[Senate Hearing 113-83]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-83

 
   MITIGATING SYSTEMIC RISK IN FINANCIAL MARKETS THROUGH WALL STREET 
                                REFORMS

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



                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING EFFORTS BY THE SEC AND CFTC TO IMPROVE FINANCIAL STABILITY 
       AND REDUCE SYSTEMIC RISK IN THE FINANCIAL MARKETS THROUGH 
    IMPLEMENTATION OF THE DODD-FRANK WALL STREET REFORM ACT AND THE 
                    CONSUMER PROTECTION ACT OF 2010

                               __________

                             JULY 30, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

                      Jeff Siegel, Senior Counsel

                      Elisha Tuku, Senior Counsel

                 William Fields, Legislative Assistant

                  Brett Hewitt, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

                Hope Jarkowski, Republican SEC Detailee

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 30, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                               WITNESSES

Mary Jo White, Chair, Securities and Exchange Commission.........     3
    Prepared statement...........................................    23
    Responses to written questions of:
        Chairman Johnson.........................................    49
        Senator Crapo............................................    52
        Senator Corker...........................................    55
        Senator Johanns..........................................    56
Gary Gensler, Chairman, Commodity Futures Trading Commission.....     5
    Prepared statement...........................................    39
    Responses to written questions of:
        Chairman Johnson.........................................    57
        Senator Crapo............................................    58

              Additional Material Supplied for the Record

United States Conference of Mayors Resolution submitted by
  Senator Menendez...............................................    61

                                 (iii)


   MITIGATING SYSTEMIC RISK IN FINANCIAL MARKETS THROUGH WALL STREET 
                                REFORMS

                              ----------                              


                         TUESDAY, JULY 30, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    Today we welcome Chair White and Chairman Gensler to update 
the Committee on important work underway at the SEC and CFTC to 
implement the Wall Street Reform Act and reduce systemic risk 
in our financial markets. We look forward to hearing about the 
progress being made to better oversee the derivatives market, 
finalize the Volcker rule, and implement changes to money 
market funds and credit rating agencies, among other reforms.
    On derivatives, the SEC and CFTC should be proud of the 
progress made to date. Important rules governing clearing and 
swap data reporting have taken effect, with the majority of 
other rules slated to be completed and take effect in the 
months ahead. Also, due in no small part to the work of both 
agencies, the U.S. has provided the template for how other 
Nations should regulate derivatives. This large, global market 
demands strong, coordinated regulations to help improve 
financial stability, and I commend the recent CFTC agreement 
with the EU Commission to establish a framework that relies on 
strong cooperation between our two jurisdictions. As you work 
to harmonize international swap regulations, the SEC and CFTC 
should continue to harmonize your separate rules in a way that 
avoids market disruption or fragmentation.
    On other reforms, the SEC has made progress to address 
areas of systemic risk by proposing rules to implement money 
market fund reform. The proposed rules follow earlier reform 
measures taken by the SEC, and I hope the considerable work 
that has been done in this area will result in a more stable 
framework for the money market fund market.
    We also look forward to hearing more about the SEC's 
efforts to address flaws in the operation and use of credit 
ratings that were exposed by the financial crisis. As required 
by the Wall Street Reform Act, there has been extensive 
examination of this issue, and I look forward to improvements 
in the credit rating process.
    Last, actions that improve investor protection will restore 
confidence in financial markets and bolster financial 
stability. To that end, I want to encourage the SEC and CFTC to 
continue to use every tool Congress gave them to stop fraud and 
protect investors. That is also why I believe the SEC should 
move forward with adding sensible safeguards in the private 
placement market.
    With that, I look forward to hearing today's testimony, and 
I now turn to Ranking Member Crapo for his opening remarks.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman, and I agree with 
the concerns and issues that you have raised. Today we will 
hear from SEC Chair White and CFTC Chairman Gensler on their 
implementation of financial reform, including Dodd-Frank and 
the JOBS Act.
    Having just passed Dodd-Frank's third anniversary, there is 
still considerable work to be done. Among other things, this 
hearing provides an opportunity to learn more about the steps 
they are taking to fix the lack of coordination and 
harmonization of rules among the United States and 
international regulators for the cross-border derivatives 
market.
    The unique role that the securities, futures, and swaps 
markets each play has informed the manner in which the SEC and 
CFTC regulatory regimes have developed since the 1930s. 
Notwithstanding these differences, it is critical that the SEC 
and CFTC harmonize their regulatory approaches where sensible, 
both domestically and abroad.
    True harmonization is not only getting on the same page, 
but it is working together to get on the right page. The U.S. 
markets are the most liquid in the world and must remain so.
    Market participants must not be discouraged from entering a 
market that will allow them to allocate their risks, hedge 
their investments, and grow their business. The cumulative 
regulatory burdens that will flow from a regime that is not 
truly harmonized will work against the flow of free capital in 
the United States and abroad.
    The CFTC has issued an array of interpretive guidance, 
exemptive orders, and no-action letters on cross-border issues. 
The CFTC's initial proposal for the cross-border implementation 
of Title VII received criticism both domestically and in 
foreign markets participants and regulators as being confusing, 
overexpansive, and harmful.
    The final cross-border interpretive guidance announced by 
the CFTC on July 12th continues to raise questions both as to 
its substance and the process surrounding its issuance.
    In the hours leading up to the CFTC's final guidance, the 
CFTC and European regulators issued a joint statement regarding 
how international coordination of rulemaking should proceed. 
This path forward has been characterized as an ``agreement'' 
when it appears to be a statement of future collaboration. 
While this development may prove to be constructive, a number 
of questions still remain.
    For example, how will conflicts in rules for central 
clearinghouses, which will handle the large majority of trades 
and collateral posted by swap dealers, be addressed across 
borders?
    We also need information as to what agreement has been 
reached, if any, regarding treatment of margin for end users.
    Timelines for implementation remain very much in flux, and 
the path forward does not make mention of Canada or various 
Asian jurisdictions where swap dealing takes place and where 
regulatory reform is progressing.
    I look forward to hearing Chairman Gensler's testimony on 
what exactly was agreed upon with respect to these and other 
issues. With these questions unanswered, it is clear there is a 
lot of work to be done on international harmonization.
    The SEC proposed its own cross-border rule on May 1st. In 
light of the far-reaching significance of this rule, the SEC 
also reopened comment periods for many of its previously 
proposed security-based swap regulations. The public is now 
faced with two marginally similar plans from two agencies 
issued through very different processes--the CFTC through 
interpretive guidance and examinations, the SEC through notice 
and comment rulemaking.
    For example, both cross-border schemes contemplate 
substituted compliance, which is intended to provide foreign 
market participants with a chance to continue to abide by their 
own country's requirements if those requirements are deemed 
comparable to U.S. requirements. The willingness of each agency 
to grant substituted compliance for foreign jurisdictions is 
questionable. The details matter.
    I look forward to hearing the views of Chair White and 
Chairman Gensler on these issues of truly international 
significance. Our capital markets are the preferred destination 
in the world and cannot be tarnished by virtue of two 
regulators that appear to be going in different directions and 
not working effectively with each other and their international 
counterparts.
    If the current lack of coordination persists, it would not 
be surprising to me to hear additional calls for merging the 
two agencies into a single regulator for the securities, 
futures, and swaps markets.
    I appreciate, again, your holding this hearing, Mr. 
Chairman, and I look forward to hearing from our witnesses.
    Chairman Johnson. Thank you, Senator Crapo.
    Due to votes scheduled on the floor this morning, opening 
statements will be limited to the Chair and Ranking Member. The 
record will be open for the next 7 days for opening statements 
and any other materials Members would like to submit. Now I 
would like to introduce our witnesses.
    The Honorable Mary Jo White is the Chair of the Securities 
and Exchange Commission. She was confirmed to this position in 
April 2013.
    The Honorable Gary Gensler is the Chairman of the Commodity 
Futures Trading Commission. He was confirmed to this position 
in May of 2009.
    Chair White, please begin your testimony.

  STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE 
                           COMMISSION

    Ms. White. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, thank you for inviting me 
to testify on behalf of the Securities and Exchange Commission 
regarding the steps the agency has taken in an effort to reduce 
systemic risk in our capital markets. We recognize the 
importance of addressing systemic risk in a manner that 
preserves the strengths of our financial system and protects 
both investors and taxpayers alike.
    There are many ways in which the Commission has sought to 
reduce the likelihood of systemic risk, many of which stem from 
our efforts to implement the various provisions of the Dodd-
Frank Act. I will highlight several of these in my oral 
testimony. Other steps are described in my written testimony.
    First, under Title VII of the Dodd-Frank Act, the 
Commission, along with the CFTC, has focused on creating a new 
oversight regime for the global, multi-trillion-dollar over-
the-counter derivatives market. To put this regime in place, 
the Commission has proposed or adopted virtually every rule 
required under Title VII. It is a regime aimed directly at 
mitigating systemic risk in the financial markets.
    In 2012, along with the CFTC, we adopted rules defining key 
products and entities. In addition, the SEC proposed important 
rules setting capital requirements for security-based swap 
dealers and describing how those dealers would have to collect 
margin collateral. In the event of a failure, these capital and 
margin rules are designed to help protect customers and 
counterparties and limit the impact on the capital markets and 
the broader economy.
    Given the global nature of the derivatives market, the 
Commission also has been working with our regulatory 
counterparts abroad and the CFTC to coordinate our approach. In 
May, we issued a proposal outlining which regulatory 
requirements would apply when a security-based swap transaction 
occurs in part within and in part outside the United States. 
Comments are due on August 21st.
    Second, the Commission has been serving as the primary 
supervisory agency for four of the eight financial market 
utilities designated as systemically important by the Financial 
Stability Oversight Council. Under Title VIII of the Dodd-Frank 
Act, FSOC is authorized to make such a designation if the 
failure or disruption of the financial market utility could 
increase the risk of significant liquidity or credit problems 
spreading among financial institutions or markets. The SEC 
examines each of these utilities annually and reviews all 
proposals that affect the level and nature of risk of these 
entities in light of their systemic importance.
    Third, the Commission adopted rules last year requiring 
registered clearing agencies to meet comprehensive standards 
with respect to risk management and operations. The 
requirements are designed in part to strengthen and promote 
consistency in the regulation of clearing organizations, 
thereby reducing systemic risk in the financial markets.
    A fourth step we have taken under Title IV of Dodd-Frank is 
to establish reporting requirements for investor advisers to 
private funds on the new Form PF. The information submitted is 
intended in part to assist the FSOC in better assessing 
systemic risk across the market. The filing requirements for 
Form PF are scaled to the size of the adviser.
    Last week, the SEC filed its first annual report to 
Congress relating to the use of the data collected. In 
addition, under Title I of Dodd-Frank, as the Chair of the 
Commission, I serve as a voting member of FSOC. Among other 
things, FSOC considers whether certain nonbank financial 
companies should be deemed ``systemically important'' and 
thereby subject to heightened prudential supervision by the 
Federal Reserve Board.
    The Commission has also taken additional steps intended to 
further reduce systemic risk in the operation of our capital 
markets. For example, in March of this year, the Commission 
proposed Regulation SCI, which stands for systems, compliance, 
and integrity. Regulation SCI requires exchanges and clearing 
agencies to maintain policies and procedures reasonably 
designed to meet certain technology standards, and it would 
require appropriate corrective action if problems occur.
    The Commission also approved a ``limit up-limit down'' 
mechanism that will create speed bumps to reduce abrupt market 
movements in individual securities, and put in place new 
marketwide circuit breakers to provide for brief, coordinated, 
cross-market trading halts during sharp declines in the 
securities market.
    As a final example of the agency's work to reduce systemic 
risk, in June the Commission proposed reforms designed to 
reduce the susceptibility of money market funds to heavy 
redemptions so as to mitigate potential contagion effects and 
to increase the transparency of the funds' risks. Comments are 
due September 17th, and we look forward to public input on all 
aspects of this proposal, including whether the proposal 
appropriately addresses systemic risk concerns while 
maintaining money market funds as a viable investment product.
    The men and women of the SEC have been tasked with expanded 
responsibilities to help mitigate systemic risk in the 
financial markets. I am proud of what they have accomplished, 
and I am confident that we will be able to also complete the 
remaining tasks before us.
    Thank you very much. I would be happy to answer any of your 
questions.
    Chairman Johnson. Thank you.
    Chairman Gensler.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Gensler. Good morning, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee.
    Today's hearing comes as market participants are well along 
a path implementing the congressionally mandated swaps market 
reforms, and the CFTC has nearly completed rule writing to 
implement these critical reforms. I am pleased to testify along 
with SEC Chair Mary Jo White--the second time we are testifying 
together in her now 3 months of tenure. But I am also pleased 
to say the CFTC has benefited greatly from the SEC's input and 
collaboration. On every step of this journey to bring about 
swaps market and securities swaps market reform.
    Just as we have commonsense rules on our roads--by that, I 
mean traffic lights, stop signs, speed limits, and, yes, cops 
on the streets to enforce the rules--the comprehensive swaps 
market reforms that are nearly complete include complementary, 
robust rules of the road to benefit both those who trade 
swaps--those on the roads--and also those who do not, the 
bystanders in our society. Americans would never accept a city 
or highway system with no rules, no street lights, no traffic 
lights, or no cops.
    Middle-class Americans paid the price of the financial 
crisis with their jobs, their pensions, and their homes. They 
were the bystanders that were not even standing on these 
complex roads called ``derivatives.'' The crisis cost 8 million 
jobs and thousands of businesses, and the swaps market was 
right at the center of it.
    And now the American public no longer will need to accept a 
dark market, that is, the swaps market, lacking commonsense 
rules of the road. That is because based on what Congress put 
in place and our completed rules, reforms now shine light on a 
marketplace that has been opaque for too long. Both the public 
and regulators have already benefited from what is called 
``real-time reporting.'' This started last December. It has 
been phasing in. There are some additional phasing dates in 
August and September, but for over 9 months, that full data 
set, regulators, like the SEC, like the Federal Reserve, and we 
have had access to it, and foreign regulators as well. Further, 
markets will shortly benefit from something called ``swap 
execution facilities,'' a new trading facility that will bring 
greater competition, access, and pretrade transparency along 
the way.
    Completed reforms also mitigate risk and broaden market 
access through something called ``central clearing,'' a key 
part of the G20 commitment that the President laid out in 
Pittsburgh in September of 2009. The vast majority of interest 
rate swaps and credit index swaps are already coming into 
central clearing, but, again, key compliance dates go along the 
way through October of this year--October 9th will be an 
important date for some of the cross-border swaps to come into 
clearing.
    Nonfinancial end users, as Congress dictated, will have a 
choice on central clearing, and consistent with this intent, 
the CFTC has proposed that margin for uncleared swaps will not 
have to be collected from such end users. To anticipate a 
question, we have been actively encouraging the international 
community to adopt that same approach. I believe in August we 
will publish international standards that will be consistent 
with that approach.
    Third, completed reforms bring oversight to swap dealers. 
We now have 80 that are registered. Many of these were at the 
center of the bailout 5 years ago, and they are coming under 
business conduct and reporting rules. Completed cross-border 
guidance ensures that the far-flung operations of U.S. 
financial institutions will be covered by reform, either 
directly under Dodd-Frank or through what we call substituted 
compliance. That means if there is a guaranteed affiliate 
sitting offshore in a jurisdiction that does not have reform, 
then it is Dodd-Frank, if it is somewhere where they do have 
reform, we might look to those home country rules.
    It is critical to the American public, and I am sure in 
South Dakota, Idaho, Massachusetts, and in Ohio, your publics 
are all saying, ``Do not forget the lessons of AIG and Lehman 
Brothers and these other institutions that brought their far-
flung operations risk back home.''
    We worked closely with international regulators, 
collaborated here and abroad, and most recently we came to 
these understandings with the European Union on cross-border 
transactions. To anticipate the question, many of these were 
included specifically in the guidance or were acted upon that 
day by no-action letters. I view those as agreements because 
they are embedded in Commission actions today. But there are 
some aspirational things that we still need to work on. This 
journey is not complete, and it is a multiyear journey with 
Europe and with Asia.
    We do have work to do moving forward. Most importantly, we 
are working with market participants to smooth the transition 
to these new reforms. We do also want to work closely with the 
international community on the substituted compliance 
determinations. Last, there are a handful of rules, including 
capital, margin, the Volcker rule, and relooking at the 
position limits that need further work. But I thank you, and I 
look forward to your questions.
    Chairman Johnson. Thank you.
    Votes have just been called on the Senate floor, so we will 
take a short recess to allow Senators to vote. I ask the 
Senators to vote quickly and then return immediately to the 
hearing room so that we may resume questioning.
    The Committee stands in recess.
    [Recess.]
    Chairman Johnson. The hearing will now return to order, and 
we will now resume the questioning of our witnesses. As we 
begin questions, I will ask the clerk to put 5 minutes on the 
clock for each Member.
    Chair White, while I recognize there is a lot on the SEC's 
plate and Congress must do its part to appropriately fund your 
agency, how soon can we expect Wall Street reform rules to be 
completed, especially on derivatives, the Volcker rule, and 
QRM? What, if any, barriers are there to completing these 
rules?
    Ms. White. I share the concern for--and I think I testified 
in my confirmation hearing that one of my highest immediate 
priorities, is to complete the congressionally rulemakings 
under Dodd-Frank and the JOBS Act. I think we have made very 
good progress. We are continuing to push extremely hard to 
complete those rulemakings.
    I cannot give you a precise timetable as to the completion 
for all of them, but I think you will see through the summer 
and through the fall and throughout this year those rulemakings 
coming out. That is my expectation and hope. I am not saying 
every single one will be done by year end.
    In terms of derivatives, as I think I mentioned in my 
testimony, our comment period on the cross-border proposal ends 
on August 21st. We did reopen, as Ranking Member Crapo said, 
our substantive rules that we proposed in the derivatives 
space. That comment period ended July 22nd.
    So it is my--obviously, I operate in a commission, but it 
is my hope and expectation that we will move into the adoption 
phase when those comment periods are completed.
    QRM is one that is a joint rulemaking, as you know. We are 
working quite hard and quite actively now with our fellow 
regulators on that, at both the staff level and the Commission 
level. So, you know, it is, again, a hope and expectation that 
some action should be taken in the very near term.
    On Volcker, I think particularly in the last 2 or 3 months, 
obviously an extraordinarily complex rulemaking. We need to get 
it right to make sure we are carrying out the statutory 
objectives. But we also want to make sure that we are dealing 
with the exemptions that occur so that we do not have 
unintended consequences there.
    We are working quite well in the last 2 or 3 months 
particularly with our fellow regulators on that. I think 
Governor Tarullo may have testified before this Committee, 
maybe more than once, that his at least hope and expectation is 
that may be completed by year end. I hope that is correct.
    Chairman Johnson. What, if any, barriers are there to 
completing these rules?
    Ms. White. I think what I would say the barriers are, the 
SEC was given, depending on how you count it, over 90--and this 
is under Dodd-Frank, alone--92, I think, and if you count 
subsets, about 130 rulemakings under Dodd-Frank. So there is a 
lot of volume. Many of them have a great deal of complexity. 
Some of them are done, as they should be, jointly with other 
regulators. I think those would be the factors that I would 
point to, and there has been, no question about it, some 
backlog at the SEC.
    When I arrived there, I tried to make certain that we had 
parallel work streams working on both the Dodd-Frank 
rulemakings and the JOBS Act rulemakings so that we did not 
have the same people at the staff level working on different 
rulemakings. So I am hoping to expedite and complete that 
process.
    Chairman Johnson. Chairman Gensler, consistent with the 
CFTC goal to limit regulatory arbitrage, will the CFTC allow 
swap trades between non-U.S. customers and foreign branches of 
U.S. swap dealers to rely on substituted compliance? In 
comparison, how will the CFTC treat swap trades between non-
U.S. customers and foreign affiliates of U.S. swap dealers?
    Mr. Gensler. I am pleased to say that we were able to 
finalize guidance with a lot of public input, and this issue 
was one of those, where the overseas branches and overseas 
guaranteed affiliates of U.S. swap dealers are covered by 
reform. This is necessary because so much of that risk did come 
back in 2008.
    Specific to your question, if a branch of a U.S. swap 
dealer is dealing overseas, it is part of the U.S. person; it 
is part of the legal entity. And we would look to substituted 
compliance if there are such rules in place.
    We did have a carveout, though, that said that up to 5 
percent of their business is in emerging markets, that they 
might not have to come in.
    For the guaranteed affiliates, if it is truly an offshore 
entity operating in London or Toronto or Tokyo and doing a 
business with some local insurance company, the transaction 
level compliance, we said that is up to the foreign 
jurisdiction, not ours. Sort of similar to this 5-percent 
exception for the branches.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman, and both Chair 
White and Chairman Gensler, in my opening statement I mentioned 
that there are some discrepancies between the rules and 
guidances that the two agencies are engaged in, both in terms 
of the substance of how they are being adopted and in terms of 
their actual substance. And my question to both of you is: Do 
you agree that we need to have as much coordination on these 
rules and guidances as possible so that both agencies are, to 
the maximum extent reasonably possible, on the same page and on 
the right page? And if you agree with that, are you undertaking 
actions to coordinate and communicate with each other to 
achieve these objectives? Chair White.
    Ms. White. I do agree with your statement, Senator Crapo, 
very much so. There may be some differences because we have 
different markets, different market participants, but for the 
most part, I think we need to strive for consistency, avoiding 
disruption, avoiding duplication.
    The staffs of the agencies have been, before my arrival and 
after my arrival, working together with each other sharing 
drafts and having discussions. Obviously differences do remain. 
One of the things you will see in our proposal where the 
comment period ends in August is we specifically tee up that 
consistency question. And what I would like to see going 
forward--there are open issues to deal with--is even an 
increase in the depth of engagement at the principal level as 
well as the staff level.
    Senator Crapo. Thank you.
    Chairman Gensler.
    Mr. Gensler. Senator, I do agree. We have been coordinating 
and collaborating all the way back to the legislative phase and 
to sharing our term sheets. If we send a term sheet or a draft 
memo to our Commissioners, we send it to the SEC. We also share 
with the Federal Reserve and other U.S. regulators, and 
internationally as well. We have gotten tremendous feedback. We 
do have some differences, of course, because this is the only 
thing we focus on--futures, commodities, and swaps--and the 
SEC, frankly, has so many other things. We oversee markets 
called the ``interest rate swap markets'' and some other 
markets that are so large that they are well over 90 percent of 
the swaps markets.
    Last, there are some small but very important differences 
in the law themselves, a swap, for instance, is not a future, a 
securities-based swap is a security. This was embedded in the 
laws. It might sound like a small difference, but actually the 
lawyers tell me it is a big difference. Also on cross-border, 
Congress expressly had direction for the CFTC that was not 
included in the SEC. You may have heard these words, but it is 
about a direct and significant connection to or effect on U.S. 
commerce or activities. If I have the words garbled, I 
apologize. That is what we were asked to give some guidance on 
and did so.
    Senator Crapo. Well, I appreciate your answers and 
encourage you to continue to try to coordinate to the maximum 
extent reasonably possible.
    Chairman Gensler, a number of questions remain regarding 
the path forward, and in my introductory comments I indicated I 
thought it was more of an agreement to agree or to collaborate 
further. But I think in your opening statement you indicated 
you felt there was more specificity than I was suggesting. 
Could you just explain that a little better and what you 
believe the next steps are to implementing the path forward?
    Mr. Gensler. Why, thank you. We have worked really on this 
journey for 4-plus years with the European Commission and the 
various European authorities, and we decided to put in writing 
this 10 or 15 pages about a path forward that I thank you for 
highlighting.
    Many of those pieces were incorporated specifically and 
expressly in the Commission guidance, particularly about when 
international parties meet on trading platforms. It is in our 
guidance. We expressly said that a U.S. person could fulfill 
some of their trading requirements under Dodd-Frank even on 
foreign boards of trade, so they do not have to do it here in 
the U.S. on swap execution facilities. That, too, is expressly 
in the guidance that is--everybody can use that.
    We took most of that path forward, wherever we could, and 
we put it in the guidance or in addition in some things called 
``no-action letters.'' Going forward, though, we will be 
working with Europe, Japan, Canada, Australia, Hong Kong, and 
Switzerland on looking at whether they have comparable rules 
overseas, and where we can, particularly on the entity-level 
requirements, we hope to do some substituted compliance 
determinations before December; and where we cannot, at least 
alert market participants to that.
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you both 
for your testimony.
    Chair White, let me ask you, there is a comment period 
going on now with the SEC as it relates to proposed money 
market fund rules, and I am sure you are already receiving a 
lot of responses to that. Money market funds remain an 
important financing channel for investors, fund managers, for 
companies and local governments who obtain financing through 
money market funds. And they have expressed concerns that one 
of the SEC's proposals about floating a net asset value could 
potentially cause some investors to turn away from money market 
funds and thereby increase funding costs for borrowers.
    For example, the U.S. Conference of Mayors, an organization 
I work with quite closely, having been a former mayor, recently 
adopted resolutions--which, Mr. Chairman, I ask consent to 
submit for the record.
    Chairman Johnson. Without objection.
    Senator Menendez. They recently adopted resolutions where 
they talk about these concerns, and I think, if I am not 
mistaken, it was the SEC itself that in one of its studies said 
that the floating net asset value does not in and of itself 
solve the concern of solvency issues, might make it, you know, 
more understanding of what the potential exists in the 
marketplace. There are those who suggest that gating is more 
likely to create a safeguard.
    Are you going to be considering the consequences in the 
marketplace--I know you are not ready to determine here at this 
moment on the rule, but are you going to be considering as part 
of the equation what happens in the marketplace, what happens 
to access, to, for example, public entities like municipalities 
across the Nation, as well as other entities in terms of making 
this decision on what the rule should look like?
    Ms. White. No question about that, Senator. We obviously 
did that kind of analysis, aided by our economists, when we 
made the proposals we did. There are actually alternative 
proposals, one that proposes a floating NAV for prime 
institutional funds only, not for Government funds or retail 
funds, and another that is a fees and gates proposal. We also 
invited comments on combining them. But we are very interested 
in the impacts under both proposals, taken separately or 
combined, and will be studying all of those comments very 
carefully.
    Senator Menendez. I appreciate that. I have a feeling that 
there is some suggestion or some pressure that exists out 
there, at least from my perception, that the Fed wants to see 
this happen. You have the jurisdiction here, and having a 
merger for the sake of making everybody happy over these two 
rules is not--these two elements of the rules, the two options, 
is not the optimum result. So I hope you will look at the real 
consequences in the marketplace and making sure that what you 
ultimately do is to ensure the very safety and soundness of 
those funds versus just responding to another entity that may 
have their own views.
    Ms. White. If I may, Senator, this is a space where the SEC 
has the expertise. The SEC has acted. Obviously we take input 
from wherever it comes from that is useful, whether it is 
fellow regulators or the public or end users. But it is 
something we will decide quite independently.
    Senator Menendez. During your confirmation hearing, I asked 
you on a provision that I included in Dodd-Frank, which was the 
issue of having disclosure in annual SEC filings of the amount 
of CEO pay to the amount of the median company worker pay and 
the ratio of the two. I asked you to look at that as the 
Chairperson. There was a Bloomberg report that suggested that 
the SEC is moving forward with a proposed rule soon. Is that a 
correct report, or is that an incorrect report?
    Ms. White. I would not want to comment on specific timing. 
I know the report that you are referring to. But we are very 
much as a staff and Commission focused on that rulemaking.
    Senator Menendez. OK. So while you do not want to commit to 
a time, since I have been waiting for several years now--which 
precedes you, but heavy is the head that wears the crown. Right 
now you have it. Can you give me some time frame here?
    Ms. White. It should be in the near future. I do not know 
if that is helpful to you or not. We have two new 
Commissioners.
    Senator Menendez. How do you define ``near future''? Two 
months? Three months? Six months? A year?
    Ms. White. I would hope that it is completed in the next 
month or two. You know, we have two new Commissioners coming on 
board, or we are expecting to, so that may affect some of the 
projected timetables you may have read about.
    Senator Menendez. All right. Thank you very much, Mr. 
Chairman.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and thank you and 
welcome to our witnesses today.
    Madam Chairman, I just want to follow up--well, let me go 
to the question of the rules implementing some of the JOBS Act. 
I have got to confess, I continue to be frustrated. It has been 
over a year now. Reg A in particular strikes me as a relatively 
straightforward, relatively simple change in law that has been 
on the books now for over a year, and we still do not have a 
rule.
    What kind of progress are we making? And what can we expect 
there?
    Ms. White. I think we are making progress. I think, 
Senator, you and I discussed this actually at my confirmation 
hearing, too. I think I commented that, from the outside at 
least, it would seem to me that with Reg A Plus, as we refer to 
it, the regulation should be one that could be done 
comparatively faster than others.
    One of the reasons it is taking longer, although it is very 
much front and center with the staff and the Commission, is to 
make sure that it is workable. Reg A itself has not been used, 
particularly in recent years.
    One of the issues that we are focused on--there was not 
sweeping preemption given to that rule--is to make sure that it 
actually is used once we adopt the final rules. But it is very 
much--I have several things on front burners, but it very much 
is one of those.
    Senator Toomey. So it is on the front burner.
    Ms. White. Along with several others, but, yes, sir.
    Senator Toomey. OK. Now, I know how reluctant you are to 
put a time frame on this, but I have got to ask you: Do front-
burner things get taken care of this summer? Is that a fall 
kind of thing? When do you think we can----
    Ms. White. Well, again, I would just comment, I am one 
member of a Commission. I have two new Commissioners coming on 
board. But I would hope we would certainly reach that by the 
fall.
    Senator Toomey. OK. All right. Thank you.
    Then I would like to follow up on some questions that 
Senator Menendez raised. Could you just briefly summarize what 
you see as the advantages of the disclosure mandate on floating 
NAV, the daily disclosure of a net asset value with greater 
precision, which is one of the proposals, as I understand it, 
for the nonprime institutional money funds?
    Ms. White. We certainly have in the proposal enhanced 
disclosures fairly across the board, and as you know, a number 
of prime funds have actually voluntarily made disclosure. What 
I guess now is referred to as the ``shadow NAV.'' I think the 
floating NAV alternative that is the subject of a proposal 
would obviously have those disclosure features with it, but 
also would actually, change to a market value.
    Senator Toomey. So I guess the question is: The argument 
that I most frequently heard advocating for a floating NAV was 
to provide additional, more precise information to investors. 
To the extent that that is provided, why is it necessary to 
operationally float the NAV? And, second--well, second, I would 
like to discuss the tax implications, but in the first 
instance, why is it necessary to operationally do so when the 
information is being provided?
    Ms. White. Again, those are among the questions that we 
have, I think, teed up, with the proposal. But disclosure 
itself does not change the transaction value. What this 
proposal would add to disclosure is that you basically would be 
transacting at a market rate. Simply knowing what the NAV is 
does not deal necessarily with the gaming of the one dollar 
price. And so the main thrust of additional money market reform 
is to deal with what is perceived to be--and obviously we had 
our economists study this--the run risk or the possibility of 
the run risk. And so it is not just a disclosure proposal, 
although that is included.
    Senator Toomey. It seems to me that there is always a 
first-mover advantage regardless of whether you disclose a net 
asset value or whether you operationally impose it. It seems to 
me the main argument has always been about transparency and 
greater disclosure, and that is achieved by simply disclosure.
    As you know, of course, there is a tax consequence if these 
minute changes manifest themselves in capital gains and losses 
that have to be monitored.
    Clearly the SEC has no authority to make that problem go 
away or solve that problem, right?
    Ms. White. That is correct. We have been working closely 
with Treasury and the IRS on those issues. One is whether the 
wash sales rules would be, in effect, a problem if, in fact, 
the floating NAV proposal was adopted. And the IRS on that tax 
aspect has actually recently put out tentative guidance saying 
that you would not have that negative tax consequence.
    There is another outstanding tax issue which we have not--
the IRS has not concluded on, which is sometimes referred to as 
a ``record keeping requirement,'' but it really would allow 
netting, which obviously would be very important to this 
proposal.
    Senator Toomey. I am concerned that the operational 
challenges and potential remaining tax consequences of this 
would create a huge disincentive for firms, for institutions to 
use this very valuable tool, and I hope you will keep that in 
mind as you consider finalizing the rule.
    Ms. White. We certainly will, Senator. We also--and I think 
I have stated it publicly--are concerned about preserving the 
viability of the product.
    Senator Toomey. All right. Thank you.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Gensler, manufacturers, as you know, that rely on 
aluminum to produce products--beer and soda pop cans and cars 
and other things--say that banks are using their metal 
warehouses to delay aluminum deliveries, driving up the cost of 
aluminum. These warehouses are linked to the London Metal 
Exchange. Apparently U.S. and U.K. authorities have said that 
neither has oversight over these bank-owned warehouses.
    There is a 2000 Memorandum of Understanding with U.K. 
market regulators that entitles the CFTC to information 
regarding ``the operations and stocks of warehouses,'' and 
``the use of warehouses by regulated market members, their 
licensees, or customers,'' including warehouses outside the 
U.S.
    There is a 2001 no-action letter between the CFTC and the 
London Metal Exchange, conditioned in part on the fact that 
``the law, systems, rules, compliance mechanisms of the U.K. 
applicable to the London Metal Exchange will continue to 
require LME to maintain fair and orderly markets, prohibit 
fraud, abuse, and market manipulation.'' It appears that this 
is manipulation, at the very least abuse.
    One of the purposes of the Commodity Exchange Act is to 
deter and prevent price manipulation or any other disruptions 
of market integrity.
    Now, I understand from news reports that the CFTC has sent 
out notices to at least a couple of banks saying, ``Do not 
destroy any emails,'' suggesting there will be an 
investigation.
    So my question is: Does the CFTC have the legal authority 
to interrogate and investigate and address potential market 
manipulation occurring at U.S. warehouses that are harming U.S. 
companies? If not, how can that be?
    Mr. Gensler. Senator, we are a market regulator overseeing 
the commodity futures swaps markets and have clear authority to 
police these markets for fraud, manipulation, and other abuses, 
and we will use those authorities appropriately where we see 
abuses and pursue it. That is in the physical commodity markets 
as well as the derivative marketplace. We tend to do that when 
it is related to derivatives, but the authorities are there.
    We also have authorities and Dodd-Frank included 
authorities with regard to something called ``foreign boards of 
trade,'' and the LME is actually operating under, as you said, 
this no-action letter from 12 years ago, has followed along 
with I think 18 others to become registered foreign boards of 
trade. So we have that in front of us as well.
    But, yes, we have authorities to pursue fraud manipulation 
and other abuses in the commodity markets.
    Senator Brown. So can you tell us what the next step is 
after you sent this admonition to these banks?
    Mr. Gensler. I think it would be best not to try to 
prejudice any matter that we might be--or might not be looking 
at. I think it would be better not to try to prejudice anything 
that we might be doing.
    Senator Brown. OK. This is a question for both Ms. White 
and Mr. Gensler. We know, as we heard in a hearing in my 
Subcommittee last week, that some banks own oil tankers and 
trade oil futures; others own energy transmission rights and 
sell energy derivatives; financial institutions in some cases 
control fleets of oil tankers and can withhold delivery while 
also wagering on the price of oil, or they can speculate on the 
price of energy while controlling its supply, as we saw in 
today's settlement between FERC and JPMorgan.
    In a Reuters story, a commodities expert in 2012 said that 
owning physical assets while trading in financial markets gives 
you the visibility of the market to make far more successful 
proprietary trading decisions in both physical and financial 
markets. It is trading with material nonpublic information. The 
only difference, this writer pointers out, that this market 
experts points out, the difference compared with equity markets 
is that it is perfectly legal.
    That certainly suggests a conflict of interest. Should the 
rules--and that suggests the question to both of you. Should 
the rules for commodities markets be updated to prohibit 
trading on this kind of, call it ``insider,'' but at least two 
judging it, calling it ``nonmarket information.'' Should these 
rules be updated? Ms. White, if you would answer that, and then 
Mr. Gensler.
    Ms. White. It is a subject matter that once it came to my 
attention--and that is fairly recently--I have actually asked 
the staff to examine that question, those series of questions. 
I cannot really respond further at this point other than I am 
looking into that and, frankly, the range of possible 
disclosure issues that could be involved as well.
    Senator Brown. Mr. Gensler.
    Mr. Gensler. Based on the Dodd-Frank reforms, we actually 
did update our whole regime about fraud and manipulation rules, 
and those were finalized about 2 years ago, and Congress 
expressly focused on information and deceptive practices.
    As it relates to an individual having information, the 
commodity markets have been looked at. A grain elevator 
operator or farmer or rancher may know something about their 
crop and want to hedge that, and we would not want to diminish 
the ability of that farmer, rancher, or grain elevator operator 
to hedge that risk even though in a sense they might be the 
only one to know that their crop is not yielding as well as 
they thought or yielding better than they thought.
    So there are some differences, but the good news is that 
Dodd-Frank did include and we finalized rules that give us a 
lot of enhanced protection. But, there is a long history of 
allowing the hedgers to really ensure that they can hedge their 
risk and not concern themselves that they might know something 
about their crop or what is happening on the ground that 
somebody else did not know.
    Senator Brown. Thank you.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and I thank the 
witnesses as well. And while I have not followed the issue as 
closely as Senator Brown, I think I would simply say, Mr. 
Gensler, that there is knowledge in the field on appropriate 
hedging, but some of the representations that Senator Brown 
made seem to be closer to manipulation than hedging. So I 
appreciate the work he is doing.
    I want to come back actually, Chairman White, to my 
favorite topic, which is the JOBS Act, again, the crowdfunding 
issue. I think it is--I know Senator Merkley worked on this 
issue as well. I think there is enormous, enormous opportunity 
to use this new tool for equity crowdfunding that can really 
marry together in a remarkable way, particularly from markets, 
rural markets, smaller markets that do not have access to this 
early stage capital, this really could be transformative. I 
have traveled around Virginia and around the country, and there 
is a nascent industry waiting for the regulations to get out, 
and let me acknowledge on the front end the nature of this will 
be--I do not think the SEC will get it perfect the first time 
out, and there will be people who will lose money. But I do 
think there will be the ability for the Internet to kind of 
self-police a bit and call out bad actors in an appropriate way 
and to work with you I think is, again, different than the 
analogy that was sometimes made back to the old telephone 
boiler room operations where there was a lot of fraud.
    So I am not sure you are going to give me the answer I am 
looking for, but back to the Senator Toomey analogy, I am 
hoping you are going to say this is front burner as well since 
it has been more than a year-plus, and we are seeing other 
Nations around the world move into this space and take away any 
potential first-mover advantage America has. How front-burner 
issue within the parameters of what you have been able to say, 
what else can you--a lot of folks are waiting for you to get 
these regulations out.
    Ms. White. I appreciate that, Senator, and I think there 
still is, despite the length of time, a great deal of 
excitement out there about this.
    Again, I seem to be describing multiple front burners to 
some degree, but it is certainly--the crowdfunding rulemaking 
is certainly on one of those front burners. It has been quite 
an undertaking to some degree, although the crowdfunding 
legislation does build in a number of investor protections. 
Obviously the funding portals, there are some issues there. We 
are working very closely with FINRA to make sure that does not 
delay us, that we----
    Senator Warner. Right. Because once you are done, there is 
still a FINRA process as well.
    Ms. White. We are trying to land that at the same time, if 
we can, so that does not build in other delays any more than it 
needs to. So it is among those front-burner rulemakings very 
much in----
    Senator Warner. Summer front burner? Fall front burner?
    Ms. White. We are almost out of summer, right? We are 
almost out of summer. Yes, I guess I have defined ``front 
burner'' so far to be into the fall, but I do not want to 
really--again, what I have said before is, I really have 
separated out these work streams. I have prioritized as many as 
I possibly can, and I get them done as they are ready to get 
done. But it does not take away from what I said that it is 
certainly among those very front burners.
    Senator Warner. I would acknowledge that this is, you know, 
a new space, but I would simply make the editorial comment that 
this is one where the perfect could be the enemy of the good, 
and, you know, I think there will be mistakes made. I think all 
of us who supported the JOBS Act recognize that there were 
challenges in this space. But the potential upside in terms of 
connecting capital to entrepreneurs that otherwise are not 
going to exist--I was in Richmond yesterday where Kiva, which 
is the microlending site I know you are familiar with--launched 
in Richmond, and, you know, the lending portal is a little 
better, you know, less regulatory burdensome than the equity 
portal, although the Kiva fellows announced the fact that they 
spent about 7 or 8 years being told everything they were doing 
was virtually illegal. They have now done close to 900,000 
loans and $500 million of lending with a rate of return north 
of 98 percent. So, you know, it is a pretty good system that 
actually both abroad and now domestically provides a lot of 
value. So my hope will be, again, that we keep this front 
burner.
    I am going to run out of time here. I would simply--I 
wanted to get your comment as well on the swap depository--the 
swap data repositories, you know, these SDRs, and how you are 
working with--whether you are going to have to kind of 
reduplicate what your colleague Mr. Gensler has already done. 
We need to get these registered as quickly as possible. This is 
going to be an important part of transparency in the swaps 
market.
    Ms. White. I think just briefly on that, the SEC has 
actually put out what we call the ``implementation policy,'' 
and those rulemakings are, I think, in our second category. I 
think the first category is to make sure that we get the cross-
border out and adopted. Obviously mandatory clearing decisions 
have to be made, but I would not anticipate delay once we are 
at that stage.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and thank you both 
for being here today.
    Ms. White, one of the issues that we have talked about over 
the past has been the definition of a ``fiduciary,'' and it is 
coming--obviously it is here again, this definition.
    Now that you have had a few months in office, can you 
provide an update on the coordination between the SEC and the 
Department of Labor on this issue of the definition of 
``fiduciary'' and how you are working.
    Ms. White. Yes. Obviously, again, we are independent 
agencies, but, I fully take all the points in that space about 
the desirability for consistency.
    One of the things that we have done--and I think we did 
talk about this before at my confirmation hearing, again, 
before my arrival--the SEC staff has been working very closely 
with the Department of Labor's staff to make certain that they 
understand the broker-dealer business model impacts of 
rulemaking on those models. Obviously, we, in terms of 
considering a fiduciary duty standard, are also told other 
things about what we can do and not do. The commission 
structure remains, principal trading remains.
    What I have done, I think July 5 was when our period of 
comment closed on our request for additional information on the 
fiduciary duty, so that is fairly recently closed. I have 
actually personally met with senior officials at the Department 
of Labor and directed the staff to really engage even more 
actively than they have in the past to try to coordinate, try 
to make certain that the Department of Labor understands our 
perspective and we can provide our expertise.
    Again, we have our different rules, are different agencies, 
but that is really the status.
    Senator Hagan. I appreciate you taking that effort. I 
appreciate that.
    On the asset management study, as you know, the FSOC is 
responsible for the designation of systemically important 
nonbank institutions. The FSOC has indicated publicly that it 
is reviewing what risk, if any, the asset managers pose to the 
U.S. financial system. The SEC is the expert agency on asset 
management, both from its long-established oversight of the 
mutual fund industry, but also more recently with the Dodd-
Frank requirement that advisers to private funds, such as 
private equity and hedge funds, register with the SEC as 
investment advisers.
    My question is: What role is the SEC playing in this FSOC 
review? And is the SEC being active here? And if so, is your 
expertise being reflected in the study?
    Ms. White. The answer is we are very active. The study is 
actually with the Office of Financial Research, but my staff is 
extremely active in providing comments, again, providing 
expertise in connection with that study. I cannot tell you when 
it will be completed, but we are quite active in participating 
in that process. Again, it is not being led by us--but, 
certainly we are being listened to, and we are very focused on 
making certain that that level of activity and interface 
continues.
    Senator Hagan. One other question back on the definition of 
``fiduciary,'' and you mentioned that July 5th was the end of 
the comment period. What do you see as the time frame going 
forward on either the SEC and the DOL setting the actual 
definitions?
    Ms. White. I cannot speak for the DOL----
    Senator Hagan. I did not know if you had heard any comments 
through that.
    Ms. White. I think that they are considering kind of what 
to do next. I mean, what we are focused on as far as they are 
concerned is just making sure they have all the expertise and 
data.
    In terms of, a timetable for what we may do at the SEC, 
that is something we are focused on, but we obviously have a 
very full plate of mandated rulemakings as well. But it is 
not--it is very important to me that we get to wherever we are 
going on that as quickly as we can.
    Senator Hagan. OK. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    I want to just start by saying you have really done some 
remarkable work, Chairman Gensler, over the last 4 years. You 
have taken on important fights for taxpayers, for consumers. 
You have shown some real backbone, something that I hope would 
act as a model for some of the other leaders of our regulatory 
agencies. You have laid out a road map for the CFTC to follow 
in the years to come, and you have really done a great job in 
identifying priorities, where we should be, what we should do.
    But I have a specific follow-up question to what you have 
laid out, and that is, as you know, the CFTC has been under 
sustained pressure to delay implementing the rules that you 
have already worked out. And so my question is: Could you 
comment on how important it is to stick to the timetables that 
the CFTC has laid out?
    Mr. Gensler. Thank you for that question. I think it is 
important, one, because 8 million people lost their jobs.
    Two, there is still risk in the financial system, and there 
will always be risk in the financial system. And if we are 
going to truly end too big to fail, we need to cover and finish 
off these transparency and risk reduction things.
    And then, three, sometimes a deadline just helps people 
come into compliance. You were a professor. You know that 
sometimes having those deadlines helps people come into 
compliance. So we will work with market participants to smooth 
the transition and, where appropriate, use our tools to give 
them some relief. But stick to the deadlines.
    Senator Warren. Good. Thank you very much, Mr. Chairman.
    I wanted to ask both of you a question about enforcement. 
We have spoken individually about enforcement multiple times, 
and recently, Chair White, you announced that the SEC will be 
requiring admission of guilt in more cases. I think that is a 
powerfully important step. It shows real toughness in your 
enforcement strategy and that that will help build leverage, 
even when you end up with a settlement.
    But when I talk about the importance of being willing to 
take large financial institutions to trial, people tell me, 
well, it is a real problem because the agencies do not have 
enough resources in their Enforcement Divisions, and they would 
have a tough time going up against big Wall Street 
corporations.
    So can each of you discuss whether you have the resources 
and the importance of resources in having an effective 
enforcement strategy? Chair White, might I start with you?
    Ms. White. Yes. There is no question that additional 
resources are essential to our successful enforcement strategy, 
including the change that you are referencing. One of our 
specific requests in the President's budget is for additional 
trial attorneys, and we cannot judge at this point how many 
additional trials we are going to have, but we already do not 
have enough trial resources. We have to be prepared to go to 
trial. We are prepared to go to trial. I am really proud of, 
frankly, the record that the SEC has had in trials. I think it 
is about 80 percent, when you see it from a defendant's point 
of view.
    One of the things--we need resources across the board for 
many other things as well, and our budget situation is we are 
budget neutral, deficit neutral, and, I would certainly hope 
that we could get that funding. And it really is essential to 
that strategy.
    Senator Warren. Thank you.
    Chairman Gensler.
    Mr. Gensler. We have not shied away from bringing cases 
against large banks, against exchanges, and sometimes if they 
do not settle, going straight into court. We are proud of that. 
But I would say our enforcement resources are tiny compared to 
the size of the markets, and, you know, the American public put 
$180 billion into AIG. That is 600 times what the President 
asked for for funding for our agency. Our enforcement folks are 
only about 150 of our people. We are trying to make the best 
decisions, but often we have to delay justice because we do not 
have the right resources.
    Senator Warren. That is a very important point. Thank you 
very much. It seems clear that if Congress wants to have a 
tough watchdog, it needs to make sure that the dog has not been 
starved, so I appreciate your comments on this.
    I have one more question, and that is for you, Chair White. 
One share/one vote has long been a bedrock principle of 
corporate governance. In recent years, however, a number of 
companies--Facebook, LinkedIn, Groupon--have given special 
insiders voting powers that are far greater than those 
available to the investing public. This can have short-term 
benefits, of course, in some cases, but it undermines the basic 
concept of ownership and says, in effect, that some inside 
owners can help themselves even if it is at the expense of 
other outside owners.
    Now, last October, the Council of Institutional Investors 
wrote letters to the New York Stock Exchange and Nasdaq 
requesting that they prohibit companies seeking an initial 
listing from having unequal voting rights. I wrote a follow-up 
letter to the exchange last month. I have not gotten a very 
encouraging reply.
    Chair White, do you support the principle of one share/one 
vote? And if so, do you have a position on whether or not the 
exchanges should require it?
    Ms. White. I think it is a--the voting rights and the 
voting rights structure is dictated by State law, actually. 
But--and the SEC years ago actually attempted to act in this 
space in that direction, but there was an authority issue that 
the court overturned the action that the SEC did take.
    So if there is to be movement in that direction--and I 
cannot prejudge it because I would have to judge it when it 
comes in--it would come from the SROs. In terms of the legal 
issue, I think, the SEC's possible lack of authority would not 
necessarily preclude the SROs. They do have a rule that 
prohibits disenfranchisement, but that is different than what 
you are talking about.
    Senator Warren. No, I understand that, and the question I 
was asking is basic support for the idea of one share/one vote.
    Ms. White. Well, I certainly support shareholder 
franchisement to the degree--to the most significant degree 
possible. But it is not an issue where I think the SEC can act 
on its own.
    Senator Warren. I understand that limitation. I apologize 
for going over. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you both for testifying. I wanted to return to the topic that 
Senator Brown was pursuing.
    We have the situation now where we have JPMorgan is in the 
process of--an examination is underway by FERC of their trading 
in the electricity markets. Some articles say a settlement is 
pending, but FERC is talking about eight market manipulation 
strategies that were used to crank up prices that are 
unacceptable.
    We have certainly the situation with the LIBOR rates more 
recently. We have the big article in the New York Times over 
aluminum warehouses that Goldman holds. We have the public 
discussion of the SEC allowing--and, Chair White, correct me if 
I am wrong, but basically approving JPMorgan to own a 
significant share of the copper assets with the anticipation of 
a strategy that might look something like what is happening in 
aluminum.
    I find it fascinating that we have a variety of regulatory 
powers, but essentially despite those powers dispersed among a 
number of different agencies, we have a picture of companies, 
big banks, that have enormous assets being able to buy vast 
quantities of particular commodities and control of the 
distribution systems through pipelines, through offshore oil 
tankers, through warehouses, not only providing a huge amount 
of market information that is very advantageous in trading, but 
also in a sense to have a thumb on the scale in terms of supply 
and demand and be able to have some influence over the price. 
And if you are simultaneously allowed to bet on the price and 
you are allowed to have your thumb on the scale reflecting the 
price, it is a huge conflict of interest.
    So in Dodd-Frank and within the Volcker framework, we have 
conflict-of-interest provisions that provide some powers on 
this. We certainly have the Fed that has control over commodity 
trading assets and a reasonable benefit test that is to be 
applied to that. And, Chair Gensler, as you noted, the CFTC has 
considerable power regarding market manipulation.
    Despite the powers invested in the Fed and the SEC and the 
CFTC, it seems like there is a huge amount of conflict of 
interest and a huge amount of market manipulation, and it does 
not seem like much action. Meanwhile, this is essentially--when 
these prices go up, it is a huge tax on the economy, whether it 
is in the price of a beer can or aluminum siding or in the 
future copper that goes into every electric--the electricity 
channel through every house, et cetera. Should we expect more? 
Is the regulatory power too dispersed? What needs to be done? 
Because essentially the law is written time and time again to 
try to say such conflicts of interest, such market 
manipulation, such trading in commodities while you are also 
betting on the price of commodities is not allowed, and yet 
somehow we end up with all of that. How are we to explain this? 
And what is to be done? And maybe I will start with you, Chair 
Gensler.
    Mr. Gensler. Senator, I could not agree more that these 
markets matter. And they matter on the dining table at night; 
they matter for somebody buying a six-pack of beer; they matter 
when we all fill up a tank of gas; and they even matter when we 
take out of a mortgage or a student loan. And as you noted 
LIBOR. We at the CFTC oversee markets for commodities, and 
commodities and their derivatives, futures, and swaps include 
even interest rates. We took I think appropriate but tough 
action about three banks that were readily and pervasively 
rigging interest rates. We will do similar, if we see it, in--
whether it is corn or wheat, whether it is metals, whether it 
is energy products. The Federal Reserve has authorities as to 
whether bank holding companies are actually in that space, as 
you say, that they actually hold those assets. What is critical 
is that the CFTC ensure that the markets are free of fraud and 
manipulation and other abuses.
    I do think Congress gave us strong tools of enforcement. We 
need to get the funding behind it, as Senator Warren said. But 
I do think we have the strong legal tools to do what we are 
supposed to do.
    Senator Merkley. Chair Gensler, a number of articles have 
said what FERC is doing in terms of being an aggressive 
regulator in manipulation of the electric markets needs to be 
replicated, if you will, in the metals market. Is that a model 
that you are looking to as you think about where the agency 
goes down the road here?
    Mr. Gensler. We have good collaboration with FERC. They 
take the primary lead in the electricity markets, as you know, 
as Congress has dictated. And we have some involvement if it is 
in the futures or swaps on electricity. We principally have 
used our authorities with regard to those derivatives 
marketplaces, and I think we will continue to do so. But as I 
said, and as you pointed out, these are important markets to 
all Americans.
    Senator Merkley. Is there such an inherent conflict in 
owning commodities and the tools that control the flow of those 
commodities--warehouses, pipelines, et cetera--should it simply 
be a situation where, if you are in the business of betting on 
the price, you cannot engage in those commercial activities?
    Mr. Gensler. I think, Senator, the challenge we have is 
that hedgers, whether you are a farmer, a rancher, thinking 
about----
    Senator Merkley. But we are not talking about farmers or 
ranchers. Those are very small players. We are only talking 
about a situation where people can own vast shares of a 
commodity market.
    Mr. Gensler. You are absolutely right. I was just saying 
there are speculators in the marketplace, and there have been 
for centuries. The tools Congress gave us are to set 
appropriate levels, call it ``position limits.'' I think we do 
need to move forward. That was a rule we finalized. A court 
vacated it. Two trade associations challenged it in court, and 
though we are appealing, I think we do need to move forward and 
finalize those rules.
    We do have some interesting provisions in Dodd-Frank that 
conflicts at large banks, that they have to separate out their 
research--let us say they are doing research on oil and gas and 
so forth, and they are trading. So there are conflict-of-
interest provisions that we also had. But ultimately it is the 
Federal Reserve that would decide whether they are in that 
space at all.
    Senator Merkley. My time is up, and so, Chair White, I am 
sorry I do not have time to get your insights. Thank you.
    Chairman Johnson. I would like to thank Chair White and 
Chairman Gensler for being here with us today. The 
implementation of Wall Street reform continues to be a high 
priority for this Committee, and we appreciate your hard work.
    This hearing is adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                  PREPARED STATEMENT OF MARY JO WHITE
               Chair, Securities and Exchange Commission
                             July 30, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for inviting me to testify on behalf of the 
Securities and Exchange Commission regarding steps taken by the SEC to 
reduce systemic risk in our capital markets. In particular, you 
requested that I discuss the Commission's responsibilities with respect 
to those aspects of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'' or the ``Act'') designed to mitigate 
systemic risk.
    The Commission, of course, recognizes the importance of addressing 
systemic risk and promoting financial stability. The Dodd-Frank Act 
gave the SEC significant new responsibilities for, among other things, 
over-the-counter derivatives, hedge fund and other private fund 
advisers, municipal advisors, and clearing agencies. The SEC has 
proposed or adopted rules for over 80 percent of the more than 90 Dodd-
Frank Act provisions that require SEC rulemaking, and completing this 
rulemaking--and the rulemaking called for under the Jumpstart Our 
Business Startups Act (JOBS Act)--remains a top and immediate priority. 
It is critical that we execute our responsibilities under both the 
Dodd-Frank Act and JOBS Act in as timely and smart a way as possible.
    Among the Dodd-Frank Act's goals was to decrease the likelihood 
that an entity's failure will cause a cascading failure across the 
financial system as a whole. Many of the core provisions of the Act 
that seek to reduce systemic risks are within the sole jurisdiction of 
the Federal banking regulators, but other provisions are within the 
SEC's jurisdiction, either solely or as shared with other regulators. 
For example, the Act:

    Established a regulatory regime for over-the-counter 
        derivatives transactions, including security-based swaps;

    Enhanced oversight and standards for systemically important 
        financial market utilities, including designated clearing 
        agencies supervised by the Commission;

    Required advisers to many private funds to report data, on 
        a confidential basis, for use in monitoring systemic risk and 
        also supporting the SEC's mission;

    Prohibited banks and their affiliates generally from 
        engaging in proprietary trading, or sponsoring or investing in 
        a hedge fund or private equity fund;

    Altered the regulation of credit rating agencies;

    Prohibited entities that create and distribute asset-backed 
        securities from engaging in certain transactions;

    Established a new orderly liquidation authority for 
        systemically important broker-dealers and other financial 
        entities; and

    Created the Financial Stability Oversight Council (FSOC) to 
        provide a formal structure for coordination among the heads of 
        various financial regulators to monitor systemic risk and to 
        promote financial stability across our Nation's financial 
        system.

    Beyond the actions taken in connection with the Dodd-Frank Act, the 
SEC has tried to diminish systemic risk in the securities markets by, 
among other things, providing additional safeguards for money market 
mutual funds.
    Below is an overview of the steps the SEC has undertaken to try to 
mitigate systemic risk in our securities markets, with an emphasis on 
those actions mandated by the Dodd-Frank Act. \1\
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     \1\ A list of the rulemaking provisions in the Dodd-Frank Act 
applicable to the SEC is attached as Appendix A.
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Over-the-Counter Derivatives
    Among the key provisions of the Dodd-Frank Act are those that 
establish a new oversight regime for the over-the-counter (OTC) 
derivatives marketplace. Title VII of the Dodd-Frank Act (Title VII) 
requires the Commission to regulate ``security-based swaps'' and to 
write rules that address, among other things: mandatory clearing; trade 
reporting and trade execution; the operation of clearing agencies, 
trade data repositories, and trade execution facilities; capital and 
margin requirements and business conduct standards for dealers and 
major market participants; and public transparency for transactional 
information. Such rules are intended to achieve a number of goals, 
including:

    Facilitating the centralized clearing of swaps, with the 
        intent of reducing counterparty and systemic risk;

    Increasing market transparency for regulators and market 
        participants;

    Increasing security-based swap transaction disclosure; and

    Addressing potential conflict of interest issues relating 
        to security-based swaps.

    To date, the Commission has: proposed substantially all of the core 
rules required by Title VII; adopted a number of final rules and 
interpretations; provided a ``roadmap'' to implement Title VII and to 
inform market participants of the sequence in which the new 
requirements will become effective and how the proposed rules would 
apply in a cross border context; and taken other actions to provide 
legal certainty to market participants during the implementation 
process. In advancing its regulatory initiatives, the Commission also 
takes into account the potential disruption and cost to the market. The 
Commission's more recent Title VII initiatives are discussed below in 
more detail.
Proposal of Rules Regarding the Application of Title VII in the Cross-
        Border Context
    Given the global nature of the derivatives market, the Commission 
has been working with its counterparts abroad and the Commodity Futures 
Trading Commission (CFTC) to coordinate an approach to the regulation 
of derivatives. In May, the Commission proposed rules and interpretive 
guidance regarding the application of Title VII to cross-border 
security-based swap transactions. \2\ The proposal includes rules and 
interpretive guidance that, among other things, would inform parties to 
a security-based swap transaction about which regulatory requirements 
apply when their transaction occurs in part within and in part outside 
the U.S. In addition, the proposal would provide interpretive guidance 
regarding when a trading platform or clearing agency is required to 
register with the Commission.
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     \2\ See, Release No. 34-69490, Cross-Border Security-Based Swap 
Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms 
Relating to the Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants (May 1, 2013), http://sec.gov/rules/
proposed/2012/34-68071.pdf.
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    The proposal generally would subject security-based swap 
transactions to the requirements of Title VII if they are entered into 
with a U.S. person or otherwise conducted within the United States. In 
addition, foreign affiliates whose security-based swap transactions are 
guaranteed by U.S. persons would be subject to certain requirements 
under Title VII, based on the risk such guaranteed transactions might 
pose to the U.S. financial system.
    Under the proposal, a party may have the ability to comply with 
Commission requirements by complying instead with some or all of the 
requirements of a foreign regulatory regime, provided that those 
requirements have been determined by the Commission to achieve 
comparable regulatory outcomes. The Commission's proposal refers to 
this approach as ``substituted compliance.'' Under substituted 
compliance, a foreign market participant would be permitted to comply 
with the requirements imposed by its own home country, so long as those 
requirements achieve regulatory outcomes comparable with the regulatory 
outcomes of the relevant provisions of Title VII. If the home country 
does not have any requirements that achieve comparable regulatory 
outcomes, substituted compliance would not be permitted and the foreign 
entity would be required to comply with the applicable U.S. 
requirements. The 60-day reopening of the comment period for certain 
Title VII rulemaking releases and the policy statement ended July 22, 
2013, and the comment period for our proposal on cross-border security-
based swap transactions ends August 21, 2013. We are actively reviewing 
public input on the proposals, as well as the final guidance approved 
by the CFTC on July 12, 2013.
    The Commission has been, and continues to be, strongly supportive 
of coordination of regulatory reforms to meet the G20 Leaders' 
commitments to central clearing, trading, and reporting of OTC 
derivatives. The Commission has been actively engaged in ongoing 
discussions with foreign regulators regarding the direction of 
international derivatives regulation and the Commission's efforts to 
implement the requirements of Title VII, including participation in the 
Financial Stability Board and the International Organization of 
Securities Commissions (IOSCO), and engaging in regulatory dialogues 
with other countries about our respective regulatory reform efforts.
Requirements for Security-Based Swap Dealers and Major Security-Based 
        Swap Participants
    In July 2012, the Commission adopted final rules and 
interpretations jointly with the CFTC regarding key product definitions 
under Title VII, such as the meaning of ``swap'' and ``security-based 
swap.'' \3\ This effort followed the joint adoption of entity 
definitions by the Commission and the CFTC in April 2012, which further 
defined the key terms ``swap dealer'' and ``security-based swap 
dealer,'' provided guidance as to what constitutes dealing activity, 
and implemented the Dodd-Frank Act's ``major security-based swap 
participant'' definition. \4\
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     \3\ See, Release No. 33-9338, Further Definition of ``Swap,'' 
``Security-Based Swap,'' and ``Security-Based Swap Agreement''; Mixed 
Swaps; Security-Based Swap Agreement Recordkeeping (July 18, 2012), 
http://www.sec.gov/rules/final/2012/33-9338.pdf.
     \4\ See, Release No. 34-66868, Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap Participant,'' 
``Major Security-Based Swap Participant,'' and ``Eligible Contract 
Participant'' (April 27, 2012), http://www.sec.gov/rules/final/2012/34-
66868.pdf.
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    In October 2012, the Commission proposed rules that would, among 
other things, prescribe how much capital security-based swap dealers 
would need to maintain, when and how these dealers would need to 
collect margin collateral to protect against counterparty losses, and 
how these dealers would need to segregate and protect customer funds 
and securities. \5\ The proposal also would establish capital and 
margin collateral requirements for major security-based swap 
participants and raise capital requirements for certain large broker-
dealers that use internal models in computing capital. The proposal 
would further require those large broker-dealers and security-based 
swap dealers to compute capital utilizing internal models, perform a 
liquidity stress test at least monthly, and maintain liquidity reserves 
sufficient to address potential funding needs during a stress event.
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     \5\ See, Release No. 34-68071, Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-Based 
Swap Participants and Capital Requirements for Broker-Dealers (Oct. 18, 
2012), http://www.sec.gov/rules/proposed/2012/34-68071.pdf.
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    Taken together, the goal of these rules is to help ensure that 
market participants remain highly liquid and well capitalized so that 
they can meet their obligations to customers and counterparties without 
creating unnecessary burdens that impede liquidity and efficient 
capital formation. In addition, in the event of a failure, enhanced 
capital, margin, and customer segregation rules should help ensure that 
customers and counterparties will be protected, thus limiting systemic 
effects in the capital markets and the broader economy.
Requirements for Security-Based Swap Clearing Activity
    Title VII of the Dodd-Frank Act requires that an entity acting as a 
clearing agency with respect to security-based swaps register with the 
Commission and that the Commission adopt rules with respect to clearing 
agencies that clear security-based swaps. As described below, in 
October 2012, the Commission adopted a rule that establishes 
operational and risk management standards for clearing agencies, 
including clearing agencies that clear security-based swaps. In June 
2012, the Commission adopted rules that establish procedures for its 
review of certain actions undertaken by clearing agencies. These rules 
include provisions detailing how clearing agencies will provide 
information to the Commission about the security-based swaps the 
clearing agencies plan to accept for clearing, which will then be used 
by the Commission to aid in determining whether those security-based 
swaps are required to be cleared.
Financial Market Utilities
    Title VIII of the Dodd-Frank Act (Title VIII) aims to mitigate 
systemic risk in the financial system and promote financial stability 
by providing for increased regulation of financial market utilities \6\ 
(FMUs) and financial institutions engaging in payment, clearing, and 
settlement activities that are designated as systemically important.
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     \6\ Section 803(6) of the Dodd-Frank Act defines a financial 
market utility as ``any person that manages or operates a multilateral 
system for the purpose of transferring, clearing, or settling payments, 
securities, or other financial transactions among financial 
institutions or between financial institutions and the person.''
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Enhanced Standards for Systemically Important Financial Market 
        Utilities
    Under Title VIII, FSOC is authorized to designate an FMU as 
systemically important if the failure, or a disruption to the 
functioning, of the FMU could create or increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets, thereby threatening the stability of the U.S. 
financial system. FSOC established an interagency FMU designations 
committee to develop a framework for the designation of systemically 
important FMUs. In July 2012, FSOC designated eight FMUs as 
systemically important under Title VIII (DFMUs), and the Commission 
acts as primary supervisory agency for four of these: the Depository 
Trust Company, Fixed Income Clearing Corporation, National Securities 
Clearing Corporation, and The Options Clearing Corporation. \7\
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     \7\ Two other clearing agencies registered with the Commission are 
designated systemically important for which the CFTC is the primary 
supervisory agency: Chicago Mercantile Exchange, Inc. and ICE Clear 
Credit LLC. The Federal Reserve Board acts as primary supervisory 
agency for two payment systems that were designated as systemically 
important FMUs: CLS Bank International and the Clearing House 
International Payments System.
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    Title VIII provides a framework for an enhanced supervisory regime 
for DFMUs, including oversight in consultation with the Federal Reserve 
Board (Federal Reserve) and FSOC. It permits the Commission to 
prescribe regulations for risk management and operations, and also 
directs the Commission to take into consideration relevant 
international standards and existing prudential requirements for the 
DFMUs it supervises. \8\ The Commission is also required to examine 
such DFMUs annually.
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     \8\ See, 805(a)(2) of the Dodd-Frank Act. Commission staff also 
worked jointly with the staffs of the CFTC and the Federal Reserve to 
submit a required report to Congress in July 2011 discussing 
recommendations regarding risk management supervision of clearing 
entities that are DFMUs. Risk Management Supervision of Designated 
Clearing Entities, Report by the Commission, Board and CFTC to the 
Senate Committees on Banking, Housing, and Urban Affairs and 
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act (July 2011), http://www.sec.gov/news/studies/2011/
813study.pdf. The report discussed several recommendations, including 
finalizing rulemakings to establish enhanced risk management for such 
clearing entities, formalizing the process for ongoing consultations 
and information sharing regarding such clearing entities and systemic 
risk, and enhancing clearing entity examinations.
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    Title VIII also establishes a process for a DFMU to submit to the 
Commission, with a copy to the Federal Reserve, advance notices 
identifying changes to its rules, procedures, or operations that could 
materially affect the nature or level of risk presented by the FMU. \9\ 
In June 2012, the Commission adopted rules that establish procedures 
for how it will address these advance notices, \10\ and it has since 
considered a significant number of such notices. \11\
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     \9\ See, 806(e)(4) of the Dodd-Frank Act.
     \10\ See, Release No. 34-67286, Process for Submissions for Review 
of Security-Based Swaps for Mandatory Clearing and Notice Filing 
Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 
and Form 19b-4 Applicable to All Self-Regulatory Organizations (June 
28, 2012), http://www.sec.gov/rules/final/2012/34-67286.pdf.
     \11\ Advance notices are published on the Commission Web site at 
http://www.sec.gov/rules/sro.shtml.
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            Adoption of Clearing Agency Standards
    Clearing agencies play a critical role in financial markets by 
ensuring that transactions settle on time and on agreed-upon terms. To 
enhance the integrity of clearing agency operations and governance, the 
Commission adopted rules in October 2012 requiring all registered 
clearing agencies--including, as noted above, clearing agencies that 
clear security-based swaps--to maintain certain standards with respect 
to risk management and operations. \12\ The rules contain specific 
requirements for clearing agencies that perform central counterparty 
services, including, for example, written policies and procedures 
addressing measuring credit exposures, use margin requirements, 
maintaining financial resources sufficient to withstand defaults, and 
fair and reasonable membership opportunities for persons who are not 
dealers or security-based swap dealers. The requirements are designed 
to strengthen the Commission's oversight of securities clearing 
agencies and promote consistency in the regulation of clearing 
organizations generally, thereby helping to ensure that clearing agency 
regulation reduces systemic risk in the financial markets.
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     \12\ See, Release No. 34-68080, Clearing Agency Standards (October 
22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.
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Form PF: Systemic Risk Reporting by Advisers to Private Funds
    Title IV of the Dodd-Frank Act directed the Commission to establish 
reporting requirements for investment advisers to private funds as 
necessary and appropriate in the public interest and for the protection 
of investors or for the assessment of systemic risk by the FSOC. \13\ 
The Dodd-Frank Act specifies that such reporting must include certain 
information about private funds, including but not limited to the 
amount of assets under management, use of leverage, counterparty credit 
risk exposure, and trading practices for each private fund managed by 
the adviser. \14\ The Commission implemented this provision of the 
Dodd-Frank Act when it adopted Form PF in October 2011, a systemic risk 
reporting form for advisers to private funds. \15\ As required by the 
Dodd-Frank Act, Form PF was designed in consultation with FSOC. To 
date, approximately 2,300 investment advisers managing over $7 trillion 
in private fund assets have filed approximately 4,000 reports on Form 
PF concerning approximately 6,700 hedge funds, 66 liquidity funds and 
5,900 private equity funds.
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     \13\ Section 404 of the Dodd-Frank Act (codified at Section 204(b) 
of the Investment Advisers Act of 1940, as amended).
     \14\ Section 404 of the Dodd-Frank Act.
     \15\ See, Release No. IA-3308, Reporting by Investment Advisers to 
Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF (Oct. 31, 2011), http://www.sec.gov/rules/
final/2011/ia-3308.pdf.
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    The requirement to file Form PF applies to investment advisers 
registered with the Commission that advise one or more private funds 
and have at least $150 million in private fund assets under management 
at the end of the adviser's most recently completed fiscal year. The 
filing requirements of Form PF vary depending on the size of the 
adviser. Both the amount of information required to be reported and the 
frequency with which Form PF must be filed depend on the amount of the 
adviser's assets under management and the types of funds it advises. 
\16\ Most advisers are required to file Form PF once a year, and report 
basic information regarding the private funds they advise, such as the 
types of private funds that an adviser advises, and information 
relating to such funds' size, leverage, types of investors, liquidity, 
and performance. Advisers managing hedge funds must also report 
information about fund strategy, counterparty credit risk, and the use 
of trading and clearing mechanisms.
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     \16\ Large private fund advisers must provide more detailed 
information than smaller private fund advisers. The content and 
frequency of this more detailed reporting is different depending on the 
type of private fund the large adviser manages. For example, advisers 
with $1.5 billion or more in hedge fund assets under management must 
report on risk metrics, financing information, and fund exposure for 
each hedge fund managed that has a net asset value of at least $500 
million.
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    To comply with enhanced confidentiality provisions established 
under the Dodd-Frank Act with respect to Form PF, Commission staff has 
been developing a secure filing environment for Form PF to protect the 
information when and after it is filed, including controls and systems 
to handle the data across the agency and to deliver the data 
electronically to the Office of Financial Research (OFR) within the 
Department of the Treasury. As of May 1, 2013, the Commission received 
a complete set of initial Form PF filings from those investment 
advisers required to file. Commission staff has started to use the data 
in carrying out the Commission's regulatory mission, including 
examinations, investigations, and investor protection efforts.
The Volcker Rule
    Section 619 of the Dodd-Frank Act (known as the ``Volcker Rule'') 
generally prohibits and restricts banks, bank affiliates, and certain 
nonbank financial companies from engaging in proprietary trading, or 
sponsoring, investing, or having certain interests or relationships 
with a hedge fund or private equity fund. The statute provides 
exceptions to these prohibitions for certain customer-service oriented 
activities, such as market making, underwriting, and, subject to 
certain limitations, organizing and offering hedge funds and private 
equity funds as part of bona fide trust, fiduciary, or investment 
advisory services provided to a bank's customers.
    In October 2011, the Federal banking agencies and SEC jointly 
proposed rules to implement the Volcker Rule. \17\ In January 2012, the 
CFTC issued a substantially similar proposal. To date, we have received 
nearly 19,000 comment letters in response to the proposal. SEC staff 
has carefully reviewed these comments and continues to engage in 
regular and active consultation with the staffs at our fellow Federal 
financial regulators to develop recommendations for implementing the 
Volcker Rule in ways that advance the goals of Section 619 while also 
limiting the potential for unintended market impacts.
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     \17\ See, Release No. 34-65545, Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships With, 
Hedge Funds and Private Equity Funds (October 12, 2011), http://
www.sec.gov/rules/proposed/2011/34-65545.pdf.
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Credit Rating Agencies
    The Dodd-Frank Act required the Commission to undertake a number of 
rulemakings related to credit rating agencies registered as nationally 
recognized statistical rating organizations, or ``NRSROs.'' The 
Commission has proposed a series of rules intended to strengthen the 
integrity of credit ratings by, among other things, improving the 
transparency of ratings methodologies and performance. \18\
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     \18\ Release No. 34-64514, Proposed Rules for Nationally 
Recognized Statistical Rating Organizations (May 18, 2011), http://
www.sec.gov/rules/proposed/2011/34-64514.pdf.
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    Additionally, the Dodd-Frank Act required each Federal agency, to 
the extent applicable, to review its regulations that require use of 
credit ratings as an assessment of the creditworthiness of a security, 
remove these references, and replace them with appropriate standards of 
creditworthiness. The Commission has proposed and, in some cases, 
adopted amendments to a number of its rules to remove references to 
credit ratings. \19\ The Commission plans to take further action in the 
near term to complete implementation of these mandates.
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     \19\ See, Release No. IC-No. 30268, Purchase of Certain Debt 
Securities by Business Development Companies Relying on an Investment 
Company Act Exemption (Nov. 19, 2012), http://www.sec.gov/rules/final/
2012/ic-30268.pdf; Release No. 34-67448, Commission Guidance Regarding 
Definitions of Mortgage Related Security and Small Business Related 
Security (Jul. 17, 2012), http://www.sec.gov/rules/interp/2012/34-
67448.pdf; Release No. 34-9245, Security Ratings (Jul. 27, 2011), 
http://www.sec.gov/rules/final/2011/33-9245fr.pdf; Release No. 34-9244, 
Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities 
and Other Additional Requests for Comment (Jul. 26, 2011), http://
www.sec.gov/rules/proposed/2011/33-9244fr.pdf; Release No. 34-64352, 
Removal of Certain References to Credit Ratings under the Securities 
Exchange Act of 1934 (Apr. 27, 2011), http://www.sec.gov/rules/
proposed/2011/34-64352.pdf; Release No. IC-9193, References to Credit 
Ratings in Certain Investment Company Act Rules and Forms (Mar. 3, 
2011), http://www.sec.gov/rules/proposed/2011/33-9193fr.pdf.
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    The Dodd-Frank Act also required the Commission to study the credit 
rating process for structured products and the conflicts of interest 
associated with the issuer-pay and subscriber-pay rating agency models, 
and to examine the feasibility of establishing an assigned ratings 
system or alternative means for compensating NRSROs. In December 2012, 
the Commission submitted a required report to Congress containing the 
findings of the study and recommendations for regulatory or statutory 
changes that should be made to implement the findings of the study. 
\20\ In May 2013, the Commission held a roundtable dedicated to these 
topics.
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     \20\ See, Report to Congress on Assigned Credit Ratings (December 
2012), http://www.sec.gov/news/studies/2012/assigned-credit-ratings-
study.pdf.
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Prohibition Against Conflicts of Interest in Certain Securitizations
    In September 2011, the Commission proposed a rule to implement 
Section 621 of the Dodd-Frank Act, which prohibits entities that create 
and distribute asset-backed securities from engaging in transactions 
that involve or result in material conflicts of interest with respect 
to the investors in such asset-backed securities. \21\ The proposed 
rule would prohibit underwriters, placement agents, initial purchasers, 
and sponsors of an asset-backed security, among others, from engaging 
in any transaction that would involve or result in any material 
conflicts of interest with respect to any investor in the relevant 
asset-backed security.
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     \21\ See, Release No. 34-65355, Prohibition Against Conflicts of 
Interest in Certain Securitizations (September 19, 2011), http://
www.sec.gov/rules/proposed/2011/34-65355.pdf.
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    The Commission received a number of comment letters discussing a 
range of complex issues, including the ability of portfolio managers to 
hedge the credit risk that a bank holds on its balance sheet through 
synthetic securitizations. Commission staff is carefully considering 
each of the issues and concerns raised in the comment letters.
Orderly Liquidation Authority
    Title II of the Dodd-Frank Act created a new process, modeled on 
the receivership process used for failed banks, pursuant to which the 
Federal Deposit Insurance Corporation (FDIC) may serve as receiver for 
certain large financial companies, including broker-dealers, whose 
failure poses a significant risk to financial stability in the United 
States. Under Title II, the Commission and the FDIC are required to 
develop joint rules governing the orderly liquidation of broker-
dealers, and the Commission staff is working to prepare a 
recommendation for the Commission's consideration. The rules should 
provide greater certainty and transparency regarding the process the 
FDIC would follow during the orderly liquidation of a systemically 
important broker-dealer.
Other Commission Actions Addressing Potential Systemic Risks
    Beyond actions taken in connection with the implementation of the 
Dodd-Frank Act, the Commission has taken additional steps to further 
reduced systemic risk in our securities markets.
Enhancing Operational Integrity
    Nearly all trading in the equity and options markets today depends 
on the reliable performance of highly automated systems, as reliance on 
technology has enabled the markets to achieve extraordinary levels of 
speed and efficiency. When technology systems do not work as intended, 
however, the failures can harm not only the operator of the system, but 
also a wide range of other market participants.
    In November 2010, the Commission adopted a new Market Access Rule 
to require broker-dealers with market access to put in place risk 
management controls and supervisory procedures on a pretrade basis. 
Among other things, the rule requires any broker using or providing 
access to trading on the securities markets to implement pretrade 
controls reasonably designed to manage the financial, regulatory, and 
other risks of such access.
    In March of this year, the Commission proposed Regulation Systems 
Compliance and Integrity (Regulation SCI), \22\ which would require 
exchanges, certain alternative trading systems, clearing agencies, and 
plan processors to maintain policies and procedures reasonably designed 
to meet certain technology standards, and take appropriate corrective 
action if problems do occur. The comment period for proposed Regulation 
SCI closed on July 8, and Commission staff is currently in the process 
of reviewing the comment letters.
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     \22\ See, Release No. 34-69077, Regulation Systems Compliance and 
Integrity (March 8, 2013), http://www.sec.gov/rules/proposed/2013/34-
69077.pdf.
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Addressing Significant Market Volatility
    The Commission also recently approved a National Market System 
(NMS) Plan to implement a ``limit up-limit down'' mechanism to create 
``speed bumps'' to limit abrupt market movements in individual 
securities, \23\ and amendments to the marketwide circuit breakers to 
provide for brief, coordinated, cross-market trading halts during a 
sharp decline in the securities market. \24\ The marketwide circuit 
breakers and phase I of the NMS Plan relating to the limit up-limit 
down mechanism were implemented on April 8, 2013. \25\
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     \23\ See, Release No. 67091, Order Approving, on a Pilot Basis, 
the National Market System Plan To Address Extraordinary Market 
Volatility by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board 
Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq 
Stock Market LLC, National Stock Exchange, Inc., New York Stock 
Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (May 31, 2012), http://
www.sec.gov/rules/sro/nms/2012/34-67091.pdf; Release No. 34-68953, 
Notice of Filing and Immediate Effectiveness of the Second Amendment to 
the Limit Up-Limit Down Plan (February 20, 2013), http://www.sec.gov/
rules/sro/nms/2013/34-68953.pdf; Release No. 34-69287, Order Approving 
the Third Amendment to the Limit Up-Limit Down Plan (April 3, 2013), 
http://www.sec.gov/rules/sro/nms/2013/34-69287.pdf.
     \24\ See, Release No. 34-67090, Notice of Filing of Amendments No. 
1 and Order Granting Accelerated Approval of Proposed Rule Changes as 
Modified by Amendments No. 1, Relating to Trading Halts Due to 
Extraordinary Market Volatility (May 31, 2012), http://www.sec.gov/
rules/sro/bats/2012/34-67090.pdf. The operative date of the revised 
circuit breakers was delayed from February 4, 2013, to April 8, 2013. 
See, e.g., Release No. 34-68784, Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Delaying the Operative Date of a 
Rule Change to NYSE Rule 80B, Which Provides for Methodology for 
Determining When To Halt Trading in All Stocks Due to Extraordinary 
Market Volatility, From the Date of February 4, 2013, Until April 8, 
2013 (January 31, 2013), http://www.sec.gov/rules/sro/nyse/2013/34-
68784.pdf.
     \25\ Phase I applies the limit up-limit down mechanism to stocks 
in the S&P 500, the Russell 1000, and to select exchange-traded 
products. Phase II, currently scheduled for implementation in November 
2013, will apply to all remaining exchange-traded equity securities, 
and will be implemented 6 months following the implementation of Phase 
I.
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Money Market Funds
    While there are many possible explanations for the redemptions from 
money market funds during the 2007-2008 financial crisis, regardless of 
the cause or causes, money market funds' experience in the 2007-2008 
financial crisis demonstrates the harm that can result from rapid heavy 
redemptions in money market funds. Since that time, the Commission and 
its staff have reexamined the Commission's regulation of money market 
funds. This effort began with the Commission's 2010 reforms to money 
market fund regulation, followed by a 2011 Commission roundtable on 
money market funds and systemic risk, a new and detailed study in 2012 
by SEC economists, and most recently a June 2013 proposal requesting 
public comment on additional reforms to the Commission's regulation of 
money market funds. \26\ The staff also has used data collected from 
money market funds on Form N-MFP to monitor trends and risks in this 
area, which was particularly useful during the Eurozone sovereign debt 
crisis.
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     \26\ See, Release No. IC-30551, Money Market Fund Reform; 
Amendments to Form PF (Jun. 5, 2013), http://www.sec.gov/rules/
proposed/2013/33-9408.pdf; Response to Questions Posed by Commissioners 
Aguilar, Paredes, and Gallagher, a report by staff of the Division of 
Risk, Strategy, and Financial Innovation (Nov. 30, 2012), http://
www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf; U.S. 
Securities and Exchange Commission, Roundtable on Money Market Funds 
and Systemic Risk, unofficial transcript (May 10, 2011), http://
www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm; Release 
No. IC-29132, Money Market Fund Reform (Feb. 23, 2010), http://
www.sec.gov/rules/final/2010/ic-29132.pdf.
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    The Commission's recent proposal requests comment on a variety of 
reforms designed to reduce money market funds' susceptibility to heavy 
redemptions, to mitigate potential contagion effects from heavy 
redemptions, and to increase the transparency of their risks, while 
preserving the benefits of this product to both retail and 
institutional investors to the extent possible. There are two principal 
reform proposals--which could be adopted separately or in combination. 
The first--would require that all prime institutional money market 
funds operate with a floating net asset value. The second would require 
that all non-Government money market funds impose a 2 percent liquidity 
fee if the fund's level of weekly liquid assets fell below 15 percent 
of its total assets, unless the fund's board determined that it was not 
in the best interest of the fund. The second reform alternative also 
would permit the fund's board of directors to temporarily suspend 
redemptions in the fund for up to 30 days if it crossed that liquidity 
threshold. With respect to both alternatives, the proposed reforms also 
would tighten diversification requirements, enhance disclosure 
requirements, improve data reporting on both registered and 
unregistered money market funds, and strengthen fund stress testing. We 
look forward to receiving public input on the proposal and whether it 
strikes the right balance between addressing systemic risk concerns 
while also maintaining money market funds as a viable investment 
product. The 90-day comment period ends in mid-September.
Financial Stability Oversight Council
    Title I of the Dodd-Frank Act provides that the Chairman of the 
Commission shall serve as a voting member of FSOC. \27\ Pursuant to the 
Dodd-Frank Act, the purposes of the Council are:
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     \27\ Dodd-Frank Act 111(b)(1).

    Identifying risks to the financial stability of the United 
        States that could arise from the material financial distress or 
        failure--or ongoing activities--of large, interconnected bank 
        holding companies or nonbank financial holding companies, or 
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        that could arise outside the financial services marketplace;

    Promoting market discipline by eliminating expectations on 
        the part of shareholders, creditors, and counterparties of such 
        companies that the Government will shield them from losses in 
        the event of failure; and

    Responding to emerging threats to the stability of the 
        United States financial system. \28\
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     \28\ Dodd-Frank Act 112(a)(1)(E).

    In addition, FSOC provides a formal structure for coordination 
among the various financial regulators. As Chairman of the SEC, I 
participate in the activities of the Council, including consideration 
of designation of certain nonbank financial companies as systemically 
important financial institutions (SIFIs) subject to heightened 
prudential supervision by the Board of Governors of the Federal Reserve 
System (Federal Reserve Board). \29\
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     \29\ See, Dodd-Frank Act 112(a)(2)(H) and 113. See also, 
``Financial Stability Oversight Council Makes First Nonbank Financial 
Company Designations To Address Potential Threats to Financial 
Stability'' (Jul. 9, 2013), http://www.treasury.gov/press-center/press-
releases/Pages/jl2004.aspx.
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Conclusion
    The Commission recognizes the importance of limiting systemic risk 
in our financial markets and is committed to taking appropriate steps 
to address systemic threats to our financial system in a balanced 
manner that preserves the strengths of the system and protects 
investors. Thank you for inviting me to testify today. I would be happy 
to answer any questions you may have.
APPENDIX A
















                   PREPARED STATEMENT OF GARY GENSLER
             Chairman, Commodity Futures Trading Commission
                             July 30, 2013
    Good morning Chairman Johnson, Ranking Member Crapo, and Members of 
the Committee. Thank you for inviting me to today's hearing. I am 
pleased to testify along with Securities and Exchange Commission (SEC) 
Chair Mary Jo White.
    Today's hearing comes at an historic moment in the CFTC's effort to 
implement the much-needed reforms of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act). Now, 3 years since 
passage of the Dodd-Frank Act, I am pleased to report that we have 
nearly completed all of the necessary rule writing. Market participants 
are well along the path of implementing these reforms.
    These reforms for the first time shine a light on a marketplace 
that has been opaque for far too long. These reforms mitigate risk and 
broaden market access through central clearing of standardized 
derivatives. These reforms for the first time bring oversight to swap 
dealers and major swap participants--some of whom were at the center of 
the bailouts of the financial crisis 5 years ago. I thank my fellow 
commissioners and the staff of the Commodity Futures Trading Commission 
(CFTC) for all of their hard work, dedication, and collaboration in 
bringing oversight to the swaps marketplace.
Introduction
    The public and the economy benefit from swap market reforms, just 
as the public benefited from the historic reforms in the securities and 
futures markets since the 1930s. For the first time, we have in place a 
legal and regulatory foundation for the vast swaps markets that brings 
transparency and lowers risk for the American public. This new 
comprehensive regulatory regime includes robust rules of the road to 
benefit those who trade swaps as well as those who have never even 
heard of them.
    In 2008, we witnessed widespread failure throughout the financial 
system and financial regulatory system. The lack of important oversight 
in the swaps market--oversight that we've had for decades in the 
securities and futures markets--allowed for risk to accumulate and be 
passed on to the public in the form of taxpayer-funded bailouts. 
Taxpayers sent $182 billion to AIG alone. And AIG was just one part of 
the larger financial crisis that nearly took down the U.S. and global 
economies.
    Middle class Americans paid the price of the 2008 financial crisis 
with their jobs, their pensions and their homes. The crisis cost eight 
million jobs and thousands of businesses, and the swaps market was 
right at the center. Americans are remarkably resilient, but they do 
expect us to learn from the lessons of the crisis and to do everything 
possible to prevent this from happening again. That is why Congress 
passed the Dodd-Frank Act and why the hard working staff of the CFTC 
have worked so diligently to implement its reforms.
    These rules are complementary pieces of an interconnected 
foundation on which the swaps market will operate in a transparent, 
open and competitive manner. Further, just as we have complementary 
commonsense rules for our roads--traffic lights, stop signs, and speed 
limits, and cops on the streets to enforce all these rules--we need 
commonsense rules of the road for the swaps markets. In 2008, we had 
AIG recklessly driving toward failure, and it, along with other failing 
financial institutions, were so big that they injured millions of 
bystanders.
    Americans would never accept a city or highway system with no 
rules, no streetlights, no traffic lights, and no cops.
    And now, with the near-completion of swaps market reforms, the 
American public no longer will need to accept a dark swaps market 
lacking commonsense rules of the road.
    Credit should be shared for this reform with the SEC. We have 
worked collaboratively with the SEC, sharing our internal memos, term 
sheets, and draft regulations and seeking advice and counsel every step 
of the way. In addition to the consultation, Congress tasked the CFTC 
and SEC with jointly completing a number of critical, foundational 
rules further defining swap dealers and swaps, among other terms. It is 
only with this close work and collaboration that reform came to life. 
We also significantly benefited from collaboration with other U.S. and 
international regulators.
    We have completed this reform sensitive, as Congress was, that 
nonfinancial firms, responsible for 94 percent of private sector jobs 
in this country, only make up approximately 10 percent of the swaps 
market. Congress directed that these nonfinancial end users have a 
choice about central clearing, and our rules reflect that. Consistent 
with Congress's direction related to clearing, the CFTC has proposed 
that margin for uncleared swaps does not have to be collected from 
nonfinancial end users. We also have ensured that treasury affiliates 
of nonfinancial end users will have a choice about central clearing. 
Further, we granted relief for inter-affiliate clearing and reporting 
as long as outward-facing transactions are cleared and reported.
    I now will walk you through the three key areas of completed 
reforms: transparency, central clearing, and oversight of swap dealers 
and other intermediaries.
Transparency and Access--Lowering Cost and Increasing Liquidity, 
        Efficiency, and Competition
    A key benefit of swaps reform is providing critical transparency 
and access to businesses and other end users that use the swaps market 
to lock in a price or hedge a risk. Transparency and access--
longstanding hallmarks of the futures market, both before and after the 
trade--lower costs for investors, consumers, and businesses.
    When light shines on a market, the economy and public benefit. 
Transparency increases liquidity, efficiency, and competition. It is 
the nonfinancial part of our economy that provides 94 percent of 
private sector jobs in the United States and will most benefit from 
transparency and access to markets. Even amongst financial entities, 
pension funds, community banks, insurance companies, and other 
nondealers will significantly benefit as they manage the savings and 
security of Americans.
    Based upon completed reforms, the public and regulators already are 
benefiting from significant new transparency. Starting late last year, 
financial regulators have been able to look at swaps transactions that 
are now being reported to swap data repositories. The phased 
implementation of these reporting requirements is nearly complete, with 
just one remaining group of U.S. transactions coming into data 
repositories August 19. Additional reporting from offshore swap dealers 
will phase in later this fall.
    We now have pricing, transactional, counterparty and valuation 
information in the data repositories for more than $360 trillion in 
outstanding swaps. This covers all the different asset classes, 
including interest rate swaps, credit index swaps, foreign currency 
swaps, energy swaps, metals swaps, and agriculture swaps. We already 
are benefiting at the CFTC, reviewing this data for purposes of our 
oversight and surveillance.
    Congress knew, though that transparency to the regulators is not 
enough. Markets work best when the public benefits from seeing the 
price and volume of transactions after they have been executed. 
Beginning this past January, the public can now see the prices and 
volume of transactions on a time delayed basis (and in a way that masks 
counterparties), similar to a modern-day ticker tape, free of charge 
and available on the Internet. Further, starting today, July 30, a 
significant portion of the smaller-size transactions will no longer be 
reported on a time-delayed basis. This fulfills Congress's mandate that 
transactions below a block size be publicly reported ``as soon as 
technologically practicable.''
    As the Commission recently finalized block rules for swaps, it will 
shortly turn to consider staff recommendations for a proposal on a 
futures block rule.
    In addition, for the first time, all swaps trading facilities will 
have to register, completing the task of closing what had come to be 
known as the ``Enron loophole.'' We accomplished this through 
finalizing rules relating to swap execution facilities (SEFs), which 
are trading facilities for the transaction of swaps. SEFs already have 
started to register, and some are likely to be operating by August 5. 
Others will need to register and include the minimum trading functions, 
such as an order book, by October 2. All market participants shortly 
will have the ability to compete by making bids and offers to each 
other through an order book. They also benefit by seeing the prices of 
such orders prior to making a decision on a transaction.
    Thus, market participants, whether they be pension funds, asset 
managers, community banks or other end users, shortly will be able to 
go onto a centralized market structure--a designated contract market 
(DCM) or a SEF--and execute their swaps transactions in a competitive 
marketplace, while in the past they were primarily only able to do this 
directly with dealers. This is a critical benefit to our overall 
economy. When transparency and competition come to a marketplace, costs 
go down.
    Further, standardized swaps (swaps that are subject to the clearing 
requirement and made available for trading) will be subject to a trade 
execution requirement likely starting by early next year. A significant 
portion of interest rate and credit derivative index swaps will be in 
full view to the marketplace before transactions occur. Trading 
platforms also can elect to offer other types of swaps for transparent 
trading. This is a significant shift toward market transparency from 
the way it used to be.
    As Congress made clear in the law, trades will be required to be 
executed on SEFs or DCMs only when financial institutions transact with 
financial institutions. Nonfinancial commercial companies and other end 
users will benefit from access to the information on these platforms, 
but will not be required to use them. Further, companies will be able 
to continue relying on customized transactions--those not required to 
be cleared--to meet their particular needs, as well as to enter into 
large block trades.
    Beyond these reforms, new CFTC rules brought additional 
transparency earlier this year, as customers can now see the valuation 
of their positions on a daily basis--either as reported by the 
clearinghouse or by their swap dealers as required by business conduct 
rules.
    With these transparency reforms, the public and regulators now have 
their first full window into the swaps marketplace. These reforms build 
upon the democratization of the swaps market that is coming with the 
clearing of standardized swaps.
Central Clearing--Mitigating Risk and Promoting Access
    Transparency is but one critical rule of the road in the swaps 
markets. It provides the street lamps that light the roads, but we also 
must ensure that the streets are safe for driving and that drivers have 
easy access to the highways.
    Clearinghouses have operated in the futures markets since the late 
19th century to lower risk and improve access for market participants. 
Clearinghouses reduce the risk that one entity's failure could spread 
to the public by standing between the parties and maintaining resources 
to cover defaults. They value every position daily and require the 
parties to post adequate margin on a regular basis. Clearing also 
fosters access for the broad market as it ensures that each participant 
no longer has to individually worry about its counterparty's credit 
characteristics.
    The CFTC has implemented the two principal reforms of the Dodd-
Frank Act relating to clearing.
    First, consistent with the direction of the statute, the Commission 
in the fall of 2011 adopted a comprehensive set of rules for the risk 
management of clearinghouses. These final rules provided a strong set 
of protections for customer money posted to clearinghouses, including 
for the first time a requirement for gross margining as well as 
segregation of customer money at the clearinghouse.
    These final rules were consistent with international standards as 
of the time that our rules were published. Subsequently, new 
international standards have been adopted--the Principles for Financial 
Market Infrastructures. Though the Commission's clearinghouse risk 
management rules cover the vast majority of these new international 
standards, CFTC staff is working expeditiously to recommend the 
necessary steps to implement the remaining items that should be 
incorporated in our rules. Most importantly, Commissioners currently 
are considering finalizing a rule requiring systemically important 
clearinghouses to have prefunded default resources sufficient to cover 
the default of the two clearing members that would cause the greatest 
loss (after margin) in extreme but plausible circumstances.
    Second, the CFTC adopted rules to implement the Dodd-Frank Act's 
requirement that standardized swaps be cleared. The Commission approved 
the first clearing requirement last November, following through on the 
U.S. commitment at the 2009 G20 meeting that standardized swaps be 
cleared by the end of 2012. The Commission has determined that swaps in 
four interest rate swap classes (U.S. Dollar, Euro, Sterling, and Yen) 
and in two credit index swap classes (CDX and iTraxx) are subject to 
the clearing requirement. These asset classes account for the vast 
majority of interest rate and credit default index swaps.
    We reached a key milestone in March when the clearing requirement 
for swap dealers and the largest hedge funds went into effect. 
Additional financial entities began clearing June 10. Compliance will 
continue to be phased in throughout this year. Accounts managed by 
third party investment managers and ERISA pension plans have until 
September 9. As we phase in compliance with the recently completed 
cross-border interpretive guidance, collective investment vehicles, 
including hedge funds, whose principal place of business is in the U.S. 
but may have incorporated offshore (for instance, in the Cayman 
Islands) will have to comply with the clearing requirements by October 
10. Further, guaranteed affiliates of U.S. persons will have to begin 
complying with the clearing requirement on October 10 as well. The CFTC 
also fulfilled Congress's direction to exempt nonfinancial end users 
from the clearing requirement.
Oversight of Swap Dealers and Other Intermediaries
    The third critical piece of swaps market reform is oversight of 
swap dealers and investment funds operating in the swaps market. To 
extend the highway metaphor, we require that drivers have licenses and 
know the rules of the road. Though Congress did not suggest this for 
all market participants, they were clear that the dealers themselves 
had to be registered and be brought under new reforms. Furthermore, 
Congress directed that swaps reforms extend to investment vehicles that 
invest in swaps.
    The foundational joint rules of the CFTC and SEC further defining 
swap dealers and swaps went into effect last October. By last December, 
swap dealers began to provisionally register. We now have had 80 swap 
dealers and two major swap participants provisionally register with the 
CFTC. This group includes the largest domestic and international 
financial institutions dealing in swaps, including the 16 institutions 
commonly referred to as the G16 dealers. We expect additional entities 
to register as swap dealers as the recently completed cross-border 
interpretive guidance becomes effective later this year.
    Since the beginning of this year, swap dealers have had to report 
their trades to both regulators and the public. They also have had to 
comply with various business conduct standards that lower risk and 
increase market integrity. These include promoting the timely 
confirmation of trades and documentation of the trading relationship. 
Swap dealers also have been required since earlier this year to 
implement sales practice standards that prohibit fraud, require fair 
treatment of customers, and improve transparency.
Cross-Border Derivatives Reform
    Congress was clear that the far-flung operations of U.S. 
enterprises are to be covered by reform. Recognizing the lessons of the 
crisis and modern finance, Congress was clear in section 722(d) of the 
Dodd-Frank Act that swaps reform does apply to activities outside our 
borders with ``a direct and significant connection with activities in, 
or effect on, commerce of the United States.''
    The largest banks and institutions are global in nature, and when a 
run starts on any part of an overseas affiliate or branch of a modern 
financial institution, risk comes crashing right back to our shores. 
The nature of modern finance is that financial institutions commonly 
set up hundreds, or even thousands, of legal entities around the globe. 
In fact, the U.S.'s largest banks each have somewhere between 2,000 and 
3,000 legal entities. AIG nearly brought down the U.S. economy because 
it guaranteed the losses of a Mayfair Branch operating under a French 
bank license in London. Lehman Brothers had 3,300 legal entities, 
including a London affiliate that was guaranteed here in the U.S., and 
it had 130,000 outstanding swap transactions. Citigroup had structured 
investment vehicles that were set up in the Cayman Islands, run out of 
London, and yet were central to not one, but two bailouts of that 
institution. Bear Stearns, in 2007 had two sinking hedge funds 
organized in the Cayman Islands that had to be bailed out by the parent 
entity. A decade earlier, the same was true for Long-Term Capital 
Management.
    After receiving public input and coordinating with the SEC and 
other regulators, working with international regulators, we issued 
guidance and an exemptive order to provide clarity to the market that 
our new rules apply to cross-border derivative activities. The CFTC 
interprets the cross-border provisions to cover swaps between non-U.S. 
swap dealers and guaranteed affiliates of U.S. persons as well as swaps 
between two guaranteed affiliates. The guidance does recognize and 
embrace the concept of substituted compliances where there are 
comparable and comprehensive rules abroad. Further, the interpretive 
guidance captures offshore hedge funds and collective investment 
vehicles that have their principal place of business here in the U.S. 
or that are majority owned by U.S. persons.
    We published the proposed guidance for public comment in June of 
last year and then sought additional comment in December. On July 12, 
we gave swap dealers organized in each of six jurisdictions (Australia, 
Canada, the European Union, Hong Kong, Japan, and Switzerland) 5 
additional months to come into compliance with certain swaps reforms as 
we assess the submissions from those jurisdictions regarding 
substituted compliance.
Investment Funds
    Furthermore, Consistent with Congress's direction that swaps 
reforms extend to investment vehicles investing in swaps, the 
Commission approved final rules 18 months ago that increase 
transparency to regulators of commodity pool operators (CPOs) and 
commodity trading advisors (CTAs) acting in the derivatives 
marketplace--both futures and swaps. The rulemaking also rescinded 
prior exemptions from CPO registration that had been used by many hedge 
funds. As a result, CPOs of registered investment companies and hedge 
funds were required to register by December 31, 2012, and, to date, 
more than 500 funds and registered investment companies have done so. 
Pooled investment vehicles, including registered investment companies 
that trade more than a de minimis amount in commodities or market 
themselves as commodity funds now will be subject to CFTC oversight. 
These rules enhance transparency and increase customer protections 
through amendments to the compliance obligations for CPOs and CTAs. The 
Commission currently is considering staff recommendations to finalize a 
rule that seeks to harmonize with the securities laws, to the extent 
possible, requirements for CPOs of registered investment companies.
Looking Forward on Swaps Market Reform
    Now that we have successfully completed the bulk of the rulemaking, 
and the market is largely implementing those reforms, the CFTC is 
focusing on three principal areas.
Compliance, Registration, Surveillance, and Enforcement
    First, with most of the new reforms' compliance dates behind us, 
the CFTC is increasingly shifting toward reviewing registration 
applications of various entities and reviewing those entities and 
transactions for compliance through the agency's surveillance, 
examination, and enforcement functions.
    The CFTC will continue to work with market participants as they 
phase in compliance with these completed reforms. The CFTC embraced 
phasing in compliance to smooth the transition to a new regulatory 
regime and to ensure that reform is actively implemented. Market 
participants began phasing in compliance last October. As I have 
reviewed, much already has been accomplished, but, looking ahead, there 
are critical compliance dates through the rest of this year and into 
2014.
International Harmonization
    Second, we are going to continue to work with regulators around the 
globe to promote reform and harmonize where we can. For example, we are 
working closely with our international counterparts to ensure that all 
U.S. persons and their guaranteed affiliates are covered by reform--
either the Dodd-Frank Act reforms or through compliance with comparable 
and comprehensive rules of another jurisdiction.
    Earlier this month, we took a significant step when the European 
Union and we announced a path forward regarding joint understandings 
for the regulation of cross-border derivatives. This was a significant 
step forward in harmonizing and giving clarity to the markets, 
particularly when there might be jurisdictional overlaps with regard to 
our respective reforms.
    The CFTC over the next 5 months will be reviewing submissions from 
the six jurisdictions (Australia, Canada, the European Union, Hong 
Kong, Japan, and Switzerland) to assess their regulatory regimes with 
regard to possible substituted compliance determinations.
    We also are working with foreign regulators on memoranda of 
understanding to ensure that we will be able to exercise our respective 
supervisory responsibilities in an efficient, coordinated manner.
Dodd-Frank Rulemakings
    Third, we do have a handful of rules to finalize, including capital 
and margin for swap dealers, the Volcker Rule and position limits.
    The CFTC is collaborating closely domestically and internationally 
on a global approach to margin requirements for uncleared swaps. We 
have been working along with the Federal Reserve, the other U.S. 
banking regulators, the SEC and our international counterparts on a 
final set of standards to be published by the Basel Committee on 
Banking Supervision and the International Organization of Securities 
Commissions (IOSCO). The CFTC's proposed margin rules exclude 
nonfinancial end users from margin requirements for uncleared swaps. We 
have been advocating with global regulators for an approach consistent 
with that of the CFTC. I now anticipate that the final set of 
international standards, which are nearing completion, will not call 
for margin for nonsystemic, nonfinancial entities. After the 
international standards are published, the CFTC will further propose 
margin rules likely later this year and seek to finalize those rules in 
the first half of 2014.
    Following Congress' mandate, the CFTC is working with our fellow 
domestic financial regulators to complete the Volcker Rule. In adopting 
the Volcker Rule, Congress prohibited banking entities from proprietary 
trading, an activity that may put taxpayers at risk. At the same time, 
Congress permitted banking entities to engage in certain activities, 
such as market making and risk mitigating hedging. One of the 
challenges in finalizing a rule is achieving these multiple objectives.
    In the Dodd-Frank Act, Congress directed the Commission to impose 
limits on speculative positions in physical commodity futures and 
options contracts and economically equivalent swaps. The agency 
finalized a rule in October 2011 that addressed Congress's direction to 
prevent any single trader from obtaining too large a share of the 
market to ensure that derivatives markets remain fair and competitive. 
Last fall, a Federal court vacated the rule, and we currently are in 
the process of appealing that decision. Concurrently, we are working on 
developing a new proposed rulemaking to address position limits. It is 
critically important that these position limits be established as 
Congress required.
Looking Forward on Other Critical Reforms
    In addition to the ongoing work on swaps market reform, the CFTC 
also is pursuing a number of other critical initiatives. I will 
highlight three such initiatives in this testimony.
Customer Protection
    First, the Commission is continuing its work to enhance the 
protection of customer funds in both the futures and swaps markets.
    We have completed amendments to rule 1.25 regarding the investment 
of customer funds to benefit both futures and swaps customers in 
December 2011. The CFTC's gross margining rules for futures and swaps 
customers, which went into effect last November, require clearinghouses 
to collect margin on a gross basis. Futures Commission Merchants (FCMs) 
are no longer able to offset one customer's collateral against another 
or to send only the net to the clearinghouse. Swaps customers further 
benefit from the new so-called ``LSOC'' (legal segregation with 
operational comingling) rules, which also became effective last year 
and ensure funds are protected individually all the way to the 
clearinghouse.
    The Commission also worked closely with market participants on new 
customer protection rules adopted by the self-regulatory organization 
(SRO), the NFA. These include requiring FCMs to hold sufficient funds 
for U.S. foreign futures and options customers trading on foreign 
contract markets (in Part 30 secured accounts). Starting last year, 
FCMs must meet their total obligations to customers trading on foreign 
markets under the net liquidating equity method. In addition, 
withdrawals of 25 percent or more of excess segregated funds would 
necessitate pre-approval in writing by senior management and must be 
reported to the designated SRO and the CFTC.
    Building upon these reforms, in the fall of 2012, the Commission 
sought public comment on a proposal that would further strengthen the 
controls around customer funds at FCMs. It would set new regulatory 
accounting requirements and would raise minimum standards for 
independent public accountants who audit FCMs. And it would provide 
regulators with daily direct electronic access to the FCMs' bank and 
custodial accounts for customer funds.
    The proposal includes a provision on residual interest to ensure 
that the assets of one customer are not used to cover the positions of 
another customer. We are considering the many comments we have received 
on this, consistent with the specific provisions of the Commodity 
Exchange Act and the overall goal of protecting customers. The 
Commissioners shortly will receive final staff recommendations on this 
rule. I think it is critical that we complete these reforms this fall.
Benchmark Interest Rates
    Second, the CFTC is continuing its work with domestic and 
international regulators to ensure the market integrity of benchmark 
interest rates. Benchmark interest rates, such as the London Interbank 
Offered Rate (LIBOR) are very important to the American public. LIBOR 
is the reference rate for 70 percent of the U.S. futures market and 
more than half of our swaps market. It is the reference rate for more 
than $300 trillion in derivatives and more than $10 trillion in loans. 
We need to ensure that these benchmark interest rates have market 
integrity and that they are based on fact, not fiction.
    The interbank unsecured market that the benchmarks are intended to 
measure, however, essentially no longer exists, particularly for longer 
tenors.
    Furthermore, our enforcement actions against three global banks, 
along with those of the Financial Conduct Authority, the Justice 
Department and others, have shown that LIBOR, EURIBOR, and similar 
rates have been readily and pervasively rigged. The CFTC initiated an 
investigation in 2008 related to LIBOR. Barclays, UBS, and RBS paid 
fines of approximately $2.5 billion for manipulative conduct relating 
to these rates as a result of multiple agencies' enforcement and 
criminal actions.
    Given these vulnerabilities and the real risk that they will 
remain, to ensure market integrity and support financial stability, the 
Financial Stability Oversight Council recommended in its annual report 
that U.S. regulators work with foreign regulators, international 
bodies, and market participants to promptly identify alternative 
interest rate benchmarks that are anchored in observable transactions 
and are supported by appropriate governance structures, and to develop 
a plan to accomplish a transition to new benchmarks while such 
alternative benchmarks are being identified. The Council further 
recommended that steps be taken to plan for and promote a smooth and 
orderly transition to alternative benchmarks, with consideration given 
to issues of stability and to mitigation of short-term market 
disruptions.
    An IOSCO task force took an important step in bringing reform to 
benchmark interest rates in announcing new principles earlier this 
month. Given the known problems with LIBOR, EURIBOR, and other 
significant market benchmarks, I am pleased that the IOSCO Principles 
require that benchmarks be anchored by observable transactions and 
subject to robust governance processes that address potential conflicts 
of interest. This report establishes new international standards.
    The Financial Stability Board (FSB) is building upon the work of 
IOSCO by initiating a review of alternatives to existing benchmark 
interest rates as well as considering any potential transition issues. 
The FSB has established an Official Sector Steering Group of regulators 
and central banks and will convene and guide the work of a Market 
Participants Group.
Direct Market Access
    Third, Commission staff currently is developing a concept release 
for public comment concerning the testing of systems and supervision of 
market participants with direct electronic market access. These 
concepts will be designed to address potential risks that high 
frequency traders and others who have direct market access may cause. 
Working with other regulators, we hope to hear from the public on this 
issue soon.
Resources
    Traffic laws are only as good and as valuable as the cops assigned 
to enforce them. While the reforms of the Dodd-Frank Act are essential 
to promoting transparency and lowering risk in the marketplace, they 
will not be sufficient to protect the public unless we have the cops on 
the beat to enforce them. To do so, the CFTC must be adequately funded.
    The agency currently is operating on a budget of $195 million after 
sequestration and has a staff of 685. That is only 8 percent more staff 
than we had 20 years ago. Yet since that time, the futures market has 
grown five-fold, driven by rapid advances in technology. The swaps 
market is eight times larger than the futures market.
    Imagine telling the South Dakota Highway Patrol or the Idaho Patrol 
that, instead of just patrolling the streets of South Dakota or Idaho, 
they are now responsible for policing a vast portion of the country's 
highway system, but they can only hire 8 percent more officers.
    That is basically the challenge we now face at the CFTC. Making the 
challenge even harder is that the new highway system we have been 
tasked with overseeing is much more complex. Not only do we need 
resources to have enough cops on the beat, but we need to make sure 
that our cops have the tools necessary to police the highways and 
protect the public.
    We are not asking for eight times our current funding, but 
investments in both technology and people are needed for effective 
oversight of these markets by regulators.
    Though data has started to be reported to the public and to 
regulators, we need the staff and technology to access, review, and 
analyze the data. With 80 entities having registered as new swap 
dealers, as well as new swap data repositories, swap execution 
facilities, and clearinghouses, we need people to review registrations 
and to run examinations to ensure compliance and ensure market 
integrity. Furthermore, as market participants expand their 
technological sophistication, CFTC technology upgrades are critical for 
market surveillance and to enhance customer fund protection programs.
    The U.S. Government is facing a strained budget environment, but 
adequately funding the CFTC is a good investment for the American 
public. The $182 billion AIG bailout was nearly 600 times more than the 
CFTC's budget request of $315 million. Without sufficient funding for 
the CFTC, the Nation cannot be assured that this agency can effectively 
enforce essential rules that promote transparency and lower risk to the 
economy. Without sufficient funding for the CFTC, the Nation cannot be 
assured this agency can closely monitor for the protection of customer 
funds and utilize our enforcement arm to its fullest potential to go 
after bad actors in the futures and swaps markets.
Conclusion
    Today's hearing comes as many of the swaps market reforms that this 
Committee worked to include in the Dodd-Frank Act have already begun to 
benefit the American public. The CFTC, having completed 59 final rules, 
orders and guidances, has nearly completed the rule set, and market 
participants are coming into compliance with these reforms. 
Clearinghouses have begun clearing the majority of interest rate and 
credit index derivatives, and the biggest swap dealers have 
provisionally registered with the CFTC. The public and regulators are 
benefiting from transparency, as real time and regulatory reporting is 
already a reality. SEFs will be up and running soon.
    Our staff has worked tirelessly to complete this reform that is so 
important to the American public. We will continue to work with 
domestic and international regulators on these critical reforms and to 
ensure compliance.
    I am pleased to tell you that the swaps market, which once was an 
unregulated highway, now has streetlights and traffic laws. The dealers 
now have to have drivers' licenses. Though there is still critical work 
to be done, the swaps marketplace will no longer be dark and will now 
have safer roads. Still, our traffic laws will not be fully effective 
without a sufficient number of cops patrolling the highways and back 
roads.
    Thank you again for inviting me today, and I look forward to your 
questions.




               RESPONSES TO WRITTEN QUESTIONS OF
              CHAIRMAN JOHNSON FROM MARY JO WHITE

Q.1. Identifying New Systemic Risks--What steps are the SEC and 
CFTC taking to identify other potential systemic risks in the 
markets each of you regulate?

A.1. Since the financial crisis, the SEC staff and their 
colleagues from other regulators have been collaborating with 
greater frequency and intensity to identify and appropriately 
address potential systemic risks. SEC staff participates in a 
number of working groups with other federal financial 
regulators relating to the supervision of certain large 
financial companies with subsidiaries or affiliates that are 
registered U.S. broker-dealers, where such risks may arise. In 
addition, SEC staff serves on the Financial Stability Oversight 
Council (FSOC or the Council) Systemic Risk Committee, which 
plays a role in monitoring systemic risk in the financial 
markets. As systemic risks often are global in nature, SEC 
staff also serves on international regulatory groups, such as 
Financial Stability Board committees, that seek to identify and 
develop coordinated initiatives to mitigate systemic risks, and 
I personally serve on the Financial Stability Board Steering 
Committee. These groups are designed to enhance regulatory 
cooperation and oversight, including crisis management and 
planning. Participation enhances the agency's ability to 
effectively supervise market participants by giving it greater 
insights into the full range of their activities, as well as 
providing a forum for regulators to discuss any emerging issues 
of potential concern with respect to those activities.
    Commission staff also is active in (1) leading the 
regulatory oversight of four registered clearing agencies 
designated as systemically important by the FSOC for which we 
act as supervisory agency under Title VIII of the Dodd-Frank 
Act and (2) contributing to the oversight of two other clearing 
agencies for which the CFTC is the named supervisory agency. 
Among the activities undertaken in the past year are the 
examinations required by Title VIII, in which staff from the 
Federal Reserve Board participates, as well as ad hoc reviews 
by Commission supervisory staff focused on governance and risk 
management. These examinations and reviews include attention to 
a clearing agency's compliance processes; internal audit 
findings and resolution; board of directors' interaction; and 
risk management framework, including new product reviews and 
approvals, margin methodology, back-testing and stress-testing 
procedures, risk monitoring practices, model governance 
practices, and sizing and allocation of financial resources. 
Findings from such examinations and reviews are used by 
Commission staff both to define specific remediation actions, 
and to inform discussions of systemic risk issues more 
generally with the Federal Reserve Board and the CFTC, as well 
as with other financial regulators through the Financial Market 
Utilities Committee of the FSOC.
    In addition, as a member of FSOC, I personally participate 
in the Council's work to identify risks to the financial 
stability of the United States and to respond to emerging 
threats to the stability of the U.S. financial system. As part 
of this work, particular emphasis is placed on identifying and 
follow-on monitoring of potential threats discussed in the 
FSOC's annual report, which most recently was published in 
April 2013 and is available at which most recently was 
published in April 2013 and is available at which most recently 
was published in April 2013 and is available at http://
www.treasury.gov/initiatives/fsoc/Documents/
FSOC%202013%20Annual%20Report.pdf. Among other issues, that 
report discussed issues related to vulnerabilities to sudden 
spikes in fixed income yields, foreign economic and financial 
developments, and operational risk. These are issues the SEC 
staff continues to monitor both in conjunction with FSOC 
reviews and in our own oversight of the financial entities the 
SEC regulates.

Q.2. CFTC-SEC Harmonization--What are the differences between 
how your agencies plan to regulate cross-border swaps, and what 
steps are you taking to better harmonize the two approaches?

A.2. There are many similarities, as well as some differences, 
in how the SEC and CFTC plan to regulate cross-border swaps. 
Both agencies have proposed, and the CFTC has now adopted, a 
robust set of measures for regulating cross-border swap 
activity, including a ``results-based'' substituted compliance 
framework. The principal differences between the SEC's proposed 
cross-border approach and the CFTC's final guidance involve the 
scope of the term ``U.S. person,'' the treatment of guaranteed 
affiliates, and the approach to substituted compliance for 
``true'' cross-border transactions. In addition, the agencies' 
approaches differ in the application of margin requirements 
and, potentially, the application of the Dodd-Frank Act to 
conduct in the United States by counterparties booking 
transactions outside the United States.
    First, with respect to the definition of ``U.S. person,'' 
the SEC's proposed rules define the term in a more limited and 
territorial manner than the CFTC. A key difference is the 
CFTC's focus on foreign-organized investment vehicles, such as 
hedge funds, that are majority-owned by U.S. persons. The SEC 
did not propose to take into account majority-ownership in 
determining the U.S. person status of investment vehicles. 
Instead, the SEC's proposed definition focuses on the place of 
organization of those investment vehicles.
    Second, unlike the CFTC's final guidance, the Commission's 
proposal does not require a non-U.S. person that receives a 
guarantee from a U.S. person to register as a security-based 
swap dealer so long as it limits its dealing activities to non-
U.S. persons and conducts those activities outside the United 
States. Further, the Commission's proposal does not require a 
non-U.S. person that is not guaranteed by a U.S. person to 
register as a dealer if it limits its activities to non-U.S. 
persons, regardless of whether those non-U.S. persons receive a 
guarantee from a U.S. person. The Commission's proposal, 
however, does address these risks with more targeted regulatory 
measures to address the activities of guaranteed non-U.S. 
persons.
    Third, the SEC's proposal would permit broad substituted 
compliance for ``true'' cross-border transactions, that is, 
those transactions involving a U.S. person and a non-U.S. 
counterparty (the so-called ``New Jersey Transaction''). The 
CFTC's guidance limits the use of substituted compliance in 
these circumstances, but holds out the possibility of allowing 
compliance with foreign law in these circumstances if it 
determines that the foreign requirements are ``essentially 
identical'' to the requirements of the Dodd-Frank Act.
    In addition, the SEC's proposal would treat margin as an 
``entity-level'' requirement, requiring foreign dealers to 
collect margin from both non-U.S. and U.S. counterparties, 
whereas the CFTC's final guidance would not require foreign 
dealers to collect margin from non-U.S, counterparties. On 
conduct in the United States, the SEC's proposal would apply 
certain Title VII requirements to a transaction conducted in 
the United States, but booked outside of the United States. The 
CFTC's final guidance appears to focus on conduct in the United 
States solely in the context of dealing activity by a non-U.S. 
dealer through a U.S. branch.
    As the SEC moves toward adoption of final cross-border 
rules, we are continuing to consider whether there are ways to 
bring our cross-border framework closer together with the CFTC 
framework. In addition to reviewing the comments we received on 
our proposal, we are carefully considering the approach taken 
by the CFTC in its final cross-border guidance. We are also 
engaging in discussions with CFTC on various cross-border 
issues with an eye toward finding ways, given the differences 
in our statutory frameworks, and in our products, markets and 
participants, to achieve more consistency at adoption.

Q.3. Credit Rating Agencies--What lessons have been learned in 
the credit rating market since the financial crisis? What has 
been learned considering the possible solutions, including the 
Franken Amendment? As the credit rating process is revised, do 
you think that the market can become less dependent on explicit 
ratings? Do you believe that the quality of ratings can 
improve?

A.3. The Credit Rating Agency Reform Act of 2006 provided the 
Commission with explicit oversight authority over credit rating 
agencies registered as nationally recognized statistical rating 
organizations, or NRSROs. This oversight authority was expanded 
with the enactment of the Dodd-Frank Act. Through the enhanced 
examinations of NRSROs that have been conducted since the 
financial crisis, as required by the Dodd-Frank Act and 
documented in our annual reports to Congress, we have seen the 
NRSROs strengthen their governance structure and their 
controls, increase transparency, and enhance the integrity of 
the ratings process. Other important issues have been addressed 
in a suite of recent Commission studies on credit rating 
standardization, reliance on credit ratings, and assigned 
credit ratings.
    The staff also is working to finalize the suite of new 
rules required under the Dodd-Frank Act that are applicable to 
NRSROs, and the Commission continues to focus on removing 
references to credit ratings in its rules and regulations. We 
expect that both of these efforts will contribute significantly 
to industry reform. Pursuant to the authority provided to the 
Commission under the Dodd-Frank Act, the staff will continue to 
examine the NRSROs' compliance with applicable rules and may 
develop further recommendations to be presented to the 
Commission in the future.
    In particular, in December 2012, Commission staff issued a 
Report to Congress on Assigned Credit Ratings, as required by 
Section 939F of the Dodd-Frank Act. The staff recommended that 
the Commission, as a next step, convene a roundtable to discuss 
the potential courses of action presented in the report. The 
Commission held this Credit Ratings Roundtable in May 2013 with 
broad representation from a range of interested constituencies. 
The staff considered the various viewpoints presented during 
discussion at the roundtable, as well as in the related public 
comment letters, and will be presenting to the Commission a 
recommendation for its consideration. Any such staff 
recommendation will be designed to increase transparency, 
foster competition, mitigate conflicts of interest associated 
with the issuer-pay business model, and may consider removing 
certain impediments in the rules to encourage the issuance of 
unsolicited credit ratings for structured finance products.
    In terms of whether the market can become less dependent on 
ratings, increased transparency with respect to credit ratings 
and the credit ratings process is designed to promote less 
mechanistic reliance on credit ratings. The Commission's 
continued focus on removing references to credit ratings in its 
rules and regulations will further the efforts to reduce market 
dependence on ratings.
    The notion of quality of ratings would include integrity in 
the ratings process, governance and controls around determining 
and disseminating ratings, and ongoing surveillance of ratings. 
Consistent with the authority provided to the Commission, the 
staff's examinations are designed to test, assess and, where 
deficient, make recommendations for improving, the ratings 
process. This oversight should ultimately lead to improvement 
in the quality of ratings. It is important to note, however, 
that quality of ratings is distinct from accuracy of ratings. 
Market participants need to judge for themselves the quality of 
ratings and whether to use those ratings as an input in their 
decision making.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM MARY JO WHITE

Q.1. By regulations enacted in December 2011, both the SEC and 
CFTC collect information on private funds (hedge funds, private 
equity, and liquidity funds). The SEC has been collecting data 
on Form PF for over a year, and the CFTC on its Form PQR more 
recently (starting with March 31, 2013, data). What plans does 
your agency have for the review and use of this data?

A.1. While data collected on Form PF is intended primarily for 
use by the Financial Stability Oversight Council's (FSOC) in 
monitoring systemic risk, the Commission also may use the 
information collected on Form PF in its regulatory programs, 
including examinations, investigations, and investor protection 
efforts relating to private fund advisers. As detailed in an 
annual report provided to Congress on July 25, 2013, Commission 
staff has begun to assess the quality of the Form PF data 
collected, including evaluating the consistency of filer 
responses and differences in approaches or assumptions made by 
filers. Commission staff has established a working group with 
the Office of Financial Research--the group within the 
Department of Treasury responsible for performing FSOC's 
systemic risk analyses--to coordinate how potential data 
quality concerns are addressed. In addition, a number of uses 
of the information have been identified across various 
Commission Divisions and Offices. For example, Commission staff 
has incorporated Form PF data into proprietary analytical tools 
and will develop data analytics incorporating Form PF data. 
Also, Commission staff anticipates using the information 
collected on Form PF as part of their pre-examination due 
diligence and in risk identification.

Q.2. The SEC is on a good trajectory toward embracing economic 
analysis. While I applaud its achievements, there is more to be 
done and it is too early to declare victory. Chair White, do 
you remain committed to complete implementation of the 
Commission's economic guidance?

A.2. I continue to believe that robust and transparent economic 
analysis is key to developing strong and effective regulations. 
The 2012 Current Guidance on Economic Analysis in SEC 
Rulemaking has enhanced the economic analysis in rulemaking at 
the Commission, and I remain committed to its ongoing 
application. Indeed, I am always seeking ways to further 
improve our consideration of the potential economic impacts of 
Commission rules and will continue those efforts.

Q.3. The SEC's Money Market Fund rulemaking proposes to float 
the NAV for prime institutional funds. I have concerns 
regarding the interaction of tax issues and the proposal. Chair 
White, in addition to considering the IRS's guidance on wash 
sales, is the SEC coordinating with the IRS to address tax 
issues associated with a potential floating NAV?

A.3. Commission staff is engaged in dialogue with staff at the 
Internal Revenue Service and the U.S. Department of the 
Treasury about the tax implications associated with a floating 
NAV reform alternative, as well as administrative relief that 
the IRS and Treasury Department are currently considering that 
could reduce tax reporting-related burdens and costs to 
shareholders. The reporting relief that Commission staff 
understands the IRS and Treasury Department are considering 
would allow for net information reporting by funds of realized 
gains and losses for sales of fund shares, as well as summary 
income tax reporting by shareholders (rather than requiring 
funds and shareholders to report the details of each 
transaction separately). In addition, Commission staff is 
working with staff at the IRS and Treasury Department to 
address issues relating to ``wash sale'' rules that apply when 
shareholders sell securities at a loss and, within 30 days 
before or after the sale, buy substantially identical 
securities. As you note, the IRS recently proposed guidance on 
the wash sale rules, under which redemptions of floating NAV 
money market fund shares that generate losses below a certain 
threshold would not be subject to these rules. The June 2013 
money market fund reform proposal describes the tax 
implications relating to the floating NAV alternative 
generally, as well as potential IRS and Treasury Department 
relief that would affect these implications. I, along with 
Commission staff, currently are reviewing comment letters 
submitted in response to the proposal, including comments 
requesting that greater tax relief be provided in connection 
with any floating NAV requirement in order to minimize 
operational burdens on fund groups and their intermediaries and 
shareholders. These comments certainly will inform any money 
market fund reforms that the Commission ultimately adopts, and 
I have directed SEC staff to continue working with the IRS and 
Treasury Department to minimize any tax-related burdens 
associated with money market fund reforms to the maximum extent 
possible.

Q.4. Chairman Gensler suggested in his hearing testimony that 
the CFTC and SEC coordinated closely in the issuance of the 
CFTC's final cross-border guidance and exemptive order. What is 
your view regarding the extent to which SEC's comments are 
incorporated into the CFTC's final guidance? Do you think that 
more could have been done to move the CFTC's and SEC's 
framework closer together?

A.4. The Dodd-Frank Act requires the SEC and CFTC to consult 
and coordinate regularly for the purposes of assuring 
regulatory consistency and comparability, to the extent 
possible. To that end, SEC and CFTC staff exchanged draft 
documents relating to our respective cross-border efforts, and 
engaged in conversations on various cross-border issues, over 
the months leading up to the issuance of our cross-border 
proposal and the CFTC's final guidance. These efforts helped us 
better understand the CFTC's thinking on various cross-border 
issues, and, similarly, we believe they helped shape the CFTC 
guidance in some respects. For example, the CFTC's final 
guidance addresses foreign banks conducting dealing activity 
out of their U.S. branches with foreign customers, an issue 
that was not addressed in the CFTC's proposed guidance, but was 
addressed in the SEC's cross-border proposal.
    I believe there is much that can and should be done going 
forward to ensure close consultation and collaboration on 
regulatory and interpretive questions affecting these markets 
that the two agencies jointly regulate, and our staff has 
continued to engage in useful and productive discussions with 
CFTC staff in that regard. In addition, as I indicated at the 
hearing, I am committed to having discussions at the principal 
level to enhance coordination with the CFTC on cross-border 
issues.

Q.5. As you know, the FSOC is responsible for the designation 
of nonbank systemically important financial institutions 
(SIFIs), and has publicly indicated that it is reviewing what 
risk, if any, asset managers pose to the U.S. financial system. 
The SEC is the expert agency on asset management, both from its 
long-established oversight of the mutual fund industry. What 
role is the SEC playing in this FSOC review? Is the SEC's 
expertise being reflected in the study?

A.5. I agree that, as the primary regulator of the asset 
management industry, the SEC possesses unique expertise in this 
area. I directed relevant SEC staff to engage with the Office 
of Financial Research (OFR) in the preparation of its study and 
to provide our staff's input. Ultimately, however, the study is 
the work product of the OFR. The OFR published this study in 
September 2013, and the SEC has invited public feedback on the 
study (see, http://www.sec.gov/News/PressRelease/Detail/
PressRelease/1370539852635). We have received approximately 25 
letters in response to this invitation for public feedback. In 
addition, I would expect that the SEC, as the primary regulator 
of the asset management industry, would be involved in any 
follow-on work as a result of the study.

Q.6. The Federal Reserve currently has under consideration a 
proposal that would require foreign banks to hold their U.S. 
broker-dealer operations through a U.S. intermediate holding 
company. Concerns have been expressed regarding the impact the 
application of bank capital rules at that holding company 
level--especially the leverage requirement--would have on the 
broker-dealer. Is the SEC concerned about the implications of 
the Fed's proposal for broker-dealers, and is the SEC working 
with the Fed to address them?

A.6. The SEC has a net capital rule for broker-dealers that is 
designed to ensure that customers and other market participants 
are fully protected in the event a broker-dealer fails by 
requiring a broker-dealer to hold an amount of liquid assets 
that is greater than its liabilities. The rule and related 
financial responsibility requirements are aimed at both 
protecting customer assets and limiting damage to the financial 
system that may result from the failure of a broker-dealer.
    Aspects of the Fed's proposal, particularly the bank 
leverage requirements, potentially could affect the operations 
of certain broker-dealers by, for example, requiring the 
allocation of additional capital to the broker-dealer. Such a 
result could in turn limit the ability of the broker-dealer to 
engage in some businesses, including by increasing the 
financing costs associated with a repurchase agreement or 
securities lending activities.
    The Commission staff is focused on these potential effects 
and is continuing to consult with Federal Reserve staff to 
fully define their extent and consequences, identify any 
potential changes to the proposal that may be appropriate, and 
help ensure that the impact on broker-dealers is fully 
considered and factored into adoption of any final rules in 
this area.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                       FROM MARY JO WHITE

Q.1. I know there is discussion around having the SEC pick a 
rating agency for every deal that gets done. While I support 
increased regulation of the use of these ratings and the rating 
agencies themselves, I have to say that instituting a mandatory 
rotation rule managed by the SEC seems like a cumbersome way to 
solve a problem. Is having the SEC play the role of selecting 
the rating agency on every deal even logistically possible? I 
understand that reforms to the way in which we use ratings is 
warranted, and I know that we have made some reforms already, 
such as not allowing ratings to be used by regulators as the 
primary tool for assessing a bank's asset quality. But forcing 
the SEC to assign a rating agency to every deal seems like 
overkill. Where do we stand with that issue?

A.1. As you know, in December 2012, Commission staff issued a 
Report to Congress on Assigned Credit Ratings, as required by 
Section 939F of the Dodd-Frank Act. The staff recommended that 
the Commission, as a next step, convene a roundtable to discuss 
the potential courses of action presented in the report. The 
Commission held this Credit Ratings Roundtable in May 2013 with 
broad representation from a range of interested constituencies.
    The staff considered the various viewpoints presented 
during discussion at the roundtable, as well as in the related 
public comment letters, and will be presenting to the 
Commission a recommendation for its consideration. Any such 
staff recommendation will be designed to increase transparency, 
foster competition, mitigate conflicts of interest associated 
with the issuer-pay business model, and may consider removing 
certain impediments in the rules to encourage the issuance of 
unsolicited credit ratings for structured finance products. Any 
reforms considered also will be focused on efficient, 
noncumbersome solutions.
    The staff is also working to finalize the suite of new 
rules required under the Dodd-Frank Act that are applicable to 
nationally recognized statistical rating organizations, or 
NRSROs, and the Commission continues to focus on removing 
references to credit ratings in its rules and regulations. We 
expect that both of these efforts will contribute significantly 
to industry reform. Pursuant to the authority provided to the 
Commission under the Dodd-Frank Act, the staff will continue to 
examine the NRSROs' compliance with applicable rules and may 
develop further recommendations to be presented to the 
Commission in the future.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
                       FROM MARY JO WHITE

Q.1. I understand this hearing is about systemic risk and that 
has been the focus of Congress and the regulators for the last 
5 years. However, in focusing so much time and resources on 
systemic risk, is it possible we are hindering innovation and 
opportunities for investors? I am aware of hundreds of ETF 
applications and innovations that have been pending at the SEC 
for years--some as many as 5 years. Very few businesses can 
wait for Government approvals for 5 years.
    Press reports indicate that the Division of Investment 
Management (DIM) is considering streamlining the ETF approval 
process. Is this accurate?
    Can you tell me the timeline for when we should see 
something on this from DIM, and what you expect the parameters 
to be for streamlined review? Is it your expectation that all 
equity ETFs with no leverage and no synthetic instruments will 
be eligible for this streamlined approval process?

A.1. Prior to offering any securities to the public, Exchange 
Traded Funds (ETFs) seeking to operate as investment companies 
under the Investment Company Act of 1940 must receive exemptive 
relief from various provisions of that Act. In order to receive 
the Commission's exemptive relief, an ETF must be listed and 
traded on a national securities exchange, and an ETF must be 
able to meet the requirements for listing standards prior to 
being listed and traded on a national securities exchange.
    The Commission's Division of Investment Management has 
significantly streamlined its internal review process for ETF 
applications. It has instituted deadlines for the staff's 
review and developed generally standardized terms and 
conditions for these applications. In addition, the staff 
redesigned the Commission's Web site so that ``model'' ETF 
applications are now easily available to applicants for review 
and guidance, a step that has been applauded by the industry. 
Applicants that use these models for ``plain vanilla'' ETFs--
i.e., ETFs that seek to achieve the performance of a 
securities-based index or ETFs whose investment advisers 
actively manage fund investments, including synthetic 
instruments, to achieve a stated investment objective--receive 
expedited treatment of their applications.
    In order for a national securities exchange to list the 
shares of an ETF for trading, the ETF must either fit within 
the exchange's existing ``generic'' listing standards, which 
have been approved by the Commission and require no further 
regulatory action, or the exchange must file a proposed rule 
change with the Commission pursuant to the Exchange Act to list 
and trade the new ETF, which the Commission must approve before 
the exchange can list or trade the ETF. The Exchange Act sets 
out the timing for Commission review of--and action on--the 
proposed rule changes. If the Commission fails to meet any of 
the statutory deadlines, the exchange's filing is deemed 
approved. The exchange makes the decision as to when to file 
its proposal and thereby trigger the statutory time frames.
    Staff in the Commission's Division of Trading and Markets, 
which oversees proposed rules changes and other requests for 
relief relating to the listing and trading of all exchange-
traded investment products (ETPs), including ETFs, on national 
securities exchanges, has been evaluating market issues 
relating to the listing and trading of ETPs on national 
securities exchanges.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
               CHAIRMAN JOHNSON FROM GARY GENSLER

Q.1.  CFTC-SEC Harmonization--What are the differences between 
how your agencies plan to regulate cross-border swaps, and what 
steps are you taking to better harmonize the two approaches?

A.1. The staffs of the CFTC and SEC have closely consulted in 
an effort to increase understanding of each other's regulatory 
approaches and to harmonize the cross-border approaches of the 
two agencies to the greatest extent possible, consistent with 
their respective statutory mandates. The Commissions recognize 
the value of harmonizing their cross-border policies to the 
fullest extent possible. The staffs of the two Commissions have 
participated in numerous meetings to work jointly toward this 
objective. The Commissions expect that this consultative 
process will continue as each agency works towards implementing 
its respective cross-border policy.
    Two months before publication of the CFTC's cross-border 
guidance, the SEC published for public comment proposed rules 
and interpretive guidance to address the application of the 
provisions of the Commodity Exchange Act, added by Subtitle B 
of Title VII of the Dodd-Frank Act, that relate to cross-border 
security-based swap activities. The CFTC considered the SEC's 
cross-border proposal and took it into account in the process 
of preparing the CFTC's final interpretive guidance.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM GARY GENSLER

Q.1. By regulations enacted in December 2011, both the SEC and 
CFTC collect information on private funds (hedge funds, private 
equity, and liquidity funds). The SEC has been collecting data 
on Form PF for over a year, and the CFTC on its Form PQR more 
recently (starting with March 31, 2013, data). What plans does 
your agency have for the review and use of this data?

A.1. The data will be used to check disclosures that are made 
to commodity pool participants and to assist in the review of 
annual financial statements and footnote disclosures. The data 
also will be used to support examinations of futures commission 
merchants (FCMs), including for assessing contagion pathways in 
the event of a failure of either an FCM or a commodity pool.

Q.2. The CFTC's cross-border guidance was done outside the 
formal notice and comment process that the Administrative 
Procedure Act provides. Therefore, there was no opportunity for 
the public and stakeholders to formally comment on the final 
guidance prior to its release. Chairman Gensler, given the 
global significance of the cross-border issue, please explain 
why you found it acceptable to proceed without transparent 
formal notice and comment rulemaking?

A.2. Congress was clear that the far-flung operations of U.S. 
enterprises are to be covered by reform. Recognizing the 
lessons of the crisis and modern finance, Congress provided in 
section 722(d) of the Dodd-Frank Act that swaps reform applies 
to activities outside our borders with ``a direct and 
significant connection with activities in, or effect on, 
commerce of the United States.'' To respond to industry 
questions regarding the interpretation of that provision, the 
Commission on June 29, 2012, voted to propose for public 
comment interpretive guidance on the manner in which it would 
apply Title VII's swaps provisions to cross-border activities.
    The CFTC received approximately 290 comment letters on the 
proposed guidance from a variety of interested parties, 
including major U.S. and non-U.S. banks and financial 
institutions that conduct global swap business, trade 
associations, clearing organizations, law firms, Congressional 
offices, public interest organizations, and foreign regulators. 
While considering the proposed guidance, including the public 
comments, the CFTC determined that further consideration of 
public comments regarding the CFTC's proposed interpretation of 
the term ``U.S. person,'' and its proposed guidance regarding 
aggregation for purposes of swap dealer registration would be 
helpful. On January 7, 2013, the CFTC published further 
proposed guidance on these points. The CFTC received 
approximately 24 comment letters on the further proposed 
guidance. The CFTC's final cross-border guidance discusses the 
significant issues raised by the commenters on the proposed 
guidance, and how the CFTC addressed the points that they made.
    In addition to these comment letters, Commission personnel 
held over 50 meetings regarding cross-border issues with 
various market participants and others with an interest in the 
guidance. The CFTC consulted closely throughout the process 
with the SEC, other U.S. regulators, and international 
regulators in developing the cross-border guidance.
    The comment letters, meetings, and other information 
provided were crucial to the Commission's effort in finalizing 
the interpretive guidance.

Q.3. The CFTC does not yet have a permanent Chief Economist. 
This is a critical role to be filled in order for the CFTC to 
understand the economic consequences of the regulatory choices 
it makes.
    Chairman Gensler, what is the status of the CFTC's search 
for a permanent Chief Economist?

A.3. The Commission continues in its efforts to appoint a 
permanent Chief Economist. Scott Mixon currently serves as 
Acting Chief Economist. Dr. Mixon is a financial economist with 
over 15 years of industry experience implementing and 
communicating quantitative and empirical analysis.
    OCE staff economists play an integral role in cost and 
benefit considerations, as well as other aspects of agency 
rulemakings. OCE staff consists of both Ph.D. and pre-Ph.D. 
economists trained in conducting policy analysis, economic 
research, expert testimony, education, and training.

Q.4. While the CFTC and SEC coordinated private fund reporting 
in principle, the CFTC is now requiring those private funds 
that report on Form PF to also file certain information on the 
CFTC's Form PQR. Both forms differ in how the same data is 
presented and filed with the agencies (e.g, list of 
investments)--this means that OFR is not receiving comparable 
information. This is an unnecessary burden on industry. Are you 
aware of this disconnect? What can the CFTC do to provide 
consistency here?

A.4. Dually registered investment advisers to private funds 
that file Form PF only have to file Schedule A of Form CPO-PQR 
with the Commission. This information is largely demographic in 
nature and represents a small subset of the solicited data. 
With respect to the schedule of investments, for example, the 
adviser to the private fund would only report that information 
on Form PF. With respect to the information that OFR is 
receiving from the SEC and CFTC, OFR will not receive 
duplicative or inconsistent data as a result of these advisers 
filing Form PF and Schedule A of Form CPO-PQR.

Q.5. Based on statements of CFTC Commissioners, we understand 
transmitting swaps data that is collected in swap data 
repositories (SDR) to the CFTC has caused the CFTC's computers 
to crash. The CFTC is also collecting private fund reporting 
data, which is information is filed through the National 
Futures Association (NFA) system and then transmitted to the 
CFTC. Please explain the technological problems the CFTC has 
encountered in the transmission of the SDR and NFA data to the 
CFTC system.

A.5. The Commission currently receives and processes more than 
half a billion rows of data every day from regulated entities 
and has the capability to use SDR-provided facilities to access 
swaps reporting data and receives sub-sets of that information 
as necessary. An instance when CFTC personnel attempted to open 
a very large file from an SDR with malformed data caused a 
temporary disruption. The SDR corrected the data and the 
problem was resolved.
              Additional Material Supplied for the Record




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