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





                    LEGISLATIVE PROPOSALS REGARDING
                 DERIVATIVES AND SEC ECONOMIC ANALYSIS

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 11, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-12





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 11, 2013...............................................     1
Appendix:
    April 11, 2013...............................................    41

                               WITNESSES
                        Thursday, April 11, 2013

Bentsen, Hon. Kenneth, E., Jr., Acting President and CEO, the 
  Securities Industry and Financial Markets Association (SIFMA)..     9
Childs, Christopher, Managing Director and Chief Executive 
  Officer, the Depository Trust & Clearing Corporation (DTCC) 
  Data Repository (U.S.).........................................    11
Deas, Thomas C., Jr., Vice President and Treasurer, FMC 
  Corporaton.....................................................    12
Parsons, John E., Senior Lecturer, Finance Group, Sloan School of 
  Management, Massachusetts Institute of Technology..............    14

                                APPENDIX

Prepared statements:
    Moore, Hon. Gwen.............................................    42
    Bentsen, Hon. Kenneth, E., Jr................................    45
    Childs, Christopher..........................................    53
    Deas, Thomas C., Jr..........................................    60
    Parsons, John E..............................................    66

              Additional Material Submitted for the Record

Fincher, Hon. Stephen:
    Written statement of the Financial Services Roundtable.......    71
    Written statement of the U.S. Chamber of Commerce............    73

 
                    LEGISLATIVE PROPOSALS REGARDING
                 DERIVATIVES AND SEC ECONOMIC ANALYSIS

                              ----------                              


                        Thursday, April 11, 2013

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Bachus, 
Royce, Lucas, Neugebauer, Huizenga, Grimm, Stivers, Fincher, 
Mulvaney, Hultgren, Ross, Wagner; Maloney, Sherman, Scott, 
Himes, Peters, Foster, Carney, Sewell, and Kildee.
    Ex officio present: Representatives Hensarling and Waters.
    Chairman Garrett. Good morning. Today's hearing of the 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises is called to order. Today's hearing is entitled, 
``Legislative Proposals Regarding Derivatives and SEC Economic 
Analysis.''
    I want to thank the members of the panel for the testimony 
that you are about to give.
    We will begin today's hearing with opening statements, and 
I will now recognize myself for 3 minutes.
    Today's hearing will examine seven specific legislative 
proposals to ensure an appropriate and thorough regulatory 
regime for the U.S. swaps market, and codify a good government 
regulatory approval process for the SEC.
    Let me begin with the legislative proposals addressing 
Title VII of the Dodd-Frank Act. All six of these proposals are 
common-sense and bipartisan approaches to provide clear rules 
of the road for the market participants, while ensuring a 
robust regulatory regime exists over the marketplace. Many of 
these proposals--including the end-user, the inter-affiliate, 
and indemnification bills--actually passed the full House by 
large margins last year. And I hope we do that again this year.
    I also want to begin to thank a lot of folks on both sides 
of the aisle who worked on all of these bills. I also commend 
Mr. Hultgren and Mr. Himes on their bipartisanship and 
bicameral work on the new version of the so-called ``swaps 
push-out'' legislation. I believe that the legislation changes 
made here were very appropriate. I look forward to having this 
legislation signed into law this year.
    Next, I would like to thank Mr. Fincher for bipartisan 
legislation requiring that FSOC to study implementation of the 
derivatives Credit Valuation Adjustment (CVA). Capital 
adjustments is a very good idea. I look forward to its swift 
passage, as well.
    Regarding the new version of the cross-border legislation, 
I wanted to start by complimenting--and I don't see either of 
them here--Mr. Carney and Mr. Scott for their bipartisan work 
on this legislation. In drafting this legislation, we decided 
to take a different approach than last time in attacking a very 
complicated problem of regulating swap transactions between 
U.S. and non-U.S. persons.
    Instead of drafting the exact legislation into legislation, 
what we did here is to allow the regulators to continue to have 
discretion and flexibility on how to implement the rules. I 
note there has been some confusion by some commentators on the 
impact of this legislation, so I would like to make certain 
everyone understands exactly what it does and the effect it 
will have. So, I will spend a moment on this.
    First and foremost, the legislation specifically requires 
the SEC and the CFTC to have identical cross-border rules. I 
think it is difficult, if not impossible, for anyone to suggest 
that it is appropriate for two domestic regulatory bodies to 
have different standards governing very similar parts of the 
market. By simply requiring the agencies to have identical 
rules, the bill will limit any potential opportunities between 
market participants by ensuring that we have a standard, 
identical regulatory regime for all types of the swap markets.
    First, there is a great deal of ongoing discussion about 
how to limit regulatory opportunities to market participants, 
as some of the past witnesses and the witnesses here today have 
noted in testimony, as well. And actually, we heard this last 
year, as well. Under this new regime, the most difficult, 
glaring area of this is if the SEC and the CFTC have different 
rules.
    Second, the legislation requires that formal rules be 
issued. Currently, the CFTC is moving down a path of 
instituting a form of amorphous guidance, if you will, which 
has questionable legal authority. And without a formal rule in 
place that carries the force of law, there is a valid concern 
that some of the entities won't feel the need to abide by the 
guidance--whatever that is--if challenged by a court of law. 
And the guidance might carry less weight. So by requiring a 
formal rule instead of guidance, the bill ensures that the 
force of law will not be in question.
    And finally, the legislation specifically authorizes the 
SEC and the CFTC to regulate swap transactions between U.S. and 
foreign entities if the regulators are concerned about the 
importation of systemic risk. Under current law, it is 
questionable what authority the agencies actually have to 
regulate potential transactions between them.
    If the regulator is concerned about any foreign country not 
living up to the Obama Administration's G-20 commitments 
established back in 2009, then those regulators will be 
specifically authorized to act. Now, the House Agriculture 
Committee has already passed this bill by a unanimous vote, and 
I hope this committee will do so the same.
    The last bill up for discussion today is the FCC Regulatory 
Accountability Act. It is similar to legislation which passed 
the full House last year. The House Agriculture Committee 
passed the identical bill for the CFTC and they did so in a 
bipartisan manner. And I look forward to working closely with 
my colleagues on both sides to do the same thing here.
    So, I thank the members of the panel. And I thank the 
members of this committee, on both sides of the aisle, for all 
of these pieces of legislation that we have been able to move 
forward in a bipartisan manner.
    And with that, I will recognize Mrs. Maloney for 3 minutes.
    Mrs. Maloney. Thank you very much, Mr. Chairman.
    I am delighted to be at this hearing where we are reviewing 
several bills that have already passed the Agriculture 
Committee. Many have passed the House and this committee in the 
last Congress. There is one new bill. And some of them are 
working or directed at preempting the regulation of 
derivatives.
    We certainly do not in any way want to weaken Dodd-Frank, 
the transparency, the oversight, and the accountability which 
was put in place with that important bill. But I think it is 
important to review these bills now in light of the progress 
and steps that the SEC and the CFTC have made, in addition to 
some of the improvements that Members of Congress have put in 
place.
    It is important not only to uphold Dodd-Frank and the 
oversight and transparency and accountability, but it is 
important that we get it right and make sure that it works for 
our markets and helps our country remain competitive in the 
global economy.
    There is one new bill, H.R. 1341, which requires a study on 
FSOC on capital surcharges that were placed on derivatives. The 
E.U. apparently has exempted their banks, and the study will 
look at what impact this has on our financial institutions.
    I look forward to the hearing, and to hearing from our 
distinguished panelists. I yield back.
    Chairman Garrett. The gentlelady yields back.
    Mr. Huizenga for 1\1/2\ minutes.
    Mr. Huizenga. Thank you, Chairman Garrett, and Ranking 
Member Maloney. I appreciate you holding this hearing today to 
discuss these various issues. And I am happy to work with my 
colleague from Wisconsin, Gwen Moore, on this, as well as with 
some friends from the Agriculture Committee.
    Thousands of companies, big and small, across the State of 
Michigan as well as the whole United States utilize derivatives 
to better manage the risks that they face every day. The use of 
these derivatives to hedge risks benefits the global economy by 
allowing for a range of businesses from manufacturing to health 
care to agriculture to improve their planning and forecasting 
and offer more stable prices to their customers as they are 
managing those dips.
    By imposing undue regulatory burdens on end-users, this 
could increase costs and reduce liquidity, and it would prevent 
end-users from using these markets efficiently and effectively. 
That is why I am a proud co-sponsor of H.R. 742, the Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 
2013. We have to come up with better names than these, I think 
sometimes.
    But this bipartisan legislation would remove that 
requirement imposed on foreign regulators by the Dodd-Frank Act 
as a condition of obtaining data repositories. The legislative 
solution is a small technical fix, but it is desperately 
needed, as we know. And it is vital to maintaining the 
integrity of our domestic and global derivatives markets.
    I look forward to hearing from the distinguished panel on 
this as we are moving forward.
    So with that, I yield back, Mr. Chairman.
    Chairman Garrett. Thank you. The gentleman yields back.
    We now go to the ranking member of the full Financial 
Services Committee, the gentlelady from California, Ms. Waters, 
for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for having 
this hearing today. This is a very important hearing and I look 
forward to hearing more from our witnesses about today's bills 
before the committee and their thoughts on how to best 
implement Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    But before we consider these modifications to the Act, I 
think it is important to remember what necessitated the 
legislation in the first place. I think there is consensus that 
the over-the-counter derivatives market proved to be a 
tremendous source of systemic risk during the last crisis. 
While many firms historically used derivatives like insurance 
or as a tool to manage their risks, some of our largest 
financial institutions constructed highly leveraged and opaque 
positions in the mark-to-market in the lead-up to 2008's 
financial collapse.
    As a result, we were all put in the terrible position of 
needing to provide government support to private institutions, 
or else potentially witness the collapse of a $600 trillion 
market.
    The Wall Street Reform Act seeks to ensure that we are 
never again put in that terrible position by remaking the OTC 
derivatives market via transparent trading on exchanges and 
swap execution facilities, and lowering risk through 
centralized clearing, as well as regulation of swap dealers and 
major swap participants and public reporting of swap prices and 
trading volumes.
    Though it has been 3 years since the crisis, we still await 
final regulations on about two-thirds of the provisions 
requiring rule-making. And while I remain open to changing the 
Act to respond to legitimate concerns, I am very nervous about 
potentially undermining our reforms or otherwise tying the 
hands of regulators before they have had a chance to finish 
their work. So, I will closely scrutinize each bill before us 
today, and consider each one both individually and 
cumulatively.
    Finally, I will add that I am very concerned about the 
continued push from the Majority on this committee on cost-
benefit analysis. The SEC is already subject to an onerous 
requirement in this regard, and I feel that the Majority is 
trying to tip the scales in the agency's rulemaking in order to 
favor the interests of business over the interests of 
investors. In fact, it could be said that this is really a 
back-door way of repealing some of the most crucial provisions 
in Wall Street reform.
    Thank you, Mr. Chairman, and I yield back my time.
    Chairman Garrett. And the gentlelady yields back.
    Mr. Stivers is recognized for 1 minute.
    Mr. Stivers. Thank you. I will be brief.
    I want to thank my co-sponsors--Ms. Fudge, Ms. Moore, and 
Mr. Gibson--for working with me to introduce this important 
legislation. I also want to thank Ms. Waters and the members of 
the minority for working on this bill. Last Congress, as you 
may remember, it got 357 votes on the House Floor.
    This bill clarifies that Dodd-Frank is not related to 
inter-affiliate swaps. The charges and the restrictions should 
not be required on the accounting end of those transactions. We 
shouldn't charge companies 2 to 3 times more for managing their 
risk in a centralized way, in a more advanced way, and in a 
smarter way.
    I look forward to working with the members of this 
committee and the whole House to see that these important 
clarifications get passed. And I want to thank the chairman for 
this hearing, and for his attention to these important matters.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Scott is recognized for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    As a long-time member of both the Agriculture Committee and 
the Financial Services Committee, I have had a great amount of 
time to study the intricacies of the issues presented by these 
pieces of legislation that we are reviewing here today. So it 
is not without deep examination and a keen eye on maintaining 
the effectiveness of Dodd-Frank that I am in a position to 
support the majority of these bills before us.
    And I should mention that the majority of these bills do 
have broad bipartisan support. Two of the more controversial 
ones, I might add, that I am a co-sponsor on, the cross-border, 
for example, as well as the push-out provision, are both 
supported by our Federal Reserve Chairman, Ben Bernanke, our 
former FDIC Chairman, Sheila Bair, and our good friend and 
former chairman of this committee, and one of the authors of 
this bill, Mr. Barney Frank.
    But it goes without saying that some of this legislation is 
indeed controversial. And I think the opposition to some of 
these bills stems from well-founded and very respectful fears 
of repeating some of the mistakes that in the past led to lax 
regulation, poor oversight, and eventually economic turmoil.
    However, I feel that these bills before us today are not a 
radical departure from the necessary and proper reforms that 
are laid out in Dodd-Frank. They will not blow a hole in the 
bottom of Dodd-Frank, as has been suggested. They will not lead 
to more Enron loopholes or London loopholes or London Whales.
    They are, I firmly believe, corrections to portions of 
Title VII that are not going to work and have unintended 
consequences as they are proposed. And not only just for us and 
our markets, but for foreign markets. And we must remember that 
we deal in a worldwide market. Our regulations here are 
basically for us. But we cannot and we must not put our 
financial institutions in a weakened competitive position.
    So I am very sympathetic to the concerns of those who feel 
this legislation tilts a little bit back towards Wall Street's 
favor, but I must respectfully disagree with this sentiment. 
None of the bills we are considering today drastically alters 
margin or clearing requirements, nor do they undermine 
transparency by lessening the share of trading data.
    And I should also mention that none of the bills before us 
today does anything to alter even in the slightest the Volcker 
Rule, which once implemented will be a key protection both for 
the economy and for the taxpayers against high-risk proprietary 
trading.
    So, Mr. Chairman, again, I want to add my voice to the 
support for these bills and I yield back my time.
    Chairman Garrett. The gentleman yields back.
    Mr. Fincher is recognized for 1\1/2\ minutes.
    Mr. Fincher. Thank you. Thank you, Mr. Chairman.
    A lot of folks believe Democrats and Republicans can't 
agree on anything. However, the bills we are considering this 
morning are examples of two parties coming together for good 
governance. I am pleased that we are considering H.R. 1341, the 
Financial Competitive Act of 2013, which I introduced last 
month. Mr. Scott, the gentleman from Georgia, and I are working 
to move this forward to ensure America remains competitive in 
the global marketplace.
    My bill simply requires FSOC to conduct a study of the 
impacts that implementing the credit valuation adjustment 
capital requirement, or CVA, will have on U.S. consumers, end-
users, and U.S. financial institutions. European Basel III 
rules are being finalized and would provide a significant 
exemption from the CVA market for risk-weighted assets for 
European banks. Transactions with sovereign pension funds and 
corporate counterparties, which are also exempt from clearing 
obligations, will be exempted from CVA risk-weighted assets.
    I have some serious questions about the impact the European 
exemption will have on U.S. financial institutions and the 
larger U.S. economy. To me, this exemption will provide a 
significant financial business advantage to European banks, 
European customers, and European end-users at the expense of 
American businesses, banks, and end-users.
    I am not alone. Canada recently announced it will delay its 
CVA capital requirement for 1 year, even though it implemented 
the rest of the Basel III package on schedule. Canada's 
decision to delay implementation of the CVA requirement was 
simple. It was driven by the concern that Canadian banks would 
be at a competitive disadvantage because of the European CVA 
exemption.
    Mr. Chairman, the U.S. economy is in a fragile state. Any 
additional hurdles, fees, or foreign advantage will cost the 
U.S. economy valuable jobs. I look forward to hearing the 
testimony of the panel today, and I appreciate Mr. Scott for 
co-sponsoring.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Peters for 2 minutes.
    Mr. Peters. Thank you, Mr. Chairman.
    Good morning. I would like to thank our witnesses for being 
here today, and I look forward to your testimony.
    I would like to spend a moment discussing one of the bills 
we are examining today, H.R. 634, the Business Risk Mitigation 
and Price Stabilization Act of 2013. I co-authored this 
bipartisan legislation, which would help protect businesses 
that rely on derivatives to responsibly manage risk, with Mr. 
Grimm.
    Derivative end-users represent a broad cross-section of 
U.S. production, from farmers worried about the price of 
fertilizer, to manufacturers that are concerned about 
fluctuating interest rates. Businesses in all of our districts 
use derivatives to ensure they pay a reasonable price for the 
products they need, and keep consumer prices stable no matter 
what happens in the financial markets.
    During the consideration of the Dodd-Frank Act, there was a 
bipartisan recognition that regulations to curb excessive risk-
taking in the financial sector should not stifle job creation 
in the agriculture or manufacturing industries. Michigan is a 
State that builds and grows things. And let me be clear: The 
Dodd-Frank Act was not written to hinder the hardworking folks 
building autos or growing apples.
    End-users, companies that use derivative contracts to 
offset legitimate business risk, were specifically exempted 
from the clearing requirements, and Congress did not 
specifically direct regulators to require end-users to post 
margin. Our bipartisan bill simply clarifies that non-financial 
end-users are exempt from the Dodd-Frank margin requirements. 
Forcing non-financial end-users to post margin could have 
several negative consequences by unnecessarily increasing 
prices for consumers across a range of goods, slowing job 
growth here in the United States, and driving businesses to 
foreign, less transparent derivatives markets.
    Our bill passed the House last year with overwhelming 
bipartisan support, because it is both about protecting jobs 
and clarifying congressional intent. Having served on the Dodd-
Frank conference committee, I can say that this bill will 
ensure congressional intent to protect our manufacturing and 
agricultural interests are carried out.
    And I will continue to work with Mr. Grimm to get H.R. 634 
signed into law to protect jobs across our country and help our 
economy continue to grow.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Let's turn now to Mr. Grimm for 1\1/2\ minutes.
    Mr. Grimm. Thank you, Chairman Garrett. I appreciate it.
    I would also like to thank the witnesses for testifying 
today.
    I, too, would like to focus on H.R. 634, the Business Risk 
Mitigation and Price Stabilization Act of 2013. As we just 
heard, this is truly a bipartisan piece of legislation that 
myself and my friend from Michigan, Mr. Peters, introduced.
    In the 112th Congress, H.R. 634 received a tremendous 
amount of support. It passed the House 370 to 24. And as Mr. 
Peters said, it is very common-sense, basic legislation which 
will simply ensure that non-financial commercial end-users of 
over-the-counter derivatives are not subject to margin 
requirements which Congress--and that is the key part--never 
intended. And it ensures that regulators do not attempt to 
exercise authorities that they were not granted by Congress in 
ways that would harm the economy by diverting working capital 
from productive uses, such as promoting economic growth and job 
creation.
    A lack of such an exemption could lead to regulatory 
arbitrage, increases in consumer prices, as we just heard, and 
some firms could abandon hedging altogether, or a loss of jobs 
as vital working capital is tied up in margin accounts with 
financial institutions.
    So I think we have said enough about it. I am now 
interested in hearing what the witnesses' thoughts are on this 
common-sense bipartisan legislation.
    And with that, I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    And for the final word, Mr. Hultgren for 1\1/2\ minutes.
    Mr. Hultgren. Thank you, Chairman Garrett, not just for 
holding this hearing today but also for your leadership on 
these important issues. I greatly appreciate the opportunity to 
have a role in this important bill, and I am optimistic, as you 
said, Mr. Chairman, that we can get it passed and signed into 
law.
    H.R. 992, the Swaps Regulatory Improvement Act, does two 
basic things: one, it will allow depository institutions to 
continue providing a spectrum of client services and products 
that would otherwise be unnecessarily prohibited; and two, our 
bill will clarify one of the unintended consequences of Dodd-
Frank, the complete prohibition on swaps trading applied to 
foreign banks operating in the United States. Section 716 
sponsor Senator Lincoln acknowledged this significant 
oversight, saying, ``This double standard was not intended.'' 
You can't get much clearer than that.
    It is also hard to find such a clear example of potential 
arbitrage as Section 716 and the unilateral prohibition it 
imposes on American businesses. Foreign jurisdictions have not 
followed suit, and there is a clear possibility of market share 
being pushed overseas because our banks can't provide the same 
products and services.
    Furthermore, multiple regulators have highlighted that 
spinning off swaps trades may actually increase systemic risk. 
Affiliates that will house these pushed out swaps trades will 
be less supervised and not as well-capitalized as the banks 
which currently engage in these trades.
    H.R. 992 will strengthen regulatory oversight, it will 
preserve U.S. competitiveness, and as we will hear today, it 
will protect end-users from higher costs and more counterparty 
risk.
    Finally, I want to thank my co-sponsor and teammate, Mr. 
Himes, for his leadership on this issue. I look forward to 
working with him again, and with all of my colleagues on both 
sides of the aisle to improve Title VII where we can.
    With that, I yield back.
    Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    We will now turn to the panel. And again, we welcome the 
panel to the hearing today.
    Without objection, your entire written statements will be 
made a part of the record today. For those of you who have not 
been here before, we will recognize each of you for 5 minutes. 
The light in front of you will turn yellow when you have 1 
minute remaining to wrap up, and it will turn red when your 
time has expired.
    We will now turn to Mr. Bentsen from SIFMA.
    Thank you for being with us today, and you are recognized 
for 5 minutes.

  STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., ACTING 
   PRESIDENT AND CEO, THE SECURITIES INDUSTRY AND FINANCIAL 
                  MARKETS ASSOCIATION (SIFMA)

    Mr. Bentsen. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee.
    On behalf of SIFMA and its member firms, I appreciate the 
opportunity to testify on several of these important pieces of 
legislation which would modify Title VII of the Dodd-Frank Act.
    As you know, the Dodd-Frank Act created a broad new 
regulatory regime for derivatives products, commonly referred 
to as swaps. Specifically, the Act seeks to reduce systemic 
risk by mandating central clearing for standardized swaps 
through clearing houses, imposing capital requirements in 
collection of margin for uncleared swaps, affecting customers 
through business conduct requirements to promote transparency--
    Chairman Garrett. Excuse me. Can you please pull the 
microphone a little bit closer to you?
    Mr. Bentsen. No problem, sir.
    Let me just say, SIFMA strongly supports the intent of many 
of these reforms. And I think it is important to note that many 
of these reforms are actually moving into implementation at 
this point in time, be it central clearing, data reporting, or 
even registration. And the firms are taking steps to put these 
reforms into place.
    However, if Title VII is implemented incorrectly, reforms 
may cause more harm than good. We believe that the appropriate 
sequencing and coordination of the rules will be 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.
    Given the focus of today's hearing, I would like to offer 
SIFMA's views on several pieces of the legislation, as well as 
one or two other issues I would like to bring to your 
attention. In particular, the swaps push-out rule was added in 
the Senate in the final stages of the legislative process and 
never debated in the House. As you know, it would force banks 
to push out certain swap activities into separately capitalized 
affiliates or subsidiaries.
    The push-out rule, as has been noted today, was opposed by 
senior prudential regulators, including Fed Chairman Bernanke 
and former FDIC Chairman Bair. The push-out will increase 
systemic risk and significantly increase the costs to banks in 
providing customers with the tools that they need to manage 
risk. As a result, end-users will pay a higher cost. We 
appreciate the work of Congressmen Hultgren and Himes in 
introducing bipartisan legislation to deal with this issue.
    Another concern as it relates to our members is the cross-
border application of derivatives rules. Neither the SEC nor 
the CFTC has finished their work and they are doing it in 
apparently differing ways, with the SEC having not even 
proposed a rule, and the CFTC doing so by guidance. We think 
what the CFTC has proposed is unworkable, and it could result 
in an uneven playing field across global markets that would be 
to the detriment of U.S. financial markets.
    We are encouraged by the bill that the committee is 
considering today to bring harmonization to this, which frankly 
is equivalent with what the original statute did with respect 
to product definitions and registration, which required a joint 
rulemaking. And we believe that should apply in this case to 
cross-border application.
    In addition, we think that the issue that was raised with 
respect to the CVA that Congressman Fincher has talked about 
today is of critical importance. We are seeing a growing trend 
of diversion from the G-20 principles of harmonization, of 
implementation of reforms, in particular as it relates to Basel 
capital standards. And the action by the European Union with 
respect to CVA creates a very unlevel playing field, but also 
is incongruous to what the G-20 was trying to accomplish. So we 
think it is entirely appropriate for the FSOC to look at this.
    Congressman Fincher made the point about the Canadians and 
what they are doing. And while there are clearly problems with 
the CVA calibration--every market participant agrees with 
that--exemption from rules and diversion from uniform 
application is counterproductive and will lead to greater 
systemic risk.
    I would like to mention something which is not before the 
committee today, but has been before the committee in the past, 
and that is the question of swap execution facilities. I would 
encourage the committee to take this issue up, because we 
believe again you have diversion between the CFTC on this.
    And I might mention our buy-side members, who are supposed 
to be beneficiaries of the swap execution facility proposal, 
are the ones who have the biggest concerns because of a minimum 
mandatory request for quote model that they believe will impede 
best execution for the benefit of their customers. So, this 
committee has worked on this before, and we would encourage you 
to do it again.
    On the inter-affiliate swaps bill, we think that this is a 
step in the right direction, and while I will acknowledge that 
the CFTC recently took exemptive action to address this, it 
doesn't go far enough and it is frankly onerous in its 
application. So we think the legislation is the appropriate 
step to take to do something that we believe Congress intended 
all along.
    Finally, let me just talk about cost-benefit analysis. I 
know there is a lot of discussion and concern about it, but I 
might note that President Obama, following on actions by 
President Clinton through Executive Order, brought about the 
imposition of cost-benefit analysis in non-Executive-Branch 
agencies. And we think it is entirely appropriate that non-
Executive-Branch agencies, independent agencies as created by 
Congress, should have similar cost-benefit analysis 
requirements, as President Obama and President Clinton have 
proposed before.
    Thank you, Mr. Chairman, and I look forward to answering 
your questions.
    [The prepared statement of Mr. Bentsen can be found on page 
45 of the appendix.]
    Chairman Garrett. Great. Thank you very much.
    Mr. Childs, you are recognized for 5 minutes, and welcome 
to the panel.

 STATEMENT OF CHRISTOPHER CHILDS, MANAGING DIRECTOR AND CHIEF 
EXECUTIVE OFFICER, THE DEPOSITORY TRUST & CLEARING CORPORATION 
                 (DTCC) DATA REPOSITORY (U.S.)

    Mr. Childs. Thank you, Mr. Chairman.
    I am Chris Childs, chief executive officer of the DTCC Data 
Repository, or DDR, which is DTCC's U.S. swap data repository. 
DTCC is a participant-owned and governed cooperative that 
serves as a critical financial market infrastructure for the 
U.S. and global financial markets. DTCC strongly supports H.R. 
742, the Swap Data Repository and Clearinghouse Indemnification 
Correction Act of 2013. I want to thank Congressman Huizenga 
and Congresswoman Moore for their leadership on this issue.
    I would like to focus on three points today. First, I will 
briefly introduce DTCC's role in the swaps market. Second, I 
will explain the indemnification provision in Dodd-Frank and 
the problem it poses for swap sharing and systemic risk 
oversight. And third, I will discuss why a legislative remedy 
is needed to resolve this matter.
    Let me begin with my first point. DTCC has a long history 
in the over-the-counter swaps market as a trade repository 
going back to 2005. Today, a swap data repository is 
provisionally registered with the CFTC under Dodd-Frank, and is 
the only registered SDR to offer trade repository and public 
reporting access across all five asset classes.
    In addition, the DTCC SDR was the first registered swap 
data repository to publish real-time price information. As you 
know, yesterday was the CFTC deadline for certain end-users to 
begin reporting trade data to SDRs. DTCC has been working with 
market participants to help them meet their reporting 
obligations, and I am pleased to report that end-user 
information is now being transmitted into our repository and 
made publicly available on our Web site.
    In addition to our work in the United States, DTCC provides 
trade repository services in the United Kingdom, Singapore, and 
the Netherlands. And we are the first organization to receive 
regulatory approval in Japan to establish a trade repository. 
As derivative trading is a global business, it is critical that 
regulators worldwide have access to a complete data set for 
systemic risk oversight.
    So let me turn to my second point and explain how the 
indemnification provision in Dodd-Frank has the potential to 
inhibit the ability of regulators to fully understand market 
exposures. The indemnification provision requires a registered 
SDR as a condition to sharing information with an entity like a 
foreign regulator to receive a written agreement that the 
regulator will abide by certain confidentiality requirements 
and indemnify the SDR for any expense arising from litigation 
relating to the information provided.
    We believe these provisions are complicated and unworkable. 
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 SDRs, or 
foreign governments.
    In order to access the necessary information without 
indemnification, each jurisdiction may have to establish a 
local trade repository. And a proliferation of local trade 
repositories would undermine the ability of regulators to 
obtain timely, consolidated, and accurate view of the global 
marketplace.
    For nearly 3 years, regulators globally have followed OTC 
derivatives regulatory forum guidelines to access the 
information they need for systemic risk oversight. It is the 
standard that the DTCC uses to provide regulators around the 
world with access to global credit default and interest rate 
swap data in its voluntary trade repositories, and it has 
worked well to date.
    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 an indemnification requirement.
    Turning to my final point, let me discuss potential 
remedies to indemnification. During the 112th Congress, a 
bipartisan coalition of more than 40 lawmakers in the House 
signed on as co-sponsors of legislation identical to H.R. 742. 
The SEC testified in support of such legislation and former SEC 
Chairman Elisse Walter reaffirmed this position earlier this 
week.
    In addition, three of the five CFTC Commissioners publicly 
endorsed the need for legislation to clarify this provision of 
Dodd-Frank. Last month, the House Agriculture Committee held a 
hearing on various legislative proposals, including H.R. 742. 
No opposition was expressed at the hearing.
    Soon after, H.R. 742 was approved unanimously by the 
committee. We urge this committee to approve H.R. 742 to make 
technical corrections to this provision of Dodd-Frank, and 
ensure regulatory comity with international counterparts. The 
legislation will help provide the proper environment for the 
development of a global trade repository system to support the 
goals of Congress and regulators in creating a more stable and 
secure financial system.
    Thank you.
    [The prepared statement of Mr. Childs can be found on page 
53 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Deas, welcome, and you are recognized for 5 minutes.

STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND TREASURER, 
                         FMC CORPORATON

    Mr. Deas. Thank you, sir.
    Good morning, Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee.
    I am Tom Deas, vice president and treasurer of FMC 
Corporation, and I am also chairman of the National Association 
of Corporate Treasurers (NACT). FMC and NACT are also part of 
the Coalition for Derivatives End-Users.
    As you oversee the implementation of the Dodd-Frank Act, I 
want to assure you that end-users comprising less than 10 
percent of the derivatives market were not and are not engaging 
in the kind of risky, speculative trading activity that became 
evident in 2008. We use derivatives to hedge risks in our day-
to-day business activity. We are offsetting risk with 
derivatives, not creating new risks.
    We believe it is sound policy and consistent with the law 
to exempt end-users from provisions intended to reduce the 
inherent riskiness of swap dealers' activities. However, at 
this point, 2\1/2\ years after passage of the Act, there are 
several areas where continuing regulatory uncertainty compels 
end-users to appeal for legislative relief.
    Among several areas of concern, I would like to invite your 
attention to three. First, in regard to the margining of 
derivatives. FMC Corporation, an innovator in the chemical 
industry, was founded almost 130 years ago. This is our 82nd 
year of listing on the New York Stock Exchange. In 1931, the 
NYSE was the largest pool of capital to grow our business.
    Today, using derivatives, we have an additional market that 
is the cheapest and most flexible way for us to hedge business 
risks every day, to cover foreign exchange movements, changes 
in interest rates, global energy, and commodity prices. Our 
banks do not require FMC to post cash margin to secure mark-to-
market fluctuation in the value of our derivatives.
    But instead, price the overall transaction to take this 
risk into account. This structure gives us certainty, so that 
we never have to post cash margin while the derivative is 
outstanding. To do so would divert cash from funds we would 
otherwise invest in our business.
    The proposals by the banking regulators mandating 
collection of margin from end-users are out of sync, not only 
with the CFTC, but with the European regulators as well. We 
believe end-users and their swap dealers should remain as they 
have been since the inception of the derivatives market, free 
to negotiate mutually acceptable margin agreements, instead of 
having regulators impose mandatory daily margining with its 
uncertain liquidity requirements. The coalition commends your 
bipartisan efforts to redress this through H.R. 634.
    Next, in our affiliate derivative transaction. The 
coalition recognizes the efforts of the CFTC to provide relief 
on inter-affiliated use, but we still have concerns. For 
example, end-users have long used widely accepted risk 
reduction techniques to net exposures within their corporate 
groups so that they can reduce the derivatives they do with 
banks.
    However, the internal central Treasury units they use run 
the risk of being designated as financial entities subject to 
mandatory clearing and margining, even though they are acting 
on behalf of non-financial end-user companies otherwise 
eligible for relief from these burdens. We support H.R. 677 as 
a straightforward and necessary remedy for this and related 
problems.
    Finally, capital requirements for derivative transactions. 
With your help, end-users could successfully navigate the 
complex regulatory issues I have described today, only to find 
that the unclear OTC derivatives we seek to continue using have 
become too costly because of much higher capital requirements 
imposed on our banks. The bank regulators have proposed a new 
credit valuation adjustment, significantly increasing capital 
requirements on all derivatives.
    However, European regulators have concluded endusers' 
hedging activities are in fact reducing risk and should attract 
less capital than swap dealers' trades. They propose to exempt 
non-financial end-users from these capital requirements. This 
would put FMC and other American companies at an economic 
disadvantage compared to our European competitors. The 
coalition supports legislation such as H.R. 1341 directing FSOC 
to study this problem and report on the consequences for 
American competitiveness.
    A related issue is the swaps push-out provision of Section 
716 of the Act, which would require that banks contribute 
additional capital to establish separate subsidiaries by this 
July to conduct much of their derivatives activity.
    Although I have focused here on a few main concerns, end-
users are very concerned about the web of, at times, 
conflicting rules from U.S. as well as foreign regulators that 
will determine whether we can continue to manage business risk 
through derivatives. The clear end-user exemption we thought 
would apply is still uncertain, confronting us with the risk of 
foreign regulatory arbitrage and potential competitive burdens 
that could limit growth and ultimately our ability to sustain 
and we hope grow jobs.
    Thank you again for your attention to the needs of end-user 
companies.
    [The prepared statement of Mr. Deas can be found on page 60 
of the appendix.]
    Chairman Garrett. And I thank you as well.
    Dr. Parsons, from MIT, welcome to the panel. You are 
recognized for 5 minutes.

 STATEMENT OF JOHN E. PARSONS, SENIOR LECTURER, FINANCE GROUP, 
    SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF 
                           TECHNOLOGY

    Mr. Parsons. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee for giving me the 
opportunity to testify here today.
    It has been nearly 3 years since the passage of the Dodd-
Frank Act, and many of its derivative market reforms are still 
not fully implemented. Americans remain threatened by the same 
dangers that exploded on the country in 2008. Congress should 
consider ways to encourage and enable the full implementation 
of the Dodd-Frank derivative reforms.
    Instead, five of the seven legislative proposals before the 
subcommittee today take us in the opposite direction. They 
reverse key elements of the reform. They resurrect the old 
system in which major segments of the derivatives markets are 
off limits to the cop on the beat. They reinstate the old 
system in which the cop's discretion and authority is severely 
limited, while at the same time financial players are given 
greater license and more loopholes.
    These pieces of legislation in their style highlight the 
stark differences between parts of the OTC derivative markets, 
which operate on two very different business models. The first 
business model is organized around the unique services that OTC 
swaps can offer to American and international businesses. It 
was the model that was responsible for the origin of swaps at 
the end of the 1970s.
    The swaps marketplace is uniquely positioned to offer 
customized as well as less liquid derivatives complementing the 
standardized derivatives offered for trade on futures 
exchanges, and the swaps marketplace provides an alternative 
for competition in standardizable derivatives, too.
    In serving these needs, the swaps market provides a real 
service to the economy, and it can be supported in this by a 
proper regulatory framework like Title VII of the Dodd-Frank 
Act. Unfortunately, before the financial crisis, the OTC swaps 
marketplace also had a second business model, organized around 
the lack of regulation. It valued operating in dark markets and 
the ability to evade supervision. It warehoused growing volumes 
of credit risks on the balance sheets of derivative dealers. It 
does not provide any unique service to the economy. It 
undermines the economy's stability.
    Growth in this trade was a classic case of regulatory 
arbitrage. This arbitraged trade did not have an interest in 
sound and stable markets, because its very existence relied on 
the lack of regulation and oversight. This arbitraged trade did 
not advocate wise regulation. It fought hard for no regulation.
    This is best epitomized by the legislative fight over the 
now-infamous Commodity Futures Modernization Act of 2000. Full 
implementation of the Dodd-Frank Act's derivative reforms to 
this arbitraged trade and push the OTC swaps industry to focus 
on the truly productive business model.
    Unfortunately, a large portion of the industry remains 
wedded to the regulatory arbitrage model. It constantly turns 
to Congress, and returns again and again, in a bid to repeat 
the success it had before the financial crisis in blocking 
sound and universal standards for market conduct.
    Much of the legislation at hand in today's hearing supports 
the bad business model of the arbitrage trade. The legislation 
is animated by the private benefits of loopholes for select 
constituencies and overlooks the value of universal standards 
that benefit the U.S. economy.
    What the country needs is good regulation that supports 
sound and stable derivative markets providing real services to 
America's businesses. What the country needs is to finish the 
implementation of the Dodd-Frank derivative reforms. As of 
today, this job is not yet done and that is where Congress 
should focus its attention.
    Thank you.
    [The prepared statement of Dr. Parsons can be found on page 
66 of the appendix.]
    Chairman Garrett. Again, I thank you.
    At this time, we will go to questioning, and I will yield 
myself 5 minutes.
    I will start with Mr. Deas. First, you did discuss this, 
but maybe I will just give you a moment to elaborate on the 
economic impact if traditional end-users were having to comply 
with a margin requirement?
    Second, in your testimony you talked about how under the 
existing framework, the prior framework, end-users were not 
required to have margin requirements. But I think you used 
language as to the extent that the institutions would take this 
into account with regard to their pricing.
    Could you just flesh that out a little bit?
    Mr. Deas. Yes, sir. Thank you for that question.
    The coalition commissioned a study of the effect of having 
to post margin, and FMC participated in that study. We are a 
member of the Business Roundtable, and we surveyed the non-
financial members of the Business Roundtable and found that on 
average, those members would have to set aside $269 million to 
margin their derivative positions.
    And the effect of this, when we extrapolate it across the 
S&P 500, of which FMC is also a member, would be diverting cash 
from investment and expanding planned equipment, building 
inventory for higher sales, conducting research and 
development, and ultimately growing jobs. And the jobs effect 
across the S&P 500 was 100,000 to 120,000.
    I think even Chairman Bernanke has said that he agrees with 
the concept that end-users should not be subject to margining, 
but he feels the legislation is ambiguous and requires the 
banks he regulates to collect that margin. But the effect on it 
would be to stifle growth.
    Now, for the price that is built in, just to give you an 
example, my company hedges energy exposure. We produce 
chemicals, and energy is a large component of that. So we would 
buy over-the-counter derivative strips to hedge the price of 
natural gas for the future.
    Today, you can buy that kind of locked-in protection for 
2014, for let's say around $4 an MMBTu. And we estimate that 
the credit spread that is built into that by our banks that 
would cover a period of anywhere from 18 to 24 months and would 
be something like 2 cents out of that $4 an MMBTu.
    Whereas, the fluctuations in the price of natural gas could 
be as much as 40 cents over that period, which would multiply 
times our consumption of eight million MMBTus, be a 
considerable amount of liquidity that we would have to hold in 
reserve, because failure to meet that margin--
    Chairman Garrett. So, would the argument be that 2 cents is 
or is not adequate then, versus the 40 cents fluctuation?
    Mr. Deas. Well, no, sir. I don't think there is an argument 
against it.
    Chairman Garrett. Okay.
    Mr. Deas. That is how the market conducts itself, and so 
all the end-users, FMC and all the other end-users I know have 
opted to pay that credit spread--
    Chairman Garrett. Right, right.
    Mr. Deas. --rather than to margin. And then, the extreme 
case would be if the regulators imposed daily margining which 
would introduce more volatility.
    Chairman Garrett. Okay, thanks.
    I will jump over to Congressman Bentsen. I think you were 
the one who commented on the SEC requirement of doing economic 
analysis. I appreciate that. And I think you pointed out that 
cost-benefit analysis is just basically in keeping with what 
the Administration was trying to do elsewhere, right?
    Mr. Bentsen. That is correct. The Obama Administration 
issued an Executive Order, I think 2 years ago now, requiring a 
cost-benefit analysis regime with independent agencies. They 
don't have the exact authority to do it. The SEC has weighed in 
on that and has been building it. But this legislation we see 
is in line with that, with the Obama Executive Order.
    Chairman Garrett. And isn't it also--my understanding of 
it--we had Chairman Schapiro here 27 times, I think she said. 
And she said that they are already doing it voluntarily; this 
would just basically codify it.
    Mr. Bentsen. I think that is right. If you talk--in our 
discussions with the SEC, they are building out a cost-benefit 
analysis regime. And that is evident in recent actions like the 
request for information regarding H.R. 913.
    Chairman Garrett. Thank you very much.
    I appreciate the panel.
    The gentlelady from New York is recognized for 5 minutes.
    Mrs. Maloney. Thank you.
    I want to welcome all the panelists, particularly my former 
colleague, Ken Bentsen. It is very good to see you.
    And Mr. Childs, who is DTCC is in the district that I 
represent.
    I do support H.R. 742, which would put us in line with the 
rest of the world. But in your testimony today, it is almost 
too good to believe when you say you can give on-time data on 
interest rates, credit default swaps, the overview of exposure 
trends.
    Did you have this information before the financial crisis? 
Could you have prevented the financial crisis and notified 
regulators? It says you are in constant contact with them. Why 
was this information not used in a way that it could have 
alerted us to avert or take steps to avoid this financial 
crisis from which we are still recovering? Every economist 
tells us it is the only one we have had which we could have 
prevented with better financial oversight and regulation.
    Mr. Childs. Thank you for that question. I think it is 
important to understand the development of how we got to where 
we got to. And it is true that from 2005 we have been 
collecting data, but not for the purpose necessarily of 
regulatory oversight. Obviously, the DTCC itself is not a 
regulator.
    Actually, the trade information warehouse, which was the 
pre-runner to the repositories that we are now building, was 
built so that we could better administer the operations of 
credit default swaps. Interestingly, when the crisis did hit, 
it was at that point where it became very clear that the data 
we held would be very useful.
    And it was at the point that we actually started with the 
industry, on a voluntary basis, making that data available to 
regulators. And it was actually quite useful during the 
aftermath of the crisis to understand the true risks that were 
in, at least, the credit default swaps market.
    In many respects, I think the repository we had drove a lot 
of the legislative response to the crisis. So it is true to say 
we had a lot of that data at the time of the crisis, but it 
wasn't necessarily, or it wasn't being used at that point from 
a regulatory oversight perspective.
    Mrs. Maloney. How can you be sure that your data is 
accurate if the industry we are trying to regulate is supplying 
the data to you? So if a lot of the problems that we tried to 
correct with Sarbanes-Oxley and really the derivatives and 
other oversight is that the data that we were given--regulators 
were given--was inaccurate? So the data is coming to you from 
the industry we need to regulate. And so, how you be sure the 
data is accurate?
    Mr. Childs. It is a good question in as much that a lot of 
this data is self-reported. Having said that, with the 
provisions of Dodd-Frank there is the need for both sides to 
the trade to verify their positions. So, there is not just one 
counterparty reporting. The other side should be looking at 
that data.
    And when it is a trade between two swap dealers, as well, 
one of the important pieces of provision of data is the value 
of that trade. And so, both sides of the transaction are 
independently sending in to the swap data repository their own 
independent valuation of those OTC transactions. So right 
there, hopefully there is a check and balance.
    I think the third thing is there is obviously now it is 
transforming into a highly regulated market, and the regulation 
itself should force the market participants to comply with 
their regulatory responsibilities.
    As it relates to the data itself, there are also validation 
techniques that we use when we are receiving data to ensure 
that the trade information that is coming in meets the 
requirements that are set forth within the regulation.
    Mrs. Maloney. Okay.
    I would like to ask Ken Bentsen on the extraterritoriality 
of the bill, H.R. 1256, how has the proposed bill changed from 
the bill that moved though Congress last time? And given the 
fact that we are in a global economy and that some trades 
executed overseas could have a direct impact, not only on our 
financial institutions, but on our overall economy, what are 
your thoughts about the new U.S. swaps regulations and how they 
apply to U.S. entities operating overseas?
    Do you think that this addresses it? Could you expand on 
that?
    Mr. Bentsen. Thank you. I think what this bill attempts to 
do is to better coordinate the rulemaking, and do by rulemaking 
in terms of process what the cross-border regime should be for 
swap dealer registrants who are operating in the United States.
    And the goal, from our standpoint, would be to have a 
uniform application in the United States in as uniform an 
application globally, because this is a global market.
    So what we are concerned about with the process as it is 
gone so far is that we have a potential uneven application 
through the extraterritorial application of U.S. rules with an 
uncertain definition of who is a U.S. person and who is not. 
How that treats foreign branches and affiliates of U.S. swap 
dealers, and that affects the market back here; whether you 
have reundancy in regulation or duplication in regulation in 
foreign markets and whether you have equivalency in regulation.
    We see the Europeans who are moving forward with EMIR and 
Mifid in implementing their rules. The various Asian 
jurisdictions are moving, at maybe not as fast of a pace. But 
there needs to be a level playing field across these markets. 
And it has to start with, in our view, a joint or dual 
rulemaking between the U.S. regulators, and we haven't had that 
so far.
    And I would just lastly say, we have seen because of the 
process that has gone forward with the CFTC getting too far out 
in front that they have had to backfill through exemptive 
relief and no-action letters beginning on October 12th, at the 
end of this year, at the end of March, and going--which will 
continue through this year, which has created uncertainty in 
the market and seen counterparties move away from U.S. swap 
deals--U.S.-registered swap deals.
    Mrs. Maloney. My time has expired.
    Chairman Garrett. Mr. Hurt is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. And I thank each of the 
panelists for being here and each of the patrons for bills that 
we are considering today. I commend Mr. Grimm and Mr. Peters, 
especially on the end-user bill.
    I wanted to just follow up with Mr. Deas, a little bit. I 
come from a rural district in Virginia. We have a lot of 
farming--dairy, tobacco, beef, grain. And I was wondering, for 
my constituents who are maybe watching this hearing, maybe not, 
I was wondering if you could break it down a little bit more in 
terms of what the threat to their operations--these are folks 
who depend on fuel, stable prices for fuel, and they depend on 
credit.
    If you could elaborate a little bit on the effect of 
increased capital requirements, and so forth, on end-users if 
this legislation is not adopted here, and very importantly, 
down the hall of the Senate, and made law.
    Mr. Deas. Yes, sir. Thank you for that question. FMC, as I 
mentioned, was founded 130 years ago, to make spray equipment 
for farmers. Today, we make and sell over $2 billion of 
agricultural chemicals to farmers. Your constituents depend on 
our products to make their living. And they expect not only 
innovation, but products at an effective cost.
    So as I described in our manufacturing, we use natural gas, 
and we have other inputs, and we try to achieve that low cost 
and predictability through, in part, managing our costs with 
derivatives. And so one of the important members of our 
coalition for derivative end-users is the Agricultural 
Retailers Association. And they have seen the effect on people 
in your district who would be hedging what is in the silo or 
hedging their future fuel costs of one type or another and then 
having a network of suppliers who themselves depend on 
derivatives to hedge their costs and provide products to them.
    Mr. Hurt. Thank you. I also wanted to ask Mr. Bentsen about 
testimony that was submitted in writing, and he touched on it 
briefly in his oral testimony. But in talking about the swaps 
execution facilities and some of the requirements--the CFTC has 
proposed rules relating to the customers requiring at least 
five market participants for a request for quotes, and 
requiring SEFs to display quotes for a period of time.
    In your testimony, your written testimony, you said this 
differs from current market practice and could have significant 
impact on the liquidity in the swap market. Could you talk a 
little bit more, elaborate a little bit more about the effects 
that would have, or those two proposals and the rest of the 
things that are of concern in the CFTC proposal and the 
importance of making sure we getting that right?
    Mr. Bentsen. Yes, Congressman, thank you. This is an issue 
which was part of the statute that requires, in lieu of an 
exchange trading, if you will, the ability to trade swaps 
through a swap execution facility. This is a new entity created 
by legislative fiat, so it doesn't exist today.
    And both the SEC and the CFTC are required to create these 
under the Act for the swap markets that they have jurisdiction 
over. They have come out with different proposals where the SEC 
has proposed that it would be the--the customer can determine 
whether or not or ask whether or not they want multiple 
requests for quotes.
    The CFTC has come out with a proposal requiring a mandatory 
minimum of five requests for quotes, along with a block trading 
exemption, so certain trades of a certain size are exempted 
from that. The problem--and this really comes from our buy side 
members, so our members who are mutual fund companies, asset 
managers, managers for pension accounts, whatever, and their 
concern is they do not want to have a requirement--they want 
to--they don't mind having the ability to ask for multiple 
quotes, and they are very sophisticated in the markets on a 
regular basis, but they don't want to have to have a mandatory 
requirement where they are effectively telegraphing to the 
market when they are making a transaction to rebalance a 
portfolio for liquidations, whatever the case may be.
    And they are going to have to hedge that trade they are 
making in equities or bonds, whatever it may be, that they are 
telling the market what trade they are making. And that is 
going to impede best execution at the cost of their end-users 
and customers.
    Mr. Hurt. And will impact liquidity and--
    Mr. Bentsen. Absolutely. Yes, and so they are the ones that 
this is designed to help, and they are saying, ``Stop, because 
this isn't going to help us. This is going to hurt us.''
    Mr. Hurt. Thank you. I think my time has expired.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from California?
    Ms. Waters. Thank you very much, Mr. Chairman. I have a 
question for Mr. Deas, representing the Coalition for 
Derivatives End-Users. I thank you for your testimony, and I 
think you have clarified a number of things, but I would like 
you to comment on the fact that this week we learned that ICAP, 
the biggest broker of interest rate swaps between banks, is 
being probed by the CFTC on whether their brokers colluded with 
banks in fixing interest rate swap prices. In particular, the 
CFTC is investigating whether ICAP brokers colluded with 
dealers, who stand to profit from inaccurate quotes, including 
failing to update published swap prices on a trading screen 
until after the trades occur.
    As I understand it, the ISDAfix prices that ICAP is being 
accused of manipulating or the--it is ISDAfix prices that ICAP 
is being accused of manipulating are used by many corporate 
treasurers to gauge their funding costs. I raise this point to 
ask a question. We are focusing quite a bit in this hearing 
about the cost of Dodd-Frank to derivatives' end-users, which 
include major U.S. companies. But in the wake of this probe, 
along with instances of LIBOR manipulation, to what extent are 
derivatives' end-users concerned that the system is rigged and 
that we actually need enhanced enforcement to ensure that there 
is an even playing field in our derivatives markets?
    Mr. Deas. Ranking Member Waters, thank you very much for 
that question, and thank you for your support of and attention 
to end-user issues.
    A derivative by its very nature is a financial instrument 
whose price is derived from an underlying instrument. When my 
company goes to issue a bond in the public debt market, perhaps 
we have chosen to make it a 10-year term, we will hedge the 
interest rate risk with a 10-year interest rate swap 
derivative, custom crafted to meet that, and the price of that 
derivative, we can determine independently by looking at the 
actually second-by-second movement of the associated 10-year 
U.S. Treasury note that would correspond to the maturity that 
we are issuing.
    And so we have, through access to these sources, a ready 
way to check what we think the price is, and then what we do is 
bid that transaction to a group of our banks--sometimes three 
or four banks--and pick the winning bidder from that group. So 
we have an independent means to get in the neighborhood, and we 
have a competition that allows us to select the best price.
    Now, the swap data repository will make that somewhat 
easier in that it will provide, to the extent that it has data 
for the term and the amount that we are specifically interested 
in, that is yet another cross-check, but we feel that we are--
we have adequate means to assure that we are getting an 
appropriate deal for our shareholders, our employees, and to do 
a proper transaction for the company.
    Ms. Waters. I would like to go to Mr. Parsons now. If 
manipulation is allegedly occurring in the highly liquid 
interest rates swaps market, what does it say about the 
potential for a manipulation in less liquid markets? Does this 
underscore the imperative for the reforms in Dodd-Frank Act?
    And while you are speaking on this, as I understand it, the 
ISDAfix is a benchmark for fixed rates on interest rate swaps. 
You did not speak to that, Mr. Deas, but I would ask Mr. 
Parsons to comment on that.
    Mr. Parsons. Thank you. Certainly, if you can fix the 
interest rate market, the largest market in which there are so 
many, many other players, you can fix all sorts of other more 
illiquid markets. I was a little startled by Mr. Deas' response 
to you. If he prices his bonds off of U.S. Treasury rates, he 
would be a very unusual corporate treasurer.
    Typically, you would price your bonds off of the swap rate, 
which is at a differential to the Treasury rate, and the swap 
rate is sometimes at a higher differential, and sometimes a 
lower differential. While they may not be manipulating the 
Treasury rates, if they are manipulating the swap rate, the 
premium or discount that the company is getting on selling its 
bond has just been manipulated, and there is no way for Mr. 
Deas to verify that by looking at the Treasury bill.
    We need supervision to assure that markets work well. That 
has to be true about all kinds of markets. And a non-
transparent market is going to have problems.
    Ms. Waters. Thank you very much. I yield back.
    Chairman Garrett. Thank you. The gentlelady yields back.
    Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman.
    In March, the acting USTR sent a letter to the Speaker 
noting his intention to launch negotiations of an E.U.-U.S. 
trade deal. This is, I think, a very positive development. And 
I am hopeful that we have a permanent USTR that can be named 
expeditiously and that negotiations are going to be under way 
very quickly.
    But the letter noted, as it relates to trade and services, 
that a deal should improve regulatory cooperation where 
appropriate. Clearly, financial services of securities, 
banking, and insurance are an area where improved cooperation 
and coordination would be more than appropriate.
    And I was going to ask Mr. Bentsen, do you agree that 
renewed interest in an E.U.-U.S. trade deal can have a positive 
impact on the ongoing conversation related to derivatives 
regulations and other aspects of financial services regulation 
in the United States and Europe? And specifically, could the 
trade deal help facilitate a framework for developing 
recognition arrangements?
    Mr. Bentsen. Thank you, Mr. Royce. We completely agree with 
that sentiment. We have been outspoken about the fact that we 
think a U.S.-E.U. trade agreement is entirely appropriate. We 
are very supportive of it on the broad range, but we also 
believe that it should include a financial plank to accomplish 
exactly what you are talking about. You are talking about two 
of the most intertwined markets, and combined, the largest 
financial market where you have similar efforts and new 
financial reforms going on, and we believe this agreement could 
be a model for regulatory coordination across very similar 
markets.
    We have seen this, as you know, in other agreements such as 
the U.S.-Australian free trade agreement, where there is a 
mutual recognition component. And obviously, there are mutual 
recognition components in other sectors in trade agreements, so 
we think it is entirely appropriate, and we have been 
advocating such to the Administration.
    Mr. Royce. Let me ask you another question. On the question 
of extraterritorial application of derivatives regulation, we 
have a problem where we need to ensure that we have similar 
regulation and similar enforcement by regulators, but there is 
also an important component that I think can't be 
understressed, and that is we have a problem of trust between 
nations which must withstand the pressures of crisis situations 
like the last financial crisis, and we need to build this 
trust.
    In testimony before the House Agriculture Committee last 
December, the head of the European Commission's market 
infrastructure unit said that one consequence of the current 
rules under consideration in the United States is that, in his 
words, ``Trades will not be able to clear and end-users will 
not hedge their risk or firms will hedge their risk, but they 
will only take place within one jurisdiction, which means that 
risk will be concentrated in one jurisdiction. The consequence 
of that is a fragmented market and a significant concentration 
of financial risk in the U.S. system.''
    The regulations which have been imposed appear to have sort 
of the opposite of intended intent here. The consequence has 
been sort of the reciprocal. We wanted to decrease risk and 
increase global cooperation, but at least as perceived by 
Michel Barnier in that quote, he reached a different 
conclusion.
    So what can you tell this committee about the coordination 
that you are seeing between U.S. and foreign regulators to 
ensure that there is a level playing field? And how do we avoid 
risk spilling over into the United States without adopting an 
overly strict extraterritorial regulation that appears to place 
distrust on the--in the part of our economic allies overseas?
    Mr. Bentsen. Mr. Royce, I think since that time, since the 
initial CFTC proposal and some of the push-back that has come 
not just from Europe but from various Asian jurisdictions, 
there has been increased dialogue through the IOSCO channel. 
And I think that is very positive. I think comments from former 
SEC Chairman Walter while she was in Australia about where the 
SEC may be heading with their proposed rule on cross-border are 
all positive steps.
    But you are absolutely right. At the end of the day, there 
is a reason for the G-20 principles in uniform application, 
because you have--it is a global marketplace, and there has to 
be very good global coordination to make sure that we have a 
level playing field across the globe.
    And, again, it goes back to your comments on trade. That is 
a perfect opportunity to create a protocol to address it.
    Mr. Royce. If I could just close with Mr. Barnier's quote 
yesterday, he said, ``It would be a great concern if 
duplicative rules were imposed in isolation, as it would start 
a process of costly replication worldwide, leading to capital 
and regulatory fragmentation.'' So, he is clearly still 
concerned.
    Mr. Royce. Thank you.
    Chairman Garrett. Thank you.
    Mr. Scott is recognized for 5 minutes, and a little extra.
    Mr. Scott. Yes, okay. Thank you very much. I appreciate 
that. I have questions for Dr. Parsons and Mr. Childs and Mr. 
Bentsen.
    First of all, Mr. Childs, I think the swaps data repository 
deal is very critical to smooth operations of our derivatives 
operation, but my understanding is that when a foreign 
regulator requests information from a U.S.-registered swap 
dealer repository, then that depository is required to receive 
a written agreement from the foreign regulator that it will 
abide by certain confidentiality requirements and that it will 
indemnify the SDR and its U.S. regulator for any expenses 
arising from litigation relating to inappropriate public 
release of information. Is that correct?
    Mr. Childs. That is correct.
    Mr. Scott. All right. And our bill, the bill before us, 
H.R. 742, would strike this indemnification requirement related 
to both the swap data gathered by the SDR and the data 
collected by the Commission.
    So I think it is important for you if you can explain to us 
just in plain terms what is indemnification as a legal concept, 
both with respect to domestic law, as well as the regulatory 
regime here and in foreign countries? And why would such a 
concept need to be included in the section of Dodd-Frank 
dealing with information sharing?
    Mr. Childs. Thank you for the question. I think it is 
first--it is probably important to point out that I myself am 
not a lawyer, but I think that--or the concept here is that in 
a global market, data will be held in repositories. And under 
the legislation from Dodd-Frank, at this moment in time, if a 
foreign regulator needs to see any data that is held within 
that swap data repository, they would have to indemnify both 
the repository operator and the CFTC against any potential 
loss--litigation loss resulting from the use or misuse of that 
data. That concept, as I understand it, is not necessarily a 
concept which even exists in some foreign jurisdictions.
    I think it is also important to note that in a reciprocal 
arrangement, it is unlikely that a U.S. regulator would be 
prepared to sign that indemnification language themselves.
    Mr. Scott. So what sort of data protection procedures are 
in place in DTCC and in the industry as a whole that would make 
indemnification unnecessary, as this bill would do?
    Mr. Childs. Again, a very good question. First of all, it 
is obviously important for the transparency of data for 
regulators around the world to get access to the data that they 
need so that they can fulfill their function on systemic risk 
oversight. But I think it is also important, in direct response 
to your question, to note that it doesn't mean that any 
regulator around the world can simply ask for all of the data 
within the swap data repository. There are very stringent 
controls that we would have in place and do, in fact, already 
have in place on the voluntary side of data provision, which 
ensures that regulators only get to see the data that they are 
entitled to see to perform their function.
    Mr. Scott. All right. Dr. Parsons, I would like to turn to 
you for a moment and ask just a couple of quick questions about 
some things that have been in the news, and I think it is 
important that you comment on these, for example, the London 
Whale trades which continue to be in the news. Can you tell us 
very briefly, what was the nature of these trades? They were 
proprietary trades, were they not, rather than trades done on 
behalf of a customer of a bank?
    And if they were proprietary trades, would they not be 
covered by the Volcker Rule? As I mentioned in my opening 
statement, none of the corrections to the portions of the 
Volcker Rule are in place just yet, but would you comment on 
that, please?
    Mr. Parsons. As I read the facts as they have come out from 
the investigations, that was prop trading, speculative trading. 
It would be prohibited by the Volcker Rule. Of course, there 
are people who want to broaden the definition about what 
portfolio hedging is in ways which I think would make it 
practically impossible to say that anything was not a portfolio 
hedge. And so, they would defend those trades that way.
    But it seems to me that the regulations--the first drafts 
of the rules that the supervisors presented included a number 
of provisions to examine the activities in an institution like 
the CIO and would have identified this as the kind of trade 
that is prohibited. But it wasn't yet in effect. The Volcker 
Rule is not yet in effect.
    Mr. Scott. Thank you.
    Mr. Bentsen, quickly, I know my time is pressing, but this 
pushout rule, the pushout rule results in pushing these swap 
activities out of the bank and into an area. And it is provided 
in Dodd-Frank that failure to do so then punishes or forfeits 
the bank from participating in the Fed's window, as well as 
FDIC insurance.
    My concern is--and I would like for you to comment--does 
this weaken the situation more? Is this not--
    Chairman Garrett. If you can quickly respond, since we are 
over by 1\1/2\ minutes here.
    Mr. Scott. All right. Thank you.
    Mr. Bentsen. I would say no, because the way the 
legislation is written, it doesn't open up the access to the 
payment system or to these particular swaps. And I think the 
reason why you have the prudential regulators, who didn't like 
this in the first place, is they don't like the idea of taking 
capital out of the bank and putting it in a separate affiliate, 
so they would rather keep it there where it is under their 
jurisdiction.
    Mr. Scott. Okay, thanks.
    Chairman Garrett. Great. And thank you.
    Mr. Huizenga, you are recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
    And somewhat following on what my colleague was talking 
about, Mr. Childs, if you don't mind, maybe expounding on this. 
I understand--I was not here when Dodd-Frank was created. But 
what I tell people is I am living with the echo effects of it, 
and we are trying to sort through and figure out how we make 
these things more manageable.
    And my understanding is that this indemnification process 
was actually inserted during the conference committee. There 
weren't any hearings or discussions about it. And so, I think 
we are obviously dealing with some of those unintended 
consequences.
    I am curious if you can give some perspective as to why 
foreign regulators have rejected the inclusion of these 
indemnification provisions in their derivatives reform 
legislation and why suddenly we think it is a good idea for us 
to be sort of an outlier or why some believe it is a good idea?
    Mr. Childs. Yes, thank you. I think there are probably two 
reasons. One is, as I had mentioned, that indemnification is 
not even recognized in some jurisdictions. And the second 
reason, without talking on behalf of regulators and what they 
were really thinking, I think that it is generally accepted 
that in order to provide the right level of oversight and 
transparency, it is important that the data flows to where the 
data needs to be.
    And the indemnification provisions would make that much 
more difficult, in some respects almost impossible. And, of 
course--
    Mr. Huizenga. Specifically how?
    Mr. Childs. Because if we as a swap data repository 
operator cannot provide the data without the indemnification, 
and if they cannot provide the indemnification, then the data 
cannot flow. And at that point, you don't have the transparency 
and the oversight that you need. Obviously, it is even more 
important in times of crisis that data can flow quickly. Just 
the kind of paperwork--
    Mr. Huizenga. An irresistible force moving an immovable 
object.
    Mr. Childs. Right, exactly.
    Mr. Huizenga. Okay.
    Mr. Childs. So, it feels like a correction is required to 
bring the rules in line with what is being enacted elsewhere in 
the world to allow that transparency to occur.
    Mr. Huizenga. And then who exactly determines what 
information is available and to whom? As you are dealing with 
these--I assume that data is available to those regulators, 
right?
    Mr. Childs. Obviously, anything that is in the swap data 
repository at that moment in time is available and is provided 
already to the CFTC. If we get requests from--in fact, there is 
already a kind of voluntary regime which applies to credit 
default swaps and interest rate swaps, where the OTC 
Derivatives Regulatory Forum, which is around about 50 
regulators, together with the industry agree the terms under 
which data can be provided, so we already do actually provide 
some data to foreign regulators, but under the voluntary regime 
that is in place as opposed to the legislative regime.
    But, again, as I had mentioned earlier on, I think it is 
important to note that the rules around data and who gets to 
see what will always be pretty clear. And so, the swap data 
repository operators would provide the data underneath those 
rules. And it would provide data to regulators around the world 
based on the role that they perform in the world.
    Mr. Huizenga. But in general, it is not available to the 
public?
    Mr. Childs. Correct.
    Mr. Huizenga. Okay. I appreciate that.
    Mr. Chairman, I yield back.
    Chairman Garrett. Okay, the gentleman yields back.
    The gentleman from California?
    Mr. Sherman. Thank you.
    I can understand the political reasons and the fairness 
reasons why we have exempted end-users from posting capital. My 
concern is that the financial institution that enters into an 
agreement with an end-user is thereby taking the counterparty 
risk. What do we have in the system to make sure that no one 
financial institution is taking too much counterparty risk 
dealing with end-users who are taking positions and may, when 
the market moves one way or another, be unable to come forward.
    Yes, Mr. Bentsen?
    Mr. Bentsen. Mr. Sherman, we have a couple of things in the 
system that deal with that. For starters, we have existing 
capital standards that require financial institutions which are 
subject to that, so principally banks or any institutions that 
are subject to the Basel, that they have to put capital on a 
risk-weighted basis against various types of assets, including 
derivatives. So, there is that.
    Second of all, under Section 165 of the Dodd-Frank Act, 
under enhanced prudential standards for systemically designated 
institutions and among banks under the statute, any commercial 
bank with $50 billion in assets or more is systemically 
designated by statute, they are required--there is something 
known as single-counterparty credit limits. Now, that is still 
in the rulemaking process, and, to be fair, the initial 
proposal, in our view, was not as well done as it could be, but 
it is in the rulemaking process at the Fed right now, and that 
puts a further limitation that Congress imposed under Dodd-
Frank on the level of concentration of risk that an institution 
can have with individual counterparties. And so, there are 
really two areas there where there is that requirement.
    The last would be--and it is in process now, both in the 
United States and then through the BCBS-IOSCO working group--
the capital and margin requirements for uncleared swaps. And 
that is in the proposal stage. Plus, you have the prudential 
regulators who have capital margin proposals out, as well as 
the SEC and the CFTC. The SEC just closed the books on their 
proposal about a month or so ago, and so there is a regime that 
is being established for uncleared swaps associated with that.
    Mr. Sherman. Thank you for a comprehensive answer.
    Dr. Parsons, back in November, Treasury issued a 
determination exempting certain foreign exchange swaps. I don't 
know if you are familiar with this. One situation would just be 
cash on the barrelhead literally, and one side delivers $1 
billion worth of dollars, the other side delivers $1 billion 
worth of euros. The others could be that it is a transaction to 
be taken in the future. They bet on the movement of those 
currencies. Which of these does the Treasury exempt just the 
immediate delivery of currency from one to the other or, in 
effect, a bet on the future?
    Mr. Parsons. I have to say--
    Mr. Sherman. And I am only asking you because Treasury is 
not here and--
    Mr. Parsons. I believe it includes bets on the future. But 
I have not investigated that exemption carefully. But my 
recollection was--
    Mr. Sherman. Your colleague, Mr. Bentsen, did you have a 
comment?
    Mr. Bentsen. The Treasury exemption, which the Congress put 
in statute to allow Treasury to make this exemption, excludes 
all swaps and forwards for FX. And I think it does so 
importantly because of the tenor of the vast majority of swaps 
and forwards are less than 2 years, but there is a full--
    Mr. Sherman. Currency can move a lot in 2 years. But 
whomever is on the losing side of that bet, then under this 
exemption, wouldn't have posted any capital. What risks are 
there to the financial institution that there is a 1-year bet 
on which way currency is going to move and the person on the 
losing side of that bet, or the company on the losing side of 
that bet doesn't have the funds to produce?
    Mr. Bentsen. Congressman Sherman, I would be happy to get 
back to you for the record, because I don't, off the top of my 
head, recall. But I would say, even within that 2-year tenor, 
the great--the vast--the majority within that is even in a 
much--below a year. So the way the FX market works is a very 
short-term market, and that is the reason Congress, we think 
appropriately at the time, recognized the monetary policy 
function of the FX market, the very short-term nature of the FX 
market, and designed the exemption accordingly. And I would 
say, it is still--it still nonetheless is subject to the 
reporting requirements under Title VII.
    Mr. Sherman. I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Fincher is recognized for 5 minutes.
    Mr. Fincher. Thank you. Thank you, Mr. Chairman.
    There are a extraordinary number of moving regulatory 
reforms in a derivative space. People often forget about Basel 
and the layering effect that new capital mandates, along with 
these other reforms, will have on the real economy, and for job 
creators hedging risk and seeking access to credit to expand 
their business.
    In my opening statement, I talked about European regulators 
creating an exemption from CVA, and they gave the exemption 
based on two things: concerns with Basel methodology; and the 
impact on end-users, which is critical to economic growth.
    Mr. Bentsen, I think you alluded to this earlier: are you 
at all concerned about the different implementations of CVA? 
And wouldn't it be prudent for policymakers to examine the 
impact on U.S. financial institutions and end-users?
    Mr. Bentsen. Absolutely, Mr. Fincher. We think your bill is 
the right step to take. We have reached out to U.S. 
policymakers because of our concern, as I said before, this 
really is counter to the G-20 principles of uniform application 
of capital standards as proposed under Basel III.
    As you pointed out, the Europeans provided this exemption 
because of their concerns. And to be fair, the proposed credit 
valuation adjustment--the methodology everyone believes is 
flawed and that should be reviewed. But if you start providing 
exemptions in one jurisdiction, you have the Canadian 
regulators who are now looking to see--again, they are very 
concerned about the CVA, as well, and how it will work and what 
the impact will be--you end up with a patchwork, and that 
doesn't do anyone any good and it results in an unlevel playing 
field that is unfair, frankly, commercially unfair to certain 
sectors.
    So it is something that U.S. policymakers should, we 
believe very much, as well as we think other jurisdictions who 
aren't part of the E.U. should look in and also that the FSB 
and Basel should deal with.
    Mr. Fincher. Mr. Deas, would you like to comment on that, 
as well?
    Mr. Deas. We agree, sir, that if--I was commenting on the 
margin requirements for end-users, so it would require us to 
put capital aside, and this is a concern and there is actually 
a parallel effect here with requiring banks to separately 
capitalize a subsidiary to take their own capital.
    What we know happens is that they are going to obtain a 
return on that capital and they are going to build a price into 
the swaps that they do with us. We are going to ultimately bear 
that, and that is going to just be a higher cost on the 
economy.
    Mr. Fincher. The second question is for Mr. Deas. Canadian 
regulators decided to finalize Basel III, but delay CVA, until 
both end-user cost and whether countries will implement it. 
Likewise, we are seeing similar concerns beyond Europe and 
Canada.
    I actually have a quote here in an article in Risk 
magazine, which is entitled, ``Asia Corporates Unfairly 
Penalized by CVA Capital.'' One European bank is quoted saying 
corporates shouldn't be penalized with higher prices because 
banks have to hold extra capital against these trades. 
Corporates don't pose a systemic risk, and their derivatives 
trades are used for hedging their real-world exposures. They 
are good for the economy.
    Are you worried about, as the article reads, uncompetitive 
pricing which could spill over into the problems with the real 
economy? And couldn't progress--and Mr. Grimm's margin bill--be 
undermined by different capital treatments?
    Mr. Deas. Yes, sir. We have estimated as an example for my 
company, which is highly creditworthy and has access to the 
capital markets, that the swap spreads for my company could 
increase by a factor of three. And for less well-capitalized, 
less creditworthy companies, there would be potentially--
actually, the way the formula works, it would be an exposure 
increase from that for less well-capitalized companies. And so, 
that cost would just be spread through the economy, and 
ultimately, we fear it would have an effect on jobs.
    Mr. Fincher. In wrapping up, Mr. Chairman, being a farmer, 
from 7 generations of cotton farmers, I am very familiar with 
FMC and the products that you make. And using derivatives, 
being able to hedge your positions and make the product 
affordable to the agricultural community and to other areas of 
the spectrum trickles all the way back down to the consumer in 
the end, because if we don't have your products, we can't grow 
the commodities that we produce for Americans and people all 
over the world to eat and to clothe themselves.
    We have to be careful that this one-size-fits-all approach 
usually ends up not being the right fit, and just be careful as 
we proceed. So with that, Mr. Chairman, I yield back, and I 
thank the panel for the testimony.
    Chairman Garrett. The gentleman yields back.
    Mr. Himes is recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    I would like to thank the panel for participating today and 
for your insight. And I would like to start by noting that I 
think that Title VII of Dodd-Frank is one of the signal 
achievements of that legislation, remedying a wrong that many 
of you have talked about, which was of a very large and almost 
completely unregulated market, bringing derivatives into the 
light of day through clearinghouses, trading over exchanges, 
being subject to margin requirements, power for government 
regulators to step in and require additional margin to unwind 
businesses. I believe that this is a very important step 
forward within Dodd-Frank.
    I also believe that as the work of mortals, it is not 
perfect and subject, therefore, to amendment to improve it. I 
find that this turns out to sometimes be a lonely point of 
view, as some of my friends--particularly on the other side--
would suggest we should repeal the other thing, while others 
believe that any effort to amend or improve the legislation is 
the very work of Satan.
    I find that the facts get lost in this. And now I turn to 
H.R. 992, which I have coauthored with Mr. Hultgren. There has 
been quite a bit of press about it. I talked to reporters at 
the Huffington Post, at Mother Jones, to name two. After 
extension of interviews, I asked the reporters, and they had 
actually not bothered to read Section 716 or H.R. 992, as they 
did these interviews.
    Americans for Financial Reform issued a letter on March 
15th, critical of H.R. 992, which had a number of factual 
errors in it. When I called AFR to point out these factual 
errors, they issued a second letter on March 19th, 
interestingly back-dated to March 14th, showing that sometimes 
the facts get lost.
    I want to turn, though, to the substance of the question of 
Section 716 and H.R. 992. It is puzzling. People like Sheila 
Bair and Ben Bernanke have suggested that Section 716 is 
problematic. Former Financial Services Committee Chairman 
Barney Frank made the statement that this provision, Section 
716, added nothing in terms of protection. And so one asks, why 
is there such opposition to something that is bipartisan and 
supported by regulators?
    The New York Times editorial board, and Americans for 
Financial Reform, their thesis is this: ``A taxpayer backstop 
to derivative speculation is a bad idea. That is what H.R. 992 
would permit.'' Now, H.R. 992, the idea is that the swaps that 
are not dangerous, the swaps that have always been in banks and 
that had nothing to do with what happened in 2008, the interest 
rate swaps, the currency swaps, the commodity swaps, not the 
structured asset-backed swaps, the CDOs, that they get to 
remain within banks while those more dangerous swaps, which, in 
fact, did have something to do with 2008, are pushed out.
    What I want to focus on and bring the panel's attention to, 
though, is this premise put forward by the New York Times and 
by AFR that H.R. 992 opens up a taxpayer bailout or backstop. 
Let me read the very first line of Section 716, which is in no 
way altered or amended by H.R. 992: ``Prohibition on Federal 
assistance. Notwithstanding any other provision of law, 
including regulations, no Federal assistance may be provided to 
any swaps entity with respect to any swap, security-based swap, 
or other activities of the swaps entity.'' Now, I am not a 
lawyer, but that looks to me to be a very clear prohibition on 
any Federal assistance associated with swaps activity.
    So my question to the panel is--and anybody can answer it--
can the fact of that very clear prohibition on any taxpayer 
bailout for swaps activity, is there any merit to the 
contention that H.R. 992--and, again, I quote the AFR letter--
``opens us up to taxpayer backstop for derivatives activity?''
    Yes, Dr. Parsons?
    Mr. Parsons. Yes, I think it does. I think it is very clear 
that we have too-big-to-fail banks. I think no matter what 
first line you write in a piece of legislation that says, ``We 
will never, ever bail them out,'' the day that the dominoes 
start falling, it would be a huge mistake if you didn't bail 
them out. And you will be forced to do it.
    The only way to prevent a bailout is to plan ahead of time 
for institutions which can be resolved and closed down. 
Derivatives present a very significant danger for that problem. 
We know that there was a run on the bank of Bear Stearns--
    Mr. Himes. Dr. Parsons, can I just ask you a question? I am 
running out of time here. The bailout that was done in 2009 was 
done pursuant to clear legal authority on the part of the 
Federal Reserve, was it not?
    Mr. Parsons. The problem was the--
    Mr. Himes. And--
    Mr. Parsons. The Federal Reserve has no ability to resolve 
those banks. It didn't have the legal tools in its hands to 
close them down.
    Mr. Himes. No, I understand that, but there was--
    Mr. Parsons. And the derivative portfolio--
    Mr. Himes. There was clear legal authority, and that 
subsequently has been altered, of course. If I understand your 
argument, you are making the argument that we would be required 
to violate the law if we were again faced with the need to or 
the proposition of buttressing too-big-to-fail institutions.
    Mr. Parsons. If we can avoid having too-big-to-fail 
institutions, then there won't be a problem with the law and 
necessity conflicting. Derivatives present a very major problem 
in the event of a crisis. We had a run on the bank of Bear 
Stearns, and part of that run was a run on the derivatives 
portfolio of the bank. We had a run on Lehman, and part of the 
run was a run on the derivatives portfolio of Lehman.
    The Financial Crisis Inquiry Commission documented both of 
those and identified that portfolio as a major source of the 
run problem for both of those banks.
    Mr. Himes. If the chairman will indulge me for just one 
second, under H.R. 992, of course, all structured asset-backed 
swaps are, in fact, pushed out, so would you fear that the 
interest rate, currency, commodity swaps that would be 
permitted in federally-backed institutions, would you fear that 
there is a significant risk that those swaps would, in fact, 
create a system danger within those institutions?
    Mr. Parsons. Yes, I think it is important when we try to 
prevent a repeat of 2008 that we not try to prevent just the 
very, very, very same things from happening, but that we learn 
a lesson and say, oh, wait a second. Letting that kind of thing 
go on without our paying attention is a problem. All 
derivatives pose a risk. All derivatives have the danger of a 
bank run. It is not just structured derivatives.
    Mr. Himes. Okay, thank you, Mr. Chairman. I yield back.
    Mr. Bentsen. Mr. Chairman, could I just--if I might, to Mr. 
Himes, I think his points were well made. Two points: One, 
Section 716 wouldn't apply to Bear Stearns, and it wouldn't 
apply to Lehman, because neither of them were commercial banks. 
They were just broker-dealers. Neither of them were bank 
holding companies or financial services holding companies.
    Two, Dodd-Frank does provide--not for the Federal Reserve, 
but for the Federal Deposit Insurance Corporation--the ability 
to step in and take over and resolve a failing institution. So 
that is in statute. I know it is of much debate, but that is in 
statute today because of Dodd-Frank.
    And the last thing I would say is, there is risk in the 
financial system, be it a derivative, be it to a consumer loan. 
That is the nature of finance and credit intermediation.
    Chairman Garrett. I thank you all for those answers and for 
that discussion and also for the gentleman from Connecticut's 
candid observation on the journalistic integrity of the 
Huffington Post and Mother Jones, as well.
    [laughter].
    So, thank you.
    Mrs. Wagner is recognized.
    Mrs. Wagner. Thank you, Mr. Chairman. I am pleased today 
that we are able to address a lot of these issues relating to 
Title VII of Dodd-Frank in a bipartisan way, and I know when 
individuals or families around the country hear us talk about 
derivatives or swaps, it is easy to lose sight about who 
exactly is impacted by misguided regulations. So I do want to 
note a survey of Main Street businesses that was released 
yesterday by the Center for Capital Markets Competitiveness, a 
U.S. Chamber-sponsored entity. It says, of all businesses which 
responded to that survey, one-half stated that they are ``very 
closely involved'' with the use of derivatives. Many of them 
use these instruments to manage risk and keep costs low for 
their customers, so we have to keep in mind that it is 
manufacturers, technology companies, their customers, and 
others that are impacted when regulation in this area misses 
the mark.
    The survey also showed that for an overwhelming number of 
these businesses, it is important that the financial 
institution they use ``has a wide spectrum of services to meet 
their needs.'' In other words, if regulation leads to fewer 
choices and less competition in the market, there is a real 
price to be paid.
    With that said, I do want to focus my questions on Chairman 
Garrett's bill, because I believe robust economic analysis is a 
critical factor that, frankly, I think has been missing 
recently.
    Congressman Bentsen, thank you for being here. Thank you 
all for being here. But the SEC was given an enormous amount of 
new authority as a result of Dodd-Frank and was tasked with 
writing around 100 different rules. Are you concerned that a 
proper cost-benefit analysis has been a missing factor in some 
or all of these rules?
    Mr. Bentsen. I think that the SEC, obviously, saw in the 
case of the proxy access case that a cost-benefit analysis was 
a necessary legal principle. And I think Congress has 
recognized and the Administration has recognized, certainly in 
Executive Branch departments, that there is a need for cost-
benefit analysis, that regulation isn't free. There is a need 
for regulation, but you should weigh various factors in 
crafting that regulation.
    And so, we think it is appropriate to follow up on what the 
Obama Administration and the Clinton Administration proposed by 
Executive Order. And again, to be fair, I think we are seeing 
the SEC now beginning to build a cost-benefit analysis 
structure, but we think this is an appropriate approach to 
take.
    Mrs. Wagner. And you do agree that this needs more 
attention, especially in the wake of Dodd-Frank?
    Mr. Bentsen. Absolutely.
    Mrs. Wagner. In your opinion, what has the SEC's track 
record--you talked a little bit about their movement forward in 
this--been in considering the cumulative costs of regulation 
and determining whether a regulation is inconsistent or 
duplicative of other regulations?
    Mr. Bentsen. Congresswoman, I almost think that is a 
broader question that--I don't think anyone has looked at the 
cumulative cost associated with all of the Dodd-Frank reforms. 
It doesn't mean not necessarily to do them, but I do think it 
is important to understand what the cost is in terms of capital 
allocation and capital formation and making--and then the other 
point you make is consistency, that you can't do these in a 
silo and just say, oh, we are just going to look at Title VII, 
we are going to ignore what is in Title I or Title II or the 
other costs attendant to that, but they all come together.
    Mrs. Wagner. Could you explain why it is, in fact, sound 
policy to exempt enforcement actions and emergency orders from 
the economic analyses?
    Mr. Bentsen. I think that would be appropriate in the sense 
that it reflects the enforcement and investor protection 
component of the Commission that you want to make sure that 
they have the ability to move swiftly in enforcing the law.
    Mrs. Wagner. I think the President actually put forward 
some very good principles for regulators in his Executive Order 
2 years ago, and considering that the SEC has been one of the 
more active regulators recently, wouldn't you agree that it 
makes a lot of sense to codify those principles for the SEC, as 
well?
    Mr. Bentsen. For the SEC and the CFTC, I think that the 
President can only do so much by way of Executive Order, but I 
think it sets the pathway that this is as appropriate for 
independent agencies as it is for Executive Branch agencies.
    Mrs. Wagner. Thank you. I appreciate that, Congressman 
Bentsen.
    And I yield my time back, Mr. Chairman. Thank you.
    Chairman Garrett. The gentlelady yields back.
    Mr. Foster is now recognized.
    Mr. Foster. One of my questions is, I guess, kind of a 
detail. In regards to the H.R. 677, the inter-affiliate bill, 
one of the--there are a couple of changes made with respect to 
last year's bill, and one of them is the change that would not 
include the affiliates of bank swap dealers and the affiliate 
exemption. And I was wondering, does this change allow in 
principle to have back-to-back swaps with a U.S. affiliate as a 
mechanism where you could potentially re-import overseas swap 
exposures with the--you have an overseas affiliate and you have 
a swap, and then it comes back to the United States, so that 
you effectively have a loophole? Do you understand what I am 
worried about here?
    Mr. Bentsen. I think we would be concerned that we think 
from a technical matter that the provision maybe should be 
looked at, because we think that the bank--that bank inter-
affiliate swaps should be included in the exemption.
    In terms of back-to-back swaps, cross-border back-to-back 
swaps, I think that--in something we have talked with the CFTC 
about and the SEC about is, the reason for inter-affiliate 
swaps is a risk management tool within institutions, and where 
you have global institutions, they are having to manage risk 
globally.
    So they are subject to tremendous oversight and regulation 
even within inter-affiliate exemption, so we don't think you 
should necessarily bifurcate and not allow that treatment 
cross-border.
    Mr. Foster. Okay. And it is my understanding that the 
affiliates don't have to be wholly owned or anything like that, 
so that there can be misalignment of interests, where you have 
a partially owned affiliate? Or something like that? So this is 
not like you are just netting out to zero the risk from 2 
affiliates that have 100 percent common ownership, so that they 
are actually--in principle, the situation could arise where you 
have a misalignment, where a part of the risk is transferred 
out of the organization, because of partial ownership and one 
of the affiliates involved in inter-affiliate swap.
    Mr. Bentsen. You are talking about either--within a 
financial institution or within a corporate entity?
    Mr. Foster. Yes. Yes. One or both.
    Mr. Bentsen. I don't know if Mr. Deas wants to--
    Mr. Foster. Is that a legitimate worry? Actually, if I 
could just go to a more general question, in this job, you get 
a massive respect for the ability of Senate not to do stuff, 
and so if we do not pass H.R. 677 and we are left only with the 
CFTC rulemaking, what are the major gaps that you see in the 
response of this? What is left undone by the CFTC rulemaking 
that would not be covered?
    Mr. Deas. Congressman, one of the things that we are 
concerned about is that the central Treasury units that serve 
the risk-mitigating function of taking these exposures from 
majority-owned subsidiaries and netting them out and then doing 
one smaller trade with a bank, for instance, could themselves 
be designated as financial entities and, if so, even though 
they are wholly owned subsidiaries of a U.S. manufacturing 
company like my own, they would be as financial entities 
ineligible for exemption from margining central clearing, all 
the end-user exemptions.
    And so, that is one of the important aspects of H.R. 677, 
that it would make them eligible for the end-user exemptions.
    Mr. Foster. Okay, but that is also something that in 
principle could be handled by a rulemaking--further rulemaking 
by the CFTC, correct?
    Mr. Deas. Well, sir, it hasn't been, and so that is why--
and here we are, you know, 2\1/2\ years on, and so these 
ambiguities would require huge increases in information 
systems, if they are not resolved, so that we could do real-
time reporting. It would cause us to make an investment in 
technology almost replicating a bank's trading room, in order 
to--
    Mr. Foster. Sure. I understand the downside.
    Mr. Deas. Yes, sir.
    Mr. Foster. Yes, very well. And just a quick question on 
the cost-benefit, this presumably will require significantly 
more resources for economic analysis before the rulemaking. I 
would normally have thought this would be accompanied by an 
increase in the budget of the regulator. And I was wondering if 
you had any comment on whether the extent to which this will 
simply just create a further delay in rulemaking, dilution of 
the SEC's ability to undergo enforcement, the fact that there 
is not--this is not accompanied by an increase in the budget to 
cover this additional workload? Any comments on that?
    Mr. Deas. Sir, I know there are various rules in this body 
on things that have to be offset, and I wouldn't be prepared 
to--I wouldn't pretend to understand that.
    I can tell you that the economic analysis I cited to you of 
the $269 million that we would have to set aside to margin 
derivatives was one that end-users funded--we funded ourselves. 
We got together and that is really the only economic analysis 
that I have seen on that issue.
    I would just think, with all the resources of the Federal 
Government, somewhere that work ought to be done. And I 
wouldn't presume to say how that should be funded.
    Mr. Bentsen. I would just add, again, to give credit, the 
SEC has built out their RiskFin group, which started under 
then-Chairman Schapiro, and so they--I can't speak to the 
budget. That is your business, not mine. But they have started 
down that process in establishing--not just for cost-benefit, 
also look at, take an asymmetric look at markets, but in 
addition to build out a cost-benefit apparatus.
    Mr. Foster. Okay, thank you. I yield back.
    Mr. Hurt [presiding]. Thank you. The gentleman yields back. 
The Chair now recognizes Mr. Hultgren for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you all 
for being here.
    First of all, I just want to agree with, and second, my 
good friend and colleague, Congressman Himes, on many of his 
statements. I do have a couple of questions or clarifications 
that I wanted to ask.
    Mr. Bentsen, you issued a statement in support of H.R. 992 
when it was introduced and highlighted the strong reservations 
from multiple Federal prudential regulators expressed regarding 
Section 716. I wonder if you could expound briefly on those 
concerns. And why are regulators nervous about sending certain 
swap trades to less-regulated entities?
    Mr. Bentsen. I think that they are concerned for two 
reasons. I think one concern is the creation of additional 
affiliates or subsidiaries, which creates a separate entity 
that has to be regulated, and the other concern is it takes 
capital from the parent or the holding company and puts it in 
another affiliate, so I don't think they like that. I think 
they like to have the supervision that they have over the 
direct entity, and this goes back to when Dodd-Frank was being 
adopted, but I think that concern still exists today, because 
Dodd-Frank in statute gives the prudential regulators even 
greater, more explicit regulatory oversight of both the holding 
company and the various entities.
    So I think that they feel it is better to keep it close in 
and to keep the capital close in.
    Mr. Hultgren. Mr. Deas, from your perspective--really, from 
the perspective of end-users--many of whom use depository 
institutions as counterparties for their swap trades--could you 
talk just a bit about how they might be affected by pushing out 
certain swap trades, and whether if commodities, equities, and 
credit derivatives are spun off to affiliated entities, would 
you expect prices to go up for end-users?
    Mr. Deas. Yes, sir. We believe that--one of the themes of 
my comments here today has been that capital--excessive capital 
that is required to be placed against a derivative transaction 
has a cost that ultimately end-users and their customers have 
to bear. And so if these are pushed out into separately 
capitalized subsidiaries, the banks which have done that will 
need to get a return on that capital, and that will, we have 
estimated for--I think in my testimony I mentioned, for a 7-
year interest rate swap, it could increase the credit spread by 
a factor of three.
    And for a less creditworthy entity than my corporation, 
which has an $8 billion equity market cap, the formula works in 
a way to increase that credit spread almost exponentially. So 
those costs ultimately would float through the economy and we 
fear would result in the loss of jobs.
    Mr. Hultgren. Mr. Bentsen, back to you quickly, if I may. 
Am I correct that other jurisdictions have not passed similar 
prohibitions as those contained in Section 716, foreign 
jurisdictions?
    Mr. Bentsen. Not to my knowledge, no, sir.
    Mr. Hultgren. I wonder also, am I correct that all swap 
activities that remain within banks would be subject to a 
finalized Volcker Rule?
    Mr. Bentsen. That is correct.
    Mr. Hultgren. So these trades, if a bank is involved, would 
still generally be client-facing, is that right?
    Mr. Bentsen. We don't know where the Volcker Rule is going 
to come out, and to be fair, an affiliate or subsidiary of a 
bank would be subject to Volcker, as well. But you are right. 
Volcker would apply.
    Mr. Hultgren. Okay. All of these swap trades are still 
subject to the new regime outlined under Title VII, including, 
but not limited to, the reporting requirements, entity 
registration, exchanging clearing requirements. Is that right?
    Mr. Bentsen. That is correct.
    Mr. Hultgren. One last question. And just, again, Mr. 
Bentsen or others--I just have a minute left--but does the 
CFTC's expansive international reach and its lack of 
coordination with foreign regulators have the potential to 
impose additional costs on end-users? And I wonder again, if 
time allows, what effects might this have on the ability of 
end-users to hedge their risks?
    Mr. Bentsen. I don't know if you want to comment--
    Mr. Hultgren. Maybe it is best going to you.
    Mr. Deas. Sir, we fear that there could be a foreign 
regulatory arbitrage that would disadvantage U.S. users of 
derivatives vis-a-vis our foreign competition, that our costs 
would go up while their regulators would not have imposed those 
requirements. And so, ultimately, that is where the cost would 
be.
    Mr. Hultgren. I see we are winding down. I only have 20 
seconds left. I yield back the balance of my time, so that 
others may be able to follow up further on this, if they are--
    Mr. Hurt. Thank you. The gentleman yields back.
    The Chair now recognizes Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman.
    I want to thank the panelists for coming today and for your 
testimony. And I want to thank and compliment the members on 
both sides of the aisle who have worked on these pieces of 
legislation, most of which--I think all but one of the bills is 
a repeat from last time, with some minor changes, and so we are 
going about it again. And most of those bills passed last time, 
as I recall, some here in committee by a voice vote, and all of 
them on the Floor with votes of over 300 Members.
    And I say that at the outset, because I like to associate 
myself with some of the frustration that Congressman Himes 
articulated in terms of some of the public debate that has been 
in the press and in other places about this legislation, that 
somehow these pieces of legislation are trying to roll back all 
of Dodd-Frank.
    Dr. Parsons, I read your testimony and listened to your 
comments today, and you used some pretty strong language to 
criticize the bills that are before us. And in your testimony, 
on page two, you say, ``The subcommittee should not advance 
legislation that weakens the security of U.S. taxpayers by 
inviting continued risky behavior by the largest U.S. banks and 
by return to the deregulation of derivative markets.''
    Congressman Himes talked about all the regulations 
contained in Dodd-Frank and, frankly, significant changes to 
this situation prior to 2008. Could you be specific about the 
things in these bills that trouble you the most that would 
undermine, as you say, the security of the U.S. taxpayer?
    Mr. Parsons. To speak about the swaps pushout, I think I 
replied to Mr. Himes very directly about--
    Mr. Carney. Right, and he said that it would basically 
require us to--or the Treasury to violate the law, which--I 
have heard that not just with respect to this piece of 
legislation, but with Dodd-Frank itself, in terms of resolution 
authority, that somehow we would do something different than 
what the law says that we are required to do or that the 
Administration would, I guess.
    Mr. Parsons. I understand that people may disagree. I am 
just answering your question. That is my reason on this 
particular issue, the pushout bill--
    Mr. Carney. Okay.
    Mr. Parsons. --that because I think we have--in the larger 
picture of things, we have not yet finished taking care of too-
big-to-fail, more steps--it would be--it is important to finish 
that job. I think when we invoke names like Bernanke and Bair 
and Frank, and say that they are in favor of it, it is a little 
bit out of context, because it would--there are different ways 
of solving the too-big-to-fail problem.
    Mr. Carney. Okay, let's put too-big-to-fail aside for a 
second. Congressman Frank, by the way, supported most of these 
bills the last time around, with the exception of one, which 
has changed dramatically from the last time. So pushout gives 
you heartburn because of the too-big-to-fail problem. What else 
among the bills, in your view, undermines the taxpayer 
security?
    Mr. Parsons. That is the one for the taxpayer security. The 
other ones are because of not having the cop on the beat, so to 
speak, returning to a less regulated derivatives market.
    Mr. Carney. So by exempting some of the end-user venues and 
that type of thing--the purpose in doing all that is to not--
first of all, are there--in your view, are there systemic 
issues that are implicated in those end-user legislative 
changes?
    Mr. Parsons. Yes, absolutely. I think--first of all, end-
users are already exempt in the legislation. What we are 
concerned about is banking supervisors, prudential supervisors 
who are worried about the credit risk on the balance sheets of 
their various financial institutions, imposing prudential 
standards for how those banks manage margin, manage credit risk 
embedded in derivatives.
    And I am worried that we seem to think that instead of a 
race to the top of having financial markets with good 
standards, where we lead the global community to an efficient 
market that is sound and everything, we are desperately saying, 
``Oh, my God, the other jurisdiction isn't doing something, we 
are losing competitiveness.''
    If you just look around you, we have a futures market in 
oil that has no exemption from clearing mandates, lots of 
margin is put up. It is the best-run commodity market in the 
world, and traders from all over the world come to the United 
States to this market, which mandates clearing, has no 
exemptions whatsoever, and trade there, because good markets 
win business. Sound, well-regulated businesses win business.
    Exempted markets, loopholes, loopholes, loopholes for this 
constituency and that constituency, do not promote a successful 
marketplace. No other country has been able to compete with our 
oil derivatives market, except by creating unsupervised 
markets.
    Mr. Carney. I see my time has expired. I wish I had more 
time, but I guess--
    Mr. Hurt. I thank the gentleman. The gentleman's time has 
expired.
    The Chair recognizes Ms. Sewell for 5 minutes.
    Ms. Sewell. Thank you, Mr. Chairman.
    I want to thank our panel participants today. This hearing 
gives us yet another opportunity to hear from witnesses and 
discuss Dodd-Frank's derivative reform and some of the 
challenges facing the U.S. and international markets.
    We must, I think, remain vigilant in making sure that we 
address any unintended consequences of this new regulation, and 
that is why I support the bipartisan and common-sense technical 
corrections and clarifications, such as H.R. 742, the Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 
2013, which helps to ensure that regulators continue to have 
the transparency in the derivatives markets needed, but at the 
same time helps to mitigate the risk in our domestic and our 
international markets.
    I really do want to applaud both the CFTC and the SEC in 
drafting and implementing the crucial new regulations, many 
aspects of which were fine, but I think that in helping us 
clarify it, we only make this legislation better.
    So I actually have two questions. One is to Mr. Childs. Can 
you please provide your perspective on how your trade 
repository has responded and cooperated with the regulators in 
the crisis and how the indemnification provisions would help or 
hurt those effects in the future?
    Mr. Childs. Yes, thank you for that question. There is very 
rarely a day that goes by that we are not actually talking to 
the CFTC about how we as a swap data repository can help 
increase the transparency in the derivatives markets, and how 
we can provide them the data that they need to fulfill their 
function, how we can improve upon that data. So there is a very 
good collaborative effort at the operational level with the 
regulators on the provision of data.
    Specifically to the indemnification side of the language, 
obviously, as we talked about earlier, it is really important 
in global markets that the data is provided to those in 
regulatory roles that need that data. And the indemnification 
language, as it stands at the moment, just makes that sharing 
of data that much more difficult.
    Ms. Sewell. Thank you.
    Mr. Bentsen, on cross-border issues, what are your concerns 
related to the proposed CFTC cross-border guidance?
    Mr. Bentsen. I would say we have three concerns. Number 
one, in terms of what the U.S. person definition is, the 
initial proposal was a departure from established law and 
regulation with respect to who is deemed a U.S. person or not, 
that had a potential discriminatory effect at worse or at least 
a redundant effect.
    The second is the substituted compliance regime, which went 
across, I think, 16 different transactional or entity-level 
activities on almost a country-by-country basis and company-by-
company basis that we think really sort of goes against the 
international comity and the sort of traditional mutual 
recognition approach.
    And then the third would be a matter of process, both in 
terms of coming out too quickly and then having to backfill, as 
I mentioned earlier, with various exemptive relief and no 
action relief, which we have been to three stages of now and we 
will have more, but the other in doing it--in terms of guidance 
as opposed to an actual rule proposal, which we think is 
appropriate.
    And, lastly, we think, given that cross-border application 
really tees off of definitions, and Congress wisely said that 
definitions had to be proposed jointly by the SEC and the CFTC, 
that would have been appropriate here.
    Ms. Sewell. Very good. Are there any examples of any 
adverse impact on market participants? Can you give us--
    Mr. Bentsen. We have seen--we have had members report to us 
that certainly around October 12th, which was sort of the 
kickoff date of swap dealer registration in the United States, 
that confusion over who would be deemed a swap dealer or not, a 
major swap participant, resulted in certain foreign 
counterparties moving away with swap entities that were 
required to register as a swap dealer in the United States. And 
so, that continues to be a concern if there is confusion in the 
marketplace around the globe.
    Ms. Sewell. Thank you. I yield back the rest of my time.
    Mr. Hurt. The gentlelady yields back.
    Before we adjourn, are there any Members who wish to be 
recognized? No? With that, I would like to thank each of the 
witnesses for appearing today for this important testimony.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, this hearing is now adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]









                            A P P E N D I X



                             April 11, 2013



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