[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                    BREXIT AND OTHER INTERNATIONAL 
                      DEVELOPMENTS AFFECTING U.S.
                          DERIVATIVES MARKETS

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

                                HEARING

                               BEFORE THE

        SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 26, 2019

                               __________

                           Serial No. 116-14
                           
                           
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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

DAVID SCOTT, Georgia                 K. MICHAEL CONAWAY, Texas, Ranking 
JIM COSTA, California                Minority Member
MARCIA L. FUDGE, Ohio                GLENN THOMPSON, Pennsylvania
JAMES P. McGOVERN, Massachusetts     AUSTIN SCOTT, Georgia
FILEMON VELA, Texas                  ERIC A. ``RICK'' CRAWFORD, 
STACEY E. PLASKETT, Virgin Islands   Arkansas
ALMA S. ADAMS, North Carolina        SCOTT DesJARLAIS, Tennessee
    Vice Chair                       VICKY HARTZLER, Missouri
ABIGAIL DAVIS SPANBERGER, Virginia   DOUG LaMALFA, California
JAHANA HAYES, Connecticut            RODNEY DAVIS, Illinois
ANTONIO DELGADO, New York            TED S. YOHO, Florida
TJ COX, California                   RICK W. ALLEN, Georgia
ANGIE CRAIG, Minnesota               MIKE BOST, Illinois
ANTHONY BRINDISI, New York           DAVID ROUZER, North Carolina
JEFFERSON VAN DREW, New Jersey       RALPH LEE ABRAHAM, Louisiana
JOSH HARDER, California              TRENT KELLY, Mississippi
KIM SCHRIER, Washington              JAMES COMER, Kentucky
CHELLIE PINGREE, Maine               ROGER W. MARSHALL, Kansas
CHERI BUSTOS, Illinois               DON BACON, Nebraska
SEAN PATRICK MALONEY, New York       NEAL P. DUNN, Florida
SALUD O. CARBAJAL, California        DUSTY JOHNSON, South Dakota
AL LAWSON, Jr., Florida              JAMES R. BAIRD, Indiana
TOM O'HALLERAN, Arizona              JIM HAGEDORN, Minnesota
JIMMY PANETTA, California
ANN KIRKPATRICK, Arizona
CYNTHIA AXNE, Iowa

                                 ______

                      Anne Simmons, Staff Director

              Matthew S. Schertz, Minority Staff Director

                                 ______

        Subcommittee on Commodity Exchanges, Energy, and Credit

                     DAVID SCOTT, Georgia, Chairman

JEFFERSON VAN DREW, New Jersey       AUSTIN SCOTT, Georgia, Ranking 
FILEMON VELA, Texas                  Minority Member
STACEY E. PLASKETT, Virgin Islands   ERIC A. ``RICK'' CRAWFORD, 
ABIGAIL DAVIS SPANBERGER, Virginia   Arkansas
ANTONIO DELGADO, New York            MIKE BOST, Illinois
ANGIE CRAIG, Minnesota               DAVID ROUZER, North Carolina
SEAN PATRICK MALONEY, New York       ROGER W. MARSHALL, Kansas
ANN KIRKPATRICK, Arizona             NEAL P. DUNN, Florida
CYNTHIA AXNE, Iowa                   DUSTY JOHNSON, South Dakota
                                     JAMES R. BAIRD, Indiana

               Ashley Smith, Subcommittee Staff Director

                                  (ii)
                                  
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     5
Scott, Hon. Austin, a Representative in Congress from Georgia, 
  opening statement..............................................     3
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     1
    Prepared statement...........................................     3

                               Witnesses

Duffy, Hon. Terrence A., Chairman and Chief Executive Officer, 
  CME Group Inc., Chicago, IL....................................     7
    Prepared statement...........................................     9
Edmonds, Christopher S., Senior Vice President, Financial 
  Markets, Intercontinental Exchange, Inc., Chicago, IL..........    12
    Prepared statement...........................................    14
Maguire, Daniel J., Chief Executive Officer, LCH Group Limited; 
  Member, Executive Committee, London Stock Exchange Group PLC, 
  London, UK.....................................................    17
    Prepared statement...........................................    19
Lukken, J.D., Hon. Walter L., President and Chief Executive 
  Officer, Futures Industry Association, Washington, D.C.........    23
    Prepared statement...........................................    24
Berger, Stephen John, Managing Director, Global Head of 
  Government & Regulatory Policy, Citadel, LLC, New York, NY; on 
  behalf of Managed Funds Association............................    38
    Prepared statement...........................................    40

                           Submitted Material

Appendix.........................................................    75

 
                    BREXIT AND OTHER INTERNATIONAL 
                      DEVELOPMENTS AFFECTING U.S.
                          DERIVATIVES MARKETS

                              ----------                              


                        WEDNESDAY, JUNE 26, 2019

                  House of Representatives,
   Subcommittee on Commodity Exchanges, Energy, and Credit,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. David 
Scott of Georgia [Chairman of the Subcommittee] presiding.
    Members present: Representatives David Scott of Georgia, 
Van Drew, Spanberger, Delgado, Craig, Maloney, Axne, Austin 
Scott of Georgia, Crawford, Bost, Marshall, Dunn, Johnson, 
Baird, and Conaway (ex officio).
    Staff present: Carlton Bridgeforth, Emily German, Matt 
MacKenzie, Ashley Smith, Paul Balzano, Patricia Straughn, Dana 
Sandman, and Jennifer Yezak.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. [audio malfunction in hearing room] 
Exchanges, Energy, and Credit entitled, Brexit and Other 
International Developments Affecting the U.S. Derivatives 
Market, will now come to order.
    I want to thank everyone for joining us this morning. This 
is a very, very important hearing. The very future of our 
international cross-border financing is very critical because 
of what is happening concerning Brexit.
    Today, we really want to examine, and examine it very 
thoroughly, so we come to a very succinct understanding with 
supreme knowledge as to how this situation involving the 
European Union's divorce with Great Britain affects our United 
States financial industry.
    It is most important that when we leave this hearing today, 
we will have one resolve, and that is to make sure what is 
happening with Brexit and the European Union does not, will 
not, and cannot put our United States financial industry in a 
weakened position. It is important that the United States 
financial industry remain in its position as the most 
significant, most important, most influential financial system 
in the world, because the world is depending on that and us 
making sure of it.
    There are some threats out there with this move in Brexit, 
and that is why we in this Committee realize our responsibility 
as Members of Congress to hear from you, to hear from our 
market participants, for you are the ones that engage in this. 
And we have to remember that this is an $843 trillion, not 
million, not billion, but trillion dollar, piece of the world's 
economy. And let me assure you that the United States financial 
system must remain number one in this strengthening position.
    Now, there are some very important facts I want to go over 
so you can see where we are.
    First of all, as we look at Brexit and other international 
developments, we know without a doubt that there are 27 members 
of the EU that are bracing for Great Britain's exit from the 
Union, and the UK approaches a leadership crisis with its Prime 
Minister's departure, and she is still at the helm, but there 
are so many things that are bubbling up underneath.
    Now, it is important for me to share with you that in 2016, 
the CFTC completed, that is the Commodity Futures Trading 
Commission, completed a 3 year negotiation for an equivalence 
agreement. It is very important to note that prior to this 
point, it was the European Union that was our equivalency 
partner. And this agreement on the regulatory treatment of 
derivatives clearinghouses with the European Union, and this 
agreement ensured that both the EU and U.S. clearinghouses 
operate at the same high standards, and at a comparable level 
of cost to their participants. Last year, as the EU prepared 
for the potential impact of Brexit, the EU Parliament passed 
the European Market Infrastructure Regulation, EMIR 2.2.
    I want to pause there, EMIR 2.2, and we have to examine 
EMIR 2.2 thoroughly this morning, because we on this Committee 
are convinced that EMIR 2.2 presents a very clear and present 
danger to our United States financial industry.
    When they passed EMIR 2.2, it unilaterally and 
automatically scrapped the 2016 equivalence agreement. EMIR 2.2 
increases oversight of the EU and third-country clearinghouses, 
and it has significant implications, as I said, for the 
industry in the United States.
    Some of the most extreme parts of this suggested policy is, 
number one, administrative fees charged to clearinghouses in 
other countries in exchange for oversight, and we will get back 
to that, by the EU. Comparable compliance discounts instead of 
grandfathering, which means that even when granted, you will 
get a discount of 15, 20, or 35 percent of fees. Also, a very 
complex tiering regime where the difference between Tier 1 and 
Tier 2 is fees that are as much as seven times higher. Tier 1 
is =50,000. Tier 2 is =350,000, seven times higher.
    However, the largest concern is a possible relocation 
provision requiring that all clearing move to the EU, either by 
the letter of the law or by making it so expensive that 
companies outside the EU will be priced out of competition. And 
everyone in this room knows that financial instruments do not 
operate in a vacuum. What happens in the EU and the UK will 
ripple through financial markets, just as our decisions here in 
our country have ramifications for them.
    It is my hope today that with our discussions and 
conversations that we will have today, that we can begin to 
explore and better understand what Brexit and the associated 
geopolitical developments in Europe and elsewhere will mean for 
the derivatives market in the United States.
    [The prepared statement of Mr. David Scott of Georgia 
follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    Thank you for joining us today as we look at Brexit and other 
international developments. This hearing is an important one, and a 
timely one, as the 27 members of the EU brace for the UK's exit from 
the Union, or ``Brexit'' and the UK approaches a leadership change.
    In 2016, the CFTC completed a 3 year negotiation for an equivalence 
agreement on the regulatory treatment of derivative clearinghouses with 
the European Union. This agreement ensured that both the EU and U.S. 
clearinghouses operate at the same high standards and at a comparable 
level of cost to their participants.
    Last year, as the EU prepared for the potential impact of Brexit, 
the EU Parliament passed the European Market Infrastructure Regulation 
(EMIR 2.2), which unilaterally scrapped the 2016 equivalence agreement.
    EMIR 2.2 increases oversight of EU and third-country 
clearinghouses, and it has significant implications for the industry in 
the U.S.
    Some of the most extreme parts of their suggested policies are:

   Administrative fees charged to clearinghouses in other 
        countries in exchange for oversight by the EU.

   Comparable compliance discounts instead of grandfathering 
        which means that even when deemed comparable the only 
        difference is a 15, 20 or 35 percent discount on your fees.

   A very complex tiering regime where the difference between 
        Tier 1 and Tier 2 is fees that are as much as seven times 
        higher.

    The largest concern is a possible relocation provision requiring 
that all clearing move to the EU either by the letter of the law or by 
making it so expensive that companies outside the EU will be priced out 
of competition.
    Everyone in this room knows that financial instruments do not 
operate in a vacuum. What happens in the EU and the UK will ripple 
through financial markets just as our decisions here in this country 
have ramifications for them. It's my hope that with our conversations 
today we can begin to explore and better understand what Brexit and the 
associated geopolitical developments in Europe and elsewhere will mean 
for the derivatives market in the United States.
    With that I would recognize my Ranking Member, the other 
distinguished Mr. Scott of Georgia, for 5 minutes.

    The Chairman. And with that, I would like to now recognize 
my Ranking Member, the other distinguished Mr. Scott from 
Georgia, for 5 minutes.

  OPENING STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman, for 
convening this hearing. You and I share a deep concern over 
what I would refer to as the potential absence of international 
harmonization work between the CFTC and their global 
counterparts.
    The main focus of today's hearing is the impact of Brexit 
on U.S. derivatives markets. We can't talk about that without 
discussing the European Commission's potential divergence from 
what was a hard fought 2016 equivalency agreement. For years, 
this Committee has been focused on the importance of 
harmonizing our international response to the financial crisis. 
And we, when Chairman Gensler sought to impose the U.S. swap 
dealer rules around the world, we pushed back because we 
rightly believed that overlapping rules would make it more 
difficult or impossible for global risk markets to function as 
end-users and other market participants need them to.
    Today, we are in a similar place, except instead of making 
common cause with our European colleagues, we are having to 
have another discussion about what I thought were principles 
that we had agreed on, principles that were agreed on with 
people who share both our interests and our values.
    Implementing EMIR 2.2 in a way that would disrupt our 
existing equivalency agreement would trample on our previously 
shared principles. Just like in 2011 and 2012, regulators are 
playing a dangerous game, trying to expand their reach into 
places that are already well-regulated. Such an effort, just as 
it was going to then, will result in inevitable conflicts, 
legal uncertainty, and other challenges for market 
participants. When there is uncertainty, there will be less 
liquidity, and when there is less liquidity, there is more risk 
for those who are driving our economy. We need our regulators 
to work together to preserve our open global markets while 
building the compatible standards that protect market 
participants and encourage financial stability.
    Open markets and financial stability should be our goals. 
Regulators should seek to implement rules that promote both. 
Our U.S. Prudential Regulators could also remember this lesson 
from time to time. The capital standard and margin rules that 
they have been working on are both out of step with global 
norms and do not promote access to clearing or sound hedging 
practices. The capital rules treatment of initial margined and 
unmargined commodity derivatives both penalize end-users who 
will see reductions in access to cleared market intermediaries 
and increase the cost for utilizing the right to opt out of the 
margin requirements.
    Our Prudential Regulators insistence on requiring margin 
for internal swaps that transfer risk within the same bank 
holding company presents similar problems for end-users. 
Ultimately, the cost of moving risks within a bank to the place 
that is most economical is the cost of providing a service to a 
client. If we make the services more expensive, it won't be the 
bank that pays, it will be the bank's client, the end-users who 
rely on the services, that pay. They will either pay in money 
or they will pay in loss of access. These requirements in both 
rules run contrary to the spirit and intent of our Committee's 
commitment to end-users when we enacted the law.
    I am happy to note the Commission is examining changes that 
will improve coordination and harmonization. I hope their 
efforts bear fruit, and I hope our European colleagues will 
join them.
    Mr. Chairman, I will end with this. The first meeting I was 
in this morning, a gentleman said, ``Do you want to beat people 
or win people?'' What we want in the harmonization with the 
regulators is a win-win situation for all of us who have shared 
interests and shared values. And if we don't have that, my fear 
is that it will be other countries who control the trading who 
don't share either our interests or our values.
    Thank you, Mr. Chairman for having this hearing.
    The Chairman. Well, I certainly agree with you, Ranking 
Member.
    And now, I would like to recognize our distinguished former 
Chairman and our Ranking Member, Mr. Mike Conaway.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    Mr. Conaway. Thank you, Mr. Chairman, and I agree 
wholeheartedly with what you and the Ranking Member both said 
during your opening statements. I certainly appreciate that.
    I know that you both remember the hearing that we conducted 
in 2012 on international regulatory harmonization. It was a 
good and informative hearing, and I expect that today's hearing 
will build on that work.
    I was looking through the transcript of that hearing in 
preparation for today, and I would like to share some words of 
wisdom submitted by Chairman Steven Maijoor, who was then and 
still remains the Chairman of the European Securities and 
Market Authority, or ESMA. In written testimony, he summed up 
the issues we are talking about today quite well. At the time, 
he wrote ``A number of conflicting duplicative and inconsistent 
requirements have been identified when analyzing the 
simultaneous application of different national regulations. 
These requirements, if applied on a cross-border basis to the 
same entities and transactions would, in certain cases, impede 
a transaction from taking place or might impede an entity from 
operating with the United States counterparts. This would have 
serious consequences for global market liquidity, and might 
even have financial stability consequences. ESMA considers it 
to be of fundamental importance to avoid the application of two 
or more sets of rules to the same entities or transactions, if 
those entities and transactions are subject to appropriate 
requirements in their home jurisdiction. Therefore, we urge 
U.S. regulators to rely on the maximum extent and equivalent 
requirements enshrined in EU law instead of imposing U.S. 
requirements when those non-U.S. entities are dealing with U.S. 
persons. When a duplicative application of rules cannot be 
avoided, we believe it is essential to identify and mitigate 
any possible conflict that might arise from that situation.''
    As Ranking Member and Mr. Scott mentioned, at that time, 
you and I and this whole Committee argued strenuously against 
our own U.S. regulators when they sought to push the boundaries 
of our regulations too far. We were worried about exactly what 
Chairman Maijoor identified, duplicative and inconsistent 
requirements harming global liquidity formation and raising 
financial stability concerns. Yet today, it is U.S. regulators 
who are recalibrating their approach and working to offer 
solutions to these thorny cross-border issues, and our European 
colleagues who are failing to heed their own advice. If 
European regulators persist down this path, we will likely 
learn that they were correct in their analysis and find that 
their actions have left our global markets in disarray.
    Mr. Chairman, before I close, I want to mention my deep 
disappointment in comments made by a senior Commission official 
at a conference several weeks ago in London. It is particularly 
personal to me because you and I so warmly received his 
testimony on this topic during that December 2012 hearing. In 
their worst light, his comments suggest that the United States 
does not have a partner, but a competitor in financial market 
regulation, a competitor who is willing to use its regulations 
to its strategic advantage. Viewing financial regulations as a 
competition would be a grave mistake. But, even in their best 
light, his comments betray a smugness that is inappropriate 
among friends. Such casual arrogance breeds mistrust, 
frustration, and needless friction at a time when we cannot 
afford intramural sniping.
    I have been struggling to make sense of the complete 
reverse on principle from our European friends expressed at 
their 2012 hearing. It is comments like these that lend 
credence to the argument that our ongoing CCP equivalence 
disagreements have nothing to do with systemic risks or safety 
and soundness of European institutions, and everything to do 
with retribution and competitive regulatory arbitrage. I 
certainly hope that is not the case. If it isn't, European 
leadership plainly made that clear through their words and 
their actions.
    With that, I yield back.
    The Chairman. Well, Ranking Member Conaway, thank you so 
much for that. As you know, I agree with you 100 percent. I 
really appreciate you really exposing that to the Committee 
this morning.
    Mr. Conaway. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    And now, the chair would request that other Members submit 
their opening statements for the record so the witnesses may 
begin their testimony, and to ensure that there is ample time 
for questions.
    Let me begin now by welcoming all of our distinguished 
panel members and thanking you all for coming, and we are 
looking forward to your testimony on this important issue.
    First of all, Mr. Terrence Duffy, thank you for coming. Mr. 
Duffy is Chairman and CEO of the CME Group, Chicago Mercantile 
Exchange in Chicago, Illinois. Thank you for coming, sir.
    We also have next Mr. Christopher Edmonds. Mr. Edmonds is 
Senior Vice President of Financial Markets for the 
Intercontinental Exchange, Chicago, Illinois. Wonderful. Please 
give my regards to Mr. Jeff Sprecter, a good friend, and ICE, 
as you may know, is headquartered in our wonderful State of 
Georgia in Atlanta. Thank you.
    And next, we have Mr. Daniel Maguire who is CEO of the LCH 
Group, London, United Kingdom. Thank you for coming. We really 
appreciate you coming over the pond to deal with this very 
important issue that London and Great Britain are grappling 
with at this moment. Thank you for bringing this insight to our 
Subcommittee hearing.
    And next, we have Mr. Walt Lukken, who is the President and 
CEO of Futures Industry Association, Washington, D.C. We are 
very much looking forward to your comments as well.
    And finally, we have Mr. Stephen Berger, Managing Director 
and Global Head of Government and Regulatory Policy, Citadel, 
LLC, on behalf of Managed Funds Association out of New York, 
New York. Good to have you. Thank you. We look forward to your 
input as well.
    What a distinguished panel. Thank you all very much for 
coming.
    And now, we will now proceed to hearing from our witnesses. 
Each of you will have 5 minutes, and 1 minute is left when the 
light turns yellow, signaling time is closely expiring. 
However, this is indeed a very critical and important hearing, 
and if there is something else that is pressing that you need 
to say, the chair will be lenient to make sure your full 
thoughts are here, because you are the ones who are out there 
day in and day out within this as leaders of our financial 
system in this international marketplace. We want to make sure 
that we hear from you and your recommendations as to what 
recommendations we need to take as a Committee to make sure 
your positions at the world market are strengthened, and you 
are not weakened on the world financial stage.
    All right. We will hear from you first, Mr. Duffy.

    STATEMENT OF HON. TERRENCE A. DUFFY, CHAIRMAN AND CHIEF 
         EXECUTIVE OFFICER, CME GROUP INC., CHICAGO, IL

    Mr. Duffy. Well thank you, Chairman Scott, Ranking Member 
Scott, and Members of the Committee. I am Terry Duffy, as the 
Chairman said. I am the Chairman and Chief Executive Officer of 
CME Group.
    Before I go into some of my prepared remarks that I wanted 
to give to you today, I am absolutely struck by what I heard 
here by this Congress, and I want to thank you, Mr. Chairman, 
for your leadership, Ranking Member Scott for your leadership 
on the comments that I heard. And Mr. Conaway, what you had 
said is just so profound to dig back up what people said in 
2012. It is just truly amazing that we are sitting here today 
in the duplicativeness of what people have said throughout the 
time.
    I don't think a lot of people understand the importance of 
this Committee, what it is doing here today. And so, Mr. 
Chairman, I really applaud you, your foresight to bring this 
forward because you look at what is going on in the world today 
alone, just with the farm community, and not only are they 
dealing with very difficult issues as far as trade goes; they 
are also dealing with extremely difficult issues with weather. 
These are a couple issues that they have no control over.
    But to your point, Mr. Conaway, the liquidity--or 
Chairman--Ranking Member Scott on the liquidity, this is 
critical. This Congress has an opportunity not to impose 
another problem for the American farmer, and that is giving 
them a place where they don't have any risk management tools 
during these very uncertain times. And if you think that there 
is nothing else to it but agricultural products, you can talk 
about home mortgages. You can talk about fuel for your car. You 
can talk about your 401(k). All these different services that 
we use in our daily lives need risk management products, and if 
you drive the cost up, I think Mr. Conaway said, it will fall 
on the consumers. That is where it ultimately goes. Your 
foresight to have this Committee hearing is critically 
important. It is a lot more than just regulatory arbitrage. 
This has a lot to do with the American consumer and the global 
consumers. I really applaud your efforts, all of you on this 
Committee, for going forward with this.
    That being said, I testified before this Subcommittee 
almost 3 years ago to the day in June of 2016. After that 
hearing, I stated the negotiations between the United States 
and the European Union on equivalence were successfully 
resolved in February when the European Commission officially 
granted the CFTC equivalent status. I encouraged global 
regulators to avoid potential market disruption in the future 
by implementing long-term solutions. And I warned if this was 
not the case, regulation will artificially influence liquidity, 
price discovery, and risk management, and competitively 
disadvantage individual markets in an increasingly competitive 
global marketplace.
    Unfortunately, here we are 3 years later again discussing 
our regulatory overreach by the European Union that is in 
direct challenge to the authority of the United States Congress 
and the Commodity Futures Trading Commission to set rules and 
to regulate the U.S. futures market. One year after the U.S. 
and the European Union reached the equivalence agreement in 
2016, in the wake of Brexit, the European Union proposed 
legislation creating a sweeping new set of regulations to apply 
to clearinghouses operated outside the European Union.
    This new law, as the Chairman referred to it as EMIR 2.2, 
unilaterally amends the agreement layering significant new 
requirements on top of those previously agreed to without 
justification. The 2016 agreement was the result of painstaking 
comparison of U.S. and European Union clearinghouse 
regulations. Its ratification reflected consensus that the U.S. 
regulations were comparable and equivalent to those in the 
European Union. Yet, just last month, as the Chairman said, 
ESMA and the European Union regulatory authority asked--they 
were tasked with overseeing the non-European Union 
clearinghouses, released its consultations detailing how they 
recommend implementing the new EMIR 2.2 requirements.
    The consultations proposed to needlessly require a line-by-
line comparison of U.S. and European Union laws, ignoring the 
principles of deference and substituted compliance that the two 
jurisdictions agreed to just a few years ago.
    ESMA proposed to classify U.S. clearinghouses according to 
their systemic relevance to the European Union through a set of 
subjective criteria that in many cases have no nexus to the 
European Union, and are inappropriate tests of whether a U.S. 
clearinghouse has systemic importance to the Union.
    ESMA further proposes to override U.S. law and the 2016 
agreement by rejecting substituted compliance for U.S. 
clearinghouses that they deemed systemically important to the 
European Union. ESMA's proposal would demand strict compliance 
with the majority of the European Union rulebook, effectively 
making ESMA, instead of the United States Congress and the 
CFTC, the standard setter for U.S. clearinghouses.
    ESMA would also give European Union regulators authority 
over clearinghouses' corporate governance. This is in direct 
conflict with U.S. law, and imposes fees on U.S. clearinghouses 
to fund the European Union's expansion of its regulatory 
apparatus.
    This wholesale regulatory takeover by the European Union is 
inconsistent with the needs of global financial markets. 
Without deference and cooperation, global markets will face 
regulatory fragmentation resulting in, as we said earlier, 
decreased liquidity, increased volatility, and higher prices 
for all market participants, and ultimately, consumers. It will 
place a higher cost on farmers, end-users, and producers that 
use U.S. markets to hedge risk. If this European Union 
legislation were to be enacted, it will weaken the stability of 
the U.S. financial system, in addition to the global financial 
marketplace.
    Our U.S. regulators have longstanding experience overseeing 
complex markets, ensuring robust risk management, and assessing 
systemic risk. Rather than attempting to override this capable 
and vigilant regulatory regime, the European Union regulators 
should work with the U.S. to build a coordinated global 
regulatory framework.
    Mr. Chairman, Members of the Committee, I thank you for 
giving me the extra time to give my comments today. I look 
forward to answering any questions you may have.
    [The prepared statement of Mr. Duffy follows:]

   Prepared Statement of Hon. Terrence A. Duffy, Chairman and Chief 
             Executive Officer, CME Group Inc., Chicago, IL
Hearing To Review U.S. CCP Equivalence in the EU
    Chairman Scott, Ranking Member Scott, and Members of the 
Subcommittee, I am Terry Duffy, Chairman and CEO of CME Group Inc. 
(``CME Group'').\1\ Thank you for the opportunity to testify today 
regarding U.S. central counterparty (``CCP'') equivalence in the 
European Union (``EU'') and the potential implications for the U.S. 
futures markets. We appreciate your interest in addressing the EU's 
recent legislation on non-EU CCPs, which could have a drastic impact on 
Congress's and the Commodity Futures Trading Commission's (``CFTC'') 
authority over U.S. domiciled derivatives clearing organizations 
(``DCO''). Congress now has the opportunity to positively influence the 
EU to move towards an approach of regulatory deference before the full 
package of revised legal and regulatory requirements for non-EU CCPs is 
finalized by the EU. We expand on our views on how Congress can reduce 
the likelihood of EU overreach in our concluding remarks and believe 
that active Congressional engagement is a prerequisite to a positive 
result.
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    \1\ CME Group Inc. (``CME Group'') is the parent of the Chicago 
Mercantile Exchange Inc. (``CME''). CME is registered with the 
Commodity Futures Trading Commission (``CFTC'') as a derivatives 
clearing organization (``DCO'') and is one of the largest central 
counterparty (``CCP'') clearing services in the world. CME's clearing 
house division offers clearing and settlement services for exchange-
traded futures and options on futures contracts, as well as over-the-
counter (``OTC'') derivatives transactions, including interest rate 
swaps (``IRS'') products. On July 18, 2012, the Financial Stability 
Oversight Council designated CME as a systemically important financial 
market utility under Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act'') based on its U.S. 
exposures, among other things. See, Minutes of the Financial Stability 
Oversight Council, pg. 5 (July 18, 2012), available at https://
www.treasury.gov/initiatives/fsoc/Documents/
July%2018%20FSOC%20Meeting%20Minutes.pdf.
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Background on EU CCP Equivalence
    In March of 2016, the CFTC and the EU entered into an equivalence 
agreement following years of negotiations.\2\ This agreement was soon 
followed by the recognition of individual DCOs in the U.S., like 
Chicago Mercantile Exchange Inc. (``CME''), which allowed EU persons to 
efficiently access U.S. futures markets for their hedging needs.
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    \2\ Commission Implementing Decision (EU) 2016/377 of 15 March 2016 
on the equivalence of the regulatory framework of the United States of 
America for central counterparties that are authorised and supervised 
by the Commodity Futures Trading Commission to the requirements of 
Regulation (EU) No 648/2012 of the European Parliament and of the 
Council, available at https://eur-lex.europa.eu/legal-content/EN/TXT/
PDF/?uri=CELEX:32016D0377&from=EN.
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    On June 23, 2016, the United Kingdom (``UK'') voted to depart from 
the EU. To ensure ongoing oversight of the Euro currency and financial 
markets denominated in Euros, the European Commission proposed new 
legislation in June of 2017 (hereafter, ``EMIR 2.2'').\3\ But rather 
than focus on Euro denominated products and EU risks,\4\ this 
legislation instead proposed a broad test to determine whether non-EU 
CCPs are of systemic importance to the EU. As drafted, the legislation 
may have captured non-EU CCPs with an extremely limited nexus to the 
Euro and/or limited exposures to EU financial institutions. As expanded 
upon below, this approach potentially captures U.S. DCOs such as CME, 
which have limited exposures to the Euro and EU clearing members. 
Consequently, under these very broad standards, U.S. DCOs that are 
found to be of systemic importance to the EU would be subject to direct 
EU regulation and supervision, contrary to the original equivalence 
agreement reached in March of 2016.
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    \3\ European Commission, Proposal for a Regulation of the European 
Parliament and of the Council amending Regulation (EU) No 1095/2010 
establishing a European Supervisory Authority (European Securities and 
Markets Authority) and amending Regulation (EU) No 648/2012 as regards 
the procedures and authorities involved for the authorisation of CCPs 
and requirements for the recognition of third-country CCPs (June 2017), 
available at https://eur-lex.europa.eu/
resource.html?uri=cellar:80b1cafa-50fe-11e7-a5ca-01aa75ed71a1.0001.02/
DOC_1&format=PDF.
    \4\ Id. at pg. 6 (noting, ``[m]oreover, a substantial volume of 
euro-denominated derivatives transactions (and other transactions 
subject to the EU clearing obligation) is currently cleared in CCPs 
located in the United Kingdom. When the United Kingdom exits the EU, 
there will therefore be a distinct shift in the proportion of such 
transactions being cleared in CCPs outside the EU's jurisdiction, 
exacerbating the concerns outlined above. This implies significant 
challenges for safeguarding financial stability in the EU that need to 
be addressed. In light of these considerations, the Commission adopted 
a Communication on 4 May 2017 on responding to challenges for critical 
financial market infrastructures and further developing the Capital 
Markets Union 22. The Communication indicated that `further changes [to 
EMIR] will be necessary to improve the current framework that ensures 
financial stability and supports the further development and deepening 
of the Capital Markets Union (CMU)'.'').
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    Despite efforts by the CFTC to encourage EU policy makers to 
incorporate cross-border deference into EMIR 2.2, political agreement 
was reached among the European Commission, European Parliament and 
European Council in March of 2019 on a version of EMIR 2.2 that 
provides for a test for systemic importance that does not require that 
a non-EU CCP have a nexus to the EU.\5\ Thus, U.S. DCOs such as CME 
could be designated systemically important in the EU, despite CME's 
limited exposures in EU denominated products and to EU clearing 
members. A DCO that is so designated would be directly regulated and 
supervised by the European Securities and Markets Authority (``ESMA''). 
Last month, ESMA issued technical advice consultations on EMIR 2.2 
(hereafter, ``ESMA Consultations'').\6\ The ESMA Consultations propose 
text for regulations that are required to be adopted by the European 
Commission to implement EMIR 2.2.
---------------------------------------------------------------------------
    \5\ Council of the European Union, Regulation of the European 
Parliament and of the Council amending Regulation (EU) No 648/2012 as 
regards the procedures and authorities involved for authorisation of 
CCPs and requirements for recognition of third-country CCPs--
Confirmation of the final compromise text with a view to agreement 
(March 2019), available at https://data.consilium.europa.eu/doc/
document/ST-7621-2019-ADD-1/en/pdf.
    \6\ European Securities and Markets Authority, Consultation Paper, 
Draft technical advice on criteria for tiering under Article 25(2a) of 
EMIR 2.2 (May 2019), available at https://www.esma.europa.eu/sites/
default/files/library/esma70-151-2138_cp_ta_on_tiering_criteria.pdf; 
European Securities and Markets Authority, Consultation Report, 
Technical Advice on Comparable Compliance under article 25a of EMIR 
(May 2019), available at https://www.esma.europa.eu/sites/default/
files/library/esma70-151-2179_cp_ta_on_comparable_com
pliance.pdf; European Securities and Markets Authority, Consultation 
Paper, ESMA fees for Third-Country CCPs under EMIR 2.2 (May 2019), 
available at https://www.esma.europa.eu/sites/default/files/library/
esma70-151-1663_cp_on_emir_2_2_ccp_fees.pdf.
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    Although EMIR 2.2 provides a mechanism based on comparable 
regulation that could potentially avoid the application of EU laws and 
regulations directly to U.S. DCOs, fulsome comparable compliance is not 
permitted by the proposed ESMA Consultations. Instead, the ESMA 
Consultations require that U.S. DCOs designated as systemically 
important in the EU must comply with the majority of laws and 
regulations adopted for EU CCPs. As a result, ESMA would exercise 
primary supervisory powers over such U.S. DCOs such as CME. This 
approach fails to recognize the comprehensive legal and regulatory 
framework adopted by Congress and implemented by the CFTC for U.S. DCOs 
generally and those designated as systemically important in the U.S. 
particularly.\7\ Congress adopted this framework as the exclusive form 
of regulation for such U.S. DCOs.
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    \7\ U.S. DCOs that have been designated as systemically important 
in the U.S. are subject to heightened regulatory standards along with 
direct oversight and annual examinations by the CFTC and the Board of 
Governors of the Federal Reserve System.
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    In effect, EMIR 2.2 and the ESMA Consultations propose, in many 
cases, to supersede not only U.S. laws but also CFTC regulations that 
were subject to a robust notice and comment process. Instead of those 
Congressional and CFTC mandates, U.S. DCOs would be subjected to 
recently developed EU laws and regulations on risk management and 
governance which were drafted with EU financial markets in mind. It is 
notable that ESMA does not, and will not under EMIR 2.2 or the ESMA 
Consultations, supervise any EU CCPs. In fact, the EU policy-makers 
specifically considered giving ESMA supervisory powers over EU CCPs as 
part of the legislative process and decided to continue to defer to the 
local regulators in the EU member states.
    The U.S. approach to supervision and oversight of foreign futures 
markets stands in stark contrast to EMIR 2.2 and the ESMA 
Consultations. CCPs outside of the U.S. can clear foreign futures for 
U.S. persons without being subject to any supervision or oversight from 
the CFTC due to exemptive relief offered by the CFTC under Part 30 of 
its regulations, which has been in place for decades.
CME Does Not Pose A Systemic Risk to the EU
    CME does not pose a systemic risk to the EU and is subject to the 
robust regulatory oversight of the CFTC under a framework designed for 
U.S. financial markets by this Committee and Congress. Notwithstanding 
CME's lack of systemic importance to the EU based on its financial 
exposures and products cleared, the ESMA Consultations are designed to 
capture CME as systemically important. If so captured, CME would be 
subject to EU supervision and regulation, which would have negative 
implications for the U.S. economy and regulatory sovereignty, as 
further discussed in the next section.
    CME has long provided a wide variety of U.S. Dollar denominated 
futures products to its market participants. While these products are 
used to hedge business risk on a global basis due to the role of the 
U.S. Dollar as the world's reserve currency, the vast majority of the 
risks that CME manages stem from U.S. domiciled clearing members. In 
fact, EU domiciled entities clear less than 2% of the risks that CME 
manages. The de minimis nature of CME's exposures to EU domiciled 
clearing members is consistent with the limited products that CME 
clears denominated in EU currencies. These products represent 
significantly less than 5% of CME's volume and exposure and an even 
smaller portion of the overall Euro denominated futures markets.
Potential Impacts of EU Superseding U.S. Law
    The powers proposed under EMIR 2.2 and the ESMA Consultations are 
far reaching. They present negative implications for U.S. sovereignty 
over its financial markets. Ultimately, the EU's imposition of its laws 
and regulations risk weakening the stability of the U.S. and global 
financial systems and fragmenting U.S. futures markets, while 
potentially undermining the central role the U.S. has played in the 
global commodities markets.\8\ As just one example of the wide ranging 
regulations imposed, the combination of EMIR 2.2 and the ESMA 
Consultations would allow ESMA to remove members of the board of 
directors of a U.S. DCO designated systemically important in the EU. 
That power directly conflicts with well-established corporate law 
principles in the U.S. and exceeds the authority afforded to the CFTC 
under U.S. law. The ability to dictate board representation has 
consequences beyond corporate governance since the board is the 
ultimate decision-making power on all manner of major strategic issues, 
including U.S. DCO's risk management.
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    \8\ European Commission, Communication from the Commission to the 
European Parliament, the European Council (Euro Summit), the Council, 
the European Central Bank, the European Economic and Social Committee 
and the Committee of the Regions--Towards a stronger international role 
of the euro (Dec. 2018) (noting, recently, the European Commission laid 
out a vision for a future state where the Euro replaces the U.S. Dollar 
as the currency of choice when transacting in commodities markets. That 
vision, if realized, will have broader deleterious effects on the U.S. 
economy and mainstream consumers. Historically, most commodities have 
been priced in U.S. Dollars due to the central role of the U.S. Dollar 
in the global economy and the pre-eminence of the U.S. financial 
markets.), available at https://eur-lex.europa.eu/legal-content/EN/TXT/
PDF/?uri=CELEX:52018DC0796&from=en.
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    EMIR 2.2 and the ESMA Consultations would supplant U.S. regulatory 
standards for U.S. DCOs' risk management, even though the EU standards 
were drafted by policy-makers unfamiliar with the nuances of the U.S. 
futures markets. The application of foreign regulation to U.S. futures 
markets has the potential to create systemic risk through increased 
regulatory complexity and conflict. Risk management best practices 
originated in the U.S. futures markets and have served as a template 
for global financial reform due to the robust performance of U.S. DCOs 
during the financial crisis. Congress and the CFTC have expanded upon 
these best practices by applying their well-earned expertise to develop 
a robust set of principles-based regulations that are designed to 
ensure financial stability while taking into account the unique 
characteristics of the deeply liquid U.S. cleared futures markets used 
by farmers, end-users and producers for price discovery and hedging 
purposes.
Next Steps for Congress and the CFTC
    The ESMA Consultations are currently open for comment with the 
period closing on July 29, 2019. It is expected that the ESMA 
Consultations would then be finalized by the end of 2019 with the new 
EU powers going into effect in early 2020. We respectfully urge 
Congress and the CFTC to act now to ensure that the implementation of 
EMIR 2.2 respects U.S. sovereignty and expertise over its financial 
markets.
    This Committee and Congress have since 1974 provided the exclusive 
regulatory framework for U.S. futures markets to be administered by the 
CFTC. Ensuring the continuation of that framework is critical. In the 
event that regulatory deference is not offered by its foreign 
regulatory peers, the CFTC has powers under the Commodity Exchange Act 
and Part 30 of its regulations to take actions to support U.S. 
financial markets' stability and the broader role played by U.S. 
financial markets in the global financial system. We encourage Congress 
and the CFTC to use their powers as necessary while also considering 
whether any additional statutory or regulatory tools are necessary to 
address regulatory overreach by policy-makers outside of the U.S., 
including the EU.
    Thank you. I look forward to answering your questions.

    The Chairman. Thank you very much, Mr. Duffy. That was very 
informative.
    And now, I recognize Mr. Edmonds.

  STATEMENT OF CHRISTOPHER S. EDMONDS, SENIOR VICE PRESIDENT, 
              FINANCIAL MARKETS, INTERCONTINENTAL 
                  EXCHANGE, INC., CHICAGO, IL

    Mr. Edmonds. Chairman Scott, Ranking Member Scott, and 
Members of the Subcommittee, I am Chris Edmonds, Senior Vice 
President for Financial Markets, Intercontinental Exchange, or 
ICE. I appreciate this opportunity to appear before you today 
as this Committee looks at Brexit and EMIR 2.2, and related 
cross-border issues.
    Central counterparties play a critical role in the 
financial markets serving the needs of market participants 
around the globe. Policy makers across the world, including 
this Committee, have an interest in safe and efficient markets.
    Since launching an electronic marketplace for energy in 
2000 in Atlanta, Georgia, ICE has expanded in both the U.S. and 
internationally. We have acquired or founded derivatives 
exchanges and clearinghouses in the U.S., Europe, Singapore, 
and Canada. Today, ICE owns and operates six geographically 
diverse clearinghouses that serve global markets and customers 
across North America, Europe, and Asia. Each of these 
clearinghouses is subject to direct oversight by local national 
regulators, and subject to regulations reflective of the G20 
reforms and IOSCO principles. Our assets are regulated by the 
CFTC, the SEC, the Federal Reserve System, the Bank of England, 
the UK Financial Conduct Authority, The European Securities 
Market Authority, the Monetary Authority of Singapore, among 
others.
    Over the last decade, we have become familiar and work 
closely with global regulators to understand their unique 
perspectives.
    Clearing has consistently proven to be a fundamentally safe 
and sound process for managing systemic risk. Observers 
frequently point to non-cleared derivative contracts as a 
significant factor in the broad reach and complexity of the 
2008 financial crisis, while noting the relative stability of 
cleared markets. Regulators and market participants also 
understand these are global markets, and to realize the goals 
of the G20 reforms, it is essential regulators share 
information and continue to cooperate with each other, 
consistent with agreed upon international frameworks.
    As an example, ICE supports the ongoing dialogue between 
the European and U.S. policy makers where there have been 
notable success. The 2016 agreement between the European 
Commission and CFTC established a common approach to 
supervision of cross-border CCPs. This agreement promotes 
regulatory deference as well as prioritizes provisions 
supporting robust global derivatives markets. Continued 
regulatory cooperation is imperative, as issues such as Brexit, 
which should have no bearing on these efforts, are determined 
by other political bodies and agendas.
    Differences and unsubstantiated changes in financial sector 
reforms can lead to overlapping and conflicting requirements. 
This is in no one's best interest, and it has been clearly 
articulated here today in previous comments. This spirit of 
cooperation should guide our ongoing discussion on critical 
cross-border issues, including EMIR 2.2 implementation and 
potential Brexit responses.
    The proposed EMIR 2.2 text contemplates that with respect 
to non-European Union domiciled CCPs determined to be 
systemically important, ESMA could rely on comparable 
compliance with the CCP local regulatory regime. However, the 
text also contemplates that ESMA be able to recommend and the 
Commission be able to adopt after agreement with the ECB, an 
act requiring a clearinghouse to relocate in the EU if the 
central counterparty or some of its clearing services are of 
such systemic importance.
    A better outcome would be to continue the development and 
reliance on the model of supervisory cooperation, enabling EU 
supervisors to exercise appropriate and proportionate oversight 
of central counterparties.
    The European Commission policy goals to ensure appropriate 
supervision of non-EU domiciled CCPs that are deemed 
systemically important, are completely understandable. ICE 
believes these goals can be achieved by ESMA employing 
mechanisms based on international standards such as CPMI-IOSCO. 
Each national regulator should consider the interest of other 
relevant authorities and interested parties when managing a 
crisis. However, there should be no ambiguity in the ultimate 
decision-making authority for the avoidance of doubt. The 
industry cannot afford any regulatory confusion in a time of 
stress.
    ICE believes the cross-border oversight and regulatory 
deference to home country regulators are essential to well-
functioning markets. They are the foundation of healthy global 
markets. The CFTC's recent publication and Chairman Giancarlo's 
description of his vision for future CFTC rule proposals are, 
in ICE's view, positive steps towards implementing relevant 
laws, standards, and policies that further the goal for 
financial stability and resilience while minimizing supervisory 
duplication and conflict.
    ICE has always been, and remains a strong proponent of open 
and competitive markets with appropriate regulatory oversight. 
To that end, we have, and we will continue to work closely with 
this Committee and all regulatory authorities to ensure access 
to all relevant information available.
    Mr. Chairman, thank you for the opportunity to share our 
views with you. I would be happy to answer any questions you or 
Members of the Subcommittee have today.
    [The prepared statement of Mr. Edmonds follows:]

 Prepared Statement of Christopher S. Edmonds, Senior Vice President, 
    Financial Markets, Intercontinental Exchange, Inc., Chicago, IL
Introduction
    Chairman Scott, Ranking Member Scott, I am Chris Edmonds, Senior 
Vice President, Financial Markets for Intercontinental Exchange, or 
ICE. I appreciate the opportunity to appear before you today, as this 
Committee looks at Brexit, the European Commission's recent reforms to 
its legislation governing the regulation and supervision of CCPs, 
called the European Market Infrastructure Regulation (or EMIR 2.2), and 
related cross-border issues.
    Central counterparties (or CCPs) play a critical role in the 
financial markets that serve the needs of market participants around 
the globe. Policy makers across the world, including this Committee, 
have an interest in safe and efficient markets. To further the common 
interest of well-functioning markets and well-regulated CCPs, we 
appreciate the opportunity to participate in this hearing as it 
examines the cross-border supervision of CCPs.
Background
    Since launching an electronic over-the-counter (OTC) energy 
marketplace in 2000 in Atlanta, Georgia, ICE has expanded both in the 
U.S. and internationally. Over the past seventeen years, we have 
acquired or founded derivatives exchanges and clearing houses in the 
U.S., Europe, Singapore and Canada. In 2013, ICE acquired the New York 
Stock Exchange, which added equity and equity options exchanges to our 
business. Through our global operations, ICE's exchanges and clearing 
houses are directly regulated by the U.S. Commodity Futures Trading 
Commission (CFTC), the Securities and Exchange Commission (SEC), the 
Bank of England, the UK Financial Conduct Authority (FCA), the European 
Securities and Markets Authority (ESMA) and the Monetary Authority of 
Singapore, among others.
    ICE has a successful and innovative history of clearing exchange 
traded and OTC derivatives across a spectrum of asset classes, 
including energy, agriculture and financial products. Today, ICE owns 
and operates six geographically diverse clearing houses that serve 
global markets and customers across North America, Europe and Asia. 
Each of these clearing houses is subject to direct oversight by local 
national regulators, often in close coordination and communication with 
other regulatory authorities with important interests, and subject to 
regulations reflective of the G20 reforms and IOSCO principles.
    ICE acquired its first clearing house, ICE Clear U.S., as a part of 
the 2007 purchase of the New York Board of Trade. ICE Clear U.S. is 
primarily regulated by the CFTC and is recognized by ESMA and clears a 
variety of agricultural and financial derivatives. In 2008, ICE 
launched ICE Clear Europe, the first new clearing house in the UK in 
over a century. ICE Clear Europe clears derivatives in several asset 
classes, including energy, interest rates, equity and credit 
derivatives, and is primarily supervised by the Bank of England, in 
close cooperation with the CFTC, the SEC and ESMA. ICE Clear Credit was 
established as a trust company in 2009 under the supervision of the 
Federal Reserve Board and the New York State Banking Department and 
converted to a derivatives clearing organization (DCO) following 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). ICE Clear Credit is primarily 
regulated by the CFTC and SEC and also recognized by ESMA and clears a 
global set of credit default swaps on indices, single names and 
sovereigns. ICE also operates ICE Clear Netherlands under the 
regulatory supervision of De Nederlandsche Bank, Autoriteit Financiele 
Markten and ESMA and ICE Clear Singapore which is overseen by the 
Monetary Authority of Singapore.
CCPs Vital Role in the Derivatives Market
    The risk reducing benefits of central clearing have long been 
recognized by users of exchange-traded derivatives (futures) and the 
pre-existing regulatory framework and efficacy of the clearing model 
throughout even the most challenging financial situations made it the 
natural foundation of the financial reforms put forward over the past 
decade. Clearing has consistently proven to be a fundamentally safe and 
sound process for managing systemic risk. Observers frequently point to 
non-cleared derivative contracts as a significant factor in the broad 
reach and complexity of the 2008 financial crisis, while noting the 
relative stability of cleared markets.
    The disciplined and transparent risk management practices of 
regulated clearing houses serve to reduce systemic risk. A clearing 
house, by acting as a central counterparty, to clearing members' 
transactions, eliminates the bilateral counterparty credit risk and 
imposes on clearing members a transparent set of rules and prudent risk 
management practices, such as margin requirements, to minimize risks 
managed by the clearing house. Over the past 100 years, clearing house 
risk management practices have been repeatedly tested and proven in 
resolving clearing member defaults including large bankruptcy 
proceedings, such as Lehman Brothers and MF Global. The recent 
introduction of mandated clearing obligations for certain swaps has 
sensibly extended the significant benefits of clearing to a broader 
array of financial instruments.
Regulatory Cooperation
    Following the 2008 financial crisis, global regulators were tasked 
with implementing the G20 reforms to achieve the goals of increased 
financial stability, resilience and transparency in the global OTC 
derivatives market. Over the last decade, ICE has worked with global 
regulators as they implement reforms designed to foster financial 
stability, facilitate robust, liquid and transparent markets, and 
protect the geographically diverse users of those global markets.
    It is well understood by regulators and market participants that 
the derivatives markets are global markets, as participants in those 
markets trade across venues and jurisdictions to meet their unique 
business needs. To realize the goals of the G20 reforms, it is 
essential that regulators share information and continue to cooperate 
with each other, consistent with agreed upon global frameworks. It is 
important that regulators carefully implement regulatory requirements 
to minimize the fragmentation of markets and liquidity, which can 
reduce the efficacy of commercial firms' risk management efforts and 
undermine the goals of financial stability and resilience. To this end, 
constructive relationships among regulators are critical to building 
the confidence and trust essential for effective cross-border 
regulatory frameworks and that are consistent with globally agreed to 
principles. This effort to work together is in all of our best 
interests, just as the prevention of market fragmentation should be. 
Such deference and cooperation can enhance liquid, well-functioning 
markets and minimize confusion and inefficient, duplicative oversight.
    ICE supports the ongoing dialogue between European and U.S. policy 
makers where there have been notable successes. The 2016 agreement 
between the European Commission (EC) and the CFTC established a common 
approach to the regulation and supervision of cross-border CCPs (CCP 
Agreement).\1\ The CCP Agreement promotes regulatory deference as well 
as prioritizes provisions supporting robust global derivatives markets. 
In addition, the CFTC, Bank of England and the Financial Conduct 
Authority recently issued a joint statement providing assurances to 
market participants on the continuity of derivatives trading and 
clearing activities between the UK and U.S. regardless of the outcome 
of the UK's withdrawal process from the EU. Similarly, the EU announced 
its intention to continue to recognize UK-based clearing firms after 
the UK's withdrawal process from the EU. Together, these authorities 
took cooperative measures to avoid regulatory uncertainty about the 
continuation of the global derivatives market regardless of their 
location; such an important step achieved through communication, 
coordination and local regulatory frameworks established based upon 
global principles. These measures give confidence to market 
participants about their continued ability to trade and manage their 
global risks on a cross-border basis.
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    \1\ Joint Statement from CFTC Chairman Timothy Massad and European 
Commissioner Jonathan Hill, CFTC and the European Commission: Common 
approach for transatlantic CCPs (February 10, 2016), https://
www.cftc.gov/PressRoom/PressReleases/pr7342-16.
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    Continued regulatory cooperation is imperative, as issues such as 
Brexit, which should have no bearing on these efforts, are determined 
by other political bodies. ICE has a long history of working with U.S. 
and global regulators on mutually beneficial supervisory outcomes. 
Differences and unsubstantiated changes in financial sector reforms can 
lead to overlapping or conflicting requirements. By working together 
across the globe, regulators can avoid this harmful and 
counterproductive outcome and promote a more resilient financial 
system. This spirit of cooperation should guide our ongoing discussions 
on critical cross-border issues, including EMIR 2.2 implementation and 
potential Brexit responses.
EMIR 2.2
    Recently, the European Parliament and EU-Member States reached an 
agreement on reforms to EMIR 2.2, legislation governing the regulation 
and supervision of CCPs. Prior to this announcement, the EU's approach 
to supervising non-EU CCPs was based on equivalence and deference to 
the 2016 CCP Agreement. EMIR 2.2 expands the regulatory and supervisory 
authority of ESMA over third-country CCPs, i.e., non-EU domiciled CCPs, 
if those CCPs are determined to be systemically important for the 
financial stability of the EU. EMIR 2.2 contemplates that, with respect 
to non-EU domiciled CCPs determined to be systemically important, ESMA 
could rely on comparable compliance with the CCP's local regulatory 
regime. EMIR 2.2 also contemplates that ESMA be able to recommend, and 
the Commission be able to adopt, after agreement from the ECB, an act 
that requires a clearing house to relocate to the EU if the CCP or some 
of its clearing services are deemed to be of such systemic importance. 
We agree with the final agreement of the European Parliament and 
Council that such an act should be a measure of last resort, as such a 
requirement would increase costs considerably for banks and their 
customers, because the current portfolio efficiencies would be 
unavailable if the euro-denominated portion were disaggregated. A 
better outcome would be to continue the development and reliance on a 
model of supervisory cooperation that enables EU supervisors to 
exercise appropriate and proportionate oversight of CCPs that provide 
clearing services in the EU.
    ESMA recently published two consultations on the implementation of 
the new EMIR 2.2 regime for non-EU domiciled CCPs. Specifically, ESMA 
is currently seeking public consultation on the criteria for assessing 
the systemic importance of non-EU domiciled CCPs. ESMA is also 
consulting on the detailed rules regarding ESMA's approach to 
comparable compliance. ICE is evaluating ESMA's recently published 
consultations and will be commenting. ICE supports the EMIR 2.2 goal to 
establish appropriate supervision of non-EU domiciled CCPs that are 
determined to be systemically important for the financial stability of 
the EU and looks forward to contributing to the dialogue on 
implementation of EMIR 2.2.
    The European Commission's policy goals to ensure appropriate 
supervision of non-EU domiciled CCPs that are deemed systemically 
important to the EU are understandable. ICE believes that these goals 
can be achieved by ESMA employing mechanisms based on international 
standards such as CPMI-IOSCO, together with continued cooperation and 
information-sharing agreements among CCP supervisory authorities. These 
mechanisms can provide ESMA with the information and oversight they 
require, while leaving the final decision-making in the hands of 
national regulators to prevent overlapping or conflicting requirements, 
which is particularly critical in a time of crisis. ESMA, in any effort 
to enhance oversight of non-EU CCPs, should consider strong and 
effective supervisory cooperation between the relevant authorities. 
This approach will enable EU supervisors to exercise appropriate and 
proportionate oversight of non-EU CCPs.
    A global approach to supervision brings significant benefits. 
Especially in a crisis situation, the market needs clarity that the 
national regulator can take the lead in managing a default and have the 
ultimate decision making authority. The national regulator should 
consider the interests of other relevant authorities and interested 
parties when managing a crisis, however there should be no ambiguity in 
the ultimate decision making authority.
CFTC Cross-Border Regulation
    In 2018, the CFTC indicated its desire to reassess the current 
cross-border application of its swaps regime with a rule-based 
framework based on regulatory deference to third-country regulatory 
jurisdictions that have adopted the G20 swaps reforms.\2\ The CFTC has 
stated that, as global regulators continue to implement swaps reforms 
in their markets, it is critical to ensure CFTC rules do not conflict 
and fragment the global marketplace. The CFTC has proposed to move to a 
flexible, outcomes-based approach for cross-border equivalence and 
substituted compliance and to employ deference to overseas regulators. 
To this end, Chairman Giancarlo has recently described a new approach 
to supervising certain foreign derivatives clearing organizations 
(DCOs). This approach would introduce an alternative compliance 
regulatory framework for those foreign DCOs that do not pose a 
substantial risk to the U.S. financial system and would rely on the 
DCOs' home country rules to a large extent. ICE supports this type of 
approach and hopes the CFTC will publish the proposal for comment 
shortly.
---------------------------------------------------------------------------
    \2\ ``Chairman Giancarlo Releases Cross-Border White Paper'', 
October 1, 2018 at: https://www.cftc.gov/PressRoom/PressReleases/7817-
18.
---------------------------------------------------------------------------
    ICE believes that the cross-border oversight and regulatory 
deference to home country regulators is essential to well-functioning 
markets. The [CFTC's] recent publications and Chairman Giancarlo's 
description of his vision for future CFTC rule proposals are, in ICE's 
view, positive steps towards implementing relevant laws, standards, and 
policies that further the goal of financial stability and resilience, 
while minimizing supervisory duplication and conflict.
Conclusion
    ICE has always been, and remains, a strong proponent of open and 
competitive markets with appropriate regulatory oversight. As an 
operator of global futures and derivatives markets, ICE understands the 
importance of ensuring the utmost confidence in its markets and we take 
seriously our obligations to mitigate systemic risk. To that end, we 
have worked closely with regulatory authorities in the U.S. and abroad 
in order to ensure they have access to all relevant information 
available to ICE regarding trade execution and clearing activity on our 
markets. We look forward to continuing to work closely with governments 
and regulators at home and abroad to address the evolving regulatory 
challenges presented by derivatives markets and to expand the use of 
demonstrably beneficial clearing services that underpin the best and 
safest marketplaces possible.
    Mr. Chairman, thank you for the opportunity to share our views with 
you. I would be happy to answer any questions you and Members of the 
Subcommittee may have.

    The Chairman. Yes, thank you very much, Mr. Edmonds. I 
appreciate that.
    And now, Mr. Daniel Maguire.

        STATEMENT OF DANIEL J. MAGUIRE, CHIEF EXECUTIVE 
         OFFICER, LCH GROUP LIMITED; MEMBER, EXECUTIVE 
          COMMITTEE, LONDON STOCK EXCHANGE GROUP PLC, 
                           LONDON, UK

    Mr. Maguire. Chairman Scott, Ranking Member Scott, Members 
of the Committee, thank you for your warm welcome and the 
opportunity to appear before the Committee today to discuss the 
evolving global dialogue on cross-border regulation of 
clearinghouses, as well as Brexit and its potential 
ramifications and impact on the wider markets.
    Some context: I am Daniel Maguire. I serve as Chief 
Executive Officer of LCH Group, and I am a member of the 
Executive Committee of the London Stock Exchange Group, a 
global financial market infrastructure business which comprises 
of 4,500 employees globally, of which over 700 are here based 
in the United States. I have been with the firm for 20 years, 
including several years based in New York during the formative 
years of Dodd-Frank implementation, during which time I spent a 
substantive amount of time here in Washington working with the 
regulators on the swaps rules that were developed and 
implemented.
    LCH operates the world's largest clearinghouse for swaps. 
It is domiciled in the UK, and it is a global business serving 
global clients. It covers 60+ jurisdictions in terms of 
clients, 26 currencies, and has regulatory oversight and direct 
licenses in ten jurisdictions. Our home country regulator is 
the Bank of England; however, LCH has also been registered as a 
derivatives clearing organization, a DCO, with the CFTC since 
2001, for over 18 years now, long before the crisis in 2008 and 
the Dodd-Frank Act.
    LCH's interest rate swap clearing service, SwapClear, 
clears 90 percent of the global cleared interest rate market.
    Really, just to give some context, just as farmers and 
ranchers may use commodity derivatives to manage their risk of 
exposure to commodity price fluctuations, it is fair to say 
U.S. corporations, asset managers, and other end-users in the 
U.S. utilize interest rate swaps to manage their risk exposure 
to interest rate fluctuations.
    The interest rate swap market is one of the largest global 
financial markets, and I am pleased to provide our perspective 
on this important piece of the Committee's jurisdiction. My 
remarks today will focus on three topics.
    First, with respect to Brexit, I am pleased to say that 
temporary measures have been put in place to avoid disruption 
for the interest rate swap markets, regardless of political 
outcome. Three years ago, the UK voted to leave the EU. To 
date, no agreement has been reached for their orderly exit from 
the EU, and if no agreement is reached by the end of October 
2019, no extension of the current deadline provided, the UK 
will leave the EU without the transitional arrangements in 
place, commonly known as a hard Brexit.
    To mitigate the significant market disruption and financial 
stability risks, in the event of a hard Brexit, the European 
Commission and the UK Government collaborated to install 
temporary contingency measures that would allow EU participants 
to continue to have access to UK clearinghouses and their 
global liquidity in the event of a hard Brexit.
    However, regardless of if there is a hard Brexit scenario 
or not, LCH will therefore be able to continue offering all of 
these clearing services. We welcome these proposals and actions 
by the European Commission and ESMA, as has been referred to by 
others, which provided great clarity and certainty to market 
participants in the EU and outside of the EU, too.
    As a systemically important global institution, our main 
priority continues to ensure the orderly functioning of the 
markets, continuity of service to our customers, and most 
importantly, supporting financial stability, regardless of the 
Brexit outcomes.
    My second point really comes to the evolving framework 
regarding large global international clearinghouses. The future 
architecture of global derivatives markets must, at all costs, 
avoid unnecessary fragmentation, and therefore, must support a 
form of regulatory supervisory cooperation and deference 
mentioned by my other colleagues today.
    Following the financial crisis in 2008, the G20 agreement 
in 2009, the U.S. passed derivative reforms in 2010, and Europe 
the same in 2012. In 2016, the Brexit vote was shortly followed 
thereafter by the EU proposed amendments to EMIR that would 
redefine how clearinghouses outside of the EU would be 
regulated. It is commonly known as EMIR 2.2. Under EMIR 2.2, in 
the event of the UK departure from the EU, the UK will be 
treated similar, if not the same, to the U.S. and other non-EU 
jurisdictions, known as third countries in the EU regulatory 
context.
    Regulating global markets requires different jurisdictions 
to agree on the mechanisms to allow national regulatory 
frameworks to interact on an international level to avoid 
fragmentation into smaller localized markets, which increases 
risk and increases costs for the U.S. and their users.
    My third and final point, systemically important DCOs 
should be able to deposit their U.S. dollar cash margin in a 
U.S. central bank account, regardless of their domicile. 
Although LCH does have access to central bank accounts in many 
of the G20 jurisdictions, it does not currently have that 
facility here in the U.S. with the Federal Reserve.
    As the discussion over the cross-border clearinghouse 
regulation progresses, we believe that is absolutely imperative 
for central banks to require clearinghouses that manage 
substantial risks in their jurisdiction to maintain a deposit 
account for their currency. To be clear, this is deposit 
accounts for safekeeping of customer margin. This is not and 
should not be confused with the Fed providing emergency lending 
in the event of a crisis, often known as a discount window 
access.
    Central bank deposit accounts are widely agreed by the 
industry and regulation community as the safest option for 
clearinghouses. To put this in context, LCH's daily U.S. dollar 
cash balances for U.S. customers is in the region of $30 to $40 
billion.
    It is important to note that we operate an extensive global 
collateral management function to ensure safety of margin that 
it receives. Having access to a central bank account would only 
enhance that.
    So, in line with the recommendations from the U.S. Treasury 
Department and others, we would urge this Committee and the 
relevant U.S. financial regulators to further evaluate the 
important financial stability role that central bank deposit 
accounts could make and could play for systemically important 
DCOs, such as LCH and others that are here today.
    Chairman Scott, Ranking Member Scott, and Members of the 
Committee, I would like to thank you again for this 
opportunity. I apologize for running over. I appreciate the 
opportunity to finish, and I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Maguire follows:]

 Prepared Statement of Daniel J. Maguire, Chief Executive Officer, LCH 
Group Limited; Member, Executive Committee, London Stock Exchange Group 
                            PLC, London, UK
Introduction
    Chairman Scott, Ranking Member Scott, and Members of the Committee, 
I appreciate the opportunity to appear before you today to discuss 
Brexit, its impact on the markets and the evolving international 
dialogue on cross-border regulation of clearing houses.
    I am Daniel Maguire and I serve as Chief Executive Officer of LCH 
Group Limited (``LCH'') and as a Member of the Executive Committee of 
London Stock Exchange Group (``LSEG''), a global financial market 
infrastructure business.\1\ LSEG has approximately 4,500 employees 
around the world, over 700 of which are employed in the U.S. across 
offices in five states. LCH and FTSE Russell, one of the world's 
largest index providers, which is also part of LSEG, are important 
components of the U.S. financial markets.
---------------------------------------------------------------------------
    \1\ LSEG holds an 82.6% stake in LCH Group, the remaining share is 
held by a consortium of banks.
---------------------------------------------------------------------------
    LCH operates the world's largest swaps clearing house, LCH Ltd., 
which is domiciled in the UK.\2\ LCH Ltd is directly licensed in ten 
jurisdictions, has customers in 60 jurisdictions and offers clearing 
services in 26 different currencies. LCH Ltd's home country regulator 
is the Bank of England (``BoE'') and LCH Ltd has been registered with 
the U.S. Commodity Futures Trading Commission (``CFTC'') as a 
Derivatives Clearing Organization (``DCO'') since 2001. LCH also clears 
futures traded on the London Stock Exchange Derivatives Market 
(``LSEDM''), which is registered as a Foreign Board of Trade (``FBOT'') 
by the CFTC.
---------------------------------------------------------------------------
    \2\ LCH also operates LCH SA, domiciled in Paris, which is 
regulated in four jurisdictions. LCH SA has been registered at the CFTC 
since 2013 and the U.S. Securities and Exchange Commission (``SEC'') 
since 2016. LCH SA's primary regulator is the Autorite de controle 
prudentiel et de resolution (``ACPR'').
---------------------------------------------------------------------------
    LCH's interest rate swap (``IRS'') clearing service, SwapClear, 
clears over 90 percent of the cleared IRS market globally. The health 
and liquidity of the IRS market allows banks and other financial 
institutions to manage fluctuations in interest rates, which translates 
into direct benefits for end-users, U.S. consumers and the broader U.S. 
economy. Our U.S. end-user clients includes pension funds, regional 
banks, Federal Home Loan Banks and government sponsored enterprises, 
among many others.
Summary
    My remarks today will focus on three related topics.
    First, I will discuss LCH's response to Brexit and what this means 
for our market participants, including U.S. banks and end-users. 
Through the focused efforts of the derivatives industry and key central 
banks and market regulators, contingency measures have been established 
that will permit LCH and other clearing houses in the UK and EU to 
continue to offer services to our clients in the event the UK exits the 
EU without an agreement, referred to as ``no-deal'' or ``Hard'' Brexit.
    Second, I will discuss the evolving international dialogue on 
cross-border regulation of global clearing houses. Brexit has sharpened 
the ongoing focus on this topic between the UK and EU as well as many 
other jurisdictions around the world, including here in the U.S. We 
have been encouraged by the progress and regulatory cooperation among 
major jurisdictions, yet significant work lies ahead. LCH will continue 
to work with our regulators, market partners and customers towards 
outcomes that enhance financial stability and support global markets.
    Finally, I will discuss the topic of clearing house resilience and 
our views on how the global regulatory framework for clearing houses 
can best support the common objective of strengthening these 
increasingly important components of the financial markets. I will 
specifically discuss the role central bank deposit accounts play in 
enhancing the resilience of clearing houses as the safest place to 
deposit cash margin, an issue that is widely agreed on by the industry 
and regulatory community.
UK Withdrawal from the EU and ``Hard Brexit'' Contingency Measures
    Three years ago, on June 23, 2016, the UK voted to leave the EU. In 
March 2017, the legal instrument to commence this withdrawal, known as 
Article 50, was triggered. The UK Government and EU began withdrawal 
negotiations in June 2017. In November 2018, the UK Government and the 
EU agreed on a Brexit deal, known as the Withdrawal Agreement, subject 
to approval by the EU Council and UK Parliament. In a series of three 
votes between January and March of this year, the UK Parliament voted 
against the Withdrawal Agreement. It was subsequently agreed to extend 
the deadline for Brexit until October 31, 2019.
    Currently, if no agreement is reached by October 31 and no 
extension of the current deadline is provided, the UK will leave the EU 
without transitional arrangements in place. To avoid the significant 
market disruption and financial stability risks in the event of a Hard 
Brexit, on December 19, 2018, the European Commission (``EC'') 
implemented its no-deal contingency action plan that includes a 
conditional and temporary equivalence decision to allow UK clearing 
houses to continue to provide services in the EU.\3\
---------------------------------------------------------------------------
    \3\ Brexit: European Commission implements ``no-deal'' Contingency 
Action Plan in specific sectors, available at http://europa.eu/rapid/
press-release_IP-18-6851_en.htm. Similar temporary equivalence was 
granted by the BoE for EU27 domiciled clearing houses, including LCH SA 
and LSEG's Italian clearing house, Cassa di Compensazione e Garanzia 
(``CC&G'').
---------------------------------------------------------------------------
    On February 18, 2019, the European Securities and Markets Authority 
(``ESMA'') recognized three UK clearing houses following the EC's 
equivalence decision.\4\ ESMA's recognition of LCH Ltd. as a ``third-
country CCP'' applies until March 30, 2020 and is only triggered in the 
event of a Hard Brexit, allowing LCH Ltd. the ability to continue to 
offer all clearing services for all products to all members and 
clients. We welcomed these actions by the European Commission and ESMA, 
which provided clarity for our market participants.\5\
---------------------------------------------------------------------------
    \4\ ESMA to Recognise Three UK CCPs in the Event of a No-Deal 
Brexit, available at https://www.esma.europa.eu/press-news/esma-news/
esma-recognise-three-UK-ccps-in-event-no-deal-brexit.
    \5\ LCH Member Update, April 5, 2019, available at https://
www.lch.com/membership/ltd-membership/ltd-member-updates/brexit-update-
lch-limited-article-25-recognition-0.
---------------------------------------------------------------------------
    As a systemically important institution, our main priority is 
ensuring the orderly functioning of markets, continuity of service to 
our customers and supporting financial stability. As the negotiations 
progress, we will continue to engage with the relevant regulatory 
authorities to secure the long-term recognition of LCH Ltd. in the EU. 
It remains LCH's objective to ensure a smooth transition for our 
customers whatever the outcome of the negotiations around the UK's 
withdrawal from the EU.
Cross-Border Regulation of Global Clearing Houses
    The IRS market, along with many other derivatives asset classes, 
are global in nature. This requires different jurisdictions to agree on 
regulatory mechanisms that allow national rules to interact on an 
international level. This supports global market health and liquidity 
and avoids fragmentation into smaller, localized markets.\6\ Creating a 
harmonized, level playing field of regulation and cross-border market 
access enhances competition among global markets and increases 
financial stability. This results in lower costs and increased 
protection for market participants, including end-users.
---------------------------------------------------------------------------
    \6\ IOSCO notes fragmenting global markets into smaller, localized 
markets increases counterparty risk, restricts liquidity, increases 
costs and reduces financial stability, IOSCO Report on Market 
Fragmentation & Cross-border Regulation, June 2019, available at 
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD629.pdf.
---------------------------------------------------------------------------
    Large, global clearing houses manage different levels of risk in 
the various jurisdictions where they operate. A key debate among 
national regulators is how to measure a foreign clearing house's 
importance in their jurisdiction and the resulting regulatory oversight 
needed to oversee those clearing houses. We believe that regulation of 
clearing houses outside of their home jurisdiction should be 
proportionate to the risk that clearing house is managing in the host 
jurisdiction. Host country regulators should afford deference to 
comparable home country oversight where appropriate.
    The regulatory frameworks governing the cleared swaps markets were 
significantly enhanced and redefined with the Dodd-Frank Act in 2010 
and the European Market Infrastructure Regulation (``EMIR'') in 2012. 
Similar derivatives reforms were implemented in many other markets 
around the world pursuant to the G20 financial regulatory reforms, 
which were established following the 2008 financial crisis.\7\
---------------------------------------------------------------------------
    \7\ Implementation and Effects of the G20 Financial Regulatory 
Reforms: Fourth Annual Report, November 28, 2018, available at https://
www.fsb.org/2018/11/implementation-and-effects-of-the-g20-financial-
regulatory-reforms-fourth-annual-report/.
---------------------------------------------------------------------------
    In 2016, an equivalence decision concerning the cross-border 
regulation of clearing houses was made between the CFTC and EC.\8\ In 
2017, the EC proposed amendments to EMIR, known as ``EMIR 2.2,'' which 
were agreed this past March.\9\ Provisions in EMIR 2.2 will redefine 
how non-EU domiciled clearing houses that provide clearing services to 
EU participants will be regulated by EU authorities.
---------------------------------------------------------------------------
    \8\ CFTC Approves Substituted Compliance Framework in Follow-up to 
the Recent Equivalence Agreement between the U.S. and the EU, available 
at https://www.cftc.gov/PressRoom/PressReleases/pr7342-16; European 
Commission adopts equivalence decision for CCPs in USA, available at 
http://europa.eu/rapid/press-release_IP-16-807_en.htm.
    \9\ EMIR 2.2 Final Compromise Text, available at https://
data.consilium.europa.eu/doc/document/ST-7621-2019-ADD-1/en/pdf.
---------------------------------------------------------------------------
    In the event of the UK departure from the EU, the UK will be 
treated similar to the U.S. and other non-EU jurisdictions, referred to 
as ``third countries'' in the EU regulatory context. We will continue 
to work with our regulators in the UK, EU and U.S. to define how these 
regulatory standards under EMIR 2.2 are developed, which will result in 
enhanced regulatory cooperation among these three major jurisdictions 
and beyond.
    Given LCH's significant risk management role in the U.S. financial 
markets, we have supported the direct registration of LCH Ltd with the 
CFTC since our registration 18 years ago and the legal certainty this 
has provided for our customers under the CFTC's customer protection 
rules, which serve as an important cornerstone of the CFTC's mission. 
We also believe the cooperative relationship between the BoE and the 
CFTC is a model to follow for oversight of swaps clearing houses that 
play a substantial risk management role in multiple jurisdictions.
Strengthening the Resiliency of Clearing Houses
    A central component of the risk management function of clearing 
houses is the collection of margin from counterparties to collateralize 
their derivatives trades, serving as a buffer in the event a 
counterparty or clearing member defaults on their financial 
obligations. Clearing houses are prohibited from holding this margin 
within their own legal entity and regulation carefully prescribes the 
management and placement of collateral. Clearing house placement or 
investment options for collateral is appropriately limited to a small 
number of very conservative options.\10\
---------------------------------------------------------------------------
    \10\ Including overnight reverse repurchase agreements, government 
bonds, commercial banks, money market funds (allowed in the U.S. but 
not the EU), and, where available, central bank deposit accounts.
---------------------------------------------------------------------------
    Central bank deposit accounts are widely agreed as the safest 
option for clearing houses to place collateral in any given currency, 
especially during periods of financial market stress.\11\ LCH Ltd. 
holds more margin than any other global clearinghouse.\12\ LCH Ltd 
operates an extensive global collateral management function to ensure 
the safety and liquidity of margin it receives, in line with applicable 
regulation and conservative risk management practices that often exceed 
minimum standards. LCH Ltd.'s SwapClear service daily U.S. dollar cash 
margin holdings fluctuate between $35-$40 billion. Daily margin flows 
range from $10-$20 billion in U.S. dollar cash. Currently, LCH does not 
have access to a Federal Reserve Bank deposit account.
---------------------------------------------------------------------------
    \11\ ``[Fed] accounts permit DFMUs to hold funds at the Federal 
Reserve, but not to borrow from it. Allowing DFMUs to deposit balances 
at the Federal Reserve helps them avoid some of the risk involved in 
holding balances with their clearing members. Doing so also provides 
CCPs with a flexible way to hold balances on days when margin payments 
unexpectedly spike and it is difficult to find banks that are willing 
to accept an unexpected influx in deposits. In such a case, it may also 
be too late in the day to rely on the repo market. The availability of 
Fed accounts could help avoid potential market disruptions in those 
types of circumstances,'' Federal Reserve Governor Jerome Powell, 
Central Clearing and Liquidity, June 2017, available at https://
www.federalreserve.gov/newsevents/speech/powell20170623a.htm; ``Where 
CCPs are permitted to have deposit accounts at central banks, they can 
deposit initial margin cash there instead of investing it, eliminating 
investment risk. As many of the banks providing custodial services to 
CCPs are also major clearing members, central bank deposit accounts 
would also help CCPs avoid wrong-way exposure to clearing members.'' 
Federal Reserve Bank of Chicago, Non-default loss allocation at CCPs, 
April 2017, available at https://www.chicagofed.org//media/
publications/policy-discussion-papers/2017/pdp-2017-02-pdf.pdf; ``CCP 
access to central bank money in the currencies in which they do 
business makes clearing more efficient and reduces risk to end-users 
and the broader financial system. Access should include the ability to 
use central bank money for payments, central bank accounts for safe-
keeping of participants' cash, and access to central bank liquidity, at 
least in emergency situations.'' ISDA, The Case for CCP Cooperation, 
April 2019, available at https://www.isda.org/2018/04/18/the-case-for-
ccp-supervisory-cooperation/; ``Allowing CCPs to hold cash initial 
margin with central banks will reduce CCP exposure to commercial bank 
risk generally. . . . Permitting CCPs to maintain central bank deposits 
will also reduce the need for CCPs to utilize reverse repos and/or 
directly purchase securities to reduce settlement or concentration bank 
risk, which pose enormous investment challenges and risks, like forced 
diversification.'' FIA Global, ``CCP Risk Position Paper,'' April 2015, 
available at https://fia.org/sites/default/files/content_attachments/
FIAGLOBAL_CCP_RISK_POSITION_
PAPER.pdf; ``As a result of the initiative of our staff and the 
assistance of the Federal Reserve, the pre-funded resources held by 
systemically important clearinghouses can now be deposited and held at 
Federal Reserve Banks. This is good for customer protection and for 
financial stability,'' CFTC Chairman Timothy Massad, Keynote Remarks at 
SEFCON VII, January 18, 2017, available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/opamassad-55.
    \12\ Per LCH Ltd's Q4 2018 CPMI-IOSCO quantitative disclosures, LCH 
Ltd holds $195 billion U.S. dollar equivalent in margin. A list of all 
clearing houses' CPMI-IOSCO quantitative disclosures is available at 
https://ccp12.org/ccp12-public-quantitative-disclosures/.
---------------------------------------------------------------------------
    In the U.S., Title VIII of Dodd-Frank provided a legal framework by 
which clearing houses can deposit margin in central bank deposit 
accounts.\13\ We believe the Financial Stability Oversight Council 
(``FSOC'') has the statutory authority to take measures that would 
allow non-U.S. domiciled DCOs that are systemically relevant to the 
U.S. market to apply to the Federal Reserve for deposit account access.
---------------------------------------------------------------------------
    \13\ Specifically, financial market utilities (``FMUs'') can be 
designated by the Financial Stability Oversight Council (``FSOC'') as 
systemically important or designated financial market utilities 
(``DFMUs''). DFMUs may apply to a Federal Reserve Bank for a deposit 
account. In 2012, FSOC designated eight DFMUs.
---------------------------------------------------------------------------
    As the discussion over cross-border clearing house regulation 
progresses, we believe it is critical for central banks to require 
clearing houses that manage substantial risks in their jurisdiction to 
maintain a deposit account for their respective currency. This would 
further strengthen the financial resilience of clearing houses, and 
overall, the financial markets. Central bank deposit accounts also 
provide end-users with the ultimate reassurance that their U.S. dollar 
cash margin is protected during times of market stress. In line with 
the 2017 recommendation from the U.S. Department of the Treasury, we 
call on Congress to further evaluate the important financial stability 
role that central bank deposit accounts can play for non-U.S. domiciled 
DCOs such as LCH who manage a substantial portion of cleared 
derivatives risk in the U.S. markets.\14\
---------------------------------------------------------------------------
    \14\ U.S. Department of the Treasury, A Financial System That 
Creates Economic Opportunities: Capital Markets, page 217, October 
2018, available at https://www.treasury.gov/press-center/press-
releases/documents/a-financial-system-capital-markets-final-final.pdf.
---------------------------------------------------------------------------
Conclusion
    Despite the many challenges Brexit has presented, our industry and 
regulatory community have worked collaboratively to mitigate the risk 
of market disruption and preserve financial stability in the event of a 
Hard Brexit scenario.
    Brexit has also reshaped the ongoing debate around the future 
cross-border framework for global clearing houses. We believe this 
framework should support global markets and avoid fragmentation. LCH 
believes the CFTC's direct registration model remains appropriate for 
LCH Ltd in the U.S. and other jurisdictions where we manage a 
substantial risk in the market. We recognize that other models may be 
more proportionate for clearing houses that do not manage the same 
level of risk in a foreign jurisdiction.
    Strengthening the resiliency of clearing houses and ensuring that 
client margin can be managed in the safest and most efficient manner, 
including the role of central bank deposit accounts, should continue to 
remain a key focus as the cross-border framework for global clearing 
houses evolves.

    The Chairman. Well, thank you, Mr. Maguire, and you have 
certainly opened our eyes to much of what we really need to be 
aware of, being on site there in London.
    Mr. Lukken?

 STATEMENT OF HON. WALTER L. LUKKEN, J.D., PRESIDENT AND CHIEF 
              EXECUTIVE OFFICER, FUTURES INDUSTRY 
                 ASSOCIATION, WASHINGTON, D.C.

    Mr. Lukken. Chairman Scott, Ranking Member Scott, Ranking 
Member Conaway, and other Members of the Committee, thank you 
for this opportunity to testify. I agree with the rest of the 
panel, your leadership on this topic is extraordinarily 
important.
    FIA is the leading global trade organization for the 
futures options and cleared derivatives markets. Our mission is 
to support open, transparent, and competitive markets. I 
highlight the word open in our mission, because open markets 
allow people access to hedging vehicles around the world, as 
you can see by the panel here today. Most importantly, open to 
farmers, producers, and manufacturers who are looking to hedge 
that risk. Open markets are extremely important. And certainly, 
in fact, this Committee earlier this month in a separate 
Subcommittee held a hearing entitled, The State of U.S. 
Agricultural Products in Foreign Markets. Members of both sides 
of the aisle agreed that U.S. producers benefit from fair 
access to open markets.
    The same holds true when it comes to financial markets as 
well. The American farm economy benefits from open and fair 
access to global derivatives markets. Without this access, 
costs to farmers, ranchers, and producers to hedge their risk 
would increase.
    To illustrate the global nature of the derivatives markets, 
FIA has polled several of its member exchanges, many of them 
sitting at this table, regarding the percentage of their volume 
that comes from foreign counterparties. The full results are 
included in my written testimony, but the survey highlights 
that, for example, CME Group reports that 42 percent of its 
metals contract volume originates in jurisdictions outside the 
United States. ICE reports that 35 percent of its volume in 
agricultural business comes from outside of the borders of the 
United States as well. European Exchange, Eurex, has 79 percent 
of its volume for interstate products coming from outside of 
Germany.
    These global markets would not have developed without a 
common-sense regulatory approach based on international 
cooperation. FIA strongly supports the regulatory recognition 
and deference model that has been the foundation of the futures 
industry for years. This Committee well knows, but the CFTC was 
one of the first regulators to put in place a cross-border 
recognition and deference approach, starting with foreign 
brokers back in the 1980s, and foreign exchanges in the 1990s. 
The approach focuses on whether comparable foreign rules are 
indeed comparable, and achieve a desired outcome, instead of a 
line-by-line regulatory comparison.
    As a former Commissioner and Chairman of the CFTC, I saw 
the benefits of this flexible regulatory approach to our 
domestic markets. However, with post-crisis reforms in the 
Brexit decision, there are concerns that regulators are moving 
away from the pragmatic approach by imposing direct authority 
on third-country exchanges, clearinghouses, and transactions. 
And this divergence could lead to conflicting rules and harmful 
market fragmentation.
    Europe, of course, as we have been discussing, is beginning 
to design a regulatory framework without Britain, treating them 
as any third-country nation outside the EU. This will have an 
impact on all third-country nations, including the United 
States. FIA is closely monitoring recent revisions to the EMIR 
2.2 legislation on clearinghouse supervision. This law may 
require U.S. clearinghouses that are deemed systemic to be in 
compliance with significant elements of EU law, and to be 
overseen by EU regulators. If implemented without proper 
deference to U.S. supervision, this law could lead to 
contradictory requirements, duplicative supervision, and 
counter reactions by global regulatory authorities. Indeed, the 
G20 has market fragmentation as an agenda item for discussion 
later on this week in Japan. This is of real concern at all 
levels.
    The CFTC Chairman has announced his intent to strengthen 
the CFTC's ability to recognize and to defer to home country 
supervision for certain foreign CCPs. FIA stands ready to 
comment on both EMIR 2.2 and the CFTC's proposals when they are 
released to ensure that the proven regulatory deference and 
recognition approach remains the standard for cross-border 
regulation. It is imperative that we get cross-border issues 
right, especially with Brexit looming. The stakes are 
incredibly high. Without common ground, we may find ourselves 
with increasingly fragmented markets. That doesn't benefit 
anyone, especially customers and producers.
    I want to thank this Committee for focusing on this 
important topic, and I welcome any questions this Committee may 
have.
    [The prepared statement of Mr. Lukken follows:]

Prepared Statement of Hon. Walter L. Lukken, J.D., President and Chief 
   Executive Officer, Futures Industry Association, Washington, D.C.
    Chairman Scott, Ranking Member Scott, and Members of the 
Subcommittee, thank you for the opportunity to testify about Brexit and 
various cross-border matters that impact derivatives markets and market 
participants.
    I am the President and Chief Executive Officer of FIA. FIA is the 
leading global trade organization for the futures, options and 
centrally cleared derivatives markets, with offices in London, 
Brussels, Singapore and Washington, D.C. FIA's membership includes 
clearing firms, exchanges, clearinghouses, trading firms and 
commodities specialists from more than 48 countries as well as 
technology vendors, law firms and other professionals serving the 
industry.
    FIA's mission is to support open, transparent and competitive 
markets, protect and enhance the integrity of the financial system, and 
to promote high standards of professional conduct. As the principal 
members of derivatives clearinghouses worldwide, FIA's clearing firm 
members help reduce systemic risk in global financial markets. Equally 
important, our clearing firm members provide access to the commodity 
futures markets, which allows a wide range of companies in the 
commodity supply chain to manage their price risks.
    Prior to serving as the President and CEO of FIA, I had the honor 
of serving as a Commissioner of the Commodity Futures Trading 
Commission from August 2002 to June 2009. During that time, I served as 
the Acting Chairman from June 2007 to January 2009.
    Earlier this month, a separate House Agriculture Subcommittee held 
a hearing titled ``The State of U.S. Agricultural Products in Foreign 
Markets.'' There was agreement from Members on both sides of the aisle 
that American farmers, growers, and ranchers, and the farm economy more 
broadly, benefit from fair access to foreign markets.
    The same holds true when it comes to our financial markets. The 
American farm economy benefits from open and fair access to global 
derivatives markets. Without this access, the costs to hedge risk 
become greater. Ultimately, this would be felt by American consumers 
when they visit their local grocery stores or order food at a 
restaurant.
    Dating back to my time as a CFTC Commissioner, and even prior, the 
derivatives markets have been global in nature. Transactions, clearing 
and settlement often take place in different countries and across 
different time zones and continents.
    Ultimately, market participants benefit from the global nature of 
the markets. The more participants, the stronger the market for those 
seeking to hedge risks. Open markets improve competition, keep costs 
affordable for customers and grow the economy. Our markets are not 
defined by borders--they are defined by the ingenuity and determination 
of buyers and sellers--no matter their location.
Cross-Border Trading Statistics
    To illustrate the global nature of the markets, FIA has polled 
several of its member exchanges regarding the percentage of their 
volume that comes from foreign counterparties. The results are notable.
Cross-Border Trading


          Trading originating outside the home jurisdiction as a 
        percentage of total volume during 2018.

    As made clear by these statistics, the ability to access customers 
on a cross-border basis strengthens markets. CME Group reports 42 
percent of its metals contract volume originating in jurisdictions 
outside the U.S. ICE Futures U.S. data shows that approximately 35 
percent of the volume in its agricultural business comes from overseas. 
Without access to global markets, end-users--including farmers and 
ranchers seeking to hedge their risks in the derivatives markets--are 
harmed.
A Cause of Global Market Fragmentation
    At the time of the financial crisis in 2008, I was serving as the 
Chairman of the CFTC. I vividly remember the panic and pain felt by so 
many Americans. The entire financial system was on the brink of 
collapse, and I was being called to the White House weekly as the 
President, the Treasury Secretary and policymakers of the highest 
levels searched for answers.
    In the aftermath of the crisis, the member nations of the Group of 
Twenty (G20) engaged in a fundamental restructuring of the regulatory 
framework for OTC derivatives markets. The goal was simple: to improve 
transparency, mitigate systemic risk and protect against market abuse.
    When the G20 held a summit in Pittsburgh in 2009, jurisdictions 
from across the globe were on the same page. They agreed on general 
principles and reforms, including mandates to clear all standardized 
over-the-counter derivatives.
    For a time following the summit, implementation of the core 
principles and reforms agreed upon at the summit was going smoothly. 
There was an understanding that global implementation of identical 
rules, on a line-by-line basis, was impracticable. Rather, the G20 
sought to ensure the principles and reforms agreed upon in Pittsburgh 
would be implemented to achieve equivalent regulatory outcomes.
    Unfortunately, intervening political events have caused this 
alignment to be tested over time. The best example is Brexit. Now, we 
find ourselves with a radically different situation in Europe with the 
financial center of Europe soon to be located outside the EU. This will 
make it even more difficult to have consistent implementation of those 
G20 standards.
FIA Advocacy Related to Brexit
    Since the United Kingdom voted to leave the European Union (EU) in 
2016, FIA has worked tirelessly to inform and work with our members, 
policymakers, and the general public about the operational and market 
impact of a possible no-deal Brexit scenario on the listed and cleared 
derivatives market.
    Unless the UK and the EU reach an agreement that delivers a smooth 
transition in the Brexit process, market participants will be faced 
with the prospects of significant disruption, financial instability, 
and regulatory uncertainty. Preparations for Brexit are continuing in 
the EU and UK and FIA firms have taken significant steps to ensure 
continued access to financial services in the EU and UK after Britain 
leaves the EU.
    As we set out to address these challenges, our focus at FIA has 
remained on:

   Minimizing disruption.

   Avoiding fragmentation of liquidity by regulatory actions.

   Maintaining global access to markets and counterparties.

    FIA worked extensively with our member firms and other trade 
associations to secure a commitment from the European Commission to 
allow UK clearinghouses temporary continued access to the EU in the 
event of a no-deal Brexit. This commitment by the European Commission 
was announced in December 2018 \1\ and was an enormous success for 
market participants across the globe, including in the United States. 
In response, the European Securities and Markets Authority (ESMA) 
followed suit by adopting recognition decisions for three UK CCPs.
---------------------------------------------------------------------------
    \1\ Due to the extension of the Article 50 of the Treaty of the 
European Union deadline, an amended equivalence decision in relation to 
the UK CCPs was adopted by the European Commission on April 3, 2019.
---------------------------------------------------------------------------
    FIA, however, is closely monitoring several areas of concern that 
could impact access to European and U.S. markets as the Brexit debate 
continues. Recent revisions to the European Market Infrastructure 
Regulation legislation (EMIR 2.2) on clearinghouse supervision may 
require direct compliance with substantial elements of EU law and 
supervision by EU regulators for U.S. clearinghouses deemed systemic 
unless EU regulators find U.S. supervision to be equivalent.
    If implemented without the proper recognition of home country 
supervision, this could lead to contradictory requirements, duplicative 
supervision and counter-reactions by global regulatory authorities. 
These EU consultations, which are currently out for public comment, may 
impact access to global markets if not properly clarified and 
implemented. The current Chairman of the CFTC has also announced his 
intention to strengthen the CFTC's ability to recognize and defer to 
home country supervision for foreign CCPs. FIA stands ready to comment 
on all these proposals to ensure the proven regulatory deference and 
recognition approach remains the standard for cross-border regulation.
Additional Examples of Cross-Border Challenges
    The listed and cleared derivatives markets are facing potential 
regulatory change driven by a range of geopolitical developments that 
pose a threat to the global markets.
    As jurisdictions around the world implement G20 principles from the 
2009 summit, they sometimes vary, overlap or contradict with the 
implementation of other jurisdictions.
    I'd like to highlight some specific examples of problematic 
approaches which have taken place or been proposed in recent years:

          Clearing: Japan requires certain transactions to be cleared 
        within its borders, rather than by a third-country CCP. In this 
        case, the level of local compliance is such that a local entity 
        must be established, which is costly and inefficient for many 
        market participants. These requirements greatly impact the 
        number of market participants available to offer clearing 
        services in a specific jurisdiction.
          Reporting: The EU and the U.S. have introduced similar but 
        separate derivatives trade reporting rules. Although the goals 
        are the same, they did not coordinate the substance of what is 
        reported nor the timing of the implementation. As a result, 
        regulators in these two jurisdictions have imposed highly 
        operationally intensive rules that require firms to devote 
        significant operational resources on multiple separate 
        occasions to ensure effective compliance with the separate rule 
        sets.
          Capital: Divergence in capital requirements across 
        jurisdictions is not uncommon. However, in the world of the 
        listed and cleared derivatives markets, this type of divergence 
        can have vast implications.
          Responding to the financial crisis, the Basel Committee for 
        Banking Supervision adopted a leverage ratio as a backstop that 
        requires banks to hold capital against actual exposures to 
        loss. The Federal Reserve Board, the Federal Deposit Insurance 
        Corporation (FDIC), and the Office of the Comptroller of the 
        Currency (OCC) have implemented the Basel supplementary 
        leverage ratio (SLR) in the United States.
          FIA strongly believes that capital requirements need to be 
        recalibrated so that it reflects the true amount of risk in 
        this activity. Unfortunately, the SLR fails to recognize the 
        collection of customer initial margin in the central clearing 
        process as an offset to a bank's exposures. Other jurisdictions 
        such as the EU have recognized client cleared initial margin as 
        exposure reducing under the leverage ratio. If the U.S. does 
        not correct course and do the same, capital costs associated 
        with central clearing in the U.S. will not be competitive with 
        the EU's. This impacts end-users and businesses across a wide 
        variety of industries that rely on derivatives for risk 
        management purposes, including agricultural businesses and 
        manufacturers.
          It has also left end-users with less competition and access 
        to clearing services. The number of firms providing client 
        clearing services in the U.S. has dropped from 84 in 2008 to 55 
        in 2018. This result runs counter with the clearing mandates 
        contained in Title VII of the Dodd-Frank Act. This tax on 
        clearing places clearing firms and their customers in the U.S. 
        at a disadvantage relative to their foreign competitors as 
        jurisdictions outside of the U.S. have offered or plan to offer 
        an offset for client margin.
          FIA was pleased to learn that last week the Basel Committee 
        on Banking Supervision agreed on allowing client initial margin 
        to offset the exposure amounts under the leverage ratio. We 
        look forward to the U.S. Prudential Regulators implementing 
        this global revision. FIA thanks Chairmen Peterson and Scott, 
        and Ranking Members Conaway and Scott, along with the current 
        Commissioners of the CFTC for their leadership on this issue. 
        FIA also thanks the Commissioners for their recent bipartisan 
        comment letter to the Prudential Regulators supporting this 
        needed recalibration.
          The U.S. Prudential Regulators are currently consulting on a 
        rulemaking related to implementation of the standardized 
        approach for counterparty credit risk (SA-CCR) capital 
        framework. FIA has responded seeking an offset for client 
        cleared margin. In addition, FIA believes that this rulemaking 
        raises several concerns with FIA members, including its 
        commodity members.
          Among the concerns are the very limited recognition of margin 
        under the risk weighted asset (RWA) capital requirements and 
        the punitive treatment of commodities trading. It is not 
        certain when and in what form SA-CCR will be adopted in other 
        jurisdictions that participate in the Basel Committee process. 
        If mandatory compliance with SA-CCR is required prior to its 
        adoption in other jurisdictions, U.S.-based commercial end-
        users may be susceptible to significant competitive 
        disadvantages. FIA is also concerned, broadly, that the SA-CCR 
        proposal in its current form may have a significant adverse 
        impact on the liquidity of derivatives markets, especially 
        commodities markets.\2\
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    \2\ https://fia.org/file/8709/download?token=R_6EtxRk.
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FIA Recommendations to Reduce Market Fragmentation
    To better identify and address these growing concerns and the 
cross-border uncertainty driven by a range of geopolitical 
developments, FIA published a white paper in March 2019 titled: 
Mitigating the Risk of Market Fragmentation.\3\ To summarize, we 
encouraged regulators around the world to:
---------------------------------------------------------------------------
    \3\ https://fia.org/sites/default/files/
FIA_WP_MItigating%20Risk.pdf.

   Rely on counterparts in other jurisdictions to supervise 
        certain cross-border activity through ``deference'' or 
---------------------------------------------------------------------------
        ``substituted compliance'';

   Work collectively to develop international standards and 
        implementation guidelines while recognizing local flexibility 
        and conditions; and

   Put in place mechanisms for cross-border cooperation, 
        information-sharing, and crisis-management planning, which is 
        critical for the day-to-day supervision of cross-border 
        business.

    As noted in our March white paper, FIA strongly supports the 
regulatory recognition and deference model that has been the foundation 
of the futures industry for years. Deference raises standards in global 
markets as it is used to assess whether jurisdictions have adopted 
comparable rules to those in the U.S. This tested tool is one way to 
bring other countries into compliance with global standards and make 
the marketssafer.
    We were excited to see that earlier this month, the Financial 
Stability Board (FSB) published a report, which was delivered to G20 
Finance Ministers and Central Bank Governors ahead of their meetings in 
Fukuoka, Japan on June 8 and 9, 2019. The report lays out approaches 
and mechanisms to improve international cooperation and mitigate market 
fragmentation.\4\
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    \4\ https://www.fsb.org/wp-content/uploads/P040619-2.pdf.
---------------------------------------------------------------------------
    Additionally, we are pleased to see that the issues of market 
fragmentation will be discussed at the highest levels of government as 
it will be on the agenda for the upcoming G20 Summit in Osaka, Japan 
later this week. We hope that regulators will take from this meeting 
the same commitment to working across borders as they did at the 2009 
G20 meeting in Pittsburgh.
A History of the CFTC's Approach to Cross-Border
    The CFTC has been a global regulatory leader in promoting the 
principles of deference and regulatory recognition. In 1980, the CFTC 
was one of the first regulators to put in place a cross-border 
recognition approach for market participants. At that time, the CFTC 
adopted a position that, notwithstanding the potential broad scope of 
the CFTC's jurisdiction under the Commodity Exchange Act (CEA), ``it is 
appropriate at this time to focus [the CFTC's] activities upon domestic 
firms and firms soliciting or accepting orders from domestic users of 
the futures markets and that the protection of foreign customers of 
firms confining their activities to areas outside of this country . . . 
may best be for local authorities in such areas.''
    Congress also deserves credit for the agency's historical support 
for the principles of recognition and deference.
    In 1982, Congress amended the CEA to authorize the CFTC to adopt 
rules governing the offer and sale of foreign futures to persons 
located in the U.S. Congress was careful to limit the CFTC's authority 
to the regulation of intermediaries that deal directly with persons 
located in the U.S., while expressly prohibiting the CFTC from adopting 
any rule that ``(1) requires [CFTC] approval of any contract, rule, 
regulation, or action of any foreign board of trade, exchange, or 
market or clearinghouse for such board of trade, exchange or market, or 
(2) governs in any way any rule or contract term or action of any 
foreign board of trade, exchange, market or clearinghouse for such 
board of trade, exchange or market.''
    The CFTC has allowed U.S. participants direct electronic access to 
foreign markets if the non-U.S. entities have rules that are comparable 
with the CFTC's. That process was formalized by Congress in the Dodd-
Frank Act, which authorized the CFTC to register Foreign Boards of 
Trade (FBOT) that wish to permit direct access from the U.S. but 
deferring to the home country regulator and rules where the rules are 
comparable. Today, there are 18 registered FBOTs with the CFTC.
    Finally, earlier this month, at FIA's annual International 
Derivatives Expo conference in London, CFTC Chairman Christopher 
Giancarlo highlighted the principles of his cross-border policy. 
Specifically, he stated ``the CFTC should act with deference to non-
U.S. regulators in jurisdictions that have adopted comparable G20 swaps 
reforms.'' He went on to say, ``Mutual commitment to cross-border 
regulatory deference ideally should mean that market participants can 
rely on one set of rules--in their totality--without fear that another 
jurisdiction will seek to selectively impose an additional layer of 
particular regulatory obligations that reflect differences in policy 
emphasis, or application of local market-driven policy choices beyond 
the local market. This approach is essential to ensuring strong and 
stable derivatives markets that support economic growth both in the 
U.S. and around the globe.''
    FIA agrees with Chairman Giancarlo and looks forward to working 
with the CFTC on future cross-border rulemakings
    The CFTC has for decades, under Chairs from both parties, 
understood that market fragmentation created though a patchwork of 
international regulation undermines the resilience of the clearing 
derivatives system and therefore weakens the safety mechanisms built 
into the clearing system.
Cross-Border FinTech Challenges
    With the international focus of this hearing, I would like to take 
a moment to recognize an area where the CFTC is lagging other 
international regulators, by no fault of its own.
    According to CFTC Chairman Giancarlo, the agency has limitations in 
its ability to test, demo, and generate proof of concepts around 
emerging technologies and systems. At a recent hearing before this 
Committee he said, ``Specifically, the CFTC lacks the legal authority 
to partner and collaborate with outside entities engaging directly with 
FinTech within a research and testing environment, including when the 
CFTC receives something of value absent a formal procurement.'' \5\
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    \5\ https://www.cftc.gov/PressRoom/SpeechesTestimony/
opagiancarlo70.
---------------------------------------------------------------------------
    This is problematic and prevents the CFTC from keeping pace with 
emerging technologies and puts the U.S. at a competitive disadvantage 
relative to its overseas counterparts. For example, the UK offers 
regulatory sandboxes where FinTech firms can work with the regulator 
and receive feedback and answer questions about their products.
    Given the global nature of our markets, it is important that 
regulators in the U.S. have access to the same emerging technology 
available to regulators in the UK and elsewhere.
    That is why I would like to recognize and thank Ranking Member 
Austin Scott (R-GA) for his legislative efforts to provide the CFTC 
with the necessary transaction authority to engage in public-private 
partnerships with financial technology developers. FIA stands ready to 
work with the Committee on solutions that provides the tools needed by 
the CFTC and market participants alike.
Conclusion
    FIA greatly appreciates the Subcommittee's interest in these 
critical topics that affect the global financial markets and the end-
users who rely on derivatives products for price certainty and to hedge 
their risks.
    FIA strongly supports the regulatory recognition and deference 
model that has been the foundation of the futures industry for years. 
Identical rules, on a line-by-line basis, implemented globally across 
jurisdictions is impracticable. Rather, the goal we should strive to 
achieve is ensuring equivalent regulatory outcomes.
    The good news is we have a window of opportunity to reset the 
global approach to cross-border regulation. It is imperative we get 
these cross-border issues right, especially with Brexit looming. The 
stakes are incredibly high. Without common ground, we may find 
ourselves with fragmented markets and regulation. That doesn't benefit 
anyone, especially customers and end-users.
    I appreciate the Committee's attention to this important topic.
                               Attachment
Mitigating the Risk of Market Fragmentation
March 2019
Contents
    Introduction

          Part I--What is Fragmentation and Why Does It Matter?
          Part II--The Value of Co-Operation and the Importance of 
        Reliance by Regulators in Preventing Fragmentation
          Part III--Recommendations for Cooperation and Reliance

                  Use of International Standards
                  Arrangements Between Regulatory Authorities

    Conclusion
About FIA
          FIA is the leading global trade organization for the futures, 
        options and centrally cleared derivatives markets, with offices 
        in Brussels, London, Singapore and Washington, D.C.
          FIA's mission is to:

       support open, transparent and competitive markets,

       protect and enhance the integrity of the financial 
            system, and

       promote high standards of professional conduct.

          As the leading global trade association for the futures, 
        options and centrally cleared derivatives markets, FIA 
        represents all sectors of the industry, including clearing 
        firms, exchanges, clearing houses, trading firms and 
        commodities specialists from more than 48 countries, as well as 
        technology vendors, lawyers and other professionals serving the 
        industry.
Introduction
    Cleared derivatives markets today are grappling with the challenge 
of market fragmentation caused by regulation.
    In modern derivatives markets, cross-border regulatory cooperation 
is a necessity. Post-financial crisis reforms by the G20 nations 
acknowledged as much when they enacted central clearing mandates and 
put a vision of pragmatic oversight and regulatory deference above a 
patchwork, country-by-country approach to derivatives regulation.
    Lately, however, markets have become increasingly fragmented as 
different jurisdictions have moved to implement G20 reforms on their 
own. Some policymakers are exerting their national or regional 
authority on third-country exchanges, clearinghouses, market 
participants and transactions. The unfortunate result is market 
fragmentation caused by regulation such that the original goal of 
holistic cross-border solutions has been replaced by a siloed 
regulatory and commercial landscape.
    We see several types of regulatory issues causing market 
fragmentation.

   First, there has been divergence in the content of 
        implementation as policymakers have adapted the reforms to 
        local conditions and political priorities. The resulting 
        variations have made it more difficult for regulators to make a 
        determination that foreign financial institutions are subject 
        to equivalent regulation.

   Second, there has been divergence in the pace of 
        implementation, causing some early-adopter nations to justify 
        imposing extra-territorial requirements on activity or 
        participants in jurisdictions that have not yet implemented 
        these reforms.

   Third, new issues have arisen, such as Brexit, which have 
        caused policymakers to reconsider their implementations of the 
        G20 reforms and rethink their views on cross-border 
        cooperation.

    As a result, we have seen a growing trend toward more direct 
regulation of foreign activity and participants rather than reliance on 
a foreign regulator to supervise that activity when such jurisdiction 
has implemented a regulatory regime that achieves comparable outcomes 
(an approach sometimes referred to as ``deference'' or ``substituted 
compliance''). This issue is not unique to the derivatives markets, but 
it is particularly acute because of the cross-border nature of this 
industry.
    More disturbingly, fragmented derivatives markets can also create 
barriers to entry which, in turn, lead to a fall in the number of 
participants that are able to mutualize risk and collectively withstand 
the next adverse market event, minimizing the impact of the financial 
crisis market reforms.
    As an example, regulation which requires a market participant 
active in two different jurisdictions (such as the U.S. and a European 
jurisdiction) to comply with conflicting and duplicative rules limits 
choices and increases costs for commercial end-users who are seeking to 
hedge marketplace risks beyond their control. With costly and limited 
options, market participants may choose to forgo hedging altogether 
further contracting markets and liquidity.
    The benefits of central clearing are well recognized by 
policymakers. It is one of the central pillars of the G20 post-crisis 
reforms to reduce the systemic risk associated with derivatives markets 
and market data shows these efforts are succeeding. According to the 
Bank for International Settlements, the use of clearing in the global 
interest rate derivatives market rose from 24% in 2009 to 62% by mid-
year 2018. In the global credit derivatives market, the clearing level 
rose from 5% to 37% over the same time period.
    FIA believes strongly that derivatives markets must protect and 
advance market participants' access to cross-border central clearing by 
supporting regulatory reliance (deference), with national rules 
benchmarked to internationally-agreed-upon standards. Such supervisory 
reliance has been proven to be effective and remains a key plank in 
ensuring open access to global cleared markets, reducing risk and 
increasing market efficiency through competition.
    An adherence to international standards enables pursuit of 
legitimate public policy goals in respect of cleared derivatives 
markets without causing market fragmentation. However, such an approach 
depends on international standards being specific enough to enable a 
reliance model. The CPMI-IOSCO Principles for Financial Market 
Infrastructures (PFMIs) \1\ are a good example of international 
standards that are sufficiently detailed, allowing for a reliance model 
by national regulators.
---------------------------------------------------------------------------
    \1\ https://www.bis.org/cpmi/info_pfmi.htm.
---------------------------------------------------------------------------
    To be effective, a reliance approach also requires a high level of 
cooperation and information-sharing among regulators. If the host 
supervisor requires a right to supervise the entity, home and host 
supervisors should coordinate their supervisory activities to improve 
the effectiveness and efficiency of supervision of entities with a 
cross-border footprint. In addition, periodic evaluations must take 
place to ensure that regulatory regimes continue to pass the test of 
equivalence.
    In Part I of this paper, we describe the issue of market 
fragmentation in cleared derivatives markets, explain why it is a 
threat and provide examples. In Part II of this paper, we explain the 
meaning of reliance, as our preferred solution to the risk of market 
fragmentation. In Part III of this paper, we outline our 
recommendations on the best approaches to reliance, building on the 
work carried out so far by IOSCO, multilateral arrangements and the 
bilateral achievements of regulators, and we set out specific 
substantive recommendations for regulators.
Part I--What Is Fragmentation and Why Does It Matter?
    For the purpose of this paper, market fragmentation is where 
participants in an organic, shared market which crosses jurisdictions 
are less able to interact freely with one another in one or more of 
such jurisdictions. Thus, market participants are limited to 
interacting in silos that are less liquid, less diverse and less 
competitive.

          In the context of cleared derivatives markets, fragmentation 
        results in both short-term economic costs, with reduced levels 
        of liquidity, and long-term threats to financial stability 
        thanks to inefficient risk management.

    Market fragmentation can be caused by regulation--either 
purposefully or inadvertently. Regulation that conflicts or overlaps 
will necessarily require differing forms of compliance from the same 
market participants (or even be impossible to comply with) and thus may 
cause participants to operate in silos in order to meet their 
regulatory requirements rather than operate in a shared market.
    This is a particular concern in the cleared derivatives markets, 
due to their cross-border nature. In the context of cleared derivatives 
markets, fragmentation results in both short-term economic costs, with 
reduced levels of liquidity, and long-term threats to financial 
stability thanks to inefficient risk management. Cleared derivatives 
are an essential product in today's financial markets and comprise a 
significant proportion of global financial activity.2-3  As 
stated by the President of the European Central Bank Mario Draghi: 
``open markets are conducive to freeing human potential, expanding 
opportunities, and improving well-being.'' \4\
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    \2\ https://www.bis.org/statistics/
about_derivatives_stats.htm?m=6%7C32.
    \3\ https://www.bis.org/publ/qtrpdf/r_qt1612b.htm.
    \4\ https://www.ecb.europa.eu/press/key/date/2015/html/
sp151111.en.html.
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    One measure of cross-border activity is the amount of trading on 
derivatives exchanges that originates from outside their home 
countries. Derivatives markets benefit from network effects; the more 
participants, the stronger the market. Open markets improve 
competition, keep costs affordable for customers, and grow the economy. 
Our markets are not defined by borders--they are defined by the 
ingenuity and determination of buyers and sellers--no matter their 
location. To illustrate, FIA has polled several major exchanges 
regarding the percentage of their volume that comes from foreign 
counterparties. The results show that cross-border trading makes up a 
very significant percentage of the total volume at these exchanges.
Cross-Border Trading
Trading Originating Outside the Home Jurisdiction as a Percentage of 
        Total Volume During Q2 2018
        
        
          Source: Data provided by each exchange upon the conclusion of 
        Q2 2018.

    A second measure of cross-border derivatives activity comes from a 
set of statistics published by the Commodity Futures Trading Commission 
(``CFTC''), the primary regulator of derivatives markets in the U.S. 
These statistics track the amount of customer funds held at clearing 
firms, known in the U.S. as futures commission merchants (``FCMs''). 
The funds are collected from customers for the purpose of meeting the 
margin requirements set by U.S. clearinghouses for their derivatives 
clearing. They represent one of the core protections against systemic 
risk in the U.S. derivatives markets. These CFTC-registered FCMs can be 
subsidiaries of banks or other financial companies that can be 
headquartered anywhere in the world. FIA has conducted an analysis of 
the market share held by all FCMs, using data published by the CFTC as 
well as other sources of information. Our analysis shows that foreign 
institutions are an important part of the FCM community in the U.S.
    As of December 2018, there were 54 FCMs holding a total of $295.3 
billion in customer funds, of which $203.6 billion was held in 
segregated customer accounts for exchange-traded futures and options 
and $91.7 billion for cleared swaps. Non-U.S. owned FCMs held 33% of 
the futures-related customer funds and 21% of the swap-related customer 
funds.\5\
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    \5\ https://fia.org/fcm-tracker.
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    This data shows cross-border activity is important to 
intermediaries as well as to end-users. Customers rely on clearing 
firms to provide access to markets as well as the services they need to 
meet the requirements of central clearing. In the U.S., the population 
of intermediaries includes a large number of institutions that are 
headquartered in Europe and Asia-Pacific. The impact for the world 
economy of fragmenting cleared derivatives markets will be significant 
since a reduction in the efficiency and/or liquidity of these markets 
will not only drive up costs for economic actors (including non-
financial services firms) but reduce financial stability.
Market Share of Customer Funds in Futures Accounts


          Source: U.S. Commodity Futures Trading Commission.
Market Share of Customer Funds in Cleared Swaps Accounts


          Source: U.S. Commodity Futures Trading Commission.

          Conflicting and overlapping regulations discourage or even 
        prevent deep, efficient and liquid derivative markets from 
        functioning and direct market activity to national silos.

    Due to the cross-border nature of the global financial crisis, 
there is considerable public policy interest by regulators in cleared 
derivatives markets. Although the CFTC's data on FCMs active in the 
U.S. shows the global nature of derivatives markets, the challenge is 
that local regulators may deal with issues relating to cleared 
derivatives markets in different ways and at different times. Market 
fragmentation results when separate regulations deal with the same type 
of activity differently, because regulators narrowly concern themselves 
with the impact of such activity in their own jurisdiction. Conflicting 
and overlapping regulations discourage or even prevent deep, efficient 
and liquid derivative markets from functioning and direct market 
activity to national silos.
    Complete consistency between all major jurisdictions is not 
possible, and regulators have legitimate public policy reasons for 
their national approaches. However, FIA believes this must be balanced 
against the clear risks of market fragmentation caused by divergent, 
overlapping or conflicting rules.

    Regulation causing market fragmentation can be seen to emerge in 
three key ways.

    First, regulators may deal with existing, known issues in a market 
in different ways from one another--even where there is agreement at a 
global level as to the broad outline of how the issue should be dealt 
with. This form of divergence is in respect of the content of 
regulatory implementation. It may be caused by regulators fitting 
global standards to existing national rules and law; by some regulators 
prioritizing certain aspects of global standards while other regulators 
take a contrary position; regulators choosing to deviate from global 
standards for public policy reasons; or, regulators in different 
countries developing different rules in respect of existing issues 
where global standards do not exist or are insufficiently detailed to 
form a basis for national rules.
    Second, regulators may diverge on the timing of national 
implementation of some or all parts of otherwise agreed global 
standards. This form of divergence is in respect of the pace of 
regulatory implementation. It may be caused by regulators attributing 
different levels of priority to agreed global standards or simply 
different levels of capacity on the part of regulators in different 
jurisdictions.
    Third, regulators may react differently to novel issues where 
global standards or agreements have not been agreed. This form of 
divergence is in respect of new issues that require a regulatory 
response. It may be caused by political change that results in 
governments or legislators demanding action for public policy reasons 
or it may be caused by developments in the market, such as 
technological change, which have occurred before consensus between 
different regulators can form.
    Here are examples of problematic approaches which have been taken 
or proposed in recent years:

   An example of content driven divergence relates to 
        requirements for offering clearing services in a specific 
        jurisdiction; for instance, Japan requires certain cleared 
        transactions to be cleared within its borders, rather than by a 
        third-country CCP--in this case the level of local compliance 
        is such that a local entity must be established which is costly 
        and inefficient for many market participants.

   An example of pace driven divergence relates to requirements 
        for trade reporting; the EU and the U.S. have introduced 
        derivatives trade reporting rules, but they did not coordinate 
        the timing of the implementation. As a result, regulators have 
        imposed highly operationally intensive rules that cover the 
        same general topic but that ultimately required firms to devote 
        significant operational resources on multiple separate 
        occasions to ensure effective compliance with the separate rule 
        sets.

   An example of a new issue driving divergence is Brexit. 
        Brexit has in the eyes of some policymakers necessitated 
        changes to current regulations and even market structures. 
        Thus, several EU proposals in response to Brexit, such as EMIR 
        2.2 and the Investment Firm Review, have included elements 
        requiring direct compliance with substantial elements of EU law 
        or supervision by EU entities in order for UK market 
        participants to be able to continue with their existing 
        business models, even where UK law would be substantively 
        equivalent to EU law.
Part II--The Value of Co-Operation and the Importance of Reliance By 
        Regulators in Preventing Fragmentation
    Regulatory reliance can prevent fragmentation by averting overlaps 
and conflicts. In the context of clearing and derivatives regulation, 
we view supervisory reliance as a decision by one regulatory authority 
not to seek to apply its regulations to activities conducted in another 
jurisdiction, but, instead, to depend on the regulatory authorities in 
the latter jurisdiction.
    The process of supervisory reliance should comprise several steps:

   First, a regulator should consider whether it has a genuine 
        need to oversee an activity or entity in another jurisdiction.

   Second, if such a need is identified, then there should be 
        an assessment of the rules of the foreign regulator to 
        determine whether they are comparable in the outcomes they 
        achieve.

   Third, if the rules are comparable, the regulator should 
        recognize those host country requirements as sufficient and 
        that oversight of such compliance by the relevant foreign 
        regulator is appropriate. This process will necessarily avoid 
        regulatory conflicts and overlaps where the two regulators have 
        comparable rules.

    A regulatory authority seeking to rely on another authority will 
thus need a basis to conclude that regulatory regime of the other 
jurisdiction is comprehensive and achieves comparable outcomes, such 
that the supervision and regulation of activities in accordance with 
such regime's rules would be appropriate.
    In coming to this conclusion, a jurisdiction's analysis should 
center on an outcomes-based approach rather than a line-by-line 
examination of the other jurisdiction's rules. Such an analysis can be 
driven by a comparison of the foreign jurisdiction's regulatory 
objectives, goals and outcomes to those of the domestic jurisdiction. 
This approach has been applied successfully to a number of areas, such 
as the EU's efforts with respect to EMIR equivalence and the CFTC's 
Part 30 process for FCM registration exemptions, a longstanding model 
dating to the late 1980s. Alternatively, the analysis can be driven by 
a comparison of the foreign jurisdiction's approach to international 
standards, such as the CPMI-IOSCO PFMIs.
    The principal benefit of the reliance model is that it avoids the 
market fragmentation that can arise when two authorities attempt to 
regulate the same activity in different ways and ultimately create 
legal complexity, operational risk, and added compliance costs. In 
addition, the reliance model can strengthen the resilience of the 
cleared derivatives markets by reducing the barriers to accessing 
market infrastructure.
    The market fragmentation created by the direct regulatory model 
also undermines cooperation among regulatory authorities, weakening the 
ability of the regulatory community to respond collectively to 
unexpected market events such as the collapse of a globally significant 
financial institution.
    The most direct impact of duplicative rules that characterize a 
fragmented market is the risk that compliance with one applicable set 
of rules will nonetheless result in a violation of the other set of 
rules. This results in increased cost borne by firms that need to 
comply with more than one set of rules as the outcome often can be that 
firms are forced to always comply with the ``worst of'' each rule set 
in all circumstances to ensure there is never a material regulatory 
breach; in the worst case, a particular market activity will cease when 
a route to compliance is not apparent. The consequences of duplicative 
and conflicting rules can create legal complexity, operational risk and 
compliance costs for market participants both due to the inherent costs 
of compliance with two sets of rules (seeking legal advice, developing 
compliant operational processes, compliance function activities) but 
also the costs generated through conflicts and inconsistencies in the 
rules. In a survey of financial services executives published by the 
International Federation of Accountants in February 2018, 75% said that 
the costs of divergent regulations were a material cost to their 
business.\6\
---------------------------------------------------------------------------
    \6\ https://www.ifac.org/system/files/publications/files/IFAC-OECD-
Regulatory-Divergence.pdf.
---------------------------------------------------------------------------
    It should also be noted that reliance will result in savings for 
regulatory authorities themselves. When government authorities are 
faced with finite regulatory resources, those resources can be deployed 
more cost-effectively to its own market.
    Supervisory reliance cannot exist in a vacuum, however. For the 
reliance model to work properly, it must take place within a framework 
of cooperation among regulators.
Part III--Recommendations for Cooperation and Reliance
    In light of the international nature of cleared markets, 
supervisory reliance is the ideal approach for avoiding market 
fragmentation. As set out in Part II above, the benefits of reliance 
are considerable both for ensuring stable, effective markets and in 
assisting regulators fulfill their goals.
    FIA sets out below proposals for enabling and improving supervisory 
reliance. The proposals relate to:

  1.  Use of International Standards; and

  2.  Agreements between Regulatory Authorities.
Use of International Standards
          FIA believes clear and effective standards will increase 
        consistency and predictability for market participants, reduce 
        market fragmentation and ultimately result in deep, efficient, 
        and liquid derivatives markets.

    The key plank for supervisory reliance and preventing market 
fragmentation, in the view of FIA, is recognition of rules that meet 
international standards (or where those are not available, national 
laws). Use of agreed international standards by regulatory authorities 
will limit conflicts of rules between different jurisdictions. FIA 
believes clear and effective standards will increase consistency and 
predictability for market participants, reduce market fragmentation and 
ultimately result in deep, efficient, and liquid derivatives markets.
    Both the U.S. and EU, to varying degrees, currently recognize rules 
of other jurisdictions (U.S. rules for foreign boards of trade, foreign 
futures intermediaries, and swaps exemptive approach and, in the EU, 
EMIR equivalence) and we encourage these authorities to continue doing 
so. We also note that the EU and Singapore have deemed each other to be 
equivalent in relation to the regulation and supervision of CCPs and 
have announced plans for a common approach to trading venues that will 
result in mutual recognition of each other's venues.
    FIA recommends that international standards be set through a 
dialogue between peer regulators in an effort to achieve better results 
than rules set by one country alone. The varying perspectives and 
experience of regulators ensure proposed rules endure greater scrutiny 
and do not inadvertently result market fragmentation. It is critical 
that these international standards go through rigorous public comment 
and an opportunity for input given the importance of the standards and 
principles in regulation.
    The governance and rule-making processes for international 
standard-setters may need to improve if regulatory authorities are to 
place greater reliance on this collaborative method of rulemaking. 
Furthermore, buy-in from local authorities is essential if greater 
reliance on international standards is to occur. It should also be 
noted that if international standards are to form the basis for 
supervisory reliance, some existing international standards will need 
to be improved: they must be specific and granular, not simply 
statements of principle but provisions that can be used for outcomes-
based equivalence determinations. Specificity and granularity in 
international standards play an important role in preventing content 
driven regulatory divergence, caused by regulatory authorities 
attempting to fill in the gaps where a relevant standard lacks 
sufficient detail.
    International standard setters should also consider increasing 
their focus on monitoring implementation of standards, and benchmarking 
jurisdictions against best-practices set out in agreed-upon 
international standards. This could build on the Financial Stability 
Board's Thematic Reviews \7\ and IOSCO's Assessment Committee. The 
level of cross-border cooperation that a jurisdiction engages in could 
be treated as a benchmark. The timing of implementation is also 
significant and should be benchmarked; coordinated implementation of 
standards in different jurisdictions can play an important role in 
preventing pace-driven regulatory divergence, caused by regulatory 
authorities implementing rules at different times and thus subjecting 
market participants to different rules as the same point in time.
---------------------------------------------------------------------------
    \7\ http://www.fsb.org/2017/04/handbook-for-fsb-peer-reviews-2/.
---------------------------------------------------------------------------
Arrangements Between Regulatory Authorities
    In modern derivatives markets, information sharing and cross-border 
crisis-management are crucial to market integrity. FIA believes that 
regulatory authorities should widely adopt memoranda of understanding 
(MOUs) in respect of information sharing.
    Though the use of the standard MOU produced by IOSCO \8\ is 
welcomed, the priority should be the substance of the MOUs in whatever 
form regulatory authorities are mutually comfortable. FIA believes 
regulatory authorities should provide a high level of information 
disclosure to one another in respect of regulated firms and 
infrastructure in their jurisdiction.
---------------------------------------------------------------------------
    \8\ http://www.iosco.org/library/pubdocs/pdf/IOSCOPD322.pdf.
---------------------------------------------------------------------------
    MOUs should be put in place both for general information sharing 
and in respect of specific firms in which authorities have an interest 
in for reasons of systemic financial stability. This partnership among 
global regulators goes beyond information that can be used to identify 
possible regulatory violations.
    Perhaps most importantly, MOUs should build trust and cooperation 
between authorities in an ongoing effort to reduce market fragmentation 
and increase transparency and consistency in regulation. Regulatory 
authorities should remain open-minded about allowing certain inspection 
rights in relation to critical market infrastructure in MOUs, in this 
spirit of transparency and cross-border cooperation.
    Regulatory authorities should also put in place mechanisms for 
cross-border crisis-management planning. Crisis-management processes 
will be much more effective if they are agreed ex ante rather than 
authorities attempting to agree them during the early stages of a 
crisis. Further, the process of carrying out crisis-management plans 
will ensure that authorities are better prepared for dealing with a 
crisis, even if the permutations of the crisis deviate from those 
subject to the plan.
    International regulators have historically recognized this benefit 
and formed crisis management groups for CCPs that are systemically 
important.\9\ The working group for crisis management in respect of 
LCH. Clearnet Ltd. is an example of this approach.\10\
---------------------------------------------------------------------------
    \9\ FSB Guidance on Central Counterparty Resolution and Resolution 
Planning, 5 July 2017, p. 16. http://www.fsb.org/wp-content/uploads/
P050717-1.pdf.
    \10\ https://www.cftc.gov/sites/default/files/idc/groups/public/
@internationalaffairs/documents/file/cftc-lcharrangementmou090617.pdf
---------------------------------------------------------------------------
    The global financial crisis provided graphic examples of the 
benefits of cooperation between regulatory authorities in dealing with 
crisis-stricken firms. Analysis of crisis management in respect of 
Dexia Bank, Fortis Bank, Lehman Brothers and Kaupthing Bank has noted 
the impact of cooperation and coordination by authorities (or lack 
thereof) on the achievement of goals by authorities.\11\ The crisis 
management actions in respect of Dexia benefited from a high degree of 
cooperation by relevant supervisors, whereas the crisis management 
actions in respect of Kaupthing showed a lack of cooperation and 
coordination by the home regulatory authorities with affected host 
authorities.
---------------------------------------------------------------------------
    \11\ https://www.bis.org/publ/bcbs169.pdf.
---------------------------------------------------------------------------
    Going back further, the collapse of Barings Bank in 1995 provides a 
case study in the problems that can arise due to a lack of cross-border 
cooperation.\12\ The cross-border nature of the bank's trading activity 
in certain futures markets was not fully understood either by 
regulatory authorities or other market participants. As a result, the 
collapse posed a much greater threat to the stability of those markets 
than the authorities were prepared for. The experience inspired 
regulatory authorities from 16 jurisdictions to issue the Windsor 
Declaration in 1995 in which they stated the need to improve ``co-
operative measures'' among regulatory authorities and in particular the 
need for greater information sharing. This was followed by the Boca 
Declaration in 1996, an arrangement under which the occurrence of 
certain triggering events affecting an exchange member's financial 
resources or exposures prompts the sharing of information among 
regulators. The Boca Declaration was developed with the help of 
industry representatives and trade associations, including FIA. It has 
also been noted by the Bank for International Settlements that 
cooperation between supervisors can also play a key role in averting 
crisis situations.\13\
---------------------------------------------------------------------------
    \12\ https://scholarlycommons.law.northwestern.edu/cgi/
viewcontent.cgi?referer=https://www.google.com/
&httpsredir=1&article=1536&context=njilb.
    \13\ https://www.bis.org/speeches/sp170918.pdf.
---------------------------------------------------------------------------
    Regulatory authorities should also consider the sharing of 
information and best practices with both peer organizations and trade 
associations to a greater degree. International standard-setting and 
cooperation should include the joint development of best practices. 
Networks can be established with the industry and their representatives 
in an informal or ad hoc manner for particular subjects as a way of 
sharing information and practices between authorities. Such networks 
can act as fora for particular strategies or policy proposals to be 
tested, before they are raised at the level of international standard 
setters.
Conclusion
    As set out above, reliance by regulatory authorities on agreed 
international standards and supervision by fellow regulators in other 
jurisdictions is the best way to prevent market fragmentation and 
ensure deep, efficient, liquid and competitive derivatives markets.
    Reliance, and the consultation and cooperation which it 
necessitates, can demonstrate respect for the sovereignty of each 
jurisdiction while still encouraging competition and efficient risk-
management in the era of global and interconnected derivative markets.
    The benefits of legal certainty are tangible through lowered 
regulatory costs, increased competition and more efficient 
mutualization of market risk. However, the opportunity for local 
regimes to consult with peers around the world and collectively work 
towards market stability and regulatory certainty cannot be discounted.
    FIA encourages all regulatory authorities to use existing 
international bodies such as IOSCO to further enhance international 
standards for the regulation of the derivatives markets. That will 
permit greater reliance on each other by derivatives regulators that 
are implementing regulations to advance the goals of the G20 
commitments following the financial crisis. Furthermore, FIA believes 
strongly that existing international standards should be reviewed with 
an eye towards practical application for outcomes-based equivalence 
determinations and not simply a soft statement of principles.
    Reliance will result in better outcomes for both regulatory 
authorities and market participants than attempting to restrict cross-
border activity. The current landscape of regulation for cross-border 
cleared derivatives markets is an opportunity for regulators to reset 
relations among themselves and move forwards on the basis of 
cooperative approaches.

------------------------------------------------------------------------
 
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------------------------------------------------------------------------


    The Chairman. Excellent testimony, Mr. Lukken. I agree with 
you 100 percent.
    Now, we will hear from Mr. Berger.

          STATEMENT OF STEPHEN JOHN BERGER, MANAGING 
             DIRECTOR, GLOBAL HEAD OF GOVERNMENT & 
       REGULATORY POLICY, CITADEL, LLC, NEW YORK, NY; ON 
              BEHALF OF MANAGED FUNDS ASSOCIATION

    Mr. Berger. Chairman Scott, Ranking Member Scott, Members 
of the Subcommittee, my name is Stephen Berger and I am the 
Global Head of Government and Regulatory Policy at Citadel.
    Citadel is a leading investor in the world's financial 
markets. For over a quarter of a century, we have sought to 
deliver industry-leading investment returns to clients, 
including corporate pensions, endowments, foundations, public 
institutions, and sovereign wealth funds.
    I am here today on behalf of the Managed Funds Association 
and its members, and am pleased to provide testimony as part of 
today's hearing.
    MFA represents the majority of the world's largest hedge 
funds, and is the primary advocate for sound business practices 
and thoughtful regulation of the industry. MFA has long 
supported Congressional reforms of the OTC derivatives markets, 
including central clearing. Central clearing has benefited the 
derivatives markets by reducing systemic risk, increasing 
investor protections, and promoting transparency and 
competition.
    MFA supports a coordinated global approach to the 
regulation of clearing. The coordination between U.S. and 
European regulators on clearing implementation is crucial to 
its continued success and efficacy.
    The United Kingdom's anticipated withdrawal from the 
European Union introduces new complexities for global 
regulatory coordination. MFA has been engaging with policy 
makers and regulators to highlight potential regulatory 
challenges and recommended solutions for the derivatives 
markets. I will summarize some of these.
    With respect to clearing, MFA has been a consistent 
advocate for the central clearing of derivatives transactions. 
Recently, the EU amended its derivatives regulation, dubbed 
EMIR, to allow EU authorities to conduct enhanced supervision 
of non-EU clearinghouses. In extreme cases, it also allows EU 
authorities to require those clearinghouses to relocate 
clearing activities to an EU member state.
    The impact of these changes on the U.S. derivatives markets 
will depend on how EU authorities choose to implement their new 
power. The current U.S.-EU cross-border framework relies on the 
regulatory tools of substituted compliance, equivalence, and 
deference between comparable regulations. The new EU powers 
granted by EMIR could affect that framework.
    Any deterioration in U.S. and EU regulatory cooperation 
could jeopardize cross-border clearing, which in turn could 
fragment the derivatives markets. We urge U.S. and EU 
regulators to work together to develop an agreed-upon approach 
to cross-border CCP supervision using existing tools.
    Another international clearing-related concern is the Basel 
III leverage ratio. The current application of the leverage 
ratio to investors cleared derivatives positions is 
counterproductive and increases, rather than mitigates, risk. 
Bank's capital requirements should reflect the risks of their 
activities; however, the leverage ratio does not currently take 
into account the fact that with respect to banks clearing 
activities, customers post collateral that offsets the banks 
clearing-related risks. Recognizing this offset is necessary to 
ensure that customer clearing remains affordable, and that 
customers have fair and equal access to clearinghouses.
    MFA was pleased by the announcement last week that the 
Basel Committee has finally called for an amendment to the 
leverage ratio to provide that offset. If the Basel Committee's 
upcoming published standards are consistent with that 
announcement, we would join CFTC Chairman Giancarlo in his call 
to U.S. Prudential Regulators to promptly implement the revised 
leverage ratio into their rules.
    Next, with respect to derivatives trading, the CFTC's 
proposed amendments to its rules for trading on swap execution 
facilities is also a key area of concern. The proposal could 
jeopardize the current equivalence framework between U.S. and 
EU trading venues that was built on shared commitments to 
impartial access, straight through processing, and pre-trade 
transparency. We encourage the CFTC to make the scope of any 
amendments more targeted.
    Last, the implementation dates of new margin rules for 
uncleared swaps are approaching. However, these rules are 
complex and involve significant compliance, expenses, and 
resource commitments. In the near-term, the CFTC should work 
with the Prudential Regulators to provide guidance to help 
smooth the market's transition. In the longer-term, domestic 
and international regulators should work to recalibrate the 
regime. MFA has suggested a number of regulatory measures to 
help avoid significant disruption to the swaps market, such as 
extending the phase-in timeline.
    As a final note, I want to reiterate that the successful 
implementation of clearing in the U.S. and EU has greatly 
benefitted the derivatives market. The coordination between 
U.S. and EU regulators over the past several years has been 
critical to achieving the robust derivatives clearing that we 
see today. It is therefore important for the U.S. and EU to 
find a path forward on clearing related issues.
    We appreciate the Committee's oversight of international 
developments affecting U.S. derivatives markets, and I thank 
you for the opportunity to speak here today. I would be happy 
to answer any questions.
    [The prepared statement of Mr. Berger follows:]

 Prepared Statement of Stephen John Berger, Managing Director, Global 
Head of Government & Regulatory Policy, Citadel, LLC, New York, NY; on 
                  Behalf of Managed Funds Association
    Chairman Scott, Ranking Member Scott, my name is Stephen Berger and 
I am the Managing Director, Global Head of Government & Regulatory 
Policy, of Citadel LLC. Citadel is a global financial firm built around 
world-class talent, sound risk management, and innovative market-
leading technology. Citadel is a leading investor in the world's 
financial markets. For over a quarter of a century, we have sought to 
deliver industry-leading investment returns to clients including 
corporate pensions, endowments, foundations, public institutions, and 
sovereign wealth funds. Our global team works to help our clients' 
capital fulfill its greatest potential across a diverse range of 
markets and investment strategies, including fixed income & macro, 
equities, quantitative, commodities and credit.
    I am here today to speak on behalf of Managed Funds Association 
(``MFA'') and its members regarding Brexit and other international 
developments affecting U.S. derivatives markets. MFA represents the 
world's largest alternative investment funds and is the primary 
advocate for sound business practices for hedge funds, funds of funds, 
managed futures funds, and service providers. MFA's members manage a 
substantial portion of the approximately $3 trillion invested in hedge 
funds around the world. Our members serve pensions, university 
endowments, and charities, among others.
    MFA's members are a valuable component of the capital markets. They 
provide liquidity and price discovery to capital markets, capital to 
companies seeking to grow or improve their businesses, and important 
investment options to investors seeking to increase portfolio returns 
with less risk, such as pension funds trying to meet their future 
obligations to plan beneficiaries. Our members' skills help their 
customers plan for retirement, honor pension obligations, and fund 
scholarships, among other important goals.
    MFA members are also highly sophisticated investors who participate 
in the commodities and derivatives markets. MFA has consistently 
supported the reforms to the over-the-counter (``OTC'') derivatives 
markets contained in Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act'') that mitigate systemic 
risk, increase transparency, and promote an open, competitive, and 
level playing field. We welcomed the U.S. market's transition to 
central clearing for liquid, standardized swaps that occurred over the 
course of 2013. We believe that liquid, safe, and efficient derivatives 
markets facilitate investment to the benefit of everyone in the market 
place, including corporate treasurers, farmers, and ranchers who need 
to protect themselves against swings in crop prices, and pensioners who 
seek reliable returns on their retirement investments.
    The hedge fund industry is a global industry active in many of the 
largest economic centers in the world. Most of our members are 
headquartered in the United States, but many also either are 
headquartered in foreign jurisdictions, or have established legal 
entities in foreign jurisdictions. Europe, and particularly the United 
Kingdom (``UK''), is an active jurisdiction for our members.
    Hedge funds are well-regulated investment tools. Many aspects of 
our members' activities are subject to an array of regulations and 
oversight both domestically and abroad. Regulators in the United 
States, Europe, and beyond have a wealth of information about our 
members' investment activities. As a result, MFA has devoted 
substantial resources to advocating overseas--and especially in the 
European Union (``EU'') given its importance--for open, efficient, and 
fair capital markets.
    MFA strongly supports a coordinated approach to regulation that 
fosters capital formation, increases transparency, mitigates systemic 
risk, and facilitates fair and open access to financial markets. We 
were pleased that, following the financial crisis, there was robust 
coordination between the United States and the EU, and both 
jurisdictions implemented regulatory regimes with largely comparable 
requirements that mitigated potential conflicts. The cross-border 
regulatory tools of cooperation include deference, substituted 
compliance, mutual reliance, and outcomes-based ``equivalence'' 
determinations. International convergence on regulatory outcomes makes 
compliance easier for U.S.-based financial firms that operate on a 
global basis, which in turn, facilitated the cross-border flow of 
capital.
    The UK's anticipated withdrawal (``Brexit'') from the EU will 
introduce additional complexities for global regulatory coordination. 
MFA has been actively engaging with policymakers in Brussels, London, 
Frankfurt, Dublin, Paris, and elsewhere to highlight potential 
challenges. We have also committed substantial time and resources to 
preparing MFA members for potential regulatory uncertainties.
    MFA continues to stand ready as a constructive partner to officials 
in the U.S. and Europe to highlight areas of particular challenge for 
asset managers, and to propose policy and regulatory solutions to those 
challenges. We were pleased to be invited by the UK House of Commons 
Treasury Select Committee to provide evidence to its inquiry on ``[t]he 
future of the UK's financial services'', and we have also been engaging 
with policy officials in Brussels to provide constructive suggestions 
on the EU's Capital Markets Union project. MFA also interacts with 
international bodies such as the International Organization of 
Securities Commissions (``IOSCO''), the Financial Stability Board, and 
the Bank for International Settlements and its associated committees, 
including the Basel Committee on Banking Supervision.
    Our members allocate substantial resources to ensure they comply 
with the laws and regulations of all jurisdictions in which they 
operate and invest. However, when policymakers and regulators do not 
coordinate to achieve convergent regulatory outcomes, investment 
managers end up subject to laws and regulations in other jurisdictions 
that are inconsistent with, or unnecessarily duplicate, U.S. law and 
regulations. Divergent or duplicative rules and, in some cases, 
extraterritorial application of those rules, can increase costs to 
investors by creating barriers to investment managers doing business in 
multiple jurisdictions.
    MFA has continuously been a constructive partner to this Committee. 
In that spirit, and in support of the broader policy and regulatory 
authorities in the United States and beyond, we offer observations on 
the following seven key regulatory areas that are currently presenting 
challenges for our members:

  (1)  The EU enhanced supervision regime (``EMIR 2.2'') for third-
            country central counterparties (``CCPs''),\1\
---------------------------------------------------------------------------
    \1\ Regulation of the European Parliament and of the Council of . . 
. amending Regulation (EU) No 648/2012 as regards the procedures and 
authorities involved for the authorisation of CCPs and requirements for 
the recognition of third-country CCPs, available at: http://
www.europarl.europa.eu/doceo/document/A-8-2018-0190-AM-002-002_EN.pdf 
(``EMIR CCP Regulation''). Please note that this link is to the final 
text as agreed by European Parliament and the Council, but it remains 
subject to the corrigendum procedure, and has not yet been published in 
the Official Journal of the European Union.

---------------------------------------------------------------------------
  (2)  The Basel III leverage ratio (``Leverage Ratio'');

  (3)  Swaps market and liquidity fragmentation issues addressed by the 
            CFTC Global Markets Advisory Committee (``GMAC''); \2\
---------------------------------------------------------------------------
    \2\ See letter from Laura Harper Powell, Associate General Counsel, 
MFA, to the CFTC its response to its April 15, 2019 GMAC meeting, dated 
May 10, 2019, available at: https://www.managedfunds.org/wp-content/
uploads/2019/05/MFA-Letter-on-CFTC-GMAC-Meeting-on-April-15-2019-
Final.pdf.

  (4)  The implementation of initial margin requirements for uncleared 
---------------------------------------------------------------------------
            derivatives;

  (5)  The EU General Data Protection Regulation (``GDPR''),\3\
---------------------------------------------------------------------------
    \3\ Regulation (EU) 2016/679 of the European Parliament and of the 
Council of 27 April 2016 on the protection of natural persons with 
regard to the processing of personal data and on the free movement of 
such data, and repealing Directive 95/46/EC, available at: https://eur-
lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32016R0679&from=EN.

  (6)  The need for greater data protection at regulators through the 
---------------------------------------------------------------------------
            Protection of Source Code Act; and

  (7)  Regulatory coordination in the U.S. between the Securities and 
            Exchange Commission (``SEC'') and the CFTC.

    On behalf of MFA, I appreciate the Committee's consideration of 
Brexit and other international developments affecting U.S. derivatives 
markets. MFA wishes to promote enhanced global coordination and ensure 
the continued stability of our financial system. We believe our views 
are consistent with the Committee's public policy goals, and as 
investors, we would like to work with Congress, the Committee, EU 
policymakers and regulators, the CFTC, and all other interested parties 
in addressing these issues towards the goal of preserving the strength 
of our nation's economy. Specific concerns about the effect of 
international policymaking follows, as well as discussion on certain 
U.S. policy matters.
EU EMIR CCP Regulation
    MFA has long championed the post-crisis reform efforts of Congress, 
and we broadly support the G20's efforts to apply the reforms in a 
consistent way across jurisdictions. A major reform that MFA strongly 
supports is the effort to reduce risk in the derivatives markets by 
transitioning standardized and liquid OTC derivative contracts into 
central clearing. MFA believes that central clearing has greatly 
benefited the derivatives markets by reducing systemic, counterparty, 
and operational risk, and has resulted in a well-functioning and safer 
system where counterparties face a well-regulated CCP.
    Recently, the EU amended its European Markets Infrastructure 
Regulation (``EMIR''), which is the EU regulation that implemented the 
G20 objective of mandating central clearing of derivatives. The 
recently adopted changes to EMIR (commonly referred to as EMIR 2.2) 
allow EU authorities to conduct enhanced supervision of CCPs 
established outside the EU that clear derivatives denominated in one of 
the currencies of the EU. In extreme cases where the EU perceives 
excessive systemic risk, the amended EMIR regulation allows EU 
authorities to require CCPs to relocate clearing activities to an EU 
member state.
    MFA understands that the EU's goal in modifying its rules for non-
EU CCPs is to improve financial stability--a goal MFA shares. This goal 
becomes even more important as financial markets prepare for the UK's 
withdrawal from the EU. However, the EU approach could have wide-
ranging implications for the U.S. derivatives markets depending on how 
EU authorities exercise these new authorities.
    The current transatlantic regulatory framework is built on 
substituted compliance, equivalence, and the deference of U.S. and EU 
regulators to each other's comparable regulatory regimes. It is the 
product of significant effort and coordination over the last 9 years, 
with input from stakeholders including MFA. MFA welcomes this cross-
border regulatory coherence between U.S. and EU rules, and encourages 
policy and regulatory officials to collaborate even more closely to 
avoid the risks of fragmenting derivatives markets. If cross-border 
trading and clearing of derivatives were to become more costly and 
burdensome, it would undermine the benefits that global central 
clearing has achieved.
    Much will depend on how EU authorities choose to implement their 
new powers under EMIR 2.2 and how well U.S. and European authorities 
employ the tools of cross-border regulatory cooperation. For example, 
if EU authorities exercise their power to require a relocation of 
clearing activities into the EU, the markets for derivatives clearing 
would become fragmented along jurisdictional lines. If that 
fragmentation occurs, it would harm the financial system by, among 
other things, impeding competition, limiting market participants' 
ability to operate in certain jurisdictions, and ultimately creating 
barriers across the global marketplace.
    Like CCPs and clearing members, the changes contained in the EMIR 
CCP Regulation are relevant to our members, who are a vital part of the 
cleared derivatives markets, and access central clearing and CCPs 
indirectly through those clearing members. As a result, regulatory 
changes that impact central clearing or CCPs also indirectly impact 
customers and could expose customers to increased risks.
    Therefore, MFA encourages U.S. and European authorities to continue 
to coordinate, using tools of deference, substituted compliance, and 
outcomes-based equivalence to ensure that customers and end-investors 
who use central clearing do not experience disruptions to their 
investing and hedging activities due to a breakdown of existing or 
future equivalence arrangements. In particular, MFA urges Congress to 
ensure that U.S. departments and regulatory agencies continue engaging 
with the EU on EMIR so that there is an agreed and coordinated approach 
to CCP supervision such that transatlantic central clearing is not 
hindered and the risk-reducing benefits of central clearing remain 
intact.
    We note that with respect to U.S. and UK markets, earlier this 
year, the CFTC, the Bank of England, and the UK Financial Conduct 
Authority issued a joint statement providing assurances that they are 
taking measures to ensure that the UK's withdrawal from the EU will not 
impede or create regulatory uncertainty regarding derivatives clearing 
and trading market activity between the UK and the United States. We 
also welcome the joint statement issued by the CFTC and European 
Commission in March clarifying that the updates to EMIR and the swaps 
regulatory framework will result in more deference as between the CFTC 
and the EU supervisors than is currently the case.
    MFA strongly supports such efforts and the issuance of clear, 
unified guidance as it relates to the EMIR CCP Regulation.
Leverage Ratio Impact on Customer Clearing
    The ongoing success and benefits of central clearing have been at 
risk of being undermined by the Leverage Ratio rules of the Basel 
Committee on Banking Supervision (``BCBS'' or ``Basel Committee''). 
Without revision, these rules threaten the affordability and 
accessibility of customer clearing.
    Specifically, the current Leverage Ratio disincentivizes 
derivatives clearing because it does not provide an offset for customer 
initial margin (``IM''). That unfavorable treatment limits the ability 
of customers to use centrally cleared derivatives and could limit the 
ability of end-users to hedge their risks. MFA was gratified, 
therefore, by the announcement last week that the Basel Committee has 
called for an offset for IM in the Leverage Ratio for customer-cleared 
derivatives. If the Basel Committee's forthcoming published standards 
are consistent with the announcement, we would join CFTC Chairman J. 
Christopher Giancarlo in his call to U.S. Prudential Regulators to 
implement expeditiously the revised leverage ratio in their respective 
rules.
    Customers have been key to the success of central clearing in the 
United States and across the globe. While some clearing of swaps 
between dealers existed prior to enactment of the Dodd-Frank Act, 
artificial barriers to entry prevented customers from similarly 
participating in the cleared swaps market. Implementation of the 
central clearing requirement eliminated many of those artificial 
barriers and resulted in substantial customer clearing.
    At present, swaps customers exclusively access CCPs indirectly 
through clearing members (typically banks), rather than becoming direct 
members of CCPs, for a variety of reasons, both financial and 
operational. Swaps customers must post IM, which is the customer's 
money, and CFTC rules require clearing members to hold customer funds 
from the clearing member's own assets (i.e., ``segregate'' the IM).
    Unfortunately, the current BCBS Leverage Ratio rules fail to 
provide an offset that recognizes the exposure-reducing effect of 
customers' segregated IM. According to the BCBS, the reason for the 
lack of an offset for customer IM that is held by the clearing member 
and not segregated not only offsets exposures, but also can be used by 
the clearing member for further leverage. In the U.S., segregation 
rules severely restrict the ability of IM to be held in anything other 
than extremely low-risk and extremely liquid assets, assuring that it 
is always available to absorb losses ahead of the bank. Moreover, the 
substantial majority of segregated IM is posted to the CCP, and 
therefore, is entirely outside the control of the clearing member.
    The failure of the Leverage Ratio to recognize the purpose of 
segregated IM discourages the use of cleared derivatives by customers. 
The lack of offset will result in clearing members incurring large 
Leverage Ratio exposures, which will likely raise prices for customer 
clearing significantly. As the CFTC stated in its recent letter to the 
U.S. Prudential Regulators, ``[f]ailing to reduce a clearing member's 
exposure by the segregated client margin it holds results in an 
inflated measure of the clearing member's exposure for a cleared 
trade.''
    In addition, the Leverage Ratio's current overstatement of a 
clearing member's actual economic exposure in a cleared derivative 
transaction has disincentivized banking organizations from providing 
clearing services to many customers. The Leverage Ratio is estimated to 
increase significantly the cost of using cleared derivatives. As a 
result, MFA members expect reduced access to clearing services and 
higher prices for such access without an appropriate revision to the 
Leverage Ratio. This substantial cost increase may cause customers to 
reduce their hedging activities to levels that are inadequate to manage 
their risk, which could result in price increases and volatility for 
food, gasoline, and other consumer goods.
    In MFA's view, prudential requirements that inflate the economic 
risk of derivatives, particularly the Leverage Ratio, impose artificial 
barriers for clients to access cleared derivatives and work at cross-
purposes with mandates to clear. We commend Chairman Scott for 
recognizing the adverse impact of the current formulation of the U.S. 
supplementary leverage ratio on customer clearing, and for serving as a 
lead cosponsor in the last Congress of H.R. 4659 to require the 
appropriate Federal banking agencies to recognize the exposure-reducing 
nature of client margin for cleared derivatives.
    Therefore, to ensure the continued affordability and robustness of 
customer clearing in this country, we urge U.S. prudential regulatory 
authorities to implement a similar offset for U.S. clearing members to 
the announced BCBS revision to the Leverage Ratio. To avoid competitive 
disadvantage to U.S. banks, U.S. Prudential Regulators should act 
promptly.
CFTC GMAC Discussion of Swaps Market and Liquidity Fragmentation
    During a recent CFTC GMAC meeting, MFA noted that much of the 
discussion focused on the need for global regulators to address 
purported market or liquidity fragmentation in swaps trading activity. 
MFA would like to provide buy-side perspectives to the Committee on the 
current state of global swaps market liquidity and liquidity 
fragmentation.
    MFA believes that, on the whole, the introduction of central 
clearing, organized trading, and greater pre- and post-trade 
transparency in the standardized interest rate swap and index credit 
default swap (``CDS'') markets has improved--rather than fragmented--
liquidity. In these markets, central clearing has made it easier for 
investors to transact with a wider array of trading counterparties 
while organized trading has improved pricing and competition, among 
other benefits. However, in other segments of the swaps market where 
central clearing and organized trading are not as prevalent, such as 
the single-name CDS markets, MFA members report that market liquidity 
has suffered due to lack of participants and lack of breadth of names 
traded.
    MFA is concerned that, if implemented, the CFTC's proposed 
comprehensive reforms for swaps trading on swap execution facilities 
(``SEFs'') would result in the fragmentation of the swaps market. To 
avoid this fragmentation, the SEF reforms should be targeted in scope. 
A targeted approach is necessary to preserve the CFTC-EU mutual 
recognition agreement on derivatives trading venues and to minimize 
regulatory fragmentation where possible by reducing regulatory 
divergence and related burdens on existing and potential participants 
in OTC derivatives markets. Disruptions to such mutual recognition/
equivalence agreement may jeopardize impartial access to derivatives 
trading venues, straight-through processing efficiencies, price 
discovery, and post-trade transparency. MFA submitted a recent comment 
letter on the CFTC's SEF proposals with alternative recommendations 
that would preserve and enhance the CFTC-EU mutual recognition 
agreement and its important benefits for investors in facilitating 
cross-border swaps trading.\4\
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    \4\ See MFA letter in response to the CFTC's Proposed Rule, ``Swap 
Execution Facilities and Trade Execution Requirement'' (RIN 3038-AE25), 
submitted to Christopher Kirkpatrick, Secretary of the Commission, on 
March 15, 2019, available at: https://www.managedfunds.org/wp-content/
uploads/2019/03/MFA-Comment-Letter-on-CFTC-SEF-Proposed-Rule-Final.pdf.
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    While the current SEF regime has improved conditions for investors, 
it has failed to provide buy-side market participants with true 
impartial access to the unique trading protocols and liquidity 
available on inter-dealer (``IDB'') broker SEFs that historically 
served the ``dealer-to-dealer'' segment of the market. For example, 
buy-side firms do not have true impartial access to voice-based 
execution protocols on IDB SEFs that may be best suited for their 
specific trading activity. The continuing access barrier of post-trade 
name give-up on IDB SEFs that offer anonymous execution for cleared 
swaps reduces pre-trade transparency for investors regarding available 
bids and offers on such SEFs and limits their choice of trading 
protocols to those offered by a few viable SEFs serving the ``dealer-
to-client'' segment of the market.
    We respectfully urge the Committee to support targeted reforms to 
the CFTC's swaps trading regime to avoid the risk of introducing swaps 
market and liquidity fragmentation.
UMR Initial Margin Implementation
    The implementation of the final phases of the IM requirements under 
the uncleared margin rules (``UMR'') adopted by the CFTC and other U.S. 
regulators has presented a myriad of challenges for buy-side firms. We 
are concerned that outstanding issues might result in prohibitive price 
increases and decreases in liquidity. MFA has recommendations for 
various short-term and long-term measures that are necessary to provide 
certainty and clarity for market participants.
    While our members support incentives for central clearing of 
standardized OTC derivatives, we recognize that market participants 
have an ongoing need to be able to enter into bespoke and customized 
derivatives contracts that cannot be easily cleared by a CCP (so-called 
``uncleared derivatives''). MFA supports requiring buy-side firms to 
collateralize these uncleared derivatives through the posting of 
margin. Many MFA members already post IM for their uncleared 
derivatives, but currently, most do not collect IM from their swap 
dealer counterparties. Under UMR, buy-side firms will be required to 
receive regulatory IM from their swap dealers and segregate it with a 
third-party custodian bank.
    For the last several years, MFA has engaged with U.S. and 
international regulatory bodies on implementation of UMR. Our primary 
concern with UMR implementation is maintaining reasonable costs and 
sufficient market liquidity for this important part of the swaps 
market. If the cost of trading uncleared derivatives is 
disproportionately increased by UMR implementation, it could reduce 
liquidity and adversely impact market participants' ability to invest 
and properly hedge their portfolios using these instruments. Moreover, 
for products where no central clearing offering is available and/or 
where central clearing is not appropriate, calibrating UMR to 
incentivize such clearing is unrealistic, and accordingly, may need to 
be revisited. UMR should be designed to properly mitigate the risks 
associated with uncleared derivatives, not to penalize market 
participants for using uncleared derivatives to meet their trading 
needs for prudent risk management, including entering into customized 
transactions where warranted.
    On March 5, 2019, BCBS and IOSCO \5\ issued a public statement that 
the BCBS-IOSCO international margin framework does not specify 
documentation, custodial or operational requirements if the bilateral 
IM amount does not exceed the framework's 50 million U.S.$/Euro IM 
threshold. Although the BCBS-IOSCO Guidance is a good first step in 
providing needed clarity to market participants, MFA urges the CFTC, 
the U.S. Prudential Regulators, and other regulators to adopt expressly 
the BCBS-IOSCO Guidance this summer.
---------------------------------------------------------------------------
    \5\ Available at: https://www.bis.org/press/p190305a.htm (the 
``BCBS-IOSCO Guidance'').
---------------------------------------------------------------------------
    Although the UMR does not require an in-scope entity to post 
regulatory IM until its bilateral IM amount in a counterparty 
relationship exceeds $50 million, the requested guidance would, 
nonetheless, help clarify the obligations of market participants and 
manage and prioritize their resources. MFA believes the issuance of the 
requested guidance this summer is critical to ease resource burdens and 
avoid trading disruptions for swaps market participants in the final 
phases, especially for the relatively large influx of newly in-scope 
entities, including many MFA members, on the September 1, 2020 
implementation date for Phase 5.
    MFA also requests that the CFTC coordinate with the U.S. Prudential 
Regulators and other regulators to provide a forbearance period of 6 
months after a Phase 5 entity's counterparty relationship that was 
initially below the $50 million regulatory IM exchange threshold later 
exceeds such exchange threshold. Such forbearance is necessary to allow 
the Phase 5 entity to put the necessary bilateral collateral 
documentation and trilateral custodial arrangements in place to both 
post and receive regulatory IM and avoid trading disruptions. A 
reasonable forbearance period would help to alleviate the complexities, 
compliance expenses, and resource constraints facing Phase 5 entities, 
including with respect to separately managed accounts and associated 
risks.
    In addition to these near-term measures, MFA urges the CFTC to 
coordinate with the U.S. Prudential Regulators and other regulators 
through the BCBS-IOSCO Working Group on Margining Requirements 
(``WGMR'') to implement broader regulatory solutions that would involve 
targeted recalibration of UMR IM requirements. MFA recommends that the 
CFTC and other WGMR members consider:

   Excluding physically settled foreign exchange swaps and 
        forwards in calculations of aggregate average notional amount 
        thresholds for determining whether counterparties are in-scope 
        of the UMR IM requirements. This recalibration is logical and 
        would smooth implementation by avoiding the inclusion of 
        products that should not otherwise be affected by the rules 
        into the process.

   Adopting another phase-in threshold between 750 billion 
        U.S.$/Euro and 8 billion U.S.$/Euro; specifically, MFA 
        recommended a Phase 5.a. threshold of 100 billion U.S.$/Euro in 
        2020, with 8 billion U.S.$/Euro pushed back to 2021 as Phase 
        5.b. A more gradual and orderly staging would ensure that there 
        is market infrastructure in place to support the final stages 
        of IM phase-in and avoid market disruption. Such a further 
        phase-in would also be preferable to a blanket delay of Phase 
        5, which would simply defer the cliff-edge effect of the 
        threshold dropping from 750 billion U.S.$/Euro to 8 billion 
        U.S.$/Euro without further facilitating the industry's 
        transition.

   Enhancing the use and risk-sensitivity of approved IM 
        models, including the ISDA SIMMTM, by:

     Exempting Phase 4-5 non-dealer counterparties from 
            prudential-style governance of IM models designed for bank 
            capital standards;

     Enhancing portfolio margining in IM models;

     Accelerating regulatory approvals of business-specific 
            IM models to avoid model herding to a single standard IM 
            model; and

     Authorizing opt-in margining of non-regulated products 
            to enhance portfolio offsets in IM models.

   Requiring robust data security protections by third-party 
        software vendors that provide functionality for regulatory IM 
        calculations, reconciliation, and margin workflows.

    We respectfully urge the Committee to encourage the CFTC to 
coordinate with other regulators and the WGMR to implement our 
requested regulatory measures as soon as possible to avoid significant 
swaps market disruption.
EU General Data Protection Regulation
    MFA supports robust data privacy and protection of confidential or 
sensitive data. GDPR took effect in May 2018 and seeks to protect the 
personal data of EU citizens. Because the rules under GDPR extend 
beyond the EU's geographical borders, GDPR has had a significant impact 
on the operations of many U.S. businesses.
    MFA members are subject to a panoply of U.S. Federal and state 
privacy requirements because most are registered with the CFTC and/or 
SEC as commodity trading advisors (``CTAs''), commodity pool operators 
(``CPOs''), or investment advisers. Nevertheless, many U.S.-based 
investment managers that do not have EU offices are, or may be, subject 
to GDPR as well because it has broad extraterritorial application that 
extends to non-EU businesses that offer goods or services to 
individuals in the EU.
    While GDPR does not appear to directly conflict with U.S. privacy 
regulations, it has imposed requirements on U.S.-based investment 
managers and other U.S. businesses that are significantly more 
stringent than what U.S. privacy rules impose. As a result, U.S. firms 
have had to modify their operations to comply with GDPR, 
notwithstanding their compliance with existing U.S. privacy laws. In 
effect, GDPR has become the primary privacy rule with which firms must 
comply with because it sets more stringent and prescriptive compliance 
standards than the U.S. privacy regimes prescribed by Federal agencies 
through the Gramm-Leach-Bliley Act and other Federal legislation, as 
well as by state law.
    GDPR is an example of an EU law that has a significant impact on 
U.S. businesses and markets. While MFA does not take a position on 
whether GDPR is the appropriate rulemaking for U.S. entities, we note 
that Congress may wish to consider that it is now effectively a set of 
rules with which many U.S. firms must comply even though U.S. actors 
had little or no influence over the EU's rulemaking in this important 
area. Once again, MFA strongly encourages U.S. and EU authorities to 
engage in active regulatory collaboration to ensure coordination of 
approaches on privacy matters across jurisdictions, and we encourage 
Congress to exercise its oversight and lawmaking powers as appropriate.
Enhancing Data Protection
    For several years now, MFA has engaged with regulators, including 
the CFTC, on the issue of data security and treatment of confidential 
information. MFA and its members have significant concerns about 
information security at regulatory agencies. Information security 
vulnerabilities at a regulator jeopardize not only market participants 
and their investors, but also the U.S. economy through the loss of 
domestic trade secrets and confidence in the integrity of the 
regulatory framework. This month, the CFTC Office of Inspector General 
issued a report highlighting the vulnerability of the CFTC's Integrated 
Surveillance System to hacking, which reinforces this concern.
    Over the last several years, due to both statutory mandates and 
regulatory discretion, agencies have expanded the scope and breadth of 
the types of information that they request of registrants. These 
agencies, however, have generally continued to rely on the same 
frameworks for information collection and protection. Thus, we were 
especially pleased with the announcement earlier this year of CFTC 
Commissioner Dawn Stump's data protection initiative. That initiative 
aims to ensure that the CFTC only collects data required for its 
regulatory responsibilities, removes duplicative reporting streams, 
explores alternative mechanisms for accessing sensitive information, 
enhances internal controls for interacting with data, examines response 
procedures to cyber incidents, and updates data retention best 
practices.
    MFA believes that the Committee should also consider legislative 
solutions with respect to enhancing data privacy, protection, and 
collection. We commend Chairman Scott for his leadership during the 
115th Congress in supporting the ``Protection of Source Code Act'', and 
for cosponsoring H.R. 3948, companion legislation that would amend 
securities statutes to apply the same scheme proposed for the CFTC to 
the SEC. The Protection of Source Code Act would amend the Commodity 
Exchange Act to require the CFTC to issue a subpoena before compelling 
a person to ``produce or furnish source code, including algorithmic 
trading source code or similar intellectual property that forms the 
basis for design of the source code.''
    MFA believes that legislation such as the Protection of Source Code 
Act and companion Senate legislation introduced in the 115th Congress 
(S. 3732 and S. 3733) would be an important and constructive step for 
implementing and ensuring that regulators have a robust process in 
place when it comes to determining the necessity of highly sensitive, 
confidential information. Significantly, the legislative measure does 
not impede regulators from seeking the information they need, it only 
ensures that regulators have a process in place before seeking certain 
types of information, balancing the needs of regulators and 
registrants.
    As such, MFA supports the policy of the ``Protection of Source Code 
Act'' and recommends that the Committee consider proceeding with such 
legislation during this Congress.
A Harmonized U.S. Approach to Regulation
    MFA supports the harmonization efforts that CFTC Commissioner Brian 
Quintenz and SEC Commissioner Hester Peirce have undertaken to enhance 
regulatory efficiency and effectiveness between the SEC and CFTC. To 
support this initiative and the goals of the CFTC, SEC, and Treasury 
that relate to promoting coordination, harmonization, and efficiency 
across regulators, MFA developed a proposal for a harmonized approach 
to CFTC and SEC regulation of firms that are registered with both the 
CFTC as CPOs or CTAs and with the SEC as investment advisers (``dual 
registrants'').\6\ We have urged the CFTC and SEC to enhance 
coordination and efficiency in the regulation of dual registrants, and 
we believe that this Committee has an important oversight role to play 
in ensuring that regulators take a more harmonized or coordinated 
approach to regulation of dual registrants.
---------------------------------------------------------------------------
    \6\ See letter from the Honorable Richard H. Baker, President and 
CEO, MFA, and Jennifer W. Han, Associate General Counsel, MFA, to the 
Honorable Jay Clayton, Chairman, SEC, and the Honorable Christopher 
Giancarlo, Chairman, CFTC, dated November 15, 2018, on ``A Proposal for 
a Harmonized Primary Regulator Approach to SEC and CFTC Regulation of 
Dual Registrants'', available at: https://www.managedfunds.org/wp-
content/uploads/2018/11/MFA-Proposal-for-Dual-
Registrants.final_.11.15.18.pdf.
---------------------------------------------------------------------------
    Dual registrants are subject to a wide range of related, but not 
identical, requirements arising from CFTC, SEC, and National Futures 
Association (``NFA'') rules. These requirements include systemic risk 
reporting, examinations, advertising, marketing, sales practice and 
promotional materials, recordkeeping, privacy policies, information 
security and cybersecurity, self-assessment, business continuity and 
disaster recovery planning, ethics, and registration forms.
    Under our proposed CFTC-SEC approach to harmonized regulation, 
currently dual registrants would continue to be registered with, and 
subject to oversight by, both agencies. All trading activities in the 
futures and swaps market would continue to be governed by CFTC rules 
and all securities market activities would continue to be subject to 
SEC rules. However, through an exemptive-relief safe harbor, each 
agency would provide substituted compliance for CPO/CTA and adviser 
regulations, whereby a registrant would be able to satisfy its 
compliance obligations with one agency by complying with the other 
agency's rules that serve the same purpose. A dual registrant would 
determine which agency's rules it would need to comply with based upon 
an assets under management test. For example, if a majority of a 
registrant's exposure was from derivatives overseen by the CFTC, it 
would comply with the CFTC and NFA regulations, and would be granted 
substituted compliance by the SEC for certain investment adviser 
regulations.
    MFA believes that a harmonized approach to CFTC-SEC regulation of 
dual registrants could significantly enhance regulatory efficiency and 
effectiveness, and reduce regulatory burdens by streamlining systemic 
risk reporting and implementing joint or coordinated exams of dual 
registrants. These aspects to dual regulation create the greatest 
additional ongoing cost and burden. A harmonized approach would also 
provide clear and quantifiable benefits to the CFTC and SEC, 
registrants and the investing public, as well as conserve valuable 
government resources, reduce waste, promote good governance, and 
greatly enhance regulatory efficiency and effectiveness.
    MFA continues to engage with CFTC and SEC staffs to discuss an 
optimal framework for a harmonized approach to CFTC and SEC regulation 
of dual registrants. MFA has recommended that the CFTC and SEC 
prioritize adopting a harmonized framework approach to regulation of 
dual registrants that would decrease duplicative regulation, allow for 
substituted compliance, joint, or coordinated exams, and permit the 
submission of a single systemic risk report to the CFTC, SEC, and NFA.
    We respectfully request that the Committee exercise its oversight 
role in ensuring that regulators take a more harmonized or coordinated 
approach to regulation of dual registrants.
Conclusion
    On behalf of MFA, I appreciate the Committee's consideration of 
Brexit and other international developments affecting U.S. derivatives 
markets. As discussed, we strongly support global regulatory 
coordination and regulatory efforts to define consistent, effective, 
and fair cross-border rules that foster capital formation, increase 
transparency, mitigate systemic risk, and facilitate open access to the 
financial markets. To prevent the financial markets from becoming 
fragmented along jurisdictional lines and otherwise undermining the 
progress made in safeguarding the financial system against another 
financial crisis, we urge Congress, through its oversight powers, to 
examine and encourage Treasury and regulators to formulate positions in 
each of these important areas, and then work with their international 
counterparts to resolve impediments to the objectives of open, 
efficient, and fair capital markets.
    In addition, to strengthen the U.S. financial system, we would 
appreciate Congress' continued oversight on harmonization issues by 
requesting that the CFTC and SEC implement a more harmonized and 
coordinated approach to regulation of dual registrants. We also request 
that Congress consider adoption of measures to enhance protection of 
U.S. intellectual property.
    MFA is committed to working with Members and staff of Congress, the 
Committee, and regulators to address these issues towards the goal of 
preserving the strength of our nation's economy. MFA is also committed 
to its role as a constructive partner to policy and regulatory 
officials in overseas jurisdictions, including in Europe. Thank you for 
the opportunity to appear before you today. I would be happy to answer 
any questions that you may have.

    The Chairman. Well thank you. Thanks to each of you for 
your very informative remarks and information you relayed. I 
certainly at this time want to thank my staff, our Agriculture 
Committee staff, for pulling such a distinguished panel 
together. Thank you all very, very much.
    Now, Members will be recognized for questioning in order of 
seniority for Members who were here at the start of the 
hearing. After that, Members will be recognized in order of 
arrival.
    I will start with myself for 5 minutes.
    As I said at the outset, we want to really find out from 
you what we should do in this situation as Members of Congress, 
what we can do to make sure that there are no impediments.
    And from each of your testimonies, you have shared with us 
some impediments, some things that are standing in the way that 
need to be removed because of this Brexit situation. And so, we 
want you to be frank. We want you to give us some direction in 
how we can make sure that our market participants in the cross-
border are not inhibited by this divorce that is going on, and 
also, this kind of untoward activity that the EU in and of 
itself is doing, that appears to be some sort of power play. 
And we want to be knowledgeable from you so we can put into 
action the necessary movements that can help make sure that our 
market participants, the United States financial industry, are 
not put at a disadvantage with what is happening with the 
European Union and Brexit.
    But first and foremost, I would like to get the panel's 
take on what you think about the most recent and timely news 
from the CFTC. What are your thoughts on the CFTC's 
announcement yesterday of the creation of a process to 
terminate the exemptive relief they have offered to foreign 
firms under their Part 30 rules?
    We will start with you, Mr. Duffy, and then I would just 
like very quickly to get each of your take on this. The CFTC's 
movement yesterday is very important. I want to kind of find 
out how you all feel about it.
    Mr. Duffy. I will save my comments on what you should do. I 
think that was the original question. But I will talk about 
what the question you just asked is. What do we feel about what 
the action that was taken yesterday? I think it was very 
significant for a couple of reasons there, because I think it 
was the first time we have seen a unanimous decision come out 
of the Commission for all five Commissioners from both sides of 
the aisle to agree that this is a big issue. Not to just 
somewhere, what we are hearing from your Committee here today.
    I think that was a very, very strong positive message. And 
if they were to enact to take away the exemption of the Part 
30, it would make it very, very difficult obviously for 
European brokers to deal with U.S. clients. They would have a 
whole host of new hurdles they would have to go under, which in 
return would be a lot of costs associated with them.
    I was very heartened to see that the Chairman and the rest 
of the Commissioners put that out for comment, and that is 
their position. I think that is a really good strong starting 
point.
    The Chairman. Very good. Mr. Edmonds, advice?
    Mr. Edmonds. I certainly recognize what they did yesterday 
was adding a tool to the tool chest they had. I think on an 
historical basis, everyone has looked at that as something that 
would not be touched. But now, they have been very clear about 
what they put out there, giving them the opportunity to take 
advantage of that, given certain circumstances once it is 
warranted. I think there is going to be a lot of collection of 
tools that go in the tool box before we get through this 
conversation at a holistic level.
    The Chairman. All right. Mr. Maguire?
    Mr. Maguire. Thank you, Chairman Scott. I will be brief.
    To reiterate what Chris said, I think it is a tool in the 
tool box. I think that is clear. From our perspective, we are 
clearly a known U.S.-domiciled CCP. It doesn't directly impact, 
as we operate here, as I mentioned in my testimony, under a 
direct registration model, which we are strong advocates of. We 
are fully compliant with all the rules and don't rely on 
elements of this.
    What I would encourage, though, I think it is a potential 
tool and a potential set of circumstances. There is definitely 
a need all around to consider this--how do I put it? To think 
about not having an arms race and thinking about more 
cooperation. I think the danger as this thing escalates, things 
get turned into an arms race and it is very important that we 
take the temperature down in time. But I understand the 
motivation for doing the change in the rule.
    The Chairman. Right. Mr. Lukken?
    Mr. Lukken. Yes, Part 30 is the regulation the CFTC has to 
allow U.S. customers access to foreign markets through foreign 
brokers that are deemed comparable. Their action yesterday was 
codifying how you would revoke a Part 30 comparability analysis 
if certain conditions arose. This was codifying, I think, what 
was already a regulatory practice. Again, it is a tool in the 
tool box. If you are looking at carrots and sticks, regulators 
need carrots and sticks. This was a stick. The regulator, and 
Chairman Giancarlo has also talked about some carrots as well, 
which is we need to get to a more comparable regulatory 
structure so we don't have to register DCOs around the globe. I 
am looking forward to the holistic package that he is planning 
to put out, both Part 30 yesterday as a stick, and hopefully 
some carrots in the coming weeks.
    The Chairman. Right, and Mr. Berger?
    Mr. Berger. Thank you.
    As you noted, Mr. Chairman, the proposal was voted out 
yesterday, so MFA looks forward to reviewing and commenting 
during the public comment period. I would note, seconding what 
Mr. Duffy said, there was a unanimous and bipartisan vote by 
the CFTC Commissioners to move forward. And as a general 
matter, I think it is good public policy to codify powers that 
currently only exist as part of exemptive relief.
    The Chairman. Right. Thank you very much. My time has 
expired on that; but hopefully, I will have a chance to maybe 
get to it with one or the other. But what I may want to come 
back on is that I want to make sure that we get back to this 
EMIR 2.2, and what we in Congress need to do in terms of this. 
I have talked with the CFTC and there may be a move that we 
have to put in place to retaliate, and we will examine that, 
and perhaps Mr. Scott and some of the others will get to that.
    I now recognize the Ranking Member for his questions.
    Mr. Austin Scott of Georgia. Thank you, Chairman Scott, and 
Mr. Maguire, I appreciate your comments about reducing the 
temperature. I think that would certainly be the desire of the 
Committee, and many of the others.
    Mr. Duffy, you discussed the idea of regulatory sovereignty 
and how infringement on the CFTC's ability to regulate U.S.-
domiciled entities could be harmful. Can you expand on the 
dangers you see when you look at the potential of having two 
regulatory masters?
    Mr. Duffy. Yes, sir, and thank you for the question.
    Having--first of all, it is against the law for the CME to 
be in compliance with EMIR 2.2 because under the U.S. law, the 
CFTC is our primary regulator and that is it. We would actually 
be in technical violation of U.S. law if we were to be in 
compliance with EMIR 2.2. That is just for starters.
    So, the answer to that is what do we do? Well, we can not 
do business in Europe, but that doesn't make any sense for all 
of the reasons that we outlined. Having duplicate costs 
associated with this, again, I don't think anybody can 
understand really what that is going to do to the ultimate 
consumers, and it is not just in the U.S., it is everywhere.
    When these spreads widen those costs have to be borne by 
somebody, and market participants will bear them and they will 
bear them in a way that they can widen their spread, so that is 
how they do it. And that puts the cost on the consumers. I 
think that is very damaging. And again, as I said earlier, this 
is just not agricultural products. This is your home mortgages. 
This is your 401(k)s. The illiquidity that you mentioned 
earlier, sir, that is a big, big issue. Duplicate regulation 
makes absolutely no sense, and for a company like CME, which is 
the largest exchange in the world, we have roughly less than 
five percent euro-denominated products traded in Europe. How 
are we possibly deemed systemically important to the European 
Union when we have less than five percent euro-denominated 
products?
    This is nothing more than what Ranking Member Conaway said 
earlier. This is a little retribution from 2010, 2012, but 
also, this can't go forward, and I think hopefully we are past 
that. I thought we were past it in 2016. I am very hopeful that 
this Congress will be very much involved.
    Mr. Austin Scott of Georgia. Thank you, Mr. Duffy.
    Mr. Edmonds, as you noted, Chairman Giancarlo has recently 
proposed changes to how it interacts with overseas 
clearinghouses. How would the changes that he is proposing 
change the regulation of clearinghouses?
    Mr. Edmonds. Well, the proposal that is out there now is 
really more around what we thought we had in 2016 in the 
agreement, and where that is headed. We have spent the better 
part of the last 2 decades--Terry will say it is longer, and 
that is fine--creating a global market, and everything we are 
doing right now is trying to combat the balkanization of that 
market and all the costs that come along with that on the ride. 
I agree with Terry's comments that the risk it faces on the 
widening spread.
    But, Chairman Giancarlo and what he is trying to propose is 
to take that down and get that--we know what we do really well 
here in the U.S. We understand what the Europeans do really 
well, and to take advantage of that on both sides of that so we 
have a very harmonious global financial system. And if we are 
not going to do that, as you have articulated and as other 
members of this panel today have articulated, there is a risk 
of an arms race. And I don't think as any market practitioner, 
we are looking for that. And if you think about it from a cost 
perspective, how are we making the markets safer? I mean, it is 
very difficult for either side of the aisle to say the market 
is safer at the end of the day because we are balkanizing it. I 
think that is going to be a challenge for all of us to look at.
    If I look at the Chairman's comments earlier about what we 
can encourage Congress to do is make sure not only at the 
regulatory side but also on the market operators that we are 
walking down a path to one that is comparable. And if we are 
there, then we can manage a global financial market pretty 
well.
    Mr. Austin Scott of Georgia. Would any of the rest of you 
like to comment on that in the last 50 seconds?
    Mr. Lukken. I would just mention risk management. I think 
the fear, as much as we can talk about costs and access, but 
during a crisis when a CCP is trying to preserve the safety and 
soundness of the system and you have two regulators telling you 
conflicting things, I think that is, to me, the scariest part 
of this. And we want to make sure that in this deference 
approach that it is clear who the principle regulator is and 
who CCP has to listen to so they are not conflicted during a 
time of crisis that could have significant market disruption.
    Mr. Austin Scott of Georgia. Thank you. Mr. Chairman, my 
time has expired, but it is pretty clear to me the extreme risk 
and cost that comes with not having the harmonization not just 
the U.S. markets, but the global markets and the end-users out 
there, and that, again, is very, as you know, damaging to the 
global economy.
    With that, I yield the remainder.
    The Chairman. I certainly agree with you, Ranking Member. 
That is an excellent comment.
    And now we will hear from Ms. Spanberger, please.
    Ms. Spanberger. Thank you, Mr. Chairman. Good afternoon to 
our witnesses.
    I represent central Virginia, home to farmers and producers 
across the 7th District of Virginia. We have touched on some of 
the risks to global markets that would be created in the event 
of a hard Brexit, and some of the steps that might be taken to 
mitigate those risks. But given the lack of certainty that we 
have about the future and what we could be facing, I would love 
to hear from anyone on the panel who would like to comment on 
this. What could be the possible outcomes and scenarios facing 
some of the folks in my district? I am concerned about the 
farmers who mitigate commodity price risk through future 
markets that trade on your exchanges, and other constituents 
from my district who may have pensions that are affected by 
these regulatory changes.
    Could you comment on how a soft Brexit might affect U.S. 
commodity futures and pensions, and how this would compare to 
the risks of a hard Brexit and what some of my constituents on 
an individual basis might face in the future?
    Mr. Lukken. This is something that FIA has taken a lead on, 
both in Europe and the United States, on preparing for Brexit. 
At the marketplace, we have worked with all these exchanges and 
buy-side members at the panel to make sure that either a hard 
Brexit or a soft Brexit, that there is transitional relief. In 
a hard Brexit, of course, there is no transition. But, we have 
received from the Europeans regulatory relief that will allow 
people to continue to access clearing in a hard Brexit 
scenario. We are hopeful that the two parties reach a soft 
Brexit and there is a long lead time that will allow us to 
transition to the new arrangement.
    But I think the biggest fear is just the political risk 
involved with this, things outside of our control. I think this 
industry has done a very good job of planning for either a hard 
or a soft Brexit; but, during a hard Brexit, they will cause 
market volatility most likely, and that volatility could impact 
prices, including agricultural prices.
    We have done about as much as we can to prepare for this, 
but there are certain things we just can't know, especially in 
a hard Brexit volatility situation.
    Mr. Duffy. I will say, Congresswoman, from our standpoint, 
CME has already set up operations outside of the UK so we are 
incurring duplicate costs in order to be in compliance with 
whatever happens, whether it is a soft Brexit or a hard one. 
But I think for the good people of Virginia, the good news is 
that they will have access to the U.S. clearing entities today 
completely uninterrupted to mitigate their risks as they 
continue to run their business.
    I don't see much of a risk to your constituents, 
thankfully, but the risk is the liquidity issue that I think we 
have all talked about, because there is a continuity of 
liquidity in the ecosystem that could have an impact on prices. 
But I am fairly confident that because of some of the moves 
that we have made and others, that it should be relatively not 
interrupted for your constituents.
    Ms. Spanberger. Okay, thank you.
    Would anyone else care to respond?
    Mr. Maguire. Thank you, Congresswoman. Yes, just briefly.
    Ms. Spanberger. Thank you.
    Mr. Maguire. We say we are hopeful of a soft Brexit. We are 
prepared for a hard Brexit, clearly. And to echo comments about 
this, there has been a lot of great work done by many across 
the industry to prepare for that.
    I think really the area to focus then is on EMIR 2.2, which 
has been referred to already, which is not specifically Brexit 
but is sort of interlinked with that.
    The outcome of, and I always raise the outcome of a lack of 
harmonization that has been referred to, is that markets 
fragment. The outcome of markets fragmenting is liquidity 
splits; therefore, supply goes down, demand stays the same, and 
in very simple first grade economics, if supply is down and 
demand is the same, the price increases.
    Certainly, in the financial products that we clear, I am 
not really clear on agriculture, but things that would affect 
pensions, loans, 401(k)s and mortgages and other things, if 
markets do fragment as a result of EMIR 2.2, we will see an 
impact to the end-user and the customers and the constituents 
using those financial products.
    Ms. Spanberger. Thank you very much. My time is starting to 
get close to running down, but I was wondering, Mr. Berger, if 
you could comment on the risks that uncleared swaps pose, and 
how well you expect the uncleared margin rules will work to 
mitigate this risk?
    Mr. Berger. Implementing new margin and collateral 
requirements for uncleared swaps was a key component of the G20 
reforms to the OTC derivatives markets, and we are in the 
process of phasing that in through a phased timeline that 
extends into 2020. And I think what the industry has 
experienced is the last phase includes the largest number of 
counterparties, so all those counterparties kind of getting 
ready and getting through the gate is proving to be a little 
bit of a challenge. Providing some additional time to phase-in 
the buy-side would be a welcome development.
    Ms. Spanberger. Thank you, and my time has expired. I yield 
back. Thank you.
    The Chairman. Mr. Crawford, you are recognized.
    Mr. Crawford. Thank you, Mr. Chairman. I appreciate you 
convening this hearing today.
    Mr. Duffy, I was at the 2012 hearing that Ranking Member 
Conaway mentioned. At that hearing, Patrick Pearson testified 
on behalf of the European Commission, and raised an important 
point about the danger of unenforceable regulations. He said: 
``If the European Union were to try and enforce its rules on 
all of its affiliates in the United States of America, we would 
be doing two things that are horribly wrong. We would be trying 
to enforce something we can't enforce in practice. Even worse, 
we would be giving the impression that we will be able to 
enforce it. And if something goes wrong, where will the plane 
land? Will it land here in the United States, or with a 
regulator in Europe? That is the thing that we are trying to 
avoid. We do not afford ourselves the luxury of putting in 
place a regulatory system that we know we cannot enforce.''
    Is the EU in danger of putting in place a regulatory system 
it can't enforce?
    Mr. Duffy. I am not so sure it is in danger of putting in 
something that it can't enforce. I think what it is doing, it 
is trying to put something in place to displace you and the 
rest of the United States and take over as the regulators.
    In today's global market, they probably could enforce it, 
and I think that is one of the main reasons why we are here 
today is because of the concern that U.S. entities are going to 
be regulated by European oversight, and it will displace the 
United States Congress and its own government agencies. We 
think that is the damaging part.
    Whether they could do it, or not, is something that is yet 
to be decided, because they haven't done it. I would not be 
able to pass judgment on that just yet.
    Mr. Crawford. Well, let me thank you for your candor. You 
indicated this. I do think there is a political dynamic here. I 
appreciate your candor on that subject, but in the bigger 
picture here, what we are talking about today, we have heard 
this recurring theme about liquidity and things of this nature, 
and quite frankly, what we are discussing here today, if we 
don't get it right, we are scaring a lot of liquidity out of 
the market.
    I have some concerns about my farmers back home who have 
over the years, particularly since Dodd-Frank, have been 
literally scared out of the market, and at the same time, we in 
this Committee have been told we need to move to a market-based 
system of agriculture support. And what is the market-based 
system? It would be obviously using the tools that CME offers. 
And yet, farmers are afraid to get in it. There is a liquidity 
problem which creates more volatility, which further 
exacerbates the problem for farmers that have become relegated 
to price takers.
    I don't think a local basis contract is a sufficient risk 
management tool. Do you?
    Mr. Duffy. Well, I don't know if it is not, but I will tell 
you that your comments are not on deaf ears. We have worked 
very, very hard with the community. That is our roots, is in 
agriculture, as you know.
    Mr. Crawford. Sure.
    Mr. Duffy. And we want to continue to make sure we provide 
a level playing field for people to manage their risk in the 
farm community. We are talking about feeding nine billion 
people by 2050, and the American farmer is a big part of that. 
But they are not going to be able to be a big part of that if 
they don't have good risk management tools to do so.
    We need to do more with less, as you know from your 
community, and we are in a very difficult situation. What I 
said at the outset, why in the world would this Congress or our 
government agencies sit back as somebody from another country 
is trying to take away the jurisdiction and create more 
uncertainty for the farmers of the United States versus the 
certainty they need? Because you know what, sometimes you can't 
blame them for not wanting to dip their toes in the water, 
because if you don't know the rules of the road, you are not 
going to drive.
    Mr. Crawford. Well, I will tell you, I think what we have 
to do in this Committee and then broadly in this Congress is we 
have to prepare ourselves to direct ag policy in that direction 
with regard to utilizing these free market tools. In the end, 
that is the only thing that is going to be left available to 
farmers. If we don't get that right now, if we scare that out 
of the market, what are we left with? And farmers are behind 
the eight-ball and have been for quite some time.
    And so, when we talk about this in the context of hedge 
funds and all the terms that we have heard used, sort of the 
industry vernacular, that creates even more discomfort, for 
lack of a better term, among the very folks that these markets 
were designed to help protect with regard to risk management 
strategies.
    As we move forward in that, I want to work with you on this 
because I think we most definitely need to be incentivizing 
farmers to use these risk management tools. And this is a much 
more relevant question here in this Committee to advocate for 
farmers. I have nothing against hedge funds. I think they are 
important. They are important parts of the market, but the very 
basis of this, the very basic level, if we get this wrong, we 
have done maybe irreparable damage to our farmers.
    I appreciate your work on this and look forward to working 
with you, going forward.
    Mr. Duffy. Thank you, sir. I completely agree with you. I 
will also say one thing. The sophistication of the American 
farmer on risk management is at an all-time high right now, and 
good for them. They are really doing an amazing job.
    Mr. Crawford. Thank you, and I yield back. Thank you, Mr. 
Chairman.
    The Chairman. Thank you, Mr. Crawford, and now, I will 
recognize the gentleman from New York, Mr. Maloney.
    Mr. Maloney. Thank you, Mr. Chairman. I apologize for 
arriving late. I want to thank the witnesses for being here on 
this important subject, and I wouldn't have missed the first 
part of the hearing if I hadn't been shepherding a bill for my 
Subcommittee on the Coast Guard through the Transportation and 
Infrastructure Committee this morning at a markup. But I 
appreciate the opportunity to be here. I appreciate the 
testimony you have all submitted.
    I am curious, Mr. Berger, from the buy-side perspective, 
and forgive me if some of these questions have been covered 
already. But from a buy-side perspective, could you elaborate 
on some of the harm, from your perspective, with the EU 
proposals?
    Mr. Berger. As I have noted in my testimony, MFA is a 
proponent of central clearing of derivatives. We think that 
central clearing mitigates systemic risk, increases investor 
protections, and provides for a more transparent and 
competitive marketplace.
    Our derivatives markets are global markets, and for buy-
side market participants, we want to have the ability to 
conduct our investment activities, our hedging activities in 
the largest possible liquidity pools with the most diversity of 
other participants. That ensures we can get the best pricing 
for the folks that we are investing on behalf of.
    That means that it is important for us to have access to 
CCPs, to clearinghouses, whether they are headquartered in 
Chicago, Atlanta, New York, London, Paris, or Frankfurt. And 
so, it is essential for our members that regulators work 
together to use the tools of substitutive compliance, 
deference, and equivalence to ensure that there is that access.
    Taking to the extreme the concern with the EMIR 2.2 
proposal is that it would require the relocation of certain 
clearing activities, exclusively to a certain jurisdiction, 
which would fragment that global liquidity pool that we all 
benefit from operating in.
    Mr. Maloney. I appreciate that.
    Mr. Duffy, CME is certainly systemically important in the 
U.S. ESMA seems to want to give you that designation in Europe. 
Why do you think they want to do that?
    Mr. Duffy. Well, as I said earlier, Congressman, I think it 
is more of a regulatory grab, for lack of a better term. I 
think they are looking to become the regulators for the world, 
and when they want to deem a systemically important institution 
like CME here in the United States and give us that same 
designation in the EU, and as I said earlier, roughly less than 
five percent of CME's products are euro-denominated. It is kind 
of a stretch to say that we are a threat to the European 
economy.
    There is nothing else other than they want to have one set 
of rules and they want the rest of the world to fit into their 
rules, and as we have heard earlier, they were testifying here 
in 2012 how that didn't work, but now all of a sudden, that is 
the model they want to apply. They want to deem us systemically 
important because of our designation here in the United States, 
and that has no bearing whatsoever with what CME brings to the 
European Union.
    Mr. Maloney. Right. As a proponent of central clearing 
believes it is one of the kind of wonders of the world, the 
fact is, is that some of us are worried about clearinghouse 
risk. What are the risks that we should be worried about today 
in terms of your business?
    Mr. Duffy. Well I mean, there is risk associated with 
everything we do, Congressman, as you well know. I think what 
we do is we are a neutral facilitator of risk management, so we 
do not participate in the markets----
    Mr. Maloney. Yes, I understand your business model, sir, 
and I understand the role you play. What are the risks?
    Mr. Duffy. Well, the risks are, if there is a major default 
by more than two of the biggest counterparties in the business. 
If you had two or three major banks go down at the same time, 
that would be a risk not only to CME, but to the entire 
financial system.
    Mr. Maloney. And what would happen in that scenario? What 
would----
    Mr. Duffy. I don't even want to make a comment of what I 
think could happen, sir, because I don't think it would be very 
pretty.
    Mr. Maloney. And would the European approach to this be 
justified by those risk scenarios, or are those likely to be 
outside of their purview?
    Mr. Duffy. Well, if there, and I am referring to U.S. 
entities. I am not referring to European entities.
    Mr. Maloney. Right.
    Mr. Duffy. I am referring to U.S., so I don't know what the 
European entities would have any say in that matter whatsoever.
    Mr. Maloney. It wouldn't support their position that there 
might be systemic risk here? Even if we were concerned about 
clearinghouse risk in the United States, would it support their 
position in designating you systemically important?
    Mr. Duffy. No.
    Mr. Maloney. Right. I yield back, Mr. Chairman. Thanks.
    The Chairman. Thank you very much, and now the gentleman 
from Illinois, Mr. Bost. Thank you.
    Mr. Bost. Thank you, Chairman.
    Mr. Duffy, when you closed out your testimony, you 
encouraged Congress and the CFTC to consider whether additional 
regulatory and statutory tools might be useful or necessary. As 
you know, the Committee right now, we are preparing to 
reauthorize the Commission again this year.
    That being said, as we do so, what remedies might--and I 
think this is what the Chairman asked earlier and I would like 
to get into that. What remedies might be effective to protect 
U.S. markets and participants from ill effects of the EU's 
overreach?
    Mr. Duffy. Thank you, sir, and I think when you look at the 
reauthorization process, you can definitely implement new tools 
that the CFTC can have in their tool chest, as was referred to 
by Mr. Edmonds. I think what the U.S. Congress can do is a lot 
more aggressive than just on reauthorization putting in things 
to the CFTC. I think the United States Congress, who does a lot 
with the European Union on a whole host of issues, should put 
this in their side of the ledger sheet, saying we need to make 
sure this is fixed. We have other big issues as it relates 
between the European Union and the United States. Let's deal 
with them, but we also have this issue, and we are not going to 
have duplicate regulation associated with our products by your 
people. We are not doing it to you, so don't do it to us.
    There is something that the Congress can take to the next 
level, and I think that is exactly why, and I applaud the 
Chairman for holding this hearing, because when the CFTC voted 
yesterday unanimously in a bipartisan way, and I am hearing 
nothing but bipartisan by this Committee, this is what the 
Congress, I am hopeful, will continue to do and send a very 
strong message to the European Union that we have a whole host 
of issues we have to deal with outside of financial services 
that we are dealing with you on, and that we are going to put 
financial services and regulation in that bucket, so make sure 
you get this accomplished.
    Mr. Bost. Thank you. I am letting you know that this 
Committee is really in agreement with you. We just want to make 
sure we are positioned correctly.
    Mr. Edmonds and Mr. Duffy and Mr. Maguire, now while all 
your operations, all of you operate clearinghouses that welcome 
participation from international clients, the mix of products 
that you clear is a bit substantially different. Can you 
describe those differences, as well as the differences in the 
regulatory and international coordination for these products so 
we know the difference?
    Mr. Edmonds. Well, I think if we were going to describe the 
differences in all of our products, we might need more than 
this hearing allows today.
    Mr. Bost. Probably more than 5 minutes, too, correct?
    Mr. Edmonds. A little more than 5 minutes. I think I would 
sum it up for you this way and I am happy to follow up with you 
offline, if greater detail is needed.
    From an ICE perspective, when we look around the globe, we 
are not going to tell anyone how to trade, where to trade, or 
what to trade at the end of the day. What we want is the 
opportunity to earn your business when you make a decision to 
trade. If you want to be in a certain regulatory jurisdiction, 
we provide services in that. Some people do, others don't. My 
colleagues up here who we compete with head-to-head on a daily 
basis, they have slightly different philosophies from time to 
time. But once you get at the philosophical level, you are 
going to pick your jurisdiction as a customer. You are going to 
understand exactly how you are going to manage the risk that is 
most important to you and the business that you are running at 
that time. We want to give you all the tools necessary to do it 
within that jurisdiction. Slightly different perspective than 
others have, both work, and that creates competition across the 
marketplace, and ultimately benefits the consumer at the end of 
the day for having that choice.
    Mr. Maguire. If I may embellish, Congressman.
    The LCH Group, I won't, again, give you the full plateau of 
the products we clear and the differences, but our focus is 
predominantly on interest rate swaps, which is really the 
preeminent service that we clear and are responsible for.
    The swaps market is very much a global market. It has 
active participants globally for many different jurisdictions, 
and these are tools, as I referred to earlier, that are used 
for real economy hedging purposes. That is the product that we 
have a material position in.
    And that product is traded globally and is overseen 
globally, so it is a slightly different fact pattern, different 
sort of slightly unique organization in that regard. We have 
oversight through direct registration in many different 
jurisdictions, where we have worked through that over many, 
many years. As I mentioned in my testimony, we have been a 
registered DCO here in the states for 18 years. That is proven 
through the test of time through Lehman Brothers, through MF 
Global, the coordination not just at an operating level, but 
between the regulatory supervisory authorities of CFTC and Bank 
of England have operated well there.
    We have a regulatory architecture that we sit within, which 
is maybe not the architecture you would apply for some of the 
futures markets. It is very much a global OTC market. I think 
there is definitely a case here for different regulatory 
architectures for different types of markets and different 
types of products. That would be my main contribution.
    Mr. Duffy. If I may, sir? CME Group is the largest exchange 
in the world, and it lists all the major asset classes that 
touch everyone's lives on a daily basis. To give you an example 
of how important this is, CME Group had 44 percent of the 
notional value of trade of the U.S. Treasury market 5 years 
ago. Today, CME has 118 percent of the notional value of trade 
of the U.S. debt market.
    What does that mean? When you have inverted rates going on 
right now, when you have the rates that are happening in 
Germany and other parts of Europe, people are looking to invest 
in certain types of issuance, such as U.S. debt products. They 
are using CME to manage that risk. That is a very big deal for 
European participants that participate in U.S. markets, which 
as you know, helps benefit us by running our economy, by 
selling our debt to them as well.
    Mr. Bost. I want to just say thank you to all of you. My 
time has expired. Thank you, Mr. Chairman. I yield back.
    The Chairman. Thank you, and now the gentleman from Kansas, 
Mr. Marshall.
    Mr. Marshall. Thank you so much, Mr. Chairman. I think for 
my first question I am going to go with Mr. Maguire.
    Mr. Maguire, my farmers, my cattlemen, pork producers back 
home use the derivatives market a lot, and I have talked to 
hundreds of them. They say it is not broken. It is working 
fine. This Committee and many of us individuals have tried to 
understand the swaps and derivatives market, and I think it is 
going along great.
    When I study big picture analyses, I like to understand the 
culture of what is happening. I am afraid the culture with the 
European Union is going the wrong direction. I feel like maybe 
they are being a bully. They won't let us do trade with 
agriculture in the next trade agreement, and this is another 
example, it feels like, of them pushing us around and taking 
advantage of Brexit.
    Tell me what is going on with the cultural relationship 
with United States and the European Union through your eyes 
sitting there in London?
    Mr. Maguire. This could take longer than 4 minutes.
    We have a unique position in the UK. We are exiting. We are 
now going to become a third-country, much the same as the U.S. 
I think it sort of really echoes some of the points that have 
been raised already in that this seems to be an increasing--I 
will use that phrase again, I don't use it lightly--that arms 
race where there are different incentives or different 
positions being taken maybe than there were historically.
    Our position is that I think you need to take the 
temperature down. I think there were views historically that 
may be in the first instance when we had the legislation after 
the crisis in the G20 committee in 2009, Dodd-Frank went first, 
that sort of--the pendulum shifted one way and I think there is 
a feeling now that Europe is shifting the pendulum the other 
way. I think you need to bring things back to more of an 
equilibrium where actually in the eventuality of this arms race 
continues to escalate, what we are going to end up with is 
fragmentation, which is going to be a bad impact for all.
    There is really a need to take the temperature down. It is 
hard for me to say as I am not involved in the U.S.-EU 
negotiations and discussions directly. It would be wrong for me 
to comment, but it does strike me that we need to sort of 
deescalate rather than continue to escalate for the benefit of 
the end-users that are involved here.
    Mr. Marshall. Okay. Next question, as the dollar, the euro, 
and the British pound is, they fluctuate in values. Does that 
give anybody any heartburn as we make this transition, going 
forward? Maybe I am worried about nothing.
    Mr. Edmonds. There are always macroeconomic events at the 
end of the day that impact volatility as it relates to currency 
markets in any one of those sovereign nations that you make 
reference to in your question. I don't know that anything and 
what we are doing here is any different than what you see on a 
daily basis. There could be individuals that have an opinion 
and choose to express that opinion through risk management 
tools and trading the products that any of us offer at that 
moment in time, based on their opinion of where our market is 
heading or isn't. But that is a moment in time decision they 
will make and they will either profit from that or they will 
lose.
    Mr. Marshall. All right. I will go to Mr. Lukken next.
    If a CCP is faced with two regulators that are unwilling to 
defer to one another, is it possible that a foreign regulator, 
such as in the European Union, could impose requirements not 
for safety and soundness, but instead for competitive reasons? 
What does that look like? How would they take advantage of us 
on this, and how would it impact my farmers back home?
    Mr. Lukken. Well, that is what we are really trying to 
avoid here is that type of duplicative situation. There have 
been situations in the past where two competing regulators have 
been talking to clearinghouses--LCH has had examples of this in 
the past--during systemic events, and thankfully during those 
times one regulator deferred to the other and they were allowed 
to do what was in the best interest of the clearinghouse.
    These are the things that regulators need to work out now. 
This is a level, it comes down to as much as we can paper this 
with agreements, it comes down to trust. And for some reason 
right now, there is a lack of trust between the Europeans and 
the United States that we are trying to figure out how do we 
get back to that level of cooperation that has existed for a 
long period of time between our two jurisdictions.
    Our hope is, and EMIR has the capability of, the Europeans 
recognizing the 2016 equivalence agreement and agreeing to 
defer to U.S. regulation. And I hope they take that common-
sense approach so that we avoid the situation that you are 
talking about.
    Mr. Marshall. Mr. Duffy, I just have a second left.
    CME has been around a while, a great reputation. How do you 
see this culturally, is this something new or just another 
chapter of this relationship with the EU?
    Mr. Duffy. I think it is a bit of another chapter, and we 
have been around 175 years, so you are right, a long time.
    I really believe people want to do the right thing, sir, to 
be honest with you, and I think people understand that there is 
a regulatory regime and it is not a one-size-fits-all, and we 
can all get along together and operate in a global marketplace, 
because that is truly what it is today. It is not a centric 
marketplace. It has grown exponentially, and it has benefitted 
everybody. I think when cooler heads prevail so the good people 
that you represent will be able to sell their products 
internationally without somebody maybe manipulating their 
currency to avoid a tariff, things of that nature. Those are 
all big, big issues that this Congress needs to address, but I 
don't believe that the European Union is doing anything other 
than when you look at what happened in 2010 with Dodd-Frank, 
when you create new legislation, the pendulum always goes to a 
certain way. And it did it in 2003 with Sarbanes-Oxley. It 
doesn't make it wrong, because you can always walk it back. It 
is hard to walk it forward.
    What is going on right now is you are seeing the same thing 
happening in Europe, and I think they are going for a little 
bit of an overreach right now. And I think just alone with 
Congress being involved, you can walk them back to where they 
need to be.
    Mr. Marshall. Great insight. Thank you.
    Mr. Chairman, I yield back.
    The Chairman. Thank you, and now we will hear from the 
gentleman from Florida, Mr. Dunn.
    Mr. Dunn. Thank you very much, Mr. Chairman.
    I think we all see the problems in the risks in the 
proposed EU regulations. I want to highlight several of those 
problems.
    Mr. Duffy, the EMIR 2.2 proposal does not provide ESMA with 
oversight over European clearinghouses, rather, it defers 
oversight to what they recognize as competent national 
regulators in the EU member states. But that does make ESMA in 
the space of clearinghouse oversight an international regulator 
focus really only on the third-country clearinghouses. And 
while that is strange enough, the proposal also envisions fees 
on these third-country CCPs would cover the entire cost of this 
activity. It means the CCP in the United States, for example, 
would pay for the privilege of being regulated by a foreign 
entity and pay handsomely indeed.
    I believe that that is an egregiously bad infringement on 
U.S. sovereignty, and you said earlier in your testimony, a 
crime under U.S. law. If we are honest with ourselves, I think 
this entire regulatory exercise is an attempt to punish the UK 
for Brexit and to ensure that the punishment is so severe that 
subsequent members will never attempt to leave the Union. 
Because ESMA's proposal caps the fees on Tier 1 CCPs and 
divides the cost of ESMA's clearinghouse budget between all the 
Tier 2s, and they designate who is a Tier 2, does that not seem 
to incentivize them to designate more CCPs as Tier 2 in order 
to expand their staff, build their regulatory footprint, a sin 
we frequently see in bureaucracies?
    Mr. Duffy. Spot on, sir. I mean, that's all I can say is 
spot on.
    When you are talking about a proposal that doesn't even 
charge the local entities for their own regulatory cost and 
they want other parts of the world to pay for it for them that 
are not even systemically important to that part of the Union 
in order to do business, it doesn't pass the ha-ha test, as 
they say in the business. I think you are spot on with the fee 
issue, and it is really a shame what the European Union is 
trying to do right now.
    Mr. Dunn. Thank you very much.
    Mr. Lukken, your testimony contains a chart detailing the 
cross-border activity that occurs at several of the FIA's 
membership. If I am reading correctly, it looks like the Eurex 
has well over 50 percent of its transactions originating 
outside its home jurisdiction.
    I would like a sense from you, either now or in writing 
later, of what those percentages represent in a dollar value, 
and what percent of the overall business in the European CCPs 
is dollar-denominated derivatives and futures originate in the 
United States. Also, if we are threatening the concept of 
equivalence between the United States and Europe, what does 
that impact look like on European exchanges? And I ask that 
because the U.S. is unlikely to cede regulatory authority to, 
or sovereignty to, the EU, and in that case, are the EU 
regulators really willing to walk away entirely from any access 
to U.S. derivatives in the future? Are they willing to give up 
all access to American markets for swaps and hedges? That looks 
like that is what is on the table.
    Mr. Lukken. No, it is exactly what we are trying to portray 
in that chart is all of these global exchanges require, in 
order to have the proper liquidity, to serve domestic markets, 
they need foreign participation. And Eurex is one example where 
they get a significant amount of their trades from outside of 
Germany. A lot of it may be coming from the UK, a lot of it is 
coming from the United States. But again, if any of these 
proposals end up causing a loss of access to either Europe or 
the United States, that harms everybody. And that is what we 
are trying to say is we really need to be sensible about this. 
Open markets benefit everybody. All boats rise.
    Mr. Dunn. It hurts our ability to manage the risk, right?
    Mr. Lukken. Absolutely, absolutely.
    Mr. Dunn. My time is growing short, but I want to say that 
I--it seems to me like there are no winners in failing to 
provide equivalence where equivalence is clearly due. I believe 
that the U.S. should us--and the Congress should use any 
leverage necessary to ensure that we do not get stuck with a 
raw deal.
    In the meantime, I think Congress should request or even 
demand that the European regulators come before Congress and 
explain to us how this is going to work, and why we should 
allow this regulatory invasion of the United States.
    And with that, Mr. Chairman, I yield back.
    The Chairman. Well certainly we appreciate that, and we 
will move forthrightly on that. I agree with you. As a matter 
of fact, the Ranking Member and I were just talking about the 
next steps we need to take. But I assure you, there will be a 
very strong and adequate response for this. We are not going to 
put and make our financial service industry be turned into 
second class citizens on the world financial stage. You can bet 
that. Thank you, sir.
    Now we will hear from Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman, and I will have some 
questions for Mr. Lukken.
    I think picking up thematically on the lines of questioning 
from Mr. Marshall and Mr. Dunn, and it seems as I have heard 
everybody speak today, it seems as though we have a shared 
understanding of the value of the 2016 equivalence agreement. 
It seems we have a shared concern about EU efforts to pull back 
or perhaps complicate that system of regulatory deference. And 
I am surprised by that, because it seems as though the 
fundamental landscape is the same as it was in 2016, save for 
one thing, and that is a pretty substantial member default, and 
I think a concerning response at a European CCP regulated under 
the EMIR framework.
    My first question for you, Mr. Lukken, FIA has a wide cross 
section of market participants, including a number in Europe. 
What were your thoughts or the thoughts of your company when 
you saw this pretty substantial failure?
    Mr. Lukken. Well, I think there was significant concern 
among the entire industry, and a lot of soul searching even 
among panelists up here on what went wrong during the NASDAQ 
default. And as you mentioned, they appeared to be EMIR 
compliant, that entity, and they are owned by the NASDAQ 
Corporation, the holding company here in the United States. And 
we did a review of that default and have recommendations. 
NASDAQ, to its credit, has also done an internal--hired outside 
consultants to help it identify what went wrong.
    Even though you can be in regulatory compliance, that 
doesn't absolve you from active risk management. I think these 
clearinghouses can talk about this. Even though on paper you 
may be compliant, there is an active daily risk management that 
has to be carefully considered, and for whatever reason, the 
NASDAQ had, especially as it gained new members, individual 
members of the clearinghouse, may have let in more risk than 
was appropriate. It was something concerning to us.
    Mr. Johnson. And I certainly understand that it is hard to 
be a perfect safety and soundness regulator, right? I mean, 
there is risk inherent in the system. But as we said here today 
talking about a potential pretty substantial shift of that 
safety and soundness being evaluated in this country to being 
evaluated in the EU, I have to be left with the question is 
there any reason to believe they are any good at it? I mean, if 
they miss the warning signs that led up to this again, a pretty 
decent sized failure, should we doubt the prudence of the 
European regulators?
    Mr. Lukken. I think it is a very good question. Here is 
ESMA deferring to the national competent authority of the 
NASDAQ of Sweden in this situation, but not directly regulating 
that CCP. That is the way the EU law is written, but I think it 
does raise a question that if you are not regulating your own 
CCPs, why should you be regulating outside CCPs? That is the 
way the law is written, but I do think fundamentally, 
philosophically it raises a good concern and question.
    Mr. Johnson. Thank goodness we didn't have a serious 
contagion problem in the wake of that. Were there components or 
fact sets within this environment that kept the ripple impact 
to the, I don't want to call it modest, but to the non-systemic 
level that we had?
    Mr. Lukken. Well, I would say that clearing worked, and one 
of the reasons that G20 recommended clearing as a safety net 
for our markets is it has several layers of its waterfall of 
clearinghouses that ensure that a default does not have 
contagion risk.
    Unfortunately, it got pretty far down into the waterfall, 
including into the guarantee fund. It took down about \2/3\ of 
the guarantee fund. But it quickly recovered and members put 
more money into the guarantee fund and clearing worked. That 
doesn't mean we shouldn't use that example, though, to see what 
the lessons learned might be, and we are in the midst of doing 
that.
    Mr. Johnson. My understanding is that it was in the third 
tier of that waterfall you described. Had the entirety of that 
default fund been exhausted, is there a fourth level to the 
waterfall?
    Mr. Lukken. CCPs have the ability to assess clearing 
members, again, to replenish the guarantee fund, and certainly, 
that would have occurred. This was not a major size clearing 
organization like the ones here, and I think the clearing 
members would have done so.
    But still, I mean, if you extrapolate that to larger 
clearinghouses, it is problematic and we want to make sure that 
whatever problems existed there that we, as an industry, try to 
address those things.
    Mr. Johnson. Particularly if you have a couple of problems 
happen during the same time period, you start to exhaust these 
management mechanisms pretty quickly.
    Thank you very much, Mr. Lukken. Thank you very much, Mr. 
Chairman. I yield back.
    The Chairman. Now we will hear from the gentleman from 
Indiana, Mr. Baird, and I might mention, in case any of you 
don't know, that the Ranking Member and I have decided we will 
have just a short second round so we can come back and put some 
final touches on this. If you want to hang around and have a 
second series, you certainly can.
    Mr. Baird, you are recognized.
    Mr. Baird. Thank you, Mr. Chairman. I certainly appreciate 
the comments from some of my colleagues about agriculture and 
the livestock industry, and farmers and ranchers. Mr. Duffy, I 
really appreciate you recognizing the importance of agriculture 
in the CME.
    But my question, Mr. Edmonds, deals with some background 
for you. They held a hearing here on the clearinghouse recovery 
and resolution last year. One thing we learned is that the 
certainty about the rights and obligations of affected parties 
and clarity about who is in control is essential to managing 
the crisis and restoring order. In your testimony, you briefly 
discussed the challenges of overlapping regulators during a 
time of crisis. While no one expects a clearinghouse failure, 
if there was a failure at a non-European Tier 2 CCP that was 
not extended substitute compliance, is it clear exactly which 
regulator would be in charge?
    Mr. Edmonds. As we answer the question today, I think it is 
difficult for us to say with absolute certainty who would be in 
charge at that point in time. As Mr. Duffy said, if it were CME 
Group that found itself in that, there would be problems with 
the U.S. law here. I mean, certainly we have clearinghouse 
operations around the world that we would also have local and 
national regulators at the time having that concern at that 
moment wanting to weigh in.
    The one word that keeps coming up, and many of us have 
touched on it here, really at the epicenter of the issue is 
whether or not we are creating certainty. And the less 
certainty we have or the more uncertainty we create, that is 
where you begin to see all of the questions and the waterfall 
of what you might determine bad things happening. Whether it is 
inside the clearinghouse, there is a lack of certainty when 
these things take place. Whether it is in the market, the lack 
of certainty creates volatility. Sometimes that is good and it 
means that people are on the right side of that. Other times if 
it is overwhelming, like we saw in the financial crisis, of the 
uncertainty, it is really bad for national economic policy or 
international economic policy at the time.
    I can't answer your question with absolute certainty if we 
would at that time of stress. I think, as Mr. Lukken said, we 
all want to avoid that. We are all committed to finding ways 
through that, and if we weren't, we wouldn't be sitting here 
today and wouldn't be taking the stances we do on the 
international stage and attempt to drive to that certainty. The 
worst thing that we can do is wake up and have a customer call 
us on any one of our venues and say at a given moment in time, 
what is the answer to this question and not be able to give 
them a complete answer. And right now, I think as a whole until 
some of the arms race as Mr. Maguire has articulated settles a 
bit, we are faced with that issue of having an incomplete 
answer.
    Mr. Baird. Thank you. Anyone else care to comment on that 
question?
    Okay. My next question goes to Mr. Maguire. You are 
registered with the CFTC, and the same as any U.S.-based 
clearinghouse, and yet you are domiciled in the United Kingdom. 
Can you describe to me how that relationship between LCH, the 
CFTC, and the UK regulators works?
    Mr. Maguire. Sure. Thank you for the question, Congressman.
    I think the way I would describe it is simply it works 
well. I think the relationships are, you need to think things 
through, let's say, sunny day scenarios and rainy day 
scenarios, and the sunny days business as usual, and there are 
no major defaults or crises, and the rainy days are crises or 
defaults such as Lehman or MF Global. And over the course of 18 
years with those events, and also with the enactment of Dodd-
Frank and European regulation and other regulation around the 
globe, we have always found a way between LCH with the Bank of 
England, who is a primary regulator in the UK, and the CFTC, 
who have oversight as well, to navigate through any of those 
legal or regulatory texts, and always arrived at a sensible 
outcome.
    That has enabled us to be 100 percent compliant with all of 
the DCO core principles here in the U.S. We are fully compliant 
with the--and our clients benefit from the client asset 
protection rules and Part 190 Bankruptcy Code here in the U.S. 
We hold assets on shore.
    It is a way to show that it is possible to navigate where 
you are systemically important to a jurisdiction, which we 
clearly are. In this case, it is possible to achieve it.
    But, the main point I would say is that the key to that is 
trust. The key to that is cooperation. The key to that is 
deference between the regulators and constant communication and 
transparency.
    Mr. Baird. Thank you, and I am running out of time, so I 
yield back, Mr. Chairman.
    The Chairman. Thank you very much.
    As I mentioned, the Ranking Member and I have a few more 
questions, and you may as well, Mr. Baird.
    But, let me get to the heart of the matter, and the heart 
of the matter is, quite honestly, we have a problem here. There 
is no getting around it. I think in each of your testimonies, 
you pointed at that.
    We want to try to find out what do we do about it? And 
judging from what I am hearing and what we have heard, I can 
assure you that we in this Committee, myself and Ranking 
Member, are prepared to move on some action to very quickly and 
decisively get a message to the European Union in a proper way. 
And second, we need to devise a way in which we can use our 
leverage to respond to this. We are the strongest, most 
powerful, and fairest economy and financial system in the 
world, and the European Union is really messing with the wrong 
tiger here. And we need to get that message out, because if we 
don't--for example, this whole EMIR situation is wrong in so 
many ways.
    First of all, setting up a way in which you all become or 
we become what is affectionately called third countries. What 
does all that mean? Why? And then Great Britain is thrown in 
with that, and between the United States and Great Britain, we 
are the two largest, most significant financial systems. And 
they are operating in a very haphazard and dangerous way to 
themselves. We need to get that out.
    We also need to examine how we offer some form of 
retaliation. Do we pull back our market to them? We have the 
largest, so we have to think very seriously how we use our 
leverage. I hope we don't have to go there, but we have to send 
that message.
    What I want to do with this period is to hear from each of 
you in terms of what specifically you all would recommend that 
we here in Congress do, and the incubator of this action will 
be our Subcommittee, because this is our territory. We have an 
excellent staff. The full bipartisanship of this Committee is 
ready to spring into action quickly and decisively to do 
something. What that something is, we need to discuss and come 
to some decision very quickly on to what it is we need to do to 
make sure that our financial system, our market participants 
are not put at a disadvantage on the world stage at this time, 
or at any time.
    That is what I want to try to get to at this point, and may 
I please start with you, Mr. Duffy, on what it is you think we 
can do to address this problem with the European Union right 
now?
    Mr. Duffy. I appreciate that, Mr. Chairman, and as we have 
been talking about, I think you have already done a lot more 
than anybody else has done historically, just by holding this 
hearing and giving the time and attention it so deserves. That 
is greatly appreciated, and it is has been so bipartisan, as I 
said earlier, that it is a very powerful message when the 
United States Congress gets involved, not just the regulators. 
I am very much appreciative of that, and I know the industry is 
as well.
    I want to go back to what one of your colleagues said 
earlier, that the UK is the bully. I don't believe the UK is 
the bully, nor is Mr. Maguire. I think Mr. Maguire and the UK 
are in the same situation as the U.S. is right now. The EU is 
trying to show their dominance throughout this process on the 
Brexit, and that is part of what this hearing is about, and 
they are using the U.S. as part of their leverage against the 
UK. I don't believe they are the bully. As you said earlier, I 
think they are a very powerful economy and they are going to 
maintain that.
    What Mr. Lukken said earlier is critically important, and I 
hope to remind everybody of the statistics he gave: 70 percent 
of the German bond is traded outside of Germany, and if you 
really want to get to the heart of the matter, you get the 
German authorities in here and ask them what they think they 
are doing with their European counterparts in order to drive 
this regulation. Because if you take the liquidity out of the 
German bond, that will cripple their economy to a degree, and 
if that liquidity going into that bond is coming out of the UK 
and the U.S., which I believe a good chunk is coming out of the 
U.S., and you limit that, that would be a very powerful 
statement to limit that type of activity.
    Now is that a good thing? Absolutely not, but if they are 
going to go down this path, we have to also understand that we 
can just as well by going through the Part 30 process.
    The Chairman. Thank you very much.
    Mr. Edmonds?
    Mr. Edmonds. I think you have a multitude of options and 
probably know, certainly better than I do, and maybe better 
than the rest of us on the panel, of all the levers you have to 
pull. I am going to talk to you a little bit about when you 
pull those levers, whatever, how they are perceived on the 
other side.
    You have heard us all talk about certainty and anything 
that you can do to increase certainty, I think, is an absolute 
must, and you should find great favor in it when you are 
drafting whatever response you deem is appropriate and 
proportionate to make sure that it is promoting certainty.
    I think you should promote equivalence. We have taken a 
lead on this as a country. I don't know on the regulatory side; 
I am not exactly sure of the benefit of us going in a different 
direction than the leadership we have shown to date----
    The Chairman. You did say equivalence?
    Mr. Edmonds. Right. That is correct.
    If we are providing a framework and supporting other 
frameworks that provide that level of deference through the 
equivalence process, and we are providing certainty along the 
way, I think what you are doing is to the benefit for the 
marketplace as a whole to be able to operate within a set of 
rules in order to manage the businesses they have, no matter 
where they are, from a hedge fund down to a farmer, and 
everyone in between, that you want to get to that have a 
crucial function to play within our market system as a whole.
    The Chairman. Yes.
    Mr. Edmonds. And then if you don't get what you are looking 
for there, you have to be prepared to act. And those are the 
levers that you are going to know better than we are exactly 
what is best. This is not a binary decision that you are going 
to make, whichever one. There are going to be other actions and 
reactions to whatever you decide to do, and I think you have to 
look at that holistically and you have a much better point of 
view or vision of that than we are going to be able to see. 
Because we are going to take your action and we are going to 
have to react to it, whatever that is. And we are going to have 
change parts of our business, whether it is in London, whether 
it is in Chicago, or anywhere else here in the United States, 
in order to continue to provide for our customers. That is our 
job at the end of the day is to get through all of it at the 
end of the day and give them some level that they can continue 
to manage their business within the confines of that regulatory 
framework.
    Just to reiterate, the more that you can promote 
equivalence, the more you can promote certainty from that 
equivalence, and being that leader by example, I think we get 
to a better place at the end of the day.
    The Chairman. All right.
    Mr. Maguire, yes?
    Mr. Maguire. Thank you, Chairman. I want to make two 
remarks to your request.
    In the first, I just point to the long established and well 
working relationship between both the U.S. and the UK financial 
systems markets, and I would hold those up as the epitome of 
something that works and works well, and it works well into, 
repeating what I said earlier, sunny days and rainy days, good 
times and bad times. I think it is important to lean on that 
when we talk about how equivalence and deference can work 
around the globe from financial markets. We have a model in 
place between the UK authorities and the U.S. authorities for 
overseeing the firm that I lead. It works well, and I think 
that should be held up as a model and I think it should be used 
as an artifact in explaining how things could and should work, 
and do work.
    I think the second remark I would make is that when we talk 
around Tier 2, which has been referred to, slight technical 
point in EMIR 2.2, right now things are in, let's say, an 
ambiguous state. There is a full range of tools available to 
the European authorities in the bucket of Tier 2, and it is 
really expected to be a continuum of either Tier 2 heavy 
oversight versus Tier 2 light oversight. But what is lacking 
and what makes us all nervous and gives us that lack of 
certainty and clarity that Mr. Edmonds refers to is there is no 
definition or precision around that.
    The sooner there is more precision and definition of what 
Tier 2 means, what it means for each firm, what kind of 
oversight that that could potentially mean, I think that could 
very much help bring the temperature down here on how things 
are looked at from the third countries.
    But right now, absent that clarity and certainty, it is 
difficult, and a key point being that that determination of 
level 2 tiering is likely to commence towards the back end of 
this year and into Q1 2020. The time, I would say, is opportune 
to request that level of specificity and definition.
    The Chairman. Okay, thank you.
    Mr. Lukken?
    Mr. Lukken. Thank you, Mr. Chairman.
    I think the most powerful tool that this Committee has at 
the moment is its oversight function; this hearing being a part 
of that. There is an open comment period right now in Europe on 
EMIR 2.2. I would be sending a letter to the ESMA agency and 
with the record of this hearing as part of that comment period, 
so they understand what the view of Congress is and the view of 
the United States might be on this topic. You certainly have 
the ability through your oversight to make sure that it is 
clear that there will be collateral damage as a result of this 
EMIR 2.2 if the United States is not recognized as part of that 
regulation.
    I do want to make clear though on one of the issues that 
the Europeans have raised with us when we see them is that the 
CFTC over time, and this dates back to Dodd-Frank, has laws and 
regulations in place that regulate and require the registration 
of foreign CCPs.
    Now, the current Chairman has said he wants to walk that 
back and he wants to propose something very soon that would put 
in place a recognition regime like we are talking about. 
Because of the transition to the new Chairman, that has not 
occurred yet. But I would give this new Chairman some room, 
some breathing room to try to negotiate with the Europeans to 
get them to make the right choice.
    It reminds me of my parents. They would tell me you have 
two choices, choice one and the right choice. This Committee 
can be very effective at making sure that they are making the 
right choice on this and allowing the new Chairman to come in 
and help us to get us to that place.
    The Chairman. Now, you said a letter. What would be the 
most emphatic points that we need to make within that letter, 
and I think you also mentioned that we would send them this 
hearing in and of itself.
    Mr. Lukken. This is part of the public record, this hearing 
here, and our testimony is part of the public record. They are 
in the midst of a consultation, and just like any public 
record, this is an important factor that should be a part of 
their determination.
    Whatever cover letter you would like to summarize the 
hearing here, and your views that includes the entire record of 
this hearing, I think, would be important.
    The Chairman. And you are saying within the European Union, 
who specifically, you mentioned the----
    Mr. Lukken. ESMA is the agency that has an open 
consultation period right now for this regulation.
    The Chairman. All right. Good. Thank you.
    Yes, Mr. Berger?
    Mr. Berger. Thank you.
    The U.S. has a robust framework for the regulation and 
supervision of our clearinghouses, and that is what helps make 
the U.S. markets the most deep liquid and efficient markets in 
the world. And as market participants who are active on all the 
clearinghouses that are represented here, MFA members don't 
trust that blindly. We remain vigilant. We care about the 
governance and risk management practices of all CCPs that we 
participate on, and sometimes comment on those to even enhance 
them further.
    To pick up on the points that Mr. Lukken just made, where 
we stand right now in the European process is they are 
evaluating how they approach two decisions. One is how they 
evaluate which foreign or non-EU CCPs they deem to be 
systemically important, and then if they make that decision 
that they are systemically important or Tier 2 CCP, then the 
next step is how do they evaluate whether the framework in that 
other jurisdiction is comparable. They call it comparable 
compliance.
    I suspect everyone up here will be weighing in with advice 
on how they take those next steps in the process. EMIR 2.2 is 
now a piece of legislation, but the implementing rules are 
still under development. I still think there is ample 
opportunity for our voices to be heard, and your leadership and 
bringing attention to these important points will, I think, 
help amplify the voices that are providing advice to ESMA as 
they consider the next steps here.
    The Chairman. Thank you, and now we will recognize and hear 
from the Ranking Member, Mr. Scott.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    I want to go back again to some of the statements I made 
earlier.
    We share common interests and common values, and we need 
each other. And while we need each other now for economic 
growth, we will need each other more in the case of a financial 
crisis in any one of the countries or regions that we are 
talking about.
    The best path forward to me is very clear, to take a couple 
of steps back. Let's take a look at what Commissioner Giancarlo 
or the new Commissioner of the CFTC would put out, and 
hopefully, no additional steps would be necessary from this 
Committee to achieve global harmonization.
    But with that said, while I prefer to take a couple of 
steps back and end up with that harmonization from the 
regulatory agencies, if necessary, I stand prepared to move 
forward with my colleague, Chairman Scott, as I believe the 
full Agriculture Committee would be, if necessary, to make sure 
that we achieve that global harmonization. But again, I do 
believe the best path forward is to take a--everybody take a 
couple steps back and recognize that we need each other.
    We have talked about, and this gets to my question, we have 
talked about the transactions, if you will, but one of the 
things we haven't talked about much is the technology. And this 
question is for you, Mr. Lukken, because you mentioned it 
specifically with regard to FinTech and the R&D capabilities. 
You talked about the emergence of the importance of the 
emerging financial technology. You talked a little bit about 
legislation that this Committee, including myself, has been 
working on.
    Can you speak to why it is so important that U.S. 
regulators, and quite honestly, global regulators are able to 
stay abreast of the latest financial technologies and keep up 
with the capabilities, both for the U.S. and for foreign 
regulators?
    Mr. Lukken. FIA as a trade association oftentimes have 
conferences, and we have oftentimes new innovators--we call it 
Innovators Pavilion--where we ask for the latest technology 
being developed. Oftentimes, it is on the private-sector 
trading side, but oftentimes it is on the reg tech side. It is 
giving us technology on how you surveil the markets, making 
sure that traders aren't trading ahead or doing illegal 
activity, or if risk is building up in the system. All these 
CCPs around this table have private companies that are helping 
them to manage the risk of their exchanges.
    You have shown some leadership on this and have introduced 
some legislation that would allow the CFTC to partner with 
private-sector financial firms to allow them to utilize some of 
this technology in a fair way, in a transparent way, currently, 
the CFTC is not allowed because this would be an in-private 
inurement to the CFTC, and governments can't receive gifts. 
This would be an exception.
    Right now, the Defense Department allows this sort of 
partnership arrangement. A lot of the EU and the UK allows this 
type of partnership arrangement. As a former Commissioner and 
Chairman of the CFTC, having access to that kind of technology 
would be tremendous in a way that will better the markets, 
further the public interest.
    We as an agency, or we as the FIA, certainly support this 
initiative that you put forward.
    Mr. Austin Scott of Georgia. And let me say as one of the 
authors of the legislation, we recognize the word gift can be 
misconstrued. If there is a way to change that definition to 
relieve any concerns that some individual is actually receiving 
something of monetary value, because that is clearly not the 
intention of the legislation, then we are happy to work to find 
the definitions that resolve any of those questions. But the 
goal is simply to allow our regulators to see and work within 
that technology so that they understand what is actually 
happening in the technological side of the market and the 
trades.
    Thank you for your comments. Mr. Chairman, thank you for 
your leadership on this. As I said, I think the best path 
forward is a step back, but if necessary, I am perfectly 
willing to work with you to push ahead with legislation.
    With that, I yield the remainder of my time.
    The Chairman. Thank you very much, Ranking Member. Oh, yes, 
sir, Mr. Duffy.
    Mr. Duffy. I am so sorry, but may I make a comment?
    The Chairman. Sure.
    Mr. Duffy. I would be remiss if I walked out of here 
without making this comment, because I really feel passionate 
about this.
    I understand what the Ranking Member said about taking a 
step back, and I understand what Mr. Lukken said about giving 
the new Chairman an opportunity to deal with this issue. The 
new Chairman has a lot on his plate, other than just dealing 
with equivalence by running this government agency. I think 
having the confidence of the United States Congress working 
with him is a very powerful tool that he would embrace, and I 
don't think he would shun it away.
    I also want to talk a little bit about the timing. As you 
know, the EMIR 2.2 has already been agreed upon by the European 
Union. Also, I think it would be critically important for this 
Congress to send a very strong message that you do not move 
forward any further until our answers have been addressed and 
our concerns have been recognized. Because I think when Mr. 
Maguire referenced here, too, under EMIR 2.0, I don't know if 
everybody realizes what that means. They are talking about 
having the ability to set margins on products here in the 
United States. You tell me what they know about the livestock 
market that your colleagues talked about. You tell me what they 
know about the risk management of these products and they are 
going to set the margins that won't put the U.S. at risk.
    They are also going to charge fees, as we discussed 
earlier, to fund their own agencies. They are also going to 
have the ability to fine CCPs up to 30 percent of their revenue 
unilaterally, whatever they want to do. They also get to decide 
the governance of these entities, which is in direct conflict 
with Delaware law, as public companies. And as far as it goes 
with the regulation by the U.S. on the EU or on the UK, we do 
not regulate their base futures and options business. What Mr. 
Lukken was referring to is swaps. We have a very light touch on 
anything that relates to futures and options. They want to 
regulate our entire business, not just what our government is 
doing with them right now on the swap side.
    There are some major differences here, and I applaud you 
again, Mr. Chairman and this Committee, for taking this up. 
Thank you for allowing me the time.
    The Chairman. Thank you so very much.
    And as we conclude, let me just say this. I feel very 
strongly about this, and we are going to take the results of 
this hearing and all of our remarks and concerns. We are going 
to take it to the full Committee Chairman and Ranking Member, 
Chairman Peterson and as well as Ranking Member Conaway, and I 
am going to be pushing very hard to hopefully convince them 
that we need to take a step. We need to send a message to the 
European Union. I think the least we can do is follow your 
recommendation, Mr. Lukken, that they make sure--we love C-
SPAN. It would be wonderful if they were watching this now 
there, but we can work with C-SPAN to make sure they get the 
full hearing.
    It is not just me. It is not just our Committee, our 
Subcommittee here. It is you. It is you all who are the ones 
that have to make it work. You all are the ones that are being 
put at a disadvantage. And when you are being put at a 
disadvantage, the American people are being put at a 
disadvantage. I am telling you, I feel it very insulting that 
this EMIR 2.2 coming at this time, and they are going to take 
away the regulation of our financial services industry from us 
to them, and then charge you a fee for regulating them. This is 
insulting. It is wrong, and we need to respond to it.
    It is important that we respond as a full, bipartisan 
Congress, so you can rest assured that your testimonies and the 
results of this will be discussed and we will meet with the 
full Committee. We will take it from that point. We will also 
speak with the leadership of the full Congress, Speaker Pelosi, 
as well as the Minority Leader, Mr. McCarthy, on that side, and 
move forward.
    This is an insult to the American people. It is an insult 
to us. We are going to respond. We have an excellent staff that 
has been taking copious notes, and we have the recording. We 
will let you know that this meeting has not been in vain. The 
ESMA will hear this voice that we spoke this morning. I can 
assure you that certainly will be the first step.
    And now with that, I want to thank everybody for coming----
    Mr. Austin Scott of Georgia. Mr. Chairman, just in my 
closing remark, I want to address what Mr. Duffy said and make 
it clear. When I say the best path forward is to take a step 
back, a step forward on EMIR 2.2 triggers what others have been 
referring to as the arms race.
    The Chairman. Yes.
    Certainly, and Ranking Member, I want to thank you as well. 
I mean, we have been fighting so many battles together. This is 
just another one. We had to fight to get the emergency funding 
down to our farmers. He and I have been at it, and now we are 
fighting to protect our financial system on the world's stage.
    With that, thank you all very much, and I may say, under 
the Rules of the Committee, the record of today's hearing will 
remain open for 10 calendar days to receive additional material 
and supplementary written responses from the witnesses to any 
questions posed by a Member.
    This hearing of the Subcommittee on Commodity Exchanges, 
Energy, and Credit is adjourned.
    [Whereupon, at 12:13 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
                                Appendix
    The listed material is being submitted as attachments to the 
Committee on Agriculture of the United States House of Representatives 
Consultation submission of ESMA's EMIR 2.2 proposal. The documents are 
also retained in Committee file.

  1.  Duffy Ref. No. 01: Minutes of the Financial Stability Oversight 
            Council, July 18, 2012, https://www.treasury.gov/
            initiatives/fsoc/Documents/July%2018
            %20FSOC%20Meeting%20Minutes.pdf.

  2.  Duffy Ref. No. 02: Commission Implementing Decision (EU) 2016/377 
            of 15 March 2016 on the equivalence of the regulatory 
            framework of the United States of America for central 
            counterparties that are authorised and supervised by the 
            Commodity Futures Trading Commission to the requirements of 
            Regulation (EU) No 648/2012 of the European Parliament and 
            of the Council, March 15, 2016, https://eur-lex.europa.eu/
            legal-content/EN/TXT/PDF/?uri=CELEX:32016D0377&from=EN.

  3.  Duffy Ref. No. 03: COM(2017) 331 final--Proposal for a Regulation 
            of the European Parliament and of the Council amending 
            Regulation (EU) No 1095/2010 establishing a European 
            Supervisory Authority (European Securities and Markets 
            Authority) and amending Regulation (EU) No 648/2012 as 
            regards the procedures and authorities involved for the 
            authorisation of CCPs and requirements for the recognition 
            of third-country CCPs, June 13, 2017, https://eur-
            lex.europa.eu/resource.html?uri=cellar:80b1cafa-50fe-11e7-
            a5ca-01aa75
            ed71a1.0001.02/DOC_1&format=PDF.

  4.  Duffy Ref. No. 04: 7621/19--Interinstitutional File: 2017/0136 
            (COD), COM(2017) 331 final, Regulation of the European 
            Parliament and of the Council amending Regulation (EU) No 
            648/2012 as regards the procedures and authorities involved 
            for the authorisation of CCPs and requirements for the 
            recognition of third-country CCPs--Confirmation of the 
            final compromise text with a view to agreement, March 19, 
            2019, https://data.consilium.europa.eu/doc/document/ST-
            7621-2019-ADD-1/en/pdf.

  5.  Duffy Ref. No. 05: ESMA, Consultation Paper, ESMA 70-151-2138, 
            Draft technical advice on criteria for tiering under 
            Article 25(2a) of EMIR2.2, May 28, 2019, https://
            www.esma.europa.eu/sites/default/files/library/esma70-151-
            2138_cp_ta_on_tiering_criteria.pdf.

  6.  Duffy Ref. No. 06: ESMA, Consultation Paper, ESMA 70-151-2179, 
            Technical Advice on Comparable Compliance under article 25a 
            of EMIR, May 28, 2019, https://www.esma.europa.eu/sites/
            default/files/library/esma70-151-2179_
            cp_ta_on_comparable_compliance.pdf.

  7.  Duffy Ref. No. 07: ESMA, Consultation Paper, ESMA 70-151-1663, 
            ESMA fees for Third-Country CCPs under EMIR 2.2, May 28, 
            2019, https://www.esma.europa.eu/sites/default/files/
            library/esma70-151-1663_cp_on_
            emir_2_2_ccp_fees.pdf.

  8.  Duffy Ref. No. 08: COM(2018) 796 final--Communication from the 
            Commission to the European Parliament, the European Council 
            (Euro Summit), the Council, the European Central Bank, the 
            European Economic and Social Committee and the Committee of 
            the Regions, Towards a stronger international role of the 
            euro, May 12, 2018, https://eur-lex.europa.eu/legal-
            content/EN/TXT/PDF/?uri=CELEX:52018DC0796&from=en.

  9.  Edmonds Ref. No. 01: PR7342-16, CFTC Approves Substituted 
            Compliance Framework in Follow-up to the Recent Equivalence 
            Agreement between the US and the EU, March 16, 2016, 
            https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.

       Attachment 9a: Comparability Determination for the 
            European Union: 
              Dually-Registered Derivatives Clearing Organizations and 
            Central 
              Counterparties, Federal Register, March 22, 2016 pp. 
            15260-15272, 
              https://www.cftc.gov/idc/groups/public/
            @lrfederalregister/documents/
              file/2016-06261a.pdf.

       Attachment 9b: Staff Letter, 16-26, No-Action Relief for 
            EU-Based Reg-
              istered Derivatives Clearing Organizations that are 
            Authorized to Operate in 
              the European Union, from Certain Requirements under Part 
            22 and Part 39 
              of Commission Regulations, March 16, 2016, https://
            www.cftc.gov/idc/
              groups/public/@lrlettergeneral/documents/letter/16-
            26.pdf.

       Attachment 9c: Statement of CFTC Chairman Timothy Massad 
            regarding 
              Substituted Compliance Determination for the European 
            Union, March 16, 
              2016, https://www.cftc.gov/PressRoom/SpeechesTestimony/
            massadstate
              ment031616.

       Attachment 9d: Statement of CFTC Commissioner J. 
            Christopher Giancarlo 
              Comparability Determination for the European Union: 
            Dually-Registered 
              Derivatives Clearing Organizations and Central 
            Counterparties, March 16, 
              2016, https://www.cftc.gov/PressRoom/SpeechesTestimony/
            giancarlostate
              ment031616.

  10.  Edmonds Ref. No. 02: PR7817-18, Chairman Giancarlo Releases 
            Cross-Border White Paper, October 1, 2018, https://
            www.cftc.gov/PressRoom/PressReleases/7817-18.

       Attachment 10a: Cross-Border Swaps Regulation Version 
            2.0: A Risk-Based 
              Approach with Deference to Comparable Non-U.S. 
            Regulation.

  11.  Maguire Ref. No. 01: European Commission, Brexit: European 
            Commission implements ``no-deal'' Contingency Action Plan 
            in specific sectors, December 19, 2018, http://europa.eu/
            rapid/press-release_IP-18-6851_en.htm.

  12.  Maguire Ref. No. 02: European Securities and Markets Authority, 
            ESMA-71-99-1114--ESMA to recognise three UK CCPs in the 
            event of a no-deal Brexit, February 18, 2019, https://
            www.esma.europa.eu/press-news/esma-news/esma-recognise-
            three-UK-ccps-in-event-no-deal-brexit.

  13.  Maguire Ref. No. 03: LCH Member Update, Brexit Update: LCH 
            Limited Article 25 Recognition by ESMA under an Article 50 
            extension, April 5, 2019, https://www.lch.com/membership/
            ltd-membership/ltd-member-updates/brexit-update-lch-
            limited-article-25-recognition-0.

  14.  Maguire Ref. No. 04: International Organization of Securities 
            Commissions, FR07/2019, Market Fragmentation & Cross-border 
            Regulation, June 2019, https://www.iosco.org/library/
            pubdocs/pdf/IOSCOPD629.pdf.

  15.  Maguire Ref. No. 05: Financial Stability Board, Implementation 
            and Effects of the G20 Financial Regulatory Reforms, 4th 
            Annual Report, November 28, 2018, https://www.fsb.org/2018/
            11/implementation-and-effects-of-the-g20-financial-
            regulatory-reforms-fourth-annual-report/.

  16.  Maguire Ref. No. 06: European Commission, European Commission 
            adopts equivalence decision for CCPs in USA, March 15, 
            2016, http://europa.eu/rapid/press-release_IP-16-
            807_en.htm.

  17.  Maguire Ref. No. 07: Remarks by Jerome H. Powell, Member, Board 
            of Governors of the Federal Reserve System at The Federal 
            Reserve Bank of Chicago Symposium on Central Clearing, 
            Chicago, Illinois, Central Clearing and Liquidity, June 23, 
            2017, https://www.federalreserve.gov/newsevents/speech/
            powell20170623a.htm.

  18.  Maguire Ref. No. 08: Lewis, Rebecca, John McPartland, Federal 
            Reserve Bank of Chicago, PDP-2017-02, Non-default loss 
            allocation at CCPs, April 2017, https://www.chicagofed.org/
            /media/publications/policy-discussion-papers/2017/pdp-
            2017-02-pdf.pdf

  19.  Maguire Ref. No. 09: International Swaps and Derivatives 
            Association, The Case for CCP Supervisory Cooperation, 
            April 2018, https://www.isda.org/2018/04/18/the-case-for-
            ccp-supervisory-cooperation/.

  20.  Maguire Ref. No. 10: Futures Industry Association, FIA Global: 
            CCP Risk Position Paper, April 2015, https://fia.org/sites/
            default/files/content_attachments/
            FIAGLOBAL_CCP_RISK_POSITION_PAPER.pdf.

  21.  Maguire Ref. No. 11: Keynote Remarks of Chairman Timothy Massad 
            at SEFCON VII, January 18, 2017, https://www.cftc.gov/
            PressRoom/SpeechesTestimony/opamassad-55.

       Attachment 21a: Accomplishments of the Commodity Futures 
            Trading Com-
              mission, June 2014-January 2017, January 18, 2017, 
            https://
              www.cftc.gov/idc/groups/public/@newsroom/documents/file/
            massadaccom
              plishments0614_1216.pdf.

  22.  Maguire Ref. No. 12: U.S. Department of the Treasury, A 
            Financial System That Creates Economic Opportunities 
            Capital Markets-Capital Markets, October 2017, https://
            www.treasury.gov/press-center/press-releases/documents/a-
            financial-system-capital-markets-final-final.pdf.

  23.  Lukken Ref. No. 01: Comment Letter, March 18, 2019, Jacqueline 
            H. Mesa, COO and SVP, Global Advocacy, FIA, Re: 
            Standardized Approach for Calculating the Exposure Amount 
            of Derivative Contracts, https://fia.org/file/8709/
            download?token=R_6EtxRk.

  24.  Lukken Ref. No. 02: \1\ Futures Industry Association, Mitigating 
            the Risk of Market Fragmentation, March 2019, https://
            fia.org/sites/default/files/FIA_WP_MItigating%20Risk.pdf.
---------------------------------------------------------------------------
    \1\ Note: this report is attached following the prepared statement 
of Mr. Lukken, see p. 29.

  25.  Lukken Ref. No. 03: Financial Stability Board, FSB Report on 
            Market Fragmentation, June 4, 2019, https://www.fsb.org/wp-
---------------------------------------------------------------------------
            content/uploads/P040619-2.pdf.

  26.  Lukken Ref. No. 04: \2\ Testimony of Chairman J. Christopher 
            Giancarlo Before the House Committee on Agriculture 
            Subcommittee on Commodity Exchanges, Energy and Credit, 
            Washington, D.C., May 1, 2019, https://www.cftc.gov/
            PressRoom/SpeechesTestimony/opagiancarlo70.
---------------------------------------------------------------------------
    \2\ This is the press release issued by the CFTC posting Chairman 
Giancarlo's prepared statement. In the case of this submission, 
attached is the actual hearing: The State of the Commodity Futures 
Trading Commission, held on May 1, 2019 by the Commodity Exchanges, 
Energy, and Credit Subcommittee.

  27.  Berger Ref. No. 01: Committee on Economic and Monetary Affairs, 
            A8-0190/2018, Authorisation of CCPs and recognition of 
            third-country CCPs, Amendments By the European Parliament 
            to the Commission proposal Regulation (EU) 2019/ . . . of 
            the European Parliament and of the Council of . . ., April 
            10, 2019, http://www.europarl.europa.eu/doceo/document/A-8-
---------------------------------------------------------------------------
            2018-0190-AM-002-002_EN.pdf.

  28.  Berger Ref. No. 02: Comment Letter: May 10, 2019, Laura Harper 
            Powell, Associate General Counsel, Managed Funds 
            Association, Re: Global Markets Advisory Committee, https:/
            /www.managedfunds.org/wp-content/uploads/2019/05/MFA-
            Letter-on-CFTC-GMAC-Meeting-on-April-15-2019-Final.pdf.

  29.  Berger Ref. No. 03: Comment Letter: March 15, 2019, Laura Harper 
            Powell, Associate General Counsel, Managed Funds 
            Association, Re: Swap Execution Facilities and the Trade 
            Execution Requirement (RIN Number 3038-AE25), https://
            www.managedfunds.org/wp-content/uploads/2019/03/MFA-
            Comment-Letter-on-CFTC-SEF-Proposed-Rule-Final.pdf.

  30.  Berger Ref. No. 04: Bank for International Settlements, BCBS/
            IOSCO statement on the final implementation phases of the 
            Margin requirements for non-centrally cleared derivatives, 
            March 5, 2019, https://www.bis.org/press/p190305a.htm.

  31.  Berger Ref. No. 05: Comment Letter: November 15, 2018, Richard 
            H. Baker, President and CEO; and Jennifer W. Han, Associate 
            General Counsel, Re: A Proposal for a Harmonized Primary 
            Regulator Approach to SEC and CFTC Regulation of Dual 
            Registrants, https://www.managedfunds.org/wp-content/
            uploads/2018/11/MFA-Proposal-for-Dual-
            Registrants.final_.11.15.
            18.pdf.

                                  [all]