[Senate Hearing 113-246]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-246
 
         OVERSIGHT OF THE COMMODITY FUTURES TRADING COMMISSION

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


                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,

                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE


                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION


                               __________

                           FEBRUARY 27, 2013

                               __________

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


        Available via the World Wide Web: http://www.fdsys.gov/





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            COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY



                 DEBBIE STABENOW, Michigan, Chairwoman

PATRICK J. LEAHY, Vermont            THAD COCHRAN, Mississippi
TOM HARKIN, Iowa                     MITCH McCONNELL, Kentucky
MAX BAUCUS, Montana                  PAT ROBERTS, Kansas
SHERROD BROWN, Ohio                  SAXBY CHAMBLISS, Georgia
AMY KLOBUCHAR, Minnesota             JOHN BOOZMAN, Arkansas
MICHAEL BENNET, Colorado             JOHN HOEVEN, North Dakota
KIRSTEN GILLIBRAND, New York         MIKE JOHANNS, Nebraska
JOE DONNELLY, Indiana                CHARLES E. GRASSLEY, Iowa
HEITKAMP, HEIDI, North Dakota        JOHN THUNE, South Dakota
COWAN, WILLIAM ``MO'', 
Massachusetts

             Christopher J. Adamo, Majority Staff Director

              Jonathan W. Coppess, Majority Chief Counsel

                    Jessica L. Williams, Chief Clerk

              Thomas Allen Hawks, Minority Staff Director

                Anne C. Hazlett, Minority Chief Counsel

                                  (ii)


                            C O N T E N T S

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                                                                   Page

Hearing(s):

Oversight of the Commodity Futures Trading Commission............     1

                              ----------                              

                      Wednesday, February 27, 2013
                    STATEMENTS PRESENTED BY SENATORS

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, 
  Chairwoman, Committee on Agriculture, Nutrition and Forestry...     1
Cochran, Hon. Thad, U.S. Senator from the State of Mississippi...     2

                                Witness

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission.....................................................     3
                              ----------                              

                                APPENDIX

Prepared Statements:
    Cochran, Hon. Thad...........................................    28
    Thune, Hon. John.............................................    33
    Gensler, Hon. Gary...........................................    34
Question and Answer:
Hon. Debbie Stabenow:
    Written questions to Hon. Gary Gensler.......................    60
Hon. Saxby Chambliss:
    Written questions to Hon. Gary Gensler.......................    62
Hon. Thad Cochran:
    Written questions to Hon. Gary Gensler.......................    63
Hon. Charles Grassley:
    Written questions to Hon. Gary Gensler.......................    66
Hon. Tom Harkin:
    Written questions to Hon. Gary Gensler.......................    68
Hon. Patrick J. Leahy:
    Written questions to Hon. Gary Gensler.......................    69
Hon. John Thune:
    Written questions to Hon. Gary Gensler.......................    70
Hon. Gary Gensler:
    Written response to questions from Hon. Debbie Stabenow......    73
    Written response to questions from Hon. Saxby Chambliss......    94
    Written response to questions from Hon. Thad Cochran.........    76
    Written response to questions from Hon. Charles Grassley.....    95
    Written response to questions from Hon. Tom Harkin...........    91
    Written response to questions from Hon. Patrick J. Leahy.....    90
    Written response to questions from Hon. John Thune...........    98



         OVERSIGHT OF THE COMMODITY FUTURES TRADING COMMISSION

                              ----------                              


                      Wednesday, February 27, 2013

                              United States Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 2:36 p.m., in 
room 328A, Russell Senate Office Building, Hon. Debbie 
Stabenow, Chairwoman of the Committee, presiding.
    Present: Senators Stabenow, Klobuchar, Gillibrand, 
Donnelly, Heitkamp, Cowan, Cochran, Roberts, Chambliss, 
Boozman, Hoeven, and Johanns.

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

    Chairwoman Stabenow. Well, good afternoon, and we will call 
to order the Senate Committee on Agriculture, Nutrition, and 
Forestry, and we very much appreciate Chairman Gensler joining 
us today. This is a very important oversight hearing on the 
Commodity Futures Trading Commission, and we are looking 
forward to the opportunity to talk about some very important 
issues.
    This hearing will look at the agency's agenda for this 
year, its implementation of Wall Street reform, its efforts to 
protect customers since the failures of MF Global and 
Peregrine, and lay out this Committee's plans for the agency's 
2013 reauthorization. The CFTC is responsible for making sure 
derivatives markets are safe for trading and free of 
manipulation, as we all know.
    American farmers and co-ops, manufacturers, utilities, and 
businesses rely on these markets to manage their risk and 
shield consumers from price swings. In fact, more than 38 
million Americans work at companies that use derivatives, a 
number that underscores the importance of the agency to our 
daily lives. That is why the Wall Street Reform and Consumer 
Protection Act is so important.
    While the CFTC is further ahead than other agencies in 
implementing this law--and we appreciate that--there are still 
many outstanding issues to address, including a final rule on 
swaps execution facilities, cross-border guidance, and 
compliance with the law. It is also important to get a progress 
report on the issues surrounding the failures at MF Global and 
Peregrine Financial Group.
    I would like to take a couple of moments to make a couple 
of points on cross-border issues, which I think are so 
important.
    It is imperative that the agency uses its authority on 
extraterritoriality wisely. It is critical that we prioritize 
safety and soundness, particularly in such interconnected 
markets, but the CFTC must also take into consideration the 
importance of global harmonization and international 
cooperation and find creative ways to meet and merge these 
goals. A failure to meet this objective invites congressional 
action or, worse, global retaliation.
    With so many critical issues before the agency, I also want 
to acknowledge the serious budget constraints that the CFTC is 
experiencing, including the uncertainty of sequestration. I 
continue to be concerned that if the agency does not have the 
tools it needs to implement reform and oversee these markets, 
we are asking for a repeat of the crisis that cost us so many 
jobs.
    Finally, we will begin the discussion about reauthorization 
of the CFTC today. Senator Cochran and I will work closely on 
this issue. The process will be open and bipartisan, with any 
product being consensus driven.
    To that end, Senator Cochran and I will release a joint 
letter in the coming days that will invite the public's input 
by May 1. These comments and recommendations will become part 
of the public conversation, particularly about commodity market 
oversight generally and the need for additional customer 
protections in the wake of failures at MF Global and Peregrine 
Financial. These markets, whether for physical goods or 
financial products, must be orderly, transparent, competitive, 
and safe for trading.
    We must have markets that allow farmers, small businesses, 
and others to manage risk without fear. That also means we need 
our cops on the beat to have the resources they need to do 
their jobs.
    Thank you again, Chairman Gensler, for being here today. We 
look forward, as always, to working with you and the rest of 
the Commission on these very important issues.
    I will now turn to my friend and Ranking Member, Senator 
Cochran.

STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM THE STATE OF 
                          MISSISSIPPI

    Senator Cochran. Thank you, Madam Chairwoman. We appreciate 
your convening this hearing today.
    We understand the CFTC has been busy. They have completed 
43 rules covering approximately 80 percent of the CFTC's Dodd-
Frank reforms. There have also been issued by the agency no-
action letters, which are used to exempt entities from the 
regulations if they do not apply.
    We understand our role is to determine whether in these 
instances their actions have been consistent with the 
provisions of the Dodd-Frank Act, Title VII in particular, and 
whether or not there has been any overreaching of congressional 
intent or interpretation of the law.
    So, with that in mind, Madam Chair, we join you in 
welcoming our witnesses and thanking them for their good 
efforts, and we look forward to hearing their testimony.
    Chairwoman Stabenow. Thank you very much, Senator Cochran.
    We have a lot to discuss today, and in the interest of 
time, I will ask members to submit opening statements for the 
record. And, of course, as always, for questions we will 
recognize Senators based on order of appearance, alternating 
sides.
    I am pleased once again to welcome someone who is no 
stranger to this Committee. We appreciate your work and the 
tasks that you and the Commission have been given.
    Mr. Gensler is the Chairman, as we know, of the Commodity 
Futures Trading Commission and has been a leader in the effort 
to implement Title VII of Dodd-Frank. Prior to his appointment, 
Mr. Gensler had two positions with U.S. Treasury under the 
Clinton administration, and there he served as Under Secretary 
of Treasury for Domestic Finance and Assistant Secretary of the 
Treasury for Financial Markets.
    We welcome you back, and as you know, we ask for 5 minutes 
of verbal testimony, and we certainly welcome anything you 
would like to give us in writing, and then we will open it up 
to questions. Welcome.

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

    Mr. Gensler. Thank you, Chairwoman Stabenow, Ranking Member 
Cochran, and members of the Committee, the new members. Good to 
be before you. I think this is the tenth time, I am told, that 
I have testified in front of your Committee, and it is always 
an honor to be here.
    This hearing is occurring at a historic time in the 
markets. With your direction, this Committee's and the whole 
Congress, the CFTC now oversees the derivatives marketplace, 
both the futures marketplace but also the swaps marketplace.
    As Senator Cochran noted, our agency has completed about 80 
percent of the rules that Congress tasked us with, and the 
marketplace is increasingly shifting to implementation of these 
common-sense rules of the road.
    So what does it mean? For the first time, the public is 
benefitting from actually seeing the price and volume of each 
swap transaction as it occurs, with some time delay to benefit 
the market. But this information is available free of charge on 
a website just like a modern-day ticker tape.
    Secondly, for the first time the public will benefit from 
greater access to the swaps market and risk reduction that 
comes from centralized clearing that will be phased in between 
March and September of this year. We are one of two nations, 
along with Japan, that met the 2012 deadline to do this, but 
Europe is just within months behind us.
    And for the first time, the public is benefitting from the 
oversight of swap dealers. More than 70 have actually 
registered, and this means they would adhere to sales practice 
and business conduct standards to help lower risks to the 
overall economy. These are the reforms that are already in 
place and are being implemented this year.
    The swaps market reforms ultimately benefit end users. End 
users in our economy make up over 94 percent of private sector 
jobs. This is the non-financial side of the economy. These 
reforms benefit end users by greater transparency, which then 
tends to shift the information advantage from Wall Street to 
Main Street. And we have completed rules to ensure, as you 
directed us to, that non-financial end users are not required 
to participate in clearing; furthermore, that the CFTC's 
proposed margin rules provide that end users will not be caught 
up to have to post margin for uncleared swaps, and we are 
advocating internationally for that as well, both here 
domestically with the Federal Reserve as well as 
internationally with bank regulators in Europe and elsewhere.
    And to smooth the market's transition to reform, the 
Commission has consistently been committed to phase in 
compliance based upon input from market participants, and that 
has led, as Senator Cochran mentioned, to sometimes granting 
no-action relief to try to phase the compliance, give people 
more time to phase this in.
    In 2013, we still need to finish rules in two key areas. As 
the Chairwoman mentioned, pre-trade transparency benefits the 
market, and this is accomplished through the swap execution 
facilities and the block rule.
    Secondly, ensuring that cross-border application of swaps 
market reform appropriately covers risks that can come back 
here, and I think the key here is that we cover the U.S. 
affiliates overseas if they are guaranteed here. We recognize 
that they might be regulated there. If they are regulated 
comparably and consistently, then we would be all right with 
that. But I think Congress recognized the basic lessons of the 
2008 crisis, that during a default risk knows no geographic 
boundary and it can come crashing back here, as it did in 
Lehman Brothers and AIG and elsewhere. And I think failing to 
incorporate those basic lessons of modern finance into our 
oversight would not only fall short of your direction but also 
leave the public at risk that jobs might move offshore in these 
large U.S. financial institutions, but the risk would still 
certainly be able to come right back here.
    I would like to just mention something on customer 
protection and on the LIBOR situation in my 50 seconds left. We 
have worked closely with the industry and market participants 
to enhance customer protection. The NFA adopted rules last year 
and so forth, but we put further proposals out to public 
comment, and we have gotten 125 good comment letters on it. We 
had three public roundtables. And so part of our 2013 agenda is 
to finish up on the customer protection agenda.
    Also part of our 2013 agenda relates to the international 
rates called LIBOR and related rates, and though the Treasury 
Department did collect $2 billion in fines between the Justice 
Department and our fines, the really main issue is not the 
fines. It is about ensuring that these are reliable and honest 
rates that the rest of the market can reference.
    I would like to just close by noting on resources, as the 
Chairwoman said, the CFTC has been asked to take on a market 
that is vast in size, actually 8 times the size of the futures 
market, and the futures market itself has grown considerably 
since the 1990s, and yet we still stand about 10 percent larger 
than we were 20 years ago. We are an agency that is not sized 
appropriately to the new tasks that Congress has given us, and 
I would look forward to working with everyone in Congress on 
that issue as well.
    I thank you.
    [The prepared statement of Mr. Gensler can be found on page 
34 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    It is our intent to do two rounds of 5 minutes each on 
questions today, and we can determine from there if we wish to 
go any further. But thank you again for coming before the 
Committee.
    Mr. Chairman, we all know that the Wall Street reform 
addressed the opaque risk taking that crippled the economy, and 
in Title VII this involved requiring standardized swaps to be 
centrally cleared. Next month, the clearing mandate will begin 
for many swaps, and major clearinghouses will grow in size and 
importance. Clearinghouses should not become new points of 
systemic risk.
    So can you expand on your testimony? What specifically is 
the CFTC doing to ensure that derivatives clearing 
organizations properly value and manage risk and have adequate 
resources to meet the evolving needs of the clearinghouses?
    Mr. Gensler. Clearinghouses, which have existed actually 
since the 1890s to help lower risk, are not without risk. I 
think they are a better model than leaving those risks inside 
the banking system, but they still have risk.
    Core to the rules that we finalized at your direction-- and 
we finalized these about a year and a half ago--we took the 
international standards, and we put them in our rules to make 
sure that every day the derivatives, futures, or swaps are 
valued and every day something called collateral is posted on 
these transactions. And in the futures world, that has worked 
well over many decades, but the swaps world was a new piece of 
that.
    We have consulted with the Federal Reserve closely as well, 
as Congress directed us that we should, and the SEC and the 
international arena as well.
    Chairwoman Stabenow. Would you talk a little bit more about 
swaps and futures? Because there is a lot of concern there. 
Some have argued that different margin standards for certain 
swaps and futures are a concern; in particular, that higher 
minimum margin standards for certain cleared swaps discriminate 
unnecessarily against swaps markets, and that if a margin 
requirement were risk based, this would not be the case. Could 
you talk about--do you believe that cleared swaps are riskier 
than cleared futures?
    Mr. Gensler. Well, where we settled out in a rule that we 
finalized in the fall of 2011 is that the margin posted for 
cleared swaps in the energy markets, in the agricultural 
markets, and the metals markets would be identical to the 
margin posted for cleared futures and agricultural, energy, and 
metals.
    The one place where we differed, where we thought that the 
margins for cleared swaps should be higher, was in the interest 
rate swaps market and in the credit derivatives. There are no 
futures really right now for credit derivatives, so actually 
the only real difference is in this interest rate market. And 
the reason we settled out there was because the market actually 
said we should be at something called a minimum 5 days, meaning 
it might take 5 days to liquidate an interest rate swap.
    The similar product in the futures market is called the 
eurodollar future, which is highly liquid--it is traded on the 
Chicago Mercantile Exchange--and we did not think it was 
appropriate to move that to 5 days. But these interest rate 
swaps, which are generally cleared currently--the actual 
current practice was 5-day minimum margining, is what we 
adopted. And so that is one difference. But we thought it was 
appropriate given the current market structure.
    Chairwoman Stabenow. Thank you.
    Let me talk about cross-border issues, which we know are 
very challenging here to get this right. As the Commission 
finalizes the cross-border guidance, you really have the 
challenging job of regulating in a global marketplace. This 
highlights the importance of cooperation with world regulators 
to harmonize rules. We have talked about this every time that 
you have joined us. It also highlights the importance of the 
CFTC's cross-border authority and how best to utilize it.
    The CFTC's cross-border guidance has not been completed. 
Could you talk about the reasons for the delay, the 
differences, points of disagreements at this point in time? 
Also, the agency extended time-limited, exemptive relief on 
cross-border matters until mid-2013. It is important for 
companies to know what their roles will look like, to be able 
to make decisions and build compliance systems. Can you assure 
the Committee that you will give enough time and certainty for 
global companies to comply with the final guidance?
    Mr. Gensler. We have been committed throughout this process 
to phase compliance. We are nearly 3 years after the passage of 
Dodd-Frank, and we continue to use the authorities you have 
granted us to do that.
    On the cross-border side, we have made tremendous progress. 
Europe has passed the laws, Canada and Japan have passed laws 
for central clearing and data reporting. Europe is still 
considering laws on what I would call public market reporting.
    In terms of our cross-border guidance, we have used the 
authority that you have given us to say that if a U.S. 
financial institution is operating overseas, we are comfortable 
with looking to comparable and consistent home country--whether 
it is in London or Frankfurt or in Tokyo. And so we are working 
with those international regulators to establish what is called 
``substituted compliance.''
    But I do think we have to remember the lessons of 2008 that 
risk can come back here, and if it is not at least comparable 
and consistent regimes over there, then Dodd-Frank should apply 
to protect our taxpayers.
    Chairwoman Stabenow. This is, I think, a very challenging 
line that we are trying to find, particularly as we are working 
with other countries and the difference in timelines, even 
though they are beginning to move in Europe and so on. But I 
think there are some real challenges here on how we do that. 
But my time is up----
    Mr. Gensler. I do agree with you. I do agree with you 
there.
    Chairwoman Stabenow. My time is up. Senator Cochran?
    Senator Cochran. I have been advised that there is some 
concern among some groups that margin requirements may be 
increased dramatically by the Commission in response to some of 
the changes that are in this legislation.
    What is your reaction to that?
    Mr. Gensler. Senator, I am not entirely sure what they are 
referencing. I do know it could be one of two things.
    In Europe--not here in the U.S. but in Europe--they have 
finalized a rule that margining clearinghouses need to go from 
1-day margining to 2-day margining. And we have not done that 
here. This 1-day means how much money you have to put up in the 
circumstance of a U.S.-listed futures product. So that may be 
what they are raising with you, and I think that might actually 
end up shifting some people to want to trade here rather than 
there.
    Secondly, in our customer protection rules, we have said 
very clearly that one customer's margin or money should not be 
used to benefit or back up another customer's position. And it 
has been interesting how we have gotten these 125 comment 
letters on that one provision, because I thought that was just 
consistent with the law, that you should not use one customer's 
money to benefit another. And yet we have gotten a lot of 
comments on it that we have to look seriously at, in 
circumstances in the middle of the day has been sometimes used.
    So on the first matter, if it is about Europe, it is 
correct that Europe is raising some of their margin standards. 
On the second one, on the customer margining, we are looking at 
these 120 comment letters on this matter.
    Senator Cochran. Do you think the provision of the law that 
defines the authority of the Commission needs to be amended or 
changed in any way that would help protect the integrity of the 
process and the respect for the law that we now have?
    Mr. Gensler. I think that certainly the events of the last 
year and a half around customer funds has led for many 
proposals. We have been using the authorities we have to 
enhance customer protection, and as I mentioned, we have worked 
with the National Futures Association and the self-regulatory 
organizations to enhance customer protection.
    To the extent proposals come in front of you or us to 
change the law, we would address them with you. But I think 
that our proposals that we have right now in front of the 
Commission are pretty strong enhancements to customer 
protection.
    The Peregrine situation, outright forgeries and so forth, 
when we look back, we see that both the NFA and we should 
really have direct electronic access to these accounts, and we 
are getting to that. The matters around both of the companies 
where customers lost money have shown that we have to enhance 
our provisions around customer protection and the accounting 
for those monies.
    Senator Cochran. Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Cowan.
    Senator Cowan. Thank you, Madam Chair.
    Mr. Chairman, how are you?
    Mr. Gensler. Terrific.
    Senator Cowan. I want to talk a little bit about the 
provisions of Title VII of the Dodd-Frank Act that deal with 
excessive manipulation in the markets of a different kind of 
commodity, in this case, frankly, oil and oil futures. When I 
was home last week in the Commonwealth, running second only to 
questions about the sequester were questions about oil prices. 
And Reuters reported just last week or the week before that, I 
believe, that the hedge funds have doubled their bets on higher 
oil prices at the highest levels in a long time and certainly 
since December, and that this may be impacting the market and 
the prices for oil.
    I am curious. What is your perspective on that? And what, 
if anything, can the Commission do or do more of in these 
circumstances?
    Mr. Gensler. The markets that we oversee involve both 
merchants and hedgers and speculators, and, in fact, in the oil 
markets, the financial participation is well over 80 and 
sometimes approaches 90 percent of the market.
    I think what is critical is that we always police the 
markets for fraud and manipulation, but also to ensure the 
integrity of the markets is, as Congress directed us, to 
complete and put in place effective position limit regimes.
    Now, we are not a price-setting agency. To me that is not 
what position limits are about. It is just about ensuring the 
integrity of the market, that no one party has too large a 
position in that market.
    As you may know, we have finalized rules on position 
limits. It was challenged by some industry associations. The 
district court sided with the industry associations. We do not 
agree with that outcome, and we have appealed that to the 
appellate level.
    Senator Cowan. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you.
    Senator Roberts.
    Senator Roberts. Well, thank you, Madam Chairman, and 
welcome back--pardon me. Chairperson. Do not beat me with a 
stick, please.
    Mr. Chairman, welcome back.
    Mr. Gensler. Thank you.
    Senator Roberts. I have a few questions based on my 
continuing concerns over how the CFTC approaches regulation, in 
particular the need for a full and proper cost/benefit analysis 
of the regulations you are charged with implementing. This is 
in concert with the concerns raised by our distinguished 
Ranking Member.
    I raise these issues because I am concerned with what those 
within the futures industry have told me and my staff, and they 
describe it as an ad hoc approach to regulation, particularly 
in regards to Dodd-Frank rules, thus creating uncertainty among 
the participants in these markets.
    So based on the industry feedback, the CFTC's proposal on 
residual risk may be the most far-reaching and causing the most 
concern. It has been described in the industry as an 
``industry-killing rule that jeopardizes the entire existence 
of the model and is likely to raise the overall level of risk 
to all participants in the market.''
    To date, has the CFTC performed a cost/benefit analysis to 
consider the negative impacts of the residual risk rule, 
especially to customers in the agriculture sector?
    Mr. Gensler. We proposed in the fall a package of customer 
protection provisions that did include a full cost/benefit 
consideration section, but it was just a proposal, and we have 
heard--as I say, we got about 125 comment letters.
    One of the provisions says that thou shalt not use one 
customer's money to benefit or support somebody else's. And 
what was interesting to me in the comments is we found that, in 
fact, a number of futures commission merchants actually are 
intraday, during the middle of the day, using one customer's 
money for another, and it has led to this issue, as the Senator 
said, of residual. That is just a word saying they might have 
to put some extra money up, the futures commission merchant.
    So we are going to go through the 120 comment letters and 
take a very serious look at it with cost and benefits in mind. 
It comes down to who bears the risk. Is it the customers that 
somehow are bearing the risk of default, the futures commission 
merchant, and the cost of that? And I share the Senator's view. 
We have to see this through a lens of cost and benefit.
    Senator Roberts. I appreciate that. In the same proposal, 
the CFTC would require FCMs to be in compliance with margin 
deficiencies at all times. However, option values and margins 
are currently not available in real time. In order to meet 
these requirements, initial margins would likely have to 
double. Why would the CFTC propose a rule that is practically 
impossible to meet that increases the cost to customers and 
their risk exposure?
    Let me add on that the majority of Kansans in the commodity 
markets are not large banks but instead are small business 
owners, including farmers and ranchers. Many of these folks are 
in rural areas, and they still meet their margin calls by 
check. Requiring them to post margin calls more than once a day 
will certainly increase their transaction costs, many have said 
to a prohibitive level. I am sure it is not the CFTC's intent 
to force small clients out of the futures market, but how would 
you expect these customers to stay in the market?
    Mr. Gensler. I think to go to the intent, the intent of the 
proposal is that the futures commission merchants, the 
financial firm, at all times protect customer money and at all 
times not use one customer's surplus to benefit and cover 
another customer's deficit. So the focus on the customer 
deficits is just with an eye that the other customers with 
surpluses are not somehow shortchanged. And I think these two 
issues, both of them that you have raised, are at the heart of 
the comment letters that we have to sort through.
    Senator Roberts. All right. I appreciate that.
    Ever since the reporting requirements for swap transactions 
began, the staff at the CFTC has approved numerous no-action 
letters. Could you provide the Committee who is able to be 
relieved of these requirements, who is not, a clarification of 
the no-action letters in terms of where the large financial 
firms, brokers, exchanges, or international participants? Is 
there some way you could----
    Mr. Gensler. I think we could work with you and the 
Committee to try to summarize that. You are right that as we 
got close to the date, which was December 31st, for rules that 
had been completed 13 months earlier, industry associations and 
some individual firms came to us and said, you know, we really 
cannot do this all by December 31st, could we have more time. 
We generally did say yes and gave them----
    Senator Roberts. Okay. I am out of time. If you could 
furnish that information to the Chairperson and the Ranking 
Member, and I know they will share it with us, I think that is 
what I would like to see happen, if possible.
    Mr. Gensler. I would be glad to do that.
    Senator Roberts. Thank you so much.
    Chairwoman Stabenow. Thank you, Mr. Chairman. We look 
forward to getting that information.
    Let me turn now to Senator Donnelly, and let me also say 
that Senator Donnelly is going to be our new Chair of the 
Subcommittee on Commodities, Markets, Trade, and Risk 
Management. I think now you have worked on this in the House as 
well. We look forward to working with you as we delve more into 
these issues.
    Senator Donnelly. Thank you, Madam Chair.
    Good afternoon, Chairman. When I was home, like Senator 
Cowan, one of the largest concerns was about rising gas prices 
and the effect on American families that they are making 
decisions as to whether to go shopping for clothes or whether 
to fill up their car. And they look at me and they say that the 
market fundamentals of supply and demand do not seem to apply 
anymore as to the way the prices are affected and the price of 
a gallon of gasoline. And when you look at this, we have at 
various times over 400 million plus barrels on speculation, 80 
to 90 percent of it is financial speculation. It is not 
airlines, it is not our farmers. It is simple financial 
speculation.
    There have been studies on both sides, some saying no 
effect on pricing, others saying 10 cents a barrel or more, 
which would be $42 a barrel that the price is increased by 
because of the speculation that occurs.
    So part of what we tried to do with Dodd-Frank was to put 
position limits in place, not to eliminate speculation but to 
put common-sense limitation in order to cap that kind of effect 
of undue speculation, negative effect on American families who 
are trying to make ends meet.
    We know what has happened with your efforts, and I was 
wondering if you have taken a look at or if the CFTC has taken 
a look at rewriting the position limit rules.
    Mr. Gensler. As the district court had vacated this rule, 
we have appealed that to an appellate court level. But on a 
parallel path, we have done, as the Senator has asked or maybe 
is suggesting, to look, based on the district judge's vacating 
the rule and his direction, can we also rewrite the rule based 
on that. So we actually are exploring both. Well, one, we have 
appealed, and we are also considering bringing a document in 
front of Commissioners on the second.
    Senator Donnelly. Have they given you--has the appeals 
court given you any idea as to when a decision would be handed 
down?
    Mr. Gensler. No. The briefing schedule, if I recall, runs 
through maybe as late as late spring or early summer, and then 
as you probably--I am not a lawyer, but you know better than I 
that an appellate court decides whenever they want.
    Senator Donnelly. By having the parallel tracks, you are in 
no way indicating that your first set of rules should not get 
the job done. What you are saying is just in case the appeals 
court goes the other way, you also have another opportunity to 
put in place.
    Mr. Gensler. We feel it is quite clear that Congress was 
serious in their intent that we put position limits in place 
and expand them to the energy markets. They are in place in the 
agricultural markets now, and they have worked well over the 
years. And that was the central issue in this litigation in 
front of the courts, did Congress direct us to do this, and so 
forth. But, yes, it is really with an eye to getting the job 
done, that Congress wanted us to get this done. We are 
appealing the decision but at the same time considering, as I 
said, this other approach.
    Senator Donnelly. One last question. When you look at how 
to conclude this, is there any other legislative action you 
need from Congress at this point that you can see or any 
suggestions that you have on this end to try to get this done?
    Mr. Gensler. Well, certainly, as you consider 
reauthorization and move forward, if position limits is an 
important component as it was in 2010, you know, this is at 
least one district judge that thought that maybe Congress had 
not directed us to do this. You could address that issue square 
on.
    Senator Donnelly. Thank you, Mr. Chairman.
    Madam Chair, thank you very much.
    Chairwoman Stabenow. Thank you very much.
    Senator Chambliss.
    Senator Chambliss. Thanks very much, Madam Chair.
    Mr. Chairman, at the conclusion of Dodd-Frank, Chairman 
Frank as well as others noted that a technical corrections bill 
was going to be a necessity. Have you and the other regulators 
along with the Treasury gotten together and made a list of what 
technical corrections you think need to be made?
    Mr. Gensler. I cannot speak for other regulators. I am not 
aware of any broad list. I think Title VII, we have been able 
to sort through with your help and with help from the other 
side of the Congress as well, issue by issue, rule by rule. So 
I actually think Title VII holds together pretty well.
    Senator Chambliss. Well, is that the only area of technical 
corrections you think are going to be necessary?
    Mr. Gensler. I actually think that Title VII holds together 
pretty well, so I am not recommending any particular changes. I 
do know that whether it is addressing specific issues to ensure 
that end users do not pay margin, for instance, or are not 
required to pay margin and other things that have been 
considered in each of the chambers are things that will be 
taken up potentially as you consider moving forward.
    But, again, I think that Title VII, technically speaking, 
has held together pretty well, and then we have been able to 
navigate through Title VII with your help and direction.
    Senator Chambliss. So has there not been any discussion 
between CFTC and other regulators about corrections? Is that 
what I am understanding?
    Mr. Gensler. Senator, I am just not aware--there has 
certainly been, as we have gone rule by rule, public comment 
on--I could use as an example one area. On swap data 
repositories, there is a provision in the statute that there is 
a need for an indemnification. I do not know if you remember 
this issue. International regulators raised it and were 
concerned with it. It is not so much a technical correction. It 
is just whether that is good public policy to require that 
indemnification.
    Senator Chambliss. During the course of the drafting of 
Dodd-Frank, you and I had numerous discussions about what I 
feared to be a result of Dodd-Frank, particularly as it applied 
to the international opportunities for trading of swaps and 
derivatives and the fact that the international markets were 
not at that point anywhere near as strict with their 
requirements as what Dodd-Frank was putting in place.
    Since then, you and I have discussed it again. I have also 
discussed it with any number of banks, particularly across 
Europe, and what I feared is what I am hearing from the 
European side. Now, I am getting a little bit different from 
you, so I want to give you a chance to let us talk about that. 
But basically I was in--I met with some German bankers within 
the last month and was told, look, we have done about all we 
are going to do, which is not much, because our system is 
working pretty well. And it is pretty obvious to me that they 
are getting a lot of U.S. business on the London exchange, they 
are getting a lot of U.S. business on the Asian exchange. And 
if that is going to continue, then obviously it makes our 
markets have less of an impact on the worldwide trading scheme.
    So tell me where you think we are with regard to the 
Europeans and others getting on board with our increased 
regulation of swaps and derivatives.
    Mr. Gensler. Europe passed a law last year and their rules 
were approved in a parliamentary process just last month for 
central clearing, for reporting of the data to data 
repositories, and for the risk mitigation piece, which is the 
margin and capital and so forth that we have for swap dealers. 
And they are actually largely consistent. Of course, when you 
get to the fine detail, there are some differences, and just as 
we had the discussion with your colleagues down to your right, 
Europe actually might have a stricter standard, a higher 
standard on margin for futures.
    Where Europe is still working is on public market 
transparency. They have before their parliament for 
consideration--they think that they will finish it up this 
summer, but the proof will be in the pudding--a law called 
MIFID, that will have requirements for something similar to 
swap execution facilities, they call them OTFs, and also for 
the public reporting of the transparent afterwards.
    There is a timing difference. Their clearing requirements 
will go into place probably 6 or 9 months after ours. But they 
will be very similar. The trading requirement or the public 
market requirement, it depends how their law is passed, and if 
it is passed this summer.
    Senator Chambliss. Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Heitkamp.
    Senator Heitkamp. Thank you, Madam Chair, and thank you, 
Commissioner, for appearing today and answering our questions. 
I just have a couple quick points I want to make and a couple 
quick questions.
    One relates to something that probably has not been raised 
here yet, but I understand that the swap reporting compliance 
date is fast approaching, April 10, 2013. On that date large 
and small energy companies and other commercial end users may 
have to report to the Commission's new swap data repository all 
customized physical commodity swaps.
    I understand the transactions entered into since the 
enactment of Dodd-Frank in July of 2010 must be reported even 
if those transactions have been terminated. Banks and 
registered swap dealers are not even involved in many of these 
transactions. Utilities and other energy companies have been 
the counterparties. A large majority of these entities have no 
impact whatever on the global financial system. They are not 
interconnected with financial institutions. And I understand 
they have asked the Commission for a clarification of its 
reporting rules as they apply to these transactions to limit 
the requirement for end users and, more importantly, to defer 
the reporting deadlines for end users to end physical commodity 
swaps.
    So a couple questions. Has the Commission provided 
regulatory certainty to these important American businesses? Or 
are these businesses rushing to comply with the deadline to 
deliver reports, only to have that effort be determined to be 
unnecessary? And does the Commission intend to provide further 
guidance to these businesses? And if so, when?
    Mr. Gensler. I think we have provided guidance. These are 
transactions where there is no swap dealer, where it is 
effectively two parties who are not dealers at all, which is a 
small part but important to any of those companies but still a 
small part of the market.
    I think one of the questions--and I would like to see if we 
could follow up with your and your staff, but one of the 
questions I am aware of is on--you referenced historical swaps 
that are not even in existence anymore. And I think there is 
request in front of us about those, and I do not remember 
exactly the nature of that request, but I know it is something 
we were looking at closely and trying to accommodate.
    The law, Dodd-Frank, actually says if you entered into a 
swap after the President signed the bill and even if it was 
terminated, it needed to get into these data repositories, and 
we are trying to look at these ``historical swaps,'' especially 
for these end users. I think the request was could they report 
it just once a quarter or something. I cannot remember exactly 
how the request was.
    Senator Heitkamp. I think when you go back and you take a 
look at kind of how they have done business historically--and 
very many of these businesses want to be in compliance, and 
fear of not being in compliance, you know, requires a whole lot 
of energy to meet what they think might be a compliance issue 
for them. And so where you might think it is taken care of, the 
questions that come to me would imply that it has not, or at 
least the message has not gotten there. And obviously, as you 
talked about, the narrowness and the need to expand your 
effort, taking things off the plate that do not need to be on 
your plate, that are not threatening the financial markets, 
would be a good place to start. And so please consider that, 
and we will follow up with you, Commissioner, and with your 
staff to try and get a better answer to this question.
    Thank you so much.
    Chairwoman Stabenow. Thank you very much.
    Senator Johanns.
    Senator Johanns. Mr. Chairman, good to see you again.
    Mr. Gensler. Always good to see you on both committees.
    Senator Johanns. Mr. Chairman, let me go a little further 
on position limits. The first thing I wanted to ask, I cannot 
imagine that there would be anything in a position limits rule 
that would drive down the price of a gallon of gasoline. It 
just does not register with me.
    Tell me what I am missing. Tell me, if you get that rule in 
place, how I can guarantee to my constituents that the price of 
their gasoline will go down.
    Mr. Gensler. You and I might have similar views on this. I 
think that position limits help the integrity of markets, that 
no one participant in the market--no one speculator in the 
market has an outside position either to push the price down or 
up. So to me, it is just about ensuring that there is a wide 
range of opinions in the marketplace, a diversity of points of 
view.
    But we are not a price-setting agency. I think position 
limits do help the market integrity, and that price formation 
comes from a diverse set of views rather than one push. But 
that is different than saying that it would be higher or lower.
    Senator Johanns. That is totally different than the price 
of gasoline going down.
    The other thing that I wanted to ask you about--and maybe I 
will offer a comment because this is pending litigation. I 
understand the reluctance about delving into this too deeply 
because you have appealed this district court case. But here is 
my thought: I do not have that exact language in front of me, 
but I think what Congress said to you is that you have the 
authority to do position limits as appropriate. We did not say 
you have the authority to do position limits by the seat of 
your pants or when you wake up in the morning and decide to do 
it. There has to be something there that drives that decision, 
which would seem to imply a cost/benefit analysis, some kind of 
analysis.
    Was any of that done in preparation for this rule?
    Mr. Gensler. Yes, it was, and yes, you are correct that 
there were some words, either ``as appropriate'' or ``as 
necessary.'' But Congress also used the word ``require'' I 
think four or six times--I cannot remember--and asked us to 
report directly back to Congress some number of months after we 
put them in place.
    So our view in front of the courts was that modifier, ``as 
necessary,'' ``as required,'' was what level, do we set these 
at 2.5 percent or some other level, what was the appropriate 
level of the position limits. The district court did not 
necessarily see it the way we do, and we have appealed that.
    Senator Johanns. And that is fair. I mean, that is what the 
system provides for.
    Mr. Gensler. That is our democracy.
    Senator Johanns. That is why we have appellate courts. But, 
again, I kind of get back to this notion that I think what you 
are being told in the litigation is that there is a standard 
for action here, and we could require you to do something as 
necessary, but you still have the burden of establishing that 
it was necessary. And I will just offer my thought that is 
where I think this is headed.
    The other thing I wanted to talk to you about, like Senator 
Chambliss, I have expressed to you over and over again that I 
think really what we are ending up with here, or too much of, 
is we are just making it difficult to do business in the United 
States.
    Now, you may argue, you may say, ``Mike, but we needed to 
do something here. This was not a good situation.'' But what I 
see happening overseas is report after report that other 
companies, banks, are pulling out of the marketplace here just 
simply because they are worried about getting all tangled up in 
U.S. regulation. And I do not share your optimism. I do not 
think there is anything out there that is going to rival the 
complexity of Dodd-Frank. Then I want to offer one last 
thought, and then I will let you comment.
    When you overregulate--and I have been around this a long 
time, as a mayor, as a county commissioner, as an Ag Secretary, 
and on and on--I know who gets hammered. It is the little guy 
because the costs get passed on. Of course, they are going to 
get passed on. They do not get absorbed. The little guy is 
going to get hammered by regulations, and the big are going to 
get bigger and the small are going to get pushed out of 
business, and the consumer is going to take the hit.
    Explain to me where I have missed something in 30 years of 
experience.
    Mr. Gensler. I respect your 30 years of experience, and I 
think we have taken it to heart in what we have done. We have 
drafted the final rules that end users are not going to get 
caught up and be defined as a swap dealer, that end users are 
not going to have to pay margin if they do not want to and 
there is no requirement for swap dealers to do that.
    Where we are down to is basically, frankly, an issue of 
which large financial institutions are registered as swap 
dealers; 71 of them I think have registered, including the 
largest international banks from Europe and Asia. All of what 
is called the G-16 have registered, you know, Barclays and 
Societe Generale and the big ones from Japan.
    And so I think we have taken to heart what you are saying 
in your 30 years of experience. They have actually registered 
to do business here in the U.S. We narrowed the definition of 
``U.S. person,'' so it is only if they are really sort of 
dealing with a territorial U.S. person.
    I do think we need to come back and make sure we cover the 
U.S. financial institutions operating overseas because 
sometimes that risk comes back here, and if we do not cover it, 
the jobs will go offshore--it will probably hurt Senator 
Gillibrand's constituents because the jobs will go offshore, 
but the risk will be still back here. So I still think we have 
to cover the sort of Morgan Stanleys in London, so to speak, or 
at least do it through substituted compliance. If there is 
home-country rules that are comparable, that is great. That is 
great. But if there is not, you know, if it is in some small 
island somewhere where it is not, then we have got to cover it.
    Senator Johanns. I am out of time. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chair. Hello, 
Chairman. Thank you for being here.
    Mr. Gensler. Always good to see you.
    Senator Klobuchar. Very good.
    One of the topics under debate right now is the different 
collateral, as you know, or margins that market parties need to 
set aside as a safeguard when trading swaps. Futures and 
options have a 1-day margin requirement, and swaps have a 5-day 
margin. Is that right?
    Mr. Gensler. Well, actually, all futures and all swaps for 
energy, metals, and agricultural products all are 1-day.
    Senator Klobuchar. Then what gets the 5-day margin?
    Mr. Gensler. The 5-day is only on interest rate swaps, 
which we felt has a very different risk component than the 
eurodollar contract that trades so actively and liquidly on the 
Chicago Mercantile Exchange, which is 1-day. So----
    Senator Klobuchar. Well, do you think some of the 
differences with the margin requirements, though, between the 
futures and the swaps markets, could that drive more trading to 
futures in any way? I just heard some concerns about this.
    Mr. Gensler. It could----
    Senator Klobuchar. And allow them to circumvent the 
safeguards that were put in place for the swaps market?
    Mr. Gensler. It could in the interest rate complex. In the 
rest of the complex, it is all 1-day. It could, but I would 
note I think the futures marketplace has some pretty good 
safeguards as well. I do not mean to brag about it, but, you 
know, over the many decades--it was not at the center of the 
2008 crisis. So----
    Senator Klobuchar. And do you think it could lead to less 
transparency or increased risk in any way if that starts 
happening?
    Mr. Gensler. I think that the one thing that you have 
highlighted is less transparency. The futures marketplace has 
had very good public market transparency to date. But we are 
considering some of these changes that happened late last year 
where some swaps were relabeled futures, and to ensure that 
there continues to be the public market transparency, that 
somehow the transparency is not lessened because of t his.
    Senator Klobuchar. Then the OTC market, I have something 
else that farmers in Minnesota, as you know, work through their 
co-ops. Senator Thune and I head up the Senate Co-Op Caucus, 
and they use the futures or over-the-counter market to hedge 
their risk from national disasters and market failures. 
Following the MF Global failure--and we have talked about that 
before, but we know how important it is for farmers to have 
confidence that their hard-earned dollars are kept segregated.
    How can you make certain that the farmers are protected in 
these markets from fraud while ensuring that these risk 
management tools remain affordable for the farmers?
    Mr. Gensler. I think that we need to do more. We have done 
a lot working with the self-regulatory organizations like the 
National Futures Association. We put out further proposals late 
last year. We just got 120 comment letters in. And the farmers 
and ranchers are the foremost, I think. It is really their 
money that has to be protected and that one customer's money is 
not used for another customer. And certainly no firm should be 
able to put their hand in the kitty and take it out. And we 
have learned a lot from these circumstances to tighten up the 
accounting, to tighten up the oversight of these futures 
commission merchants.
    Senator Klobuchar. And you and I have talked extensively 
about the differences with end users compared to some of the 
trading that goes on and the differences with places from Delta 
to Cargill that are important in my State. And as I understand 
it, beginning in April end users will also have to comply with 
the real-time reporting requirements and report their data to 
swap data repositories. And you know that they use the swap 
markets to hedge risk. That is an important planning tool for 
them. And I know that you have worked very hard to try to 
strike the balance.
    I want to hear a little bit more as to why all participants 
in the swaps market, including end users, need to comply with 
the reporting requirement. How would it be helpful to 
regulators? And are you concerned with the ability of end users 
at all to have the resources to comply with these requirements?
    Mr. Gensler. Well, first, because we are complying with the 
law and there was no end user exception to reporting. I think 
why Congress included all of the trades coming into the trading 
repository is that regulators had a view of the whole market, 
and even the public reports that way.
    What we did do is we gave a lot more time; whereas, the 
swap dealers might have, for instance, 30 minutes to report 
their trades this year, the end user to end user trades we 
gave--I cannot remember--in some circumstances 2 days, in some 
circumstances 3 days. And then I think over the course of a 
couple of years, it comes in to 1 to 2 days. So there is a 
different timeline of the reporting that we tried to strike a 
balance in this.
    Senator Klobuchar. Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Hoeven? And, by the way, I did notice, Senator 
Hoeven, I think you were enjoying our chocolate mints that we 
have on the table from Michigan. I just want you to know, made 
in Michigan. So if you would like some more----
    Senator Hoeven. Madam Chairman, I only ate four because 
that is all I could reach.
    [Laughter.]
    Senator Hoeven. Senator Johanns has left, and I am going to 
get that one before Boozman does.
    Chairwoman Stabenow. We have a bigger stash in the back, so 
we will be happy to give it to you.
    Senator Hoeven. All right. Thank you, Madam Chairman.
    Chairman Gensler, if you would, explain to me specifically 
how the rules that you are implementing pursuant to Dodd-Frank 
are making the commodity futures trading system more 
transparent to the public and how they are reducing both 
institutional risk and systemic risk, specifically, and tell me 
in a way that the public will understand.
    Mr. Gensler. For the first time, starting this January 1st, 
the public gets to see a modern-day ticker tape on these 
transactions. It is time-delayed so that there is some 
anonymity, but the transactions are publicly announced, and you 
could go, for free, to a website and see where the transactions 
are priced. That means any farmer or rancher or corporate 
treasurer could see the pricing of transactions, and in the 
afternoon they might say, ``I want to do a similar 
transaction,'' and they could see where it was priced in the 
morning. Without seeing anybody's name, they would see the 
price and volume of a similar transaction. It is new, it is 
early. It will take some time for the market to start to find 
benefit in that, but that is transparency that did not exist 
before.
    In terms of lowering risk to the public, one of the things 
that has happened and worked in the futures industry, this 
complex market, for over 100 years is something called 
``central clearing.'' A clearinghouse stands between buyers and 
sellers of these complex products in case one of them goes 
bankrupt, is default. Congress said bring that to this other 
part of the market swaps, and it will be brought to the swaps 
market throughout 2013 for financial institutions. Congress was 
very clear: Do not make end users get caught up in this, but 
between an insurance company and a bank or a hedge fund and 
another hedge fund, that we should lower risk this way. And 
that is happening in 2013.
    Senator Hoeven. Do we understand and have we quantified the 
systemic risk from financial derivatives? Do you as a regulator 
feel that you truly understand it, it is quantifiable, it is 
understood, and that you have the safeguards in place to 
prevent some type of system failure from large institutional 
failure? And what specifically is it that protects us from that 
type of failure?
    Mr. Gensler. It is hard to quantify. We do know in 2008 
that swaps were part of the crisis. AIG, the insurance company, 
one of the significant reasons it needed $180 billion of 
taxpayer money was because of credit derivatives that they took 
on. And we know that the risks still are there in the system. 
What we have done specifically to address the AIG type of 
circumstance, again, is central clearing for swaps that can be 
brought into a clearinghouse. Not everything AIG could be 
brought into a clearinghouse. But also requirements for 
transparency to the regulators, as well as we will over time 
require financial institutions, not end users but financial 
institutions, to post what is called margin to each other to 
help back up the transactions that are not in clearinghouses. 
We will phase that over probably a number of years because 
there are significant costs involved.
    Senator Hoeven. Specifically, what is providing that 
protection against both large institutional failures and 
particularly those type of failures that could lead to a 
systemic problem?
    Mr. Gensler. I think that there has to be a freedom to 
fail. Large financial institutions still will fail in the 
future----
    Senator Hoeven. Now you are getting to it.
    Mr. Gensler. And I believe that the taxpayers should not 
back those large----
    Senator Hoeven. I am sorry to interrupt, but you have got 
to have a way for a large institution to fail for us to 
understand what the risk is of that institution and to be able 
to manage it and take appropriate action without creating a 
systemic risk. That is the key that I believe Dodd-Frank was 
supposed to get on top of, and I want to understand if you have 
got that accomplished and specifically how.
    Mr. Gensler. I agree with you on that goal and that there 
should be a freedom to fail. In Title VII, the piece that we 
have authority for, the way that we allow a firm to fail more 
readily is the swaps that can be in the clearinghouse are, and 
clearinghouses help because they stand between two parties in 
case one of them fails. And on the swaps that are not in a 
clearinghouse--and I know I am sounding technical, but the ones 
that are not in a clearinghouse, that they post collateral or 
margin at least between the financial institutions. One bank 
has to post it to another. And those two disciplines, the 
central clearing and the margin for the uncleared swaps between 
financial institutions, I think raises the chance that we can 
let it fail and a Treasury Secretary and a head of the Federal 
Reserve does not feel they have got to bail something out.
    Senator Hoeven. And, Madam Chairman, I see my time is up, 
but to me that is the crux of the issue. You have to be able to 
demonstrate in a way that the public understands that the 
regulators have created safeguards in the system that will 
allow an institution to fail and you understand the 
ramifications of that without triggering systemic risk and at 
the same time, back to Mike Johanns' point and some of the 
others, you know, what the impact of that is on the end user 
like, you know, a farmer or small business. And that is still 
the part that I think when you testify or in the information 
you put out, you have got to make that clear to people like, 
you know, me and the public who are not experts in this 
business. And that is the part I am still looking for as a 
result of the rules and regulations you are implementing 
pursuant to Dodd-Frank.
    Mr. Gensler. That is very good advice to me and to the 
agency.
    Senator Hoeven. Well, it is a request to see that in a 
specific, understandable form that we can disseminate to the 
public.
    Thank you.
    Chairwoman Stabenow. Thank you very much. I think those are 
very good points.
    Senator Gillibrand.
    Senator Gillibrand. Thank you, Madam Chairwoman, for your 
leadership in holding this hearing. I am very grateful.
    Thank you, Chairman Gensler, for being here. I am going to 
follow up on Senator Hoeven's question because I know what he 
is trying to say. If you are saying that margin requirements is 
the protection for catastrophic failure of the system, I think 
what Senator Hoeven or an average American would need to 
understand is it is a relatively low percentage of money you 
are requiring for margin, so how could that relatively low 
percent actually save the system from failing a la AIG?
    Mr. Gensler. There are two forms of margin. One is that 
every single day a position is valued, and based upon that the 
two firms settle up. That is called ``variation margin.'' That 
was not done in AIG, and AIG, when the piper, you know, came 
calling, there were tens of billions of dollars just to handle 
what was the current value or what was called ``mark to 
market.''
    Senator Gillibrand. So to simplify this, if you could just 
for us do the analysis of what if AIG was trading in the same 
trades they were trading then and under the current system what 
would have been required of them, why it would not have 
collapsed that company and then, therefore, had the following 
on repercussions, I think if you give the AIG analysis under 
today's regulatory scheme and tell us why it would have 
protected the financial services industry.
    Mr. Gensler. We will do our best. One of the rules, the 
margin requirements for the non-cleared swaps, has not been 
finalized, but----
    Senator Gillibrand. When it is, yes.
    Mr. Gensler. Based on finalizing that, we will do that.
    Senator Gillibrand. Just basically proving out that this 
system of checks and balances is enough I think would be 
incredibly useful for our Committee.
    Mr. Gensler. Okay.
    Senator Gillibrand. Thank you for your time. I want to talk 
a little about LIBOR. Obviously, manipulation of LIBOR has 
grave effects in the U.S. It affects our derivatives market, 
affects student loan rates, affects mortgages. So I want to 
know from you what are the lessons that you would suggest to us 
about how we should think about benchmarks such as LIBOR. Is 
there something we should be working on legislatively to 
protect against future manipulations? And then we can go into 
some of the details about your response and how you are 
coordinating with the European regulators and how it has 
changed market behavior.
    Mr. Gensler. I think that for a benchmark or index to be 
reliable and honest, it should be anchored in real 
transactions. And, unfortunately, what has happened over the 
years, this critical interest rate benchmark that is the mother 
of all benchmarks was no longer tied to real transactions. The 
marketplace had a fundamental change. Banks are really 
essentially not lending to each other on an unsecured basis in 
London any longer. And what we found is the rate was 
pervasively rigged and readily rigged by these three banks.
    We are working very closely with the European regulators 
and international regulators around the globe, and bank 
regulators as well, one, to come up with a set of best 
practices or principles; but, two, also how to transition if 
there is a need to transition from this rate that is so 
unstable. And it is unstable right now, and I believe is 
actually unsustainable, long run, to have a benchmark that is 
not anchored in real transactions and what does it mean.
    The S&P 500 references 500 stocks that trade every day. We 
know what that means. The American public basically does. This 
is not anchored in something that is real any longer.
    Senator Gillibrand. Do you have adequate resources to be 
able to provide the oversight on this issue?
    Mr. Gensler. No, we absolutely do not. We are currently 
shelving enforcement cases. ``Shelving'' is not a technical 
term, but I will share that with you, that we just have to 
because of limited resources.
    We are also not doing the examinations that we really 
should be doing of the clearinghouses or the futures commission 
merchants, our examinations staffs. We are basically wrong-
sized for the job because we are only about 10 percent bigger 
than we were 20 years ago.
    Senator Gillibrand. Well, that gets to sequestration. 
Obviously, with an 8-percent cut, that is going to be 
devastating. Is this going to affect your ability to have the 
appropriate level of personnel, or will it just come out of 
other expenses like technology or travel or other items?
    Mr. Gensler. We do not have many places to go. Nearly two-
thirds of our budget is people. But it will come out of 
technology and people. We have been cautious and have been 
running a little below the head count that Congress has 
authorized. I just have to say as the Chairman I sort of 
presume that sequestration might happen, and so we have been 
running cautious and running a little below head count.
    Senator Gillibrand. Do you think it is going to affect your 
ability to register the swap execution facilities once you 
enact the rule?
    Mr. Gensler. I think it will. I think that if we have 
registrations of 15 or 20 swap execution facilities, many of 
those applications will probably be sitting on the shelf for a 
while.
    Senator Gillibrand. And then just one last question. Do you 
think the swap execution facility rules will be technology 
neutral? Because there is a lot of concern that there is 
ambiguity, uncertainty, whether it will use voice brokering or 
electronic trading?
    Mr. Gensler. I think it was Congress' clear words that we 
be technology neutral, and we will be technology neutral, 
whether it is by Internet, by text messaging, by telephone, by 
carrier pigeon.
    Senator Gillibrand. Thank you.
    Mr. Gensler. You said by any means of interstate commerce, 
and we are getting that.
    Senator Gillibrand. Thank you, Mr. Chairman. I appreciate 
your time.
    Chairwoman Stabenow. Thank you very much.
    Senator Boozman.
    Senator Boozman. Thank you, and thanks to the Chair and the 
Ranking Member for having this very important Committee 
hearing.
    I just want to follow up a little bit because I am a little 
confused and I think it is important. It is my understanding 
that the Asia Pacific, European, and South American partner 
nations have all expressed serious concerns, recent concerns, 
regarding the CFTC proposals for regulating swaps 
internationally. I think the reality is not only have they 
criticized the process but have expressed concerns regarding 
overlapping and conflicting regulations that imposes 
unnecessary costs and burdens on individual firms, lack of 
eligibility for substituted compliance on transaction level 
requirements, and some nations have expressed concerns as to 
whether or not some practices can be reconciled at all.
    When we began oversight on the process, many of the 
concerns that have been raised not only regarding the cross-
border issues but also that these regulations, if taken too 
far, could result in discouraging participation here in the 
United States. Now we have all of these issues that seem to be 
rising out of the fact that we have had problems harmonizing 
these regulations with other participants in the global 
marketplace.
    So many of the letters issuing comments regarding the 
cross-border issues implore more careful consideration in 
implementation as to not fragment the global marketplace 
leading to less stable regional markets.
    So I guess my question is--you know, you mentioned in your 
statement that now you are concerned about participants routing 
through foreign affiliates to avoid certain clearing 
requirements. I guess the question is: What is to prevent 
participants from simply withdrawing from the U.S. market and 
managing their risk in a less cumbersome regulated foreign 
market? And, again, what have we done specifically or what are 
we doing to better harmonize these proposed rules with foreign 
partners and to roll them out to prevent withdrawal in a less 
regulated foreign market and the result subsequently creating 
more risk in our efforts to create less risk?
    Mr. Gensler. The cross-border area is one of the more 
challenging pieces of our rule writing. I think what you all as 
a Committee and what the American public expect us to do is to 
ensure that risk booked offshore does not just flow back here 
unless it is covered by some comparable regime.
    I will tell you from personal experience, I was the young 
Assistant Secretary of the Treasury calling up the Secretary 
when a hedge fund called Long Term Capital Management was 
failing, located in Connecticut, managed out of Connecticut, a 
$1.2 trillion derivatives book. This was 1998. And I remember 
saying to Secretary Rubin on the telephone it would fail by 
Wednesday, and he said, ``Well, what is going to happen?'' I 
said, ``Bob''--I called him ``Bob.'' I said, ``Bob, I cannot 
really tell you because they are all booked in the Cayman 
Islands.'' And Long Term Capital Management happened to operate 
out of the Caymans-- not operate. They just had their legal 
entity there that something like 90-plus percent of hedge funds 
in the U.S. do. We would not want to somehow have that risk 
flow back here and just because it is in the Cayman Islands not 
cover it--unless, of course, the Caymans have comparable rules. 
That is I think what this Committee wants us to cover.
    What the foreign regulators raised with us is they said if 
their banks, Deutsche Bank or Societe Generale or their banks 
operated offshore, would we do substituted compliance, and we 
have said absolutely. But the harder question was: What if they 
did a trade here in New York or in New Jersey or your home 
State, so out of Germany they did a trade in your home State, 
would we look to U.S. law or their law? And we have said, well, 
we think if it is here in the U.S., with a territorial U.S. 
person, that Dodd-Frank applies. We think that is the best 
reading of the statute.
    But we have said if there is a conflict, if there is a real 
conflict, we want to try to sort out the conflict through some 
no-action relief or other technical relief. But we think if 
they are not covered by U.S. law in your home State, that also 
would be kind of anticompetitive for the banks that operate out 
of New York.
    Senator Boozman. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    Mr. Chairman, let me go back in talking about customer 
protections. I do not want to go back and cover ground that 
Senator Cochran and Senator Roberts did, but I want to 
underscore that I am also hearing concerns from smaller market 
participants about the proposals on residual interest and 
margin account-related capital charges and what this means for 
them. And I look forward to working with you on that because I 
know that we are not interested in putting the smaller FCMs out 
of business. So I think we have to--I would encourage you and 
ask that you take another look at that.
    Mr. Gensler. We are, but I want to first thank you for the 
two chocolates from Michigan. They were very good.
    [Laughter.]
    Mr. Gensler. I would also say that it has actually taken me 
aback a little bit because what we put in the proposal I 
thought was just law, that you should not use one customer's 
money to benefit another customer. And what we have found is 
actually intraday, during the midst of a day, if one customer 
has a deficit, the other customer's surplus might actually be 
benefitting. So we are trying to deal with that practical 
circumstance.
    Chairwoman Stabenow. I think that is the key, just looking 
at it practically. Obviously, we want to make sure that, you 
know, customers are covered. But there is a concern there, and 
you have heard that from a number of members.
    Let me go back and talk a little bit more about customer 
protections, because when we do reauthorization, we are going 
to consider legislative changes to enhance customer protections 
in the futures and swaps markets. And I think it is important 
for us to know if there are laws that have limited what your 
agency has been able to do to protect customers. I am 
specifically thinking of the Bankruptcy Code as well as the 
Commodity Exchange Act as it relates to segregation 
alternatives for customers.
    Are there areas that have put limitations on what you have 
been able to do for customers?
    Mr. Gensler. There are members of the public, particularly 
some pension funds, that have raised issues about the 
Bankruptcy Code. There is a section of the Bankruptcy Code that 
if there are any shortfalls, there is a pro rata sharing of 
that. And though we do not have any recommendations there, I 
would say there are some members that have raised that, and we 
would be looking forward to working with you if you were 
considering that, along with, you know, other committees.
    Chairwoman Stabenow. I think it is important as we go 
forward. As I mentioned in my opening statement, Senator 
Cochran and I are going to be sending out a letter asking all 
those involved in these issues to give us suggestions about 
changes or improvements in the law. It is important that we 
hear from you as well, being in the middle of this, as we look 
at how we might strengthen what we are doing, particularly what 
has happened for customers, and looking at customer 
protections.
    I also wanted to follow up on what Senator Gillibrand 
talked about in terms of resources, because clearly we have 
seen an increase in the last decade in the responsibilities of 
the CFTC, and we are all expressing concerns about customer 
funds and about what needs to be done to make sure these 
markets work right, what happens in terms of cross-border 
issues, a whole range of things that are critical, we must have 
integrity in the markets. And one of the things that I am 
concerned about, I understand but am concerned about in what 
you said a few moments ago, was shelving enforcement cases. 
Here we are talking about accountability, and I know you do not 
want to do that, but I wonder if you might talk more 
specifically about what lack of resources has meant to you. 
And, also, as part of all of this, how much money did the CFTC 
collect in civil penalties last year related to the budget? 
Where did those dollars go? Because that is an important piece 
of this as well, because if we want to have integrity in the 
system, there are going to have to be enough resources both for 
the technology and the people to be able to do the enforcement 
that we all want to have happen.
    Mr. Gensler. We are not sized for the task that Congress 
gave us, and I know that is a hard thing to raise because our 
Nation is so challenged by our budget deficits. And I feel it 
is one of the harder things in my job to even come before you 
and ask for more money, but I think it is a good investment. We 
are being asked to cover a market that is vast, that was at the 
center of the crisis, that 8 million people lost their jobs in.
    In terms of the money that we have collected, I would ask 
if we can get back to you, but just even on the LIBOR cases, 
these three LIBOR cases between the Department of Justice and 
the fines that we assessed, it was $2 billion. I think $1.25 
billion was our side of it, but $2 billion is probably more 
than has been spent on the CFTC in the last, you know, 20 years 
combined or something. We are only a $200 million agency, 
roughly, and we think we should be at $300 million.
    We are shelving enforcement action, and our examination 
staffs are still the same size as they were a couple of years 
ago, and we have had these two events--Peregrine and MF Global. 
We know that we have to do a better job at examining futures 
commission merchants, and now we have a new job to help the NFA 
examine the swap dealers, these 70 or so swap dealers.
    We know we have a new responsibility to go into the 
clearinghouses more regularly. We do not have staff examining 
clearinghouses annually for their risk management. And we are 
pushing, statutorily pushing all sorts of additional 
transactions into clearinghouses. I think we should have enough 
staff to at least go in and ensure the risk management of the 
clearinghouses.
    And we do not really have enough staff to consider all the 
requests, because we want to be a flexible agency, when 
appropriate, when somebody comes to the registration request or 
other requests.
    Chairwoman Stabenow. Thank you very much. I think we all 
realize that we are in a challenging time as it relates to 
deficits, but also economic growth is critical and confidence 
in the markets is critical and managing risk is critical if we 
are going to continue to see the investments in the economy 
that we need. So thank you very much.
    Senator Cochran.
    Senator Cochran. Madam Chair, I just want to clarify what I 
think I just heard, and that is, the request for funding, is 
this appropriated through the annual appropriations process? Or 
do you use your abilities to generate funds from your legal 
responsibilities in enforcing and carrying out legally 
authorized activities?
    Mr. Gensler. Excellent question. Any fines that are 
assessed go to the U.S. Department of Treasury. We are fully 
under congressional appropriations, and it is annual 
appropriations.
    Senator Cochran. Well, I noticed that the current funding 
level is $207 million, and I understand from your statement 
that you submitted--you are saying the President has requested 
$308 million for fiscal year 2013. This would permit the 
employment of 1,015 full-time employees. Is that the current 
status of the request?
    Mr. Gensler. That is correct. We think we need about 40 
percent more people, but we also think in technology we should 
grow technology more than that 40 percent to use technology to 
be efficient. But it is in the context of a marketplace that we 
are asked to oversee that is 8 times the size of what we once 
oversaw.
    Now, we do not need 8 times the number of people, but we do 
think we need more people.
    Senator Cochran. Thank you.
    Mr. Gensler. Could I for the record answer the Chair's 
question? In fiscal year 2012, the penalties collected were 
$257 million, again, to the Department of Treasury; and in 
fiscal year 2013, $1,030,000,000 for the CFTC. So 257 and then 
1,030,000,000.
    Chairwoman Stabenow. Would it be fair to say that given the 
fact that you are bringing in penalties and using your 
resources and bringing in dollars, like any enforcement agency, 
if you had more ability to bring enforcement cases, more 
dollars would be coming in? And that would sound to me like it 
would be a pretty good investment, not only in the economy and 
stability and confidence in the marketplace, but actually for 
the Federal Treasury. Would you want to comment on that?
    Mr. Gensler. Well, I think the most important thing is the 
second part you said, that it would help the economy and market 
integrity. I think it is a very good investment for the 
taxpayers to ensure for transparent markets, but also that 
farmers and ranchers and everybody that uses these products 
have better confidence in customer protection and so forth. 
Yes, in addition, there happens to be this flow of penalties to 
the U.S. Treasury.
    Chairwoman Stabenow. We have this big deficit. Could you do 
a lot more enforcement and maybe we could offset sequester?
    [Laughter.]
    Chairwoman Stabenow. Senator Boozman.
    Senator Boozman. Thank you, Madam Chair. I am good.
    Chairwoman Stabenow. Well, thank you very much. We 
appreciate all the members, and, Senator Cochran, thank you 
very much. And we appreciate your coming before the Committee 
again. We appreciate your work and look forward to continuing 
to work with you.
    We would ask that any additional questions for the record 
be submitted to the Committee clerk 5 business days from today. 
That is 5:00 p.m. next Wednesday, March 6th.
    If there is no further business, the Committee is 
adjourned.
    [Whereupon, at 4:01 p.m., the Committee was adjourned.]
      
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