[Senate Hearing 112-694]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 112-694

                     DODD-FRANK WALL STREET REFORM
                      AND CONSUMER PROTECTION ACT:
                             2 YEARS LATER
=======================================================================

                                HEARING

                               BEFORE THE 

                       COMMITTEE ON AGRICULTURE,
                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 17, 2012

                               __________

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



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            COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY



                 DEBBIE STABENOW, Michigan, Chairwoman

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

             Christopher J. Adamo, Majority Staff Director

              Jonathan W. Coppess, Majority Chief Counsel

                    Jessica L. Williams, Chief Clerk

              Michael J. Seyfert, Minority Staff Director

                Anne C. Hazlett, Minority Chief Counsel

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

Dodd-Frank Wall Street Reform and Consumer Protection Act: 2 
  Years Later....................................................     1

                              ----------                              

                         Tuesday, July 17, 2012
                    STATEMENTS PRESENTED BY SENATORS

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

                                Panel I

Cook, Robert, Director, Division of Trading and Market, 
  Securities and Exchange Commission, Washington, DC.............     6
Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, DC.....................................     4

                                Panel II

Erickson, Thomas, on behalf of the Commodity Markets Council, VP 
  of Government Affairs, Bunge North America, St. Louis, MO......    32
Kelleher, Dennis, President and CEO, Better Markets, Washington, 
  DC.............................................................    36
Pickel, Robert, CEO, International Swaps and Derivatives 
  Association, Washington, DC....................................    30
Thompson, Larry, Managing Director and General Counsel, The 
  Depository Trust & Clearing Corporation (DTCC), New York, NY...    34
                              ----------                              

                                APPENDIX

Prepared Statements:
    Cook, Robert.................................................    46
    Erickson, Thomas.............................................    53
    Gensler, Hon. Gary...........................................    59
    Kelleher, Dennis.............................................    87
    Pickel, Robert...............................................   114
    Thompson, Larry..............................................   122
Question and Answer:
Stabenow, Hon. Debbie:
    Written questions to Hon. Gary Gensler.......................   141
    Written questions to Robert Cook.............................   130
    Written questions to Robert Pickel...........................   157
    Written questions to Thomas Erickson.........................   134
    Written questions to Larry Thompson..........................   162
    Written questions to Dennis Kelleher.........................   151
Roberts, Hon. Pat:
    Written questions to Hon. Gary Gensler.......................   142
    Written questions to Robert Cook.............................   132
    Written questions to Robert Pickel...........................   159
Chambliss, Hon. Saxby:
    Written questions to Hon. Gary Gensler.......................   147
    Written questions to Larry Thompson..........................   165
Harkin, Hon. Tom:
    Written questions to Hon. Gary Gensler.......................   145
Cook, Robert:
    Written response to questions from Hon. Debbie Stabenow......   130
    Written response to questions from Hon. Pat Roberts..........   132
Erickson, Thomas:
    Written response to questions from Hon. Debbie Stabenow......   134
Gensler, Hon. Gary:
    Written response to questions from Hon. Debbie Stabenow......   141
    Written response to questions from Hon. Pat Roberts..........   142
    Written response to questions from Hon. Tom Harkin...........   145
    Written response to questions from Hon. Saxby Chambliss......   147
Kelleher, Dennis:
    Written response to questions from Hon. Debbie Stabenow......   151
Pickel, Robert:
    Written response to questions from Hon. Debbie Stabenow......   157
    Written response to questions from Hon. Pat Roberts..........   159
Thompson, Larry:
    Written response to questions from Hon. Debbie Stabenow......   162
    Written response to questions from Hon. Saxby Chambliss......   165



                     DODD-FRANK WALL STREET REFORM



                     AND CONSUMER PROTECTION ACT:



                             2 YEARS LATER

                         Tuesday, July 17, 2012

                              United States Senate,
           Committee on Agriculture, Nutrition and Forestry
                                                     Washington, DC
    The Committee met, pursuant to notice, at 10:11 a.m., in 
room 328A, Russell Senate Office Building, Hon. Debbie 
Stabenow, Chairwoman of the Committee, presiding.
    Present: Senators Stabenow, Harkin, Klobuchar, Roberts, 
Lugar, Boozman, Grassley and Thune.

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

    Chairwoman Stabenow. Good morning. We will call to order 
the Committee on Agriculture, Nutrition and Forestry, and we 
welcome our witnesses and everyone that has joined us today.
    Let me just say at the beginning that for our first panel 
we have agreed, because of the importance of a number of issues 
that we will be talking about today, to do two rounds, and we 
will be giving each member seven minutes a round. So we will 
have some additional time to be able to have a full, important 
discussion today.
    It has been two years since Congress passed the Dodd-Frank 
Wall Street Reform and Consumer Protection Act. In that time, 
there has been an open rulemaking process with multiple 
opportunities for public input. And as I have said before, it 
is extremely important that we get the rules done right.
    Recently, the Joint Product Definition Rule was made final, 
which along with the Entity Definition Rule, starts the clock 
on compliance. This is a significant step toward greater 
transparency and final implementation of key provisions of the 
law. I also appreciate the Commission's work to finalize the 
end user rules, yet we are still waiting on a number of 
significant rules to be made final or to go into effect, 
including those on capital and margin, clearing and trading, 
block trading, conflicts of interest, and swap execution 
facilities.
    There is no question that it is important to coordinate the 
rules between agencies and harmonize them internationally. But 
it is also critical to get them done. How many rules are 
still--while so many rules are still unwritten, many 
derivatives are still trading in the dark, and some financial 
institutions are still taking risks that threaten our economy.
    If anyone is wondering why we need these rules, all you 
have to do today is turn on the news. There is the LIBOR rate 
setting scandal, the euro zone prices, the demise of Peregrine 
Financial Group, significant trading losses at J.P. Morgan, and 
the MF Global bankruptcy. And you cannot blame people for 
thinking what is next.
    We need these markets to have integrity and market 
participants need certainty so that they can plan for 
compliance and make business decisions for the coming months 
and years. Job creating companies and farmers and ranchers need 
to know that these markets are safe for trading and hedging 
their risks. And again, American families need to know that 
their jobs are not going to disappear again because of 
excessive risk taking by a reckless few.
    I understand there have been significant hurdles. We have 
seen proposals to defund the agencies charged with protecting 
our markets, even as events at home and around the globe 
continue to highlight the need for effective oversight. We 
cannot forget that when this law was passed we were on a brink 
of a global economic crisis, a crisis that left eight million 
Americans out of work, home mortgages under water, and small 
businesses closed forever.
    Despite the challenges, I know that the individuals charged 
with writing these rules have been working very hard in the 
face of great challenges and difficulty, and I would like to 
commend everyone involved and their staffs for what I know has 
been a tremendous amount of hard work.
    I am eager to hear from our witnesses today about where we 
are in the rulemaking process, what challenges they are facing 
as they try to complete these rules, and what this Committee 
can do to support those efforts. So again, I would welcome both 
of our first witnesses. We appreciate your efforts and 
leadership, and I would now turn now to Senator Roberts.

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

    Senator Roberts. Thank you Madam Chairwoman. I thank you 
for calling this hearing this morning to discuss the Dodd-Frank 
bill two years after it has become law. At first, in light of 
the LIBOR situation, you brought it up Madam Chairwoman, very 
appropriately, which we now have learned the CFTC knew about 
back in 2008.
    I have serious concerns why it has taken until the end of 
Chairman Gensler's term for the CFTC to act. This is 2012, four 
years after the Commission was first made aware of the 
potential underreporting. This Committee and the American 
taxpayer deserve an explanation. There is going to be more 
shoes to drop on this issue.
    Typically, two years after a major piece of legislation 
like Dodd-Frank has passed, we would hear an update from 
stakeholders about how the law is affecting the real world. We 
would hear from the agencies in charge of implementing the law 
about the things that Congress did well, and for sure, some of 
the things that we might need to consider changing.
    But when it comes to Dodd-Frank, stakeholders are still 
confused and frustrated and begging to be told what is expected 
of them. The courts have already thrown out a major rule or 
inadequate cost benefit analysis and other rules are being 
challenged on the same basis. The agencies are here today to 
explain why they apparently cannot cooperate and why it is 
taking them over two years to figure out a way to cooperate 
with the rest of the world.
    Here we are two years later and we still have no plan. The 
CFTC has told no one how it plans to coordinate the 
implementation of the over 30 rules and thousands and thousands 
of pages of new regulations it has created. No one knows how 
all these rules will fit together or how much, if any, 
coordination there has been between the agencies in charge of 
implementing Dodd-Frank domestically or internationally.
    I want to be very clear on this point. Stakeholders are 
certainly not opposed to the certainty that goes along with 
Dodd-Frank's mandate that swaps be cleared. In fact, many firms 
have already spent millions of dollars in an effort to be ready 
to implement the Dodd-Frank rules. What these folks want and 
what they have been asking for these past few years is 
certainty and direction from the CFTC as to what they need to 
do toward implementing what Commissioner Sommers has properly 
labeled Chairman Gensler's intergalactic commerce clause of 
regulation. The problem is that no one knows what Chairman 
Gensler's plan is. Chairman Gensler's plan two years later is 
disjointed. It's incomplete, and now we find out it is just 
interpretive, and therefore, not enforceable by law.
    Regardless, the CFTC is about to initiate its 60-day 
countdown to implementation, and in doing so, potentially sets 
in motion a series of events that will send further shock waves 
of uncertainty through our derivative users and industry. What 
happens at the end of the 60 days, which should be on or about 
October 1, when our domestic users of derivatives international 
regulators, or international users of derivatives are not 
ready? Will the Commission offer waivers? Or will participants 
simply face massive fines and enforcement actions by the CFTC?
    Is the CFTC about to create its own system of systemic 
risk? And if this were not enough, the CFTC is not doing a good 
job, in my opinion, of what it was created to do, and that is 
to police the financial streets. It appears as though Chairman 
Gensler's CFTC is too busy working on this intergalactic plan 
to have a conversation with anyone, including fellow 
commissioners, or the Securities and Exchange Commission, about 
implementing recommendations in the aftermath of the MF Global 
bankruptcy.
    Now the chairman set a unique precedent by taking a non-
participating role and wanted to step aside from his 
relationship with Jon Corzine in the investigation of MF 
Global. I understand that, but he made it clear to other CFTC 
commissioners, staff and outside parties that he wanted to keep 
control of the recommendations that came out of that 
investigation. My question, especially in light of the failure 
of Peregrine, PFGBest, last week, the second major failure of 
this nature on his watch, where are the recommendations? 
Investors, stakeholders and others need confidence in the 
system.
    Now, Commissioner O'Malia said it well when he called for 
using the best, most innovative and least burdensome tools to 
meet the regulatory ends laid out in the Commodity Exchange 
Act. Chairman Gensler, CFTC, should be focused on doing exactly 
that and overseeing the rules on the books rather than 
requesting new multitudes of staff and looking for 
justification to regulate the world, any entity doing business 
with a U.S. person, therefore, the world. Again, with the 
regulations we have seen, labeled interpretive and not 
enforceable by law.
    Madam Chairwoman, I look forward to hearing from the 
chairman on how we land the spaceship and how he plans to work 
with the SEC and the real world of frustrated and worried 
stakeholders to implement what Dodd-Frank intended. Thank you.
    Chairwoman Stabenow. Thank you very much, Senator Roberts. 
We certainly have a lot of things to discuss today, we welcome 
both of you here.
    Let me first introduce our first panelist, Gary Gensler. 
Mr. Gensler is the Chairman of the Commodities Futures Trading 
Commission, as we know, and has led the effort to implement 
provisions, most importantly, title VII of Dodd-Frank, into the 
derivatives marketplace. Prior to his appointment, Mr. Gensler 
held two positions with the Treasury under the Clinton 
Administration. Mr. Gensler served as Undersecretary of the 
Treasury for Domestic Finance and Assistant Secretary of the 
Treasury for Financial Markets. We welcome Chairman Gensler.
    Let me also introduce our second panelist, Robert Cook. Mr. 
Cook is the director of the Division of Trading and Markets at 
the Securities and Exchange Commission. Mr. Cook has oversight 
of the standards for fair, orderly and efficient markets. Mr. 
Cook is a nationwide leading practitioner on broker-dealer and 
market regulation. We welcome you this morning, as well, and we 
will start with Chairman Gensler.

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

    Mr. Gensler. Good morning, Chairwoman Stabenow, Ranking 
Member Roberts, and members of the Committee. Thank you for 
inviting me here to talk about the swaps markets reforms. I 
also want to comment on LIBOR and the recent events related to 
Peregrine.
    The Commission has made significant progress in 
implementing Congress' commonsense rules of the road, bringing 
transparency to and lowering risks of the swaps market. Four 
years after the fact, and two years after the passage of the 
Dodd-Frank Act, Americans are still struggling from the worst 
economic crisis experienced since the Great Depression.
    Eight million Americans lost their jobs. Millions of 
families lost their homes and thousands of businesses 
shuttered. With 35 rules completed, we are increasingly moving 
from the rule writing process to the implementation of reforms, 
and I look forward to discussing that with this Committee, and 
Ranking Member Roberts' questions, very good questions, I want 
to go through.
    Light will begin though to shine on the swaps market this 
fall when, yes, around October swaps price and volume 
information will be publicly reported for the first time in 
real time. Regulators will get their first full window into 
these markets. Swap dealers will begin to register 
provisionally at first to come under comprehensive regulation 
and aggregate spot-month position limits will apply to both 
futures and swaps. We look forward to completing other swaps 
markets reforms this year, including those related to 
determining swaps must be cleared in pre-trade transparency to 
promote competition. And as we finalize cross-border guidance, 
we will recall the lessons of past crises.
    Financial transactions executed offshore by U.S. financial 
institutions often send risk right back here to our shores. It 
was true in the London and Cayman Island affiliates of AIG, of 
Lehman Brothers, of Citigroup, of Bear Stearns and a decade 
earlier, Long-Term Capital Management, all with affiliates in 
London and Cayman Islands, crashing back here. The recent 
events of JPMorgan Chase, again, why do they call it the London 
whale? Executed in the London branch; again, a stark reminder.
    The LIBOR index at the center of the capital markets for 
both borrowing and derivatives contracts is but another example 
of our globally interconnected financial system. Hundreds of 
trillions of dollars of derivatives transactions here and 
abroad are based on LIBOR. People taking out small business 
loans, credit cards, mortgages, often in the fine print there 
is a reference to this variable rate called LIBOR as big as--as 
well as big companies doing complex transactions.
    What do they rely on? The honesty of this benchmark. Banks 
must not attempt to influence LIBOR or other of its sister 
rates like Euribor, and they cannot do it if they are concerned 
about their reputation, and they cannot do it if they are 
concerned about their profitability. It is just wrong and 
against the law. So if these key benchmarks are based on 
observable transactions, borrowers and lenders and derivatives 
users around the globe benefit. But if these key benchmarks are 
not based on honest submissions, we all lose.
    Before I close, I would like to just review the recent 
events at Peregrine. On July 10th, the CFTC brought a federal 
action alleging $200 million fraud, misappropriation of 
customer funds. The firm's owner was arrested and charged 
criminally. Simply put, the evidence alleged in these cases is 
that Mr. Wasendorf embezzled millions of dollars, manufactured 
phony bank statements, forged signatures and created fake bank 
addresses.
    The charges against him are that he took customers' funds 
right out of the bank and lied about it for years. Peregrine is 
a futures commission merchant registered at the CFTC. The 
National Futures Association, the self-regulatory organization 
responsible for frontline oversight of Peregrine, is required 
to conduct periodic audits of Peregrine. In addition, there has 
to be an annual review by an independent CPA. Just like the 
police cannot prevent all bank robberies, market regulators 
cannot prevent all financial fraud.
    Having said that, the system failed to protect Peregrine's 
customers, and we all must do better. The Commission has been 
actively working to improve protections of customer funds. We 
have finalized four separate critical rules in this regard. We 
also worked with the National Futures Association and futures 
industry over these last seven or eight months and finalized 
last week rules that are new commonsense rules to protect 
customers.
    But the CFTC has been implementing also significant 
restructuring our oversight of intermediaries. We have hired 
new leadership of this division and stood up a new examination 
group nine months ago. Looking forward though, I believe it is 
critical that we further update our rules, giving regulators 
direct electronic access to all bank accounts and custodial 
accounts.
    Now we do not yet know the full facts of the circumstances, 
but we are committed at the CFTC to conduct a full review of 
the CFTC's and the self-regulatory functions, examination and 
audit oversight of futures commission merchants, looking openly 
for further improvements. We must do that. We must do 
everything within our authorities and resources to strengthen 
our oversight programs and the protection of customer funds, 
and I look forward to taking your questions.
    [The prepared statement of Mr. Gensler can be found on page 
59 in the appendix.]
    Chairwoman Stabenow. Mr. Cook, welcome.

  STATEMENT OF ROBERT COOK, DIRECTOR, DIVISION OF TRADING AND 
           MARKET, SECURITIES AND EXCHANGE COMMISSION

    Mr. Cook. Thank you, Chairman Stabenow, Ranking Member 
Roberts, and members of the Committee. Good morning. My name is 
Robert Cook, and I am the director of the Securities and 
Exchange Commission's Division of Trading and Markets. Thank 
you for the opportunity to testify regarding title VII of the 
Dodd-Frank Act.
    As you know, title VII creates an entirely new regulatory 
regime for over-the-counter derivatives, and directs the SEC 
and the CFTC to write a number of rules to implement this 
regime. The SEC has authority over security-based swaps, while 
the CFTC has authority over all other swaps which comprise the 
overwhelming majority of the products subject to title VII.
    My testimony today will provide an overview of the SEC's 
efforts to implement title VII, focusing on developments since 
Chairman Schapiro's testimony before this Committee in 
December. Since enactment of the Dodd-Frank Act two years ago, 
the SEC has proposed most of the rules required by title VII, 
and we continue to work diligently in coordination with the 
CFTC and other domestic and foreign regulators to implement all 
the title's provisions.
    In June, the SEC issued a policy statement describing the 
order in which it expects to require compliance with the 
Commission's final rules under title VII, and requesting public 
comment. The policy statement is divided into five broad 
categories of rules and explains how the compliance dates of 
these rules would be sequenced by describing the dependencies 
that exist within and among the categories.
    The SEC's approach aims to avoid the disruption and costs 
that could result if compliance with all the rules were 
required simultaneously or haphazardly. The policy statement 
also emphasizes that those subject to the new regulatory 
requirements will be given adequate, but not excessive time to 
come into compliance with them.
    I am also pleased to report that earlier this month the 
SEC, acting jointly with the CFTC, adopted final rules and 
interpretations further defining certain products subject to 
title VII, including swaps, security-based swaps and security-
based swap agreements. In April, again jointly with the CFTC, 
the SEC adopted final rules and interpretations further 
defining certain entities subject to title VII, like 
securities-based swap dealers, and providing guidance regarding 
the application of the dealer-trader distinction in identifying 
such entities.
    The rulemaking also implemented the Dodd-Frank Act 
statutory de minimis exception for dealers in a way that 
recognizes different types of security-based swaps that 
includes a phase-in designed to promote the orderly roll out of 
the regulation of security-based swap dealers.
    The completion of these two joint rulemakings is a 
significant milestone in the journey toward the complete 
implementation of title VII. Beyond these definitional rules, 
the SEC also this year has adopted rules that establish 
procedures for its review of certain actions undertaken by 
clearing agencies, including their submission of information to 
the SEC about the security-based swaps they plan to accept for 
clearing.
    The rules also require clearing agencies that are 
designated as systemically important under the Dodd-Frank Act 
to submit advanced notice of changes to their rules, procedures 
or operations that could materially affect the nature and level 
of risk at those clearing agencies. Moving forward, the SEC 
expects soon to complete the last of the core elements of our 
proposal phase, rules related to the financial responsibility 
of security-based swap dealers and major security-based swap 
participants.
    Further, we intend to propose in a single holistic 
rulemaking rules and interpretative guidance addressing the 
international implications of title VII. Our cross-border 
approach will be informed by discussions with the CFTC and 
fellow regulators in other jurisdictions. I expect that the 
Commission's proposal will address the international 
implications of title VII with respect to each of the major 
registration categories covered by title VII relating to market 
intermediaries and infrastructures for securities-based swaps, 
as well as with respect to the transaction-related requirements 
under title VII in connection with reporting, clearing, and 
trade execution for security-based swaps.
    This publication is intended in part to give investors, 
market participants, foreign regulators and other interested 
parties an opportunity to consider as an integrated whole our 
approach to the registration and regulation of foreign entities 
engaged in cross-border transactions involving U.S. persons. 
The Commission therefore, anticipates that this release will be 
published before the underlying rules addressed in it are 
finalized so that the comments received can be taken into 
account in drafting the final rules.
    In conclusion, as we continue to implement title VII, we 
look forward to continuing to work closely with Congress, our 
fellow regulators, both at home and abroad, and members of the 
public. Thank you for the opportunity to share our progress and 
current thinking on the implementation of title VII. I will be 
happy to answer any questions.
    [The prepared statement of Mr. Cook can be found on page 46 
in the appendix.]
    Chairwoman Stabenow. Thank you very much to both of you. 
Chairman Gensler, there are a lot of things we want to talk 
about in this hearing. They are all very important, both in 
terms of the Dodd-Frank implementation on title VII, as well as 
what has happened since then.
    Let me start by asking something related to MF Global and 
to the Peregrine Financial Group, because there is no question 
that these efforts are devastating to the futures markets. They 
point to regulatory gaps. You spoke about that in your opening 
statements and that some things were being done.
    Earlier this year after MF Global, I had asked that those 
involved as market participants give us recommendations and 
what we should be doing, what they should be doing, what you 
should be doing. We will be doing a hearing on August 1 
specifically on that, but I would like to know from your 
perspective what is happening. As you are making changes, what 
else are you doing to protect consumers, instill confidence in 
the integrity of the futures markets?
    I get asked all the time at home by farmers, by grain 
elevator operators, should I use the futures markets anymore 
because of their concern about what has happened and their lack 
of confidence. What are we doing to repair what is really 
viewed as a broken regulatory system at this point?
    Mr. Gensler. Excellent question. We pulled together market 
participants in early February into two full days of 
roundtables, and out of that, good recommendations came forward 
that the National Futures Association, and we, finalized last 
week. One was the use of the firm's money that sometimes they 
put into the customer fund. This is called the excess funds 
that you remember so well from the events of last fall. That 
can only be removed if it is more than 25 percent, removed with 
signatures of the chief executive officer, chief financial 
officer, some other senior management, and reported directly to 
the regulators.
    We also closed a significant gap that had existed for over 
20 years in our rules about foreign futures accounts. There 
were two methodologies to compute. I am not entirely sure why 
in the 1980s one was picked, but we have closed that gap as 
well.
    Those are very important changes. Also we have in front of 
commissioners now a series of recommendations to go further 
than that. One of them that I highlighted in my opening 
statement, I really believe that the regulators, the Chicago 
Mercantile Exchange, the National Futures Association, should 
have direct and daily electronic access to see what is in the 
bank accounts, to see what is in the custodial accounts, not 
relying somewhere on--I mean, of course, the events of 
Peregrine were about falsifying bank statements and forging 
signatures and so forth, and we are not going to be able to 
stop every fraud. But to have the regulators have direct access 
on a daily basis, I think, is a critical reform. But we need to 
go further.
    Chairwoman Stabenow. If I might just on that point. Is that 
one of the changes you will be making? Because with technology 
available today, I do not know why we are not requiring real 
time oversight of the futures commissions merchants at this 
point.
    Mr. Gensler. It is I think, a critical reform. It is one we 
have talked to the NFA, the CME and the Futures Industry 
Association about. I am hoping that it will have broad support. 
We need to put it out to public comment, but yes.
    Chairwoman Stabenow. Okay. That is great. Talk a little bit 
about, you know, there is obviously criticism about the 
regulators failing to do your job and reacting to crises rather 
than preventative efforts. Could you speak broadly to that?
    Mr. Gensler. Well, we are an agency that ultimately has 
responsibility for futures and now swaps oversight. We, through 
statute, have to work with self-regulatory organizations, and 
that has been appropriated for decades. It is a multi-decade 
approach. I think the SEC has it similarly. They are the front-
line regulators, then we oversee them as well.
    But I do think that we need to do more. We need to do more 
and review that relationship and make sure that we are doing 
the right things at the CFTC when we examine the examiners, so 
to speak, as the second line of defense, to ensure that their 
audits are full and do not miss things.
    Chairwoman Stabenow. Mr. Cook, when we look at the SEC--and 
I appreciate very much the SEC and CFTC working together on 
definitions and on rules and so on. But at this point, the SEC 
has, frankly, been behind the CFTC in terms of title VII kind 
of moving forward and finalizing. I think you finalized about a 
third of your rules. You have indicated there is a lot coming 
up in the near future.
    But I wonder if you know when the SEC is going to put forth 
a proposed rule on extraterritoriality and why the SEC chose to 
propose a rule rather than interpretive guidance?
    Mr. Cook. Thank you, Chairman. It is difficult to predict 
with precision exactly when that rule will come out, but I can 
tell you it is right in the sweet spot of the focus of the 
staff right now, together with the final proposing rule we need 
to implement, which is the rule relating to the financial 
requirements for securities-based swap dealers, the capital and 
margin rules. So we are hoping in the next several months we 
will have those rules in front of the Commission and acted 
upon.
    We are intending to sequence them with the capital and 
margin rule coming first, and then the cross-border release 
coming second, because under our approach, we want--the cross-
border release is really the capstone to all of our regulatory 
proposals. It kind of looks back over all of them and asks the 
question, how will these apply to cross-border transactions? 
And so it really is important that we have all of our proposals 
done and then do the cross-border release.
    That is in part an answer to your second question, which is 
why would we do it as rules? We are in some cases amending some 
of the rules that we have already proposed and providing fairly 
significant guidance about how the rules would apply in a 
cross-border context where we feel that it is beyond the scope 
of what we can do by interpretation.
    The question of whether you do something by interpretation 
or rule is a judgment that each agency has to make. We have 
different statutes and so we have different words that we are 
trying to interpret in some cases. But our approach so far at a 
staff level, and the Commission has not yet addressed this 
issue, is that we will need to do that through a rulemaking 
that adds to what is in the statute within the scope of our 
authority, and also that will incorporate full economic 
analysis and a cost benefit analysis that normally would 
accompany a regular rulemaking.
    Chairwoman Stabenow. And when would you anticipate having 
that done? I mean, when you look going forward, you have about 
a third of the rules done now. Are we talking the end of the 
year?
    Mr. Cook. We are talking before the end of the year, I 
would hope. We are hoping to get the capital and margin rule 
done in the next couple months, meaning finalized in the next 
couple of months, and then the cross-border release would come 
right after that. But we are actively working on it now so that 
we can, as I said, sequence it after capital and margin, but 
have it done as quickly as possible after that.
    Chairwoman Stabenow. Thank you. Senator Roberts.
    Senator Roberts. In Commissioner O'Malia's statement of 
dissent regarding the president's fiscal year 2013 budget for 
the CFTC, he states that the Commission's investment in 
technology should be its highest priority and that funds for 
technology should not be redirected for other purposes. My 
question, Mr. Chairman, have you redirected funds meant to be 
used for technology, and I stress, was it not a technology 
update that allowed the self-regulatory administration, the 
National Futures Association, pardon me, to ultimately catch 
Mr. Wasendorf at Peregrine?
    Mr. Gensler. From reports, sir, it does appear that they go 
in every nine to 15 months, and their role is to do audits. And 
this has moved from a paper process to an electronic process. 
And you are correct, from the reports we will learn more facts. 
They are moving to an electronic confirmation platform rather 
than a paper confirmation platform.
    Senator Roberts. But have you redirected funds meant to be 
used for technology? That is my basic question.
    Mr. Gensler. So to that part of your question, I believe 
actually we have gone the other way. We are an agency just 
about 10 percent in head count more than we were 20 years ago. 
We are about 690 people right now. This year we will spend just 
approximately 50 million on technology, which is significantly 
up from last year. And in fact, working with Congress, I think 
they laid out that we must spend at least 45 million.
    What we have been able to do over the last several months 
is redirect more into technology. We need to do both. We need 
people and machines.
    Senator Roberts. But have you redirected funds that were 
designated for technology for other purposes?
    Mr. Gensler. Well, our appropriations said that we had to 
spend at least 45 in this year, and I think we will be close to 
50 million on technology.
    Senator Roberts. I appreciate that. Let me understand if--
or see if I understand this correctly. The CFTC needs a larger 
budget to regulate a $50 swap in Singapore, because it has a 
direct and significant connection to U.S. commerce. This 
requires the CFTC enforcement action on a foreign bank that you 
are calling a U.S. person based on substituted compliance in 
interpretative guidance, a document that has no force of law. 
Where is all of this found in Dodd-Frank?
    Mr. Gensler. Well, in Dodd-Frank, in section 722(d), 
Congress laid out specifically the jurisdiction of the agency. 
They did that for the CFTC. There is not a similar provision on 
the SEC side. We had many, many commenters say, can you help 
interpret the words? What does it mean to have a direct and 
significant effect on commerce and activity in the United 
States?
    I am roughly paraphrasing, but that is what 722(d) is.
    Senator Roberts. All right, let me see----
    Mr. Gensler. But that is what we are trying to interpret, 
sir.
    Senator Roberts. If I might, what if this U.S. person 
disagrees that it is a U.S. person based on this interpretative 
guidance that you admit has no force of law; what happens then?
    Mr. Gensler. Well, we are trying to--the statute is very 
clear, black letter words, and we are helping give guidance and 
we have actually put it out to notice and comment. We are going 
to take public comment, and I think benefit from consultation 
with the public before we finalize such a guidance.
    Senator Roberts. Well, if we have letters from five 
international regulatory agencies saying thanks, but no thanks, 
we are not a U.S. person, does this still make the U.S. 
vulnerable to retaliatory regulation or regulatory arbitrage?
    Mr. Gensler. Well, if somebody is not a U.S. person under 
the guidance under the law, then it is not under our 
jurisdiction. What we do have is JPMorgan Chase which just lost 
several billion, $5 billion in London, and that became a U.S. 
issue. AIG, if I can say, was very much a U.S. issue, even 
though they ran their derivatives portfolio out of Mayfair, 
London, and $180 billion of U.S. taxpayer money went into AIG 
at $600 for each of us.
    Senator Roberts. I understand that problem, and it is a 
very serious problem. But what happens when the foreign 
regulations are not similar to U.S. regulations? Which 
regulation supersedes the others? Who will decide if there is a 
disagreement?
    Mr. Gensler. Well, what we have said is if they are 
comparable and comprehensive, which are words that have been 
used for actually more than a decade probably, then we will 
defer under something called substituted compliance. But if 
U.S. taxpayers are left exposed because a U.S. bank is 
operating in London, Dodd-Frank would still be applicable in 
that situation.
    Senator Roberts. About a year ago I asked you if a Sumner 
County, Kansas grain elevator would have to change his sign to 
read swap dealer. A year later we now have five different 
definitions for a bona fide hedge. Why can't we just have one 
definition? We have five.
    Mr. Gensler. Well, the good news is that Sumner County 
grain elevator operator will not have to be a swap dealer under 
our completed rules.
    Senator Roberts. I appreciate that.
    Mr. Gensler. And that is very important. Why we have 
different definitions is in the circumstance of end users and 
their choice not to clear, I think Congress was very direct 
with us. Make it easy. Make sure that all these non-financial 
end users do not have to clear, and I think that is what we did 
last week when we finalized the rule.
    But then in another circumstance, for instance the Volcker 
Rule, there is different language about hedging, and I think 
Congress did not want the hedge exemption to swallow the 
limitation on proprietary trading, so different circumstances 
and congressional intent.
    Senator Roberts. Where are the CFTC's recommendations 
regarding the MF Global fiasco? We had the second major failure 
we just talked about this week. Do you have those 
recommendations?
    Mr. Gensler. Recommendations are in front of commissioners 
now. Some of the recommendations were embodied in the good work 
with the NFA and the CME and the futures industry, that was 
finalized last week.
    Senator Roberts. Mr. Cook, the CFTC has already proposed an 
interpretative guidance. Your testimony indicates the SEC 
intends to propose an administrative rule. You are also doing a 
cost benefit analysis. The CFTC is not. It is my understanding 
the two agencies will somehow merge these into a single 
proposal coming later; is this correct?
    Mr. Cook. It is correct that we would do a--we intend to do 
a series of rules.
    Senator Roberts. You are a lawyer. How does this work? How 
long will it take?
    Mr. Cook. Well, we are not going to merge our rules into a 
single rule. We will, when we propose our rule, take into 
account what the CFTC has done and obviously, one of the things 
we have to do when we do a cost benefit analysis is consider 
whether if we are being different than another regulator where 
the markets overlap, what are the costs and what are the 
benefits for doing that.
    Senator Roberts. Are you saying the CFTC sees it one way 
and the SEC sees it another, and when the public gets a chance 
to comment they will ultimately see it the SEC's way?
    Mr. Cook. No, sir. I did not mean to suggest that. We have 
not come out with our proposal yet and so it will be informed 
by what the CFTC has done. It may, in many respects, look like 
it. It may look different in certain respects, all of which we 
would request comment on.
    Senator Roberts. So you believe the SEC is doing this 
correctly?
    Mr. Cook. I believe we are trying to do our best to 
implement faithfully the statute and consistent with our 
organic documents, which require us to follow certain 
administrative procedures.
    Senator Roberts. Mr. Gensler, how about you? Do you also 
believe the CFTC is doing this correctly?
    Chairwoman Stabenow. And please be brief. I am going to 
wrap up.
    Mr. Gensler. I do, sir. I do. May I just clarify something? 
About this transfer of technology, we spent a little over 37 
million last year. This year I think we will be close to 50. 
There was discussions with Congress as to how much we should 
spend this year. The appropriations bill ultimately ended up at 
55 million, but then said it could be brought down to 45 by 
something technically called transfer authority. So we did 
that, but we are spending approximately 50.
    Chairwoman Stabenow. Okay, thank you. Yes. Thank you very 
much. Senator Harkin.
    Senator Harkin. Thank you, Madam Chair. Mr. Gensler, you 
have already covered a little bit about Peregrine Financial 
that went under in Iowa, over $200 million shortfall in 
customer segregated accounts.
    First of all, I find it hard to believe, hard to believe 
that one person with hundreds of employees dealing with all 
these accounts could be the sole person responsible for this. I 
just find that hard to believe, and I hope the investigations 
will continue on to find out if there were others involved.
    Secondly, the controlling agency, that was the National 
Futures Association, not you, not the CFTC, the National 
Futures Association. I am astounded that this could go on for 
nearly two decades, and yet nobody checked to see where these 
bank statements were going, who they were going to, if they 
were real or not.
    I am just--I find that mind boggling, that no one at NFA 
could discern this, which raises again a question in my mind 
about this whole issue of self-regulation. You know, self-
regulation only works if you have really tight controls from 
the regulatory body over them, which would be you, the CFTC. So 
I guess picking up on this Peregrine debacle, if the CFTC has 
direct access to bank records on customer funds, if you do 
that, you have the resources to actually--and the personnel to 
do an adequate job of oversight then?
    Mr. Gensler: We do not, frankly. We do not--we are only 
about 10 percent greater than we were 20 years ago, and the 
futures market alone is five-fold bigger, and then we have the 
swaps market that is vast, eight-fold more than that five-fold. 
But I do think direct electronic access for the self-regulatory 
function and for us is critical. But the first line of defense 
still will be the self-regulatory organizations.
    Senator Harkin. As I said, I am losing faith in self-
regulation, unless there is adequate, tight oversight by the 
agencies that we fund through the Federal Government and 
through the regulatory process through what you can do to make 
sure that they are doing their job.
    We have seen self-regulation fail since Glass-Steagall was 
overturned in 1999. I had the Federal Reserve chairman here 
telling me that oh, yeah, they are going to self-regulate 
themselves. Well, we found that that did not work either. But 
so you have to have the personnel and the resources to be able 
to adequately oversee the National Futures Association.
    Mr. Gensler. We do, and I think we all----
    Senator Harkin. But you----
    Mr. Gensler. We absolutely do need those resources the 
President put forward, $308 million budget.
    Senator Harkin. Well, let me ask you this. The House 
Appropriations Committee just cut the funding by $25 million. 
How is that going to help you? How is that going to help 
reassure the public that the CFTC is going to have oversight 
and adequate regulatory oversight over the NFA and other 
entities?
    Mr. Gensler. I think there would be more mayhem in the 
markets.
    Senator Harkin. Well, that is what is happening. They are 
trying to cut this down, say well, they will just take care of 
themselves. We have seen what has happened on that in the past.
    I wanted to get in just briefly on the swaps issue that my 
friend from Kansas raised in terms of overseas. Dodd-Frank does 
say, and I quote, that U.S. regulators can oversee swap 
activities that quote, have a direct and significant connection 
with activities and/or effect on commerce of the United States. 
You mentioned that there.
    Well, I am concerned that without the proper regulatory 
framework, here we go again, the proper regulatory framework, 
that large U.S. swap dealers will move their swaps business to 
a subsidiary overseas, evade CFTC oversight while retaining the 
financial risk in the parent U.S.-based company. In other 
words, U.S. taxpayers will still bear the risk.
    So I ask you, Chairman Gensler, did the trades conducted by 
JPMorgan's chief investment officer in London, about $7 billion 
that you mentioned, did it have a direct and significant effect 
on commerce in the United States? If so--yes?
    Mr. Gensler. Absolutely. Yes.
    Senator Harkin. Well then, going forward, how will the 
Commission ensure that U.S. taxpayers are protected for swaps 
conducted overseas, but for which financial risk is held in the 
United States?
    Mr. Gensler. What we laid out in this legal interpretation 
of the statute that Congress wrote is that it is a branch of a 
U.S. person overseas that is covered by Dodd-Frank. If it is 
guaranteed by the mother ship back here so that risk can come 
back here, that comes under Dodd-Frank. But we could look to 
substitute a compliance and so forth.
    But these risks do come crashing back here. I used to work 
at a large financial institution. We set up hundreds of legal 
entities. Today I understand they set up thousands of legal 
entities around the globe. But in a crisis, the risk comes 
crashing back here.
    Senator Harkin. Mr. Gensler, I am worried, and Mr. Cook 
also, about the integrity of financial markets, especially in 
the areas of swaps and futures. Here are some troubling events. 
Goldman Sachs sold a CDO derivative to a client, even though 
internal e-mails from the bank labeled it one blank deal, bad 
deal. JPMorgan's chief investment office did the $7 billion 
that we lost in London.
    Large financial institutions across the globe are being 
investigated for fixing the London Interbank Offered Rate, 
LIBOR, a key benchmark interest rate in trillions of dollars 
worth of financial transactions. Two futures brokers, MF 
Global, Peregrine, have recently been found to have significant 
shortfalls in segregated customer funds.
    So when I hear people say that we need to get rid of the 
reforms of Dodd-Frank, most of which are not even in effect 
yet, it makes me wonder whether or not people are paying 
attention to the same things that we read about in the paper. 
So again, it is high time that we get the regulations out, get 
the reforms of Dodd-Frank finalized so both of you--when will 
your commissions get this work done? Mr. Cook?
    Mr. Cook. There is a whole series of regulatory 
requirements under Dodd-Frank to address a range of those 
issues you raised, sir, including things beyond title VII and 
whether it is a Volcker Rule or restrictions on asset-backed 
offerings, and we are trying to tackle all of these in parallel 
and move them as quickly as possible.
    We have a lot of work ahead of us, but we certainly 
understand the importance of getting it done as quickly as 
possible, and are trying to prioritize and coordinate 
effectively in doing so.
    Senator Roberts. So you cannot give me any time frame. 
Chairman Gensler, how about----
    Mr. Gensler. We are well over halfway done. You gave us 
about 55 things to do. We have just under 20 to go, and I think 
that we will complete most, if not all, by December 31st of 
this year, but there may be two or three that slide into the 
first quarter of next year.
    Senator Harkin. Well, good luck in getting it done when you 
are going to cut $25 million from your budget, but I hope that 
we do not do that.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much, Senator Harkin. 
Senator Grassley.
    Senator Grassley. Thank you, Madam Chairman. Very important 
hearing. Glad you are having it. I follow along on what Senator 
Harkin said about Peregrine. I have some of those same 
questions. I have a little more specific questions, but before 
I go to those questions, Mr. Gensler, let me say a few things.
    It is important that we do flesh out the issues with the 
implementation of Dodd-Frank. For instance, I continue to be 
concerned about what sort of reach these regulations will have 
on agricultural cooperatives, especially given that 
agricultural cooperatives were by no means responsible for the 
events that led to financial crisis in the first place.
    Our commodity markets are vital for our farmer's 
businesses, our economy. We must have confidence in our system. 
Farmers have utilized a commodity trading system for decades to 
help manage risk, but the confidence of farmers, investors and 
other market participants is shaken, first MF Global. Now we 
have Peregrine.
    So while we are here today to discuss the development of 
regulations, we have to also make sure that the regulations we 
already have in place are being enforced. I know some people 
will always try to get around regulations, but both MF Global 
and Peregrine situations cause me concern that perhaps not 
everything is being done to ensure proper oversight of 
brokerage firms.
    Lead in for my first question. It has been widely reported 
that the owner of PFGBest was able to defraud regulators by 
forging bank statements. My first question is two-part, but I 
will give you both parts of it. Isn't it a cornerstone of 
independent auditing for auditors to check with banking 
institutions as to what account balances are? Why were the 
auditors who were auditing PFGBest not checking with PFGBest 
Bank during the 20 years this fraud was apparently occurring?
    Mr. Gensler. I appear here as the head of the Commodity 
Futures Trading Commission, not as an auditor, but I do 
understand that those are the cornerstones of confirmation by 
independent CPAs and the National Futures Association, to do 
that. It appears here, and what we have alleged, is that there 
was deliberately dishonest and forged bank statements and also 
fake, what was it called, bank addresses on these statements. 
That is what we have alleged, and in fact, has been admitted in 
a note that was left when Mr. Wasendorf attempted to take his 
own life. So we need to go back and look at that.
    I do think that this failed the investors of Peregrine, but 
both the independent CPA and the NFA, as we understand it, were 
well aware of the cornerstones that you mentioned in a paper 
world. I think we have to go to direct electronic means so that 
the regulator and the CPAs can get these confirmations and 
acknowledgment letters.
    Senator Grassley. And my second question, we have had 
customer money go missing in MF Global and Peregrine. What is 
the CFTC doing to ensure segregated customer money is properly 
safeguarded? How is the CFTC going to respond to jittery 
farmers and investors worried about whether their money is 
properly accounted for at whatever firm it is held?
    Mr. Gensler. We have done significant steps. We need to do 
more. We have reorganized and stood up a division. We have 
hired new leadership, not only at the top of the intermediary 
oversight, but also the examination function, a man who is long 
time an auditor himself. And we have helped with the NFA and 
others put in place four or five new commonsense rules. Though 
I am not--as you know, I am not participating directly in the 
MF Global situation. We have had some good public comments 
about that.
    We worked through the roundtables. We got public input. Our 
five commissioners came together and NFA put some new rules in 
place, and our commissioners now have in front of them a whole 
set of new rules as well that we will put out to public comment 
hopefully in the near term.
    I do also think we need to do a complete review and get 
people looking at how we examine the examiners, how we at the 
CFTC oversee the SRO functions, as Senator Harkin and Senator 
Roberts also referenced. We have to be reflective and when we 
are reflective, we might find things over the years that we 
wish we had done better at the CFTC too, but we should not shy 
away from that. We have to look at that and really see what can 
we do better as well.
    Senator Grassley. And my last question, do you have any 
initial impressions or opinions on how the National Futures 
Association and/or the CFTC missed this fraud by Peregrine over 
the last 20 years?
    Mr. Gensler. Again, I think we are going to learn a lot 
more facts. We are going to look at the audit files themselves 
and see specifically what was NFA looking at, and it is going 
to be all part of this investigation. And also, we are going to 
be reviewing ourselves too and having people look at how we 
examine, as I say, the examiners, how we look at that.
    So I look forward to sharing that as we learn more of the 
facts, because the investors here at Peregrine got let down.
    Senator Grassley. I will yield back my time, Madam 
Chairman.
    Chairwoman Stabenow. Thank you very much, Senator Grassley. 
Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chairman. 
Thank you for holding today's oversight hearing. I think we all 
know that in the last two years since Dodd-Frank was signed 
into law, there have been far too many stark reminders of the 
financial crisis of '08, and the necessary reason to put forth 
some reform of our regulatory system.
    We have seen the collapse of MF Global, which left those 
the system was supposed to protect holding the bag, many in my 
state who are still working to collect the money, and had a 
devastating impact on the livelihoods and savings of so many 
people. And I understand we are going to have a hearing on that 
August 1st, so I will explore more what is happening with that 
at that time.
    More recently, as we have discussed, the JPMorgan trading 
loss, Barclays' admission to manipulating the LIBOR rate, and 
now last week Peregrine Financial Group filed for bankruptcy 
after its founder blatantly defrauded its customers out of 
hundreds of millions of dollars.
    It seems that there is more work to be done, and that is 
what I wanted to focus on. I know that you discussed with some 
of my colleagues, Chairman Gensler, the emergency industry 
meeting set for next week to explore how to better protect 
customer money in light of what happened at PFG. And it just 
seems so unbelievable that it is just nine months after MF 
Global, especially when you look at the timeline, and as my 
colleagues from Iowa pointed out, the simplicity of how this 
fraud was perpetrated.
    What assurance do you have that we can address this going 
forward? And my specific question is, I know you were pushing 
them to do electronic filings, so do you have that power now 
and it is just that it has not been rolled out? Can you require 
all of these firms to do electronic filings, and what other 
ideas do you have?
    Mr. Gensler. We do think we have the authority, but we have 
to do it through notice and comment and the administrative 
procedures, put a rule out, take comment. But we do think that 
we have that authority and we look forward to doing that. In 
terms of beyond that, I also believe that investors should get 
the same transparency into their accounts in the futures world 
that they have come to expect in the securities world and the 
mutual fund area, that if I have a futures account somewhere, 
that if I choose to, can know how is it invested, and so forth. 
We have raised that with industry. If we have the support to 
put it out to public comment, we will do that.
    I think there needs to be a strengthening of the internal 
controls of futures commission merchants and it will be all 
weighed against cost and benefits, of course, but higher 
internal controls at these futures commission merchants, 
particularly the separation of duties, separations of duties of 
the people that can move money from those who can count the 
money. This is a classic separation of duties issue.
    Senator Klobuchar. Just to give you a sense of one 
Minnesotan that we have already heard from on Peregrine. And he 
copied me on the letter that he sent to the NFA. And this guy 
had his money with MF Global, then he lost money on that, and 
then he went over to Peregrine, which I think we are going to 
find of many mid-western farmers, to try to protect himself.
    This is what he said to the NFA. He said, the problem with 
your statement is the implication--a statement by the NFA--the 
problem with your statement is the implication that failure to 
detect a $200 million fraud earlier should not count against 
you. It just matters that you catch it. I could not disagree 
more. Your job is to prevent fraud by putting in place the 
tools and people to ensure that funds are as reported, that 
segregated balances are protected, and that people making 
investment decisions can rely on the audits that you perform.
    Why have there been so many recent cases where the system 
has failed to detect the risk and again, can you commit here 
that we are going to be able to fix this?
    Mr. Gensler. Senator, I find myself agreeing with your 
constituent who wrote that letter. We have to do better. I 
think we all do, at the NFA and the self-regulatory functions, 
but also how we examine the examiners. There are certainly 
funding issues as well, but I think it is really about how the 
audits and examination function occurs on the street.
    Senator Klobuchar. And I know I have heard you talking to 
some of the other senators about reaching out to the banks 
where future firms held cash, to seek to obtain independent 
verification that the statements made by the firms are 
accurate, which I think would have helped to catch the 
Peregrine problem earlier.
    Obviously, you were not chairman when this started, this 
particular fraud. But I just wonder why this decision was not 
made back in January to rely on information maintained by the 
FCMs instead of confirming balances directly with depositories 
holding customer funds.
    Mr. Gensler. Again, we will learn a lot more facts, but as 
we understand it, there is Photoshopped or purposefully forged 
documents and even a fake P.O. Box for the bank. What we 
understand is the NFA last did their audit in May of 2011, 
February of 2010. The independent CPA last did one for December 
31, 2011. All of them were in essence defrauded and lied to, 
and as I say, we are going to take a look, very close look at 
each of those, and go back as many years as the documents 
exist, and also look at what the CFTC did, and what we need to 
change.
    Senator Klobuchar. You think the NFA is up to the task of 
serving as the first-line regulator here? Obviously, we are 
getting letters like the one I just received that make people 
think they are not ready for this.
    Mr. Gensler. You raise an excellent question, and in fact, 
I will say to this Committee, we are broadening it with the 
swaps reform of Dodd-Frank, because under Dodd-Frank, the NFA 
will be the frontline regulator of swaps dealers, ranging from 
the J.P. Morgans of the world across any swap dealers. No 
agricultural cooperatives, by the way, will be swap dealers 
though. We did address that. I want to make sure we understand 
that.
    So we are adding a self-regulatory function to the NFA. It 
is in our statute the way Congress has laid it out. We rely on 
them and then we are supposed to oversee them. So you raise an 
excellent question. I think that all of us have to do better, 
and we are going to review the NFA self-regulatory 
responsibilities.
    Senator Klobuchar. Okay, thanks. And one last question. You 
mentioned the end user issue, and I thank you for your work on 
that issue with many of the end users in my state. And you 
mentioned in your testimony that the CFTC has been working with 
the Federal Reserve, the other U.S. banking regulators, the SEC 
and international regulators and policymakers to align margin 
requirements for uncleared swaps.
    As I know you are aware, the rule proposed by the 
Prudential regulators has caused a great deal of concern among 
end users, as it would explicitly require swap dealers and 
major swap participants to collect initial and variation margin 
from non-financial end users under certain circumstances. Could 
you talk about your efforts to align these requirements both 
here and abroad and where things stand with the Prudential 
regulators?
    Chairwoman Stabenow. And I would ask you to do that 
quickly. Thanks.
    Senator Klobuchar. Because it was such an easy question.
    Mr. Gensler. We have made great progress, and we put out an 
approach to margin which actually, I believe, is consistent 
with what the CFTC had done, and this document only went out 
about a week and a half ago and is out for two months of 
further comment. So I think that the Prudential regulators 
understand what----
    Senator Klobuchar. Okay, and Chairman Stabenow, I will 
simply ask a follow-up question in writing to the chairman 
about this matter. Thank you.
    Chairwoman Stabenow. Absolutely. Thank you very much. 
Senator Thune.
    Senator Thune. Thank you, Madam Chair, thank you, 
distinguished Ranking Member, for holding this hearing. It is 
important. It is timely. I want to kind of follow-up a little 
bit.
    I am sorry I walked in a little bit as the senator from 
Minnesota was asking questions, but I am just curious to know 
from the standpoint of the average investor out there, when the 
meltdown occurred in 2008, we enacted these reforms. Dodd-Frank 
was supposed to make sure that investors were protected, that 
these types of things that have been done in the past would be 
prevented from happening again.
    And if you are an average investor or an end user, what 
kind of--this is sort of a global question from 30,000 feet--
how would you reassure that person out there after you had MF 
Global and Peregrine now, and then, of course, what is 
happening with JPMorgan Chase, those are like sort of major, 
big, significant events that I think cause people to question, 
doubt, and really impact the confidence that the American 
people have that there are safeguards in place that are going 
to protect them.
    I mean, how do you respond to them in light of the fact 
that Dodd-Frank was supposed to address this issue of systemic 
risk and get us away from the concerns and the doubts and the 
questions, that the lack of confidence that the American people 
have that it is a--financial system is working and working with 
integrity?
    Mr. Gensler. And Senator, I would certainly add to that, 
this recent matter with Barclays and LIBOR, which was not----
    Senator Thune. Right. Exactly.
    Mr. Gensler. --which was not an honest reporting and not 
with integrity in essence. I would say that this is midstream. 
This is very much a work in progress. Dodd-Frank is historic. I 
think it is really critical that we get it in place. We have 
not been trying to rush it against the clock though. We have 
been trying to get it balanced with cost benefit analyses and 
so forth.
    But it is time to get it done. I think that we still have 
much work to do at the CFTC, both in the futures and in the 
swaps area. There is going to be greater transparency starting 
this fall, that the public will see these transactions in the 
swaps markets.
    We have greater customer protections. But just as 
Peregrine's circumstance showed when somebody attempted to rob 
the bank basically, I mean, this was like a bank robber with 
falsifying statements and taking $200 million approximately. We 
have to do everything we can to ensure that is harder to do, it 
is harder to defraud. Because human nature, there is always 
going to be somebody out there who is looking to defraud. You 
have to make it harder and have enough cops on the beat to go 
after them.
    Senator Thune. Do you think that you--you are confident the 
Commission has the types of safeguards in place?
    Mr. Gensler. I think we are getting there. I think that in 
terms of the swaps markets reform, we are not fully there. We 
have close to 20 rules to continue to implement. We need to 
continue to work with industry to make sure that it smoothly is 
implemented, that it is not, as Senator Roberts was concerned, 
and I agree with him, that it is not like a gotcha moment on 
October 1st, but that it smoothly is put in place.
    So I think there is a lot more to do here. And in the 
customer protection area, just as this Peregrine situation 
highlights, I think it is critical that regulators have direct 
access and can see these accounts.
    Senator Thune. Let me ask a question, because a lot of this 
comes back to use of segregated customer accounts, and that is 
where the Volcker Rule would apply. But I would like to ask 
you, I guess, how you would distinguish between proprietary 
trading and hedging, which again, I think is the crux of the 
Volcker Rule, and whether or not you believe you can draw a 
clear distinction between proprietary trading and what 
constitutes a proper hedge, and if so, how would you make that 
distinction?
    Mr. Gensler. Senator, I think it is one of the most 
challenging rules that you gave, Congress gave the federal 
regulators, prohibit proprietary trading so the taxpayers do 
not stand behind sort of just betting on the markets, but 
permit, as you say, hedging and market making as well, which 
are really critical.
    It is critical that banks hedge themselves. We are making 
very good progress, but it is very challenging, because they 
overlap.
    Senator Thune. What about portfolio hedging, is that 
something that ought be allowed under the Volcker Rule?
    Mr. Gensler. Well, Congress actually spoke to it and said 
that it applies to hedges for specific risks or aggregate 
positions. I think that should be allowed. Congress answered 
that question. This word portfolio hedging can sometimes mean 
almost anything to anybody.
    If it is tied to specific positions, even if there are a 
100 of them and it is tied to specific positions, I think 
Congress spoke to that and it should be allowed, but not if it 
is just something that has a label, but is really betting on 
markets.
    Senator Thune. Let me ask to the whole question of how the 
SEC and the CFTC interact with regard to capital and margin 
requirements. I mean, the Commission initially said it would 
recognize the SEC's capital and margin requirements and CFTC 
has now indicated it will not. Where in the Dodd-Frank Act is 
this distinction made?
    Mr. Gensler. Well, for Futures Commission Merchants, they 
are often also registered as Broker-Dealers, and so when there 
are a joint Broker-Dealer and Futures Commission Merchant, we 
have joint rules on capital that have been in place for 
numerous years, and we continue to share our work with them for 
the non-joint registrants.
    But I think that we would set the margin for somebody who 
is not a broker-dealer, but is just under our jurisdiction, and 
obviously they would be similar. But maybe Mr. Cook has 
something----
    Mr. Cook. I think that is right. I think--and one of the 
proposals was to recognize for certain capital purposes the use 
of models or evaluation at risk regime, and I think there was 
in the CFTC proposal, and Chairman Gensler can correct me, 
there was some recognition if the SEC had approved a model that 
the CFTC would accept that. And I think that is part of an 
overall regime where we are trying to recognize where other 
regulators have already addressed a particular framework for 
capital and risk management. It is something we are considering 
on our end as well.
    Mr. Gensler. Particularly since we are thin-staffed, we are 
glad to recognize models that they approved.
    Senator Thune. I see my time has expired. Thanks. Thanks, 
Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator Lugar.
    Senator Lugar. Thank you, Madam Chairman. I remember 
vividly a hearing that Senator Harkin conducted four years ago. 
It was at the time of mortgage crisis, and this oversimplifies 
the explanation we were given, but a gentleman from the Federal 
Government said that you must understand this way, that 
bankers, young bankers out in the neighborhoods are determined 
to get as many mortgages as possible. They even get bonuses 
regardless of whether the borrower can pay it back.
    Because the bank then packages all of these mortgages, 
sends it on to a larger bank, has no risk left. The larger bank 
packages some more and some bigger packages finally arrive at 
locations where financial institutions, realizing they have 
quite a bag full now, and the risks are such, try to devise 
formulas, maybe from one to 10. Some are very risky and some 
are less and they then produce securities, which have lots of 
risk attached, or less as the case may be, and they try to 
market those, often successfully, and those who buy the 
riskiest ones want insurance.
    They go to a firm such as AIG, was mentioned specifically 
in those days. AIG then has a whole raft of these situations, 
and they offer insurance, but the testifiers to the offerer 
also bets, or opinions, and says what's this all about? Well, 
for example, somebody at AIG might decide that a security in 
Pakistan was the one that they wanted to have a tradeoff, swap, 
or what have you with, and so they go into this sort of 
situation.
    Now, I mention all of this because it was at least a 
reasonable way to explain to my constituents why disaster had 
occurred along the way and why AIG finally had to be rescued 
itself from all of these machinations. And we had then 
descriptions of very able guys back in the backroom trying to 
make money for their banks or for their institutions with all 
sorts of extraordinary trades. And people said this is the 
American enterprise system, this is freedom of choice to use 
your money however you want to.
    The dilemma was that the American public was left with the 
recession and all the tragedies that have come from all of 
this. So this led to Dodd-Frank and led to other things prior 
to that point. Now even as you have testified, Mr. Gensler, 
over the years, we always keep raising the question, and you 
have raised it tactfully today, how are all these regulations 
ever going to be written with the staff that you have, or 
with--how in the world can CFTC or other regulatory, maybe SEC 
too, but we have been dealing with--and the answer never really 
comes through because there seems to be a tension between some 
who are risk takers in our system and who we admire and people 
who do not really want regulation. And the tensions finally 
come down to the fact that if you do not have many rule makers 
over at CFTC, there probably is going to be less regulations.
    So if we pass Dodd-Frank and two years later we are out 
asking you where are all the rules, and you are saying well, 
you have to go through this public notice and all the rest of 
it, even then I would be curious how you run the agency. Why 
don't you have people sitting around the table and say, now 
today we are going to make a decision, we are going to have a 
vote, we are going to move this thing along?
    But leaving that aside, it just seems to me we keep talking 
past the issue. On the one hand, we know these risks occur, 
these tragedies we have discussed today. On the other hand, we 
seem very reticent to do rulemaking or to have transparency 
with swaps, for example, or transparency with a lot of things, 
for fear this is an invasion of privacy and a curtailment of 
American free enterprise.
    I lay all this out because I am wondering how, with 30 
rules done, or 25 to go or so forth, how there is any assurance 
the American public--and in the meanwhile, more tragedies are 
not going to occur that jeopardize banks, and then get back to 
the argument of too big to fail. In other words, if an agency 
or a entity makes mistakes, do they fail and take everybody 
with them, or is there a public assurance they are going to be 
rescued?
    When you advocate before congressional committees for more 
staff, why aren't you successful? What do you see as the 
barriers right now? Why don't you make the rules? Why don't you 
get on with it much more rapidly?
    Mr. Gensler. These are excellent questions. I have three 
daughters and when they ask for the car keys, I am glad that 
there are actually commonsense rules of the road and there are 
traffic lights and there are cops on the road to protect my 
daughters from drunk driving, and I think that is what the 
American public wants in the financial markets as well, 
commonsense rules, but still let you get to where you need to 
go.
    Innovation and risk in the economy are there. It is a great 
backbone of our American success is that people can innovate. 
In terms of the head winds we have, they are very significant. 
Congress asked us to write nearly 60 rules. We have gotten 
33,000 comment letters. We have had 1,700 meetings, 18 full 
roundtables. In my written testimony I say we are going to have 
another roundtable on customer protection. We have two lawsuits 
already, and it is our American way, and we are going to 
vigorously defend them and if we got them wrong and a court 
says we got them wrong, we will have to go back and do them 
again.
    But I think that the American public needs us to finish 
these rules. They need--I believe it is a good investment to 
have the CFTC have more cops on the beat in essence, like my 
daughters would like, so that we protect the roads from the 
drunk drivers.
    Senator Lugar. Well, can we protect the Volcker Rule? 
Inside the few seconds left, the one Paul Volcker was really 
talking about, the fact that as a depositor in my local bank, I 
do not really want the bankers speculating with my money, even 
if they can make more money on it. We try to separate these 
functions. Is this going to work in real life, or are people 
going to continue to protest that depositor money, or whatever 
you want to call it, is really up for grabs? Can you get that 
part of it at least safe?
    Mr. Gensler. I think it is a real challenge, Senator. I 
think there will still be risks in banks. Nobody is going to 
repeal the risk in banks. I think the banks need to have a 
freedom to fail and when they fail the taxpayers do not bail 
them out.
    Senator Lugar. Thank you. Thank you, Madam Chairman.
    Chairwoman Stabenow. Thank you very much, Senator Lugar. 
Senator Boozman.
    Senator Boozman. Thank you, Madam Chair. I agree with 
Senator Harkin in the sense that we certainly need to provide 
you with the adequate resources that you need to carry forth 
with the agency and provide oversight. I guess the question is 
is perhaps a lot of people are concerned that you have mission 
creep and have creeped over into a lot of areas with 
duplicative entities.
    Sometimes not really having the authority that Dodd-Frank 
gave you, I think you have used the term in the spirit of Dodd-
Frank, whatever. But I think an example of that might be that 
the CFTC has in their definition of swaps dual registration and 
things. Essentially you are going to have an additional 18,000 
to 28,000 registrations to be audited by the CFTC despite 
having regulated--many of those being regulated by other 
agencies.
    With the problems that we have had with situations where 
people have lost a vast amount of money and the regulation has 
not been there, wouldn't you be better off concentrating on the 
core role of the agency right now and getting that under 
control?
    Mr. Gensler. Senator, we are very much focused on the core 
role and mission to oversee the derivatives market. Of course, 
Congress added this vast market swaps that is eight times the 
size. But I will use just this LIBOR situation. CFTC opens an 
investigation in 2008, April, to look at a key benchmark where 
market regulator--there were bank regulators, of course, around 
the globe. But we as a market regulator we knew it was 
critical. Over 70 percent of the futures markets priced off of 
Eurodollars, by the way, off of this LIBOR rate.
    It took us four years. It is a very complex case, but we 
are very much focused on the core mission. That is very core to 
the futures marketplace, even before Dodd-Frank. Now, of 
course, we are also focused very much on what Congress asked us 
to do to protect the public for the unregulated swaps 
marketplace that existed in 2008.
    Senator Boozman. Let me ask both of you. Are you doing a 
better job of working together and trying to come up with 
regulations that are in harmony with each other and not 
regulations that makes it difficult as those that follow the 
regulations, for them to really feel like perhaps one agency is 
going one way and the other agency is going another? Mr. Cook?
    Mr. Cook. Thank you, sir. I think we are working hard to do 
that, but in the spirit of the need for regulators to be self-
critical, I think the jury is still out, because we have not 
really finalized our rules yet. While I think if you look over 
the rules, there are vast swaths of similarities or identical 
aspects of what we proposed.
    There are some important distinctions, and I think we need 
to keep those in mind as we move to the adoption phase. And if 
it is different, we need to be able to justify it based on some 
rationale, like a different market. There are some differences 
between the markets we regulate. There are some differences on 
our statutes, and I think we need to take a very careful look 
at that as we move forward.
    Senator Boozman. Your roll out is different than the other 
agencies' roll out. Can you tell us why you chose to roll it 
out in the way that you did as opposed to piecemealing it?
    Mr. Cook. We made a choice early on that we wanted to delay 
the effectiveness of the substantive requirements, and so none 
of our substantive rules were triggered by the recent adoption 
of the product definitions because we were not sure when that 
was going to happen and where we would be in the process. At 
that time, we decided that we were going to--each time we adopt 
a rule, consider when it should go live, and then wanting to 
kind of look back at the whole mosaic of the rules and see how 
they fit together and give people an opportunity to see how we 
think of sequencing them, and then to consider how to comment 
on that.
    That is the policy statement that I mentioned in my opening 
remarks that we have put out as a way to kind of help inform 
that debate.
    Senator Boozman. Very good. Chairman, you have taken a 
little different view of that in your roll out. Will you 
comment on that, and then again, a comment on how things are 
going in working with the SEC in trying to get these things 
accomplished?
    One of the problems that we have, and you guys know this so 
well, better than anybody, but when there is uncertainty, and 
there is uncertainty in this area, there is uncertainty 
throughout our entire economy. It is such a drag on the 
economy, and so if you would comment, that would be great.
    Mr. Gensler. I think we are working very well with the SEC, 
with Chairman Schapiro and myself forming a partnership, but it 
is not just the Chairman. It is the staff really. It may have 
been a low bar, but there were rules that Congress asked the 
two agencies to do back in 2000 that were not done when each of 
us got here eight, nine, 10 years later, and yet we have just 
completed two very important foundational rules jointly with 
the SEC.
    I know that was a low bar, but we are doing so much better. 
In terms of moving forward, Congress gave us oversight to what 
is approximately 95 percent of the overall swaps market, just 
measured in notional side. The interest rate swaps market, the 
energy swaps and agricultural swaps are smaller, and then also 
the indices for credit default swaps.
    That is kind of the things we got. They got a lot of other 
things to do that Congress gave them to do. So in fairness to 
the SEC, they have such a full plate on other things. We are 
just swimming in one very deep lane called futures and swaps, 
and so that is partly why we have taken another approach. We 
have gotten so much completed. They have gotten many things 
completed in other lanes, not derivatives lanes.
    Senator Boozman. Your approach is being received----
    Mr. Gensler. Well, our approach----
    Senator Boozman. --positively from the industry?
    Mr. Gensler. Well, our approach is is that we finished our 
proposal phase of about 55 proposals by about a year ago, and 
then we opened them all up to public comment again, or mostly 
all of them. Then we turned the corner and started finalizing 
rules about a year ago. We have finalized 35 of them. Many of 
them will now be implemented. Also, we are living within the 
President's commitment to the G-20 nation leaders that said we 
would complete this by December 31, 2012. Congress said to get 
the job done within one year of Dodd-Frank, and now it is two 
years.
    But again, we are in one very deep lane and the SEC is in 
many other lanes, so that is why we actually had the luxury to 
further along on our job.
    Senator Boozman. Thank you all. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Chairman Gensler, 
I would like to talk a little bit more about LIBOR, and 
appreciate the recent enforcement actions against Barclays, and 
there is no question that this rate manipulation scandal is 
very significant, implications of hundreds of trillions of 
dollars in transactions, and it really casts another dark cloud 
over the financial industry. Are you working on similar cases 
related to LIBOR?
    Mr. Gensler. I would not want to compromise other 
enforcement matters, but I would say that numerous other 
financial institutions have publicly reported that the CFTC has 
been asking them questions. So if that----
    Chairwoman Stabenow. Could you speak to again the length of 
time it has taken, because I think it is hard from a public 
standpoint for people to understand you began this in 2008? 
What took so long?
    Mr. Gensler. They are very complex cases. We started in 
April of 2008 and started just actually reviewing the markets 
and reaching out. I arrived in the spring of 2009, so I 
remember this one pretty well and got involved. Wonderful 
staff.
    Evidence starts to populate by late '09 and early 2010, and 
we get the Justice Department and the Financial Services 
Authority, I think, open formally their case in England in the 
spring of 2010. So that is already almost two years.
    What happens in a case like this, there are millions of 
documents. Information requests have to be handled 
jurisdictionally overseas, and so even sometimes to schedule 
what is called interviews over there--sometimes we call them 
depositions here--takes a considerable amount of time.
    This case was pervasive. It involved trading desks on three 
continents. It involved two key rates, LIBOR and Euribor. It 
involved at least four other banks that we name as Bank A, B, C 
and D in the order, aiding and abetting, what other people 
might call a collusion, but under our statute, is aiding and 
abetting, and this management directive where management was 
saying stay below the parapet, let's get in the pack over a 14 
or 15-month period.
    So it is a very important case and we focused resources on 
it. I would also say we have far fewer people on our LIBOR 
Barclays team than are sitting at this table right now. So it 
starts--we have 400 different investigations going on at a 
particular time at the CFTC.
    Chairwoman Stabenow. Well, when you look at terms of the 
settlement, you have laid out parameters for rate setting that 
seemed to dictate standards that bring integrity back into the 
process, firewalls, transition, base submissions. I am 
wondering, when you talk about the broader global lending 
implications, certainly of which there are many, did you work 
with the Fed? Did you work with international banking 
authorities on prescribing standards? How did you approach 
this?
    Mr. Gensler. We worked with other law enforcement agencies. 
When we pursue a law enforcement action like this, we work with 
law enforcement agencies and really try to keep the parameters 
within that community, because it protects the enforcement 
floor and does not compromise that enforcement effort.
    But I thank you for raising the undertakings. We thought 
Barclays really needed to do this better. This has to be an 
honest rate, and Barclays is committed to make it transaction 
focused based on real transactions that Barclays entered into, 
and make adjustments if need be as provided in the order. 
Firewalls and other provisions that are critical, because what 
they were doing was so pervasive, and it was wrong.
    Chairwoman Stabenow. Let me talk a little bit more about 
international harmonization and global coordination of 
financial market regulation. It really is a balance on the one 
hand. We want to make sure we keep this very important industry 
in the United States and at the same time, there are broad--we 
are in a global marketplace and so there are broad 
implications. So I know that there are some very important 
things to look at on both sides here.
    I am glad that you have proposed guidance on the matter, 
but I have some questions. First, I guess, for both of you, 
what sort of coordination are you doing with the SEC? I would 
ask Mr. Cook vice versa in terms of this whole question of the 
global marketplace and international harmonization.
    Mr. Gensler. We shared with the SEC, the Federal Reserve, 
the Treasury, the other regulators, not only our draft document 
before we put it out, but we started about a year ago, in 
consultation with the SEC, and by about six or eight months ago 
with the Treasury Department, particularly their group of 
international folks at Treasury, got a lot of feedback from 
both the SEC and Treasury on our guidance.
    Chairwoman Stabenow. Mr. Cook, you want to respond to that 
coordination issue?
    Mr. Cook. Yes. We have consulted extensively with the CFTC 
staff. I think as we move forward with our proposal, and as 
they consider comments on theirs, I fully anticipate we will 
continue to do so. We have also been partnering up in the 
international dialog through some of the international 
organizations, the FSB, the ISCO.
    But working groups in that area, but also some other multi-
lateral conversations, including at least two meetings of 
regulators in key jurisdictions, have been attended by the 
senior leadership of the agencies and agencies from around the 
world to talk about the timing, you know, what the substance is 
of the regulations and to further seek to harmonize the end 
result.
    Chairwoman Stabenow. Chairman Gensler, as you look at 
regulating branches of U.S. institutions abroad at the 
transactional level, could you speak to the concerns? I know 
that there is significant competitive disadvantage with U.S. 
entities versus foreign competitors, so how do we balance that 
with certainly protecting American consumers and American 
investors?
    Mr. Gensler. If we were to adopt fully what some in the 
industry have asked for, the jobs would move offshore and the 
risk would still be back here. Let me say that again. If we do 
not cover the branches of JPMorgan Chase and Citibank and Bank 
of America that do a lot of this business in branches, and the 
guaranteed affiliates of the Goldman Sachs and the Morgan 
Stanleys, they would not be covered by Dodd-Frank.
    The risk is still the American taxpayers. The jobs and the 
markets will move to London and elsewhere, because they will go 
to where they can have less regulation. I used to do a bit of 
this when I was at one of those firms. It is natural. It is 
basically just planning, and they have thousands of legal 
entities now to pick from.
    So we are taking into consideration how to best protect the 
American public foremost, and to comply with Dodd-Frank.
    Chairwoman Stabenow. Thank you very much. Senator Roberts.
    Senator Roberts. One of the things I think is obvious is 
that, as Senator Lugar pointed out, the need for transparency 
and cooperation. Just as a question to the chairman, when did 
the commissioners, or have the commissioners received your 
recommendations on MF Global?
    Mr. Gensler. As I am not participating in the MF Global 
matter. I assume your question is more broadly about customer 
protection. Starting with the roundtables that we had in 
February, staff under the Division of Swap and Intermediary 
Oversight----
    Senator Roberts. No, I mean your specific recommendations, 
your plan for MF Global. After it is wrapped up, they did the 
investigation by the FBI and all the rest of the folks that are 
involved in it at the trustee. But you indicated you were a 
non-participant, but then you said you wanted to be in control. 
I am assuming that you have a plan for MF Global, or at least a 
plan to go forward. Have you shared that with the 
commissioners?
    Mr. Gensler. Again, I am not participating directly in MF 
Global. In terms of customer protection initiatives, those have 
been shared throughout this process from January to now, even 
leading to what was approved last week from the National 
Futures Associations.
    Senator Roberts. All right, here is what I am getting at. 
You have said before that the commissioners have received, or 
were being--working on recommendations, sharing things on 
recommendations. When did they get a copy or the final product 
in regards to your recommendations?
    Mr. Gensler. The product is actually not yet finalized. It 
started in January and February with staff briefings, lists of 
possible alternatives. A lot of that led to what the NFA 
adopted.
    Senator Roberts. You did not give the commissioners at 6:00 
last night a copy of your recommendations?
    Mr. Gensler. What they received yesterday is still a draft 
of rule text, which is rule text----
    Senator Roberts. So they received a draft?
    Mr. Gensler. That is correct. That is correct.
    Senator Roberts. It is a draft of the recommendations?
    Mr. Gensler. Well, it is actually a draft of rule text that 
we moved from lists of recommendations, a PowerPoint 
presentation.
    Senator Roberts. That was the----
    Mr. Gensler. I do not know the exact time, but yes, a draft 
of the rule text, yes.
    Senator Roberts. All right, we are sort of dancing around a 
pin here in terms of cooperation and to at least letting your 
commissioners know what the heck is going on.
    Why did the CFTC choose to address the cross-border issue 
via a guidance rather than through a formal rulemaking process? 
The obvious follow-up is, was that so you could avoid a cost 
benefit analysis that the SEC is doing?
    I think you have sort of indicating that you are trying to 
direct this or to push this from the CFTC standpoint so that 
the SEC would follow when it comes to defining the overseas 
reach of the U.S. derivatives regulation. That was a speech. 
You can respond to it any way you can.
    Mr. Gensler. Okay. There is actually a specific provision 
in Dodd-Frank, which is 722(d), which is not also over in the 
SEC. I do not know the history and the legislative history of 
why we have it and they do not, but we do. We've got a lot of 
questions----
    Senator Roberts. I am concerned----
    Mr. Gensler. We got a lot of--I am sorry, Senator.
    Senator Roberts. I am just concerned that what has been 
described as your intergalactic plan, that nobody other than 
you knows what it actually is, and it could be taking our 
derivatives markets over a cliff. I just--we know what the SEC 
is doing. They have a plan.
    My question is, what is your plan? For example, how many 
swap execution facilities do we have operational? Those are the 
entities that are up and running today that can do the job.
    Mr. Gensler. Swap execution facilities have yet to 
register. We estimate that there may be somewhere close to 20, 
but we do not know yet how many will be, and we have not 
finalized those rules.
    Senator Roberts. It is my understanding there is only one 
that is up and operational.
    Mr. Gensler. I am sorry.
    Senator Roberts. Is that correct?
    Mr. Gensler. Swap execution facilities, there are not any 
yet. We have not finalized the rules. But if you are 
referencing swap data repositories, possibly there is just one. 
There are four others that have various stages of application 
to become swap data repositories.
    Senator Roberts. Mr. Cook, can you confirm--you have 
already indicated that the SEC will be issuing its own cross-
border proposal; is that true?
    Mr. Cook. Yes, sir.
    Senator Roberts. Are we going to end up with two separate 
and distinct cross-border regulations between the SEC and the 
CFTC when we are through?
    Mr. Cook. I think we will have to, as I mentioned, take 
into account very closely what the CFTC has done and consider 
whether there are any differences in our markets that might 
justify a difference in our proposal. I think one of the things 
we found in some rulemakings, that often proposing 
alternatives, it is helpful to get good public comment back and 
inform where we ultimately land. But we have not yet put out 
our proposal.
    Senator Roberts. Well, I am worried about the two trains 
going in a different direction. Why is the CFTC doing it 
directly? Why don't you have a 60-day clock over at the SEC?
    Mr. Cook. We do not----
    Senator Roberts. They have a 60-day clock. Why don't you 
have a 60-day clock?
    Mr. Cook. I believe the 60-day clock is triggered by the 
adoption of the products release, and we did--which on the CFTC 
side, as Chairman Gensler can address if I am wrong, but it 
triggers the application of certain of those rules.
    Senator Roberts. Well one is an interpretive guidance and 
the other one basically is rulemaking that involves a cost 
benefit study, which CFTC has not done. It just seems to me 
that you got two different frameworks here.
    Is the SEC requiring any registration or even provisional 
registration be automatically triggered before all of its rules 
go into effect at the SEC?
    Mr. Cook. We are not requiring registration at this point. 
We have not finalized our registration rules, so none of the 
rules----
    Senator Roberts. None of it made the difference. I yield 
back, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator--let's 
see here. Where are we? Senator Lugar. Okay. Senator Boozman. 
All right. Well, given this, at this point we will thank both 
of you very much. We will continue to work with you and 
appreciate the opportunities, both formally and informally, as 
we have been certainly in constant communication with you both 
directly, but through staff.
    There is a lot of work left to be done. We look forward to 
working with you on it. Thank you very much.
    Mr. Gensler. Thank you again.
    Chairwoman Stabenow. We will ask our second panel to come 
forward. We will return to our five-minute rounds. We will do 
one five-minute round with our second panel.
    [Pause.]
    Chairwoman Stabenow. Well, good morning again, and we thank 
you for your patience and we very much appreciate each of you 
being here. So let me introduce our panel, and then as you 
know, we would like you to speak for up to five minutes. Of 
course, we welcome anything in writing that you would like to 
give the Committee as well, and then we will open to questions.
    So first, Mr. Robert Pickel. Mr. Pickel is the CEO of the 
International Swaps and Derivatives Association. Prior to his 
current position, Mr. Pickel was general counsel for ISDA. Mr. 
Pickel has been a highly visible figure in the ongoing 
regulatory discussions regarding over-the-counter derivatives 
and has a J.D. from New York University and completed his 
undergraduate work at Williams College. So welcome. Good to 
have you with us.
    Our next panelist is Larry Thompson. Mr. Thompson is 
managing director and general counsel for the Depository Trust 
and Clearing Corporation. Mr. Thompson is responsible for all 
legal and regulatory activities of the DTCC and its 
subsidiaries and he regularly interacts with government and 
regulatory agencies and issues impacting the company. Mr. 
Thompson earned his law degree at the University of California 
at Berkeley and obtained a B.A. degree from Yale University.
    Our next panelist is Dennis Kelleher. Mr. Kelleher has 
over--I think we are--it looks like we are a little out of 
order here on how we are introducing folks. But Mr. Kelleher 
has over three decades of experience in the public, private, 
political, charitable and non-profit sectors and has 
contributed four years as well of active duty to the United 
States Air Force and received a J.D. from Harvard Law School 
and undergraduate degree from Brandeis University. Welcome. 
Good to have you.
    Our final panelist is Thomas Erickson. Mr. Erickson is here 
on behalf of the Commodity Markets Council. Mr. Erickson is 
vice president of governmental affairs at Bunge North America. 
Prior to his current position, Mr. Erickson was previously 
appointed as a commissioner of the Commodities Futures Trading 
Commission. Mr. Erickson received his B.A. degree in 
government, international affairs from Augustana College and 
his J.D. from the University of South Dakota, South Dakota 
School of Law.
    So it appears as we introduced today, that we were not 
introducing in the order in which you are sitting, but we will 
go down the panel, I think, from left to right, our right, and 
ask each of you to speak in that order. So we welcome each of 
you, and Mr. Pickel, you are first.

   STATEMENT OF ROBERT PICKEL, CEO, INTERNATIONAL SWAPS AND 
                    DERIVATIVES ASSOCIATION

    Mr. Pickel. Thank you. Chairwoman Stabenow, Ranking Member 
Roberts, and members of the Committee, thank you for the 
opportunity to testify today. Based in the U.S., ISDA 
represents the full range of participants in the global OTC 
derivatives markets. The association squarely supports 
regulatory reform. We believe there has been significant 
progress in the past two years in building a safer, more 
transparent OTC derivatives market and a more robust financial 
system.
    First, OTC derivative market participants have continued to 
work in advance of the onset of this new regulatory framework 
toward the goals of reducing counterparty credit risks and 
increasing regulatory transparency. We note that currently, in 
advance of any legally required clearing, over 50 percent of 
the interest rate swaps market is centrally cleared.
    The volume of uncleared interest rate swaps has declined 40 
percent between 2007 and 2011. ISDA and market participants 
have also established trade repositories for the different OTC 
derivative asset classes. Trade repositories collect and 
maintain a database of OTC derivatives transactions and these 
databases are available to regulators at any time, as I believe 
you will hear shortly from DTCC. As noted, they can play an 
important role in improving regulatory transparency by 
providing an unprecedented level of market and firm-wide risk 
exposures to the appropriate supervisors and regulators.
    Second, U.S. policymakers over the past two years have made 
significant progress in defining and implementing the new 
regulatory framework. The scale and scope of this undertaking 
is considerable and within that context, it is clear that much 
has been achieved; even as much remains to be done.
    Third, progress has also been made on an international 
level in understanding the need for regulatory frameworks to be 
consistent and coordinated across jurisdictions. This is 
essential to ensure a level playing field for financial markets 
and financial institutions and to avoid regulatory arbitrage. 
Global markets require global coordination.
    While this progress is real, it is clear that in certain 
respects, the process of implementing the new regulatory 
framework has been problematic. It has, for example, taken 
longer than initially expected. Many rules and regulations have 
yet to be finalized. The interrelationship of Dodd-Frank-
related regulations needs to be considered and assessed to 
avoid contradictory rulemakings. Similarly, the set of Dodd-
Frank rules in the U.S. needs to be calibrated against similar 
frameworks in other jurisdictions.
    All of these issues are causing uncertainty in the 
financial markets. This uncertainty imposes both direct and 
indirect costs that have a real economic impact, and regardless 
of these costs, it is highly likely that the industry, market 
utilities, such as clearing houses and repositories and the 
regulators will be unable to fully implement many provisions of 
the law within the requisite time frame.
    It seems at this point fair to step back and ask how and 
where we could best facilitate regulatory implementation. ISDA 
and our members would suggest four concrete steps that could 
lead to the most progress in the shortest time frame with the 
fewest disruptions. First, the finalization and implementation 
of rulemakings should be prioritized to focus on those that are 
most systemically important, such as clearing and reporting.
    Second, the most systemically important rulemakings should 
be analyzed to ensure that their implementation is properly 
sequenced. Third, after that sequencing is completed, U.S. 
regulators should continue to work with their international 
counterparts to ensure consistency and substance and timing of 
the new regulations.
    The principles of restraint and regard for comity are vital 
in this context. Encouraging participation in U.S. markets by 
non-U.S. persons provides greater choice for U.S. parties, and 
appropriate treatment of U.S. participants in non-U.S. markets 
enables them to compete. Care must be taken to ensure the 
creation of a safe level playing field.
    Fourth, the agencies need to engage in a fulsome cost 
benefit analysis that considers the impact of the new framework 
on financial institutions, corporations, market liquidity and 
the economy. This is not just good policy; it is the law.
    ISDA and our members believe that such an approach is 
feasible and desirable. It would enable us to continue the 
important work that is being done toward our shared goal of 
reducing risk and increasing the stability of the OTC 
derivative markets. Thank you again for the opportunity to 
appear before the Committee, and I look forward to your 
questions.
    [The prepared statement of Mr. Pickel can be found on page 
114 in the appendix.]
    Chairwoman Stabenow. Thank you very much. Mr. Erickson.

  STATEMENT OF THOMAS ERICKSON, VICE PRESIDENT OF GOVERNMENT 
   AFFAIRS, BUNGE NORTH AMERICA, ON BEHALF OF THE COMMODITY 
                        MARKETS COUNCIL

    Mr. Erickson. Thank you. Chairwoman Stabenow, Ranking 
Member Roberts and members of the Committee, thank you for the 
invitation to appear before you today on the implementation of 
Dodd-Frank. My name is Tom Erickson, vice president for 
government and industry affairs for Bunge North America, and I 
am testifying today here on behalf of the Commodity Markets 
Council, or CMC.
    CMC is a trade association that brings together commodity 
exchanges and their industry counterparts. The activities of 
CMC members include the complete spectrum of commercial end 
users, the futures markets, including energy and agriculture. 
As a group and as individuals, we support open, competitive, 
competitive--competitive, transparent and well-regulated 
markets.
    While the financial crisis of 2008 had nothing to do with 
physical commodity markets, we recognize the need for the Dodd-
Frank Act and support its goals. The CMC members have 
approached the implementation of Dodd-Frank from the principle 
of promoting market integrity while holding fast to the primary 
functions of the market, price discovery and risk management.
    Through our comments to the various agencies, CMC has 
focused on those aspects of the proposed rules that in our view 
risk efficiency or function of the markets. In some cases, the 
new rules may affect liquidity, second guess hedging 
strategies, or present new challenges to maintaining global 
benchmarks in the United States. In all cases, however, the new 
rules will drive business decisions about how, where, whether 
and with whom to hedge price risks in physical commodity 
markets.
    My comments today summarize the ongoing concerns of CMC 
members as Dodd-Frank implementation begins to wind down. My 
prepared statement provides additional detail on these, and I 
ask that it be entered into the record.
    Congress for the first time created a statutory definition 
of bona fide hedge transactions in Dodd-Frank. The Commission 
instead has taken an approach to bona fide hedging that has 
given the regulatory industry at least five separate 
definitions of hedging. The clarity of the law is gone. It has 
been replaced with case by case reconsideration of the 
Commission.
    Inter-affiliate swaps have been used effectively over the 
years by many firms to manage corporate risk on an enterprise 
basis. While the Commission has recognized the need to 
distinguish these activities in some rules, we understand the 
agency is considering imposing margin, clearing, real time 
reporting and other requirements to these transactions. The 
result would impose substantial cost on the economy, on 
consumers, and on end users. We urge the Commission to 
reconsider any such action.
    With respect to recording and recordkeeping, the CFTC has 
proposed imposing unprecedented recordings and recordkeeping 
requirements across the broad swath of the cash grain 
marketplace to require all members of designated contract 
markets to capture and maintain extensive records of all 
communications related to cash market transactions.
    Dodd-Frank was intended to address concerns about systemic 
risks created by an unregulated over-the-counter market. The 
proposed direct regulation of their cash market seems a step 
too far. The position limits rule requires market participants 
to report daily on their cash market positions as they relate 
to hedges held in the market.
    We currently provide the Commission with snapshot data. 
What the Commission envisions, frankly, is impractical, where 
cash commodity transactions occur somewhere around the globe 
24/7, oftentimes in places lacking technology. In the end, the 
requirement holds commercial firms to a number rather than 
ensuring compliance with hedging rules.
    The final rule on position limits for futures and swaps 
required aggregation of positions between commonly-owned 
entities based solely on ownership and deleted a proposed 
exemption from aggregation for non-financial entities. CMC, 
along with the working group of commercial energy firms, 
submitted a petition to request changes to the final rule. We 
appreciated the CFTC's response, which advanced a proposed rule 
to include control over trading as a factor in determining 
aggregation.
    Control of trading activities should be the determining 
factor for aggregation, not the ownership interest, because the 
purpose of the aggregation provision is to ensure that position 
limits are not circumvented by multiple entities trading in 
concert. If there is not common control, trading in concert 
should not occur.
    Possibly the most important rule regulators have approved 
in the derivatives areas is a joint rule between the CFTC and 
SEC which defines who will be regulated as a swap dealer. 
Despite early assurances that these rules likely would require 
the registration of the largest 15 to 20 dealers, the final 
rules are estimated to require the registration of over 125 
firms, including diversified businesses in the energy and 
agricultural sector who buy and sell commodities and who have 
been subject to CFTC oversight for their futures market 
activities for decades.
    Through the implementation of Dodd-Frank, CMC has been a 
consistent critic of the sequencing of the rules relating to 
swaps. The reason is simple, commercial companies who buy and 
sell physical commodities never envisioned that their use of 
derivatives might compel registration as a dealer. Therefore, 
the definitions were the most important element to the 
rulemaking process to begin assessing the registration risk or 
opportunity. In fact, even with last week's final rulemaking of 
the swap, the physical commodity market still has no final 
clarity.
    The Commission has asked for additional comment on trade 
options and volumetric optionality. Further, the end user 
community does not yet know to the extent to which capital and 
margin requirements will attach to their activities, or how to 
correlate swap transactions into futures equivalence. In the 
end, knowing the mechanics of registration are less important 
than knowing the definitions.
    For these reasons, CMC members are struggling. Commercial 
agriculture and energy firms are now only able to begin to 
assess what activities may trigger registration and the 
consequent regulatory requirements and structures and systems 
to meet exponentially larger requirements.
    In sum, we understand and respect the difficult challenge 
the Commission has had in implementing Dodd-Frank. That said, 
CMC believes the Commission's rules relating to physical 
commodity markets and their primary commercial users routinely 
fail to adequately consider the impacts to the underlying 
functions of the markets, price discovery and risk management. 
The objective should not be to discourage hedging, but rather 
to create markets that respect those functions. Thank you.
    [The prepared statement of Mr. Erickson can be found on 
page 53 in the appendix.]
    Chairwoman Stabenow. Thank you very much. Mr. Thompson.

  STATEMENT OF LARRY THOMPSON, MANAGING DIRECTOR AND GENERAL 
      COUNSEL, THE DEPOSITORY TRUST & CLEARING CORPORATION

    Mr. Thompson. Thank you, Chairwoman Stabenow, Ranking 
Member Roberts and the members of the Committee. I am Larry 
Thompson, general counsel of The Depository Trust & Clearing 
Corporation, a participant-owned and governed cooperative that 
serves as a critical financial market utility for the U.S. and 
global financial markets.
    Thank you for the opportunity to testify on Dodd-Frank, the 
role of swap data repositories and legal entity identifiers in 
a new regulatory regime. My comments will initially focus on 
voluntary trade reporting undertaken by market participants and 
then highlight the new Dodd-Frank rules which mirror the global 
G-20 mandates.
    Consistent with the pending Dodd-Frank mandate, global 
regulators and the public have had access to data on both 
cleared and uncleared swap transactions for several years now 
as a result of voluntary reporting by financial institutions. 
The availability and the accessibility of this information has 
helped bring greater transparency to what was an opaque market. 
The next step involves regulators acquiring the analytical 
tools to be able to red flag excessive risk taking so action 
can be taken to prevent or mitigate systemic shocks to the 
financial system.
    By way of background, comprehensive global market 
information on credit default swaps is published weekly by DTCC 
and is made available at no cost to regulators and to the 
public on our public website. This robust data allows parties 
to assess risks using timely, comprehensive information. DTCC 
launched a regulatory portal in January 2011 to give regulators 
efficient access to more granular data utilizing a set of 
principles that permitted global data sharing. Today, over 40 
regulators use the portal, including regulators from the U.S., 
Europe, Asia and other regions.
    DTCC is prepared to meet Dodd-Frank's swap data reporting 
requirements. Over the past two years, DTCC has made 
substantial investments to design, development and implement 
systems to support swap data reporting for all five derivative 
asset classes-credit, equity, commodities, interest rate and 
foreign exchange.
    Two DTCC subsidiaries have applied for registration with 
the Commodities Futures Trading Commission to operate as swap 
data repositories. These new repositories are undergoing 
extensive user testing at this time and will be fully 
operational in August for interest rate and credit default 
swaps well in advance of the September/October reporting 
deadline as outlined by Chairman Gensler this morning.
    As final decisions for establishing U.S. swap data 
repositories and global trade repositories are reached, 
regulators globally are concerned over the potential 
fragmentation of data across multiple repositories worldwide. 
This is best exemplified by the indemnification provision in 
Dodd-Frank.
    It is critical during the implementation of the new 
reporting mandates that one, the reported data is complete and 
accurate, and two, a system is developed that ensures data 
aggregation. Regulators should allow market forces to converge 
to support centralization. DTCC created a repository for credit 
derivatives in response to market forces and with encouragement 
from regulators. If new systems do not ensure aggregation, data 
could fragment, inevitably resulting in misleading reporting of 
exposures.
    One final thought. DTCC is committed to developing 
solutions to ensure regulators have complete and timely 
position and transaction information across all asset classes. 
One major concern for the Committee's consideration is that the 
public sector is not currently in a position to allocate scarce 
resources and the extensive time needed to develop data 
collection and reference data efforts like the Legal Entity 
Identifier Initiative. The financial services industry should 
shoulder these costs, which would free up the public sector to 
make investments in developing critical analytical tools and 
perform the required oversight.
    In conclusion, significant resources have been invested in 
the Dodd-Frank legislative and rulemaking process. Industry 
participants must continue to work with regulators and Congress 
to ensure that the rules are adopted and implemented 
consistently with the statute and in a manner that supports the 
red flagging and mitigation of risks to the financial system. 
Ensuring access to comprehensive aggregated and timely data, 
along with regulators having the tools to analyze this 
information, are vital to the success of all of our efforts.
    Thank you, and I welcome your questions.
    [The prepared statement of Mr. Thompson can be found on 
page 122 in the appendix.]
    Chairwoman Stabenow. Thank you very much. Mr. Kelleher, 
welcome.

STATEMENT OF DENNIS KELLEHER, PRESIDENT AND CEO, BETTER MARKETS

    Mr. Kelleher. Good morning, Chairman Stabenow, Ranking 
Member Roberts and the members of the Committee. Thank you for 
the invitation to Better Markets to testify today. I am the 
head of Better Markets, which is a non-profit, non-partisan 
organization that promotes the public interest in the domestic 
and global financial markets.
    I have detailed my background and what Better Markets does 
in my written testimony. That is also available on our website, 
BetterMarkets.com, and I will not repeat that here. But I would 
like to say that it is a privilege to return to the Senate to 
testify after having been a staffer for three senators over the 
years. Most recently, until September of 2010, I served as 
chief counsel and senior leadership advisor to the former 
chairman of the Democratic Policy Committee, Byron Dorgan, and 
spent many long days and nights on the Senate floor with all of 
you and your colleagues. It was an honor to do so and it is an 
honor to be here.
    Let me begin by saying, while we are here today because the 
financial reform law was passed two years ago, we also need to 
remember why that law is necessary and what happened to our 
country that caused us to need it. As we sit here today, tens 
of millions of good, hard-working Americans are suffering 
through the worst economy since the Great Depression of the 
1930s. That is a direct result of the Wall Street-created 
financial collapse of 2008, which was the worst financial 
crisis since the stock market crash of 1929.
    Tonight, many of our neighbors will sit at their dinner 
table. They will look their children in the eye and they are 
going to worry about their future. Twenty-one million Americans 
today cannot find full-time work. Eleven million Americans 
today are paying more on their mortgages than the value of 
their homes. Five million Americans have had to move out of 
their homes due to foreclosure and millions more are packing as 
we speak.
    The American family's net worth has plummeted almost 40 
percent in just three years, wiping out almost two decades of 
hard work and prosperity. None of this happened because of the 
Dodd-Frank financial reform law passed two years ago. None of 
this happened because of rules meant to implement the financial 
reform law. None of this happened because regulators are trying 
to make Wall Street follow the law like everybody else in our 
country.
    That economic disaster happened as a result of Wall Street 
and the financial industry being deregulated in the nineties 
and virtually unregulated starting in 2000. That was after 70 
years of unprecedented degree of government regulation of Wall 
Street and the U.S. capital markets as a result of the crash of 
'29 and the Great Depression.
    Remember, during those 70 years of the heaviest regulation 
in history, our country prospered. We built the largest and 
most broad-based middle class in the history of the world, and 
Wall Street, our financial industry, our non-financial 
businesses, our farmers and our economy all thrived. 
Deregulation of the only industry in the country that threatens 
our financial system and our entire economy changed all that, 
and that is why the financial reform law was passed two years 
ago.
    As is well known, derivatives in the over-the-counter 
markets were at the heart of causing and spreading the 
financial crisis. That is why title VII is vital not only to 
effective financial reform, but also to the protection of the 
American people, taxpayers, our treasury, our financial system 
and our entire economy.
    I have detailed this and other key topics, like CFTC 
funding, the Volcker Rule, end users, cross-border regulation 
and others in my written testimony, but will mention only one 
key issue here. For more than 100 years, the industry has 
complained non-stop about regulation and cost, but history 
proves again and again that these complaints are without merit, 
that the industry has adapted and that our country and that 
very industry has prospered and thrived.
    The latest weapon being used here in Congress in the 
regulatory agencies and in court, by ISDA, the Chamber of 
Commerce and others, is to gut the financial reform law under 
the guise of the innocent-sounding concept of cost benefit 
analysis. It seems sensible and appealing. After all, assessing 
and weighing the cost and benefits of taking an action appears 
on the surface to be reasonable. Do not be fooled.
    In the context of regulation generally and financial 
regulation in particular, that thinking is simply wrong. One of 
the many flaws of this type of cost benefit analysis is that it 
elevates the industry's easy-to-see cost over the incalculable 
but often hard to quantify benefit of protecting the American 
people from another financial collapse and economic crisis.
    For example, how do you quantify the benefit of 
transparency, preventing fraud or investor confidence, whether 
it is instilled or lost, as every member of this Committee 
alluded to early? In truth, today's demands for what can only 
be viewed as an extreme version of cost benefit analysis seek 
the same outcome as the industry's past demands for 
deregulation, different words seeking the same thing, which 
will lead to the same result, an extremely costly disaster for 
the American people, its families and its farmers.
    Cost benefit analysis sounds good in theory, but it is 
often a catastrophe in reality and in its detail. All these 
issues are elaborated on in my written testimony, and I would 
be happy to discuss them further in questions. Thank you.
    [The prepared statement of Mr. Kelleher can be found on 
page 87 in the appendix.]
    Chairwoman Stabenow. Thank you very much. Great to have you 
back in the Senate on the other side of the table, so it is 
good to have you back.
    Mr. Kelleher. Thank you.
    Chairwoman Stabenow. Let me ask first of all to each of 
you, once Wall Street reform is fully implemented, it obviously 
is critical to get it implemented in terms of reducing risk and 
financial markets, increasing transparency and addressing all 
of the things that have been said in terms of going forward for 
consumers and families and workers and businesses and so on.
    But as the SEC and CFTC just finished the product and 
entity definition rules, the clock has started to run on 
compliance, and I would like each of you to, from your 
perspective, indicate if you believe the market participants 
are ready to comply, and if not, why not? Mr. Pickel.
    Mr. Pickel. I think it really depends on which market 
participants we are talking about. The larger dealers, the ones 
that frankly have always assumed they would be swap dealers, 
have taken significant steps. I mentioned the clearing that has 
already been done, but there are others, such as the commodity 
firms, who are facing the prospect of being swap dealers who 
would really have to start almost from scratch to put in place 
all those--to satisfy all those regulatory requirements.
    We know that some of the larger asset management firms are 
facing the need to educate their customers, which is a very 
large base of customers, to get them to sign appropriate 
documentation, which is still in process, not finalized yet, 
even on an industry level. So there are a lot of challenges 
there.
    I think another thing that we face is that there are--we 
focused on this 60 days, but actually there are a lot of 
different aspects of the rules that come into effect at various 
points in time over the next six months, and we are facing the 
prospect of effectively having to amend documentation at each 
stage along the way.
    So one of the things we are engaged in with the Commission 
is to talk about trying to get to some common date where it 
would be kind of a big bang where everything comes into effect 
on that day and we would all plan to that date, and I think we 
can work together with the Commission to achieve. But that 
would be sometime further down the road.
    Chairwoman Stabenow. Anyone else want to--Mr. Erickson.
    Mr. Erickson. I would echo the comments of Mr. Pickel next 
to me. With respect to the commercial end user community, the 
issue, as I brought to the table, was really with the 
sequencing. Because for the 15 or 20 largest firms who did deal 
in swaps, they knew they were swaps dealers, the sequencing 
probably did not matter so much. But for companies who may get 
caught up in the swap and dealer definitions, the definitions 
really are the only way you can make the business decision as 
to whether you are going to be a swap dealer or not, or whether 
you are captured in those regulations, and then work back to 
decide how that is going to affect you.
    So those costs and those decisions are really only now just 
starting to reveal themselves to commercial firms. With respect 
to other kinds of reporting, there may be also some issues with 
respect to some of the reporting on the position limits rules 
from a bona fide hedge position perspective, because commercial 
firms are going to be required to globally roll up all of their 
cash positions that they have in places that may not have the 
benefit of technology.
    Chairwoman Stabenow. Mr. Thompson, certainly from your 
standpoint, technology is where you have been focused. Do you 
think from your perspective that folks will be ready?
    Mr. Thompson. We believe so, Madam Chairwoman. We have been 
working very vigorously with the industry for the last two 
years to get ready to meet trace repoting mandates on a global 
basis. We have over 28 working groups with the industry that we 
are working with. We are also working with all of the 
regulators on a global basis--for example, the FSA, the JFSA, 
the MAS in Singapore--to make certain that all of the rules are 
going to be phased in a manner that makes sense. We spent 
hundreds of millions of dollars at DTCC, and we know the 
industry has spent more than that in preparing for the 
implementation of Dodd-Frank. Thank you.
    Chairwoman Stabenow. Thank you. Before my time is up, Mr. 
Kelleher, I am going to ask you a different question. We are 
focused on important reforms in Dodd-Frank, but from your 
perspective, what else should we be paying attention to as we 
look to protect the economy and strengthen these markets?
    Mr. Kelleher. There are really, I would say, two issues. 
One has been alluded to and is a concern of every member of 
this Committee and frankly, the panelists, and that is the 
regular enforcement of the law in the commodity markets to 
protect investors, farmers, families, and the people 
downstream. All of them benefit from this.
    From Peregrine to MF Global, all the way through, we do 
have to look hard at the self-regulatory organization model and 
whether or not they are resourced properly and then whether or 
not the CFTC and the SEC are resourced properly so that they 
can monitor the frontline regulators and the SROs. That is 
critically important or we are going to keep seeing the 
Peregrines of the world happen and we are going to keep seeing 
more victims in families and farmers that are just 
unacceptable.
    The second issue that really needs to be focused on that 
has not gotten much attention, that we have tried to raise in 
15 or so comment letters to CFTC, is high-frequency trading. 
This is, currently, the predatory conduct associated with our 
equity markets and is causing the confidence in those markets 
to drop to one of the lowest ebbs ever. That type of trading 
and predatory conduct is going to move into the new market 
infrastructure that is created in the commodity markets.
    You all are going to be here, mark my words, in future 
years trying to figure out how to deal with those computer 
predators in the same way in the past we tried to deal with the 
Peregrines and the people predators of the past. The computer 
predators of the future are not getting the attention needed. 
Now is the perfect time to start thinking about that. As you 
put this market infrastructure in place you have the 
opportunity to address that on the front end instead of having 
to address it after the fact when you have victims across the 
land.
    Chairwoman Stabenow. Thank you very much. Senator Roberts.
    Senator Roberts. Mr. Erickson, I see from your testimony 
that you share my concern that the CFTC process and rule 
sequencing could get us into a situation where market integrity 
or market function is compromised. I think you stated, quote 
the length and complexity of many of the final rules, combined 
with the short compliance timelines, are making the compliance 
process nearly impossible.
    Will your firm be able to comply by the end of CFTC's 60-
day clock? That is about October 1.
    Mr. Erickson. Senator, speaking more broadly on behalf of 
the membership within the CMC, that is a point of concern for a 
number of the companies, the commercial companies, whether they 
will be able to be in compliance within 60 days on those two 
items. One is swap dealer registration and the other is simply 
being able to collect all the data globally from the position 
limits rules.
    Senator Roberts. Do you have any idea of the cost of 
compliance for your firm, other firms in the coalition you 
represent?
    Mr. Erickson. Well, I think that has been one of the 
struggles, Senator, frankly, is developing an actual number has 
been very difficult, in part because of the sequencing. 
Because----
    Senator Roberts. Right.
    Mr. Erickson. --when you are looking at no definitions, you 
really do not know what the costs are until you can roll that 
up.
    Senator Roberts. I think that is an obvious observation. 
What about the margin, the capital requirements for those who 
will be newly defined as swap dealers; will that designation 
cost these firms? What will that designation cost these firms?
    Mr. Erickson. Well, for----
    Senator Roberts. Again, we do not know. Will that 
designation cause your firm or other CMC members to stop 
trading swaps? My point is, if so, who will end up conducting 
this business, just the big banks? That really worries me.
    Mr. Erickson. We see a real risk, especially in the smaller 
more esoteric markets, you know, the more thinly traded 
physical commodity markets where that is really the only 
hedging tool available.
    Senator Roberts. Mr. Pickel, thank you for your four major 
recommendations, sequencing, getting something worked out with 
the international responsibilities and then the cost benefit 
testimony. Can you give me a good example as to why the SEC and 
the CFTC has two very different plans for implementing the 
cross-border or international component of the Dodd-Frank?
    Mr. Pickel. Well, I believe Chairman Gensler did allude to 
that provision in the law that he is pointing to, the one about 
significant and direct effect on the U.S. commerce. What I 
think, and certainly Congress should look at more generally, is 
what the implications of the application of those, whether it 
is the SEC or the CFTC, not just on that issue, but also on the 
availability of products to U.S. users of derivatives.
    The fact is that while the five large U.S. institutions are 
significant providers, many corporations will turn to British, 
Swiss, German, French banks also to get quotes and to do 
business. Also this question of competitiveness of U.S. 
institutions overseas is a significant concern, I think, for 
the U.S. economy and for the Congress.
    Then I think there is some risk, depending on where this 
comes out, of retaliation, quote/unquote, from other 
regulations, taking a similar stance which will, I think, harm 
U.S. companies, but also harm this market, which works around 
the world and requires that global coordination.
    Senator Roberts. I appreciate that. Mr. Thompson, can you 
tell me more about the Depository Trust Clearing Corporation's 
global effort to implement, which you call the ostensible 
business reporting language system; are you ready to go? I 
think you have indicated that you are ready to go.
    Mr. Thompson. We are ready to go, Senator.
    Senator Roberts. What do you need from the CFTC or SEC at 
this point?
    Mr. Thompson. Well, we are working collaboratively with the 
CFTC to secure a designation to operate swap data repositories 
in the U.S. The CFTC is the first out of the box on a global 
basis with the legal entity identifier, and it is our 
understanding that they have gone through a process to 
determine who should be the designee.
    Senator Roberts. Well, who else is doing what you are 
doing?
    Mr. Thompson. Well, we are working in a partnership with 
SWIFT. We do not know of any other companies right now that 
would have the international and global capabilities to meet 
the needs of regulators.
    Senator Roberts. So in your view we do have the 
infrastructure?
    Mr. Thompson. DTCC has the infrastructure in place.
    Senator Roberts. How clued in are our regulators regarding 
the real world of being responsive to industry questions so 
they can meet the deadlines requiring them to be able to 
connect to the data repositories?
    Mr. Thompson. Well, we have been, as I mentioned earlier, 
in user testing with participants. We have also sat down with 
all of the regulators to brief them on our readiness to meet 
the upcoming deadline, and we have spoken extensively to global 
regulators as well. So they are all fully aware of our 
readiness.
    Senator Roberts. So quite a few folks in the U.S. 
Government do have access to this data?
    Mr. Thompson. Yes.
    Senator Roberts. Do our regulators have the technology and 
the analytics they need to study the data you are collecting? 
Are they even looking at the data that you are collecting?
    Mr. Thompson. Well, that was one of the points that I 
addressed in my testimony. I think we all need to develop 
better analytical tools. I think the fact of the matter is we 
have now built the infrastructure to collect the data. The 
issue for the regulators is: how do you build the right 
analytical tools going forward to turn that data into useful 
information?
    Senator Roberts. I appreciate that. Thank you.
    Chairwoman Stabenow. Thank you very much. Senator Lugar.
    Senator Lugar. Thank you, Madam Chairman. Mr. Kelleher 
raised in his testimony the new problem of high-frequency 
trading. Any of the other of you have comments about how this 
might affect your organizations, or is this problem, as you 
foresee it, in the regulations? Mr. Pickel, you have----
    Mr. Pickel. We do not, in our business currently, see that. 
The number of trades done per day in the OTC derivative 
business, whether it is interest rates or credit, is a very 
small number as compared to the exchange-traded activity, 
whether it is futures or stock exchange. So we do not see that 
as an issue on any near term horizon within the OTC derivatives 
business.
    Senator Lugar. Mr. Erickson, at the small firms, is this a 
problem?
    Mr. Erickson. You know, personally, I just do not know that 
we know enough about it yet. Certainly these are all 
developments that have impact on markets. It is similar to what 
we saw with the advent and emergence of index funds some years 
ago. A lot of this is new liquidity. It is different liquidity 
and the market needs to find a way to respond and the 
regulators need to find a way to adapt.
    Senator Lugar. Mr. Thompson?
    Mr. Thompson. What I would say, Senator, is I do not think 
we have enough information at this point. I think Mr. Pickel, 
to some extent, got it correct. The swaps markets are not as 
heavily traded in as the equity markets where you have high-
frequency trading.
    However, we have the data in the swap data repositories for 
the regulators to analyze. This should help them better 
understand market structure issues going forward and to come to 
a conclusion as to whether or not they foresee any kind of high 
frequency trading. Thank you.
    Senator Lugar. I note that there is at least some tension 
in the testimony between Mr. Kelleher, perhaps Mr. Erickson, in 
the whole idea of cost benefit analysis. Mr. Erickson, at least 
you point out, looking at it from the standpoint of your 
constituents, and some are small, that this is a costly 
procedure.
    At the same time, Mr. Kelleher's point about the cost 
benefit analysis being an argument against proper regulation 
makes a lot of sense. How do you respond to what you heard from 
him?
    Mr. Erickson. Well, I would put the white hat on. I think 
that there are people, I am sure, who would want to use 
arguments in a way to try and defeat the overarching purposes 
of regulation. But frankly, there are a lot of people that are 
involved in this business day in and day out that need these 
markets to work well, and for those people, they are looking at 
these costs and benefits, and it goes to the heart of what they 
do. It is their ability to manage price risk.
    These markets need to perform, and that is the perspective 
that our folks bring to that cost benefit analysis.
    Senator Lugar. I am just struck with the fact that the CFTC 
or the SEC or others are faced with such a myriad of different 
kinds of businesses and different subjects that are being 
regulated, that this is very difficult to draw up rules that 
are likely to have a cosmic effect without having particular 
difficulties. Yet the need to think about this is apparent.
    I note, as you do, just anecdotally people suggesting that 
you only have about a half hours worth of work to do if you are 
a trader in the morning. Perhaps this is, as you say, much more 
with the financial markets. But you got your computer going and 
you can make a lot of trades fast and go off and play golf, or 
whatever you want to do.
    This is sort of the nature of technology. At the same time 
that people are sitting around the table at CFTC attempting to 
rule make practically, and that is the value of this panel, the 
wide scope of small to the large and the medium in different 
sorts of ways, and yet the need to sort of contain this.
    I have a feeling that smart guys and gals are still going 
to gain the system, are going to try to find out after the 
rules are written where the gaps are in this situation. 
Hopefully all of us will be bright enough either as proprietors 
and recognize--or as regulators, to stop the deluge before we 
have yet another story that somebody was brighter than the 
system and gouge the public.
    I am just curious again from the standpoint of the small--
are you confident that the fraud and abuse, at least with the 
small people, can be contained, or is there danger here of 
something out of the billion dollar significance, but something 
that might be very detrimental to farmers and ranchers in a 
particular state?
    Mr. Erickson. Senator, you have made many great 
observations about the way these people respond. I think I go 
back to the biggest challenge, I think, from the commercial 
perspective and the small participants has been the sequencing 
of rules, because nobody knew whether they were going to be in 
or out. So the cost of actually looking at what systems will I 
need to build to support something I may never have to use, is 
just not something people routinely go forward.
    So the regulators really do not get quality information 
from our industry about what the costs really will be for some 
of their activities. But as for fraud, the problems we are 
seeing in those cases it really comes down to the sad truth 
that there are people who will lie, cheat and steal, and that 
is one of the things you are trying to protect against.
    Senator Lugar. I thank you each for your testimony. Thank 
you, Madam Chairman.
    Chairwoman Stabenow. Thank you very much. Thank you for 
coming today and we appreciate your input. There is still a lot 
of work to be done. I think overall, while we have been 
thoughtful moving through this process to make sure that there 
was input and the ability to move forward and implement 
effectively sequencing, timing, there is a number of issues. It 
is also clear that if we are going to have certainty that we 
need to get this done.
    So I think from this perspective, certainly my perspective 
and the Committee, it is now time to make sure that in a 
thoughtful way this moves forward to be able to get done so 
that there is the certainty--so that the industry can do what 
it needs to do to be able to comply, and those that are not 
covered will know that.
    But we certainly need to have certainty in the marketplace, 
I think, to be able to move forward and ultimately to protect 
consumers. So thank you very much.
    [Whereupon, at 12:31 p.m., the hearing was adjourned.]
      
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