it is very important to the industry to have representatives in the room and when i showed up at the hearing, the line was sneaking down two flights of stairs, with various people from the major companies in the major logging firms to represent them. it makes sense. these people were confirmed to be commissioners that the fcc have a lot of power. the regulations are very complicated. congress does not want to get involved in it, so they need to develop a good relationship with julius genachowski and this is how the show that they care. >> host: our guest for the last half-hour have been fawn johnson with doug jones newswires and andrew feinberg of broadband census.com. we have been discussing the nomination of julius genachowski to be the next year of the fcc. when will the vote happen? if it hasn't already?

>> guest: it could happen before the july 4th recess. there are things that could stop it obviously. it only takes one senator. that is in the plan. we will have to wait and see. we expect other nominees to go forward a lot more quickly and then they have got held up so we are still waiting on that one. >> host: you can watch the full herring if you want at c-span.org. thank you both for being on the communicators. >> guest: you are welcome.

steve opnet veering gain reregulating oh mcandrew this. witnesses include mary schapiro, a securities and exchange commission, officials from regulatory agencies have had read that trading organizations for zilpha this is celestin 2-1/2 hours. >> let me call the hearing to order. i want to thank all of our witnesses for joining us this afternoon, and i am particularly happy to welcome back chairman schapiro, thank you and also i want to thank chairman gensler foresting tett testified before us on the tour of this issue which gives us a chance to talk directly to you about this issue, which transcends several different agencies. and also, the federal reserve. i also obviously want to recognize chairman harkin on the agriculture committee for the

longstanding work on derivatives issues and i look forward to having both committees coordinate closely as we work to provide transparency and reduce the risk of the financial sector. this week we find ourselves more focused than ever on the important work of merchandising and outdated regulatory system for goeth call this hearing to explore one of the key aspects of such reforms. to modernize regulation of the over-the-counter derivatives market and the institutions that participate in these markets. both exchange rate and over-the-counter markets have grown extremely rapidly over the past decade. and tillie recent downturn of the economic markets, every category of derivatives show almost a decade of extreme growth, in many cases more than tripling or quadrupling trading values according to data compiled by the data resource service. between 20,002,008 the number of contracts traded on exchanges rose by 425% and the total

notional amount of over-the-counter contracts of standing rose by 522% over that period, representing trillions of dollars in trading fur coat this afternoon's hearing will focus in particular on over-the-counter derivatives markets, which today are subject to no direct regulation. one of the key questions we will examine is the extent to which existing and emerging to rip this market should be subject to regulatory oversight. until recently the prevailing presumption was that market discipline alone largely protected us from any potential risk we face from otc derivatives. , obey received a wake-up call, having had to siege aig to keep its credit default swaps worth trillions of dollars from greatly exacerbating the financial crisis. it is now clearer than ever that we need to find ways to make these markets much more transparent and to ensure that the dealers of other users of these markets do a better job than aig of ensuring that their

derivative activities did not threaten the stability of the overall financial system. but we face difficult questions as we move forward in accomplishing this goal. these products are often extremely complex and there is an equally complex history of regulation or lack thereof, of such products. as a result we need to take a careful and thoughtful approach to these issues. there is no doubt that improving the regulation and oversight of derivatives markets and those who trade in them is a key part of modernizing our regulatory system. i hope my colleagues and their witnesses will help us identify the key steps that we can and should take right now to address the serious problems that we are confronting. for example, what key decisions need to be considered as congress weighs proposals to move more over-the-counter derivatives to central counterparties for exchanges. how do various proposals to enhance oversight of otc derivatives affect different market participants? how does the issue of improved otc derivatives regulation

relate to broader reform issues such as the creation of a new systemic risk regulator and to what extent the u.s. efforts require an international court nation. these are just a few of the challenging questions that we will face together and we will rely on your expertise and your insights as we go forward. at this time i would like to call on the ranking member, senator bunning for his comments. >> thank you mr. chairman. i appreciate all of our witnesses coming here today for this very important hearing. it is important for everyone to understand the financial nature of derivatives and does, the banking committee's interest in overseeing them. let me say at the beginning that i to not know what regulations and restrictions we should put on these products. figuring that out is the purpose of this hearing. but, it should be clear to everyone that the current

regulations are not enough. i understand the desire of the firm's to hedge their risks. whether those risks are interest or exchange rates, commodity prices, credit exposure, or something else, jenny when hedges are accurately priced, that are accurately priced in provide the risk management firms need, but it is not clear that all derivative products arjun yiwen hedges are accurately priced. in fact, some look a lot more like a way to get around regulations, improper risk management, or just plain gambling. regulators and the public needs a better understanding of all the exposures of firms to eliminate uncertainty and the

justification for further bailouts. increase transparency and standardization of derivative contracts will help, and must be accomplished. however, how far standardization requirements should go depends on whether there are two economic benefits to the custom products that outweigh the costs and risks associated with them. so far, specifics and credible evidence on that point is then. a credit derivatives may present the toughest questions. should these products be treated as insurance, with proper reserves? should the bear have an insurable interest, and have to suffer actual losses or deliver

the references referred assets? how do we make sure credit protection does not undermine credit research, or lead predators to push debtors into bankruptcy? should they even exists, if not traded on an exchange? someone has to bear the risk of every financial transaction. so, we must not allow the wizards of finance to pretend it is-- has disappeared. finally, just like with banks, we must eliminate the opportunity to avoid or choose favorable regulators. or regulations. similarly, similar activities must be regulated the same way by the same regulator. otherwise, her firms will be

able to gain the system and regulators will not be able to effectively enforce the rules. thank you mr. chairman. >> thank you senator bunning. senator crapo comment you have an opening statement? >> thank you for holding this hearing. i believe although there is a breath of derivative action in our economy, i believe that a significant amount, if not a significant majority of the amount of those transactions falls under the jurisdiction of this committee and i appreciate your attention to that. i also agree with the comments that but the chairman and ranking member have made. rescinded fence and the credit markets have highlighted the need for greater attention to risk management practices and counterparty risk in particular and although i agree with the need to focus on where we can standardize and the types of risk reduction and better practices that we need to address, i also want in my

remarks to just focus very quickly on one specific part of it and that is not letting the pendulum swing too far to the other side to where we cause damage, and efficient economy. the creation of clearinghouse is an increased information to trade information warehouses are positive steps to strengthen the infrastructure for clearing and settling credit default swaps. wilson turrell kundra party qiuring in exchange trading of simple standardized contracts as the potential to reduce risk and increase efficiency, market participants must be permitted to continue to negotiate customized bilateral contracts and over-the-counter markets. many businesses use over-the-counter derivatives to minimize the impact of commodity price, interest-rate and exchange-rate volatility and order to maintain stability in earnings and predictability in their operations. if congress overreaches or bands or generate significant uncertainty with regard to legitimacy of decisions to customize individual otc derivatives transactions, i

believe there could be very significant negative risk. in the contemplation of this hearing in this issue mr. chairman i actually requested that a number of the end users of these types of transactions respond to a question about what increase flexibility or reduction of flexibility would do and at this time i would like to share three or four examples of responses that i have received. david dines, the brezhniv cargo risk-management indicates, while marching other credit support mechanisms are in place in utilized every day in the otc market there is flexibility in the credit terms, the credit threshold some type of collateral that can be applied. this flexibility is a benefit for end users of derivatives such as cargill in managing working capital. losing this flexibility is particularly concerning because mandatory marching will divert working capital from investments that can grow our business and-- well it depends on market

conditions the diversion of working capital from cargill for marching could be in excess of $1 billion. multiply this across all companies in the united states and the ramifications are enormous especially at a time when credit is critically tight. kevin colgan from the corporate treasurer caterpillar, our understanding of current and pending regulation in this area is it would require clearing function which would standardize terms like duration and amount. any standardization of this type would prohibit us from matching exactly the terms and underlined exposure we are attempting to hedge. this in turn would expose us to uncovered risk and introduce the list volatility into our financial crisis. i have a number of other examples in which i will insert for the record mr. chairman, and if possible i'd like permission of the committee to answer the letters that i received in response to these inquiries into the record and i may get another in the next couple of days. the bottom line mr. german is i completely agree with the need to do as much as we can to

assure that we have covered the risks in our economy that have been created by the utilization of these types of derivatives, different types of derivatives that credit default swaps for example. i just believe that we want to pay careful attention to making sure that we do what is necessary to protect and strengthen our markets, and that we leave flexibility where it is necessary and helpful for the utilization of these credit instruments to advance the interests of our businesses. thank you. >> you have illustrated the challenges very well in terms of that balance. senator bennett, you have an opening statement? >> thank you for holding the hearing and we are appreciative of the witnesses better here. >> senator johanns. do you have an opening statement? >> i do not. >> let me introduce our witnesses. we are very pleased to be joined today, first by the honorable

mary schapiro chairman of the securities and exchange commission. prior to becoming chairman she was ceo of the financial industry regulatory authority, the largest non-governmental regulator for all securities firms doing business within the united states. chairman schapiro served as the commissioner at the fcc from december 1988 to october 1994 and chairman of the commodity futures trading commission from 1994 until 1996. thank you chairman. next is the honorable gary gensler. gary gensler is the chairman of the commodity futures-- he served at the u.s. department treasury as undersecretary of domestic finance from 1999 to 2000, assistant secretary of financial markets from 1997 to 1999. persia joining the treasury he worked it 18 years of goldman sachs most recently as the co-head of finance. our third witness is ms. patricia wide, secede director of the federal reserve,

a division of research and statistics. ms. white is oversight responsibilities for sections that analyze risks in process microeconomic data and she is participated in domestic and international working groups on central counterparties, securities settlement in financial regulation. we very much appreciate all of you joining us here this afternoon and chairman schapiro would you give your testimony? >> thank you very much. mr. chairman, ranking member bunning and members of the subcommittee i am pleased to have this opportunity to testify to the house and securities exchange commission concerning the regulation of over-the-counter derivatives. the severe financial crisis that has unfolded over the last two years has revealed serious weaknesses and the structure of u.s. financial regulation. one of these gaps is the gap in regulation of otc derivatives, which under current law are largely excluded or exempted from regulation. the ker regulatory framework has permitted certain opaque

securities related otc derivatives to develop outside investor protections afforded by the securities laws. the fcc is committed to working closely with this committee, congress and the administration and our fellow regulators to close this gap and restore sound structure for u.s. financial regulation. i am pleased to be able to report to you that u.s. regulatory authorities have reached a broad consensus on the pressing need for comprehensive regulatory framework for otc derivatives. this consensus covers all of the basics of sound financial regulation and the 21st century including record-keeping and reporting requirements, appropriate capital and margin requirements, transparent and efficient markets, clearing and settlement systems that monitor kimmage risk, business conduct and disclosure standards to protect the interests of market participants in vigorous enforcement against fraud and other wrongdoing. dscc is strongly supportive of ongoing initiatives to promote the standardization and central

clearing of otc derivatives. the sec working in consultation with the board of governors of the federal reserve system and the commodity futures trading commission and operating under the parameters of the current legislative structure already has taken a number of actions to help further centralized clearing for otc derivatives, including providing temporary conditional exemptions for three central counterparties to begin centrally clearing credit default swaps. more needs to be done however and in building in a regulatory framework for otc derivatives it is vital that the system be designed to protect the public interest, manage systemic risk and promote capital formation and general economic welfare. treasury secretary geithner's may 13th letter to the congressional leadership outline the administrations plan for establishing a comprehensive framework for regulating the otc derivatives. multiple federal regulatory agencies will play critical roles, including those

represented here today. in fashioning a regulatory framework for otc derivatives, it is crucial to recognize the close relationship between the regulated securities and futures markets and that no, mostly unregulated, markets for otc derivatives. for example with respect to the securities markets, when otc derivative references an issuer of securities such as a public company or security itself, it can be used to establish synthetic, long or short exposures to an underlying security or group of securities. in this way, market participants can replicate the economics of the deray purchase or sale of securities without purchasing or selling the securities themselves. because market participants can use these securities related the otc derivatives, to serve as synthetic substitutes for securities, the markets for these otc derivatives are interconnected with the regulated securities markets. moreover, the market for these securities related otc

derivatives implicate the policy objectives for capital markets that congress has set forth in the federal securities laws, including investor protection, the manus of their and orderly markets in the facilitation of capital formation. for this reason it is important congress carefully consider whether securities related otc derivatives be subject to the federal securities laws so that the rest of arbitrage and manipulation is minimized and certainly has a similar analogy can be made to the futures market by the cftc. michael today's to assess the congress in its efforts to craft legislation that empowers the respective regulatory authorities to do their jobs effectively and operatively. i am confident that working together we will meet the challenge that is so important to the financial well-being of individual americans and i would be pleased to answer your questions. >> thank you very much chairman schapiro. chairman gensler.

>> chairman reed, ranking member bunning, other members of the subcommittee thank you for inviting me here to talk to you today about the over-the-counter derivatives market. i would like my full testimony to be entered into the record, if that is all right. i too and talking on behalf of the full commission. i believe we must urgently move now to bring the over-the-counter derivatives marketplace on the regulation. there are four key objectives in doing so in accomplishing this goal. one is to lower systemic risk. two, we need to provide the transparency, and efficiency of these markets that we believe we would have in our securities and futures and options markets when need to bring to the derivatives marketplace. three, when he to ensure integrity in this market preventing fraud, manipulation and other abuses and for me to protect the retail public in these markets as we do and other markets we oversee. meeting these objectives will

require close coordination between the cftc and sec and other federal regulators. senators, i believe these reforms must establish a regulatory regime that governs the entire over the counters marketplace, and a matter who was treating them, what type of derivative is traded, whether the standardized or tailored or highly customized. i think it should include interest-rate products, the currency product, a commodity product, equities products, credit default swaps and those slots we have not yet thought of that are just a blip on the horizon. as the administration laid out in its may 13th letter i believe this can best be accomplished in two complementary regimes. one, to regulate the derivatives dealers or the actors otis beat, and another regime to regulate the big market functions where the stages upon which the actors perform their duties. for the dealers, in this marketplace, the large financial institutions by and large the

deal, we should set capital standards in margin requirements to help lower the risk in the system. we should set business conduct standards to make sure that the market is, exercises itself with of fraud, manipulation and other pieces and thirdly, we should set recordkeeping and reporting with audit trails that we have transparency in this market. so, lower risk, promote market integrity and enhance the transparency. but i think this dealer regime will really be enough. it is important and it gets to all of the markets, customized and standardized but we can further lower risk by having central clearing on the standardized products. also bringing the standardized products onto regulated trading venues whether they be full exchanges or electronic platforms and this will lower risk and further enhance transparency. to fully achieve these objectives we must enact both of

these complementary regimes. regulating both the traders and the trades will ensure we cover both the actors and the stages upon which they create the significant risk. unfortunate-- i'm fortunate to have a partner, sec chair mary schapiro. she brings a valuable expertise which gives me confidence we will be able to work together on what is bound to be a lot of challenges moving forward. we have not only this but we are going to be working together in advising congress and the administration on how cases can best harmonize some of the roles between the securities and futures world, cover gaps in our regulatory oversight. president obama's says called to strengthen market integrity, low-risk and protect investors and i look forward to working with members of this committee and others in congress to accomplish this goal. i thank you again for the opportunity to testify and i look forward to answering any of your questions. >> thank you very much chairman

gensler. >> chairman reed, ranking member bunning and members of the subcommittee, i appreciate this opportunity to provide the federal reserve on the development of the new regulatory structure for the over-the-counter or otc derivatives market. the events of the last two years have demonstrated the potential for difficulties in one part of the financial system to create problems in other sectors and sidney macroeconomy broccoli. centralized clearing is standardized otc products is the key component of diverse to mitigate such systemic risk. the board believes moving toward centralized clearing for most or all standardized otc products would have significant benefits. if properly designed and overseen central counterparties orice ccp's offer an important tool for managing credit risk. benefits from centralized clearing would be greatest it ccp's are structured so as to allow participation by end users within a framework that ensures protection in their positions

and collateral. infrastructure changes in the otc market's will be required to meet most otc contracts into centralized clearing systems. such changes include agreement on key terms that constitutes standardization and development of electronic systems for feeding data to ccp's. for their part, ccp's most seven place systems to manage the risk from this new business. a particular imports are procedures to handle defaults because of tc-99 products are likely to be less liquid than the exchange traded products that ccp's most commonly handled. although implementation challenges knodell whitehead, the board will work to ensure that these challenges are dressed quickly and constructively. major dealers have committed to making improvements and back office systems that are important prerequisite for centralized clearing. dealers also have committed to clearing standardized otc products and they will be expected to demonstrate progress

on this commitment even as the broader regulatory reform debate evolves. substantial progress in improving the transparency of the credit default swap or cds market, occurred with the creation of the trade information warehouse. the contract repository that contains an electronic record of a large and growing share of cbs trades. the board supports grading contract repositories for all fset classes and requiring a record of all otc derivatives contracts that are not centrally clear to be stored in these repositories. aggregate data on volumes should be made public by repositories and more detailed data should be made available to authorities to support policy objectives related to the prevention and manipulation and systemic risk. although the creation of ccp's will provide an important tool for managing counterparty credit risk enhancements to risk management by individual participants will continue to be

a high priority for supervisors. if the reforms outlined here are implemented the firms currently most active in bilateral otc market will become the firms most active clearing members of ccp's. as such the quality of their internal risk-management is important to the ccp. supervisory efforts are already underway to prove collateralization practices and to examine whether the current capital regime can be improved. policy issues associated with the otc derivatives are not limited to the united states. the markets are global and issues are unlikely to be fully addressed without international coordination. much work must be done but with effective oversight by supervisors, putin risk management by end users and dealers and appropriate changes in the regulatory structure, derivatives can continue to provide significant benefits to businesses and investors to use them to manage