of hedging and futures markets can be 
safely continued.
    Mr. Gensler. What we are doing at the agency, and 
Commissioner Sommers may have things to add to this specific to 
the individual company, but what we are doing is really asking 
ourselves and asking the staff and each Commissioner what we 
can do better. Specifically, what we are doing now, along with 
the CME and the National Futures Association, is conducting on-
site reviews--they are limited reviews, but on-site reviews of 
all of the Futures Commission Merchants. We have taken the top 
dozen or 14 and we have gone in looking at the segregated 
accounts. The CME is taking the next 35 or 40. And then the NFA 
are taking the others. And we are hoping to finish these this 
month of December.
    But beyond that review of the segregated accounts, really 
looking at our whole procedures of audit. We do not audit, 
actually. There is an annual audit that is required under the 
law and under the rules. But should that be more robust and 
more enhanced? It is an audit of the Futures Commission 
Merchant. It is not an audit specifically of the segregated 
accounts. How do we add to it and enhance that? The examination 
functions of the self-regulatory organizations, how do we 
enhance that, working, of course, along with the CME, and just 
going straight across the board, but I do not know if 
Commissioner Sommers would want to add. Any lessons learned out 
of that particular company, of course, she and others will be 
closer to than I will because I am not participating now.
    Senator Thune. Do you think these steps are going to be--
and you said end of December?
    Mr. Gensler. In terms of just our limited review----
    Senator Thune. Right.
    Mr. Gensler. --of these large firms.
    Senator Thune. And the steps that you intend to take, do 
you think that they are going to be adequate? I mean----
    Mr. Gensler. Well, I think it is important that customers 
have confidence, and the farmers and ranchers and the energy 
companies, they just have to have confidence that their funds 
are not only segregated, but they are theirs. They are not 
somebody else's to, you know, to divert in any way. And that 
confidence is at the core, because these products are important 
so those farmers and ranchers focus on what they do well and 
then they lock in a price of wheat or corn or soy and they do 
not have, as I think Senator Nelson, was it, said, they do not 
have account risk.
    Senator Thune. Right.
    Mr. Gensler. And, in fact, they do not even want market 
risk because they are trying to lock in that price and then the 
focus on the risk of the rain and the yields and so forth.
    Senator Thune. Well, I just--I guess the question I am 
trying to get at is how do you--can you assure us and those who 
have lost money as a result of MF Global that adequate 
protection is now in place so that this does not occur again in 
the future. I mean, I think that is, at the end of the day, 
what people want to know. There is the money that has been lost 
and hopefully can be recovered. But then there is the concern 
about what steps are being taken so that there is certainty and 
confidence in the markets and in this process.
    Mr. Gensler. Let me ensure you that I think all of us at 
the CFTC are focused on exactly that, that there is confidence 
in these markets so that end users can properly use these 
products, and that working along with the self-regulatory 
organizations, that segregation means segregation.
    Senator Thune. Okay. I see my time has expired. Thank you, 
Madam Chairwoman.
    Chairwoman Stabenow. Thank you very much.
    Senator Hoeven.
    Senator Hoeven. Thank you, Madam Chairman.
    My questions go to Dodd-Frank and then we will use MF 
Global as kind of the example to help you explain an answer to 
the questions I have.
    Given that you had Dodd-Frank, which the idea was to 
provide for more transparency, improvements in terms of 
reducing systemic risk, and enhancing regulators' ability to 
make sure they understood the risk of firms on an individual 
firm basis and better oversee and regulate systemic risk 
throughout the financial services industry, what did Dodd-
Frank--how did Dodd-Frank impact what happened at MF Global? 
Why was it not effective in helping prevent the kind of failure 
that occurred? How did it help? How did it not help?
    Ms. Schapiro. Senator, I guess I would say that the 
violation of the segregation rules on the commodities side was 
already illegal long before Dodd-Frank. Those are rules that 
have been the cornerstone of futures regulation for many years. 
So I am not sure that Dodd-Frank specifically sought to address 
the kinds of issues that were at MF Global.
    I will say, I mean, what broke down here was the framework 
for the protection of customer assets based on the actions by 
this firm, which, as I say, not knowing exactly what happened 
yet, and hopefully we will know soon, may well have been 
    Dodd-Frank did not really eliminate the potential for firms 
to go out of business. It sought to help us ensure that firms 
could be--that were systemically important unwound in an 
orderly way without creating reverberations throughout the 
financial system. And it sought to close gaps with respect to 
transactions, like over-the-counter derivatives that had not 
been subject to regulation.
    It also, importantly, created a process for the Financial 
Stability Oversight Council to look at firms like MF Global, 
that if they met certain trigger points would be subjected to 
an additional layer of regulation by the Fed, so at the $50 
billion asset level and then hitting another trigger, like 
leverage or concentration or interconnectedness, could subject 
a firm to being designated as systemically important and 
subjected to additional oversight. But that process has not 
been put in place yet and FSOC has not made those 
    Senator Hoeven. So, Chairman Schapiro, you would say Dodd-
Frank had no impact in this case?
    Ms. Schapiro. Well, I think much of Dodd-Frank is not 
implemented yet anyway. I do think that had the FSOC process 
been in place, potentially, MF Global is a firm that could have 
been on the radar screen. I do not know that, but I am just 
using that as an example of a way Dodd-Frank could potentially 
have made a difference.
    What happened here, and really Chairman Gensler should 
speak to this because it is on the commodities side, to the 
extent the segregation rules were violated by this firm, if 
they were, those are longstanding rules that well predate Dodd-
    Senator Hoeven. Chairman Gensler.
    Mr. Gensler. As I am not participating in matters with 
regard to this one firm, if I might just talk--the core of your 
question so is wrapped up in one firm, it is a little 
challenging, so can I take it just as a general question about 
    Senator Hoeven. Well, we can try that, sure.
    Mr. Gensler. All right. Otherwise, staff or Commissioner 
Sommers may be more appropriate to address your question.
    But Dodd-Frank really addressed in title VII the regulation 
of swaps for the first time and does have similar protections 
for the first time on segregation of customer funds in the 
swaps marketplace, and that is very clear that Congress's 
intent was that people get the protections for segregated funds 
in the swaps world which they are meant to get in the futures 
world already.
    But as Chairman Schapiro said, Dodd-Frank also will not 
turn around the longstanding thing, that financial firms will, 
from time to time, fail.
    Senator Hoeven. Specifically, and I understand, Chairman 
Gensler, you may not be in a position to answer this question 
based on your earlier testimony, but certainly Chairman 
Schapiro, specifically what are you doing to help customers 
recover, and specifically what recommendations would you have 
that would help prevent the kind of problems that we are 
experiencing with MF Global?
    Ms. Schapiro. Well, Senator, let me just say again there 
are a very small number of securities accounts at MF Global. 
The trustee has identified less than 400, I think about 330 of 
them, that are non-affiliated and non-insider customer accounts 
that are custody accounts, and he is in the process of asking 
the court to permit him to transfer those securities accounts 
to another brokerage firm that is qualified to handle them. And 
that motion by the trustee was filed with the court yesterday. 
I think the court will hear it next week. And that will remove 
the vast majority of the securities accounts----
    Senator Hoeven. Would they be limited to their SIPC 
coverage or would they be transferred in whole?
    Ms. Schapiro. The trustee has proposed in this motion that 
he will transfer cash and securities for these accounts at the 
SIPC net equity up to the limits of SIPC protection plus 60 
percent of the net equity. In short, what that means is that 
about 85 percent of the securities account customers will be 
made whole through this transfer, because these were relatively 
small securities accounts, and, of course, quite small in 
number in comparison to the futures accounts.
    Senator Hoeven. If I could beg the indulgence of the 
Chairman for just another minute or so, specifically, your 
recommendations to prevent this kind of problem and do what we 
can to make sure that customers are made whole in the future, 
and then, Chairman Gensler, to the extent you are willing to 
take a shot at this same thing on the commodities side.
    Ms. Schapiro. Well, on the securities side, we have 
proposed in June of this year rules that would require 
brokerage firms that have custody of customer assets to get an 
additional audit by a PCAOB registered accounting firm. That 
will give us another set of eyes on the financial 
responsibility compliance of the firms and I think that will be 
very important.
    We will look carefully at whether there are other things we 
can be doing. I hope that we will approve a rule proposal that 
is pending before us from the self-regulatory organization 
FINRA that would require additional financial reporting to them 
so they can monitor more closely issues like sovereign debt 
exposure at brokerage firms. And, of course, we are pursuing an 
active investigation with the potential for enforcement action 
at the end of the process.
    Senator Hoeven. Thank you.
    Mr. Gensler. Again, let me just talk more generally, and 
then if others at the agency or Commissioner Sommers wish and 
you wish to chat with. But more generally, I do think it is 
important that we move forward on the rule that we are 
considering next Monday on the investment of customer funds, to 
sort of step back from some of the exemptions that we gave in 
2005 and earlier for the use of customer money to be loaned to 
affiliates or in-house. I think that is an important step.
    But beyond that, I think that it is important for the 
agency to continue this process of looking at our relationship 
to the self-regulatory organizations and where the examination 
functions are and what transparency we can bring, greater 
transparency to the reporting to customers themselves as to 
where their money is. Currently, they sort of get one line 
    Senator Hoeven. Mm-hmm.
    Mr. Gensler. And that transparency, so the customers can 
really see, are you in cash or securities or something else, I 
think would be a very important step. But I would not limit it 
to that transparency. I think we, as the firms relate to their 
self-regulatory organizations and the self-regulatory 
organizations relate to us, we need to sort of look at all of 
those pieces as to possible enhancements.
    Chairwoman Stabenow. Thank you.
    Senator Hoeven. Thank you, Madam Chairman.
    Chairwoman Stabenow. You are welcome.
    As we move to the second round of questions, I want to back 
up a bit and talk about one piece of this certainly that has 
become very clear about impact on the European debt situation. 
But we all know that there is potential devastating impacts on 
the global economy. In fact, today, I am hearing of serious 
impacts on our American automobile industry. I am sure we could 
speak about numerous other impacts in other parts of our 
economy. We remain hopeful that a deal will be worked out, but 
I think we need to prepare for the worst.
    So from your perspectives, what are your agencies doing to 
monitor the exposures of U.S. firms to these kinds of events? 
What are the ramifications of default or break-up of the Euro 
on the financial markets? And have you required firms with 
significant exposure to change their behavior? Chairman 
    Mr. Gensler. We are monitoring the events in Europe, but 
mostly through our conversations with other regulators at the 
FSOC and reading as much as we can, of course. Our primary 
focus has been on the clearinghouses, the largest amongst them 
in London and Chicago and Atlanta, I guess, and we have had in-
depth meetings with them as to if shocks were to come out of 
Europe, how they would withstand those shocks, because it is 
always a best--that we hope for the best, to also plan for 
possible shocks.
    We do not as an agency examine Futures Commission Merchants 
for their European exposures, but we do stay in communications 
with the Federal Reserve, the bank regulators, and the SEC with 
regard to the risks that they seek.
    Chairwoman Stabenow. Chairman Schapiro.
    Ms. Schapiro. Yes. Well, we, of course, are also monitoring 
very closely the events in Europe, participating actively in 
the FSOC process where these issues are discussed really on a 
weekly if not more frequent basis. FINRA is also monitoring 
broker-dealer exposures to sovereign debt closely, and we are 
particularly focused at the SEC on the exposure of money market 
funds to European sovereign debt and stress testing that is 
going on in those funds to ensure that a default of the 
European sovereign or the commercial paper of a European bank 
might not cause a money market to break the buck, as happened 
during the financial crisis with Lehman paper, and create some 
severe consequences for money market fund investors.
    Chairwoman Stabenow. Thank you.
    Let me go back and talk a bit about audits. This has come 
up in a number of questions from colleagues and it certainly 
has come up as I have looked at the MF Global situation, where 
there is customer money missing, poor internal controls to 
prevent that from happening, which is, of course, absolutely 
unacceptable from the public standpoint, from a customer 
    I have serious concerns that our system of audits and 
reviews is inadequate to identify and address the kinds of 
problems that are exemplified by MF Global. If the internal 
controls are as bad as some have indicated, it would be 
shocking, frankly, that, again, a company like this could have 
passed an audit, in the case of MF Global in the Spring of 
2011. I have a question how that happened. How did they pass 
that audit?
    So my question is, broadly, now, again, from a systems 
standpoint, are the scope and frequency of audits sufficient to 
understand the full exposures of companies? And again, use MF 
Global as an example of that. But the risks that they pose to 
the marketplace, should there not be a clean paper trail for 
companies like this? Chairman Schapiro.
    Ms. Schapiro. Sure. I cannot speak to the examination 
process on the futures side. I will say that we are very 
reliant on self-regulatory organizations on the securities 
side, as well. We have about 300 examiners for 5,000 broker-
dealers, so we are very reliant on FINRA to do risk-based 
audits of firms, examinations.
    But on the pure auditing side, Pricewaterhouse was the 
auditor for MF Global. We and the PCAOB, which is the direct 
regulator of auditing firms, the Public Company Accounting 
Oversight Board, are looking very closely at their role in 
    The other thing I would add, and I have mentioned already, 
is that we proposed in June an additional level of auditing for 
broker-dealer custody arrangements, and I would hope that the 
Commission will go ahead and finalize that rule shortly.
    Chairwoman Stabenow. Chairman Gensler, broadly looking at 
this situation, what should be done on audits and 
    Mr. Gensler. I am jealous when I hear that Chairman 
Schapiro has 300 examiners because I do not think we have 20. 
But audits are required once a year of the financials. I think 
we really have to look at whether there also should be an 
audit, a separate audit of the segregated accounts themselves 
and whether we should change that and enhance that rule. The 
examination function, we are reliant on the self-regulatory 
organizations. They do those examinations once every nine to 15 
months under our guidance, but we do not participate in those 
    I think we need to really look as to whether there is 
enhancements and lessons learned. Again, others can--I will not 
participate. Others will come up with some of those working 
directly with the CME about the examination of this particular 
    But more generally, how we as an agency can work with the 
self-regulatory organizations, frankly, with limited resources. 
I do not envision Congress is going to give us a lot more 
resources this year. We are advocating for them, but I have to 
be realistic, too.
    Chairwoman Stabenow. So it does matter how many 
investigators, how many cops there are on the beat, even on the 
Wall Street beat.
    Mr. Gensler. In this case, it is how many accountants, but 
yes, it very much matters. We have 125 Futures Commission 
Merchants and 40 or 50 of them are large enough to be clearing 
members at the CME. We do not examine any of them. Can I repeat 
    Chairwoman Stabenow. Please do, although it is very 
    Mr. Gensler. Yes. I mean, we do not examine any of them. 
That is not the system we have. We rely on self-regulatory 
organizations. We do some for-cause limited reviews, a handful 
a year. We are doing them right now actively on these top 12 to 
14, as I earlier explained. But the front line is this reliance 
on self-regulatory organizations, and it has been for decades. 
That is not a change. And I think that it can work, but we have 
to really work with them to make it work.
    Chairwoman Stabenow. Senator Roberts.
    Senator Roberts. Thank you, Madam Chairman.
    I am going to continue in regards to the line of questions 
that I had for the Chairman. The time line surrounding your 
statement of non-participation, I know everybody is talking 
about either recusing, stepping aside, or not participating. I 
am not too sure what the difference is. Your response to my 
letters raises questions about who was in charge of CFTC's work 
in the early days of this event. I am talking, obviously, about 
MF Global.
    According to your letter, you notified the General Counsel 
that you would not participate in enforcement matters. Why did 
you come to this realization on November 3? Had you not been 
participating in official CFTC actions regarding MF Global 
before this date?
    Mr. Gensler. As I mentioned, Senator, I had conversations 
directly with the General Counsel and through my staff with the 
Ethics Officer himself throughout those days and they had 
indicated that it was warranted for my involvement to stay 
participating. I indicated to the General Counsel on that 
Thursday that I thought that it could be a distraction to the 
very important work of pursuing where was the cash, where was 
the money, get the money back, and any investigation or 
enforcement matters.
    Senator Roberts. Well, why would your participation be a 
distraction for that effort? Why?
    Mr. Gensler. Though I had not worked at the same firm in 14 
years, and though I had not worked with the individual in nine 
    Senator Roberts. All right. You went over that. I am sorry.
    Mr. Gensler. I am sorry.
    Senator Roberts. You jogged my memory. I think another 
question will help on that. Your statement of non-participation 
is dated November 8. My question obviously is, who was in 
charge between November 3, or you could go back to October 24, 
and November 8? Furthermore, Commissioner Sommers was not 
appointed the Senior Commissioner for this investigation until 
November 9. Who was steering the ship while you were deciding 
what you could and could not be involved in, or your attorney, 
or the Ethics Officer?
    Mr. Gensler. Well, as most things at the CFTC, we have 
talented staff, very excellent staff in the enforcement and 
other divisions----
    Senator Roberts. So staff was in charge?
    Mr. Gensler. I--the reason it took until, if you can remind 
me, the 7th or 8th for me to sign a document is I----
    Senator Roberts. It was November 8.
    Mr. Gensler. I thank you. I turned it over to the General 
Counsel that Thursday and said, if he could work through how to 
document this and to work with the other four Commissioners in 
terms of what would be the proper oversight moving forward.
    Senator Roberts. Okay. A personal question. Why did it take 
you an additional 13 days and a follow-up letter from me to 
send your response on exactly what you are stating there?
    Mr. Gensler. Part of it is just the press of business at an 
agency like ours. I had hoped that there was enough 
    Senator Roberts. Okay.
    Mr. Gensler. --but if there was not, I will try to work 
better to communicate with you personally and your office----
    Senator Roberts. Okay, I appreciate that.
    Mr. Gensler. --more promptly.
    Senator Roberts. Media reports say that you met with Mr. 
Corzine on Regulation 1.25. That is the regulation we are all 
talking about. Is this true? If yes, why did you not recuse 
yourself then?
    Mr. Gensler. As many, many companies have asked for phone 
calls or meetings, they asked for--it was actually a phone call 
in July of this year and we promptly put it on our website, as 
we have 1,100 other similar circumstances. But I was 
participating in the general rule writing as I was then and 
continue to participate in general rule writing.
    Senator Roberts. Well, but did you meet with Mr. Corzine on 
Regulation 1.25?
    Mr. Gensler. Well, there was this phone call that staff and 
I participated in July.
    Senator Roberts. I see. And you consider that a normal 
situation or business as usual, but now, since this has popped 
up, you have chosen to recuse yourself because of that, or the 
impression of that, or the perception of that, or----
    Mr. Gensler. No. It was really as of that Thursday of that 
week there had been a transition from a registrant had gone 
into bankruptcy and there was an ongoing investigative matter, 
and that Friday there was going to be an open surveillance 
meeting to discuss those matters, and I turned to General 
Counsel Berkovitz and asked him what I needed to do, and he 
said, you do not need to do anything different. And I said, let 
me tell you that I think it could be a distraction----
    Senator Roberts. Well, it is now.
    Mr. Gensler. --to the very good work of the government.
    Senator Roberts. I mean, if you determined that you met 
with Mr. Corzine on Regulation 1.25 and you know that in the 
back of your head, and then you say, well, from October 26 to 
November 8, and I am asking who is in charge and you are saying 
staff, and then all of a sudden it pops out of the woodwork 
that we are either stepping aside or we are not participating 
or we are recusing--and I still do not know what any of that 
means really. I do not understand why you just did not recuse.
    Now you are going to have an investigation by Commissioner 
Sommers and the CFTC and this is going to drag on for a 
considerable amount of time until we find out really what 
happened to the money. And you have all sorts of conjecture in 
the press and the media about that and you are going to still 
be, what, non-participating? That just raises it up as a bigger 
    I think you should have probably just gone ahead and said, 
hey, I am the Chairman. I can make these decisions. But now you 
have said that you are non-participating. We had two regulatory 
questions and you said, ``I am non-participating.'' That is a 
dodge, you know? That is not right. Can you clarify the 
Regulation 1.25 is not a Dodd-Frank prescribed regulation? In 
fact, did the CFTC not issue an Advance Notice of Proposed 
Rulemaking on Regulation 1.25 before Dodd-Frank was signed into 
    Mr. Gensler. There is one component that relates to Dodd-
Frank, but most of it is, you are right, is not necessarily 
Dodd-Frank. The one component is Dodd-Frank said we had to 
withdraw reliance on rating agencies in all of our rules, and 
that is a component of the 1.25 rule.
    Senator Roberts. All right. As we go through this inquiry, 
or hearings here--not an investigation, but an inquiry, 
hearings, and I again thank the Chairwoman for her efforts in 
this regard--and I realize I am out of time, but I just--I am 
having a lot of trouble with your non-participation or recusal. 
Can you spell out the specific terms of your non-participation, 
or is it a recusal? I know you said you are going to step 
aside. And again, this is going to go on for quite some time 
and you are going to get an awful lot of questions and you are 
just going to say, ``Well, I cannot answer that because I am 
non-participating.'' I think it would be better for you to say, 
``I am recused,'' or not being--or turn it around and say, ``I 
made a mistake. I can answer these questions.'' Because now it 
is a distraction, Gary. Come on.
    Mr. Gensler. Senator, I am not participating in the 
matters, and the letter that you posted on your website, 
including the document of my non-participation, is of public 
record. I thank you for putting it on the website. I mean, I am 
not participating so that it is not a distraction to the hard 
working efforts of the staff on these matters, and that 
includes--the General Counsel will make determinations, but 
that includes the bankruptcy and the matters related to--the 
General Counsel was very clear with me that it would be broadly 
interpreted with regard to matters related to this company.
    Senator Roberts. All right. I will take it at that.
    Madam Chairman, I had just a couple of questions on the 
rulemaking, and I know that this has gone on for a long time 
and I think you have, as well.
    Chairwoman Stabenow. Yes. We can do--Senator Klobuchar is 
here. We can----
    Senator Roberts. Oh, I am sorry. I apologize to the 
Senator. My apologies.
    Chairwoman Stabenow. No, no. That is okay. Thank you very 
much. We will, in fact, do another round, Senator Roberts, 
because I have additional questions, as well.
    Senator Klobuchar.
    Senator Klobuchar. Very good. Thank you very much, Madam 
    Getting a little broader here and the effect this is going 
to have in general on the markets, I am just looking at the 
fact that this is rural America, people like Dennis Magnuson, 
who is a pork producer in Austin, Minnesota, that were not 
directly--and even those that were not directly impacted in the 
agriculture community have serious concerns. And my question 
is, what do you see as the long-term economic consequences of 
the MF Global failure? We certainly saw long-term consequences 
with Lehman Brothers and other failures. Are you concerned that 
a lack of confidence regarding the security of segregated 
accounts could lead to a less predictable and more volatile 
commodities market?
    Mr. Gensler. I think it is critical for people, as you just 
mentioned--was it Dennis?--and others have confidence, because 
the economic welfare of Dennis and of America relies on people 
being able to protect themselves against price risk, as the 
price of corn or wheat or oil going up or down or interest 
rates going up or down, and focusing on what they really do 
best. And so I think we are all committed at the CFTC to 
ensuring in that confidence.
    Firms will fail from time to time. We are not going to 
repeal that nature. Firms in every other field fail, not just 
the financial world fail. But what we have to ensure is when 
they fail, it does not become systemic, and when they fail, 
that the customers are protected and that the money and the 
segregation of that money is protected and it might be only 
invested in sort of a little bit boring stuff, but it is 
invested, you know, safely.
    Senator Klobuchar. We like boring stuff in our State.
    There are a lot of questions, speaking of those damages, 
about the amount of the shortfall. The only public statement 
from the trustee has been $1.2 billion, almost double the early 
estimates that we heard from the CFTC and CME. Regardless of 
the number, we know there is going to be a shortfall. And I do 
not know if Commissioner Sommers can answer this, but what do 
you see as the legal recourse that the victims of this have?
    Ms. Sommers. Senator, the process that is ongoing right now 
includes several different distributions of customer money back 
to the customers. It started with the transfer of the open 
positions that were on the exchanges. That happened first, 
along with the margin that supported those positions. 
Approximately 60 percent different for different customers 
transferred with those positions.
    The next group of transfers that was approved by the court 
was cash only, people who did not have positions that had cash 
only at MF Global. They were given a distribution of 
approximately 60 percent.
    Now there are a couple other groups of people, people who 
liquidated after this SIPC bankruptcy went into effect on the 
31st. Those people who liquidated in between October 31 and the 
time of the transfers, those people were not covered in the 
first two distributions, so they will be included in a motion 
that the trustee just filed this week to true up everybody who 
has not received distributions so far, to true those accounts 
up to approximately two-thirds of what was in the account.
    We are hopeful that we will be able to return all customer 
money to those customers, to make them whole. That is our goal 
and that is what we will be working with the trustee to make 
happen. What will probably happen after final distributions to 
true those accounts up is that all other claims will go through 
the formal claims process.
    Senator Klobuchar. All right. Well, I really hope you are 
hopeful in the right way, that this happens, because, 
obviously, people are very, very concerned about this, and they 
have heard that two-thirds number, but to get to the full 
reimbursement would obviously be our goal.
    Several constituents have had questions about CME's $550 
million guarantee, and I know you cannot speak for the Chicago 
Mercantile Exchange, but this guarantee certainly has a bearing 
on constituents. Can you discuss how this guarantee will work, 
because I know there is a lot of confusion. That will be my 
last question.
    Ms. Sommers. My understanding of the guarantee is that if 
the trustee were to distribute approximately 66 percent of the 
money back to the customers and in the end find that the 
shortfall in the customer funds account is more than what they 
anticipated so that they had actually distributed more than 
they should have back to customers, this guarantee fund would 
cover any shortfall in the money that the trustee may have 
given out too much.
    Senator Klobuchar. Right. So the extra money that we are 
looking for above the 66 percent, the two-thirds percent, they 
will have to find in other ways?
    Ms. Sommers. Right. It would be--if the shortfall is found 
in the end to be more than 34 percent, that guarantee fund 
would cover anything above that.
    Senator Klobuchar. Okay. Thank you very much.
    Ms. Sommers. Sure.
    Chairwoman Stabenow. Thank you very much.
    Chairman Gensler and Chairman Schapiro, a number of times 
today, we have heard conversations about having resources, and 
we certainly want you to manage the resources that you have in 
the most effective way possible and to stretch every dollar. 
But I think it is realistic and important and fair to look at 
over the years what has happened, particularly on the CFTC side 
when in the last ten years we have seen the volume of future 
trades increase 435 percent and the staff budget go up nine 
percent. So that certainly does not correlate. And when we add 
to that the Wall Street Reform effort and title VII on top of 
that, this has created a very difficult situation.
    So I would appreciate both of you responding to the need 
for resources if we are going to truly oversee and protect 
markets and market integrity and market participants. We have 
seen calls to cut investigators and auditors in both of your 
agencies, and at the same time concerns are raised about 
customer protection, which is of great concern to me on behalf 
of the people I represent in Michigan and people I am hearing 
from in Michigan.
    We are told that there is great concern about not doing 
enough to look after the markets, but then the same folks will 
suggest cutting the resources, and again, the cops on the beat, 
the folks that are the investigators, the auditors, whatever is 
needed in terms of protecting American customers and their 
    Certainly MF Global is a stark reminder of the consequences 
if we play politics with agency resources, because, ultimately, 
we are talking about customers' money and hard working people. 
I have heard from farmers. I have heard from retirees, grain 
elevators, other business people. Obviously, folks want us to 
take this very seriously.
    So I would like to ask each of you to respond to a level of 
funding that you believe you need to fully focus on the areas 
of concern that we have raised here in the committee. Chairman 
    Mr. Gensler. I thank you. I think this is a good investment 
for the American public. Our funding this year was just boosted 
from $202 to $205 million. The President's request for this 
year is for $308 million. And while our great nation is 
challenged by budget deficits, and so I appreciate that this is 
a hard request, taking on a market that is so vast and so 
complex as the swaps marketplace, I think it is in the order of 
probably, if it does not happen this year, I think it is going 
to be needed in the next two, three years to increase our 
funding about 40 to 50 percent.
    Heavy emphasis on technology. Maybe it is technology goes 
up twice and staffing only goes up 30 to 40 percent. But we 
cannot send computers in front of judges, and you could not 
really have used a computer to do all the audits and 
examinations. I mean, we do need probably 30 to 40 percent more 
    Chairwoman Stabenow. Thank you.
    Chairman Schapiro.
    Ms. Schapiro. Thank you. We are obviously a lot larger than 
the CFTC, but the scope of our responsibilities is really 
extraordinarily broad when you think about issues ranging from 
market structure, mutual funds, money market funds, accounting, 
transfer agents, exchanges, broker-dealers, and clearing 
    The President's request for the SEC for this fiscal year--
we are under a continuing resolution still--was $1.4 billion. 
Our goal with that would be to expand our enforcement and 
examination efforts and our core responsibilities, but also be 
able to operationalize the rules that we are in the process of 
finalizing for over-the-counter derivatives, hedge funds--those 
rules are finalized, to bring hedge funds over regulation--
municipal advisors, credit rating agencies, and others.
    The one thing I think is important to note for the SEC is 
that we are deficit neutral. We have matched funding from 
industry fees and assessments that cover 100 percent of our 
appropriation. So depriving the SEC does not benefit other 
agencies in any way.
    Chairwoman Stabenow. Thank you very much.
    Finally, my last question, I cannot have both of you here 
and not talk about harmonizing rules, and so let me just ask, 
as you know, we in Congress require the agencies to consult and 
to coordinate, and I know that you are doing that, but we do 
have a lot of work left to do and then concerns that I have 
about really seeing that happen. The proposed rules are being 
released on separate time lines with significant differences in 
several key rules, notably swap execution facility rules. There 
are some differences certainly in commodities and securities 
markets, and having two separate systems, I understand there 
are differences, but it is really counterproductive, I think, 
and burdensome and simply makes market oversight tougher if we 
are not harmonizing definitions and rules and so on.
    You have both testified in the past that you are working 
together. I know that you are doing that. But at this point, 
despite the fact that there are a number of issues that I know 
that are quite contentious and quite complicated, it is 
absolutely critical from the customer standpoint, again, the 
public standpoint, that you be harmonizing what you are doing.
    So I would ask each of you, what are the greatest 
differences yet to be resolved between your two agencies and 
what final rules do you foresee being different in the future. 
Chairman Gensler.
    Mr. Gensler. Well, we are working very closely on the 
definitions rules, on who is a swap dealer, a securities-based 
swap dealer and what is a swap and securities-based swap. 
Frankly, in that area, we will have some differences because 
the issue of forwards is so much more important that we do not 
inadvertently bring in some transaction on grain or energy into 
the definition of swap and it does not relate as much. So there 
is a lot of technical things that you will be happy we are 
doing, but there will be some differences, I think.
    I think those two sets of definition rules, we really need 
to get out there, and the markets want to have that-- lower 
that regulatory uncertainty.
    The swap execution facility rules might be in that later 
stage. You know, it will not be in January, for instance. I 
mean, I think it will take us a number of months more, and we 
are going to try to continue to narrow any differences in 
there. But as you mentioned, there might still be some 
differences because the futures market and the securities 
markets do have some differences, but we are trying to work to 
get in that where we can.
    Chairwoman Stabenow. Before Chairman Schapiro answers, I 
wonder if you might talk a little bit more specifically, 
though, about how close you are to finalizing the entity 
definitions and the product definitions, because those are 
really foundational rules, as you know, and important 
definitions that really need to be completed jointly.
    Mr. Gensler. Though I had been optimistic throughout the 
month of October and November that we might vote on the entity 
definition rule this month of December, just given the press of 
business at both of our agencies, we have a document between us 
that is very close and it is getting final review by the 
economists and others. But I think that rule could be 
calendered--I will see if Chairman Schapiro will shoot me or 
not--for early to mid-January if we could get that last bit of 
work done.
    I think on the product side, we are a little bit behind 
because we only proposed that in April. Jointly, we proposed it 
in April. We have our comment summaries, our staff 
recommendations, and the two staffs are working on the actual 
document, but it may not be in front of Commissioners until 
January, which could then put off the vote for a little bit 
longer because Commissioners, of course, need to weigh in and 
deliberate, all ten Commissioners in this case.
    Chairwoman Stabenow. Chairman Schapiro.
    Ms. Schapiro. I think that is a fair estimate for when we 
will be able to do the joint definitions. I think the effort 
right now is very much focused on the cost-benefit analysis and 
making sure it is as robust and thoughtful as it possibly can 
    More broadly, you know, there are differences, obviously, 
between our rules and the CFTC's rules, and Madam Chairwoman, 
as you point out, some of those distinctions or differences 
come about because of the distinctions between the products. 
Security-based swaps and swaps can be quite different. They 
have different liquidity characteristics, in some instances 
different trading characteristics.
    But I think, also, each agency's respective concerns about 
arbitrage with our existing markets has driven some of the 
differences, as well, for the CFTC between the OTC derivatives 
and the regulated futures markets, for us, between the 
derivatives and the primary equity markets.
    That said, I think that we have worked very well together. 
We are still trying to narrow differences where we can. I think 
the big differences really do come about in Reg SEF, the swap 
execution facilities, which we have defined basically multiple 
to multiple in a different way. Around blocks, how to define 
block trades and the dissemination of block information to the 
marketplace is an area where we have some differences. There 
are some differences in the data elements for reporting between 
the two agencies. And then there are a number of other perhaps 
less significant ones.
    And I think a lot needs to come together as we do our 
implementation releases and talk about how we plan to build and 
sequence the rollout of these rules.
    Chairwoman Stabenow. Thank you very much.
    Senator Roberts.
    Senator Roberts. Thank you, Madam Chairwoman.
    Chairman Gensler, at a previous hearing, I posed to you a 
simple question regarding bona fide hedges that involved, as 
you recall, a Kansas grain elevator, and I understand that 
prior to your vote on the position limits rule, there is a 
colloquy between you and former Commissioner Dunn on this topic 
and the final rule. Were you able to resolve this issue? Yes or 
    Mr. Gensler. I think the answer is yes. We believe so.
    Senator Roberts. So all the country elevators out in Kansas 
can now not worry about putting up on their silos that they are 
a hedge fund, or that they continue to be a country elevator 
and not a hedge fund?
    Mr. Gensler. They are country elevators.
    Senator Roberts. All right. Thank you.
    Chairman Schapiro, in July, the D.C. Circuit Court vacated 
your proxy rule based on your agency's to be determined cost-
benefit analysis. Some in the media have called the court's 
opinion a stinging rebuke of the SEC's methodology. You have 
already spoken to that to some degree with the Chairman on what 
you intend to do. I have long been, as I think everybody on the 
committee has been, an advocate for honest evaluation of the 
costs and benefits of our government regulations. That is the 
number one issue that I get in Kansas regardless of the other 
things that we are facing.
    What have you learned from this decision, and Chairman 
Gensler, how can other agencies like the CFTC learn from the 
court's decision?
    Ms. Schapiro. Thank you, Senator. We have learned from the 
decision. While we do not necessarily agree with all the 
court's reasoning or findings, we have taken it very much to 
heart. We have continued to build our economic capability at 
the agency. We have a new Chief Economist and he is recruiting 
additional economists to our staff.
    We understand we need to better explain the choices that we 
make in our rulemaking and the costs and benefits of the 
different choices that we consider. We need to explain more 
effectively how we took commenters' views into consideration as 
we proceeded with rulemaking. We have incorporated our 
economists much earlier in the process and kept them well 
incorporated throughout the entire rulemaking process so they 
can be part and parcel of the team that develops any regulatory 
proposals. We are seeking more economic data when we publish 
for comment our rule proposals and we are trying to do--and we 
are doing analysis at both the proposing stage and at the final 
    So we are really redoubling our efforts in terms of a more 
robust process, more analysis where possible, recognizing that 
these can be very challenging analyses to do in particular 
    Senator Roberts. Well, the President issued an Executive 
Order clear back in January on this and another one in July and 
gave everybody, all independent agencies, 120 days to make a 
report. I do not know where yours is or that of the CFTC.
    Chairman Gensler, do you have any comment?
    Mr. Gensler. We take the cost-benefit considerations very 
importantly. Our statute actually has a section, it is called 
15a, but after the opinion to which you referred--I think it 
was in August--our Chief Economist and the lawyers all looked 
at that opinion and said, what do we need to do more? They 
produced yet another memo to all the team leads and to the 
Commissioners about that opinion. And so each of the rules that 
we are putting forward already had cost-benefit. We have vastly 
benefited from the public and their comments on this and we 
even hired a few more economists, as well, within the budget.
    In terms of the President's Executive Order from January 
and July, though Section 15a does not exactly line up with the 
Executive Order, I think that it is consistent with the main 
themes of that Executive Order. And with regard to the 120-day 
review, we actually put something on our website. This was to 
review all of our former rules, anything in the rule book. We 
put something on our website to ask for public comment. I think 
we have actually--that comment period closed, where people sort 
of have come in and said, here are the things you should change 
in your former rules, and we need to do that, but we have not 
yet then gone back to revise the existing rulebook.
    Senator Roberts. Thank you.
    One final question, again, on your recusal. You indicated 
that staff, not a Senate-confirmed Commissioner, were in charge 
from November 3rd to November 8th. Can you tell us who ran the 
surveillance meeting on November 4th that you cited as a reason 
for stepping aside or being a non-participant on November 3rd?
    Mr. Gensler. I was not there, but--so, Senator, when I am 
not there, when any Chairman is not there at the CFTC, the 
staff reports to the other Commissioners. So at the 
surveillance meeting, it would have been the Senior 
Commissioner who was there that Friday morning who--and it was 
not the first surveillance meeting I was not at. I mean, there 
are times where matters come up and it is the senior person.
    Senator Roberts. Sure. All right. Thank you.
    Chairwoman Stabenow. Well, thank you very much to both of 
you, again, for coming in and being available to the committee.
    I would just say for the notice of the members that 
additional questions for the record should be submitted to the 
clerk five business days from now, which is 5:00 on December 8.
    Let me also indicate that I have submitted a number of 
significant questions for the record to both of you regarding 
MF Global and other Dodd-Frank related matters, including high-
frequency trading, inter-affiliate transactions, small business 
broker exemption, a question that deals with important 
competitiveness issues like bundling of services for swap data, 
repositories and derivatives clearing organizations, and I 
would appreciate prompt answers to all of these questions. We 
have a number of important questions that we would appreciate 
your answers to.
    And to members of the committee, I would remind you that we 
will be holding a hearing on MF Global and the bankruptcy on 
December 13th in the morning.
    Finally, let me just say that this is about, again, 
customers. This is about American citizens, farmers, ranchers, 
retirees in Michigan that have contacted me, cooperatives, 
grain elevators, anyone who needs the markets to hedge their 
risk and trusts that the system is going to work and that their 
money is going to be where they thought it was going to be. And 
so as we move forward, we are going to let the facts take us 
wherever they take us. This is very serious. We take our 
oversight responsibility very seriously and we intend to work 
together to make sure that the people get the answers that they 
    So thank you very much for being with us today.
    [Whereupon, at 12:34 p.m., the committee was adjourned.]

                            A P P E N D I X

                            DECEMBER 1, 2011



                         QUESTIONS AND ANSWERS

                            DECEMBER 1, 2011