[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]







 EXAMINING LEGISLATIVE IMPROVEMENTS TO TITLE VII OF THE DODD-FRANK ACT

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2013

                               __________

                            Serial No. 113-3



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          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov


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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              DAVID SCOTT, Georgia
MIKE ROGERS, Alabama                 JIM COSTA, California
K. MICHAEL CONAWAY, Texas            TIMOTHY J. WALZ, Minnesota
GLENN THOMPSON, Pennsylvania         KURT SCHRADER, Oregon
BOB GIBBS, Ohio                      MARCIA L. FUDGE, Ohio
AUSTIN SCOTT, Georgia                JAMES P. McGOVERN, Massachusetts
SCOTT R. TIPTON, Colorado            SUZAN K. DelBENE, Washington
ERIC A. ``RICK'' CRAWFORD, Arkansas  GLORIA NEGRETE McLEOD, California
MARTHA ROBY, Alabama                 FILEMON VELA, Texas
SCOTT DesJARLAIS, Tennessee          MICHELLE LUJAN GRISHAM, New Mexico
CHRISTOPHER P. GIBSON, New York      ANN M. KUSTER, New Hampshire
VICKY HARTZLER, Missouri             RICHARD M. NOLAN, Minnesota
REID J. RIBBLE, Wisconsin            PETE P. GALLEGO, Texas
KRISTI L. NOEM, South Dakota         WILLIAM L. ENYART, Illinois
DAN BENISHEK, Michigan               JUAN VARGAS, California
JEFF DENHAM, California              CHERI BUSTOS, Illinois
STEPHEN LEE FINCHER, Tennessee       SEAN PATRICK MALONEY, New York
DOUG LaMALFA, California             JOE COURTNEY, Connecticut
RICHARD HUDSON, North Carolina       JOHN GARAMENDI, California
RODNEY DAVIS, Illinois
CHRIS COLLINS, New York
TED S. YOHO, Florida

                                 ______

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                  (ii)













                             C O N T E N T S

                              ----------                              
                                                                   Page
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, prepared statement......................................    40
Fudge, Hon. Marcia L., a Representative in Congress from Ohio, 
  prepared statement.............................................    41
Hudson, Hon. Richard, a Representative in Congress from North 
  Carolina, submitted letters....................................   117
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     1
    Prepared statement...........................................     2
    Submitted legislation........................................     4
    Submitted letters............................................   115
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................    39
    Prepared statement...........................................    40

                               Witnesses

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading 
  Commission, Washington, D.C....................................    42
    Prepared statement...........................................    43
    Submitted questions..........................................   122
Bentsen, Jr., Hon. Kenneth E., Acting President and Chief 
  Executive Officer, Securities Industry and Financial Markets 
  Association, Washington, D.C...................................    72
    Prepared statement...........................................    74
    Submitted question...........................................   124
Colby, James E., Assistant Treasurer, Honeywell International 
  Inc., Morristown, NJ...........................................    78
    Prepared statement...........................................    80
    Submitted questions..........................................   125
Naulty, Terrance P., General Manager and Chief Executive Officer, 
  Owensboro Municipal Utilities; Member, American Public Power 
  Association, Owensboro, KY.....................................    82
    Prepared statement...........................................    83
    Submitted questions..........................................   125
Thompson, Larry E., Managing Director and General Counsel, The 
  Depository Trust and Clearing Corporation, New York, NY........    88
    Prepared statement...........................................    90
Hollein, C.T.P., Marie N., President and Chief Executive Officer, 
  Financial Executives International and Financial Executives 
  Research Foundation, Washington, D.C.; on behalf of Coalition 
  for Derivatives End-Users......................................    94
    Prepared statement...........................................    95
    Submitted questions..........................................   126
Turbeville, Wallace C., Senior Fellow, Demos, New York, NY; on 
  behalf of Americans for Financial Reform.......................    97
    Prepared statement...........................................    98
 
EXAMINING LEGISLATIVE IMPROVEMENTS TO TITLE VII OF THE DODD-FRANK 
  ACT

    THURSDAY, MARCH 14, 2013
        House of Representatives,
          Committee on Agriculture,
            Washington, D.C.
The Committee met, pursuant to call, at 10:00 a.m., in Room 1300 
  of the Longworth House Office Building, Hon. Frank D. Lucas 
  [Chairman of the Committee] presiding..........................
Members present: Representatives Lucas, Neugebauer, Conaway, 
  Thompson, Austin Scott of Georgia, Tipton, Crawford, 
  DesJarlais, Gibson, Hartzler, Noem, Benishek, Denham, Fincher, 
  LaMalfa, Hudson, Davis, Collins, Yoho, Peterson, David Scott of 
  Georgia, Walz, Schrader, McGovern, DelBene, Negrete McLeod, 
  Vela, Nolan, Gallego, Enyart, Vargas, Bustos, Maloney, and 
  Courtney.......................................................
Staff present: Debbie Smith, Jason Goggins, John Porter, Josh 
  Mathis, Kevin Kramp, Lauren Sturgeon, Matt Schertz, Nicole 
  Scott, Suzanne Watson, Tamara Hinton, Anne Simmons, C. Clark 
  Ogilvie, Liz Friedlander, John Konya, and Caleb Crosswhite.....
                OPENING STATEMENT OF HON. FRANK D. LUCAS, A 
                  REPRESENTATIVE IN CONGRESS FROM OKLAHOMA
The Chairman. This hearing of the Committee on Agriculture to 
  examine legislative improvements to Title VII of the Dodd-Frank 
  Act will come to order. Thank you for being here today.........
In a way we have already had this hearing during the last 
  Congress. In fact, we held more than a dozen hearings on Dodd-
  Frank Act during the last Congress with dozens of witnesses, 
  and we have discussed all of the bills or topics that are on 
  the agenda today during those past hearings....................
Unfortunately, the reason we are still talking about the very 
  same issues is because the same concerns still exist with parts 
  of Dodd-Frank. We stand to harm significant portions of our 
  economy if these issues are not addressed in legislative fixes.
Since the start of 2011, the feedback we have heard all across 
  the country has been fairly consistent; farmers, ranchers, 
  financial firms, main street businesses are worried about some 
  of the unintended consequences of Dodd-Frank rules. We have 
  heard from public power companies that might not be able to 
  hedge against volatile energy prices because their 
  counterparties are walking away. As a result, energy prices 
  could rise for millions of Americans, an unacceptable result of 
  what was certainly never contemplated when Dodd-Frank was 
  written to reform our financial system.........................
And we have heard from manufacturers who employ hundreds of 
  thousands of Americans that they will have to alter their 
  business models because they may be required to post margin on 
  important risk management trades or on their very own internal 
  transactions. It boils down to this. Some of these regulations 
  could make using derivatives so expensive that businesses will 
  be forced to stop using them to hedge against risk. That 
  increases costs for consumers and reduces stability in the 
  marketplace. This is completely contrary to the intent of the 
  original Dodd-Frank legislation................................
Today we will review legislation that is balanced, that our 
  balanced proposals that ensure that legislation is implemented 
  in the manner that Congress intended or provides a technical 
  fix to ensure that Dodd-Frank does not interrupt the markets or 
  harm the economy. It is good to note that this Committee heard 
  from top regulators from Japan and the European Union just last 
  December, who warned that without better coordination between 
  the CFTC and international regulators there will be global 
  fragmentation of the derivatives markets. That cannot be 
  allowed to happen..............................................
One of today's bills, a discussion draft, will directly address 
  that issue in a commonsense manner that Dodd-Frank should have 
  already included. It is very important to note that every 
  single bill we will discuss here today is bipartisan with 
  Republicans and Democrats both on the Agriculture Committee and 
  the Financial Services Committee supporting them. They are 
  bipartisan because they contain commonsense tweaks to ensure 
  that Dodd-Frank does not unnecessarily burden our agricultural 
  producers, job creators, local utilities, financial 
  institutions, and small businesses.............................
Again, all of these bills are intended to restore the balance 
  that I believe can exist between sound regulation and a healthy 
  economy. I look forward to advancing all of them in a 
  bipartisan fashion.............................................
[The prepared statement of Mr. Lucas follows:]...................

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Thank you all for being here today.
    In a way, we have already had this hearing during the last 
Congress. In fact, we held more than a dozen hearings on the Dodd-Frank 
Act during the last Congress with dozens of witnesses. And, we have 
discussed all of the bills or topics that are on our agenda today 
during past hearings.
    Unfortunately, the reason we are still talking about the very same 
issues is because the same concerns still exist with parts of Dodd-
Frank. We stand to harm significant portions of our economy if these 
issues are not addressed with legislative fixes.
    Since the start of 2011, the feedback we have heard all across the 
country has been fairly consistent. Farmers, ranchers, financial firms, 
and Main Street businesses are worried about the unintended 
consequences of Dodd-Frank rules.
    We've heard from public power companies that might not be able to 
hedge against volatile energy prices because their counterparties are 
walking away. As a result, energy prices could rise for millions of 
Americans--an unacceptable result that was certainly never contemplated 
when Dodd-Frank was written to reform our financial system.
    And we've heard from manufacturers--who employ hundreds of 
thousands of Americans--that that they will have to alter their 
business models because they may be required to post margin on 
important risk management trades or on their very own internal 
transactions.
    It boils down to this: some of these regulations could make using 
derivatives so expensive that businesses will be forced to stop using 
them to hedge against risk.
    That increases costs for consumers and reduces stability in the 
marketplace. That is completely contrary to the intent of the original 
Dodd-Frank legislation.
    Today, we will review legislation that are balanced proposals that 
ensure the legislation is implemented in the manner Congress intended 
or provides a technical fix to ensure Dodd-Frank does not disrupt 
markets or harm the economy.
    It is good to note that this Committee heard from top regulators 
from Japan and the European Union just last December who warned that 
without better coordination between the CFTC and international 
regulators, there will be global fragmentation of the derivatives 
markets. That cannot be allowed to happen. One of today's bills--a 
discussion draft--will directly address that issue in a common-sense 
manner that Dodd-Frank should have already included.
    It is very important to note that every single bill we will discuss 
today is bipartisan with Republicans and Democrats both on the 
Agriculture Committee and the Financial Services Committee supporting 
them. They are bipartisan because they contain common-sense tweaks to 
ensure that Dodd-Frank does not unnecessarily burden our agricultural 
producers, job-creators, local utilities, financial institutions, and 
small businesses.
    Again, all of these bills are intended to restore the balance that 
I believe can exist between sound regulation and a healthy economy.
    I look forward to advancing all of them in a bipartisan fashion.
    I now will turn to the Ranking Member to make his opening 
statement.
                              Legislation
H.R. 634, Business Risk Mitigation and Price Stabilization Act of 2013


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H.R. 677, Inter-Affiliate Swap Clarification Act



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H.R. 742, Swap Data Repository and Clearinghouse Indemnification 
        Correction Act of 2013



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H.R. 992, Swaps Regulatory Improvement Act



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H.R. 1003, To improve consideration by the Commodity Futures Trading 
        Commission of the costs and benefits of its regulations and 
        orders.


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H.R. 1038, Public Power Risk Management Act of 2013




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[Discussion Draft] H.R. __, Swap Jurisdiction Certainty Act *
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    * Editor's note: The bill was introduced as H.R. 1256 on March 19, 
2013.



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    The Chairman. I now turn to the Ranking Member to make his 
opening statement.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman, and I want to 
welcome CFTC Chairman Gensler back to the Committee for what I 
have been told is his 50th appearance before Congressional 
committees going all the way back to his confirmation hearing, 
so I think that must be some kind of a record. So we appreciate 
your endurance.
    For his first 2 years in office Chairman Gensler was 
helping us fix the financial mess left over from years of 
deregulation and lax oversight, and during the past 2 years he 
has been called to account for the Commission's implementation 
of Dodd-Frank reforms enacted in 2010.
    Last Congress this Committee held several hearings as the 
Chairman has indicated where we listened to a host of 
stakeholders express concerns about Dodd-Frank's 
implementation. At each of these hearings I repeatedly 
recommended patience and caution for those seeking to change 
the law, and I think that patience generally has been rewarded 
with the Commission producing thoughtful final rules that 
respond to the concerns that were being raised.
    Today's hearing is to examine legislative proposals seeking 
to address many of those same concerns, and I, again, recommend 
patience. Despite the bipartisan support that some of these 
bills may have, I just don't see how any of these have any 
chance of passing the Senate.
    Additionally, given the CFTC's performance, I still believe 
that much of the legislation we are discussing today will not 
be needed in the end. The CFTC is most likely going to get this 
right, and today many of the final rules coming out of the 
Commission have broad bipartisan support and are addressing the 
concerns that stakeholders have expressed to both us and to the 
Commission.
    Ironically, the issue that may truly need to be addressed, 
margin requirements on end-users, is a problem not being caused 
by the CFTC but by the proposed rule of the Prudential 
Regulators. In my opinion we should be bringing the Prudential 
Regulators in to answer questions about their proposed rule, 
because we aren't holding them accountable for their actions. I 
raised this same issue in the previous Congress when we held a 
hearing on the predecessor, H.R. 634, and we still haven't 
heard from them.
    Sometime this summer the CFTC will complete the vast 
majority of its rulemaking. To me that is the best time to see 
what has been done, see the whole picture, and at that point 
fix what needs to be fixed, and hopefully by that time we will 
have completed our work in the House on the farm bill, and then 
we can turn our attention to the CFTC reauthorization, which I 
believe is the best chance for enacting any improvements to 
Dodd-Frank, if necessary.
    So with that, Mr. Chairman, I appreciate the time and yield 
back.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Mr. Chairman. I want to welcome CFTC Chairman Gensler 
for what I have been told is his 50th appearance before a Congressional 
Committee, going all the way back to his confirmation hearing. That has 
to be some kind of record.
    For his first 2 years in office, Chairman Gensler was helping us 
fix the financial mess left over from years of deregulation and lax 
oversight. During the past 2 years, he has been called to account for 
the Commission's implementation of the Dodd-Frank reforms Congress 
enacted in 2010.
    Last Congress, this Committee held several hearings where we 
listened to a host of stakeholders express concerns about Dodd-Frank's 
implementation. At each of these hearings, I repeatedly recommended 
patience and caution for those seeking to change the law. I believe 
that patience has generally been rewarded, with the Commission 
producing thoughtful, final rules that respond to the concerns being 
raised.
    Today's hearing is to examine legislative proposals seeking to 
address many of those same concerns and I, again, recommend patience.
    Despite the bipartisan support that some of these bills may have, I 
just don't see how they have any chance passing the Senate.
    Additionally, given the CFTC's performance, I still believe that 
much of the legislation we're discussing today will not be needed. The 
CFTC is going to get this right. To date, many of the final rules 
coming out of the Commission have broad bipartisan support and are 
addressing the concerns that stakeholders have expressed to both us and 
the Commission.
    Ironically, the issue that may truly need to be addressed--margin 
requirements on end-users--is a problem not being caused by the CFTC, 
but by the proposed rule of the Prudential Regulators.
    We really should be bringing the Prudential Regulators in to answer 
questions about their proposed rule because we aren't holding them 
accountable for their actions. I raised this same issue in previous 
Congress when we held a hearing on the predecessor to H.R. 634.
    Sometime this summer, the CFTC will complete the vast majority of 
its rulemaking. To me, that is the best time to see what has been done 
and fix what needs to be fixed. Hopefully, we will have completed our 
work in the House on the farm bill and can turn our attention to CFTC 
reauthorization, which I believe is the best chance for enacting any 
improvements to Dodd-Frank, if necessary.
    With that Mr. Chairman, I appreciate the time and I yield back.

    The Chairman. I thank the gentleman for his comments.
    The chair requests that other Members submit their opening 
statements for the record so that the witnesses may begin their 
testimony and to ensure there is ample time for questions.
    [The prepared statement of Mr. Conaway and Ms. Fudge 
follow:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Mr. Chairman, thank you for convening this hearing and offering our 
Committee another opportunity to examine the Dodd-Frank Act, its 
implementation, and potential fixes to some of the legislative 
oversights in the bill.
    I don't think anyone in this room would say that we got Dodd-Frank 
exactly right, so it is important that we take time at hearings like 
this to see what sections need to be corrected, what exemptions need to 
be broadened, and what instructions to the Commission need to be made 
more clear. Six of the bills we will examine today make exactly these 
type of narrow, focused changes to the law. In fact, because our 
Committee is focused on narrow fixes to the law, and not wholesale 
repeal, all of the bills we are examining today have bipartisan 
support. I am grateful to my Democratic colleagues for working with us 
on these issues.
    One issue that has been particularly unclear over the past several 
years has been the extra-territorial application of the Dodd-Frank Act. 
How laws flow across jurisdictional boundaries has a profound impact on 
how businesses operate. Last December, Members of this Committee heard 
testimony from several foreign regulators who expressed grave concerns 
about the CFTC's approach to these cross-border issues. I am worried 
that if the CFTC continues to go its own way, financial firms will exit 
American markets, reducing liquidity and increasing costs for end-users 
and other market participants.
    I am pleased that our Committee will consider the Swap Jurisdiction 
Certainty Act which would require the CFTC to cooperate with the SEC on 
promulgating a rule on the cross-border application of the Dodd-Frank 
rules, as well as to recognize the competence of foreign regulators. I 
am deeply concerned that the current course the CFTC is pursuing will 
have substantial economic burdens for little regulatory benefits.
    This is not the first rulemaking that I have had concerns about the 
appropriate accounting of the costs and benefits. Throughout the entire 
process of implementing Dodd-Frank, I have asked Chairman Gensler 
repeatedly to step up the standards of economic analysis for the rules 
the CFTC is proposing.
    In his defense, Chairman Gensler has said that the Commission is 
complying with the law, which only requires that the CFTC ``consider'' 
the costs and benefits of a particular rulemaking. The Inspector 
General of the CFTC has said this has lead to a ``check-the-box'' 
approach to cost-benefit analysis, where the actual analysis is often 
performed by the lawyers instead of economists.
    That is why I am again offering a bill, along with the support of 
Ranking Member Scott, Congressman Vargas, and others, that would set 
new standards for the economic analysis that the CFTC must perform on 
each new rulemaking. I believe that the Executive Order laid out by 
President Obama on cost-benefit analysis should represent the standard 
to which agencies are held, and the bill we are discussing today would 
do just that.
    One final issue that I am concerned about is the breaches of data 
confidentiality that have been seen in the Commission in recent months. 
The CFTC is privy to a wealth of proprietary information regarding the 
trades, positions, and strategies of every market participant. It 
relies on this data to be an effective regulator, but the recent 
reports that proprietary data has been made public calls into question 
the strength of the Commission's internal controls on the data it 
collects.
    As a recent Washington Post Op-Ed co-written by former CFTC 
Chairman James Newsome and former Commissioner Fred Hatfield states 
clearly, ``If [market] participants believe others have a likelihood of 
re-creating trading strategies or identifying their derivatives 
positions from leaked data, they will work to avoid sharing data with 
regulators. Doing so would be a tremendous blow to regulators and a 
critical setback for industry participants who want to operate in 
markets free from fraud, manipulation and other abuses.''
    It is imperative for the Commission to instill trust and confidence 
in market participants. The CFTC cannot do so if the confidential data 
market participants provide the Commission makes its way into the 
public eye.
    I look forward to the opportunity to discuss our proposed 
legislation with Chairman Gensler and the rest of our witnesses. As I 
have said many times, it is more important that we get Dodd-Frank 
reform right than that we get it done quickly. Today's bills will help 
ensure that we get Dodd-Frank right.
                                 ______
                                 
    Prepared Statement of Hon. Marcia L. Fudge, a Representative in 
                           Congress from Ohio
    Thank you for convening this hearing. Recently, I and 
Representatives Stivers, Moore, and Gibson introduced H.R. 677, the 
Inter-Affiliate Swap Clarification Act. H.R. 677 makes plain that 
inter-affiliate transactions, when the parties to the transaction are 
under common control or use centralized hedging units to manage risk 
efficiently, should not be regulated as swaps. Last Congress, my 
colleagues and I introduced similar legislation that eventually passed 
the House by a vote of 357-36. Given the broad consensus and bipartisan 
support this issue received last year, I'm hopeful that H.R. 677 will 
be widely supported as well.
    I appreciate having the opportunity to hear from experts in the 
field on why clarification on the regulations for inter-affiliate swaps 
is needed.

    The Chairman. I would like to welcome our first panel 
witness today, the Hon. Gary Gensler, Chairman of the U.S. 
Commodity Futures Trading Commission, Washington, D.C. Chairman 
Gensler, please begin when you are ready.

         STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S.
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Gensler. Chairman Lucas, Ranking Member Peterson, 
Members of this Committee, it is always good to be with you. I 
appreciate that note about 50 hearings in this job, but I think 
I have also been told it is my 10th before you, and I always 
enjoy being here and the advice and counsel that you give us, 
whether it is in the rule writing or everyday business of the 
Commission.
    Five years ago tomorrow Bear Stearns failed. You might 
remember this was a large financial institution in New York. 
The Federal Reserve and others arranged its quick sale to 
JPMorgan, but that was really the beginning of what we now call 
the 2008 Financial Crisis. Those next 6 months, or next year, 
put so many people at risk in the American economy and eight 
million people lost their jobs.
    In response, this Committee was the first to address 
derivatives reform early in 2009, when you passed a bill and 
then working later with the House Financial Services passed 
what was the core of what became Title VII, and most of that is 
now in place.
    So what does this mean? For the first time the public is 
actually benefitting from seeing the price and volume of each 
swap transaction. It is available free of charge on a website. 
I see the members from DTCC are here. They can tell you about 
the website. It is free of charge like a modern-day tickertape 
where people can see the price and volume of swaps 
transactions.
    For the first time the public also benefits from greater 
access to the markets with the risk reduction of central 
clearing. This week on Monday mandatory clearing for these big 
dealers took hold. That means that there is lower risk, and the 
system is a little less interconnected.
    And for the first time the public is benefiting from the 
oversight of the dealers themselves. We now have 73 that are 
registered. It was at the center of your hearing that you had 
with the international regulators in December. We did move 
forward, exempting many of the things that they need to do 
until this coming July to try to get it right and focus on 
something called substituted compliance.
    This reform was not about preventing firms from failing, 
though. Just as Bear Stearns failed 5 years ago, certainly some 
firms will fail in the future. I think that this part of the 
bill is about making the system safer because it is less 
interconnected, that it is less likely that taxpayers will have 
to come in and help out or bail out a firm as we all did in 
AIG, but I think it is also so that the end-users get a more 
transparent market and more access to the market.
    It is about those firms that employ 94 percent of private-
sector jobs. That is what end-users are: the non-financial 
firms that employ 94 percent of jobs in this economy, and the 
reforms were about giving end-users a choice. They don't have 
to come into clearing and by the CFTC rules, as the Ranking 
Member mentioned, they would not be caught up in margining for 
the non-cleared swaps.
    Now, we do have key things in front of us. In 2013, we 
still need to finish up some pieces of this business. We are 
still promoting further transparency before the transaction. It 
is called pre-trade transparency. Due to that we have in front 
of us finishing rules on what is called swap execution 
facilities.
    Second, a big part of it is the cross-border application as 
the Chairman mentioned of the swaps market reform. Congress 
recognized in enacting reform is that in modern finance many of 
these institutions span the globe, and risk knows no boundary. 
If a run starts in one part of a financial institution, it runs 
right back here. That is what happened at Bear Stearns, of 
course, but also it was true of AIG, which ran most of its 
swaps business out of London. It was true of Lehman Brothers, 
it was true a decade earlier in something called Long-Term 
Capital Management. The company, LTCM, was run in Connecticut 
but booked their $1.2 trillion of derivatives in the Cayman 
Islands.
    Failing to incorporate the basic lesson of modern finance 
would leave the American public at risk. It would move maybe 
the jobs to the Cayman Islands or the P.O. Boxes on the Cayman 
Islands or the jobs somewhere else, but the risk would spill 
right back here if it is a U.S. financial institution. So, I 
think we have to address that, and we are trying to do that by 
July of this year.
    We also have in front of us an important and tough agenda 
around the London Interbank Offered Rate. It is not the center 
of this hearing, but I am glad to take any questions on that. I 
think long term, though, we are going to find that that rate--
that has been so pervasively and readily rigged--is not 
sustainable in our financial markets.
    I would like to just close by mentioning the need for 
resources. The CFTC today is a little smaller than we were 1 
year ago, and yet now the swaps reform is upon us. I think that 
we are not right sized for the critical missions that you have 
given us. The Congress has given us responsibility for the 
futures markets as well as the swaps market so that the end-
users of this country can have confidence that these markets 
are well-overseen and don't present risk to them.
    So I thank you, and I look forward to questions.
    [The prepared statement of Mr. Gensler follows:]

   Prepared Statement of Hon. Gary Gensler, Chairman, U.S. Commodity 
              Futures Trading Commission, Washington, D.C.
    Good morning, Chairman Lucas, Ranking Member Peterson, and Members 
of the Committee. I thank you for inviting me to testify on the status 
of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) Title VII implementation. I also want to thank the Commodity 
Futures Trading Commission's (CFTC) Commissioners and staff for their 
hard work and dedication.
Introduction
    I am pleased to have the opportunity to discuss with you the CFTC's 
efforts on behalf of the public. The agency has been directed by 
Congress to oversee and police the nation's derivatives markets, both 
in the futures and swaps markets. It strives to promote transparency, 
fairness and integrity in these markets. The CFTC continues to carry 
out its historical mission regarding the rapidly changing futures 
market, while developing and integrating comprehensive standards for 
the swaps market. The Commission has reorganized its divisions to best 
ensure ongoing oversight of the futures market, as well as the swaps 
markets. We also have implemented improvements in protections for 
customer funds and are developing others. We continue to engage in 
targeted enforcement efforts in the public interest. These include the 
historic actions regarding benchmark rates, such as the London 
Interbank Offered Rate (LIBOR), a reference rate for much of the U.S. 
futures and swaps markets.
The New Era of Swaps Market Reform
    Congress made history with the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), and the CFTC now oversees the 
entire derivatives marketplace--across both futures and swaps. The 
common-sense rules of the road for the swaps market that Congress 
included in the law have taken shape and market participants are 
adapting to them.
    For the first time, the public is benefiting from seeing the price 
and volume of each swap transaction. This post-trade transparency 
builds upon what has worked for decades in the futures and securities 
markets. The new swaps market information is available free of charge 
on a website, like a modern-day ticker tape.
    For the first time, the public will benefit from the greater access 
to the markets and the risk reduction that comes with central clearing. 
Required clearing of interest rate and credit index swaps between 
financial entities began this week.
    For the first time, the public is benefitting from specific 
oversight of swap dealers. More than 70 swap dealers have provisionally 
registered. They are subject to standards for sales practices, record-
keeping and business conduct to help lower risk to the economy and 
protect the public from fraud and manipulation.
    An earlier economic crisis led President Roosevelt and Congress to 
enact similar common-sense rules of the road for the futures and 
securities markets. I believe these critical reforms of the 1930s have 
been at the foundation of our strong capital markets and many decades 
of economic growth.
    In the 1980s, the swaps market emerged. Until now, though, it has 
lacked the benefit of rules to promote transparency, lower risk and 
protect the public, rules that we have come to depend upon in the 
futures and securities markets. What followed was the 2008 Financial 
Crisis--a crisis that was due in part to the swaps market. Eight 
million American jobs were lost. In contrast, the futures market, 
supported by earlier reforms, weathered the financial crisis.
    Congress and the President responded to the worst economic crisis 
since the Great Depression and carefully crafted the Dodd-Frank swaps 
provisions. They borrowed from what has worked best in the futures 
market for decades: transparency, clearing and oversight of 
intermediaries.
    The CFTC has largely completed swaps market rule-writing, with 80 
percent behind us. On October 12, the CFTC and Securities and Exchange 
Commission's (SEC) foundational definition rules went into effect. This 
marked the new era of swaps market reform.
    The CFTC is seeking to consider and finalize the remaining Dodd-
Frank Act swaps reforms this year. In addition, as Congress directed 
the CFTC to do, I believe it is critical that we continue our efforts 
to put in place aggregate speculative position limits across futures 
and swaps on physical commodities.
    The agency has completed each of these Congressionally-directed 
reforms with an eye toward ensuring that the swaps market works for 
end-users, America's primary job providers. It's the end-users in the 
non-financial side of our economy that provide 94 percent of private 
sector jobs.
    Dodd-Frank Act swaps market reforms benefit end-users by lowering 
costs and increasing access to the markets. They benefit end-users 
through greater transparency--shifting information from Wall Street to 
Main Street. Following Congress' direction, end-users are not required 
to bring swaps into central clearing. Further, the Commission's 
proposed rule on margin provides that end-users will not have to post 
margin for uncleared swaps. Also, non-financial companies, other than 
those genuinely making markets in swaps, will not be required to 
register as swap dealers. Lastly, when end-users are required to report 
their transactions, they are given more time to do so than other market 
participants.
    Congress also authorized the CFTC to provide relief from the Dodd-
Frank Act's swaps reforms for certain electricity and electricity-
related energy transactions between rural electric cooperatives and 
Federal, state, municipal and tribal power authorities. Similarly, 
Congress authorized the CFTC to provide relief for certain transactions 
on markets administered by regional transmission organizations and 
independent system operators. The CFTC is looking to soon finalize 
exemptive orders related to these transactions, as Congress authorized.
    The CFTC has worked to complete the Dodd-Frank reforms in a 
deliberative way--not against a clock. We have been careful to consider 
public input, as well as the costs and benefits of each rule. CFTC 
Commissioners and staff have met more than 2,000 times with members of 
the public, and we have held 23 public roundtables. The agency has 
received more than 39,000 comment letters on matters related to reform. 
The rules also have benefited from close consultation with domestic and 
international regulators and policymakers.
    Throughout this process, the Commission has sought input from 
market participants on appropriate schedules to phase in compliance 
with swaps reforms. Now, over 2\1/2\ years since the Dodd-Frank Act 
passed and with 80 percent of our rules finalized, the market is moving 
to implementation. Thus, it's the natural order of things that market 
participants have questions and have come to us for further guidance. 
The CFTC welcomes inquiries from market participants, as some fine-
tuning is expected. As it is sometimes the case with human nature, the 
agency receives many inquiries as compliance deadlines approach.
    My fellow Commissioners and I, along with CFTC staff, have listened 
to market participants and thoughtfully sorted through issues as they 
were brought to our attention, and we will continue to do so.
    I now will go into further detail on the Commission's efforts to 
implement the Dodd-Frank Act's swaps market reform, our efforts to 
enhance protections for futures and swaps customers, and the CFTC's 
work with international regulators regarding benchmarks.
Transparency--Lowering Cost and Increasing Liquidity, Efficiency, 
        Competition
    Transparency--a longstanding hallmark of the futures market, both 
pre- and post-trade--lowers costs for investors, consumers and 
businesses. It increases liquidity, efficiency and competition. A key 
benefit of swaps reform is providing this critical pricing information 
to businesses and other end-users across this land that use the swaps 
market to lock in a price or hedge a risk.
    As of December 31, 2012, provisionally registered swap dealers are 
reporting in real time their interest rate and credit index swap 
transactions to the public and to regulators through swap data 
repositories. These are some of the same products that were at the 
center of the financial crisis. Building on this, swap dealers began 
reporting swap transactions in equity, foreign exchange and other 
commodity asset classes on February 28. Other market participants will 
begin reporting April 10.
    With these transparency reforms, the public and regulators now have 
their first full window into the swaps marketplace.
    To further enhance liquidity and price competition, the CFTC is 
working to finish the pre-trade transparency rules for swap execution 
facilities (SEFs), as well as the block rule for swaps. SEFs would 
allow market participants to view the prices of available bids and 
offers prior to making their decision on a transaction. These rules 
will build on the democratization of the swaps market that comes with 
the clearing of standardized swaps.
Clearing--Lowering Risk and Democratizing the Market
    Since the late 19th century, clearinghouses have lowered risk for 
the public and fostered competition in the futures market. Clearing 
also has democratized the market by fostering access for farmers, 
ranchers, merchants and other participants.
    The Commission approved the first clearing requirement last 
November, following through on the U.S. commitment at the 2009 G20 
meeting that standardized swaps be cleared by the end of 2012. A key 
milestone was reached this week with the requirement that swap dealers 
and the largest hedge funds clear as of March 11. The vast majority of 
interest rate and credit default index swaps are being brought into 
central clearing. Compliance will continue to be phased in throughout 
this year. Other financial entities begin clearing June 10. Accounts 
managed by third party investment managers and ERISA pension plans have 
until September 9.
    Consistent with the direction of Dodd-Frank, the Commission in the 
fall of 2011 adopted a comprehensive set of rules for the risk 
management of clearinghouses. These final rules were consistent with 
international standards, as evidenced by the Principles for Financial 
Market Infrastructures (PFMIs) consultative document that had been 
published by the Committee on Payment and Settlement Systems and the 
International Organization of Securities Commissions (CPSS-IOSCO).
    In April of 2012, CPSS-IOSCO issued the final Principles. The 
Commission's clearinghouse risk management rules cover the vast 
majority of those standards. Commission staff are working expeditiously 
to recommend the necessary steps so that the Commission may implement 
any remaining items from the PFMIs not yet incorporated in our 
clearinghouse rules. I look forward to the Commission considering 
action on this in 2013.
    I expect that soon we will complete a rule to exempt swaps between 
certain affiliated entities within a corporate group from the clearing 
requirement. This year, the CFTC also will be considering possible 
clearing determinations for other commodity swaps, including energy 
swaps.
Swap Dealer Oversight--Promoting Market Integrity and Lowering Risk
    Comprehensive oversight of swap dealers, a foundational piece of 
the Dodd-Frank Act, will promote market integrity and lower risk to 
taxpayers and the rest of the economy. Congress directed that end-users 
be able to continue benefitting from customized swaps (those not 
brought into central clearing) while being protected through the 
express oversight of swap dealers. In addition, Dodd-Frank extended the 
CFTC's existing oversight of previously regulated intermediaries to 
include their swaps activity.
    As the result of CFTC rules completed in the first half of last 
year, 73 swap dealers are now provisionally registered. This initial 
group of dealers includes the largest domestic and international 
financial institutions dealing in swaps with U.S. persons. It includes 
the 16 institutions commonly referred to as the G16 dealers. Two major 
swap participants also are registered. Other entities will register 
once they reach the de minimis threshold for swap activity.
    In addition to reporting trades to both regulators and the public, 
swap dealers will implement crucial back office standards that lower 
risk and increase market integrity. These include promoting the timely 
confirmation of trades and documentation of the trading relationship. 
Swap dealers also will be required to implement sales practice 
standards that prohibit fraud, require fair treatment of customers and 
improve transparency.
    The CFTC is collaborating closely domestically and internationally 
on a global approach to margin requirements for uncleared swaps. We are 
working along with the Federal Reserve, the other U.S. banking 
regulators, the SEC and our international counterparts on a final set 
of standards to be published by the Basel Committee on Banking 
Supervision and the International Organization of Securities 
Commissions (IOSCO). The CFTC's proposed margin rules excluded non-
financial end-users from margin requirements for uncleared swaps. We 
have been advocating with global regulators for an approach consistent 
with that of the CFTC. I would anticipate that the CFTC, in 
consultation with European regulators, would take up final margin 
rules, as well as related rules on capital, in the second half of this 
year.
    Following Congress' mandate, the CFTC also is working with our 
fellow domestic financial regulators to complete the Volcker Rule. In 
adopting the Volcker Rule, Congress prohibited banking entities from 
proprietary trading, an activity that may put taxpayers at risk. At the 
same time, Congress permitted banking entities to engage in certain 
activities, such as market making and risk mitigating hedging. One of 
the challenges in finalizing a rule is achieving these multiple 
objectives.
International Coordination on Swaps Market Reform
    In enacting financial reform, Congress recognized a basic lesson of 
modern finance and the 2008 crisis: during a default, risk knows no 
geographic border.
    Risk from our housing and financial crisis contributed to economic 
downturns around the globe. If a run starts in one part of a modern 
financial institution, whether it's here or offshore, the risk comes 
back to our shores. It was true with AIG, Lehman Brothers, Citigroup, 
Bear Stearns and Long-Term Capital Management.
    AIG Financial Products, for instance, was a Connecticut subsidiary 
of the New York insurance giant that used a French bank license to run 
its swaps operations out of a Mayfair branch in London. Its near-
collapse ultimately required a government bailout of more than $180 
billion and nearly brought down the U.S. economy.
    Last year's events of JPMorgan Chase, where it executed swaps 
through its London branch, were a stark reminder of how when risk is 
booked offshore, any losses are absorbed back here at home.
    Congress addressed this reality of modern finance in Section 722(d) 
of the Dodd-Frank Act, which states that swaps reforms shall not apply 
to activities outside the United States unless those activities have 
``a direct and significant connection with activities in, or effect on, 
commerce of the United States.''
    To give financial institutions and market participants guidance on 
this provision, the CFTC last June sought public consultation on its 
interpretation of this provision. The proposed guidance is a balanced, 
measured approach, consistent with the cross-border provisions in the 
Dodd-Frank Act and the recognition that risk easily crosses borders.
    As the CFTC completes the cross-border guidance, I believe it's 
critical that Dodd-Frank swaps reform applies to transactions entered 
into by branches of U.S. institutions offshore, between guaranteed 
affiliates offshore, and for hedge funds that are incorporated offshore 
but operate in the U.S. Otherwise, American jobs and markets may move 
offshore, but, particularly in times of crisis, risk would come 
crashing back to our economy.
    The proposed guidance includes a commitment to permitting foreign 
firms and, in certain circumstances, overseas branches and guaranteed 
affiliates of U.S. swap dealers, to meet Dodd-Frank requirements 
through compliance with comparable and comprehensive foreign rules. We 
call this ``substituted compliance.''
    The Commission also proposed granting time-limited relief until 
this July for non-U.S. swap dealers (and foreign branches of U.S. swap 
dealers) from certain Dodd-Frank swap requirements. In December, the 
Commission finalized this relief.
    Under this time-limited relief, foreign swap dealers may phase in 
compliance with certain entity-level requirements. In addition, it 
provides relief for foreign dealers from specified transaction-level 
requirements when they transact with overseas affiliates guaranteed by 
U.S. entities, as well as with foreign branches of U.S. swap dealers.
    In July, when the relief expires, various Dodd-Frank Act 
requirements will apply to non-U.S. swap dealers. Overseas financial 
institutions who wish to look to substituted compliance to fulfill 
Dodd-Frank requirements are encouraged to engage now with the CFTC, as 
well as their home country regulators.
    We are hearing that some swap dealers may be promoting to hedge 
funds an idea to avoid required clearing, at least during an interim 
period from March until July. I would be concerned if, in an effort to 
avoid clearing, swap dealers route to their foreign affiliates trades 
with hedge funds organized offshore, even though such hedge funds are 
managed (or otherwise have their principal place of business) in the 
United States or they are majority owned by U.S. persons. Such an 
effort is not consistent with the spirit of the Dodd-Frank Act or the 
international consensus to clear all standardized swaps. The CFTC is 
working to ensure that this idea does not prevail and develop into a 
practice that leaves the American public at risk.
    If we don't address this, the P.O. boxes may be offshore, but the 
risk will flow back here.
Customer Protection
    The Dodd-Frank Act included provisions directing the CFTC to 
enhance the protection of swaps customer funds. While it was not a 
requirement of the Dodd-Frank Act, in 2009 the CFTC also reviewed and 
updated customer protection rules for futures market customers. As a 
result, a number of the enhancements affect both futures and swaps 
market customers. I would like to review these enhancements, as well as 
an important customer protection proposal.
    The CFTC's completed amendments to rule 1.25 regarding the 
investment of customer funds benefit both futures and swaps customers. 
The amendments include preventing in-house lending of customer money 
through repurchase agreements. The CFTC's gross margining rules for 
futures and swaps customers require clearinghouses to collect margin on 
a gross basis. FCMs are no longer able to offset one customer's 
collateral against another or to send only the net to the 
clearinghouse.
    Swaps customers further benefit from the new so-called ``LSOC'' 
(legal segregation with operational comingling) rules, which ensure 
funds are protected individually all the way to the clearinghouse.
    The Commission also worked closely with market participants on new 
customer protection rules adopted by the self-regulatory organization 
(SRO), the National Futures Association (NFA). These include requiring 
FCMs to hold sufficient funds for U.S. foreign futures and options 
customers trading on foreign contract markets (in Part 30 secured 
accounts). Starting last year, they must meet their total obligations 
to customers trading on foreign markets under the net liquidating 
equity method. In addition, withdrawals of 25 percent or more of excess 
segregated funds would necessitate pre-approval in writing by senior 
management and must be reported to the designated SRO and the CFTC.
    These steps were significant, but market events have further 
highlighted that the Commission must do everything within our 
authorities and resources to strengthen oversight programs and the 
protection of customers and their funds.
    In the fall of 2012, the Commission sought public comment on a 
proposal that would strengthen the controls around customer funds at 
FCMs. It would set new regulatory accounting requirements and would 
raise minimum standards for independent public accountants who audit 
FCMs. And it would provide regulators with daily direct electronic 
access to the FCMs' bank and custodial accounts for customer funds.
    The proposal includes a provision on residual interest to ensure 
that the assets of one customer are not used to cover the positions of 
another customer. We are considering the many comments we have received 
on this and plan to finalize the proposal consistent with the specific 
provisions of the Commodity Exchange Act and the overall goal of 
protecting customers.
    Further, the CFTC intends to finalize a rule this year on 
segregation for uncleared swaps.
Benchmark Interest Rates
    This hearing comes at a critical juncture.
    It comes as there has been a lot of media attention surrounding the 
three enforcement cases against Barclays, UBS and RBS for manipulative 
conduct with respect to the London Interbank Offered Rate (LIBOR) and 
other benchmark interest rate submissions.
    More importantly, it comes as market participants and regulators 
around the globe have turned to consider the critical issue of how we 
reform and revise a system that has become so reliant on LIBOR, Euribor 
and similar rates.
    I believe that continuing to reference such rates diminishes market 
integrity and is unsustainable in the long run.
    Let's look at what we've learned to date.
    Foremost, the Interbank, unsecured market to which LIBOR, Euribor 
and other such rates reference has changed dramatically. Some say that 
it is has become essentially nonexistent. In 2008, Mervyn King, the 
governor of the Bank of England, said of LIBOR: ``It is, in many ways, 
the rate at which banks do not lend to each other.'' He went on further 
to say: ``[I]t is not a rate at which anyone is actually borrowing.''
    There has been a significant structural shift in how financial 
market participants finance their balance sheets and trading positions. 
There is an increasing shift from borrowing unsecured (without posting 
collateral) toward borrowings that are secured by posting collateral. 
In particular, this shift has occurred within the funding markets 
between banks.
    The Interbank, unsecured market used to be where banks funded 
themselves at a wholesale rate. The 2008 Financial Crisis and 
subsequent events, however, have shattered this model. The European 
debt crisis that began in 2010 and the downgrading of large banks' 
credit ratings have exacerbated the hesitancy of banks to lend 
unsecured to one another.
    Other factors have played a role in this structural shift. Central 
banks are providing significant funding directly to banks. Banks are 
more closely managing demands on their balance sheets.
    Looking forward, recent changes to Basel capital rules will take 
root and will move banks even further from interbank lending. The Basel 
III capital rules now include an asset correlation factor, which 
requires additional capital when a bank is exposed to another bank. 
This was included to reduce financial system interconnectedness. 
Furthermore, the rules introduce a liquidity coverage ratio (LCR). For 
the first time, banks will have to hold a sufficient amount of high 
quality liquid assets to cover their projected net outflows over 30 
days.
    At an IOSCO roundtable on financial market benchmarks held in 
London last month, one major bank indicated that the LCR rule alone 
would make it prohibitively expensive for banks to lend to each other 
in the interbank market for tenors greater than 30 days. Thus, this 
banker posited that it is unlikely that banks will return to the days 
when they would lend to each other for 3 months, 6 months or a year.
    The public also has learned that LIBOR and Euribor--central to 
borrowing, lending and hedging in our economies--has been readily and 
pervasively rigged.
    Barclays, UBS and RBS were fined approximately $2.5 billion for 
manipulative conduct by the CFTC, the UK Financial Services Authority 
(FSA) and the U.S. Justice Department. At each bank, the misconduct 
spanned many years; took place in offices in several cities around the 
globe; included numerous people--sometimes dozens, and even senior 
management; and involved multiple benchmark rates and currencies. In 
each case, there was evidence of collusion.
    In the UBS and RBS cases, one or more inter-dealer brokers painted 
false pictures to influence submissions of other banks, i.e., to spread 
the falsehoods more widely. Barclays and UBS also were reporting 
falsely low borrowing rates in an effort to protect their reputation.
    These findings are shocking, though the lack of an interbank market 
made the system more vulnerable to such misconduct.
    In addition, a significant amount of publicly available market data 
raises questions about the integrity of LIBOR and similar rates today.
    A comparison of LIBOR submissions to the volatilities of other 
short-term rates reflects that LIBOR is remarkably more stable than any 
comparable rate. For instance, in 2012--looking at the 252 submission 
days for 3 month U.S. dollar LIBOR--the banks did not change their rate 
85 percent of the time. Some banks did not change their submissions for 
3 month U.S. Dollar LIBOR for upwards of 115 straight trading days. 
This means, in effect, that one bank represented that the market for 
its funding was completely stable for 115 straight trading days or more 
than 5 months.
    Further, when comparing LIBOR submissions to the same banks' credit 
default swaps spreads or to the broader markets' currency forward 
rates, there is a continuing disconnect between LIBOR and what those 
other market rates tell us.
    Nassim Nicholas Taleb, the best selling author of The Black Swan, 
has written a recent book called Antifragile: Things that Gain from 
Disorder. He notes that systems that are not readily able to evolve and 
adapt are fragile. Such systems succumb to stress, tension and change. 
One of his key points is that propping up a fragile system in the 
interest of maintaining a sense of stability only creates more 
instability in the end. One can buy an artificial sense of calm for a 
while, but when that calm cracks, the resulting turmoil is invariably 
greater.
    I think that the financial system's reliance on interest rate 
benchmarks, such as LIBOR and Euribor, is particularly fragile. These 
benchmarks basically have not adapted to the significant changes in the 
market. Thus, the challenge we face is how the financial system adapts 
to this significant shift.
    International regulators and market participants have begun to 
discuss transition. The CFTC and the FSA are co-chairing the IOSCO Task 
Force on Financial Market Benchmarks.
    One of the key questions in the consultation with the public is: 
how do we address transition when a benchmark is no longer tied to 
sufficient transactions and may have become unreliable or obsolete?
    Without transactions, the situation is similar to trying to buy a 
house, when the realtor cannot provide comparable transaction prices in 
the neighborhood--because no houses were sold in the neighborhood in 
years.
    Given what the public has learned, it is critical to move to a more 
robust framework for financial benchmarks, particularly those for 
short-term, variable interest rates. A reference rate has to be based 
on facts, not fiction.
    I recognize that moving on from LIBOR and Euribor may be 
challenging. Today, LIBOR is the reference rate for 70 percent of the 
U.S. futures market, most of the swaps market and nearly half of U.S. 
adjustable rate mortgages.
    Yet, as the author Nassim Taleb might suggest, it would be best not 
to fall prey to accepting that LIBOR or any benchmark is ``too big to 
replace.''
Resources
    The CFTC's hardworking team of 684 is just seven percent more in 
numbers than at our peak in the 1990s. Yet since that time, the futures 
market has grown five-fold, and the swaps market is eight times larger 
than the futures market.
    Investments in both technology and people are needed for effective 
oversight of these markets by regulators.
    Though data has started to be reported to the public and to 
regulators, we need the staff and technology to access, review and 
analyze the data. Though 75 entities have registered as new swap 
dealers and major swap participants, we need people to answer their 
questions and work with the NFA on the necessary oversight to ensure 
market integrity. Furthermore, as market participants expand their 
technological sophistication, CFTC technology upgrades are critical for 
market surveillance and to enhance customer fund protection programs.
    Without sufficient funding for the CFTC, the nation cannot be 
assured this agency can closely monitor for the protection of customer 
funds and utilize our enforcement arm to its fullest potential to go 
after bad actors in the futures and swaps markets. Without sufficient 
funding for the CFTC, the nation cannot be assured that this agency can 
effectively enforce essential rules that promote transparency and lower 
risk to the economy.
    The CFTC is currently funded at $207 million. To fulfill our 
mission for the benefit of the public, the President requested $308 
million for Fiscal Year 2013 and 1,015 full-time employees.
    Thank you again for inviting me today, and I look forward to your 
questions.

    The Chairman. Thank you, Chairman Gensler.
    The chair would like to remind Members they will be 
recognized for questioning in the order of seniority for 
Members who were here at the start of the hearing, and after 
that Members will be recognized in order of arrival. As always, 
I appreciate the Members' understanding.
    And I recognize myself for 5 minutes now.
    Chairman, top regulators from European Union and Japan 
testified before the Committee in December and detailed serious 
concerns about CFTC's cross-border guidance, stating that if 
cross-border rules weren't harmonized, trades will not be able 
to clear, if they can't be cleared, they won't take place, 
firms and users will not hedge the risk or firms will hedge the 
risk, but they will only take place within one jurisdiction. 
The consequences of that is obviously a fragmented market, 
significant concentration of financial risk in the U.S. system, 
and is exactly what we have tried to prevent with our global 
regulatory reforms.
    Now, given multiple failed attempts to coordinate between 
the United States and international regulators, the most 
recently-failed negotiations occurring in February, and we are 
moving quickly towards that scenario described to us in 
December. Chairman, with all due respect, why don't you believe 
that long established markets will have sufficient regulatory 
regimes or overseas swap transactions within their own borders? 
Expand on that if you would.
    Mr. Gensler. We have made tremendous progress here in this 
country with the financial reform that this Committee helped 
put in place in Dodd-Frank, and there has been great progress 
in Europe, Canada, and Japan in terms of the central clearing, 
data reporting and some other means.
    We have embraced and said that where there is comparable 
and comprehensive regimes in other countries, we would look to 
something we call substituted compliance. We could look to that 
home country's rules, but if a U.S. firm is guaranteeing 
activities of a London affiliate or a Cayman Islands affiliate 
or somewhere else, if they are guaranteeing that, that risk can 
still come back here to the U.S. So we said there has to at 
least be comparable and comprehensive oversight. Not every 
jurisdiction would have that. Many will. Many will.
    The Chairman. Moving to another important subject, I have 
heard concerns from farmers, ranchers, the small to medium-
sized futures commission merchants opposing CFTC's proposed 
rule to improve customer protections. Many of those folks say 
the new proposals would profoundly increase their costs, 
potentially threaten their existence, and this is very 
disturbing to me because many of these smaller FCMs are the 
ones who actually serve risk management needs of my farmers and 
ranchers, the two groups that are of the utmost importance to 
this Committee.
    Putting aside your statutory requirements and given the 
importance of this subject, was there an extensive cost-benefit 
analysis performed by the Office of Chief Economist before 
those rules were proposed, Chairman?
    Mr. Gensler. Yes. We take seriously the cost-benefit 
provisions that were put in the statute over a dozen years ago, 
and the Chief Economist's Office participates and signs off on 
each of those before they come to the Commissioners. Rules are 
also put out for public comment. In this case we put out a set 
of proposals on customer protection to the public. Many of 
those proposals have gotten strong support. We received about 
125 comment letters, but you are absolutely right, Mr. 
Chairman. There is one issue in there--people have been using 
the term residual interest--that has been raised where we are 
going to take a very thoughtful look at the comments that have 
come in because people have raised not only cost issues, but 
just some practicality issues with regard to it.
    The Chairman. So along that line, given the outcry, does 
the Commission plan to re-propose the rule or make extensive 
changes to the rule?
    Mr. Gensler. I don't know yet, and I would like to keep 
this Committee and you apprised. The comment period only closed 
about 2 weeks ago. We extended it an extra month at the request 
of many market participants. At its core what we did was we 
repeated what is in the law. The law says that no futures 
commission merchant should take one customer's money and use it 
to benefit or secure, guarantee another customer's position, 
their deficit or their position.
    And that is, in fact, what we said, but what we found is 
commenters have said that intraday, during the day they 
actually do sometimes have one customer's surplus guaranteeing 
other customer's deficits, and so we have to sort through that 
practical circumstance.
    The Chairman. Just bear in mind, Commissioner, that the 
Committee won't ignore the pleas from the smaller ag players in 
the market, and I am hopeful the Commission won't either.
    Returning to the cross-border issue, I understand the 
European officials could stretch the implementation timeline 
out into next year for their own derivatives rules, and earlier 
this week one of your Commissioners even stated or one of the 
Commissioners even stated it would not be unlikely for the CFTC 
to grant another extension to implement the cross-border 
guidance.
    So I guess my question is if the European regulators extend 
their own rulemaking process into next year, and we made no 
progress on substituted compliance by July 2013, global markets 
would be in danger of, I think the appropriate phrase is 
fragmentation and pooling risks. How do you plan to avoid that 
outcome, Chairman?
    Mr. Gensler. We have been committed this whole time to 
phased implementation. You actually only gave us 1 year to get 
everything in place, and here we are nearly 3 years since Dodd-
Frank passed. There were even bills considered at some point to 
ask us to take more time. We have not felt we are doing this 
against the clock. We want to get it balanced and appropriately 
in place, but I also think we keep in mind that 5 years ago 
Bear Stearns failed, and eight million people lost their jobs.
    So I would envision as we get closer to July we will have 
checked off more things with the Europeans and Canadians and 
others, like Japan. We now have 30 international dealers 
regulated and registered, which is a big positive. We have the 
public seeing their transactions for the first time, which is a 
big positive, and we will see where we are as we approach July 
as to whether there is some appropriate additional phased 
compliance.
    The Chairman. Thank you, Mr. Chairman. My time has expired.
    I now recognize the gentleman from Minnesota for 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman.
    Following up on that a little bit, one of my reservations 
as you know about moving forward on these bills is that we 
don't have the whole picture of all the rules, and we don't 
have all the rules in place and in effect, and we don't have a 
full picture of what this swap market is yet.
    In your testimony you say you are 80 percent of the way 
completed with these rules, and by August, how much of the 
remaining 20 percent do you hope to have finalized, and are 
there any potential issue, outliers that may take longer to 
resolve, and if so, what are they?
    Mr. Gensler. We now have with the Commission full final set 
of rules on pre-trade transparency provision, the swap 
execution facility, and we are working through it in a very 
constructive way amongst the five of us to reach a consensus 
and move something out. The cross-border issues we look to 
finish up many of the big pieces, the guidance, by July, but 
there is certainly going to be more work internationally that 
will just continue on a day-to-day basis. We will address more 
issues about rural electric cooperatives and various 
electricity companies where we are planning certain exemptions.
    So I think the bulk of what we need to do will be done by 
August, but one area I just want to mention that will still be 
outstanding is we purposely slowed down on finalizing margin 
for uncleared swaps--the issue that is so interesting to end-
users. The Federal Reserve slowed down as well because we 
wanted an international agreement, and we have been working on 
that. We put something out in consultation last summer. We put 
a new document out I think it was in February, and that should 
point us to probably finalizing the margin rules closer to the 
4th quarter of this year because we didn't want to move forward 
if there wasn't, as the Chairman said, harmonization on this 
key issue.
    We have been advocating with the Federal Reserve and with 
the international regulators that there is not a requirement 
for the banks to charge a margin on this uncleared swaps for 
the non-financial end-users, but that is one piece that we are 
purposely waiting on until the fourth quarter.
    Mr. Peterson. I mean, you get unfairly blamed for this 
margin requirement. What is the discussion with you and these 
Prudential Regulators? They are the ones that are causing this 
problem, right?
    Mr. Gensler. Well, we have jurisdiction. You gave us 
jurisdiction if it is a non-bank, and of the 70 or so swap 
dealers we now have statistics. The majority of them are 
actually non-banks. They are often the affiliate of a bank. You 
know, they are the sister of a bank, but you have given us that 
jurisdiction.
    I think we are pretty comfortable with what we proposed.
    Mr. Peterson. But the problem is that the ones that are 
banks that are regulated, they are telling their customers they 
are going to have to put margins on because the Prudential 
Regulator is going to require them to have margins. Is that 
what is going on?
    Mr. Gensler. Well, the proposal from the Prudential 
Regulators, the Federal Reserve and others, was that there was 
no specific requirement, but then they did include in the 
preamble several sentences that said, but, of course, if you 
are extending credit, you should do that consistent with your 
overall credit policies of the bank, and those key sentences in 
the preamble is what has been debated, and I don't know where 
the Federal Reserve will end up. I know what we have been 
advocating is to be consistent with where we are.
    Mr. Peterson. Now, you have been advocating that these end-
user, non-bank end-users shouldn't be required on this margin 
requirement.
    Mr. Gensler. Right. That it be just a matter of commercial, 
private negotiation.
    Mr. Peterson. Yes, but you think that the Prudential 
Regulators may come to the right conclusion at the end of the 
day?
    Mr. Gensler. I think so, because in February we put out a 
new consultation internationally, not just here domestically 
but internationally, that included that the end-users would not 
be caught up in this. So that is what is this last 
international document that was put out and should be finalized 
by the summer.
    Mr. Peterson. Right. So, I mean, this has been a big issue 
that has been going on for 2, 3 years. We have bills introduced 
and all this stuff, am I right that it is premature to be 
passing bills before we know what the final outcome of this is 
going to be?
    Mr. Gensler. I think that you gave us clear direction on 
this and clear authority. We have the authority to finalize it 
the way you wish. The CFTC is doing that. The international 
consensus is aligned with what your Committee's views are or at 
least your views were.
    Mr. Peterson. Thank you. Thank you, Chairman.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Chairman Gensler, 
it is good to have you.
    I was particularly interested in your testimony about some 
of the things that you are doing on LIBOR. As you know in 
another committee assignment I had we had some discussions 
about LIBOR, and can you kind of give me a blueprint of kind of 
where we are headed with that, and what kind of timeline, and 
who are the market participants that are working on this issue?
    Mr. Gensler. I thank you, and I thank you for your 
leadership on these issues because I know you have been looking 
at in the Committee. Where we are is there is a market called 
Interbank Lending, bank-to-bank lending without posting 
collateral. It is called the unsecured market or it was. What 
we know is it is essentially non-existent now due to a lot of 
changes, structural changes in the banking market and also new 
rule changes in the Basel Committee's capital rules.
    So since 2008, we have had LIBOR referencing something that 
essentially is non-existent, and we have had these three large 
cases that have led to $2.5 billion in fines at Barclay's RBS 
and UBS, but I don't think that is the central part of the 
story. The central part of the story is what do we do when a 
market is referencing something that is not actually trading, 
and if it were just not trading for 3 days or even a week or 2, 
that would be one thing, but this is long term.
    So the international regulators, both bank regulators and 
market regulators, have been pursuing dialogues and 
discussions, security regulators have a consultation out on 
best practices and also looking at if we were to transition how 
to smooth that transition. This would not be easy to transition 
from U.S. Dollar LIBOR to something else. It would be very 
challenging, should take a long time, it should be smooth, 
because it is so embedded in the financial system. There have 
been a lot of market participants involved either by written 
consultation or brought into round table discussions. But this 
goes well beyond the U.S., well beyond the CFTC because the 
system uses this rate in so many ways even though the rate, I 
think, long term is not sustainable.
    Mr. Neugebauer. So is the direction it is moving is that 
currently there are different currency LIBORs, Euro LIBOR, U.S. 
LIBOR? Are you moving to continue to have a rate in each 
currency, or are you looking for a larger, a universal number 
that everybody is working off?
    Mr. Gensler. So what the international securities 
regulators came around to in this public consult is that any 
benchmark to be viable and reliable should be anchored in real 
transactions. It is sort of like if you were to buy a home, and 
you asked your realtor what are the comparable prices in the 
neighborhood, you would like to know what the comparable price 
is. Now, if there is no transactions for the last 4 years, that 
leaves you guessing what to pay for that house.
    So to anchor in real transactions, Martin Wheatley, who 
runs the Financial Services Authority in London--has already 
recommended last summer--he recommended that there shouldn't be 
Canadian Dollar LIBOR, Australian Dollar LIBOR, and six other 
currencies. He said there just isn't enough there, but then 
that brings us back to the question about U.S. Dollar LIBOR, 
Euro LIBOR, and like you said, those are more challenging 
because they are so part of the financial system. We have this 
fragility of relying on something that may not be referencing a 
true market.
    Mr. Neugebauer. Are any of the Fed's benchmarks being 
considered? And the only reason I ask you that is because the 
Fed has the ability, obviously, to manipulate that but in many 
cases that does trigger other transactions, in other words, the 
discount rate or Fed funds rate, those kinds of things that 
would reflect what banks could either borrow from the Fed or 
could borrow from each other.
    Mr. Gensler. There are three or four different alternatives 
that market participants have been chatting about. One of them 
is something called overnight index swap rate that does 
ultimately refer to in an indirect way to overnight funding 
rates for the banks, but it is based on real transactions. 
Other things people are looking at are there rates based on how 
people do collateralized lending, general collateral or 
repurchase agreements? There is even looking at the treasury 
yield curve and so forth.
    Mr. Neugebauer. Thank you. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman, but I must say at the outset that it is somewhat 
unfortunate that we are trying to pack so much into one 
relatively brief hearing. Each of these bills we are examining 
today deal with very complex issues that entire armies of 
lawyers are paid to try to understand, and while the idea's 
embodied in these bills are not new, a great many of the 
Members of this Committee are, so in my humble opinion it would 
be preferable to break some of these bills into just a few 
hearings so as not to force our Members who are new to Congress 
and new to this Committee to sort of drink from a fire hose.
    So I am hoping, Mr. Chairman, that at least we will get one 
more bite of the apple before we pass this, but nonetheless, 
this is the hand that we dealt, so here we are.
    I do want to say at the outset, however, that I am 
supportive of these bills that we are discussing today, because 
I think it is very important for us to emphasize that none of 
these bills, neither in spirit nor in letter, seek to undermine 
the regulatory regime prescribed by Title VII of Dodd-Frank. 
Rather, they all seek to address areas of either statute or 
rulemaking that require clarification and adjustment, and that 
is why all of them have historically had strong bipartisan 
support both in this Committee and the other Committee I serve 
on, Financial Services.
    It is in my opinion that these bills will not lead to new 
loopholes, these bills will not lead to lax regulation, and 
they will not lead to another Wall Street meltdown. These bills 
are not about protecting the bottom line of big banks or 
helping the exchanges skirt regulation. The legislation before 
us today is about keeping the cost of doing business down for 
end-users of derivatives, whether they are big companies like 
Delta Airlines or Home Depot or small and large farms and 
ranches in our districts and allowing them to continue to hedge 
price risk.
    This, in turn, helps keep costs down for consumers, and the 
ideas contained in these bills are not incompatible with the 
stated goals of Dodd-Frank on transparency or customer 
protection. We must not be afraid to make changes to Dodd-Frank 
where they are warranted, particularly to portions that may not 
work as we intended them to do or may have unintended negative 
consequences.
    So with that said, let me turn to you, Chairman Gensler, 
and ask you about an issue that I have raised with you many 
times, and that is the extraterritorial application of Dodd-
Frank rules. It would seem that with the application of 
clearing and margin requirements as well as swap dealer and 
major swap participant registration and reporting requirements 
would prevent any risk of another AIG-like market failure, and 
yet the cost of such extraterritorial application would be 
quite substantial, not to mention the risk to U.S. 
competitiveness in this space.
    Given developments late last year unnecessary disruptions 
around the October 12, deadlines, last-minute, no-action 
letters reports that foreign banks wouldn't do business with 
U.S. firms and interim final rules.
    Let me ask you why should Congress have any level of 
confidence that you are moving in the right direction and that 
markets won't be negatively impacted by the actions of the CFTC 
with respect to extraterritoriality, and also how do you intend 
on getting the rest of the world to follow the United States 
when the SEC and the CFTC rules currently don't align on 
timing, process, or content in many areas?
    Mr. Gensler. I would hope that you would have confidence in 
any agency that was handed an enormous task and has largely 
completed it, that we have had 40,000 public comment letters 
and 2,000 meetings, and we have actually addressed where we 
need to move in moderation or even re-proposed rules in a 
number of circumstances.
    I think also on the cross-border side I just raised, that 
even the bills before you could blow a hole in the bottom of 
Title VII with all respect because whether it is through 
booking something in an affiliate or booking it offshore, that 
risk will and does come back here. That is exactly what 
happened in AIG.
    Mr. David Scott of Georgia. Let me ask you, what would 
happen later this year if there still is not an international 
harmonization or even domestic harmonization?
    Mr. Gensler. We will continue to work, I think, very 
closely with the international community. We will not be 
exactly the same, but where there are conflicts, we are taking 
a very pragmatic approach. We have worked through a number of 
them with Japan with Mr. Masamichi who testified here in 
December. They have a clearing requirement, we have a clearing 
requirement. They were actually tightly aligned, but there was 
a conflict, and we did one of those no-action letters so that 
U.S. firms can clear in a Japanese clearing house, for 
instance.
    So where there are conflicts, we have been pragmatists, and 
that is what has led to a lot of these no-action letters is 
trying to adjust and moderate.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    Mr. Conaway [presiding.] The gentleman's time has expired. 
Thank you, Mr. Scott.
    I now recognize myself for 5 minutes.
    Chairman, thank you for being here. Welcome.
    Following up on the cross-border jurisdiction issues, are 
there countries now that you trust their regulatory scheme to 
be good enough that you could go ahead and grant them the 
substituted compliance designation like Japan or EU or Canada 
where at least with respect to those jurisdictions you could 
put these kinds of questions aside without a lot of hassle?
    Mr. Gensler. I think it is an excellent question. There are 
six jurisdictions overseas; just six that have registered swap 
dealers with us; Europe, Switzerland, Canada, Japan, Australia, 
and Hong Kong. We have reached out to all six and said, let's 
get going because we could probably identify maybe not all the 
rules but a substantial number of them where we can look to 
that home country's substituted compliance, and we made some 
good progress with Canada and Europe in some of those 
discussions.
    Mr. Conaway. Are there any of the six that you don't out of 
hand trust?
    Mr. Gensler. I trust all of my fellow regulators, but their 
laws and rules are sometimes a little different than ours. So 
it is a question of whether, technically whether they are 
comparable and comprehensive. Let's say they have a clearing 
requirement that it is comparable enough. It doesn't have to be 
identical.
    Mr. Conaway. All right. So perfection is the enemy of the 
good here, is it?
    Mr. Gensler. No, no, no. It has to be comparable and cover 
the sort of waterfront but not identical.
    Mr. Conaway. One of these comes up from time to time that 
we generally vehemently oppose is some idea of combining the 
SEC and the CFTC, and one of the fodder for that idea is that 
you can't do joint rules. You have a U.S. person rule that for 
the SEC's one kind of a U.S. person, and you have a different 
one. Why can't you guys get together so we can put some of 
these kind of arguments aside, because quite frankly, I think 
that would be in the worst interest of the overall scheme to 
try to combine you, but those kinds of apparent lack of 
cooperation, for lack of a better phrase, give people fodder 
for that idea.
    Mr. Gensler. Yes. I want to say that I do share your view 
about it I don't think it would benefit the American public 
to----
    Mr. Conaway. I don't either.
    Mr. Gensler. All right. We are together on that.
    Mr. Conaway. Absolutely.
    Mr. Gensler. But in terms of coordination, we are 
coordinating with the SEC. You granted this agency oversight of 
about 95 percent of the swaps market, and SEC has about five 
percent. On U.S. person, more specifically, we put out a 
proposal on guidance last July. We have actually narrowed it to 
a more territorial approach, and I think we put that out in 
December. We had one set of questions left about offshore 
commodity pools that are still for the benefit of U.S. persons 
managed here in the U.S. But that narrower territorial approach 
actually, I think, has been working reasonably well.
    That means if you do a trade offshore even with a 
guaranteed affiliate, it doesn't get counted like it does to 
this more territorial U.S. person approach.
    Mr. Conaway. Well, let the record reflect I vehemently 
oppose that idea because I do think the public would be harmed 
by it, but the closer you can work together on joint rules like 
that, obviously the better.
    We have the cost-benefit legislation that my colleagues and 
I have proposed last year, passed the House with overwhelming 
bipartisan support, would require the CFTC to come in line with 
the President's Executive Order of cost-benefit analysis.
    Do you oppose that idea? Is that not in the best interest 
of the regulated?
    Mr. Gensler. I think that considering costs and benefits 
have benefited our rulemaking. I think we have done it better 
because we have focused on those costs and benefits. There are 
many choices, though, that Congress makes--we are delegated 
authority--but you make the key choice, whether there is 
clearing, whether there is public transparency and so forth, 
and so I think just to raise the concern that you wouldn't want 
us to have to reconsider the things that you have already 
decided in the eyes of some cost-benefit.
    Mr. Conaway. Chairman, you are wonderful at answering, but 
the question was do you oppose the legislation?
    Mr. Gensler. Oh, the legislation? I think the legislation 
would make our jobs quite a bit harder. In the future, whether 
there are tweaks to any cost-benefit in the Commodity Exchange 
Act, we will live with it, but it may well be hard to get any 
rule out of the building.
    Mr. Conaway. Okay. Speaking of the building, there is a 
report out that there is a data access issue with respect to 
the Office of Chief Economist. Can you talk to use about when 
you knew about it, did you approve the program in its 
inception, or just kind of quick snapshot of what is going on 
there.
    Mr. Gensler. So our Chief Economist Office for years, maybe 
decades, has done research on data that comes into the building 
and sometimes publishes some results and puts that out to 
benefit the public and benefit the markets. They also have, and 
this is for many years, used some outside consultants and 
academics who are credentialed and signed in. There was a 
question that came to our attention in December about at least 
one research report written by an outside academic as to 
whether they had the right to use the data and so forth. It 
came to my attention then. We immediately started to look at 
our credentialing, how are they documented, what sort of 
documents they signed, and so forth. And what we did at that 
point in time is we said let's for the moment just shut down 
the use of any outside academics, consultants as we found some 
that our documentation and internal controls weren't fully up 
to snuff. We shut it down promptly, and we referred it to our 
Inspector General.
    Mr. Conaway. Okay. Well, if you decide to do something 
again in that arena, we would appreciate being briefed on the 
internal controls and the other things that you are going to 
put in place.
    Mr. Gensler. I think that is a good idea that we would do 
that.
    Mr. Conaway. All right. My time has expired.
    Mr. Enyart, Illinois, 5 minutes. Bill. All right. No 
questions.
    Mr. Vargas.
    Mr. Vargas. Thank you very much, Mr. Chairman. I appreciate 
the opportunity.
    You did comment when you first got here that you were quite 
restrained, that we had given you an enormous task, and you 
were quite restrained because of resources. Could you comment a 
little further on that?
    Mr. Gensler. Well, we have 684 people. That is about 50 
more people than we had 20 years ago or seven percent more than 
we had 20 years ago and a little smaller than a year ago. In 
that time Congress gave us the job to oversee the swaps market 
that is eight times larger in risk than the futures market that 
we had overseen.
    So we think that we need about 1,000 people, and we also 
need significantly to grow the technology, and I know this is 
hard because Congress is grappling with big issues about the 
Federal budget, and an extra $100 million for this small agency 
is hard to find, but I think it is a good investment for the 
American public, and simply put we are not right-sized for the 
mission that we have right now. We just simply don't have the 
staff to do the examinations, we don't have the staff to do the 
enforcement. Our enforcement staff is smaller than it was, I 
think, 2 years ago or about the same size, and though it is not 
a way to measure it, these LIBOR cases brought in $2 billion to 
the U.S. Treasury, and the last 12 months we are funded at 
about $200 million.
    Mr. Vargas. And a follow-up question with respect then to 
sequester. Is the sequester in any way causing havoc in your 
agency or not really, or how it is affecting you?
    Mr. Gensler. It pinches us. It definitely pinches us. As I 
said, we are a little smaller than we were a year ago. We were 
cautious this year because frankly I thought it was a 
reasonable possibility that we would end up with a sequester, 
and maybe I am a man that came from markets and playing the 
odds or something, but so we have been cautious, and so we are 
able to make it through the next 6 months we think without 
furloughs, but we are just not in the right place. We shrank a 
little bit over this last year to prepare for sequestration. We 
are not spending enough on technology either.
    Mr. Vargas. You mentioned that there are six international 
regulators, and where do you find the convergence or divergence 
with them on the issues that we have been discussing so far?
    Mr. Gensler. Geographically we are best with Europe and 
Japan because they are further along. They have passed their 
legislation, and they have put in place most of their rules. 
Canada almost as far, Australia and Hong Kong have more work to 
do legislatively.
    In terms of substance, in terms of policy where we are 
closest is central clearing seems to be a good, solid, strong, 
international consensus, data reporting to the regulators, 
strong international consensus, and some of these margin 
issues, actually a growing consensus. Where we are less close 
is whether the public gets the benefit, the end-users get the 
benefit from seeing the price in volume and transparency. In 
our country we have benefited since the 1930s in the securities 
markets, the futures markets, and I think we come together 
actually across the philosophies that transparency is a good 
thing, but it does tip things away from Wall Street, and so it 
shifts some information to the public, to the end-users, and 
that consensus isn't as well formed in some of the other 
jurisdictions around the globe.
    Mr. Vargas. Like which ones?
    Mr. Gensler. In Europe they are still putting that in front 
of their European Parliament, and they look to try to finalize 
that this summer, so I think they are going to get there. It 
feels very good that they will get there. Japan has it but more 
narrowly than ours, and then other jurisdictions do not have 
the public transparency components like Hong Kong or Singapore 
for instance.
    Mr. Vargas. Thank you very much. Thank you very much, Mr. 
Chairman.
    Mr. Conaway. The gentleman yields back.
    Mr. Austin Scott for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman, and 
many of the questions that I had have been asked, but I do want 
to commend you, Chairman, for the statement that you made that 
you actually prepared for the sequester. That is not something 
that we have heard from many of the people that were in charge 
of their agencies.
    Mr. Gensler. I thank you. I just was reading the 
newspapers.
    Mr. Austin Scott of Georgia. Yes. I majored in risk 
management, so I think that it was just prudent to prepare for 
it once it became the law of the land, so thank you for running 
your agency like that.
    I think the other thing I would just reiterate that has 
been talked about a good bit here is that making sure that we 
are able to maintain the difference in the end-users who don't 
pose a systemic risk to the markets and the others who do pose 
a risk, and with that said, H.R. 634 is before us. We passed 
this bill last year, 370 to 24. It is the legislation that 
simply, essentially says that if you are an end-user and you 
qualify for the clearing exemption, you would also qualify for 
the margin exemption.
    Again, it passed 370 to 24 last year in the House. We are 
going to be dealing with it again this year, broad bipartisan 
support. It was not taken up in the Senate.
    Do you have any thoughts on that that you would care to 
share with the Committee?
    Mr. Gensler. The non-financial part of our economy employs 
94 percent of private-sector jobs, and Congress came to a 
judgment that those parties who only, if I can use another 
statistic, only make up about nine percent of this swaps 
market. So 94 percent of jobs, if I can say it that way but 
nine percent of the swaps market. Congress came to the judgment 
that the Administration supported that they didn't have to come 
into central clearing. Consistent with that we have proposed 
that they are not caught up in margin.
    Mr. Austin Scott of Georgia. The margin.
    Mr. Gensler. The margin and I think that is where we will 
end up as a final rule later this year as well, and that is 
what we have been advocating with the international community.
    We have also looked at whether end-users should have more 
time to report their data to the data repositories. In every 
spot we reach out to many of these end-user communities, and 
you will hear from some of them later today.
    Mr. Austin Scott of Georgia. Yes.
    Mr. Gensler. As to how we can accommodate to make sure that 
this might touch them but touch them lightly.
    Mr. Austin Scott of Georgia. Okay. One last question if I 
might. I have been through 50 Committee hearings. So is the 
President going to sentence you to another 50 hearings or----
    Mr. Gensler. I guess you maybe have read some news reports. 
There are ongoing discussions about that. It is a terrific 
honor to serve, privilege, and I hope that a significant part 
of my remaining professional life is in public service. So I 
think this job is terrific, and appearing before this Committee 
is terrific.
    Mr. Austin Scott of Georgia. Up until that I think your 
testimony was very honest.
    Thank you, Mr. Chairman. Thank you, Mr. Gensler. I yield 
the remainder of my time.
    Mr. Conaway. The gentleman yields back.
    Mr. Gallego from Texas, 5 minutes. No? All right.
    Mrs. McLeod for 5 minutes. No?
    Anybody else? Mr. Nolan, 5 minutes? All right.
    Mr. Crawford.
    Mr. Crawford. Thank you, Mr. Chairman, and before I begin 
with questions, I would like to thank both panels for being 
here to testify today about the current state of Dodd-Frank 
implementation, particularly thank you to Mr. Larry Thompson, 
General Counsel, for the Depository Trust and Clearing 
Corporation, who has come before the Committee before to 
testify particularly on the merits of legislation H.R. 742, the 
Swap Data Repository and Clearinghouse Indemnification 
Correction Act of 2013. I certainly appreciate my colleague, 
Congressman Sean Patrick Maloney for joining me as a cosponsor 
of this bill, and finally, Chairman Gensler, I would like to 
thank you as you are charged with the difficult task of 
improving market transparency and systemic risk mitigation and 
global derivatives market. I am hopeful the CFTC will achieve 
these goals, and I introduced H.R. 742 to fix the Dodd-Frank 
provision which threatens to undermine the bipartisan goal of 
enhancing transparency and mitigating systemic risk.
    Currently Dodd-Frank law includes a provision requiring a 
foreign regulator to indemnify a U.S.-based SDR for any 
expenses arising from litigation relating to a request for 
market data. Unlike most of the world, the concept of 
indemnification is only established within U.S. tort law. As a 
result, foreign regulators have been reluctant to comply with 
the provision, and international regulatory coordination is 
being thwarted.
    While the idea of the provision was to protect market 
confidentiality, in practice it threatens to fragment global 
data on swap markets. Foreign regulators would be forced to 
create their own SDRs, resulting in fragmented global data 
framework where regulators can't possibly see a complete 
picture of the marketplace. Without effective coordination 
between international regulators and SDRs monitoring and 
mitigating global systemic risk is severely limited. H.R. 742 
fixes this problem, and while the CFTC seeks to clarify this 
provision through interpretive guidance, all indications are 
that there is no viable solution without adopting my 
legislation as we will hear from Mr. Thompson later in the day.
    So with that I have the following question for you, 
Chairman Gensler. Recently your colleagues, Commissioners 
Sommers and Chilton both testified before this Committee and 
agreed that H.R. 742 is a necessary fix to the indemnification 
provision of Dodd-Frank. The SEC testified to that same effect 
before the Financial Services Committee last year.
    Do you agree or disagree with your colleagues?
    Mr. Gensler. I think that you have provided us in title VII 
a great deal of flexibility, and we have used that flexibility 
in the interpretation we have done. The bill as I understand it 
is consistent with that, and certainly international regulators 
would like that extra step. I mean, what we did in the 
interpretation that we put out--that you referenced--is that 
international regulators, if in their statute, anywhere in that 
statute they have authority to get that information, then the 
indemnification doesn't apply.
    So we interpreted it, I think, just about as broadly, but 
your bill certainly just goes further by just removing the 
indemnification altogether.
    Mr. Crawford. You have indicated that interpretive guidance 
would be enough to address the indemnification problem, so I 
think as you indicated global regulators disagree and have 
expressed that they actually support the legislative approach. 
I am just wondering why there was a difference of opinion 
there.
    Mr. Gensler. Well, we have addressed it. I think that in 
some circumstances global regulators would like to see 
information that they don't necessarily have authority to see, 
that their local laws or legislation haven't given them the 
authority to see, and so I think as they have expressed to us, 
for instance, they might want to see in these data repositories 
information about U.S. traders who might do a transaction 
referencing one of their government rates or something. So they 
wanted to go a little further in what they could see.
    Mr. Crawford. Okay. Why are reforms like cross-border 
guidance at CFTC being made through interpretive guidance and 
staff no-action letters versus a formal rulemaking process? 
Shouldn't the CFTC follow the Administrative Procedures Act 
requirements?
    Mr. Gensler. With regard to guidance we do follow the 
Administration Procedures Act quite closely. There have been 
four or five places where we were not asked to do rules, but 
somebody has come in and said can you interpret some words in a 
statute, and this cross-border provision is something that 
Congress put in--it is actually technically called Section 
722(d)--that did not have required rulemaking. Furthermore, is 
not in the provisions for the Securities and Exchange 
Commission. This was one place that it was not the same.
    And so we had a lot of people come in. We debated whether 
we just left it to facts and circumstances, issue no 
interpretation, or put out an interpretation, or third, put out 
an interpretation subject to public comment. We chose the third 
to get the public input, and yes, we have gotten a lot of 
public input. I would include this hearing in that public 
input. So it has been very helpful to interpret these words, 
and I think give guidance.
    Mr. Crawford. I appreciate that. You anticipated my next 
question so I don't have to ask it. I am out of time. I 
appreciate your being here, Chairman Gensler.
    I yield back.
    Mr. Conaway. The gentleman yields back.
    With apologies to Mr. Maloney from New York for skipping a 
while ago. Sean, you are recognized for 5 minutes. Sorry about 
that.
    Mr. Maloney. That is quite all right, Mr. Chairman. I am 
the youngest of six kids. I am quite used to it. My mother says 
I was lucky to get a name, Mr. Gensler, at the end of five 
brothers.
    Listen, I want to reiterate the comments of my colleagues 
and commend you on what I think is really extraordinary public 
service. I was with a very significant player in a marketplace 
that you oversee just on Sunday night, and he said to me there 
are a dozen or so guys in Chairman Gensler's position all over 
the globe, and he is the only one getting anything done, and 
regardless of the minor differences, a lot of the people you 
oversee have with each of the decisions you have made, there is 
from my perspective a real growing consensus that you have been 
extremely effective given the extraordinary responsibilities 
that Congress has placed on you recently. And so thank you, 
first of all, for the work you have done. I think it is 
extraordinary and critical to the functioning of these markets. 
When I was last in Washington, I was working in the White House 
for President Clinton, but when I left, I ran a commodity 
derivatives risk management company, and we made software to 
try to get at some of the very issues for the commodity 
derivatives market that we are still wrestling with in the 
larger derivatives markets.
    So I have been an observer of this space for a decade, 
although I am a little rusty having worked in other areas 
since. But I am particularly concerned about your comments 
about the resources that you have been provided, and I want to 
give you a chance to elaborate on that because I really would 
like you to be able to inform the Committee what the world is 
going to look like if we don't right size your agency given the 
extraordinary increasing responsibilities that we have bestowed 
on you.
    Mr. Gensler. I thank you. I am one of five children, and I 
am at the bottom end, too, so I know that which you speak of.
    I think it is also about risk assessment. I think that a 
wrong-sized agency can survive for a while and then at some 
point something kind of pops up. We don't have the staff right 
now. We don't go into the big clearinghouses annually as 
Congress directed us to do for the systemically important ones; 
Chicago Mercantile Exchange, ICE, and LCH. We don't really have 
the staff to do examinations of the future commission merchants 
and now the swap dealers.
    Now, we first rely on the National Futures Association, but 
we feel some obligation to have back up and to have spot checks 
and to move in from time to time. We don't really have the 
staff to answer all the hundreds of questions that are coming 
in. The futures industry comes in with questions, the swaps 
industry, and we do our best, but it would be better to have 
more people, and in the enforcement side we don't have enough 
people on the enforcement side.
    I liken it sometimes to if the National Football League 
took on eight times the number of games--because we have eight 
times the number of risks that we are overseeing--and kept the 
same number of referees, and so you would have one ref per 
seven games, and then one game wouldn't even be reffed.
    And I think what we know would happen in football is it 
would be a rougher, tougher game out there probably, but the 
fans over time would lose confidence, and I think the analogy 
is the investors at some point would lose confidence because 
there would be some major hiccup, everybody would haul us up 
here, I would be up here for my 76th hearing, and it would be, 
well, why, Mr. Gensler, did you let this happen, and nobody 
would want to hear because we didn't have resources. I mean, 
the American public needs some protection and oversight, and so 
I think that is where we are.
    Mr. Maloney. Well, thank you for that, and in the time I 
have remaining let me just cut the other way a little bit. I 
mean, do you feel that you also have a role in reducing the 
regulatory burden of some of the firms you oversee, and where 
do you think, if there are areas where Dodd-Frank went too far 
or where we could reduce both their burden and yours, what 
would you like to see us do?
    Mr. Gensler. Well, I think title VII coupled with a 
provision that was passed 20 years ago which gave the 
Commission exemptive authority, where we can exempt some 
provisions if it is in the public interest, has worked very 
well. We have taken to heart end-users, non-financial companies 
that are 94 percent of jobs but only nine percent of the market 
and tried to give them more time. There were issues that were 
focused on in the inter-affiliate area. I know there are bills 
here that I might have concerns about because I think you could 
really undercut this. We are going to address the inter-
affiliate issues, and we have something in front of 
Commissioners to finalize it.
    We have end-users coming in about something called the 
treasury function. If they set up a treasury function, how to 
address that, but, again, I think our exemptive authority gives 
us pretty good ways to craft things. Where we can't we would 
come to you, but I think we have some pretty good authorities, 
and we look to your advice and guidance on these things as 
well.
    Mr. Maloney. Thank you, Mr. Chairman.
    Mr. Conaway. The gentleman yields back.
    Mr. Denham from California, 5 minutes.
    Mr. Denham. Thank you, Mr. Chairman.
    Mr. Chairman, I wanted to follow up on that same line of 
questioning on the regulatory level. First of all, my belief 
obviously with Dodd-Frank was it was designed for the big 
banks, yet in my community we are dealing with a lot of 
challenges on a day-to-day level with some of my smaller 
irrigation districts.
    Do you think that it is appropriate that that long reach 
goes all the way down to the irrigation districts and some of 
their day-to-day activities?
    Mr. Gensler. I would like to follow up with you and 
understand what they have raised, because if I think of an 
irrigation district, they would be an end-user. They wouldn't 
have to use this clearing and margining. I would like to find 
out and if there is some practical issues there that we could 
explore together.
    Mr. Denham. Thank you. I will send you some of those 
details right after this hearing and certainly would love to 
follow up with you on a meeting.
    Mr. Gensler. You know, it would be very helpful if we got 
such details, and we can then follow up a week or 2 later and 
then sit down and see what the issues are.
    Mr. Denham. Thank you. Just one other question. Do you 
believe that the swap execution facilities should have five 
RFQs?
    Mr. Gensler. Congress incorporated in the bill a provision 
to promote transparency that buyers and sellers meet in the 
marketplace and compete in the marketplace, and it actually 
used words that it would be multiple parties having the ability 
to transact with multiple parties. Roughly. I don't have the 
words.
    We proposed that there are a number of ways to do that. The 
traditional way which is called an order book where everybody 
sees the bids and offers and the whole market sees it, but as 
an alternative also because this is a little bit different 
market, a more narrow focus called a request for quote that you 
could go out to a smaller number. We proposed five. I think 
that that is an appropriate level.
    I would note there are 73 registered swap dealers. It is 
not a small community, and even though some of those are 
multiple in a company, there are at least 35 or 40 separate 
families or big companies making markets.
    I would also note this requirement would only be in the big 
interest rate markets, the big four currency markets that we 
have a clearing mandate and for the big credit default swap 
entities that were at the heart of this marketplace. So it is 
narrow that way as well.
    And last, I would note you gave us authority to exempt from 
this any large notional size transactions or what people 
usually call block trades. So it is only those markets that are 
liquid enough to be cleared. There are 73 registered swap 
dealers, so it is not like there is only a handful of them. It 
is not about energy or agriculture or metal products because we 
don't have a clearing mandate on those at this time.
    Mr. Denham. The SEC has an alternative proposal on what the 
mandatory requirement is. Why the difference between the two 
Commissions?
    Mr. Gensler. They had also included something which I know 
it is in the weeds, but it is called order integration. They 
said if there is an order book, you must go to that, and that 
gets what is called time and price priority. We did not do 
that. That is more central to their marketplace than the 
futures marketplace and what we proposed. We didn't do this for 
the swaps marketplace.
    There are also many, many things that are identical in 
their swap execution facility rules, proposals, but those tend 
to get less focus, of course. This issue is one, but, again, we 
are working through this, the five Commissioners. We have done 
most of what we have done unanimous. Many other things 
bipartisan. We seek consensus at the Commission. We are not 
there yet on this one.
    Mr. Denham. Thank you. I would like to follow up with you 
on that one as well. And just to clarify, I understand that I 
call things somewhat differently than you do. Our irrigation 
districts are your special entities. That is the challenge in 
the regulation on irrigation districts, but I will follow up 
with you on that as well.
    Mr. Gensler. Okay. I look forward to that.
    Mr. Denham. Thank you.
    The Chairman [presiding.] The gentleman yields back.
    The chair now recognizes the gentleman from Florida, Mr. 
Yoho, for 5 minutes.
    Mr. Yoho. Thank you, Mr. Chairman.
    Mr. Gensler, I appreciate you being here, and it is an 
honor to be here, and I heard you say that, too, and I also 
want to reiterate what Austin Scott said that you prepared for 
sequestration, and I commend you for that.
    You know, the Dodd-Frank financial reform bill, it came 
out, it was such a massive change to the economy. It was 
something we needed some oversight and some of those things 
granted, but it also created so much confusion in the 
marketplace, and what we need now is jobs, and what we have to 
do right now is create that certainty. And I look through this, 
and I look forward to these bringing that certainty to parts of 
the market.
    But one of the things here it says, excuse me, it says, 
``Congress never intended for the end-user to be subject to 
expensive margin requirements which would require companies to 
take capital away from their businesses and hinder their 
ability to make job creation investment.''
    We see that in the community banks in our area in north 
central Florida. We have a lot of the community banks that the 
farmers go to, and it is impeding them in doing business, and 
the more clarity that we can bring to that would be great, and 
I look forward to working through those proposals for you.
    And one question I do have for you is it is my 
understanding that there are five different definitions of 
hedging, including separate definitions within the same rule. 
Do you think this provides clarity for the regulated community?
    Mr. Gensler. You know, it is an interesting challenge being 
at a regulatory agency and sometimes a hedging exemption 
Congress would want it to be wide and sometimes they would want 
it to be narrow, depending upon the circumstance, whether it is 
related to position limits or this clearing exception and so 
forth.
    We made it very wide with regard to the clearing exception, 
and I should mention we also used our exemptive authority to 
exempt community banks, those smaller than $10 billion, 
thousands of banks in this land, from the clearing exception. 
So the vast majority of banks are treated like non-financial 
end-users as well.
    But sometimes the words in the statute and sometimes even 
the intent of Congress is to be wide or narrow, and in the 
clearing requirement it was pretty clear you wanted us to be 
pretty wide to give these end-users an out from clearing if 
they were hedging.
    Mr. Yoho. Okay. Following up with that, is there any harm 
in using just one common definition? Why or why not, and if you 
could discuss that a little bit.
    Mr. Gensler. There could be. I think if we were to use the 
same definition and position limits and people debate whether 
they are for or against position limits, but I think it is 
pretty clear Congress in Dodd-Frank and for decades earlier 
wanted us to have them, you probably exempt almost everybody 
from position limits even the speculators. I mean, the way that 
we sort of wrote the hedgers out of clearing was very wide and 
was not the same words. They are not the same Congressional 
words because in the position limit area it talks about bona 
fide hedging in a different way, but I think it would not be 
appropriate to use the same definition and position limits 
because we would have to then be too narrow in the clearing 
exception.
    Or you might say, well, that would be good because you 
would just basically gut position limits, one way or the other.
    Mr. Yoho. All right. Thank you.
    Mr. Chairman, I yield back the remainder of my time.
    The Chairman. The gentleman yields back the balance of his 
time.
    The chair now recognizes the gentleman from California for 
5 minutes.
    Mr. LaMalfa. Thank you, Mr. Chairman, and for having this 
hearing.
    As we know, regulations hopefully well intended, can have 
sometimes an adverse impact on people's lives and sometimes it 
is unclear what the benefits may be from some of those regs.
    For example, public utilities like I have in my district 
and probably common to many areas of the country, are seeing 
their access to energy supplies cut off by arbitrary 
regulations.
    So without a correction I think one of the byproducts of 
this portion of Dodd-Frank may be increased cost for 
electricity and gas bills for regular rate payers all around 
the country, which to me, especially at this time is 
unacceptable or not when it is hard to see what the benefit 
really is. So myself and my colleagues, Mr. Vargas and Mr. 
Denham and a few others have joined in on a bill, H.R. 1038, 
which would allow government-owned utilities to continue 
managing their risks, with many of their former counterparties 
who have continued to walk away from even in like the ability 
to enter into these agreements because of the CFTC's non-
binding no-action letter.
    So I wonder would you support what we are trying to do in a 
very narrow scope of H.R. 1038?
    Mr. Gensler. If I could just mention a little background 
that emanated in Dodd-Frank from the Senate side but just a 
little background, there was a provision in the final bill that 
there had to be enhanced sales practices and enhanced 
protections for transacting these swap transactions with what 
was defined as special entities, which included municipals and 
pension funds or certain pension funds.
    We sorted through a second provision, where Congress gave 
us authority to further define a swap dealer and a de minimis, 
if you were less than a certain level, you didn't have to 
register as a swap dealer. The special entity provisions were 
to provide greater protections of whether it was for a 
municipal electric co-op or just a municipal government or as I 
said, pension fund.
    Mr. LaMalfa. Certainly, and I know my time is limited, I am 
sorry, so I guess what we are finding in practice, though, is 
that people are pulling back from entering into these 
agreements, and so my bottom line is H.R. 1038, do you feel in 
its narrow scope a supportable measure?
    Mr. Gensler. Well, I haven't read it in detail so I----
    Mr. LaMalfa. Okay.
    Mr. Gensler.--want to stay away from that but let me just--
--
    Mr. LaMalfa. Let's move from there then.
    Mr. Gensler.--I think the policy issue that we will be 
addressing is the protection of those entities, those 
protections, those sales practice protections, those that you 
want to be at that level. We did use that to make it easier.
    Mr. LaMalfa. I am sorry. Let me ask on that. Has there been 
a problem in the past? What role did public power companies 
play in the crisis we have seen before then?
    Mr. Gensler. They didn't play a role or any material role 
except for they were the losers in a sense by a crisis. Their 
jobs and their markets were hurt. I think that what we did was 
we recognized this, we gave exemptive authority, we raised the 
de minimis, meaning you don't have to register as a swap dealer 
unless you do more than $800 million of transactions with 
special entities, and we did that because the one comment 
letter we got on this gave us a ratio to make it \1/10\ of the 
overall de minimis. So we were reacting to comment letters as 
well. At the time the comment letter came in they suggested 
$300 million. We went to $800 million, but again, I respect 
that some of these rural electric cooperatives think it should 
be higher.
    Mr. LaMalfa. Yes. We are looking to level the playing field 
with the independent utilities as well, which has $8 billion. 
What they are running into is that they don't believe that what 
is called the no-action letter gives them enough certainty to 
be able to operate. This would be like driving through a town 
where the speed limit says 25 miles an hour but everybody says 
you can go 50. Well, you don't know if they are going to 
enforce that or not. So the no-action letter that says that 
they can go up to the $800 million, do you believe that really 
provides them with the certainty they need?
    Mr. Gensler. The history of our regulatory system, these 
no-action letters, have given people a lot of confidence. I 
understand the metaphor, but I think it is more than that. The 
staff recommends not to bring an enforcement action. The 
Commission doesn't then sort of impose and without a lot of 
public notice, and I think we have maybe withdrawn two or three 
no-action letters in the last 20 or 30 years, but then we do 
it, and people know it, and it is public and----
    Mr. LaMalfa. The input we are getting is that people are 
pulling back and drawing out of it, so I am out of time. Thank 
you.
    Mr. Conaway [presiding.] I thank the gentleman. Mrs. 
Hartzler for 5 minutes.
    Mrs. Hartzler. Thank you, Mr. Chairman. Thank you, Chairman 
Gensler, for being here with us and for working and listening 
to people as you have implemented these rules, and I have heard 
of some positive outcomes, and people are feeling like that you 
are being responsive. And so I don't know if we are completely 
there, all the concerns are aligned, but I know you are trying, 
so thank you for that.
    I wanted to ask a little bit about MF Global, kind of 
switch topics just a little bit because I have a lot of 
constituents in my district that were impacted by that. I know 
we are kind of winding up that situation there, but I wondered 
first of all if you could kind of give your perspective on how 
that happened and kind of summarize the recent findings and 
suggestions for changes to see that that doesn't happen again.
    Mr. Gensler. One, I want to thank you. There is always more 
work to be done, so if there are issues, we want to address 
them.
    On MF Global, and I don't know if you are aware, within 
days after the collapse of MF Global and as it turned to a 
possible enforcement action involving senior executives of MF 
Global including Jon Corzine, who I once had worked with now 15 
years ago at Goldman Sachs, I stepped aside, I am not 
participating and have not participated in these last 18 months 
or so since that occurred, but certainly we could take that 
question back. John Riley is here and could get it back. 
Commissioner Sommers heads up from the Commission to get you--
--
    Mrs. Hartzler. Yes.
    Mr. Gensler.--details that you just asked about.
    Mrs. Hartzler. Okay. Well, the Committee here has been 
aware of a recent internal report conducted by the CFTC lawyers 
on whether you were required to withdraw from matters involving 
MF Global, and the Committee has seen recent press which 
essentially said you were not required to withdraw and from a 
legal and ethical perspective your participation in Commission 
matters involving MF Global were not improper.
    As part of the oversight mandate of this Committee, we have 
an obligation to understand fully this, including the contents 
of the December 13, 2012, memo.
    So I wondered if you could please provide a copy of the 
memo by the end of this week?
    Mr. Gensler. Sure. I think it is actually on our website, 
but we will certainly get it to you directly.
    Mrs. Hartzler. Great, and has this internal report altered 
your daily activities into the investigation and your 
subsequent rule proposals for customer protection?
    Mr. Gensler. It has certainly changed my involvement. I am 
not in any way participating in that investigation.
    With regard to rulemaking, rulemakings of general 
applicability, I have been involved with that, voted on the 
proposals as staff recommended, those proposals last October, 
which have brought applicability to the marketplaces.
    Mrs. Hartzler. Okay. Great. There has been another recent 
press report about a possible serious data breach at the 
Commission surrounding the OCE Net Program run by the former 
chief economist, who is now a professor at MIT.
    So how familiar were you with how this program operated 
during its existence, and what are you doing to investigate 
what happened?
    Mr. Gensler. We have had for many years, well before I was 
at the Commission, a Chief Economist Office that works and does 
research on data but also uses from time to time outside 
consultants, academics that are then credentialed in to 
maintain that confidential information. In December it came to 
our attention. Somebody contacted us and said they saw a 
research report by one academic, and though that research 
report didn't name any specific data by any one market 
participant, they wanted to know how does that work.
    And we started looking at it immediately, and I promptly 
directed that we should suspend any of the outside consultants. 
So what we found that there were some concerns about internal 
controls, about whether they were fully documented as signed, 
their non-disclosure agreements and things like that.
    We also promptly referred it to our Inspector General. We 
have been conducting a management review, but we also see the 
benefit of having an independent IG look at it as well.
    Mrs. Hartzler. Very good. Did you know how OCE Net 
operated?
    Mr. Gensler. I have learned a lot about it since December.
    Mrs. Hartzler. Okay. All right. Well, thank you very much, 
Mr. Chairman. I appreciate it.
    Mr. Conaway. The gentlelady yields back. Mr. Hudson for 5 
minutes.
    Mr. Hudson. Thank you, Mr. Chairman. As a cosponsor along 
with my friend from New York, Mr. Maloney, of one of the bills 
being considered before the House Agriculture Committee, I 
appreciate the opportunity to hear the testimony of Chairman 
Gensler and look forward to the testimony of our future panel.
    The Swaps Regulatory Improvement Act, H.R. 992, which we 
introduced on Wednesday last week, along with two bipartisan 
colleagues in the House Financial Services Committee, amends 
the provision of the Dodd-Frank Act which sought to prevent 
risky swaps activities of banks from being eligible for a 
Federal bailout, FDIC insurance, or capital infusions from the 
Federal Reserve. While we believe this provision was proposed 
in good faith, it simply does not prevent the risk that the 
author has intended.
    Moreover, this provision of the bill will cause many 
American financial institutions to operate at a significant 
disadvantage to our foreign competitors. Federal Reserve 
Chairman Ben Bernanke, former Federal Reserve Chairman, Paul 
Volcker, who was also Chairman of the President's Economic 
Recovery Advisory Board, and former FDIC Chairman Sheila Bair, 
have all raised concerns about Section 716. I have with me 
today letters from the above-mentioned financial and economic 
leaders which illustrate the views on this particular section.
    Without objection, Mr. Chairman, I would like to submit 
them into the record.
    Mr. Conaway. Without objection they will be submitted.
    [The documents referred to are located on p. 117]
    Mr. Hudson. Thank you. I should also point out that 18 
Democrats, colleagues from the House Financial Services 
Committee, including the Ranking Member, Maxine Waters, and 
former Chairman Barney Frank wrote that they supported the bill 
that addressed the issues with Section 716 in the last 
Congress, which is identical to H.R. 992 in this Congress.
    I would also like to add that letter for the record, Mr. 
Chairman.
    Mr. Conaway. No objection.
    [The document referred to is located on p. 121.]
    Mr. Hudson. Just last month on February 26, 2013, Chairman 
Bernanke testified before the Senate Banking Committee that, 
``Dodd-Frank is a very big, complicated piece of legislation in 
an area proving difficult is the push-out provision for 
derivatives.'' The next day, February 27, when testifying 
before the House Financial Service Committee, Chairman Bernanke 
elaborated on the need for Section 716 reform and stated, ``It 
was not evident that Section 716 makes the company as a whole 
safer, and what we do see is that it will likely increase costs 
to people who use the derivatives and make it more difficult 
for the bank to compete with foreign competitors who can 
provide a more complete set of services.''
    Now, Mr. Chairman, I would like to use the balance of my 
time to ask Chairman Gensler about his concerns with Section 
716. Chairman Gensler, I appreciate the opportunity to speak 
with you today and thank you for your time.
    Given the statements from Fed Chairman Bernanke and former 
Fed Chairman which I provided today, do you agree that Section 
716 needs to be reformed?
    Mr. Gensler. I don't have a particular developed view on 
section 716 partly because it is under the Federal Reserve 
side, and we have so much we are focused on, and what has 
happened and what we know. Facts on the ground, 73 registered 
swap dealers. The vast majority of them are not insured 
depository institutions. The vast majority are actually 
affiliates already, which is what they would be if section 716 
pushes things out. I would make an observation the vast 
majority of the swap dealers registered with us in the last 2 
months actually are not the banks themselves. Thirty of them 
are foreign but even amongst the other 45 the majority of those 
are the affiliates that are ready, and I think section 716 
doesn't go into effect for another year or 2, but, again, I am 
not as close to it.
    Mr. Hudson. Would you consider it an overreach in the 
authority, or would you categorize it that way? Do you think--
--
    Mr. Gensler. You mean the original statute? I am sorry.
    Mr. Hudson. Yes, section 716.
    Mr. Gensler. No. I think as I remember it it was a judgment 
of those who worked on it at the time that certain 
transactions, energy, and non-interest rate derivatives, as 
well as certain credit default swaps would be put in the 
affiliates. The actual facts on the ground are many of these 
are in affiliates. I think the largest dealers right now, the 
Goldman Sachs and the Deutsche Banks and so forth do have 
energy affiliates because that is how they chose to organize 
themselves, and I could get back to you to look at our list to 
see how they are organized.
    Mr. Hudson. I appreciate that. You mentioned the 
international folks. To your knowledge are any international 
jurisdictions proposed or implemented in any type of swaps, 
seek push-out provisions similar to this?
    Mr. Gensler. I am not aware of any, sir.
    Mr. Hudson. Okay. As I see my time is dwindling, Mr. 
Chairman, I will just yield back the balance of my time. Thank 
you.
    Mr. Conaway. The gentleman yields back the balance of his 
time.
    We do have a second panel, and I had not intended to a 
second round of questioning, but with unanimous consent, Mr. 
Maloney from New York wants one other question, so the 
gentleman is recognized for 2 minutes.
    Mr. Maloney. Thank you, Mr. Chairman. I will be brief.
    Chairman Gensler, I just wanted to ask you, I know you 
spoke a little bit about the cross-border harmonization efforts 
that you are engaged in, and I am curious on your view on the 
status of that. I know you mentioned it before, but I think I 
may have missed some of what you said, but in particular I am 
curious about are there areas of dis-harmonization that would 
create regulatory arbitrage opportunities that worry you?
    Mr. Gensler. There are. We have made tremendous progress 
with the European Union, Canada, and Japan, and we have other 
jurisdictions like Australia and Hong Kong, Singapore are 
always in our--when we meet, when we do these things. Frankly 
we are further along with Europe particularly.
    Where I would raise the greatest policy difference that we 
just haven't locked in yet is after the transaction and before 
the transaction in the U.S. the public gets the benefit of some 
transparency. Europe has that in front of their Parliament 
right now. I think they are going to do it. It seems to be the 
consensus to do it, but they are not there yet, and then this 
other thing is is there are many jurisdictions, whether it is 
the Cayman Islands or others, that are probably not going to do 
things. And so that is where, if a U.S. financial institution 
is guaranteeing their affiliate let's say in the Cayman Islands 
or something, that risk is going to come right back here. It is 
going to be unfortunately in our markets, our taxpayers that 
aren't supposed to stand behind it, but have that risk, and we 
think that we need to at least say that if it is guaranteed 
affiliate, we will look to substituted compliance, we will look 
to home country rules if they are comparable, but if they are 
not comparable, then it has got to be--we have to look to Dodd-
Frank.
    Mr. Maloney. I will yield back, Mr. Chairman.
    Mr. Conaway. All right. Thank you, Mr. Maloney.
    Chairman Gensler, thank you very much. Excellent testimony 
again. We appreciate it, and thank you and your team for coming 
to visit with us. We have lots of things to talk about as we 
move forward and----
    Mr. Gensler. It is truly always an honor to be here, and 
Member Scott didn't think so, I really do enjoy coming here.
    Mr. Conaway. Well, thank you. You may need to run for an 
elected office at some point in time with those skills.
    Mr. Gensler. No, no, no. I won't do that. No. That is for 
you all.
    Mr. Conaway. All right. I would now like to introduce our 
second panel. Thank you, Mr. Gensler.
    While they are making their way forward, I will do the 
introductions. First off we will have Hon. Kenneth E. Bentsen, 
Acting President and CEO of Securities Industry and Financial 
Markets Association here in D.C. We have Mr. Jim Colby, 
Assistant Treasurer, Honeywell International Inc., Morristown, 
New Jersey. We have Mr. Terrance Naulty, General Manager and 
CEO of Owensboro Municipal Utilities, Owensboro, Kentucky, on 
behalf of the American Public Power Association. We have Mr. 
Larry Thompson, General Counsel, The Depository Trust and 
Clearing Corporation, New York, New York. We have Ms. Marie 
Hollein, President and CEO, Financial Executives International 
and Financial Executives Research Foundation here in Washington 
on behalf of the Coalition for Derivatives End-Users, and 
finally, we have Mr. Wallace Turbeville, Senior Fellow, Demos, 
New York, New York, on behalf of the Americans for Financial 
Reform.
    We got everybody seated, the right name tags up. All right. 
So, Mr. Bentsen, you are now recognized for 5 minutes at your 
leisure. Thank you.

STATEMENT OF HON. KENNETH E. BENTSEN, Jr., ACTING PRESIDENT AND 
  CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL 
                      MARKETS ASSOCIATION,
                        WASHINGTON, D.C.

    Mr. Bentsen. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to testify on several 
important legislative improvements to Title VII of the Dodd-
Frank Act that this Committee is considering.
    As you know, the Dodd-Frank Act created a broad new 
regulatory regime for derivative products commonly referred to 
as swaps. However, if Title VII is implemented incorrectly, it 
may cause more harm than good. We believe that appropriate 
sequencing in Title VII rules and coordination is critical to 
the successful implementation of the Act. In addition, we 
encourage the regulators to harmonize their rules so that 
similar products will be subject to similar rules.
    I would like to focus my testimony on five specific pieces 
of legislation that we understand the Committee may take up in 
the near future.
    First, the Swap Push-Out Rule was added to the Dodd-Frank 
Act at a late stage in the Senate, not debated in the House at 
all. It would force banks to push out certain swap activities 
into separately-capitalized affiliates and subsidiaries. As has 
been mentioned already at this hearing, this provision was 
opposed at the time and continues to be opposed by then, by 
Chairman Bernanke of the Federal Reserve, as well as former 
Chairman of the FDIC Sheila Bair. We believe it would create 
increased systemic risks and significantly increase costs to 
banks providing customers with swap products at the expense of 
those customers.
    Last week Congressmen Hultgren and Himes among others 
introduced bipartisan legislation to modify this provision 
which we strongly support.
    Second, with respect to cross-border, the CFTC and the SEC 
have not yet finalized rules clarifying their interpretation of 
which swap activities will be subject to U.S. regulation and 
which will be subject to foreign regulations. The result has 
been a significant uncertainty in the international marketplace 
and due to the CFTC's proposed guidance, a reluctance of 
foreign market participants to trade with U.S.-registered swap 
dealers until that uncertainty is resolved.
    Last Congress Congressmen Himes and Garrett introduced 
bipartisan legislation that would provide clarity on this 
issue, and we understand that the Committee is considering 
legislation and based upon drafts that we have been informed 
of, we believe appropriately mandates joint rulemaking as well 
as providing for coordination on a cross-border basis with our 
G20 partners.
    I would like to mention in addition to that risk of 
fragmentation that this Committee should be aware of, and that 
is with respect to the European Union and its recent proposal 
for what is known as CRD-4, which is the European Union's 
implementation of Basel III. As proposed by the European Union, 
this provision would create an exemption under certain Basel 
III capital calculations for swaps between EU supervised banks 
and EU non-financial end-users, which would create even further 
fragmentation on top of that which we see coming out of the 
CFTC's cross-border guidance, and again, undermine the 
principles of the G20 of trying to have uniform standards and 
rules across all jurisdictions.
    Third, the Dodd-Frank Act requires a subset of the most 
standardized swaps to be traded on an exchange or new platform 
know as swap execution facility. This is something where the 
CFTC has come out with a proposed rule, yet the SEC has not put 
out as the SEC, but they are very different in their approach, 
and in particular, our concern is with the CFTC's proposal to 
have a minimum mandatory request for quotes that we believe 
actually undermines the intent of this provision to the 
detriment of the customers. And in our case, our asset 
management group and so these are the people that the provision 
would seek to help, believe that this actually would impede 
best execution for the benefit of their customers, which 
include everyday investors, and we think it is appropriate that 
the Congress take up legislation similar to that which was 
passed last year by the House Financial Services Committee.
    With respect to inter-affiliate swaps, again, this is 
something where the Act was not clear on. Congressman Stivers 
has introduced legislation that would clarify inter-affiliate 
swaps which are a critical part of risk management functions of 
institutions, and we think the Committee should take that up.
    Last, it is critical that regulators carefully balance the 
benefits of swap-related regulation and the potential decrease 
in liquidity and increased costs to customers using hedging 
activities. We think it is appropriate for cost-benefit 
analysis. In fact, this is consistent with the Obama 
Administration's Executive Order 13563, which asks agencies to 
follow similar cost-benefit analysis that Executive Branch 
agencies and departments already follow under statute. The SEC, 
I might add, has already weighed into this. We think it is 
appropriate for the CFTC as well, and we appreciate Congressman 
Conaway's bill that would bring this into implementation.
    With that, Mr. Chairman, I appreciate the opportunity to 
testify on behalf of our members at SIFMA, and I am happy to 
answer your questions at the appropriate time.
    [The prepared statement of Mr. Bentsen follows:]

 Prepared Statement of Hon. Kenneth E. Bentsen, Jr., Acting President 
 and Chief Executive Officer, Securities Industry and Financial Markets
                     Association, Washington, D.C.
    Chairman Lucas and Ranking Member Peterson. My name is Ken Bentsen 
and I am Acting President and CEO of the Securities Industry and 
Financial Markets Association (SIFMA).\1\ SIFMA appreciates the 
opportunity to testify on several important legislative improvements to 
Title VII of the Dodd-Frank Act relating to derivatives being 
considered by the House of Representatives.
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    \1\ The Securities Industry and Financial Markets Association 
(SIFMA) brings together the shared interests of hundreds of securities 
firms, banks and asset managers. SIFMA's mission is to support a strong 
financial industry, investor opportunity, capital formation, job 
creation and economic growth, while building trust and confidence in 
the financial markets. SIFMA, with offices in New York and Washington, 
D.C., is the U.S. regional member of the Global Financial Markets 
Association (GFMA). For more information, visit http://www.sifma.org.
---------------------------------------------------------------------------
    As you know, the Dodd-Frank Act created a new regulatory regime for 
derivative products commonly referred to as swaps. Dodd-Frank seeks to 
reduce systemic risk by mandating central clearing for standardized 
swaps through clearinghouses. capital requirements and collection of 
margin for uncleared swaps; to protect customers through business 
conduct requirements; and to promote transparency through reporting 
requirements and required trading of swaps on exchanges or swap 
execution facilities. SIFMA supports these goals. There have been 
significant and constructive reforms put in place that market 
participants have implemented. Late last year, firms engaged in 
significant swap dealing activities were required to register with the 
CFTC as swap dealers and became subject to reporting, record-keeping 
and other requirements, many more of which will be phased in over time. 
This week, the first swap transactions were required to be cleared at 
central clearinghouses to decrease systemic risk in the swap markets. 
These accomplishments will make our system safer, and it is important 
that market participants realize that these changes represent real 
progress.
    However, as with all regulation, if Title VII is implemented 
incorrectly it may cause more harm than good. Specifically, incorrect 
implementation of Title VII has the potential to detrimentally limit 
the availability and increase the cost of derivatives, which are a 
valuable risk management tool for American businesses, including 
manufacturers and the agricultural industry.
    We recognize the tremendous undertaking required by regulators in 
their efforts to implement derivatives reform. Throughout this process, 
SIFMA has sought to constructively engage with regulators through the 
comment process.
    As an overarching matter, I want to emphasize our belief that 
appropriate sequencing of Title VII rules and coordination between the 
various regulators responsible for them is critical to successful 
implementation of the Dodd-Frank Act. In order to adapt to the new swap 
regulatory regime, our member firms are making dramatic changes to 
their business, operational, legal and compliance systems. We continue 
to work closely with the relevant regulators on developing an 
appropriate implementation timeline to avoid a rushed process that 
would raise unnecessary complications and risk. In addition, we 
encourage the regulators to harmonize their rules so that similar 
products will be subject to similar rules.\2\
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    \2\ SIFMA/ISDA Comments to CFTC on Proposed Schedule for Title VII 
Rulemaking (June 29, 2012), http://www.sifma.org/issues/
item.aspx?id=8589939400; SIFMA Comments to SEC on the Sequencing of 
Compliance Dates for Security-Based Swap Final Rules (Aug. 13, 2012), 
http://www.sifma.org/issues/item.aspx?id=8589939893.
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    In the remainder of my testimony, I would like to focus on a few 
specific issues that are the topic of legislation currently pending 
before this Committee, which could have a profound impact on the 
success of Title VII and its impact on the marketplace.
The Swap Push-Out Rule
    The first important initiative I would like to highlight is 
legislation to amend Section 716 of the Dodd-Frank Act, often referred 
to as the ``Swap Push-Out Rule.'' The Swap Push-Out Rule was added to 
the Dodd-Frank Act at a late stage in the Senate and was not debated or 
considered in the House of Representatives. It would force banks to 
``push out'' certain swap activities into separately capitalized 
affiliates or subsidiaries by providing that a bank that engages in 
such swap activity would forfeit its right the Federal Reserve discount 
window or FDIC insurance.
    The Swap Push-Out Rule has been opposed by senior Prudential 
Regulators from the time it was first considered. Ben Bernanke, 
Chairman of the Federal Reserve, stated in a letter to Congress that 
``forcing these activities out of insured depository institutions would 
weaken both financial stability and strong prudential regulation of 
derivative activities.'' \3\ Sheila Bair, former FDIC Chairwoman, said 
that ``by concentrating the activity in an affiliate of the insured 
bank, we could end up with less and lower quality capital, less 
information and oversight for the FDIC, and potentially less support 
for the insured bank in a time of crisis'' and added that ``one 
unintended outcome of this provision would be weakened, not 
strengthened, protection of the insured bank and the Deposit Insurance 
Fund.'' \4\
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    \3\ Letter from Ben Bernanke, Federal Reserve Chairman, to Senator 
Christopher Dodd (May 13, 2010), available at http://blogs.wsj.com/
economics/2010/05/13/bernanke-letter-to-lawmakers-on-swaps-spin-off/.
    \4\ Letter from Sheila Bair, FDIC Chairman, to Senators Christopher 
Dodd and Blanche Lincoln (Apr. 30, 2010), available at http://
www.gpo.gov/fdsys/pkg/CREC-2010-05-04/pdf/CREC-2010-05-04-pt1-PgS3065-
2.pdf#page=5.
---------------------------------------------------------------------------
    In addition to the increase in risk that would be caused by the 
Swaps Push-Out Rule, the limitations will significantly increase the 
cost to banks of providing customers with swap products as a result of 
the need to fragment related activities across different legal 
entities. As a result, U.S. corporate end-users and farmers will face 
higher prices for the instruments they need to hedge the risks of the 
items they produce.\5\ Mark Zandi, Chief Economist at Moody's 
Analytics, stated in a letter to Congressman Garrett that ``Section 716 
would create significant complications and counter the efforts to 
resolve [large financial] firms in an orderly manner.'' \6\
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    \5\ An example of negative impacts of the ``Swap Push-Out Rule'' 
can be seen when a mid-size agriculture producer (``Ag Producer'') 
receives a revolver loan with a floating rate of interest from a bank. 
In order to hedge the interest rate exposure, the Ag Producer executes 
a master swap agreement with the Bank and executes a fixed-for-floating 
interest rate swap as a hedge (``Interest Rate Hedge''). The Ag 
Producer's risk management guidelines require it to hedge the price 
exposure related to its production of wheat by executing a wheat swap 
(``Wheat Hedge''). Under the Push-Out Rule, the bank would not be able 
to execute the wheat swap with the Ag Producer. With this restriction, 
the Ag Producer would be required to negotiate another master swap 
agreement with an affiliate of the bank or a third party and then 
execute the wheat swap with such entity. With separate entities as 
hedging counterparties, there is no netting of the Wheat Hedge and the 
Interest Rate Hedge. Without the efficiency of netting, the Ag 
Producer's gross exposure to both entities would be used to calculate 
its exposure and margin requirements.
    \6\ Letter from Mark Zandi, Chief Economist, Moody's Corporation, 
to Congressman Scott Garrett (Nov. 14, 2011).
---------------------------------------------------------------------------
    Last Congress, Congresswoman Nan Hayworth introduced H.R. 1838, 
(http://www.gpo.gov/fdsys/pkg/BILLS-112hr1838ih/pdf/BILLS-
112hr1838ih.pdf) legislation that would strike Section 716 from the 
Dodd Frank Act. The House Financial Services Committee considered and 
made significant changes to this bill. The first change was to modify 
this bill so that additional types of products could remain within the 
bank. This bill also included an important provision for foreign 
institutions. SIFMA supported both of these changes and submitted a 
letter of support for this bill.\7\
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    \7\ http://www.sifma.org/workarea/downloadasset.aspx?id=8589937400.
---------------------------------------------------------------------------
    Last week, Congressman Hultgren introduced bipartisan legislation 
(H.R. 992) (http://www.gpo.gov/fdsys/pkg/BILLS-113hr992ih/pdf/BILLS-
113hr992ih.pdf) that would, in his words, ``modify the `push-out' 
provision in the Dodd-Frank Act to ensure that federally insured 
financial institutions can continue to conduct risk-mitigation efforts 
for clients like farmers and manufacturers that use swaps to insure 
against price fluctuations.'' \8\ SIFMA applauds Congressman Hultgren 
for this critical legislation and urges the House Committee on 
Agriculture to favorably report this bill.
---------------------------------------------------------------------------
    \8\ In addition, the bill would fix a drafting error acknowledged 
by the Swap Push-Out Rule's authors, under which the limited exceptions 
to the rule that apply to insured depositing institutions appear not to 
include U.S. uninsured branches or agencies of foreign banks.
---------------------------------------------------------------------------
Cross-Border Impact of Dodd-Frank
    Though Title VII was signed into law 2\1/2\ years ago, we still do 
not know which swaps activities will be subject to U.S. regulation and 
which will be subject to foreign regulation. Section 722 of the Dodd-
Frank Act limits the CFTC's jurisdiction over swap transactions outside 
of the United States to those that ``have a direct and significant 
connection with activities in, or effect on, commerce of the U.S.'' or 
are meant to evade Dodd-Frank. Section 772 limits the SEC's 
jurisdiction over security-based swap transactions outside of the 
United States to those meant to evade Dodd-Frank. However, the CFTC and 
SEC have not yet finalized (or, in the SEC's case, proposed) rules 
clarifying their interpretation of these statutory provisions. The 
result has been significant uncertainty in the international 
marketplace and, due to the aggressive position being taken by the CFTC 
as described below, a reluctance of foreign market participants to 
trade with U.S. financial institutions until that uncertainty is 
resolved.
    While the CFTC has proposed guidance on the cross-border impact of 
their swaps rules, that guidance inappropriately recasts the 
restriction that Congress placed on CFTC jurisdiction over swap 
transactions outside the United States into a grant of authority to 
regulate cross-border trades. The CFTC primarily does so with a very 
broad definition of ``U.S. Person,'' which it applies to persons with 
even a minimal jurisdictional nexus to the United States. In addition, 
the CFTC has released several differing interim and proposed 
definitions of ``U.S. Person'' for varying purposes, resulting in a 
great deal of ambiguity and confusion for market participants. SIFMA 
supports a final definition of U.S. Person that focuses on real, rather 
than nominal, connections to the United States and that is simple, 
objective and determinable so a person can determine its status and the 
status of its counterparties.\9\ Equally significant, the CFTC has 
issued its proposed cross-border release as ``guidance'' rather than as 
formal rulemaking process subject to the Administrative Procedure Act. 
By doing so, the CFTC avoids the need to conduct a cost-benefit 
analysis, which is critical for ensuring that the CFTC appropriately 
weighs any costs imposed on market participants as a result of 
implementing an overly broad and complex U.S. person definition against 
perceived benefits.
---------------------------------------------------------------------------
    \9\ SIFMA Comments to CFTC Proposed Interpretive Guidance (August 
27, 2013), available at http://www.sifma.org/issues/
item.aspx?id=8589940053; SIFMA/TCH/FSR Comments to CFTC on Further 
Proposed Guidance (Feb. 6. 2013), available at http://www.sifma.org/
issues/item.aspx?id=8589941955.
---------------------------------------------------------------------------
    The SEC has not yet proposed cross-border rules. The Commission and 
its staff have publicly suggested, however, that they will consider a 
holistic cross-border rule proposal later this year. It is rumored that 
this document will be nearly 1,000 pages long and will include many 
questions for public comment.
    Last Congress, Congressmen Himes and Garrett introduced bipartisan 
legislation (H.R. 3283) (http://www.gpo.gov/fdsys/pkg/BILLS-
112hr3283ih/pdf/BILLS-112hr3283ih.pdf) that would provide clarity on 
this issue. The Himes-Garrett bill would permit non-U.S. swap dealers 
to comply with capital rules in their home jurisdiction that are 
comparable to U.S. capital rules and adhere to Basel standards. The 
legislation also prevents the requirement that registered swap dealers 
post separate margins for each jurisdiction under which they are 
regulated. During the 112th Congress, the House Financial Services 
Committee acted to support this legislation by a vote of 41 to 18. 
SIFMA strongly supports this effort to clarify the jurisdiction of U.S. 
regulators and urges the House Agriculture Committee to vote for this 
critical legislation.
Swap Execution Facilities
    As I noted above, the Dodd-Frank Act requires a subset of the most 
standardized swaps to be traded on an exchange or a new platform known 
as a ``swap execution facility,'' commonly called a ``SEF.'' Congress 
generally defined what constitutes a SEF but left further definition to 
the CFTC and SEC. To date, both the CFTC and SEC have proposed SEF 
definitions for the products under their respective jurisdiction, but 
neither Commission has adopted a final definition.
    An appropriately flexible definition of ``SEF'' is critical for 
ensuring that SEF trading requirement does not negatively impact 
liquidity in the swap markets. In truth, it remains unclear what will 
happen to liquidity of instruments that have been traditionally 
transacted bilaterally when they are subjected to a SEF environment. 
Understanding this reality, the SEC has proposed a rule that would 
permit SEFs to naturally evolve their execution mechanisms for those 
swaps that are widely traded. These SEFs could be structured in many 
different ways, similar to how electronic trading platforms have 
evolved in the securities markets.
    The CFTC has proposed a different rule that would require customers 
to either trade swaps on SEFs as if they were traded on exchanges or to 
solicit prices by issuing requests for quotes, generally known as 
``RFQs,'' from a minimum of five market participants for each swap 
subject to the SEF trading requirement. This differs from current 
market practice and could have significant impact on the liquidity in 
the swap market. By signaling to the market the desire to purchase a 
swap, customers may be telegraphing important information that may 
impede best execution of their orders. While we appreciate the CFTC's 
goals of encouraging competition among dealers to decrease the price of 
swaps, the reality is that this practice will do just the opposite and 
drive up the cost of transactions, ultimately harming the corporations 
and other swaps users this rule aims to protect.
    Last Congress, the House Financial Services Committee supported, by 
voice vote, legislation that would require CFTC and the SEC to adopt 
SEF rules that allow the swaps markets to naturally evolve to the best 
form of execution (H.R. 2586) 
(http://www.gpo.gov/fdsys/pkg/BILLS-112hr2586rh/pdf/BILLS-
112hr2586rh.pdf). H.R. 2586 would explicitly not require a minimum 
number of participants to receive or respond to quote requests and 
would prevent regulators from requiring SEFs to display quotes for any 
period of time. Finally, this bill would prevent regulators from 
limiting the means by which these contracts should be executed and 
ensuring that the final regulation does not require trading systems to 
interact with each other. SIFMA urges Congress to support similar 
legislation in this Congress.
Inter-Affiliate Swaps
    The Dodd-Frank Act is effectively silent on the application of swap 
rules to swaps entered into between affiliates. Such inter-affiliate 
swaps provide important benefits to corporate groups by enabling 
centralized management of market, liquidity, capital and other risks 
inherent in their businesses and allowing these groups to realize 
hedging efficiencies. Since the swaps are between affiliates, rather 
than with external counterparties, they pose no systemic risk and 
therefore there are no significant gains to be achieved by requiring 
them to be cleared or subjecting them to margin posting requirements. 
In addition, these swaps are not market transactions and, as a result, 
requiring market participants to report them or trade them on an 
exchange or swap execution facility provides no transparency benefits 
to the market--if anything, it would introduce useless noise that would 
make Dodd-Frank's transparency rules less helpful.
    During the 112th Congress, the House of Representatives voted 357 
to 36 in support of legislation (H.R. 2779) (http://www.gpo.gov/fdsys/
pkg/BILLS-112hr2779pcs/pdf/BILLS-112hr2779pcs.pdf) that would exempt 
inter-affiliate trades from certain Title VII requirements due to the 
important role the transactions play in firms' risk management 
procedures and the negative impact the full scope of Title VII 
regulation would have if applied to them. In this Congress, Congressman 
Stivers has introduced H.R. 677 (http://www.gpo.gov/fdsys/pkg/BILLS-
113hr677ih/pdf/BILLS-113hr677ih.pdf), the Inter-Affiliate Swap 
Clarification Act, which would exempt certain inter-affiliate 
transactions from the margin, clearing, and reporting requirements 
under Title VII. SIFMA supports this initiative and urges the House 
Committee on Agriculture to vote in support of this important bill.
Cost-Benefit Analysis
    As noted above, it is critical that regulators carefully balance 
the benefits of swap-related regulation with the potential decreases in 
liquidity and increased costs to customers wishing to hedge their 
activities. As a result, throughout the Title VII rulemaking process, 
SIFMA has encouraged regulators to conduct comprehensive cost-benefit 
analysis for all Dodd-Frank rules.
    This is consistent with the Obama Administration's efforts to 
promote better cost-benefit analysis for Federal agencies through 
Executive Order 13563,\10\ which requires all agencies proposing or 
adopting regulations to include cost-benefit analyses in an attempt to 
minimize burdens, maximize net benefits and specify performance 
objectives. The President also stated that regulations should be 
subject to meaningful public comment, be harmonized across agencies, 
ensure objectivity and be subject to periodic review. In 2012, in 
testimony before the House Committee on Government Reform, SEC Chairman 
Schapiro stated ``I continue to be committed to ensuring that the 
Commission engages in sound, robust economic analysis in its 
rulemaking, in furtherance of the Commission's statutory mission, and 
will continue to work to enhance both the process and substance of that 
analysis.'' \11\
---------------------------------------------------------------------------
    \10\ http://www.whitehouse.gov/the-press-office/2011/01/18/
improving-regulation-and-regulatory-review-executive-order.
    \11\ http://www.sec.gov/news/testimony/2012/ts041712mls.htm.
---------------------------------------------------------------------------
    Congressman Conaway has introduced legislation (H.R. 1003) that 
would require the CFTC's cost-benefit analysis to be both quantitative 
and qualitative and specifies in greater detail the costs and benefits 
that the CFTC must take into account as part of their cost-benefit 
analyses. The bill also requires that a regulation adopted by the CFTC 
must ``measure, and seek to improve, the actual results of regulatory 
requirements.'' SIFMA strongly supports H.R. 1003 and urges the House 
Committee on Agriculture to support this vital initiative that would 
enhance cost-benefit analysis done by the CFTC.
    Thank you for giving me this opportunity to explain our views 
related to several important measures to be considered by the House 
Committee on Agriculture.

    The Chairman. Thank you, Mr. Bentsen.
    You may proceed when you are ready, Mr. Colby.

  STATEMENT OF JAMES E. COLBY, ASSISTANT TREASURER, HONEYWELL 
               INTERNATIONAL INC., MORRISTOWN, NJ

    Mr. Colby. Mr. Chairman, Ranking Member Peterson, and other 
Members of the Committee, thank you for inviting me to testify 
at this important hearing. I am an Assistant Treasurer at 
Honeywell International, and today I speak on behalf of 
Honeywell and other commercial end-users, including members of 
the Coalition for Derivatives End-Users.
    Honeywell is a diversified technology and manufacturing 
leader serving customers worldwide with aerospace products and 
services, control technologies for buildings, homes, and 
industry, turbochargers, and performance materials. Honeywell's 
growth is driven by technologies that address some of the 
world's toughest challenges such as energy efficiency, clean 
energy generation, safety and security, globalization, and 
customer productivity.
    Honeywell is truly a global company with more than 50 
percent of our sales outside of the United States, and we are, 
therefore, exposed to market risks from changes in interest 
rates, foreign exchange rates, and commodity prices. When 
appropriate, we hedge exposures through the use of derivative 
contracts. The purpose of our hedging activities is to 
eliminate risks that we cannot control, allowing us to focus on 
our core strengths, namely delivering high-quality products to 
our customers. We do not use derivatives for speculative 
purposes.
    I will provide some examples to demonstrate how we use 
derivatives. We sell satellite and launch vehicle inertial 
measurement units manufactured in Florida to customers in 
Germany. Europe is a key growth market for commercial space 
products, and in order to qualify for consideration on certain 
opportunities, we may be required to enter into contracts 
denominated in Euros, even though all costs of production are 
incurred in U.S. dollars. The period for this type of contract 
can span multiple years during which changes in the value of 
the Euro versus the U.S. dollar can significantly impact its 
economic viability. To mitigate this risk we may enter into a 
forward contract to sell an amount of Euros equal to our net 
exposure to lock in the market rate.
    Honeywell sells catalysts and adsorbents manufactured in 
multiple U.S. manufacturing plants to customers in the refining 
industry. As the refinery starts up, a supply of catalysts is 
required to operate it, and Honeywell could arrange a catalyst 
supply agreement with the customer as part of the overall 
package. During contract negotiations, some European customers 
will require sales contracts to be denominated in Euros whereas 
all costs of production are incurred in U.S. dollars. To 
mitigate this risk, Honeywell may enter into a forward contract 
to sell an amount of Euros equal to our net exposure to lock in 
the market rate.
    Honeywell carefully manages its ratio of fixed to floating-
rate debt in order to lower its overall cost of debt while 
providing sufficient interest rate certainty to accurately 
forecast and manage interest expense. Floating-rate debt has 
historically been cheaper than fixed-rate debt but cannot be 
easily issued in longer maturities, thereby exposing Honeywell 
to refinancing risks. Honeywell uses interest rate derivatives 
to convert a portion of its fixed-rate debt to floating, 
thereby creating a synthetic floating-rate note with a longer 
term maturity that can be issued directly in the capital 
markets.
    With compliance deadlines looming, Honeywell is concerned 
with the direction in which certain rules appear to be heading. 
We strongly support two bills referred to your Committee. H.R. 
634 would exempt transactions in which a non-financial end-user 
is a party from margin requirements, whereas H.R. 677 would 
exempt inter-affiliate transactions of end-users from clearing 
requirements.
    The margin bill is of particular interest to Honeywell. In 
the Dodd-Frank Act Congress made clear that end-users were not 
to be subject to margin requirements. Nonetheless, regulations 
proposed by the Prudential Banking Regulators could require 
end-users to post margin. This stems directly from what they 
view to be a legal obligation under Title VII. While the 
regulations proposed by the CFTC are preferable, they do not 
provide end-users with the certainty that legislation offers. 
According to a Coalition for Derivatives End-Users' survey, a 
three percent initial margin requirement could reduce capital 
spending by as much as $5.1 to $6.7 billion among S&P 500 
companies alone and cost 100,000 to 130,000 jobs.
    What does this mean for Honeywell? We had approximately $2 
billion of hedging contracts outstanding at year end that would 
be defined as a swap under Dodd-Frank. Applying the three 
percent initial margin and ten percent variation margin implies 
a potential margin requirement of $260 million. Cash deposited 
in a margin account cannot be productively deployed in our 
business, and therefore, detracts from Honeywell's financial 
performance and the ability to promote economic growth and 
protect American jobs.
    The margin bill does not undermine Dodd-Frank. It helps 
ensure that the final Act and rules function as intended and 
that commercial end-users do not face the same regulatory 
burden as those who speculate and create systemic risk. Not 
only did commercial end-users not contribute to the financial 
crisis, but they were a safe haven during the financial 
turmoil. Investors who were afraid to invest in the debt of 
financial institutions purchased the debt of companies like 
Honeywell, companies that prudently use derivatives to manage 
and reduce risk and to manage the financial crisis without need 
for government assistance.
    In conclusion, we need Congress to enact legislation so 
that end-users like Honeywell will continue to have the ability 
to manage risks without having margin requirements imposed on 
us.
    Thank you for inviting me to testify today. We greatly 
appreciate the support that the Committee has provided, and I 
look forward to answering any questions that you may have.
    [The prepared statement of Mr. Colby follows:]

 Prepared Statement of James E. Colby, Assistant Treasurer, Honeywell 
                   International Inc., Morristown, NJ
    Mr. Chairman, Ranking Member Peterson, and other Members of the 
Committee, thank you for inviting me to testify at this important 
hearing. I am an Assistant Treasurer at Honeywell International and 
today I speak on behalf of both Honeywell and commercial end-users.
    Honeywell is a diversified technology and manufacturing leader, 
serving customers worldwide with aerospace products and services; 
control technologies for buildings, homes and industry; turbochargers; 
and performance materials. Honeywell's growth is driven by technologies 
that address some of the world's toughest challenges such as energy 
efficiency, clean energy generation, safety & security, globalization 
and customer productivity. The company's more than 132,000 employees 
include 20,000 scientists and engineers who are focused on developing 
innovative products and solutions that help Honeywell's customers--and 
their customers--improve performance and productivity.
    Honeywell is truly a global company, with more than 50 percent of 
our sales outside of the United States and we are therefore exposed to 
market risks from changes in interest rates, foreign exchange rates and 
commodity prices. When appropriate, we hedge exposures through the use 
of derivative contracts. The purpose of our hedging activities is to 
eliminate risks that we cannot control, allowing us to focus on our 
core strengths, namely delivering high-quality products, on time, to 
our customers in a manner that not only meets, but exceeds 
expectations. We do not use derivatives for speculative purposes.
    I'll provide some examples to demonstrate how we use derivatives. 
We sell satellite and launch vehicle inertial measurement units 
manufactured in Florida to customers in Germany. Europe is a key growth 
market for commercial space products and, in order to qualify for 
consideration on certain opportunities, we may be required to enter 
into contracts denominated in Euros even though all costs of production 
are incurred in U.S. Dollars. The period for this type of contract can 
span multiple years, during which changes in the value of the Euro 
versus the U.S. dollar can significantly impact its economic viability. 
To mitigate this risk, we may enter into a forward contract to sell an 
amount of Euros equal to our net exposure to lock in the market rate.
    Honeywell sells catalysts and adsorbents manufactured in multiple 
U.S. manufacturing plants to customers in the refining industry. As a 
refinery starts-up, a supply of catalysts is required to operate it and 
Honeywell will attempt to arrange a Catalyst Supply Agreement with the 
customer as part of the overall package. During contract negotiations, 
some European customers will require sales contracts to be denominated 
in Euros, whereas all costs of production are incurred in U.S. Dollars. 
To mitigate this risk, Honeywell may enter into a forward contract to 
sell an amount of Euros equal to our net exposure to lock in the market 
rate.
    Honeywell carefully manages its ratio of fixed-to floating rate 
debt in order to lower its overall cost of debt, while providing 
sufficient interest rate certainty to accurately forecast and manage 
interest expense. Floating rate debt has historically been cheaper than 
fixed-rate debt, but cannot be easily issued in longer maturities, 
thereby exposing Honeywell to refinancing risk. Honeywell uses interest 
rate derivatives to convert a portion of its fixed-rate debt to 
floating, thereby creating a synthetic floating rate note with a 
longer-term maturity than can be issued directly in the capital 
markets.
    With compliance deadlines for end-users looming, Honeywell is 
concerned with the direction in which certain rules appear to be 
heading. We strongly support two pieces of legislation that have been 
referred to your Committee. H.R. 634 would exempt transactions in which 
a non-financial end-user is a party from margin requirements, whereas 
H.R. 677 would exempt inter-affiliate transactions of end-users from 
clearing requirements.
    Today I will focus on the margin bill, as it is of particular 
interest to Honeywell. In approving the Dodd-Frank Act, Congress made 
clear that end-users were not to be subject to margin requirements. 
Nonetheless, regulations proposed by the Prudential Banking Regulators 
could require end-users to post margin. This stems directly from what 
they view to be a legal obligation under Title VII. While the 
regulations proposed by the CFTC are preferable, they do not provide 
end-users with the certainty that legislation offers. According to a 
Coalition for Derivatives End-Users survey, a 3% initial margin 
requirement could reduce capital spending by as much as $5.1 to $6.7 
billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs.
    To shed some light on Honeywell's potential exposure to margin 
requirements, we had approximately $2 billion of hedging contracts 
outstanding at year-end that would be defined as a swap under Dodd-
Frank. Applying 3% initial margin and 10% variation margin implies a 
potential margin requirement of $260 million. Cash deposited in a 
margin account cannot be productively deployed in our businesses and 
therefore detracts from Honeywell's financial performance and ability 
to promote economic growth and protect American jobs.
    The following is an excerpt of a question and answer session on 
July 17, 2012 between Senator Mike Crapo and Federal Reserve Board 
Chairman Ben Bernanke at the Hearing of the Senate Banking, Housing and 
Urban Affairs: ``The Semiannual Federal Reserve Monetary Policy Report 
to the Congress.'' This dialogue underscores why a Margin bill is 
necessary.

          Senator Crapo: ``According to the proposed rule, the proposal 
        to require margins stems directly from what they view to be a 
        legal obligation under Title VII. Recently I offered an 
        amendment with Senator Johanns to fulfill Congressional intent 
        by providing an explicit exemption for margin requirements for 
        non-financial end-users that qualify for the clearing 
        exemption. The amendment is identical to the House bill which 
        passed the House by a vote of 370 to 24.''
          ``Is it accurate in your opinion, that regardless of 
        Congressional intent, the banking regulators view the plain 
        language of the statute as requiring them to impose some kind 
        of margin requirement on non-financial end-users unless 
        Congress changes the statute?''
          Chairman Bernanke: ``We believe that the statute does require 
        us to impose some type of margin requirement. We tried to 
        mitigate the effect as much as possible by allowing for 
        exemptions when the credit risk associated with the margin was 
        viewed as being sufficiently small. So many small end-users 
        would be exempt in practice.''
          Senator Crapo: ``Do you agree that the non-financial end-
        users hedging does not contribute to systemic risk, that the 
        economy, the economic benefits from their risk management 
        activity--excuse me--that the economy benefits from their 
        hedging activity and that it's appropriate for Congress to 
        provide an explicit exemption for margin requirements for non-
        financial end-users that qualify for the clearing exemption?''
          Chairman Bernanke: ``I certainly agree that non-financial 
        end-users benefit and that the economy benefits from the use 
        of--of derivatives. It seems to be the sense of a large portion 
        of the Congress that that exemption should be made explicit. 
        And speaking for the Federal Reserve, we're very comfortable 
        with that proposal.''

    We are not interested in dismantling Dodd-Frank. We are simply 
trying to ensure that the final Act and rules function as intended and 
that commercial end-users do not face the same regulatory burden as 
those who speculate and create systemic risk. Not only did commercial 
end-users not contribute to the financial crisis, but they were a safe-
haven during the financial turmoil. Investors who were afraid to invest 
in the debt of financial institutions were actively purchasing the debt 
of companies like Honeywell, companies that prudently use derivatives 
to manage and reduce risk and who continued to be profitable throughout 
the financial crisis, with no need for government assistance.
    In conclusion, we need Congress to enact legislation so that end-
users like Honeywell will continue to have the ability to manage risk 
without having margin requirements imposed on us.
    Thank you for inviting me to testify today. We greatly appreciate 
the support that the Committee has provided and I look forward to 
answering any questions that you may have.

    The Chairman. Thank you, Mr. Colby.
    Mr. Naulty, you may begin when you are ready.

  STATEMENT OF TERRANCE P. NAULTY, GENERAL MANAGER AND CHIEF 
   EXECUTIVE OFFICER, OWENSBORO MUNICIPAL UTILITIES; MEMBER, 
                     AMERICAN PUBLIC POWER
                   ASSOCIATION, OWENSBORO, KY

    Mr. Naulty. Good morning, Mr. Chairman, Members of the 
Committee. My name is Terrance Naulty. I am the General Manager 
and CEO of Owensboro Municipal Utilities. Prior to this 
position I spent 15 years in senior management at utility-
affiliated trading companies and at a financial entity.
    I thank you for the opportunity to testify today on behalf 
of the American Public Power Association of which we are a 
member. OMU provides water and telecommunications and electric 
services to over 26,000 customers in Owensboro, the third 
largest city in Kentucky. We operate a 540 megawatt coal-fired 
power plant that produces some of the lowest cost power in the 
Midwest and Southeast. Approximately 63 percent of our electric 
revenues are derived from the wholesale market.
    Traditionally we have hedged future wholesale electric 
revenues with bilateral fixed-for-floating swaps at liquid 
trading points that are in close proximity to the point of 
physical delivery. These swaps hedge future wholesale revenue 
and consequently protect our customer owners from the wholesale 
price fluctuations associated with both long-term and short-
term market movements. By hedging this future revenue stream we 
can ensure stable and low electric rates.
    To limit our credit risks and reduce costs we would enter 
into financial swap transactions with the most active and 
credit-worthy counterparties in the physical markets we sell 
into. Most of these counterparties are affiliates of investor-
owned utilities. We also have limited enabling agreements with 
financial entities. With these financial entities and more 
importantly the utility-affiliated trading counterparties, OMU 
is able to hedge its position with virtually no cash reserve 
requirements due to the strength of our balance sheet.
    However, CFTC regulations implementing the Dodd-Frank Act 
have made this pragmatic and conservative hedging strategy very 
difficult. Under the regulations our non-swap dealer 
counterparties can engage in just $25 million per year in swap 
dealing activities with government-owned utilities and other 
special entities before being classified as a swap dealer.
    Even OMU's relatively small hedge position has an notional 
value in excess of $200 million. Also, the comparable limit for 
swap-dealing activities with other non-governmental entities is 
$8 billion. As a result, two of our three largest trading 
counterparties informed us that they would no longer transact 
financial swaps with us for fear of becoming a swap dealer 
under the Act. This decision has forced us to change our risk 
management strategy in two ways.
    First, we can now only use financial entities willing to 
register as a swap dealer. Our hedging transactions have 
migrated from utility-affiliated companies to these financial 
entities, and we have seen the bid-ask spreads widen.
    Second, to avoid these wider spreads and define liquidity 
where we hedge, we have been forced to the ICE and IMEX trade 
platforms to manage our position. Both these futures platforms 
require cash reserves to meet initial and maintenance margin. 
This means OMU can no longer take advantage of its negotiated 
collateral arrangements. As a result, our Board of Directors 
has required us to establish incremental reserves of $10 
million to ensure that the utility can meet margin calls 
associated with its hedge position. If this $10 million in 
incremental cash reserves were funded from our customers, the 
result would be approximately ten percent rate increase.
    The CFTC in October provided a no-action letter which we 
heard about this morning that moved the threshold from $25 
million to $800 million. However, the letter has imposed a 
number of new and additional requirements, and as a result, the 
position of our lost trading counterparties has not changed.
    In response just this Monday H.R. 1038, the Public Power 
Risk Management Act of 2013, was introduced. The legislation 
provides narrow targeted relief for utility operations related 
to swaps for government-owned entities. The legislation 
carefully defines which entity would qualify as a utility 
special entity and the types of swaps that could and could not 
be considered a utility operations-related swap.
    In conclusion, the protection that CFTC is trying to afford 
through the $25 million special entity sub-threshold are not 
needed for government-owned utilities. We are well versed in 
the markets and rely on these swaps solely to manage the price 
and operational risks. A failure to allow the narrow exclusion 
provided under this Public Power Risk Management Act will limit 
our members' ability to hedge against risks and lead to higher 
costs for the customers they serve.
    Thank you again for the opportunity to testify.
    [The prepared statement of Mr. Naulty follows:]

  Prepared Statement of Terrance P. Naulty, General Manager and Chief
   Executive Officer, Owensboro Municipal Utilities; Member, American
                Public Power Association, Owensboro, KY
    Mr. Chairman and Members of the Committee, I am Terry Naulty, 
General Manager and CEO of Owensboro Municipal Utilities (OMU) 
testifying today on behalf of my utility and the American Public Power 
Association (APPA).\1\
---------------------------------------------------------------------------
    \1\ ``Public Power'' is not defined in the law, but generally 
refers to government-owned utilities. This is distinguished from a 
``public utility'' which generally refers to an investor-owned utility, 
as under the Public Utility Holding Company Act of 1935 and the Federal 
Power Act.
---------------------------------------------------------------------------
    OMU is located in Owensboro, Kentucky, proudly serving an estimated 
26,100 electric customers and 24,739 water users, including both 
residential and commercial accounts. The sole purpose of our business 
is to ensure that the electric and water and sewer demands of our 
customers are met, both today and for generations to come.
    OMU is a member of APPA, the national service organization 
representing the interests of over 2,000 municipal and other state- and 
locally-owned, not-for-profit electric utilities throughout the United 
States (all but Hawaii). Collectively, these government-owned utilities 
deliver electricity to one of every seven electricity customers in the 
United States (approximately 47 million people), serving some of the 
nation's largest cities. However, the vast majority of APPA's members 
serve communities with populations of 10,000 people or less.
    I appear today to speak in favor of H.R. 1038, the Public Power 
Risk Management Act of 2013, legislation that will allow my utility, 
and other government-owned power and natural gas utilities, to hedge 
against price risks on a level playing field with all other utilities. 
This legislation will protect our customers from unnecessary price 
increases.
Public Power Utilities and the Dodd-Frank Act
    In the wake of the 2007 and 2008 Financial Crisis, the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) 
required the Commodity Futures Trading Commission (CFTC) to provide 
comprehensive regulations for the swaps marketplace. Specifically, the 
Dodd-Frank Act requires swap dealers and major swap participants to 
register with the CFTC and meet capital, margin, and reporting and 
record-keeping requirements, as well as to comply with rigorous 
business conduct and documentation standards.
    The Dodd-Frank Act provides additional standards for swap dealers 
or major swap participants advising or entering into swaps with 
government-owned utilities and other government entities (referred to 
under the statute as ``special entities''). For a swap dealer acting as 
an advisor to a special entity, the law states that the swap dealer 
shall have a duty to act in the best interests of the special 
entity.\2\ For swap dealers or major swap participants entering into 
swaps with special entities, the law states that these dealers and swap 
participants must comply with rules set by the CFTC requiring special 
entities to have a qualified independent representative before trading 
with a swap dealer or major swap participant.\3\
---------------------------------------------------------------------------
    \2\ 7 U.S.C.  6s(h)(4).
    \3\ 7 U.S.C.  6s(h)(5).
---------------------------------------------------------------------------
    Also, in part to address concerns that the legislation would force 
too many entities into this more stringent regime, the Dodd-Frank Act 
included a ``de minimis exception'' to the definition of a swap 
dealer.\4\
---------------------------------------------------------------------------
    \4\ 7 U.S.C.  1a(49)(D).
---------------------------------------------------------------------------
    APPA supports the goals of the Dodd-Frank Act and has worked 
closely with the CFTC and other interested parties to improve its 
implementation, particularly related to regulations affecting ``end-
users''--that is, non-financial parties that enter into swaps to hedge 
or mitigate their commercial risks. OMU and other APPA members are 
``end-users.'' Dozens of new regulations affect our members' 
businesses, and APPA and a coalition of not-for-profit electric 
utilities have submitted formal comments on 17 specific regulations 
from the CFTC and Securities and Exchange Commission (SEC) related to 
implementation of the Dodd-Frank Act.
    One such instance is the rule defining swap-dealer,\5\ which became 
final on July 23, 2012. Swap dealer registration regulations went into 
effect on October 12, 2012, at which time entities were required to 
begin counting their ``swap dealing'' activities. Those with dealing 
activity in excess of the de minimis thresholds had to register as swap 
dealers by December 31, 2012. However, the CFTC issued several no-
action letters that allow swap dealers to delay their compliance with 
most of the business conduct and documentation standards until July 
2013.
---------------------------------------------------------------------------
    \5\ CFTC Regulation 1.3(ggg)(4); see 77 Fed. Reg. 30596, at 30744.
---------------------------------------------------------------------------
    As written, the swap-dealer definition will substantially hinder 
government-owned utilities' ability to hedge against operational risks. 
Just like OMU, these utilities have no shareholders, so the costs 
imposed by this regulatory decision will be borne by only one group: 
our residential and business customers.
    In December 2010, the CFTC jointly with the SEC issued a proposed 
rule to define the term ``swap dealer,'' including (as required by the 
statute) an exception from the swap-dealer designation for those 
entities that engage in a de minimis quantity of swap dealing.
    In the proposed rule, the CFTC proposed two separate de minimis 
thresholds relating to the dollar quantity of swaps: $100 million 
annually for an entity's total swap-dealing activity; and, $25 million 
annually for an entity's swap-dealing activity with special entities, 
including, as noted above, public power, public gas, and Federal 
utilities (government-owned utilities).
    In February 2011, the Not-For-Profit Electric End User Group (NFP 
EEU)--which includes APPA--filed comments on the proposed swap dealer 
rule. The comments recommended that the CFTC substantially increase the 
de minimis threshold both for total swaps and for swaps with special 
entities.
    A final swap dealer rule was approved by the CFTC on April 18, 
2012, and was published in the Federal Register on May 23, 2012. The 
final rule greatly increased the overall de minimis threshold from the 
proposed rule, raising it from $100 million to $3 billion. During an 
initial phase-in period, this threshold will be $8 billion. But, the 
final rule did not change the proposed rule's $25 million sub-threshold 
for swap-dealing activities with special entities. Thus, the disparity 
between the two thresholds is now substantially greater. This $25 
million sub-threshold is smaller still when you consider that it is the 
aggregate of a swap partner's transactions with all special entities 
during any 12 month period.\6\
---------------------------------------------------------------------------
    \6\ By way of reference a single, 1 year 100 MW swap could have a 
roughly $25 million notional value. One-hundred MWs of power is enough 
to serve the average demand of approximately 75,000 residential 
customers.
---------------------------------------------------------------------------
    As a result, non-financial entities (such as natural gas producers, 
independent generators, and investor-owned utility companies) that do 
not want to be swap dealers will severely limit their swap-dealing 
activities with government-owned utilities to avoid exceeding the $25 
million threshold.
Why Hedging Is Necessary
    Government-owned utilities depend on non-financial commodity 
transactions, trade options, and ``swaps,'' as well as the futures 
markets, to hedge commercial risks that arise from their utility 
facilities, operations, and public service obligations. Together, non-
financial commodity markets play a central role in the ability of 
government-owned utilities to secure electric energy, fuel for 
generation, and natural gas supplies for delivery to consumers at 
reasonable and stable prices.
    Specifically, many government-owned utilities purchase firm 
electric energy, fuel and natural gas supplies in the physical delivery 
markets (in the ``cash'' or ``spot'' or ``forward'' markets) at 
prevailing and fluctuating market prices, and enter into bilateral, 
financially-settled non-financial commodity swaps with customized terms 
to hedge the unique operational risks to which many government-owned 
utilities are subject. Additionally, many government-owned utilities 
have traditionally used the swaps and futures products to hedge their 
excess electrical generation capacity, thus providing revenue and rate 
certainty to their customer/owners. In hedging, mitigating or managing 
the commercial risks of their utility facilities' operations or public 
service obligations, government-owned utilities are engaged in 
commercial risk management activities that are no different from the 
operations-related hedging of an investor-owned utility or an electric 
cooperative located in the same geographic region.
Why Non-Financial Counterparties Are Necessary
    Electric power touches virtually every home and business in the 
United States. This near universality gives a false appearance of 
homogeneity. It is important to remember that what is being delivered, 
either power or fuel to provide power, is a physical commodity, e.g., 
electricity, coal, natural gas, and the like. Ownership of a stock can 
be transferred coast to coast with a click of a button, but electricity 
must be delivered to the place it is to be used. Further, storage of 
electricity for future use, unlike other commodities such as gasoline, 
grain, coffee, etc. is not currently viable and thus electricity must 
be produced at the time it is used.
    Each regional geographic market has a somewhat different set of 
demands driven by climate, weather, population, and industrial 
activity, among other factors. Each regional geographic market also has 
a somewhat different group of financial entity counterparties and non-
financial entity counterparties available to meet these demands and 
thus able to enter into utility operations-related swaps needed for 
hedging price and supply risks. For example, a large merchant electric 
generation station in western Alabama might be available as a non-
financial counterparty for a swap transaction to provide electricity to 
a specific site in Alabama. But that same entity would not necessarily 
be able to offer the electricity in Oregon, and so would not be able to 
help an Oregon-based utility hedge its risks. Further, owners of 
electrical generation facilities and distribution utilities, whether 
investor-owned utilities, cooperative utilities, merchant generation 
companies, or government-owned utilities, operate in their geographical 
proximity and as they balance their generation to meet changing demands 
on an hour-to-hour basis are the most likely trading counterparties in 
their regions. These regional market participants, unlike financial 
entities, have a vested interest in maintaining the reliability of the 
grid and ensuring that sufficient liquidity exists to manage their 
operations.
    In Regional Transmission Organization (RTO) markets such as PJM and 
MISO, the market design is such that using financial swaps and futures 
contracts to manage risk is now the standard. This is because the RTO 
markets provide unlimited physical liquidity in the day-ahead and real-
time markets to ensure reliability of service, and thus converting a 
financial price hedge to a physically delivered product in real-time 
is, by design, the way these RTO markets function.
    Because there are a limited number of counterparties for any 
particular operations-related swap sought by a utility, each financial 
or non-financial swap counterparty brings important market liquidity 
and diversity. The greater the number of counterparties, the greater 
the price competition. Conversely, reduced price competition 
necessarily increases prices.
OMU and the Special Entity Sub-Threshold
    I would like to illustrate these points with examples from my 
utility's perspective.
    OMU has been providing electric service to its community since 
1900. OMU owns a coal-fired power plant and has surplus power that it 
sells into the wholesale market in order to offset transferring the 
fixed costs associated with such surplus capacity to its retail 
customers. OMU uses financial transactions in the forward market to 
lock in the best price for these sales, to reduce its market risk, to 
stabilize revenue, and, most importantly, to provide rate certainty to 
its customers/owners.
    OMU's approach has been to enter into enabling agreements with the 
most active physical and financial traders with solid credit ratings in 
our region. Prior to the establishment of the special entity rule de 
minimis threshold, this short list of counterparties allowed OMU to 
accomplish the hedging necessary while spreading the credit risk among 
counterparties. Because OMU has been pragmatic in choosing its trading 
counterparties, limiting the population to those entities with superior 
credit ratings, the negotiated collateral agreements do not require OMU 
to post collateral unless it exceeds a specified credit limit.
    However, since the CFTC's implementation of the special entity de 
minimis threshold, two of OMU's three largest counterparties, which are 
both utility-affiliated trading companies and not ``swap dealers,'' are 
no longer willing to do business with OMU. They cite the compliance 
risk and lack of internal systems to keep track of special entity 
transactions and ensure that they do not exceed the threshold. This 
compliance risk is not due solely to their business with OMU, but also 
because they do business with multiple ``special entities'' across the 
country and in our region.
    This means that swap dealers are the only entities willing to enter 
into swap transactions with OMU. Since OMU's ability to hedge via swaps 
bilaterally with physical generation owners in our region has been 
greatly diminished, OMU has seen the bid-ask spread from swap dealer 
counterparties widen.
    Consequently, OMU has been forced to move most of its hedging 
transactions to the ICE trading platform, which offer futures 
contracts. This means that OMU can no longer take advantage of its 
negotiated collateral agreements, and instead must comply with initial 
and maintenance margin requirements to support its hedging activities. 
As a result, OMU's board of directors required OMU to establish 
reserves of $10 million to ensure that the utility can meet margin 
calls associated with its hedged positions. If this $10 million in 
incremental cash reserves were funded from our customers/owners, the 
result would be an approximate ten percent rate increase.
    As noted above, there is a great deal of heterogeneity among APPA 
members, including in the use of hedging. Some make substantial use of 
hedging, and others do not. Likewise, of APPA members who do make use 
of hedging, a recent informal survey of members showed great diversity 
in terms of the volume of hedging and the extent to which members 
relied on non-financial entities. Also, smaller members who are 
unlikely to hedge may still be affected, if they buy power from larger 
members who do.
    The CFTC has said that it retained the $25 million threshold in 
light of the special protections that the Dodd-Frank Act affords to 
special entities. However, the statute does not require--even mention--
special protections for special entities in regard to the swap dealer 
definition. As noted above, the law imposes requirements on swap 
dealers and major swap participants advising or entering into swaps 
with special entities. Nowhere does the law mention deeming a 
participant to be a swap dealer solely based on its volume of swaps 
with government-owned entities.
    Government-owned utilities understand the operations-related swap 
transactions they use to manage their commercial risks and do not need 
the special protections provided by the $25 million sub-threshold. In 
fact, and ironically, these ``protections'' are likely to limit the 
ability of these utilities to hedge operational and price risks rather 
than to protect these utilities and their customers from risk.
Government-Owned Utilities' Petition for Rulemaking
    On July 12, 2012, APPA, the Large Public Power Council (LPPC), the 
American Public Gas Association (APGA), the Transmission Access Policy 
Study Group (TAPS), and the Bonneville Power Administration (BPA), 
filed with the CFTC a ``Petition for Rulemaking to Amend CFTC 
Regulation 1.3(ggg)(4).'' The petition requests that the CFTC amend its 
swap-dealer rule to exclude utility special entities' utility 
operations-related swap transactions from counting towards the special-
entity threshold. This amendment to the swap-dealer rule would allow a 
producer, utility company, or other non-financial entity to enter into 
energy swaps with government-owned utilities without danger of being 
required to register as a ``swap dealer'' solely because of its 
dealings with government-owned utilities.
    Specifically, the petition asks for a narrow exclusion:

   A government-owned utility's swaps related to utility 
        operations would not count towards the special entity de 
        minimis threshold, but would count towards the total de minimis 
        threshold.

   Utility operations-related swaps are those entered into to 
        hedge commercial risks intrinsically related to the utility's 
        electric or natural gas facilities or operations, or to the 
        utility's supply of natural gas or electricity to other utility 
        special entities, or to its public service obligations to 
        deliver electric energy or natural gas service to utility 
        customers. For example, these would include swap transactions 
        related to the generation, production, purchase, sale, or 
        transportation of electric energy or natural gas, or related to 
        fuel supply of electric generating facilities.

   Utility operations-related swaps do not include interest 
        rate swaps. Those swaps would remain subject to the $25 million 
        special entity sub-threshold.
CFTC ``No Action'' Letter
    CFTC released on October 12, 2012 a no-action letter relating to 
the $25 million special entity sub-threshold. The letter allows a 
counterparty to deal in up to $800 million in swaps with government-
owned utilities without being required to register as a swap dealer. As 
the CFTC explained in that letter, the $800 million is derived from a 
comment letter endorsed by the NFP EEU group suggesting that the 
special entity sub-threshold be set at \1/10\ that of the overall swap 
dealer threshold.
    The no-action letter, however, also included a number of additional 
limitations on a counterparty wishing to take advantage of the relief 
provided by the letter. Specifically, under the terms of the CFTC's no-
action letter, the $800 million threshold applies only:

   If the special entity that is a party to the swap is using 
        the swap to hedge a ``physical position;''

   If the counterparty is not a ``financial entity'' as defined 
        in the Commodity Exchange Act;

   If the swap is related to an exempt commodity in which both 
        parties transact as part of the ``normal course of their 
        physical energy businesses;'' and

   If a counterparty wanting to take advantage of the relief 
        provided by the no-action letter files with the CFTC a notice 
        that it is making use of the relief and provides, by December 
        31 (and quarterly thereafter), a list of each utility special 
        entity with which it has entered into swaps and the total gross 
        notional value of those swaps.

    Certain counterparties have expressed concerns over one or more of 
the conditions imposed in the no-action letter, but it could also be 
that counterparties, in general, are not willing to spend the time and 
money to create a separate compliance process and adjust their policies 
and procedures in order to facilitate transactions with the small 
segment of any particular regional market that utility special entities 
represent. This is especially likely now as counterparties are focused 
on implementing compliance programs dealing with the whole range of 
Dodd-Frank requirements. Finally, there is the overarching issue that 
the no-action letter, by definition, is temporary and can be revised or 
revoked without any of the steps of a formal rulemaking process.
    Whatever the reason, the no-action letter has failed to provide 
non-financial counterparties with the assurances they need to enter 
into swap transactions with our members.
    A November 19, 2012, letter to the CFTC explaining this outcome has 
failed to produce any further action from the CFTC, and some 
Commissioners have indicated that we should turn to Congress to achieve 
the remedy we are seeking.
The Public Power Risk Management Act
    On March 11, 2013, the Public Power Risk Manage Act of 2013 (H.R. 
1038) was introduced by Congressman Doug LaMalfa (R-CA), a Member of 
this Committee, with fellow Committee Members Jim Costa (D-CA), Jeff 
Denham (R-CA), and John Garamendi (D-CA), along with House Financial 
Services Committee Member Blaine Luetkemeyer (R-MO)
    The legislation largely mirrors the intent and effect of the NFP 
EEU petition to the CFTC, providing narrowly targeted relief for 
operations-related swaps for government-owned utilities.
    Specifically, the legislation would provide that the CFTC, in 
making a determination to exempt a swap dealer under the de minimis 
exception, shall treat a utility operations-related swap with a utility 
special entity the same as a utility operations-related swaps with any 
entity that is not a special entity.
    Under the current threshold/sub-threshold regulatory regime adopted 
by the CFTC, this would mean that utility operations-related swaps with 
a government-owned power or natural gas utility would not be counted in 
calculating whether swap dealing activity exceeded the $25 million 
special entity de minimis threshold, but would be counted in 
calculating whether swap dealing activity exceeded the $8 billion de 
minimis threshold.
    The legislation carefully defines which entities would qualify as a 
``utility special entity.'' It also specifically defines the types of 
swaps that could and could not be considered a ``utility operations-
related swap.'' For example, the legislation specifically prohibits 
interest, credit, equity, and currency swaps from being considered as a 
utility operations-related swap. Likewise, except in relation to their 
use as a fuel, commodity swaps in metal, agricultural, crude oil, or 
gasoline would not qualify either.
    Finally, the legislation also confirms that utility operations-
related swaps are fully subject to swap reporting requirements.
    When implemented, this legislation should provide the certainty to 
non-financial entities that they can enter into swap transactions with 
government-owned utilities without fear of being deemed a swap dealer. 
It truly levels the playing field. And, it does nothing to otherwise 
alter the CFTC's implementation of the Dodd-Frank Act.
    We wish the legislation were not necessary, but given the realities 
we face and the ongoing damage being done under the current rules, we 
urgently request the Members of this Committee to support this narrow 
legislative fix.
    Finally, because of our experience with the $25 million sub-
threshold, we are intrigued by another bipartisan bill recently 
introduced in the House. The legislation, H.R. 1003, would require the 
CFTC to quantify the costs and benefits of future regulations and 
orders. Sadly, the legislation is prospective, but we believe that had 
such an analysis been made, it could have prevented the turmoil 
currently being caused by the $25 million special entity sub-threshold.
Conclusion
    In conclusion, the protections the CFTC is trying to afford through 
the $25 million special entity sub-threshold are not needed for utility 
operations-related swaps entered into by government-owned utilities.
    Government-owned utilities are well-versed in the markets in which 
they are hedging their risks and rely on these swaps solely to manage 
price and operational risks.
    More importantly, the assumption that financial firms will be able 
to replace all the swaps offered currently by our non-financial swap 
partners reflects a dangerous misunderstanding of how electricity is 
delivered and an indifference to the price Wall Street will impose in 
the absence of adequate competition.
    In sum, a failure to allow the narrow relief provided under the 
Public Power Risk Management Act will limit our members' ability to 
hedge against risks and lead to increased risk and costs to the 
ratepayers they serve.
    Thank you again for this opportunity to testify, and I would be 
more than happy to answer any questions you might have.

    The Chairman. Thank you, Mr. Naulty.
    You may proceed when you are ready, Mr. Thompson.

 STATEMENT OF LARRY E. THOMPSON, MANAGING DIRECTOR AND GENERAL 
  COUNSEL, THE DEPOSITORY TRUST AND CLEARING CORPORATION, NEW 
                            YORK, NY

    Mr. Thompson. Thank you, Mr. Chairman. I am Larry Thompson, 
General Counsel of The Depository Trust and Clearing 
Corporation, DTCC, a participant-owned and governed cooperative 
that serves as a critical financial market utility for the U.S. 
and global financial markets. DTCC strongly supports H.R. 742, 
the Swap Data Repository Clearinghouse Indemnification 
Correction Act of 2013. I want to thank Congressman Crawford 
and Maloney for their leadership on this issue.
    I would like to focus on three points today. First, I will 
briefly review DTCC's role in the swaps market, second, I will 
explain the indemnification provision in Dodd-Frank and the 
problems it poses for swap data sharing and systemic risk 
oversight, and third, I will discuss a legislative remedy to 
resolve this matter.
    DTCC has a long history serving the over-the-counter swaps 
market and going back to 2005, we are the only party that has 
run a swap data repository. More recently we began operating a 
U.S. swap data repository called DDR, which is a swap data 
repository registered with the CFTC under Dodd-Frank. The DDR 
began accepting trade data from clients the first day that 
financial institutions began trade reporting under Dodd-Frank. 
On December 31 we were the first and only registered swap data 
repository to publish real-time price information. DDR is also 
the only registered swap data repository to offer repository 
and public reporting across all five asset classes.
    Earlier this week, we also announced that DTCC's 
registration application to establish a Japanese OTC 
derivatives trade repository was approved. DDRJ is the first 
trade repository to be approved and established for the 
Japanese market. We also have a trade repository registered 
with the FSA in the UK called DDRL.
    Turning to my second point today, the indemnification 
provision in Dodd-Frank requires a registered swap data 
repository as a condition of sharing information with a foreign 
regulator to first receive a written statement and agreement 
with that regulator will abide by certain confidentiality 
requirements and indemnify both the SDR and the regulator for 
any expenses arising from the litigation relating to the 
information provided. We believe those provisions are 
complicated and unworkable.
    First, many foreign countries and their legal systems do 
not recognize the concept of indemnification. Even where they 
do, many foreign governments cannot or will not agree to 
indemnify foreign private third parties such as U.S.-registered 
SDR or a foreign government. In order to access the necessary 
information without indemnification each jurisdiction may have 
to establish a local trade repository. A proliferation of local 
trade repositories would undermine the ability of regulators to 
obtain timely, consolidated, and accurate view of the global 
marketplace. The implementation of this provision will also 
undo the existing data sharing system that was developed 
through the OTC Derivatives Regulators Forum or ODRF and a 
Committee on Payment and Settlement Systems of the 
International Organization of Securities Commissions known as 
CPSS IOSCO.
    For nearly 3 years regulators globally have followed the 
ODRF guidelines to access the information they need for 
systemic risk oversight. It is the standard that DTCC uses to 
provide regulators around the world with access to global 
credit, default swap, and interest rate data stored in its 
voluntary trade repositories, and it has worked well to date.
    Turning my third and final point, during the 112th Congress 
the SEC testified in support of a legislative solution and 
three of the five CFTC Commissioners publicly endorsed the need 
for legislation to clarify this provision of Dodd-Frank. 
Furthermore, a bipartisan coalition of more than 40 lawmakers 
in the House signed on as cosponsors of legislation similar to 
H.R. 742. The Dodd-Frank Indemnification Requirement has not 
been copied by regulators overseas. In fact, the European 
Market Infrastructure Regulation known as EMIR, considered and 
rejected the indemnification requirement. Congress should enact 
H.R. 742 to quickly issue a regulatory comity with 
international counterparts. By passing this legislation to 
ensure that technical corrections to indemnification are 
addressed, Congress will help create the proper environment for 
the development of a global trade repository system to support 
systemic risk management and oversight.
    Thank you, and I await your questions.
    [The prepared statement of Mr. Thompson follows:]

Prepared Statement of Larry E. Thompson, Managing Director and General 
  Counsel, The Depository Trust and Clearing Corporation, New York, NY
    Thank you for holding today's hearing to examine legislative 
improvements to Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank). The Depository Trust & Clearing 
Corporation (DTCC) supports efforts to improve the effectiveness of 
this landmark legislation, particularly in areas related to regulators' 
ability to access and utilize a global data set for systemic risk 
oversight and mitigation purposes.
    DTCC strongly supports the Swap Data Repository and Clearinghouse 
Indemnification Correction Act of 2013 (H.R. 742), a bipartisan 
proposal cosponsored by Congressman Bill Huizenga (R-MI), Congressman 
Rick Crawford (R-AR), Congressman Sean Patrick Maloney (D-NY), and 
Congresswoman Gwen Moore (D-WI). H.R. 742 will resolve issues 
surrounding Dodd-Frank's indemnification provisions and confidentiality 
requirements.
    My testimony today explains the Dodd-Frank indemnification 
provision, how it will fragment swap data, and how fragmentation will 
hinder regulators' efforts to oversee a global market. I also provide 
information on how indemnification risks negating the existing global 
data sharing framework. Finally, I will address the Commodity Futures 
Trading Commission's (CFTC) interpretive guidance, what it may mean for 
U.S. regulators, and explain why legislation is needed in this 
instance.
    I appreciate the opportunity to bring greater attention to the 
unintended consequences of these provisions and the need for a 
legislative solution. These concerns have been echoed by regulatory 
officials and policymakers globally, including by representatives of 
the European Parliament, European Commission and Council, by Asian 
governments and by both Republican and Democratic Members of the U.S. 
Congress.
The Dodd-Frank Confidentiality and Indemnification Provisions
    Sections 728 and 763 of Dodd-Frank apply to swap data repositories 
(SDRs) registered with the CFTC and the Securities and Exchange 
Commission (SEC), respectively. Prior to sharing information with U.S. 
Prudential Regulators, the Financial Stability Oversight Council, the 
Department of Justice, foreign financial supervisors (including foreign 
futures authorities), foreign central banks, or foreign ministries, 
Dodd-Frank requires (i) registered SDRs to receive a written agreement 
from each entity stating that the entity shall abide by certain 
confidentiality requirements relating to the information on swap 
transactions that is provided and (ii) each entity must agree to 
indemnify the SDR and the CFTC or the SEC (as applicable) for any 
expenses arising from litigation relating to the information provided.
    In practice, these provisions have proven to be unworkable.
    As an initial matter, indemnification is a common law concept with 
its origin in tort law. Many countries and their legal systems do not 
recognize indemnification, and further, many foreign governments cannot 
or will not agree to indemnify foreign, private third parties (U.S. 
registered SDRs). Further, regulators have noted that they are already 
following policies and procedures to safeguard and share data based on 
both the OTC Derivatives Regulators' Forum (ODRF) and the International 
Organization of Securities Commissions' (IOSCO) Multi-Lateral 
Memorandum of Understanding.
Indemnification Requirement Will Fragment the Global Data Set and 
        Impede Regulatory Oversight
    The continued presence of the indemnification requirement is a 
significant barrier to the ability of regulators globally to 
effectively utilize the transparency offered by a trade repository 
registered in the U.S. Without a Dodd-Frank compliant indemnity 
agreement, U.S.-registered SDRs may be legally precluded from providing 
regulators market data on transactions that are subject to their 
jurisdiction. In order to access the swap transaction information 
necessary to regulate market participants in their jurisdiction, global 
supervisors will be forced to establish local repositories to avoid 
indemnification.
    Foreign regulators have noted concerns with a scenario in which a 
foreign regulator has an interest in certain data in a U.S. SDR 
resulting from a jurisdictional nexus with respect to the currency or 
underlying reference entity, where neither party to the transaction 
falls under the foreign regulator's oversight authority. For example, a 
U.S. and a London-based bank may trade on an equity swap involving a 
Japanese underlying entity, and the trade is reported to a U.S. SDR. If 
the Japan Financial Services Agency has an interest in accessing such 
data, it does not appear to be able to do so absent a confidentiality 
and indemnity agreement.
    The creation of multiple SDRs will, by definition, fragment the 
current consolidated information by geographic boundaries. While each 
jurisdiction would have an SDR for its local information, it would be 
far less efficient, more expensive, and prone to error when compared 
with the current global information sharing arrangement in place today.
    Further, a proliferation of local trade repositories would 
undermine the ability of regulators to obtain a timely, consolidated, 
and accurate view of the global marketplace. If a regulator can only 
``see'' data from the SDR in its jurisdiction, then that regulator 
cannot get a fully aggregated and netted position of the entire market 
as a whole. And if a regulator cannot see the whole market, then the 
regulator cannot see risk building up in the system or provide adequate 
market surveillance and oversight. In short, regulators will be blind 
to market conditions as a direct result of the indemnification 
provision. In the name of transparency, this provision creates opacity.
    This could have a profound impact for U.S. regulators if other 
jurisdictions adopt a provision like Dodd-Frank's confidentiality and 
indemnification requirement. The imposition of the indemnification 
requirement on foreign governments increases the potential that foreign 
regimes will adopt reciprocal provisions. The CFTC, SEC, and others may 
find themselves precluded from accessing non-U.S. SDR data unless they 
agree to indemnify the non-U.S. private third party trade repository. 
The SEC noted in testimony before the House Financial Services 
Committee last year that the agency ``would be legally unable to meet 
any such indemnification requirement and has argued vigorously against 
similar requirements in other contexts.'' \1\ The CFTC would likely 
face a similar challenge.
---------------------------------------------------------------------------
    \1\ H.R. __, the Swap Data Repository and Clearinghouse 
Indemnification Correction Act of 2012: Hearing Before the H. Comm. on 
Fin. Servs., 112th Cong. (2012) (statement by Ethiopis Tafara, 
Director, Office of International Affairs, SEC), available at http://
financialservices.house.gov/uploadedfiles/hhrg-112-ba-wstate-etafara-
20120321.pdf.
---------------------------------------------------------------------------
Indemnification Requirement Threatens Existing Global Data Sharing 
        Framework
    The indemnification provision threatens to undo the existing data 
sharing system that was developed through the cooperative efforts of 
more than 50 regulators worldwide under the auspices of the ODRF and 
the Committee on Payment and Settlement Systems and the International 
Organization of Securities Commissions (CPSS-IOSCO).
    For nearly 3 years, regulators globally have followed the ODRF 
guidelines to access the information they need for systemic risk 
oversight. It is the standard that DTCC uses to provide regulators 
around the world with access to global credit default swap (CDS) and 
interest rates data stored in its trade repositories. For example, 
under ODRF guidelines, regulators must maintain the confidentiality of 
information they obtain from DTCC's trade repositories and must affirm 
that information obtained is of material interest to their oversight.
    The Dodd-Frank indemnification requirement has not been copied by 
Asian and European regulators. In fact, the European Market 
Infrastructure Regulation (EMIR) considered and rejected an 
indemnification requirement. Congress should enact H.R. 742 quickly to 
bring American law in line with the rest of the world.
Limitations of the Commodity Futures Trading Commission Interpretive 
        Statement
    In May 2012, the CFTC issued an Interpretative Statement Regarding 
the Confidentiality and Indemnification Provisions of the Commodity 
Exchange Act (Interpretive Statement). DTCC appreciates the 
Commission's serious effort to address these problems in the context of 
its rulemaking authority. However, due to the limitations inherent in a 
regulatory modification to a statutory problem, and in light of 
discussions with regulators globally, the language of the statute 
ultimately requires a ``legislative fix'' to clarify the scope and 
applicability of Dodd-Frank's confidentiality and indemnification 
provisions. Many regulators globally have expressed to DTCC the belief 
that a legislative resolution is needed to address the issues presented 
by this provision. Congress should act to bring certainty and clarity 
to global swaps markets.
    While the Interpretative Statement provides clarification with 
respect to how the Commission proposes to construe the application of 
Dodd-Frank, it does not provide complete resolution to the concerns 
expressed by foreign regulatory authorities relating to regulator 
access. Even with adoption of the Interpretative Statement, which DTCC 
supports as a necessary first step, the indemnification provisions may 
still cause limited data sharing across jurisdictions.
The Swap Data Repository and Clearinghouse Indemnification Correction 
        Act of 2013
    The Swap Data Repository and Clearinghouse Indemnification 
Correction Act of 2013 would make U.S. law consistent with existing 
international standards by removing the indemnification provisions from 
sections 728 and 763 of Dodd-Frank. DTCC strongly supports this 
legislation, which we believe represents the only viable solution to 
the unintended consequences of indemnification.
    H.R. 742 is necessary because the statutory language in Dodd-Frank 
leaves little room for regulators to act without U.S. Congressional 
intervention. This point was reinforced in the CFTC/SEC January 2012 
Joint Report on International Swap Regulation, which noted that the 
Commissions ``are working to develop solutions that provide access to 
foreign regulators in a manner consistent with the DFA and to ensure 
access to foreign-based information.'' \2\ It indicates legislation is 
needed, saying that ``Congress may determine that a legislative 
amendment to the indemnification provision is appropriate.'' \3\
---------------------------------------------------------------------------
    \2\ CFTC and SEC, Joint Report on International Swap Regulation 
(Jan. 31, 2012), at 103, available at http://www.cftc.gov/ucm/groups/
public/@swaps/documents/file/dfstudy_isr_013112.pdf.
    \3\ Id.
---------------------------------------------------------------------------
    H.R. 742 would send a clear message to the international community 
that the United States is strongly committed to global data sharing and 
determined to avoid fragmenting the current global data set for over-
the-counter (OTC) derivatives. By amending and passing this legislation 
to ensure that technical corrections to indemnification are addressed, 
Congress will help create the proper environment for the development of 
a global trade repository system to support systemic risk management 
and oversight.
Bipartisan and Regulatory Support for the Swap Data Repository and 
        Clearinghouse Indemnification Correction Act of 2013
    The SEC supports removing the indemnification provision from the 
DFA. During a hearing of the House Financial Services Capital Markets 
Subcommittee last year, the Commission testified that the 
``indemnification requirement interferes with access to essential 
information, including information about the cross-border OTC 
derivatives markets. In removing the indemnification requirement, 
Congress would assist the SEC, as well as other U.S. regulators, in 
securing the access it needs to data held in global trade repositories. 
Removing the indemnification requirement would address a significant 
issue of contention with our foreign counterparts, while leaving intact 
confidentiality protections for the information provided.'' \4\
---------------------------------------------------------------------------
    \4\ H.R. __, the Swap Data Repository and Clearinghouse 
Indemnification Correction Act of 2012: Hearing Before the H. Comm. on 
Fin. Servs., 112th Cong. (2012), supra note 1.
---------------------------------------------------------------------------
    CFTC Commissioners Scott O'Malia, Bart Chilton, and Jill Sommers 
have publicly stated their support for a legislative solution to 
address the unintended consequences of the provision.\5\ Recently, 
during a Senate Committee on Agriculture, Nutrition, and Forestry 
hearing, CFTC Chairman Gary Gensler identified the indemnification 
issue as one that Congress may address.\6\
---------------------------------------------------------------------------
    \5\ See Commissioner Jill Sommers and Commissioner Scott O'Malia, 
Dissenting Statement, Interpretative Statement Regarding the 
Confidentiality and Indemnification Provisions of Section 21(d) of the 
Commodity Exchange Act, available at http://www.cftc.gov/PressRoom/
SpeechesTestimony/sommers_omailadissentstatement; see also Dodd-Frank 
Derivatives Reform: Challenges Facing U.S. and International Markets: 
Hearing Before the H. Comm. on Agric., 112th Cong. (2012) (Commissioner 
Bart Chilton expressing support for a legislative solution), transcript 
available at http://agriculture.house.gov/sites/
republicans.agriculture.house.gov/files/transcripts/112/112-35New.pdf.
    \6\ See Oversight of the Commodity Futures Trading Commission: 
Hearing Before the S. Comm. on Agric., Nutrition, and Forestry, 113th 
Cong. (2011) (colloquy between Chairman Gensler and Senator Saxby 
Chambliss).
---------------------------------------------------------------------------
    There is bicameral, bipartisan support to resolve the consequences 
of indemnification. In the last Congress, H.R. 4235 secured 41 
cosponsors and was the only DFA corrections bill to garner bipartisan, 
bicameral support. While the legislation passed the House Financial 
Services Committee, it was ultimately taken off the House Agriculture 
Committee hearing calendar.
    In addition, several other Members of Congress have publicly 
declared their support for a technical correction to the provision. 
Senator Agriculture Committee Chairwoman Debbie Stabenow (D-MI) and 
former Ranking Member Pat Roberts (R-KS), and former House 
Appropriations Agriculture Subcommittee Congressman Jack Kingston (R-
GA) and Ranking Member Sam Farr (D-CA), authored separate letters to 
their counterparts in the European Parliament expressing interest in 
working together on a solution to this issue.\7\
---------------------------------------------------------------------------
    \7\ See Letter from Representative Jack Kingston and Representative 
Sam Farr to Mr. Sharon Bowles, Mr. Jean-Paul Gauzes, Dr. Werner Langen, 
and Mr. Gabor Butor (May 18, 2011); see also Letter from Senator Debbie 
Stabenow and Senator Pat Roberts to Ms. Sharon Bowles and Dr. Werner 
Langen (June 2, 2011).
---------------------------------------------------------------------------
DTCC Has Experience Operating Global Trade Repositories
    DTCC provides critical infrastructure to serve all participants in 
the financial industry, including investors, commercial end-users, 
broker-dealers, banks, insurance carriers, and mutual funds. We operate 
as a cooperative that is owned collectively by its users and governed 
by a diverse Board of Directors.
    DTCC has extensive experience operating as a trade repository and 
meeting transparency needs.
    We provide trade repository services in the U.S., the UK, Japan, 
Singapore and The Netherlands and have established a global trio of 
fully replicated GTR data centers. To support Dodd-Frank requirements, 
the DTCC Data Repository (DDR) applied for and received provisional 
registration from the CFTC to operate a multi-asset-class SDR for OTC 
credit, equity, interest rate, foreign exchange (FX) and commodity 
derivatives in the U.S. DDR began accepting trade data from its clients 
on October 12, 2012--the first day that financial institutions began 
trade reporting under the DFA. Furthermore, on December 31, DDR was the 
first and only registered SDR to publish real-time price information. 
DTCC has been providing public aggregate information for the CDS market 
on a weekly basis, including both open positions and turnover data, 
since January 2009. This information is available, free of charge, on 
www.dtcc.com.
    Last week, DTCC announced that registered swaps dealers are now 
submitting OTC derivatives trade information for all five major asset 
classes into the DDR. The DDR is the only repository to offer reporting 
across all asset classes, a major milestone in meeting regulatory calls 
for robust trade reporting and risk mitigation in the global OTC 
derivatives market. Currently, there are approximately three million 
new positions across asset classes for a total of nearly seven million 
positions registered in the DDR.
    I am pleased to report that DTCC's application for registration to 
establish a Japanese OTC derivatives trade repository was recently 
approved by the Financial Services Agency of Japan (J-FSA). DTCC will 
begin operating this service ahead of the J-FSA's mandated April 1 
deadline for market participants in Japan to begin reporting their OTC 
derivatives transactions. DTCC Data Repository (Japan) KK (DDRJ) is the 
first trade repository to be approved and established for the Japanese 
market. DDRJ will support trade reporting across four major OTC 
derivatives asset classes including credit, equities, interest rates, 
and FX.
    In 2012, DTCC expanded the Global Trade Repository (GTR) in order 
to support mandatory regulatory reporting requirements for over-the-
counter (OTC) derivatives. The GTR, which holds detailed data on OTC 
derivatives transactions globally, gives market participants and 
regulators an unprecedented degree of transparency into this $650 
trillion market--an essential tool for managing systemic risk.
    The GTR is now established as the industry's preferred provider for 
global OTC derivatives reporting. It holds data on more than 98% of 
credit default swaps, 70% of interest rate derivatives and 60% of 
equities derivatives traded globally--and it is expanding to include 
foreign exchange and commodities derivatives.
    Thanks in large part to the financial industry's voluntary effort 
to report data to the GTR, the CDS market is the most transparent in 
the world as far as regulatory understanding of counterparty exposures. 
In fact, we believe the CDS market is even more transparent than the 
equity and bond markets.
    The GTR's Regulators Portal, which provides detailed information on 
counterparty positions as well as notional and transaction-level data, 
is leveraged on a regular basis by more than 40 supervisors globally to 
help manage sovereign debt crises, corporate failures, credit 
downgrades and significant losses by financial institutions. The portal 
is the first global service of its kind in the financial marketplace to 
provide regulators with granular data on transactions that occur within 
their jurisdictions.
    Although DTCC and the industry continue to work closely to meet 
regulatory reporting requirements, the obstacles presented by the DFA 
indemnification provisions and confidentiality requirements aren't 
going away. Ultimately, Congress must act to avoid further unintended 
consequences and to ensure market transparency and risk mitigation of 
global financial markets.
    Thank you for your time and attention this morning. I am happy to 
answer any questions that you may have.

    The Chairman. Thank you, Mr. Thompson.
    Ms. Hollein, you may begin when you are ready.

  STATEMENT OF MARIE N. HOLLEIN, C.T.P., PRESIDENT AND CHIEF 
   EXECUTIVE OFFICER, FINANCIAL EXECUTIVES INTERNATIONAL AND 
FINANCIAL EXECUTIVES RESEARCH FOUNDATION, WASHINGTON, D.C.; ON 
                           BEHALF OF
              COALITION FOR DERIVATIVES END-USERS

    Mr. Hollein. Thank you. Chairman Lucas, Ranking Member 
Peterson, and Members of the Committee, I want to thank you for 
inviting me to testify today. I am the President and CEO of 
Financial Executives International, the professional 
association of 15,000 senior-level financial executives from 
over 8,000 companies across all industries.
    For more than 30 years I worked in the treasury function of 
several major corporations, including Westinghouse, Citicorp, 
ABN AMRO, and led CPMG's treasury practice for non-financial 
institutions. Today I speak on behalf of FEI and the Coalition 
for Derivatives End-Users. The coalition includes more than 300 
companies and trade associations representing thousands of end-
users united in one respect. They use derivatives to manage 
risk, not create it.
    Corporate treasurers utilize over-the-counter derivatives 
to hedge and mitigate business risks, not for speculative 
purposes, which is why these end-users should not be regulated 
in a way that imposes unnecessary costs or restrictions. 
Congress heard our concerns in several respects and provided 
for key exemptions in Dodd-Frank for end-users.
    Unfortunately, over the 2\1/2\ years since Dodd-Frank was 
enacted, it appears that these end-user exceptions are not 
being upheld in the rulemaking process. This is especially 
evident in the proposed margin rule and in the lack of clarity 
around inter-affiliate swaps and the use of treasury hedging 
centers.
    Despite these issues the compliance clock keeps ticking 
toward imminent deadlines. The coalition strongly supports two 
pieces of legislation that have been referred to your 
Committee; H.R. 634 and H.R. 677. We would like to thank the 
Committee and the full House for supporting similar bills last 
Congress.
    Today I will focus my comments on the Inter-Affiliate Swap 
Clarification Act, H.R. 677, introduced by Congressmen Stivers, 
Fudge, Gibson, and Moore. This legislation would ensure that 
inter-affiliate derivative trades do not face the same 
demanding regulatory requirements as market-facing swaps. This 
bill also ensures that end-users are not penalized for using 
treasury hedging centers to manage their commercial risks.
    There are two serious problems facing end-users that needs 
to be addressed. First, under CFTC's proposed rule financial 
end-users would have to clear internal trades between 
affiliates unless they post variation margin or met specific 
requirements for an exception. Financial end-users such as 
pension plans, captive finance affiliates, and mutual life 
insurance companies use derivatives exactly the same way that 
non-financial end-users do.
    If these end-users have to post variation margin, there is 
little point to exempt international-affiliate trades from 
clearing requirements as the cost could be similar. And let's 
not forget the larger point. Internal end-user trades do not 
create systemic risk and hence, should not be regulated the 
same as those trades that do.
    Second, roughly \1/4\ of end-users we surveyed execute 
swaps through an affiliate. Many companies find it more 
efficient to manage their risks centrally instead of having 
hundreds of affiliates making trades in an uncoordinated 
fashion. Using this type of hedging unit centralizes expertise, 
strengthens financial controls, increases transparency, and 
improves price. These advantages led me to centralize the 
treasury function at Westinghouse while I was there.
    However, the Regulators' interpretation of the Dodd-Frank 
Act confronts non-financial end-users with a choice, either 
clear all of their trades or dismantle their treasury hedging 
centers and find a new way to manage risk. Stated differently, 
this problem threatens to deny the end-user clearing exception 
to those who have chosen to hedge their risk in an efficient, 
highly-effective, and risk-reducing way. It is difficult to 
believe that this is the result Congress hoped to achieve.
    For these reasons we hope Congress will pass H.R. 677.
    Thank you, Mr. Chairman, and I look forward to the 
questions.
    [The prepared statement of Ms. Hollein follows:]

  Prepared Statement of Marie N. Hollein, C.T.P., President and Chief
  Executive Officer, Financial Executives International and Financial
     Executives Research Foundation, Washington, D.C.; on Behalf of
                  Coalition for Derivatives End-Users
    Chairman Lucas, Ranking Member Peterson, and Members of the 
Committee, I want to thank you for inviting me to testify today on the 
topic of legislative improvements to Title VII of the Dodd-Frank Act.
    I am the President and Chief Executive Officer of Financial 
Executives International, the professional association of choice for 
15,000 senior-level financial executives, from over 8,000 public and 
privately-held companies, across all industries. For 30 years before 
coming to FEI, I worked in the treasury functions of several major 
corporations, including Westinghouse, Citicorp, ABN AMRO, and Ruesch 
International and worked in the Financial Risk Management Practice 
leading treasury for non-financial institutions for KPMG.
    Today I speak both on behalf of FEI and as a representative of the 
Coalition for Derivatives End-Users. The Coalition includes more than 
300 end-user companies and trade associations and, collectively, we 
represent thousands of end-users from across the economy. Our members 
are united in one respect; they use derivatives to manage risk, not 
create it.
    FEI as an organization is dedicated to advancing ethical and 
responsible financial management. As such, a number of FEI members, 
namely corporate treasurers, utilize over-the-counter derivatives to 
hedge and mitigate business risk. During the debate leading up to the 
Dodd-Frank Act, FEI worked alongside the Coalition to educate lawmakers 
on how derivatives are an effective tool used by non-financial 
companies for risk-management purposes and not for speculation, which 
is why end-users should not be regulated in a way that imposes unwieldy 
costs or unnecessary burdens. Congress heard our concerns in several 
respects and provided for key exceptions for end-users from some of the 
most burdensome derivatives requirements, such as central clearing 
requirements.
    Unfortunately, over 2\1/2\ years since the enactment of the Dodd-
Frank Act, it appears that the intent of these end-user exceptions is 
not being upheld in the rulemaking process, as evidenced by the 
proposed margin rule and in the lack of clarity regarding companies 
that employ inter-affiliate swaps or use a centralized treasury hedging 
center. Despite these outstanding issues, the compliance clock keeps 
ticking away and companies must be ready to meet key deadlines.
    For these reasons, the Coalition strongly supports two pieces of 
legislation that have been referred to your Committee, H.R. 634 and 
H.R. 677. We would like to thank the Committee for reporting similar 
bills by voice vote last Congress. Both bills subsequently passed the 
House by significant bipartisan majorities.
    Today, I will focus my comments on the Inter-Affiliate Swap 
Clarification Act, H.R. 677, introduced by Congressmen Stivers, Fudge, 
Gibson and Moore. This legislation would ensure that inter-affiliate 
derivatives trades, which take place between affiliated entities within 
a corporate group, do not face the same demanding regulatory 
requirements as market-facing swaps. The legislation would also ensure 
that end-users are not penalized for using central hedging centers to 
manage their commercial risk.
    There are two serious problems facing end-users that need 
addressing. First, under the CFTC's proposed inter-affiliate swap rule, 
financial end-users would have to clear purely internal trades between 
affiliates unless they posted variation margin between the affiliates 
or met specific requirements for an exception. The Coalition is 
comprised of both financial and non-financial end-user members, and 
financial end-users, such as pension plans, captive finance affiliates, 
mutual life insurance companies, and commercial companies with non-
captive finance arms, use derivatives the same way non-financial end-
users do. If these end-users have to post variation margin, there is 
little point to exempting inter-affiliate trades from clearing 
requirements, as the costs could be similar. And let's not forget the 
larger point--internal end-user trades do not create systemic risk and, 
hence, should not be regulated the same as those trades that do.
    Second, many end-users--approximately \1/4\ of those we surveyed--
execute swaps through an affiliate. This of course makes sense, as many 
companies find it more efficient to manage their risk centrally, to 
have one affiliate trading in the open market, instead of dozens or 
hundreds of affiliates making trades in an uncoordinated fashion. Using 
this type of hedging unit centralizes expertise, allows companies to 
reduce the number of trades with the street and improves pricing. These 
advantages led me to centralize the treasury function at Westinghouse 
while I was there. However, the regulators' interpretation of the Dodd-
Frank Act confronts non-financial end-users with a choice: either 
dismantle their central hedging centers and find a new way to manage 
risk, or clear all of their trades. Stated another way, this problem 
threatens to deny the end-user clearing exception to those end-users 
who have chosen to hedge their risk in an efficient, highly-effective 
and risk-reducing way. It is difficult to believe that this is the 
result Congress hoped to achieve.
    The Coalition believes that regulation of inter-affiliate swaps 
should square with the economic reality that inter-affiliate swaps do 
not pose systemic risk. H.R. 677 would make sure that end-users will 
not be forced to clear swaps simply because they use inter-affiliate 
trades or a centralized hedging structure. Thank you Chairman Lucas, I 
will be happy to answer any questions Members of the Committee might 
have.

    The Chairman. Thank you, and the chair now recognizes Mr. 
Turbeville whenever you are ready, sir.

 STATEMENT OF WALLACE C. TURBEVILLE, SENIOR FELLOW, DEMOS, NEW 
              YORK, NY; ON BEHALF OF AMERICANS FOR
                        FINANCIAL REFORM

    Mr. Turbeville. Thank you, Chairman Lucas and Members of 
the Committee. Thanks for having me here.
    My name is Wallace Turbeville. I am a Senior Fellow at 
Demos, which is a national public policy organization working 
to reduce political and economic inequality, advancing a vision 
of a country where we all have an equal say in our democracy, 
and have an equal chance in our economy. I am talking today on 
behalf of Americans for Financial Reform, which is a coalition 
of more than 250 organizations which have come together to 
advocate for the reform of the financial sector. I would like 
to thank Marcus Stanley, AFR's Policy Director, for assisting 
with the preparation of my testimony.
    I come to this testimony with a strangely appropriate set 
of experiences. First of all, I was born near Owensboro, 
Kentucky, which is not exactly qualification, but I did 
practice law in municipal bonds and worked with many municipal 
utilities for many years and then went onto Goldman Sachs to 
work in its municipal bond department for many years. After 
being at Goldman Sachs in Europe and elsewhere, I moved onto an 
international infrastructure finance and ran a derivatives risk 
service company for 7 years as CEO. Then 2\1/2\ years ago I 
decided to devote myself 100 percent of my time to thinking and 
writing about the reform of the financial markets.
    Today the Committee is considering seven pieces of 
legislation. Six of these would amend Title VII, and the cost-
benefit analysis would amend another part of the Act. The 
Americans for Financial Reform oppose six of these legislative 
proposals. We do not oppose the matter that was discussed by 
the gentleman from DTCC.
    In truth there is no urgency for technical amendments to 
Title VII at this time. This may seem surprising given the 
length of the scope of the legislation, but, in fact, what is 
happening is in large measure as Chairman Gensler pointed out, 
many of these issues are being dealt with on an ongoing basis.
    Given the complexity of the swaps space and the approach of 
Dodd-Frank Act in relying on regulatory expertise to craft 
rules, Congress should think about whether it is premature to 
do some of these things. Specifically, there are several issues 
at play here. One is the business risk management section, H.R. 
634. Now, the bill as has been talked about several times 
today, the whole issue of end-user margin is that the CFTC has 
not required end-users to post margin, but the risks that are 
associated with swaps that are margined are dead. Pure and 
simple. They are credit extensions. So the fact of the matter 
is that the Prudential Regulators have said it would be prudent 
for a bank who is doing a swap to set a threshold or a limit on 
how much debt they extend. To do otherwise would be to suggest 
that it would be prudent for banks to extend unlimited credit, 
which I think is hard to address.
    There are a couple of other points I would like to make 
quickly before we just move on. One is associated with the 
whole notion of the push-out provision. As best I can tell the 
biggest concern about the push-out provision is that it might 
be more expensive to work through an affiliate by some of the 
banks.
    As Chairman Gensler pointed out, many of the banks are 
working through affiliates in this area. I want to point out 
that the Federal Reserve tells us that JPMorgan has 3,391 
affiliates in its organization, B of A, 2,091, Goldman Sachs, 
3,115, Morgan Stanley, 2,884, and Lehman before it died had 
2,800. So the banks can manage to work through affiliates. The 
primary cost associated with the push-out is a cost of capital. 
If you have to capitalize an affiliate as opposed to relying on 
the capital of an insured bank, the cost of capital may be 
higher.
    But here is the point. That cost of capital may be higher. 
That might even cause some costs to be passed along to 
counterparties, but the alternative is to have the people of 
the United States grant a subsidy through their guarantees of 
these banks, and that is an inappropriate way to do things.
    I am perfectly happy to talk about any and all of these 
other provisions, and I look forward to your questions. Thank 
you.
    [The prepared statement of Mr. Turbeville follows:]

Prepared Statement of Wallace C. Turbeville, Senior Fellow, Demos, New 
         York, NY; on Behalf of Americans for Financial Reform
    Chairman Lucas, Ranking Member Peterson and Members of the 
Committee, good morning and thank you for the opportunity to testify 
before the Committee today.
    My name is Wallace Turbeville. I am a Senior Fellow at Demos, a 
national public policy organization working to reduce political and 
economic inequality, advancing a vision of a country where we all have 
an equal say in our democracy and an equal chance in our economy. I am 
testifying today on behalf of Americans for Financial Reform, a 
coalition of more than 250 organizations who have come together to 
advocate for the reform of the financial sector. I would also like to 
thank Marcus Stanley, AFR's Policy Director, for assistance in 
preparing this testimony.
    I come to this testimony with extensive professional experience in 
both the derivatives markets and the commodity markets. For 7 years, I 
practiced law specializing in public and private securities offerings, 
primarily municipal bond offerings for states, local governments and 
governmental utilities. I was then an investment banker at Goldman 
Sachs in its Municipal Bond Department for more than twelve years, 
specializing in governmental utilities in the United States and in 
Europe. After leaving Goldman, I managed a small advisory firm 
specializing in infrastructure finance around the world. I also served 
as CEO of a firm providing counterparty credit management services in 
the derivatives markets. For the last 2 years, I have focused my 
efforts on financial system reforms, participating in dozens of formal 
comments and various roundtable discussions at the request of 
regulatory agencies, the vast majority of them related to Title VII of 
the Dodd-Frank Act. This experience has prepared me well to discuss the 
amendments of Title VII of the Dodd-Frank Act that are the subject of 
this hearing.
    Today the Committee is considering seven pieces of legislation. Six 
of these would amend Title VII of the Dodd-Frank Act, and one would 
impose new requirements for cost-benefit analysis on the Commodity 
Futures Trading Commission (the ``CFTC''). Americans for Financial 
Reform oppose six of these legislative proposals. The specific reasons 
for our opposition to each bill are outlined in detail in my written 
testimony and will also be outlined in opposition letters that we are 
submitting today or will be submitting in the future. A guiding 
principle for AFR is that the trillions of dollars in economic costs 
created by the 2008 financial crisis, as well as the numerous related 
problems revealed in Wall Street scandals, mean that we need increased 
oversight of our financial system and full implementation of the Dodd-
Frank Act. This should not be a controversial position. Over 70 percent 
of the public supports tougher rules and enforcement for Wall Street, 
and similar proportions support the Dodd-Frank Act.\1\ But the 
legislation offered here moves in the wrong direction. Bills such as 
H.R. 992 would enable additional bailouts of Wall Street banks. 
Legislation such as H.R. 677 on inter-affiliate swaps or the discussion 
draft on extraterritorial derivatives regulation would effectively 
limit the ability of regulators to provide proper oversight of complex 
derivatives markets.
---------------------------------------------------------------------------
    \1\ Lake Research Partners, ``Polling Memo: Two Year Anniversary Of 
The Wall Street Reform Law'', July 18, 2012, available at http://
ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/
uploads/2012/07/AFR-AARP-CRL-NCLR-Lake-Research-Dodd-Frank-Anniversary-
Poll-MEMO-7-18-121.pdf.
---------------------------------------------------------------------------
    The title of this hearing suggests that the Committee is 
considering ``improvements'' of the derivatives provisions of the Dodd-
Frank Act. Despite the fact that the great majority of the Dodd-Frank 
Act has not yet been implemented or tested in the market, it has been 
suggested that there is a need for ``clarifications'' and ``technical 
amendments.''
    This has caused me to think carefully about the concepts of 
improvements, clarifications and technical amendments. Derivatives 
bristle with devilishly complex risks and valuation issues. Even a 
sophisticated bank might value the same derivative differently in 
separate organizational units of the bank.\2\ It has been reported that 
the infamous ``London Whale'' episode involved the obscuring of massive 
risk positions at JP Morgan Chase, a firm that claims industry 
leadership in risk management, by alteration to the quantitative 
formulas measuring risk.\3\ In this technical area, these concepts are 
likely to be viewed differently by those who evaluate the regulation of 
the derivatives markets differently.
---------------------------------------------------------------------------
    \2\ Arora, S., Barak, B., Brunnermeier, M., Ge, R., ``Computational 
Complexity and Information Asymmetry in Financial Products,'' October 
19, 2009, available at http://scholar.princeton.edu/markus/
publications/term/39.
    \3\ Brinded, L., ``JP Morgan's $2 Billion `London Whale' Loss 
Challenges Industry's Risk Measures,'' International Business Times, 
June 13, 2012, available at http://www.ibtimes.co.uk/articles/351700/
20120613/jp-morgan-cio-bruno-iksil-london-whale.htm.
---------------------------------------------------------------------------
    In truth, there is no urgency for ``technical amendments'' to Title 
VII at this time. This may seem surprising given the length and scope 
of the legislation, but there are two good reasons that it is true. 
First, in almost every area Title VII grants regulators extensive 
discretion to tailor and fine tune the broad directives in the Dodd 
Frank Act, and to introduce exemptions if need be. Indeed, regulators 
have been generous in doing just that, perhaps to a fault. Second, 
almost none of the significant elements of Title VII have yet been 
fully implemented. Without implementation, claims about their supposed 
harms are unfounded--especially since the key elements of Title VII, 
such as clearing, exchange trading, and improved risk management, are 
hardly radical. They are based on tried and true solutions with which 
we have long experience in real markets.
    Given the complexity of the swaps space, and the approach of the 
Dodd-Frank Act in relying on regulatory expertise to craft specific 
rules, Congress should not be advancing broad and sweeping statutory 
exemptions that overturn the judgment of expert regulators and 
effectively deregulate portions of the swaps market only a few years 
after the decision to regulate them for the first time. Given the 
delays in implementation of the Title VII provisions and the importance 
of gaining experience with how these provisions work once they are 
actually implemented, Congress should not be acting to delay their 
implementation even further. Yet several of the bills before you today 
do exactly that. For example, H.R. 677, the ``Inter-affiliate Swap 
Clarification Act'', would create an overbroad and sweeping exemption 
for all inter-affiliate swaps that completely ignores the nuanced and 
thoughtful work done by the CFTC in crafting its own rule proposal for 
inter-affiliate swaps. And H.R. 1003 would add burdensome additional 
cost-benefit analysis requirements to the Commodity Exchange Act, the 
effect of which would not be to improve the quality of rulemaking but 
instead to create indefinite additional delays in the implementation of 
financial reforms.
    Instead, the Congressional emphasis now should be on supporting the 
drastically under-funded CFTC with adequate resources to complete Dodd-
Frank rulemaking and to actually implement those rules through 
enforcement and market monitoring. Only then will Congress have the 
necessary information to examine how well these rules are actually 
working based on real data rather than the usual industry calls for 
deregulation and exemptions.
    The proposed bill on extraterritorial jurisdiction creates a 
different kind of impediment for the CFTC. The derivatives markets are 
truly international with trading taking place in cyberspace. Events in 
other jurisdictions can easily spread to the U.S. through intricate 
interrelationships across markets. The nature of the regulations in 
other jurisdictions, as well as their timing and even existence, 
remains an unknown. The ideal approach to jurisdiction in these 
circumstances is for the law to provide broad jurisdiction to the CFTC 
and to enhance the prospect that the rules in other jurisdictions will 
be comparable to the U.S. approach. Broad jurisdiction means that there 
will be no gaps in terms of scope and timing. The exercise of 
jurisdiction can be managed through substituted compliance, if 
justified. Broad jurisdiction together with point-by-point examination 
of the rules of other jurisdictions will allow the CFTC to work with 
agencies of other jurisdictions to achieve regulatory harmony which 
reflects the U.S. approach to rules, an approach that will most 
certainly be the most prudent and efficient. Yet as I outline further 
in my testimony, the proposed bill on extraterritorial jurisdiction 
would interfere with this process and undermine the CFTC's ability to 
regulate swaps that directly affect the U.S. economy.
    Americans for Financial Reform does not object to actual technical 
amendments, by which I mean amendments that make non-substantive and 
necessary changes to facilitate the achievement of the goals of the 
original statute. One of the bills before the Committee today, H.R. 
742, the ``Swap Data Repository and Clearinghouse Indemnification 
Correction Act of 2013,'' fits this description well. AFR does not 
oppose it.
    However, the other bills here are far from being ``clarifications 
or technical amendments'' and AFR does not see them as improvements. 
Instead, they significantly alter the Dodd-Frank Act in ways that 
effectively deregulate the financial sector and work against the goals 
of improving the safety, stability, fairness, and efficiency of our 
financial system.
    I use the term ``financial system'' intentionally. Far too often, 
discourse on financial reform conflates the profitability of individual 
financial institutions with a safe, sound and efficient financial 
system. Financial institutions seek short term profits and massive 
earnings from derivatives, and all too often they are able to sustain 
the long term risks involved in this pursuit due to the public safety 
net that supports too-big-to-fail banks. Combined with the fact that 
executive pay is frequently determined by short-term profits, this 
means that short-term incentives dominate their behaviors, often at the 
expense of the public at large and the safety of the broader financial 
system. The Dodd-Frank Act puts sensible risk limits on activities in 
the derivatives markets. This is good for the financial system, even if 
it reduces the profitability potential of some financial institutions.
    In thinking about the benefits of sensible limitations on 
derivatives activities, I would also like to add a personal note on one 
of the bills under consideration. H.R. 1038 purports to benefit public 
utilities by exempting them from some of the protections in Title VII 
of the Dodd Frank Act. This is a subject near and dear to my heart 
since I devoted most of my professional career to assistance of 
governmental enterprises in their capital-raising activities. In those 
years, I had the uncomfortable opportunity to witness sales calls by 
derivatives specialists on governmental utilities. I have seen the 
technique of fostering a sense of trust, encouraging an advisory 
relationship that can be exploited to sell an immensely profitable 
derivative when other alternatives could be better. As pointed out 
earlier, even the most sophisticated financial institutions struggle 
with evaluating the risks associated with derivatives. It is completely 
unreasonable to expect that governmental utilities will have the 
ability to measure the risks of derivative transactions. This is 
especially so given the massive incentives of swap dealers to 
ingratiate themselves as functional advisors and obfuscate their costs 
and risks. This means that swap dealers must be constrained in their 
dealings with governmental utilities. Their business conduct standards 
should be enhanced, not undercut. Public entities are at a major 
disadvantage in negotiating with swap dealers and the public's interest 
is in rectifying this imbalance, not facilitating it.
    Below, I discuss the bills before you today in more detail. I would 
also refer you to the opposition letters that Americans for Financial 
Reform is submitting on most of these pieces of legislation.
Extraterritoriality
    CFTC Chairman Gensler has correctly observed that a faulty 
extraterritoriality rule could blow a hole in the bottom of the ship of 
derivatives regulation. Modern markets are interrelated and trading 
occurs in cyberspace. The very concept of national jurisdictions is 
challenged by the modern financial system, especially in the area of 
derivatives.
    American financial institutions operate derivatives businesses in 
many nations through branches and guaranteed affiliates. Moreover, 
foreign banks similarly maintain large derivatives businesses in the 
U.S. There is no assurance that financial regulations in those 
countries will regulate their activities using comparable standards, 
either in the form of written rules or in their application. Indeed, in 
some jurisdictions, there is no assurance when or even if rules will be 
finalized.
    The discussion draft on extraterritoriality before the Committee 
today would greatly hamper the ability of the CFTC to effectively 
address the complex problem of extraterritoriality. It does this by 
undermining the jurisdiction granted to the agency in Section 722(d) of 
the Dodd-Frank Act and limiting the ability of the agency to work with 
foreign regulators to ensure the full comparability of U.S. and foreign 
derivatives rules. Given the centrality of proper cross-border 
regulation to effective oversight of the derivatives markets, as well 
as the potential exposure of the U.S. taxpayer and the U.S. financial 
system to failures in regulation abroad, it is of central importance to 
support the CFTC in implementing strong cross-border rules. Instead, 
this legislation would weaken it.
    There is no doubt that the viability of the U.S. financial system 
is tied inextricably to international markets. In 2008, foreign banks 
needed access to U.S. dollars to avoid default on ongoing dollar 
denominated liabilities. They could not rely on borrowing dollars in 
the crippled U.S. commercial paper market. The only remaining source 
was the foreign exchange market in which dollars are swapped between 
U.S. and foreign banks as of a future date in exchange for other 
currencies, a $4 trillion per day market.\4\ Banks in other countries 
came to doubt the reliability of U.S. banks--no one knew whether U.S. 
banks were solvent because they held huge quantities of toxic mortgage 
assets that could no longer be valued accurately. The market began to 
evaporate, as foreign banks feared that U.S. banks would not deliver 
the required currency on the appointed date. A worldwide collapse might 
ensue if the foreign banks defaulted for want of dollars. The Fed 
offered unlimited access to foreign central banks to swap dollars for 
foreign currency so that the central banks could in turn loan dollars 
to local banks, avoiding their default. Most accurately measured, the 
daily peak of Fed swaps exceeded $850 billion.
---------------------------------------------------------------------------
    \4\ Bank for International Settlements, ``Triennial Central Bank 
Survey, Report on Global Foreign Exchange Market Activity in 2010,'' 
December 2010, available at http://www.bis.org/publ/rpfxf10t.pdf.
---------------------------------------------------------------------------
    Under these circumstances, a prudent approach to 
extraterritoriality is essential. Jurisdiction and the exercise of 
jurisdiction are two different things. The best result is if the U.S. 
sets the standard for meaningful and prudent regulation and the foreign 
jurisdictions meet that standard. The best way to achieve that goal is 
to strive for broad jurisdiction for the CFTC. This likely means that 
jurisdictions will overlap. But that has several benefits. First, it 
will mean that there are no jurisdictional gaps that can be exploited. 
Second, it will mean that U.S. regulators will be in the best position 
to harmonize jurisdictional overlap under conditions in which the 
foreign rules are substantially comparable with U.S. rules. And for the 
period in which foreign rules are not in place, U.S. regulators can 
protect American taxpayers rather than allowing foreign activities to 
put the U.S. financial system at risk.
    The language of Section 722(d) of the Dodd-Frank Act strikes this 
balance wisely. It gives the CFTC jurisdiction over any activities that 
``have a direct and significant connection with activities in, or 
effect on, commerce of the United States.'' As stated above, the CFTC 
is not required to exercise this jurisdiction. It retains the option to 
tailor regulations to specific activities abroad. It is difficult to 
imagine any reason why the American public would not want to give our 
regulatory agencies jurisdiction over derivatives activities that have 
a ``direct and significant connection'' with the U.S. economy. If 
substituted compliance is appropriate, the CFTC can negotiate that out 
from a position of strength.
    It is unwise to subject these kind of jurisdictional matters to the 
Administrative Procedures Act. The APA may be appropriate for the 
design of specific derivatives rules, but should not limit the proper 
application of these rules to all areas directly affecting the U.S. 
economy.
    Further, the legislation would direct and limit the standard for 
comparability in a way that undercuts the discretion of the CFTC to 
work with foreign jurisdictions to achieve the standards that will 
protect the American public. The bill requires that, for G20 member 
nations, the agencies make overall comparability determinations based 
on the ``broad comparability'' of the entire regime in another country 
to the entire derivatives regime in this country. This eliminates the 
CFTC's ability to determine the comparability of other national regimes 
in specific areas and to permit substituted comparability for some 
requirements and not others. Given the scope of derivatives 
requirements this regulatory flexibility is valuable. Indeed, it is 
possible that the ability to approve on a point-by-point basis will 
allow regulatory agencies to be more permissive in some cases (by 
permitting substituted requirements for a few requirements when the 
overall regime is not comparable). If substituted compliance is 
implemented, the CFTC should be empowered and encouraged to vigorously 
work through the elements of regulatory regimes on an ongoing basis to 
make certain that the high standards required by Congress and the 
American people are upheld in every jurisdiction that could be the 
source of grave harm to the American economy.
    Finally, SEC extraterritoriality jurisdiction has its origin in a 
regulatory mandate that is very different from the CFTC. The nature of 
the derivatives markets regulated by the CFTC demands the standards set 
forth in Section 722(d). If the two standards were to be reconciled, it 
only makes sense that the language of Section 722(d) would prevail. In 
a world in which a financial meltdown can easily and quickly be 
transmitted throughout the international system, it makes no sense to 
make fine distinctions about jurisdictions of organization or physical 
locations of offices when it comes to the derivatives markets.
Bank Derivatives Subsidiaries
    Perhaps the most dramatic example before you today of legislation 
that undermines the goals of the Dodd-Frank Act is H.R. 992, the 
``Swaps Regulatory Improvement Act''. This would amend Section 716 of 
the Dodd-Frank Act, a provision that bans public bailouts of a broad 
range of derivatives dealing activities. This ban would require 
Federally supported banks to transact their derivatives dealing 
business in separate corporations, not guaranteed by the banks. H.R. 
992 weakens this section enormously by greatly increasing the types of 
swaps dealing activities that are exempted from the Section 716 ban on 
public bailouts of derivatives dealing. It would significantly expand 
the range of derivatives dealing that insured depository institutions, 
the banks most susceptible to public bailout, would be permitted to 
engage in and to fund. It is truly remarkable that only a few years 
after the bailout of AIG and the public support provided to derivatives 
dealing at numerous Wall Street banks, that we would see a proposal 
that allows additional public bailouts of Wall Street derivatives 
activities. Yet this is exactly what H.R. 992 would do.
    Opposition to Section 716 is really an issue of cost. The Section 
716 ban on public support would effectively require the affected 
institutions to separately capitalize subsidiaries to engage in 
derivatives dealing. We do not dispute that it would be cheaper for the 
banks to support this business using the cheap funding available 
through insured deposits. But that is because the public is forced to 
subsidize the cost of their capital because the failure of the banks 
would be potentially damaging to the public at large. The real question 
here is whether the public should subsidize these derivatives 
businesses. AFR and many others believe that the public should not. If 
these businesses cannot be done profitably without taxpayer subsidy, 
they should not be done.
    It may be argued that the increased cost of capital will adversely 
affect pricing for derivatives market participants. This argument is 
superficial, especially in its implication that costs will increase on 
a dollar-for-dollar basis. However, to the extent the elimination of 
the subsidy increases cost, taxpayers generally will be benefited from 
the reduction of the subsidy. The Federal Government can always affect 
prices by granting taxpayer subsidies to any business. The use of 
subsidies in this area is a particularly dubious policy.
    Any other result distorts the markets and constitutes a drag on the 
economy. The subsidized derivatives business has been immensely 
profitable for the banks. It has been estimated that devoting capital 
to support derivatives has been ten times more profitable than the use 
of that capital to support lending to American businesses and 
governments.\5\ That figure is completely consistent with statements 
made to me by derivatives professionals. This is completely 
inconsistent with an efficient and transparent marketplace.
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    \5\ Corporation for Public Broadcasting, Frontline, ``Money, Power 
and Wall Street,'' Episode 1, Remarks of Christopher Whalen, available 
at http://video.pbs.org/video/2226666502.
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Margin Requirements
    The stated purpose of H.R. 634, entitled the ``Business Risk 
Mitigation and Price Stabilization Act,'' is ``To provide end-user 
exemptions'' from certain provisions of the Dodd-Frank Act. Those 
provisions deal with margining of swaps that are exempted from the 
clearing requirement. The collateralization of uncleared swaps is a 
vital area for the safety and soundness of both non-bank derivatives 
entities and for banks with extensive derivatives activities.
    It is vital to understand that margin is collateral for real, not 
``technical'' or imagined, extension of credit. If a swap moves out-of-
the-money for a counterparty, the opposite counterparty is just as 
exposed to the credit of the out-of-the-money counterparty as if money 
had been loaned.\6\ Variation margin collateralizes this credit 
exposure. But that is insufficient. The credit exposure is uncapped, so 
it can grow between the time variation margin was last posted and the 
time that a counterparty can react to the default of its opposite 
counterparty. Initial margin collateralizes that additional credit 
risk.
---------------------------------------------------------------------------
    \6\ Mello, A, and Parsons, J., ``The Collateral Boogeyman--
Packaging Credit Implicitly and Explicitly,'' October 2010, available 
at http://bettingthebusiness.com/2010/10/.
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    The bill would eliminate the authority of the CFTC and the SEC to 
require swap dealers and major swap participants who are not banks to 
include margining requirements for swaps affecting commercial end-
users. This is unnecessary. The agencies have already elected not to 
require margin for uncleared swaps that originate from a non-financial 
end-user.\7\ Not only is it unnecessary, it is potentially dangerous. 
Should the agencies discover in the future that unmargined swaps from 
commercial end-users create a risk to the safety and soundness of non-
bank swap dealers, they may wish to reassess elements of their current 
rules. This statutory change prevents them from doing so.
---------------------------------------------------------------------------
    \7\ CFTC Proposed Rule, Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants, 76 FR 23732, available at 
http://cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_5_CapMargin/
index.htm; SEC Proposed Rule, Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-Based 
Swap Participants and Capital Requirements for Broker-Dealers, 78 FR 
4365 available at 
http://www.sec.gov/rules/proposed.shtml.
---------------------------------------------------------------------------
    But the bill goes further. It may affect the ability of Prudential 
Regulators from requiring that banks set a limit on the amount of 
credit extended to commercial end-user customers under derivatives 
before margin collateral is required. The Prudential Regulators have 
likewise not required margin of commercial end-users in most 
circumstances, but they have required a bank-set credit limit to the 
extent of unmargined derivatives.\8\ While technically, there is no 
limit to the credit loss if prices run away from the bank before the 
derivative position can be covered, this would at least limit the 
likely amount of credit exposure. The Prudential Regulators do not 
impose a credit limit; they simply require the bank to set one as an 
exercise of basic prudence.
---------------------------------------------------------------------------
    \8\ 76 FR 2764, Proposed Rule, Margin and Capital Requirements for 
Covered Swap Entities.
---------------------------------------------------------------------------
    I would note that this bill does appear to be drafted fairly 
narrowly, striking only at Dodd-Frank authorities for margin 
requirements for non-financial end-users, and apparently not affecting 
authorities to require capital under Dodd-Frank or prudential 
authorities outside of Dodd-Frank. While we still believe the bill is 
at best unnecessary and at worst harmful, the narrow crafting of the 
bill is positive and must be preserved if this legislation is to move 
forward. It is critical that the exemption proposed in this bill does 
not affect the authority of Prudential Regulators to set reasonable 
credit limits in all cases, including the derivatives markets, and also 
that it does not affect the ability to require appropriate capital. 
That authority is critical to bank regulation. It also benefits end-
user customers, who for their own safety should not incur excessive 
levels of concealed debt through derivatives exposures.
Cost-Benefit Analysis
    The stated purpose of H.R. 1003 is ``To improve consideration by 
the Commodity Futures Trading Commission of the costs and benefits of 
its regulations and orders.'' This proposed legislation would 
unnecessarily add numerous additional requirements to the already 
existing statutory cost-benefit requirements for the CFTC. These 
requirements could effectively paralyze the CFTC's ability to implement 
laws passed by Congress to safeguard our financial system. The rules 
affected would range from those designed to prevent excessive 
speculation that drives up prices for gas and other commodities to 
derivatives oversight necessary to prevent the repeat of a crisis like 
that of 2008.
    The requirement for consideration of costs and benefits should not 
create an opportunity to reconsider the decisions made by Congress. 
Congress enacted a comprehensive regulatory regime that is intended to 
serve the interests of the public by making the derivatives markets 
more transparent, fairer and safer. The CFTC has finalized 40 rules 
implementing Dodd-Frank and 20 more remain to be finalized. Each has 
its own benefits and each is beneficial as part of a mosaic of 
financial reform. The steps that are required in the bill for each 
element of each rule envision a reconsideration of those decisions, 
first by the agency an then by the Courts on review. This is an 
inappropriate balancing of the branches of government and does not 
serve the public's interests.
    Existing law (Section 15(a) of the Commodity Exchange Act) already 
requires the CFTC to consider the costs and benefits of regulatory 
action before issuing a new regulation. Existing law also requires the 
agency to consider the effects of any new regulation on the efficiency 
and competitiveness of the markets it supervises. In addition to such 
consideration, prior to any rulemaking the CFTC must consult 
extensively with industry and other interested parties who submit 
comments to the agency. Over the last 2 years the CFTC has collected 
and reviewed thousands of public comments and held numerous public 
round tables on Dodd-Frank rules.
    H.R. 1003 would add numerous additional requirements to these 
already extensive procedures. It would also force the agency to measure 
costs and benefits of a new rule before that rule was even implemented 
or market data resulting from the rule was available. The new 
requirements imposed by this bill also include enormously broad and 
vague mandates such as determining whether a regulation imposes the 
`least burden possible' among all possible regulatory options. A court 
could overturn the CFTC's decision in any case where it found any one 
of the numerous analyses required here to be inadequate. The vagueness 
of mandates like the `least burden possible' means that court 
challenges or court decisions could rest on claims that are essentially 
speculative and theoretical. These new mandates would not increase the 
quality of the regulatory process, they would stop it in its tracks,
    These extensive new procedural requirements are being proposed even 
as the CFTC is being starved of the resources it needs to do its job. 
The massive new requirements added by H.R. 1840 would make the problem 
much worse. Any attempt to improve the analytic capacities of the CFTC 
and its capacities to assess the effectiveness of its rules must start 
with additional funding, not with piling on unnecessary additional 
mandates and requirements that will trigger additional litigation.
Swap Dealer Business Conduct Standards and Dealer Registration Rules 
        Applicable to Governmental Entities
    The stated purpose of H.R. 1038 is ``To provide equal treatment for 
utility special entities using utility operations-related swaps, and 
for other purposes.'' This is a subject near and dear to my heart since 
I devoted most of my professional career to assistance of governmental 
enterprises in their capital-raising activities. Section 731 of the 
Dodd-Frank Act imposes enhanced business conduct standards on swap 
dealers transacting with ``special entities,'' a term that includes 
state and local government agencies and Federal agencies. H.R. 1038 
would carve out governmental electricity and gas utilities and Federal 
power marketing agencies. I suppose the ``equal treatment'' that is 
called for by the bill means equal treatment with far more 
sophisticated corporations rather than equal treatment with other 
governments and their agencies and instrumentalities.
    In my career, I have had the uncomfortable opportunity to witness 
sales calls by derivatives specialists on governmental utilities. I 
have seen the technique of fostering a sense of trust, encouraging an 
advisory relationship that can be exploited to sell an immensely 
profitable derivative when other alternatives could be better. I have 
also seen the influence that can be brought to bear through politicians 
who have appointment power with regard to these utilities. Too often, 
derivatives can be structured to disguise debt from the public, a 
tempting alternative for officials who are concerned with public 
opinion.
    As pointed out earlier, even the most sophisticated financial 
institutions struggle with evaluating the risks associated with 
derivatives. It is completely unreasonable to expect that governmental 
utilities will have the ability to measure the risks of derivative 
transactions. This is especially so given the massive incentives of 
swap dealers to ingratiate themselves as functional advisors and 
obfuscate the costs and risks and the complex influences on public 
servants. This means that registered swap dealers must be constrained 
in their dealings with governmental utilities. Their business conduct 
standards should be enhanced, not undercut. They are at a major 
disadvantage in negotiating with swap dealers and the public's interest 
is in rectifying this imbalance, not facilitating it.
    It also means that firms that specialize in work with special 
entities, including governmental utilities, should register as swap 
dealers even though their business volumes are lower than the general 
registration thresholds. Special entities need the protection of swap 
dealer registration more than the typical market participants.
Interaffiliate Rules
    H.R. 677, ``The Inter-affiliate Swaps Clarification Act'' would 
create a broad and sweeping exemption to Title VII margin, capital, 
clearing, and execution requirements between affiliated entities, so 
long as neither entity is an insured depository bank. ``Affiliated'' is 
defined broadly, as any two entities that do financial reporting on a 
consolidated basis.
    This bill is ignores the careful work performed by regulators in 
making expert judgments concerning the implementation Act. The 
supporting materials for this bill claim that inter-affiliate swaps do 
not create systemic risk, and also that the Dodd-Frank Act should 
exempt them but does not. Yet the CFTC, in a lengthy and carefully 
reasoned proposal on the regulation of inter-affiliate swaps, outlined 
numerous ways in which inter-affiliate swaps can in fact create 
systemic risk. In addition, the CFTC proposal creates a balanced 
approach which partially exempts inter-affiliate swaps from some Title 
VII requirements while still retaining basic requirements for risk 
management, a limited use of margin to back swaps trades, and clearing 
in appropriate cases. Indeed, Americans for Financial Reform criticized 
the CFTC proposal for relaxing Title VII requirements excessively.
    H.R. 667 would replace this framework with a sweeping and 
excessively broad exemption that would effectively leave inter-
affiliate swaps completely unregulated under Title VII, with the 
exception of some reporting requirements.
    The bill includes a number of limiting clauses restricting the 
effect of these exemptions on prudential regulation and insurance 
regulation. Last year Prudential Regulators insisted that these clauses 
be added to the prior version. This is because the control and 
regulation of inter-affiliate transfers of risk has been at the center 
of both banking and insurance regulation for over 50 years, since the 
passage of New Deal financial regulations and the passage of the Bank 
Holding Company Act. Of course, swaps are one of the most direct and 
effective ways to transfer risk. The centrality of the regulation of 
inter-affiliate risk transfers to oversight of large financial 
institutions should tell us that it is deeply misguided to completely 
exempt inter-affiliate transfers from the Title VII framework. 
Maintaining some of the basic requirements of Title VII for inter-
affiliate swaps while granting exemptions only in the areas where it is 
appropriate, as the CFTC has recommended, is the correct approach.
          * * * * *
    Thank you for the opportunity to provide the foregoing testimony. I 
hope that it is useful for your deliberations.

    The Chairman. Thank you, sir.
    I now recognize myself for 5 minutes, and I direct my first 
question I guess to Mr. Bentsen and Mr. Naulty. The derivative 
markets touch virtually every aspect of the economy, the food 
we eat, the price at the pump, our mortgages, credit cards, our 
retirement savings. With this in mind, do you think the CFTC 
rulemaking marathon since Dodd-Frank became law, are inherently 
flawed due to the lack of sufficient cost-benefit analysis?
    Mr. Bentsen. Thank you, Mr. Chairman, for the question. I 
don't know that I would go as far as to say they are all 
inherently flawed, but I think they are missing a key component 
in how you craft the rule as other departments and agencies 
either under statute or in adherence to the President's 
Executive Order look at how that rule is going to be crafted, 
what the cost, what the benefits are. And our view is that we 
don't really have an understanding as to what that is with 
respect to the CFTC rule proposals.
    And so the whole idea behind cost-benefit analysis is to 
really help guide the agency in that rulemaking and to come out 
with what works best in trying to achieve that balance. So that 
has not been the case with the CFTC.
    The Chairman. Mr. Naulty, would you like to add anything to 
that?
    Mr. Naulty. I share my colleague's concerns as it relates 
to the public power entities. The benefits are dubious, if any, 
for the treatment that we are receiving to classify us as a 
special entity solely because of the fact that we are a public 
entity doesn't recognize the fact that we manage the same risks 
in the same markets as our colleagues in the investor-owned 
utility space. We are very capable of managing and understand 
those risks, and although we have worked with the CFTC to make 
them aware of these concerns, we have not seen, and they have 
taken some action, we have not seen the end benefit that we 
need, which is this exemption that we are asking for.
    The Chairman. Speaking of that, Mr. Naulty, in your 
testimony you stated CFTC's no-action letter in response to 
your industry's petition to eliminate the special entities 
threshold has not given your would-be counterparties enough 
confidence to resume doing business with public power 
utilities.
    Do you think our bureaucrats having essentially eliminated 
an avenue for which you have to manage your risks, do you think 
your regulators up here really know how better to run your 
business in Owensboro than you do?
    Mr. Naulty. Well, I think that is a risk, Congressman, 
Chairman, that you get when you use a broader brush to paint 
over an issue like this, and we certainly understand how to run 
our business. You know, we are watching out for our ratepayers 
and to take away this avenue that we have used traditionally, 
and by the way, the way the market is designed, it was designed 
to allow and promoted the use of swaps in order to provide 
price certainty both for buyers and sellers in these RTO 
markets.
    I think we do understand our business, and we can manage 
our own risks on an even playing field with investor-owned 
utilities.
    The Chairman. Mr. Bentsen, one last question. I understand 
there is what might be described as a brewing disconnect 
between the U.S. and the EU on the Basel III derivatives rules. 
Could you expand on this developing issue and the potential 
impact on U.S. financial institutions?
    Mr. Bentsen. Yes.
    The Chairman. And users for that matter.
    Mr. Bentsen. Yes, Mr. Chairman. This is--and I mentioned in 
my oral testimony, the European Union is in the process of 
finalizing the adoption of their implementation of Basel III, 
which is the international capital accords that the U.S., all 
of the G20 countries have agreed to implement. The U.S. is 
going through its own rulemaking, principally through the 
Federal Reserve to implement Basel III capital standards.
    The European Union's proposal, which is called CRD-4, 
Capital Regulation Directive 4, would exempt swaps between EU-
supervised banks or dealers who are otherwise subject to the 
Basel III requirements under the EU supervision, with swaps 
that they engage in with EU non-financial end-users as it 
relates to something called the credit evaluation adjustment. 
So it is an advanced methodology for establishing a capital 
requirement against that swap.
    What that means is that for swaps, if this goes to 
fruition, which it appears that it will, what that means is 
that the capital charge that EU-supervised banks would have to 
take to engage in a swap with an EU non-financial end-user 
would be different and less than a non-EU bank, that could be a 
U.S. bank, an Asian bank, a Canadian bank, and engaging with 
those EU end-users, and frankly would be a disadvantage 
presumably to non-EU end-users as well in terms of a 
competitive disadvantage.
    I think the other, and let me say, there is a problem with 
the CVA calculation, the calibration. No question about that, 
and I think that is why this happened, but importantly this 
results in a further fragmentation of trying to have a uniform 
standard set across the G20 countries, and in this case in the 
Basel Rule. So this is a real problem that we believe U.S. 
regulators and global regulators to the Basel Committee at the 
National Stability Board and others need to engage on.
    The Chairman. Thank you. My times has expired.
    The chair now recognizes the gentleman from Georgia for 5 
minutes. Mr. Scott.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    Mr. Bentsen, let me start with you. Concerning extra-
territorial application of the Dodd-Frank rules, I gathered in 
your testimony that you have concerns with that, and I would 
like for you to tell us the most negative consequences that you 
see for the marketplace if Congress doesn't address this.
    Mr. Bentsen. Well, I think there are multiple negative 
consequences, Mr. Scott. Number one is you have in this interim 
period where the CFTC came out with its guidance and really in 
our views go ahead of the curve not waiting to do this with the 
SEC, which is still in a rulemaking process. Remember, this is 
something where this pivots off of the definition of what is a 
swap, what is a swap dealer, which was a joint rulemaking as 
prescribed by Congress under the Act and yet the CFTC went on 
its own to do this without doing it in a joint rulemaking with 
the SEC.
    But also it got out in front and we believe in lack of 
coordination with our other regulators around the globe as was 
talked about with Chairman Gensler earlier today, and that has 
created conflict not just with those regulators, but it has 
created conflict in the marketplace, and I think you referenced 
this in your comments, Mr. Scott. I was actually in Tokyo on 
October 12 when the first instance of swap requirements were 
going to take effect at the World Bank and IMF meetings with a 
program with the Japanese Security Dealers Association. And at 
that time I was hearing from both U.S. and non-U.S. firms that 
they were getting pushback from non-U.S. swap dealer 
counterparties who hadn't, that they weren't clear whether they 
would deal with someone who is registered as a swap dealer.
    So it created a market fluctuation that didn't need to 
exist, and that continues to happen.
    The second thing I would say is you have a potential for 
redundancy and conflict between U.S. and non-U.S. rules where 
it is not clear who will be required, who will be subject to 
those rules and whether or not some dealers will be subject to 
duplicative or redundant rules which has no question will have 
a price in competitive impact.
    So I think there are a number of things that come out of 
it. One is market fluctuation. The other is complexity and 
redundancy and conflict.
    Mr. David Scott of Georgia. All right. Thank you very much.
    Mr. Thompson, let me ask you, you talked about the 
indemnification not being a legal concept as respected by 
foreign jurisdictions, and could you share with us why in H.R. 
742 we need to make this change, and if we don't, what those 
consequences would be? How does that indemnification not being 
accepted by foreign jurisdictions have a negative impact?
    Mr. Thompson. Thank you, Congressman Scott. First, 
indemnification basically comes out of U.S. common law tort 
law, and a lot of foreign jurisdictions follow civil law, 
especially in Europe so that is a concept that they simply 
don't have. But just here in the U.S. a lot of foreign 
governments just like we do not allow our governmental 
authorities to actually indemnify each other. The SEC, when 
they testified on this issue, actually said that if they had to 
indemnify a foreign regulator, they couldn't because U.S. law 
would not allow them to do it. So if they had to indemnify the 
CFTC in order to get information, they couldn't do it, which is 
one of the reasons that they came out in favor of a legislative 
solution here.
    We think, as I have said and testified before, that the 
best way to assure that these global markets continue to stay 
global and you don't have local solutions to deal with this 
issue, is to do away with any impediments or fragmentation, and 
we see indemnification as an impediment to the globalization of 
the market.
    Mr. David Scott of Georgia. I just have to get one more 
little question in. There have been scores of economists that 
argue that excessive speculation in commodities derivatives has 
been a driving factor in recent radical price swings and market 
uncertainty, and I am hearing a lot of this from our main 
street businesses.
    Do you all believe that excessive speculation is a factor 
behind the kinds of price swings that we have seen over the 
last 5 years?
    Start with you, Mr. Bentsen. Do you believe that?
    Mr. Bentsen. Yes. There has been a lot of academic research 
in this area, Congressman, over whether or not, to what effect 
does market speculation impact price, and this goes to the 
whole question of position limits, and Chairman Gensler talked 
about that before.
    And we can talk about the rule itself and why we had 
problems with it, and that gets really more to cost-benefit, 
but I think what is important is the academic research is quite 
frankly inconclusive as to the material impact of speculation 
on actual price. I think that is something that regulators, not 
just in the U.S. but globally, because the other thing we have 
to remember is commodity markets you all know better than we, 
commodity markets are global markets, and they are impacted by 
various global factors, and that is another thing that has to 
be taken into consideration.
    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman.
    The Chairman. The gentleman's time has expired.
    The chair recognizes himself for a motion.
    Without objection I would like to submit the following 
letters for the record, the first from the U.S. Chamber of 
Commerce supporting H.R. 992, a second from the Illinois 
Chamber of Commerce supporting H.R. 992, third, a February, 
2013, letter from the Japanese Financial Services Agency to the 
CFTC expressing their concerns about cross-border rules.
    Seeing no objection, so ordered.
    [The information referred to is located on p. 115.]
    The Chairman. With that I now recognize the gentleman from 
California, Mr. LaMalfa, for 5 minutes.
    Mr. LaMalfa. Thanks, Mr. Chairman.
    One question for Mr. Naulty there. First, Owensboro, isn't 
that the home of the Waltrip family there?
    There is a second question but----
    Mr. Naulty. Congressman, I am not a NASCAR fan, so I don't 
know the answer to that question unfortunately.
    Mr. LaMalfa. Well, okay.
    Mr. Naulty. But I do thank you for your leadership and your 
sponsorship of our legislation.
    Mr. LaMalfa. The Waltrips would probably like me to sponsor 
them somehow, but, anyway, I just wanted to drill down a little 
more on that no-action letter that you mentioned in your 
comments there, which as you mentioned added additional 
requirements. Does that letter really inspire the confidence 
that you need to go forward or that your counterparties would 
as well, which we are gathering it doesn't.
    Mr. Naulty. Well, I think the answer to your question, 
Congressman, is that the proof is in the pudding, and while the 
no-action letter has been in place for quite some time, we have 
not seen any counterparties come back, and part of the reason 
is because of the uncertainty around some of the additional 
requirements and what the CFTC decided, tried to clarify in 
that letter but mostly because of the compliance risk that 
those counterparties perceive they would be burdened with. The 
compliance risk is that if they continue to do business with 
special entities and somehow trip over the threshold level, 
they would be pulled in as a swap dealer, and rather than 
putting in the systems and risk controls within their 
organizations, many of which are not large swap dealers, we are 
talking utility-affiliated trading companies, that cost-benefit 
just doesn't work for them. And so the easiest thing for them 
to do is to just not trade with special entities.
    Mr. LaMalfa. Limiting options. Yes. Maybe we could follow 
up later and talk about some of those specifics, those 
requirements, but additionally, I would like to find out the 
largest municipal utility in my district has a little under 
45,000 customers, and we have been talking, and they are 
expecting that the reporting requirements under Dodd-Frank are 
going to require additional staff and costs that, again, a 
fairly small utility like the one where I am from can't really 
bear.
    I wondered what you might be able to share with us on the 
effects with Owensboro there.
    Mr. Naulty. Well, the reporting requirements are actually 
the requirements that would be imposed on the swap dealer, and 
while there are additional reporting requirements for us as 
municipal utilities, due to the fact that we do transactions 
that involve swaps, they are not nearly as onerous as those 
that would be imposed on entities that are trying to avoid 
being swap dealers.
    There is a compliance burden. Make no doubt about it for us 
and for all APPA members that use these derivative markets. We 
have not quantified exactly how many headcount we are going to 
have to add, but clearly there is an additional compliance 
burden for us.
    Mr. LaMalfa. But an even bigger deterrent for your 
counterparties there that in a spectrum of things that are 
going to drive their costs and probably not----
    Mr. Naulty. Yes.
    Mr. LaMalfa.--as likely to do business with you then.
    Mr. Naulty. Correct, and as it drives their costs, then 
they become less competitive as a supplier or a buyer of our 
products. You know, the real issue for us is that these are 
costs that are being imposed on our business. The inability to 
access the markets in an equal way as our investor-owned 
utility counterparties and those costs, we have no other choice 
but to pass those through to ratepayers, and there is really no 
systemic risk and no benefit to the ratepayer for this penalty.
    Mr. LaMalfa. Now, we haven't seen where the risk has been a 
problem for utilities in this process here, so, well, maybe 
just make it up in volume.
    Thank you. I yield back my time.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman. 
Ma'am, Gentlemen, thank you for being here today, and Mr. Colby 
and Ms. Hollein, I, along with many of my colleagues, both 
Democrats and Republicans, have cosponsored H.R. 634, very 
similar to the bill that passed the House of Representatives 
last year, 370 to 24, that allowed end-users who qualified for 
the clearing exemption to also qualify for the margin 
exemption, basically making sure that the cost of the margin 
exemption is only used where a systemic risk to the financial 
markets is.
    Secretary Gensler gave an indication earlier today that he 
was supportive of that and that he thought that a rule would be 
coming forward that would be very similar to that.
    My question for you is have you heard any timeline on that 
particular rule, and could you just explain briefly why it is 
so important to allow end-users to be exempt from the cost of 
the margin requirements?
    Mr. Colby. Do you want me to start?
    Mr. Austin Scott of Georgia. Yes, sir. That is fine.
    Mr. Colby. Sorry. We haven't heard of a very specific 
timeline being provided. Although the CFTC has indicated in 
their preliminary ruling that they are supportive of commercial 
end-users not being required to post margin, the proposed rules 
by the Prudential Regulators is very troublesome, and even if 
the final rules don't require end-users to post initial margin 
and if they are high thresholds for variation margins, there 
are not assurances that in the future those rules might not 
change and be imposed upon us.
    The bill does provide such certainty, and it should be 
noted that Chairman Bernanke has on the record in front of the 
Senate Banking Committee indicated that he would be supportive 
of such an explicit exemption for end-users.
    Ms. Hollein. Congressman, I agree with Mr. Colby as far as 
the margin requirements. The issue is most non-end-users really 
hedge for the sake of mitigating their risk, especially on the 
inter-affiliate agreements. It is just centralizing and more 
treasuries have moved towards the centralization process. It is 
the best practice to just be more efficient. It does not cause 
systemic risk or counterparty risk. If you think about it, the 
end-users only make up as Chairman Gensler mentioned, nine to 
ten percent of the swap market.
    The objective of corporates are really just to mitigate 
their risk and try to efficiently manage that risk and look at 
the portfolio. My fear is if there is this margin requirement 
that it will cause companies to move away from it and not 
manage their risks, thereby increasing their risk in the 
marketplace.
    Mr. Colby. In terms of the cost side of that question, 
diverting cash flow from a company's business operations where 
we can create jobs and protect jobs and generate a good return 
for shareholders is very costly. There is a high-opportunity 
cost that in our opinion outweighs the small credit mitigation 
benefits of posting margin.
    As Chairman Gensler indicated, commercial end-users 
represent nine percent of the OTC market, but we create 94 
percent of the jobs. So the margin bill is going to very 
slightly impact the 90 percent but potentially significantly 
impact the 94 percent, which is the one that I think that we 
care about.
    Mr. Austin Scott of Georgia. Yes, sir, and Mr. Colby, you 
bring up an important point there, and 27 months ago I was in 
the private sector, and you used two words up here that we 
don't hear much from regulators, and that is cash flow, and 
certainly in the private sector we can't use the same dollar 
twice at the same time, can we? And that it----
    Mr. Colby. No, we can't.
    Mr. Austin Scott of Georgia. And I think that is where the 
real issue comes in and where we can help America's economy by 
making sure that the end-user is not subject to that extra cost 
because every dollar that is locked up is a dollar that can't 
be used to expand your business and put Americans back to work, 
and our goal is to help you get Americans back to work.
    So thank you so much, and Mr. Chairman, I yield the 
remainder of my time.
    The Chairman. The gentleman's time has expired.
    Mr. David Scott of Georgia. Mr. Chairman.
    The Chairman. Does the gentleman have a request?
    Mr. David Scott of Georgia. Yes. I would like to ask for 1 
minute if I could. I wanted to get Mr. Turbeville's response to 
my question on speculation.
    The Chairman. Seeing no objection, the chair yields the 
gentleman 1 minute that he therefore yields to the witness.
    Mr. David Scott of Georgia. Thank you very much, sir.
    Mr. Turbeville. Thank you. The question really is about 
speculative activity in the futures and swaps markets as it 
relates to prices on delivery swap prices, and the connection 
between the two has to do with the fact that in the futures 
market or in the swaps market you are creating a forward curve 
which is the expectation that prices are going to rise, fall, 
or stay the same.
    There is no question that if speculative activity changes 
the forward curve for prices it will change spot prices. For 
instance, if it appears that the prices are going to rise over 
time, then spot prices will go up as well as people withhold 
from the market waiting for the prices to rise later. If prices 
are going to fall, people will put more supply into the market. 
So there is no question about that.
    My colleague here, Mr. Bentsen, said there were many 
studies that didn't find any connection, and that is like 
saying that there are many studies that didn't find Pluto until 
they found Pluto. Once you find Pluto, you got Pluto, the 
planet, not the dog.
    So there have been studies that have found connections. I 
participated in one that found a connection, and my particular 
study that I looked at asked the following questions. Commodity 
index funds, if you are familiar with those, which there is 
these huge commodity index funds that sort of die and recreate 
themselves every month in effect. So all of their futures get 
sold off, then they buy longer-dated futures, and what we took 
a look at is whether there was a connection between that period 
where they do that lengthening of their positions and they put 
pressure on the out-years, does that actually cause the forward 
curve to go up, or does it have an influence on the forward 
curve going up? And we found that for several commodities, oil, 
some of the grains there was a correlation of 99.9 percent of 
that rollover period with upward movement pressures on the 
forward curve. Upper movement pressures on the forward curves 
means the spot prices are likely to go up.
    So the answer is there has been some good work done on it. 
It is hard to measure, but there has been a measurement of it, 
and I think that the real conclusion should be perhaps it is 
how much speculation but the easier thing to find the 
connection with this is what kind of speculation. If you do 
something every month that pushes, puts pressure out on the 
forward curve causing it to go up, then you are going to affect 
spot prices.
    Mr. David Scott of Georgia. Thank you.
    The Chairman. The gentleman's minute has expired.
    The chair now recognizes the gentleman from Tennessee, Mr. 
Fincher, for 5 minutes.
    Mr. Fincher. Thank you, Mr. Chairman. Following up with 
that, when you said the rollover, are you talking about getting 
out of the positions and getting longer positions in the 
market?
    Mr. Turbeville. That is correct. What happens is a bank 
like Goldman Sachs, which is one of the major players, has done 
a swap with somebody like a pension fund or a university fund, 
and the swap is all about the price of futures.
    Mr. Fincher. Right.
    Mr. Turbeville. And what they are doing is they are 
financializing. They are creating a synthetic ownership of oil, 
corn, wheat, soybeans, everything else. Synthetic ownership on 
the part of these funds. But to create the synthetic ownership 
the bank then has to go out into the market and----
    Mr. Fincher. Right.
    Mr. Turbeville.--replicate that and roll it over every 
month.
    Mr. Fincher. To stay in the market. To stay----
    Mr. Turbeville. That is right. So futures expire. This is 
like ownership which is permanent. So what happens is that the 
rollover puts pressure on the out-years of the market, which 
causes, the technical term is causes the forward curve to go 
more into contango, being more forced up, and that has an 
effect on prices because people price over next month's forward 
price, and they have index contracts, Platts, who has oil price 
index, references that contract, and just commonsense tells you 
that you are going to look out there. And I am actually from 
Tennessee.
    Mr. Fincher. All right. Well, the issue I have, and I have 
a couple of questions for Mr. Bentsen and Ms. Hollein also, but 
the two words and being from the private sector and a large 
family farm background and have done a lot of marketing and 
used derivatives often, is are the unintended consequences that 
go with more government and more regulation, and the things 
that it will do to the market as we are starting to learn as we 
get into Title VII even more.
    If you, in my opinion, again, knowing the details of a lot 
of this, if you try to take all of the risks out of the market, 
then you have no market. You will destroy the market 
completely, and there is a certain amount of risk that you are 
going to have. We have to take positions on everything now to 
make sure we are hedged in order to stay in business.
    But to Mr. Bentsen, section 716 would negatively affect 
uninsured depository institutions such as many foreign banks 
that operate branches in the United States.
    Would the credit availability from these institutions be 
impacted if section 716 is fully implemented, and why or why 
not?
    Mr. Bentsen. Mr. Fincher, I think that the biggest problem 
with section 716, I will come back to your point, in our view 
and I think this is where Chairman Bernanke is coming from and 
I think this is where then Chairwoman Bair was coming from is 
that you are taking capital out of the bank, and you are 
putting it into an affiliate and shifting part of the activity 
which otherwise has been under their jurisdiction and 
prudential jurisdiction and supervision. And so you are 
depleting, one, you are depleting capital from the entity that 
you are regulating, and then you are creating a separate 
affiliate that you may not have primary supervision over.
    And so I think that is where their primary concern is. So 
that is why on the whole our view is that section 716 and their 
view is that section 716 doesn't work and doesn't make sense, 
and I might just add, one thing that Chairman Gensler said that 
he thinks it is probably going to come into effect in a year or 
in 2 years. It actually is supposed to come into effect on July 
21 of this year, but there has been no proposed rulemaking, and 
in fact, the OCC just recently put out a request, sort of 
guidance with the request for firms who would be subject to it 
to ask for an extension. They do have a conformance or an 
extension period.
    To your point with respect to the foreign banks, the 
foreign branch operations, the way the law was crafted is that 
it applies to insured depository institutions. So if you are a 
foreign bank branch or agency that is not operating an insured 
bank in this country, then it is not at all clear how you are 
affected by this rule or not if you read literally off the 
statute. The Federal Reserve has some flexibility under some 
existing statutes, but it is not clear that they can make an 
adjustment.
    But I think the main point is that this is something that 
causes depletion and shift of capital and really moves things 
out of more primary jurisdiction. Congress at the end kind of 
split the thing in half with some swaps in, some swaps out, and 
it really doesn't make any sense. And so that is why I think 
you are seeing the principle regulator saying this ought to be 
fixed.
    Mr. Fincher. Will H.R. 992 provide the fix?
    Mr. Bentsen. Yes. I think so.
    Mr. Fincher. Okay, and one more follow-up question to Ms. 
Hollein. Do you think end-users pose a systemic risk?
    Ms. Hollein. Do I think they cause systemic risk?
    Mr. Fincher. Do they pose a systemic risk to U.S. financial 
institute?
    Ms. Hollein. No. I do not believe they do at all. In fact, 
they are just mitigating their risk. They don't cause any 
systemic risk at all.
    Mr. Fincher. Okay. I yield back, Mr. Chairman. Thank you 
very much.
    The Chairman. The gentleman yields back the balance of his 
time. That concludes our questions.
    I would like to note for my colleagues that this has been a 
very worthwhile hearing. These are very important subject 
matters, and I would expect some time in the very near future 
we will move towards a legislative markup.
    With that under the rules of the Committee, the record of 
today's hearing will remain open for 10 calendar days to 
receive additional material and supplemental written responses 
from the witnesses to any question posed by a Member.
    This hearing of the House Agriculture Committee is 
adjourned.
    [Whereupon, at 12:30 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
Submitted Letters by Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
March 13, 2013

 
 
 
Hon. Randy Hultgren,                 Hon. James Himes,
U.S. House of Representatives,       U.S. House of Representatives,
Washington, D.C.;                    Washington, D.C.;
 
Hon. Richard Hudson,                 Hon. Sean Patrick Maloney,
U.S. House of Representatives,       U.S. House of Representatives,
Washington, D.C.;                    Washington, D.C.
 


    Dear Reps. Hultgren, Himes, Hudson, and Maloney:

    The U.S. Chamber of Commerce, the world's largest business 
federation representing the interests of more than three million 
businesses and organizations of every size, sector, and region, 
supports H.R. 992 and S. 474, the Swaps Regulatory Improvement Act. 
This bipartisan, bicameral legislation would serve to promote vibrant 
and efficient capital markets by modifying section 716 of the Dodd-
Frank Act, a provision that undermines the Act's central policy 
objective of mitigating systemic risk.
    When section 716--often referred to as the swaps push-out 
provision--was enacted, its proponents described it as ``quarantining 
highly risky swaps activity.'' The provision attempts to accomplish 
this objective by requiring that insured depository institutions spin-
off certain derivatives activities (e.g., commodity derivatives that 
agricultural market participants use to reduce risk) into separately 
capitalized affiliates of an insured depository institution.
    However, contrary to its objectives, section 716 would increase 
risk for derivatives market participants, while at the same time 
driving up costs. It would do so by requiring market participants to 
transact with multiple entities within the same banking organization, 
which would create new risks for market participants because it would 
eliminate their ability to net multiple contracts into a single 
obligation. Additionally, it would add cost and complexity by requiring 
market participants to put in place multiple agreements and make 
multiple settlements on their derivatives transactions.
    Such outcomes would disrupt aspects of the derivatives market that 
work well and that played no role in the financial crisis. Indeed, 
market participants have implemented these practices to reduce risk. 
Additionally, section 716 would weaken prudential regulation by 
shifting activities to entities that are not prudentially regulated.
    These are among the reasons international regulators have refrained 
from introducing or implementing similar provisions in their own 
regulatory regimes. Now more than 2\1/2\ years since Dodd-Frank was 
enacted, no government has followed America's lead in implementing a 
provision like section 716. Consequently, while serving no useful 
function, the provision threatens to undermine the competitiveness of 
U.S. capital markets.
    The Chamber supports the Swaps Regulatory Improvement Act and looks 
forward to working with the Congress to ensure the U.S. maintains its 
position as the world leader in fair, efficient, and innovative capital 
markets.
            Sincerely,


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R. Bruce Josten.
Executive Vice President, Government Affairs,
U.S. Chamber of Commerce
                                 ______
                                 
March 7, 2013

Hon. Randy Hultgren,
U.S. House of Representatives,
Washington, D.C.

    Dear Congressman Hultgren:

    The Illinois Chamber of Commerce is writing in support of H.R. 992, 
a bipartisan bill that will help promote bank safety and soundness, 
limit the risks and costs associated with bank failure, and reduce 
Illinois businesses and agriculture producers cost of managing risk. We 
thank you for taking the lead on this important issue.
    The Dodd-Frank ``push-out'' provision (Section 716), would prohibit 
bank entities from engaging in certain derivatives activities within 
the bank. By forcing these activities out of the bank, it complicates 
bank risk management activities and increases the cost of a potential 
bank resolution.
    For these reasons, several current and former bank regulators, 
including Federal Reserve Chair Ben Bernanke, former FDIC-Chair Sheila 
Bair, and former Federal Reserve Chairman Paul Volcker, expressed 
concerns with this provision of Dodd-Frank.
    Your bill will reduce these risks, while at the same time, ensuring 
that banking activities cannot engage in the riskiest types of 
derivatives activities. By doing so, it achieves a common sense balance 
of allowing banks to service their customers' needs, while protecting 
bank safety and soundness. For this reason, we commend you on this 
bipartisan legislation.
            Sincerely,


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Todd Maisch,
Executive Vice President,
Illinois Chamber of Commerce.
                                 ______
                                 
February 6, 2013

Hon. Gary Gensler,
Chairman,
U.S. Commodity Futures Trading Commission,
Washington, D.C.

Re: Further Proposed Guidance Regarding Compliance With Certain Swap 
            Regulations

    Dear Gary,

    We appreciate the opportunity to comment on the further proposed 
guidance regarding compliance with certain swap regulations. We are 
writing to ask the Commission's consideration of our general and three 
specific comments with respect to (i) exclusion from aggregation of 
U.S. and non-U.S. affiliates' transactions with U.S. persons for the 
purposes of the de minimis test for a non-U.S. person, (ii) 
clarification of the scope and definition of U.S. person, and (iii) 
flexibility in the expiration of the final exemptive order.
I. General Comment
    We appreciate the Commission's effort to provide market 
participants with as much clarity as possible on (i) the aggregation 
rule for de minimis threshold for a non-U.S. person and (ii) the scope 
and definition of U.S. person in the final exemptive order published on 
December 21, 2012. However, we are concerned that the alternative 
interpretation on the aggregation rule and the scope and definition of 
U.S. person in the further proposed guidance would make the scope of 
application of the Commission's regulations broader for non-U.S. 
persons. Since we believe that the scope of application on those two 
matters in the final exemptive order is acceptable, we would like to 
request the Commission to adopt this exemptive order as the permanent 
one, after the order expires in July 2013.
II. Specific Comments
    In addition to this general comment, we have three specific 
comments on the further proposed guidance as follows.
1. Exclusion From Aggregation of U.S. and Non-U.S. Affiliates' 
        Transactions With U.S. Persons for the De Minimis Test for a 
        Non-U.S. Person
    Under the further proposed guidance, a non-U.S. person would be 
required, in determining whether its swap dealing transactions exceed 
the de minimis threshold, to include the aggregate notional value of 
swap dealing transactions entered into by all its affiliates under 
common control (i.e., both non-U.S. affiliates and U.S. affiliates), 
but would not be required to include in such determination the 
aggregate notional value of swap dealing transactions of any non-U.S. 
affiliate under common control that is registered as a swap dealer.
    As far as the Japanese financial institutions are concerned, we 
believe that they should not be required to include the aggregate 
notional value of swap dealing transactions entered into by all their 
U.S. affiliates, and non-U.S. affiliates under common control that are 
not registered as swap dealers, in addition to any non-U.S. affiliate 
that is registered as a swap dealer, since those affiliates are 
supervised by FSA Japan on a consolidated basis.
    In particular, since both U.S. and non-U.S. affiliates registered 
as swap dealers would be subject to the Commission's regulations and 
supervision, their transactions with U.S. persons should be excluded 
for de minimis test for the non-U.S. person.
2. Clarification of the Scope and Definition of U.S. Person
    We appreciate the Commission's effort to narrow the scope and 
definition of U.S. person in the final exemptive order, compared with 
that of the proposed interpretive guidance of July 2012.
    Furthermore, the proposed interpretive guidance correctly states 
that a foreign affiliate or subsidiary of a U.S. person would be 
considered a non-U.S. person, even where such an affiliate or 
subsidiary has certain or all of its swap-related obligations 
guaranteed by the U.S. person. However, it is not clear to us in this 
regard whether the further proposed guidance maintains this 
interpretation. We think the interpretation adopted in the proposed 
interpretive guidance is adequate, because non-U.S. affiliates of the 
U.S. person established under the law of foreign countries are under 
regulation and supervision by foreign regulators. We would like to 
confirm that this interpretation holds valid under the further proposed 
guidance.
3. Flexibility in the Expiration of the Final Exemptive Order
    We understand that the Commission intends to conduct assessment for 
substituted compliance with foreign regulatory requirements before the 
expiration date (July 12, 2013) of the final exemptive order. If, at 
the expiration date, substituted compliance with the Japanese 
regulatory requirements is not available for Japanese financial 
institutions which registered as swap dealers, they would be subject to 
the Commission's regulations after the expiration date. This is not 
acceptable to us. Therefore, we would like to urge the Commission to 
consider extending the effectiveness of the final exemptive rule, 
depending on whether and when such substituted compliance would be 
available.
    We would like to kindly request that the Commission take into 
account the above and amend the further proposed guidance in accordance 
with our requests. Should you have any questions concerning the above, 
please do not hesitate to contact us.
            Sincerely yours,


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Masamichi Kono,
Vice Commissioner for International Affairs,
Financial Services Agency,
Government of Japan.

CC:

    Commissioner Ms. Jill E. Sommers, CFTC;
    Commissioner Mr. Bart Chilton, CFTC;
    Commissioner Mr. Scott D. O'Malia, CFTC;
    Commissioner Mr. Mark P. Wetjen, CFTC;
    Chairman Elisse B. Walter, SEC;
    Under Secretary for International Affairs Lael Brainard, U.S. 
    Department of the Treasury.
                                 ______
                                 
Submitted Letters by Hon. Richard Hudson, a Representative in Congress 
                          from North Carolina
May 12, 2010

Hon. Christopher J. Dodd,
Chairman,
Senate Committee on Banking, Housing, and Urban Affairs,
Washington, D.C.

    Dear Mr. Chairman:

    You have asked for my views on section 716 of S. 3217. This section 
would prevent many insured depository institutions from engaging in 
swaps-related activities to hedge their own financial risks or to meet 
the hedging needs of their customers, and would prohibit non-bank swaps 
entities, including swap dealers, clearing agencies and derivative 
clearing organizations, from receiving any type of Federal assistance.
    The Federal Reserve has been a strong proponent of changes to 
strengthen the regulatory framework and infrastructure for over-the-
counter (OTC) derivative markets to reduce systemic risks, promote 
transparency, and enhance the safety and soundness of banking 
organizations and other financial institutions. Title VII and Title 
VIII of S. 3217 include important provisions designed to achieve these 
goals. For example, Title VII would require most derivative contracts 
to be cleared through central clearinghouses and traded on exchanges or 
open trading facilities, require information concerning all other 
derivatives contracts to be reported to trade repositories or 
regulators, and provide the regulatory agencies significant new 
authorities to ensure that all swaps dealers and major swap 
participants are subject to strong capital, margin, and collateral 
requirements with respect to their swap activities. Title VIII also 
includes provisions designed to help ensure that centralized market 
utilities for clearing and settling payments, securities, and 
derivatives transactions (financial market utilities), which are 
critical choke points in the financial system, are subject to robust 
and consistent risk management standards--including collateral, margin, 
and robust private-sector liquidity arrangements--and do not pose a 
systemic risk to the financial system.
    I have also frequently made clear that we must end the notion that 
some firms are ``too-big-to-fail.'' For that reason, the Federal 
Reserve has advocated the development of enhanced and rigorous 
prudential standards for all large, interconnected financial firms, and 
the enactment of a new resolution regime that would allow systemically 
important financial firms to be resolved in an orderly manner, with 
losses imposed on the Federal Reserve to provide emergency, secured 
credit to nondepository institutions only through broad-based liquidity 
facilities designed to address serious strains in the financial 
markets, and not to bail out any specific firm.
    S. 3217 makes important contributions to the goals of reducing 
systemic risk, eliminating the too-big-to-fail problem, and 
strengthening prudential supervision. I am concerned, however, that 
section 716 is counter-productive to achieving these goals.
    In particular, section 716 would essentially prohibit all insured 
depository institutions from acting as a swap dealer or a major swap 
participant--even when the institution acts in these capacities to 
serve the commercial and hedging needs of its customers or to hedge the 
institution's own financial risks. Forcing these activities out of 
insured depository institutions would weaken both financial stability 
and strong prudential regulation of derivative activities.
    Prohibiting depository institutions from engaging in significant 
swaps activities will weaken the risk mitigation efforts of banks and 
their customers. Depository institutions use derivatives to help 
mitigate the risks of their normal banking activities. For example, 
depository institutions use derivatives to hedge the interest rate, 
currency, and credit risks that arise from their loan, securities, and 
deposit portfolios. Use of derivatives by depository institutions to 
mitigate risks in the banking business also provides important 
protection to the deposit insurance fund and taxpayers as well as to 
the financial system more broadly. In addition, banks acquire 
substantial expertise in assessing and managing interest rate, 
currency, and credit risk in their ordinary commercial banking 
business. Thus, banks are well situated to be efficient and prudent 
providers of these risk management tools to customers.
    Importantly, banks conduct their derivatives activities in an 
environment that is subject to strong prudential Federal supervision 
and regulation, including capital regulations that specifically take 
account of a bank's exposures to derivative transactions. The Basel 
Committee on Banking Supervision has recently proposed tough new 
capital and liquidity requirements for derivatives that will further 
strengthen the prudential standards that apply to bank derivative 
activities. Titles I, III, VI, VII and VIII of S. 3217 all add 
provisions further strengthening the authority of the Federal banking 
agencies and other supervisory agencies to address the risks of 
derivatives. Section 716 would force derivatives activities out of 
banks and potentially into less regulated entities or into foreign 
firms that operate outside the boundaries of our Federal regulatory 
system. The movement of derivatives to entities outside the reach of 
the Federal supervisory agencies would increase, rather than reduce the 
risk to the financial system. In addition, foreign jurisdictions are 
highly unlikely to push derivatives business out of their banks. 
Accordingly, foreign banks will have a competitive advantage over U.S. 
banking firms in the global derivatives marketplace, and derivatives 
transactions could migrate outside the United States.
    More broadly, section 716 would prohibit the Federal Reserve from 
lending to any swaps dealer or major swap participant--regardless of 
whether it is affiliated with a bank--even under a broad-based 13(3) 
liquidity facility in a financial crisis. Experience over the past 2 
years demonstrates that such broad-based facilities can play a critical 
role in stemming financial panics and addressing severe strains in the 
financial markets that threaten financial stability, the flow of credit 
to households and businesses, and economic growth. These facilities 
will be less effective if participants must choose between continuing 
(or unwinding) derivatives positions and participating in the market-
liquefying facility.
    I am concerned that section 716 in its present form would make the 
U.S. financial system less resilient and more susceptible to systemic 
risk and, thus, is inconsistent with the important goals of financial 
reform legislation. We look forward to continuing to work with the 
Congress as you work to enact strong regulatory reform legislation that 
both addresses the weaknesses in the financial regulatory system that 
became painfully evident during the crisis, and positions the 
regulatory system to meet the inevitable challenges that lie ahead in 
the 21st century.
            Sincerely,


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Ben S. Bernanke,
Chairman,
Board of Governors of the Federal Reserve System.
                                 ______
                                 
May 6, 2010

    Dear Mr. Chairman:

    A number of people, including some Members of your Committee, have 
asked me about the proposed restrictions on bank trading in derivatives 
set out in Senator Lincoln's proposed amendment to Section 716 of S. 
3217. I thought it best to write you directly about my reaction.
    I well understand the concerns that have motivated Senator Lincoln 
in terms of the risks and potential conflicts posed by proprietary 
trading in derivatives concentrated in a limited number of commercial 
banking organizations. As you know, the proposed restrictions appear to 
go well beyond the proscriptions on proprietary trading by banks that 
are incorporated in Section 619 of the reform legislation that you have 
proposed. My understanding is that the prohibition already provided for 
in Section 619, specifically including the Merkley-Levin amended 
language clarifying the extent of the prohibition on proprietary 
trading by commercial banks, satisfy my concerns and those of many 
others with respect to bank trading in derivatives.
    In that connection, I am also aware of, and share, the concerns 
about the extensive reach of Senator Lincoln's proposed amendment. The 
provision of derivatives by commercial banks to their customers in the 
usual course of a banking relationship should not be prohibited.
    In sum, my sense is that the understandable concerns about 
commercial bank trading in derivatives are reasonably dealt with in 
Section 619 of your reform bill as presently drafted. Both your Bill 
and the Lincoln amendment reflect the important concern that, to the 
extent feasible, derivative transactions be centrally cleared or traded 
on a regulated exchange. These are needed elements of reform.
    I am sending copies of this letter to Secretary Geithner and to 
Senators, Shelby, Merkley, Levin and Lincoln.
            Sincerely,


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Paul A. Volcker.
                                 ______
                                 
April 30, 2010

Hon. Christopher J. Dodd,
Chairman,
Senate Committee on Banking, Housing, and Urban Affairs,
Washington, D.C.;

Hon. Blanche L. Lincoln,
Chairman,
Senate Committee on Agriculture, Nutrition, and Forestry,
Washington, D.C.

    Dear Chairman Dodd and Chairman Lincoln:

    Thank you for reaching out to the Federal Deposit Insurance 
Corporation for our views on Title VII of the ``Wall Street 
Transparency and Accountability Act'' contained in S. 3217, the 
``Restoring American Financial Stability Act of 2010.'' At the outset, 
I would like to express my strong support for enhanced regulation of 
``over-the-counter'' (OTC) derivatives and the provisions of the bill 
which would require centralized clearing and exchange trading of 
standardized products. If this requirement is applied rigorously it 
will mean that most OTC contracts will be centrally cleared, a 
desirable improvement from the bilateral clearing processes used now. I 
would also like to express my wholehearted endorsement of the ultimate 
intent of the bill, to protect the deposit insurance fund from high 
risk behavior.
    I would like to share some concerns with respect to section 716 of 
S. 3217, which would require most derivatives activities to be 
conducted outside of banks and bank holding companies. If enacted, this 
provision would require that some $294 trillion in notional amount of 
derivatives be moved outside of banks or from bank holding companies 
that own insured depository institutions, presumably to non-bank 
financial firms such as hedge funds and futures commission merchants, 
or to foreign banking organizations beyond the reach of Federal 
regulation. I would note that credit derivatives--the riskiest--held by 
banks and bank holding companies (when measured by notional amount) 
total $25.5 trillion, or slightly less than nine percent of the total 
derivatives held by these entities.
    At the same time, it needs to be pointed out that the vast majority 
of banks that use OTC derivatives confine their activity to hedging 
interest rate risk with straightforward interest rate derivatives. 
Given the continuing uncertainty surrounding future movements in 
interest rates and the detrimental effects that these could have on 
unhedged banks, I encourage you to adopt an approach that would allow 
banks to easily hedge with OTC derivatives. Moreover, I believe that 
directing standardized OTC products toward exchanges or other central 
clearing facilities would accomplish the stabilization of the OTC 
market that we seek to enhance, and would still allow banks to continue 
the important market-making functions that they currently perform.
    In addition, I urge you to carefully consider the underlying 
premise of this provision--that the best way to protect the deposit 
insurance fund is to push higher risk activities into the so-called 
shadow sector. To be sure, there are certain activities, such as 
speculative derivatives trading, that should have no place in banks or 
bank holding companies. We believe the Volcker rule addresses that 
issue and indeed would be happy to work with you on a total ban on 
speculative trading, at least in the CDS market. At the same time, 
other types of derivatives such as customized interest rate swaps and 
even some CDS do have legitimate and important functions as risk 
management tools, and insured banks play an essential role in providing 
market-making functions for these products.
    Banks are not perfect, but we do believe that insured banks as a 
whole performed better during this crisis because they are subject to 
higher capital requirements in both the amount and quality of capital. 
Insured banks also are subject to ongoing prudential supervision by 
their primary banking regulators, as well as a second pair of eyes 
through the FDIC's back up supervisory role, which we are strengthening 
as a lesson of the crisis. If all derivatives market-making activities 
were moved outside of bank holding companies, most of the activity 
would no doubt continue, but in less regulated and more highly 
leveraged venues. Even pushing the activity into a bank holding company 
affiliate would reduce the amount and quality of capital required to be 
held against this activity. It would also be beyond the scrutiny of the 
FDIC because we do not have the same comprehensive backup authority 
over the affiliates of banks as we do with the banks themselves. Such 
affiliates would have to rely on less stable sources of liquidity, 
which--as we saw during the past crisis--would be destabilizing to the 
banking organization in times of financial distress, which in turn 
would put additional pressure on the insured bank to provide stability. 
By concentrating the activity in an affiliate of the insured bank, we 
could end up with less and lower quality capital, less information and 
oversight for the FDIC, and potentially less support for the insured 
bank in a time of crisis. Thus, one unintended outcome of this 
provision would be weakened, not strengthened, protection of the 
insured bank and the Deposit Insurance Fund, which I know is not the 
result any of us want.
    A central lesson of this crisis is that it is difficult to insulate 
insured banks from risk taking conducted by their non-banking 
affiliated entities. When the crisis hit, the shadow sector collapsed, 
leaving insured banks as the only source of stability. Far from serving 
as a source of strength, bank holding companies and their affiliates 
had to draw stability from their insured deposit franchises. We must be 
careful not to reduce even further the availability of support to 
insured banks from their holding companies. As a result, we believe 
policies going forward should recognize the damage regulatory arbitrage 
caused our economy and craft policies that focus on the quality and 
strength of regulation as opposed to the business model used to support 
it.
    The FDIC is pleased to continue working with you on this important 
issue to assure that the final outcome serves all of our goals for a 
safer and more stable financial sector. We hope that a compromise can 
be achieved by perhaps moving some derivatives activity into 
affiliates, so long as capital standards remain as strict as they are 
for insured depositories and banks continue to be able to fully utilize 
derivatives for appropriate hedging activities.
    Please do not hesitate to contact me at [Redacted] or have your 
staff contact Paul Nash, Deputy Director for External Affairs, at 
[Redacted].
            Sincerely,


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


            
Sheila C. Bair,
Chairman,
Federal Deposit Insurance Corporation.
                                 ______
                                 
                      excert from h. rept 112-476
                             minority views
    The Wall Street Reform and Consumer Protection Act requires, for 
the first time, the regulation of over-the-counter derivatives, 
previously opaque transactions that helped bring our financial system 
to the brink of disaster. The vast majority of derivatives must now be 
centrally cleared and publicly reported, and be backed by margin and 
capital to ensure that swap dealers and major swap users can honor 
their commitments. In addition, the reform law also prohibits banks 
from placing bets with federally insured deposits through the ``Volcker 
Rule''. Both measures serve as important safeguards as we rebuild trust 
in our financial system.
    As amended, H.R. 1838 would repeal portions of Section 716 of the 
financial reform law, also known as the ``push-out provision.'' Section 
716 prohibits banks from engaging in several types of derivatives. 
Questions have been raised about this provision by economists and 
regulators including FDIC's Sheila Bair, who are concerned that it 
might interfere with a bank's ability to use derivatives to diminish 
risk. Section 716 was not part of the original House-passed version of 
the financial reform law.
    During the Full Committee markup, Democrats worked with the 
Majority to amend H.R. 1838 to continue the prohibition of complex 
swaps employed by AIG with devastating effect. H.R. 1838, as amended, 
addresses the valid criticisms of Section 716 without weakening the 
financial reform law's important derivative safeguards or prohibitions 
on bank proprietary trading.

                                   Barney Frank.
                                   Wm. Lacy Clay.
                                   Gwen Moore.
                                   James A. Himes.
                                   Ruben Hinojosa.
                                   Andre Carson.
                                   Gary L. Ackerman.
                                   Al Green.
                                   Stephen F. Lynch.
                                   David Scott.
                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Melvin L. Watt.
                                   Luis V. Gutierrez.
                                   Gary C. Peters.
                                   Ed Perlmutter.
                                   Michael E. Capuano.
                                   Gregory W. Meeks.
                                 ______
                                 
Response from Hon. Gary Gensler, Chairman, U.S. Commodity Futures 
        Trading Commission
Questions Submitted By Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
    Question 1. Chairman Gensler, in June of 2011, CFTC proposed a rule 
that would have required companies that have a futures exchange 
membership to record all oral and written communication regarding 
futures and related cash commodity trades and retain those 
communications for 5 years. In your final rule, the CFTC excluded 
members of a DCM--that are not otherwise registered with either the 
CFTC or NFA--from the oral recording requirements. If the appropriate 
policy regarding members of a DCM--that are not otherwise required to 
be registered with the CFTC--is to not require recording of oral 
communications related to cash commodity sales, are they required to 
retain the 21st century analogs for oral conversation, such as text 
messages and instant messages?
    Answer. In 2009, the Commission's Division of Market Oversight 
(DMO) issued an Advisory to clarify certain Commission record-keeping 
requirements pertaining to futures commission merchants (FCMs), 
introducing brokers (IBs), and members of a designated contract market. 
The Advisory was to clarify that the individuals and entities subject 
to the Commission's record-keeping requirements should maintain all 
electronic forms of communications, including email, instant messages, 
and any other form of communication created or transmitted 
electronically for all trading. Also noted in the Advisory is that 
record-keeping regulations do not distinguish between methods used to 
record the information covered by the regulations, including e-mails, 
instant messages, and any other form of communication created or 
transmitted electronically. The Commission adopted the proposed 
amendment to regulation 1.35(a) to clarify that the existing 
requirement to keep written records applies to electronic written 
communications, such as emails and instant messages.
    The amended regulation provides that among the records required to 
be kept are all oral and written communications provided or received 
concerning quotes, solicitations, bids, offers, instructions, trading, 
and prices that lead to the execution of a transaction in a commodity 
interest and related cash or forward transactions, whether communicated 
by telephone, voicemail, facsimile, instant messaging, chat rooms, 
electronic mail, mobile device, or other digital or electronic media. 
The final rule does not specifically include ``voicemail'' in the 
category of written communication but provides a list of included modes 
of communication in the requirement that ``all oral and written 
communications'' be kept.

    Question 2. It is my understanding that text messaging and instant 
messaging are difficult, if not impossible, for a company to capture 
and retain, especially with respect to mobile devices, which have 
proprietary software and operate on proprietary networks. If they are 
required to keep text messages and other non-verbal communications in 
order to comply with the final rule as written, employees of companies 
will have no choice but to avoid text and instant messaging, and simply 
go back to using the phone, which they do not have to record. Is this 
the policy outcome that you envisioned under the final rule?
    Answer. Commission staff are aware that there are companies that 
have been offering technological solutions for entities to capture and 
retain IMs and text messages.
    The overarching purpose of the Commission's final rule is to 
promote market integrity and protect customers. Requiring the recording 
and retention of oral communications will serve as a disincentive for 
covered entities to make fraudulent or misleading communications. The 
Commission received comments regarding the cost of implementing and 
maintaining an oral communication recording system for small entities 
and the commercial end-user, non-intermediary members of a DCM or SEF. 
In response the Commission determined to exclude from the new oral 
communications requirement members that are not registered or required 
to be registered with the Commission in any capacity.
Questions Submitted By Hon. Jeff Denham, a Representative in Congress 
        from California
    Question 1. Congress enacted Dodd-Frank to reform oversight of big 
financial firms. Do you think it is appropriate for the CFTC's 
regulatory reach to extend into the day-to-day operational transactions 
of electric utilities?

    Question 2. Municipal utilities have laid out a compelling case 
that the entity definitions rule is flawed and creates unintended 
consequences for the electric sector. Why can't you fix this at the 
regulatory level?
    Answer 1-2. The final rule adopted jointly by the CFTC and the SEC 
to further define the term ``swap dealer'' provides that a person shall 
not be deemed a swap dealer if swap dealing activity for the preceding 
12 months results in swap positions with an aggregate gross notional 
amount of no more than $3 billion, and an aggregate gross notional 
amount of no more than $25 million with regard to swaps with a 
``special entity'' (which includes municipalities, other political 
subdivisions and employee benefit plans). The rule also provides for a 
phase-in of the de minimis threshold to facilitate orderly 
implementation of swap dealer requirements. During the phase-in period, 
the de minimis threshold would effectively be $8 billion (while the $25 
million threshold for swaps with special entities would apply).
    In developing the rule further defining the term ``swap dealer'' 
and other rules under the Dodd-Frank Act that may affect municipal 
utilities, CFTC Commissioners and staff met with municipal utility 
representatives and their advisors and counterparties regarding their 
concerns. The final joint rule contains a provision that excludes from 
the calculation certain swaps entered into for the purpose of hedging 
physical positions. In addition, on October 12, 2012, Commission staff 
issued no-action relief, which states that staff will not recommend 
enforcement action if non-financial entities enter into swaps as part 
of a swap dealing business with utility special entities (such as 
municipal utilities) with a notional value of up to $800 million 
annually without registering as a swap dealer. By its terms, the no-
action relief will remain in effect until Commission action is 
completed on a petition submitted by public utilities requesting an 
amendment to the rule to exclude from the special entity de minimis 
threshold relevant swap contracts relating to utility operations.
    Congress also authorized the CFTC to provide relief from the Dodd-
Frank Act's swaps reforms for certain electricity and electricity-
related energy transactions between rural electric cooperatives and 
federal, state, municipal and tribal power authorities. Similarly, 
Congress authorized the CFTC to provide relief for certain transactions 
on markets administered by regional transmission organizations and 
independent system operators. The Commission recently finalized 
exemptive orders related to these transactions, as Congress authorized.

    Question 3. Chairman why do you believe Swap Execution Facilities 
(SEFs) should require five (5) Requests for Quotes (RFQs) when the SEC 
has an alternate proposal that does not include this mandatory 
requirement?
    Answer. On May 16, 2013, the Commission approved the final 
rulemaking on swap execution facilities (SEFs). This rule is key to 
fulfilling transparency reforms that Congress mandated in the Dodd-
Frank Act.
    The Dodd-Frank Act included a trade execution requirement for 
swaps. Swaps subject to mandatory clearing and made available to trade 
were to move to transparent trading platforms. Market participants will 
benefit from the price competition that comes from trading platforms 
where multiple participants have the ability to trade swaps by 
accepting bids and offers made by multiple participants. Congress also 
said that the market participants must have impartial access to these 
platforms.
    Farmers, ranchers, producers and commercial companies that want to 
hedge a risk by locking in a future price or rate will get the benefit 
of the competition and transparency that trading platforms, both SEFs 
and designated contract markets (DCMs), will provide.
    These transparent platforms will give everyone looking to compete 
in the marketplace the ability to see the prices of available bids and 
offers prior to making a decision on a transaction. By the end of this 
year, a significant portion of interest rate and credit derivative 
index swaps will be in full view to the marketplace before transactions 
occur. This is a significant shift toward market transparency from the 
status quo.
    Such common-sense transparency has existed in the securities and 
futures markets since the historic reforms of the 1930s. Transparency 
lowers costs for investors, businesses and consumers, as it shifts 
information from dealers to the broader public. It promotes competition 
and increases liquidity.
    As Congress made clear in the law, trading on SEFs and DCMs would 
be required only when financial institutions transact with financial 
institutions. End-users would benefit from access to the information on 
these platforms, but would not be required to use them.
    Further, companies would be able to continue relying on customized 
transactions--those not required to be cleared--to meet their 
particular needs, as well as to enter into large block trades.
    Consistent with Congress' directive that multiple parties have the 
ability to trade with multiple parties on these transparent platforms, 
these reforms require that market participants trade through an order 
book, and provide the flexibility as well to seek requests for quotes.
    To be a registered SEF, the trading platform will be required to 
provide an order book to all its market participants. This is 
significant, as for the first time, the broad public will be able to 
gain access and compete in this market with the assurance that their 
bids or offers will be communicated to the rest of the market. This 
provision alone will significantly enhance transparency and competition 
in the market.
    SEFs also will have the flexibility to offer trading through 
requests for quotes. The rule provides that such requests will have to 
go out to a minimum of three unaffiliated market participants before a 
swap that is cleared, made available to trade and less than a block 
could be executed. There will be an initial phase-in period with a 
minimum of two participants to smooth the transition.
    As long as the minimum functionality is met, as detailed in the 
rule, and the SEF complies with these rules and the core principles, 
the SEF can conduct business through any means of interstate commerce, 
such as the Internet, telephone or even the mail. In this way, the rule 
is technology neutral.
    Under these transparency reforms coupled with the Commission's rule 
on making swaps available for trading, the trade execution requirement 
will be phased in for market participants, giving them time to comply.
    These reforms benefited from extensive public comments. Moving 
forward, the CFTC will work with SEF applicants on implementation.
Response from Hon. Kenneth E. Bentsen, Jr., Acting President and Chief 
        Executive Officer, Securities Industry and Financial Markets 
        Association
Question Submitted By Hon. Jeff Denham, a Representative in Congress 
        from California
    Question. Mr. Bentsen what are your concerns regarding the CFTC's 
cross-border guidance? Will it negatively affect the marketplace?
    Answer. Following the March 14, 2013 House Committee on Agriculture 
hearing, you inquired what SIFMA's concerns were regarding the CFTC's 
cross-border guidance, and whether the guidance would negatively affect 
the marketplace.
    While SIFMA supports many of the stated goals of Title VII of the 
Dodd Frank Act, we have serious concerns regarding the approach the 
CFTC has taken with regard to the cross-border application of the 
derivatives regulatory regime. I appreciate this opportunity to 
elaborate on the position of SIFMA and its member firms.
    Though Title VII was signed into law 2\1/2\ years ago, we still do 
not know which swaps activities will be subject to U.S. regulation and 
which will be subject to foreign regulation. Of specific concern is the 
CFTC's release of multiple proposed definitions of ``U.S. Person.'' 
These ``U.S. Person'' definitions are very broad and give rise to 
concerns that CFTC regulation may be applied to persons with minimal 
jurisdictional nexus to the United States. This has consequently 
created a great deal of ambiguity and confusion for market participants 
as they try to determine their ``U.S. Person'' status and that of their 
counterparties, along with any accompanying regulatory obligations. 
SIFMA has advocated for a final definition of ``U.S. Person'' that 
focuses on significant, rather than nominal, connections to the United 
States and is simple, objective and transparent enough for a person to 
determine its status and the status of its counterparties on an ongoing 
basis.
    The CFTC has not adequately coordinated with other domestic and 
international regulators regarding the definition of ``U.S. Person'' 
and the scope of its extraterritorial jurisdiction. We are also 
concerned with the CFTC's proposed approach to comparing foreign-
country regulation with U.S. regulation. This proposed approach 
involves a determination by the Commission of the comparability and 
comprehensiveness of the rules relating to swaps activity on a rule-by-
rule basis. SIFMA believes this goes far beyond any established regime 
and does not comport with established norms or comity.
    Additionally, we have expressed concerns regarding the fact that 
the CFTC has issued its proposed cross-border releases as ``guidance,'' 
rather than through a formal rulemaking process subject to the 
Administrative Procedure Act. By proposing guidance as opposed to a 
formal rule, the CFTC has avoided requirements to conduct the rigorous 
cost-benefit analysis critical to ensuring that the Commission 
appropriately weighs any costs imposed on market participants that may 
result from implementing an overly broad and complex cross-border 
regulatory regime.
    With regard to the impact of the CFTC's cross-border guidance on 
the marketplace, SIFMA member firms have indeed witnessed instances of 
disruption. On October 12, 2012 (the date on which market participants 
began counting their swap dealing transactions to determine if they 
would be required to register with the CFTC), some counterparties 
outside of the U.S. refrained from entering into swap transactions with 
U.S. entities due to uncertainty in determining which transactions 
might subject the firm to CFTC registration. In light of this 
disruption, the CFTC issued numerous temporary no-action relief letters 
and other documents in an effort to assuage market concerns but this 
process was completed in a haphazard and last-minute manner. 
Notwithstanding the relief that has been issued to date by the CFTC, 
there remains significant uncertainty in the international marketplace 
due to the confusing and short-term nature of the CFTC's actions and 
public statements by CFTC officials.
    Due to these conditions, concern over the cross-border reach of the 
CFTC has generated the great risk of driving the swaps market and 
related business out of the U.S. Such a migration could result in a 
decrease in the availability of hedging instruments and an increase in 
transaction costs for corporations and other Main Street end-users 
seeking to manage risk.
Response from James E. Colby, Assistant Treasurer, Honeywell 
        International Inc.
Question Submitted By Hon. Marcia L. Fudge, a Representative in 
        Congress from Ohio
    Question. Dodd-Frank has been largely silent on the regulatory 
treatment of inter-affiliate swaps. As a result, some are concerned 
that the Commodity Futures Trading Commission may treat inter-affiliate 
transactions as it treats other swaps by subjecting them to clearing, 
execution and margin requirements. Why is it important to clarify that 
inter-affiliate swaps be treated differently than market-facing swaps? 
What negative impacts will be seen by end-users if no clarification is 
given?
    Answer. Commercial end-users frequently utilize a hedging model 
incorporating centralized treasury units. Under this model, a company's 
affiliates will hedge their exposures with the centralized treasury 
unit, which will net these exposures (because many affiliates' 
exposures will offset one another) and hedge the company's net exposure 
by executing market-facing swaps with banks. The centralized treasury 
unit model significantly lowers both the number and notional value of a 
company's externally-facing derivatives transactions and materially 
reduces a company's hedging costs and bank credit line requirements. 
Consolidating all market-facing transactions within one entity makes it 
much easier to ensure that market-facing transactions are executed by 
experienced staff and greatly improves controls around derivatives 
transactions.
    Centralized treasury units that are organized as a separate legal 
entity within the structure of a non-financial end-user might be 
considered persons engaged in activities that are financial in nature 
as defined in section 4(k) of the Bank Holding Company Act of 1956. 
These centralized treasury units could be considered Financial Entities 
under Dodd-Frank and, without the clarification provided under H.R. 
677, could be denied the clearing exception simply because they employ 
an efficient centralized treasury unit approach that reduces costs and 
mitigates systemic risk.
Response from Terrance P. Naulty, General Manager and Chief Executive 
        Officer, Owensboro Municipal Utilities; Member, American Public 
        Power Association
Questions Submitted By Hon. Jeff Denham, a Representative in Congress 
        from California
    Question 1. How familiar is your utility with transactions that 
hedge the operational risk of fuel costs , which affect the entire 
business model of municipal utilities in my Congressional district, 
such as Modesto Irrigation District and Turlock Irrigation District?
    Answer. I am very familiar with these types of fuel hedging 
transactions. They are critical to managing fuel price risk and, 
ultimately, to maintaining stability of electric rates to consumers. 
Specifically, for public power utilities that use natural gas as a fuel 
for generation of electric energy, the ability to ``lock in'' the price 
of fuel is absolutely essential. As your question notes, Modesto 
Irrigation District and Turlock Irrigation District both rely on 
natural gas a fuel for electric generation.
    By way of background, a public power utility will generally 
establish a fixed electric rate for consumers. As a result, the utility 
is contractually obligated to sell electricity at this fixed price for 
some period of time in the future. Without the ability to hedge (or 
purchase) the associated natural gas quantity for the corresponding 
period of time, the price risk imposed on the public power utility is 
not prudent. Thus, most utilities use financial instruments to fix the 
price of natural gas for such future deliveries. Doing so gives the 
utility certainty on what it will cost to produce the power and thus 
insure sufficient revenues to meet their expenses.
    For utilities that burn coal or use uranium for electric 
generation, generally the use of financial instruments to fix the 
future price is not as important today because these fuels do not have 
the same level of price volatility as natural gas. In part because of 
this price stability, coal and uranium purchases are normally done 
through long-term physical contracts. However, as is the case with 
Owensboro Municipal Utilities, obtaining price certainty--through 
financial hedging--for surplus electrical generation from whatever fuel 
source is critical to maintaining stable and low electric rates to our 
customers.
    As I pointed out in my testimony to the Committee, reducing a 
public power utility's access to the market place through the $25 
million special entity sub-threshold limit imposed by the CFTC un-
levels the playing field of the market. This is true whether the public 
power utility is hedging fuel price risk or power price risk. Again, 
suppliers that choose not to enter fuel price swap transactions with a 
public power utility to avoid being designated as a ``swap dealer'' 
represent a reduction in market liquidity to the public power utility. 
The public power utility must then turn to the smaller pool of 
financial entities for its fuel hedging business. These financial 
entities, with full understanding of these impacts, will have the 
ability to increase the bid/ask spread on these hedging instruments.
    Thus, the affected public power utility rate payers ultimately will 
pay higher rates than they need to. To the extent that the public power 
utility has negotiated collateral limits with non-financial hedge 
counterparties that are now not willing to transact with them, there is 
a real potential that the public power utility will incur higher credit 
costs than needed. Again, these costs will be passed on to rate payers.
    Entering into financial swap transactions with non-financial 
traders (many of whom are physical natural gas suppliers in the market) 
creates no incremental risk to the public power utility. The 
protections that the CFTC is trying to provide to these entities 
through the special entity sub-threshold are not needed and create real 
potential for higher electric rates with no reduction in risk.

    Question 2. Does your utility engage in other types of financial 
transactions, such as speculation in the financial markets, that could 
increase your utility's risk of bankruptcy?
    Answer. No. Owensboro Municipal Utilities uses financial swaps 
solely to hedge price risk and manage cash flow. Under current CFTC 
regulations, limiting trading counterparties as a direct result of the 
sub-threshold imposed upon special entities actually increases our 
bankruptcy risk. This is because we can no longer rely upon the 
collateral arrangements that we painstakingly negotiated with our non-
financial trading counterparties that do not want to be swap dealers. 
Currently we must provide cash margin as opposed to relying upon the 
strength of our balance sheet to meet our collateral obligations for 
hedge transactions. Large price movements in natural gas or electric 
futures that normally could be accommodated within the collateral 
limits we had negotiated may force liquidation of trades in order to 
avoid the immediate cash margining impacts to OMU. These forced 
liquidations would result in realized losses that otherwise could have 
been weathered under the terms of bilateral agreement with non-
financial counterparties.
Response from Marie N. Hollein, C.T.P., President and Chief Executive 
        Officer, Financial Executives International and Financial 
        Executives Research Foundation; on behalf of Coalition for 
        Derivatives End-Users
Questions Submitted By Hon. Marcia L. Fudge, a Representative in 
        Congress from Ohio
    Question 1. Dodd-Frank has been largely silent on the regulatory 
treatment of inter-affiliate swaps. As a result, some are concerned 
that the Commodity Futures Trading Commission may treat inter-affiliate 
transactions as it treats other swaps by subjecting them to clearing, 
execution and margin requirements. Why is it important to clarify that 
inter-affiliate swaps be treated differently than market-facing swaps? 
What negative impacts will be seen by end-users if no clarification is 
given?
    Answer. The Coalition for Derivatives End-Users believes that 
regulation of inter-affiliate swaps should square with the economic 
reality that inter-affiliate swaps do not pose systemic risk and 
therefore should not be regulated the same as trades that do. Without 
clarification, certain end-users could be faced with clearing their 
internal, inter-affiliate swaps, despite the end-user exception from 
clearing granted under Dodd-Frank. Without the clarification provided 
under H.R. 677, end-users that structure using an efficient centralized 
treasury hedging unit could be forced to dismantle this central unit 
because it could be considered a ``financial entity.'' These companies 
would be forced to abandon their business model of only having one 
street-facing entity handling swap transactions, which has become a 
best practice, leaving a system where their hundreds of affiliates 
would be trading directly with bank counterparties. The result would be 
a system that is more costly, less efficient, eliminating the benefits 
of centralizing expertise in the company. H.R. 677 is necessary as the 
CFTC final rule exempting inter-affiliate swaps from clearing does not 
fix the centralized treasury unit issue that the legislation seeks to 
address. If left un-addressed, some companies could be facing a 
disadvantage against their competitors who do not structure in the same 
way and do not have to clear their swaps transactions.

    Question 2. Inter-affiliate swaps are a common accounting practice 
used by several American corporations in multiple sectors of our 
economy. These companies have decided that managing risk in this 
fashion is more efficient and cost-effective. In your testimony, you 
stated that approximately \1/4\ of the end-users your company surveyed 
executed swaps through an affiliate. What are the benefits to managing 
risk through inter-affiliate swaps?
    Answer. Many companies find it more efficient to manage their risk 
centrally, to have one affiliate trading in the open market, instead of 
dozens or hundreds of affiliates making trades in an uncoordinated 
fashion. Using this type of hedging unit centralizes expertise, allows 
companies to reduce the number of trades with the street and improves 
pricing. These advantages led me to centralize the treasury function at 
Westinghouse while I was there.

    Question 3. If the Inter-Affiliate Swaps Clarification Act was to 
be made law, what's the likelihood that more companies would look to 
manage risk through inter-affiliate swaps? Do you think there would be 
a significant increase in these kinds of transactions?
    Answer. I believe that the trend is moving toward centralization 
because it is a best practice. Companies that may not use this model 
now, may want to do so in the future. Yet, if Title VII of the Dodd-
Frank Act makes it more costly to operate in a centralized manner, 
companies may abandon their plans to move toward the type of 
centralized treasury unit that would not qualify for the end-user 
exception from clearing.

    Question 4. Our bill last year was reported out of both this 
Committee and the House Financial Services Committee unanimously. That 
said, perhaps the only criticism we heard about the bill is that it 
applied to inter-affiliate trades made by bank swap dealers and major 
swap participants, and not just end-users. So we have amended our bill 
to make it clear that is does not apply to Wall Street Banks and major 
swap participants. Do you think that this year's version of our bill is 
sufficiently tailored to address the problems faced by end-users 
without creating a loophole that could be exploited by other market 
participants?
    Answer. The Coalition for Derivatives End-Users fully supports H.R. 
677, which would ensure that end-users can continue to use the end-user 
exception from clearing granted under Dodd-Frank regardless of their 
utilization of inter-affiliate swaps or a centralized treasury unit 
business model. In terms of preventing exploitation of the exemption 
provided under this legislation, both versions--last Congress and this 
Congress--included a specific grant of anti-evasion authority to 
regulators to prevent abuse. This year's version of the legislation 
also prevents a `swap dealer' or a `major swap participant' that is an 
insured depository institution from using the inter-affiliate exemption 
provided under this legislation to address concerns raised last year.

    Question 5. The Coalition for Derivatives End-Users has been on 
record for supporting strong regulations that ``bring transparency to 
the derivatives market.'' How does the Inter-Affiliate Swap 
Clarification support that goal?
    Answer. The Coalition for Derivatives End-Users seeks to ensure 
that financial regulatory reform measures promote economic stability 
and transparency without imposing undue burdens on derivatives end-
users. Under the Inter-Affiliate Swap Clarification Act, certain trades 
would still be reported to regulators to meet the goal of transparency 
in the financial markets, but end-users would not be overly burdened in 
terms of clearing each internal transaction, which could be extremely 
costly.

                                  
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